Faculty of Business and Management

Academic Year 2023/24

Module Name: Managing Financial Resources

Module Code: IBMFR

Module Leader: Dr. Asiya Sohail

Student ID: 230952

Name: Ali Al Jahwari

Table of Contents
INTRODUCTION ............................................................................................................................................. 3
SUMMARY OF EXTERNAL REFERENCES......................................................................................................... 3
FINANCIAL RATIOS......................................................................................................................................... 4
Common-Size Statements: ........................................................................................................................ 4
Debt Ratios: ............................................................................................................................................... 5
Times Interest Earned: .......................................................................................................................... 5
Debt-to-Capital Ratio (calculated as BV Debt / (BV Debt + MV Equity): ............................................... 5
Comments: ............................................................................................................................................ 5
Profitability Ratios: .................................................................................................................................... 6
Net Margin (aka, profit margin): ........................................................................................................... 6
Gross Margin (calculated as gross profit / revenues):........................................................................... 6
Comments: ............................................................................................................................................ 6
Valuation Ratios: ....................................................................................................................................... 7
PE Ratio: ................................................................................................................................................ 7
Market / Book Ratio: (calculated as market value equity / book value equity) .................................... 7
Comments: ............................................................................................................................................ 7
Payout Ratios: ........................................................................................................................................... 8
Dividend Payout Ratio (sometimes just called, ‘payout ratio’): ............................................................ 8
Total Payout Ratio (calculated as [Dividends + Repurchases] / Net Income) ........................................ 8
Comments: ............................................................................................................................................ 8
Return-on-Invested-Capital (ROIC):........................................................................................................... 8
Working Capital Management Ratios: ...................................................................................................... 9
Cash Conversion Cycle: ......................................................................................................................... 9
Comments: ............................................................................................................................................ 9
VALUATION .................................................................................................................................................. 10
Observations: ...................................................................................................................................... 11
CONCLUSIONS ............................................................................................................................................. 11
INTRODUCTION
Volkswagen, a well-known company in the automobile sector, is an example of the convergence of
business, finance, and innovation. Volkswagen was founded in 1937 in Germany, with the creation of the
"People's Car," or "Volkswagen" in German, under the guidance of Ferdinand Porsche at the request of
Adolf Hitler. The first Volkswagen Beetle, an iconic vehicle, went off the assembly line, and it immediately
became a symbol of economical and dependable mass transportation. Volkswagen has risen to become
one of the world's largest and most prominent automakers. The corporation has shaped the worldwide
automotive environment by contributing to technical developments, market trends, and financial
dynamics. Volkswagen has made tremendous achievements in electric mobility in recent years, with the
introduction of the ID. series, which features electric vehicles built on the groundbreaking MEB platform.
This commitment to sustainable mobility underlines Volkswagen's commitment to tackle future issues
while preserving the brand's high quality and performance standards. Volkswagen has ten brands and
will have a global market worth of around 6.7 percent in 2022. Through its subsidiary, the firm has also
entered the information technology market.

Ford is the company's main competitor. General Motors, BMW, and Toyota are also rivals. These are
obvious peers because they are all among the main automobile manufacturers using IC engines.

SUMMARY OF EXTERNAL REFERENCES

External references consulted are the Management Discussion and Analysis (MD&A) from the firm’s
most recent annual report. The annual report, data from different websites like Fitch articles, Google
articles, Wikipedia, Simfin and stock analysis.

Links:

https://uploads/Annual_Financial_Statements_of_Volkswagen_AG_as_of_December_31_2022.pdf

These documents reveal several useful pieces of information about the firm. For example, the MD&A
states plainly the following: The company's financial performance, influenced by factors such as
production efficiency, global market expansion, and innovation in electric and autonomous vehicles, has
far-reaching implications for investors, stakeholders, and the automotive sector as a whole. Over the
years, Volkswagen has faced challenges, including the "Diesel gate" scandal in 2015, which underscores
the complex interplay between business ethics, corporate governance, and financial consequences.

As the automotive industry undergoes a transformative phase, with a focus on sustainability and
technological disruption, Volkswagen's financial decisions and strategic initiatives remain critical.
Navigating the transition to electric mobility, addressing regulatory requirements, and managing the
complexities of a global supply chain are all integral aspects of Volkswagen's business finance landscape.
This introduction sets the stage to delve into Volkswagen's financial intricacies, its strategic positioning in
the automotive market, and the broader implications of its business decisions in the ever-evolving realm
of business and finance.
FINANCIAL RATIOS
Common-Size Statements:

We begin by examining the firm’s horizontal and vertical income statements, using the most recent three
annual financial statements (source: simfin):

Particulars FY 2019 FY 2020 FY 2021

Revenue 100.00% 100.00% 100.00%
Cost of revenue -80.55% -82.53% -81.12%
Gross Profit 19.45% 17.47% 18.88%
Operating Expenses -12.74% -13.13% -11.18%
Selling, General & Administrative -12.17% -12.48% -11.85%
Operating Income (Loss) 6.71% 4.34% 7.70%
Non-Operating Income (Loss) 0.55% 0.89% 0.34%
Pretax Income (Loss), Adjusted 7.27% 5.23% 8.04%
Pretax Income (Loss) 7.27% 5.23% 8.04%
Income Tax (Expense) Benefit, net -1.71% -1.28% -1.88%
Income (Loss) from Continuing Operations 5.55% 3.96% 6.17%
Income (Loss) Including Minority Interest 5.55% 3.96% 6.17%
Minority Interest -0.06% 0.02% -0.02%
Net Income 5.50% 3.98% 6.15%

Particulars FY 2019 FY 2020 FY 2021

Revenue 100.00% -10.17% 16.41%
Cost of revenue 100.00% -7.96% 14.42%
Gross Profit 100.00% -19.30% 25.78%
Operating Expenses 100.00% -7.39% -0.93%
Selling, General & Administrative 100.00% -7.91% 10.57%
Operating Income (Loss) 100.00% -41.92% 106.59%
Non-Operating Income (Loss) 100.00% 45.22% -55.73%
Pretax Income (Loss), Adjusted 100.00% -35.29% 78.89%
Pretax Income (Loss) 100.00% -35.29% 78.89%
Income Tax (Expense) Benefit, net 100.00% -33.09% 71.36%
Income (Loss) from Continuing Operations 100.00% -35.97% 81.32%
Income (Loss) Including Minority Interest 100.00% -35.97% 81.32%
Minority Interest 100.00% -130.62% -210.93%
Net Income 100.00% -34.99% 79.90%
Volkswagen's financial data across this time periods displays a combination of problems and favorable
tendencies. The vertical columns show that the gross profit has stayed nearly same in the three years
which shows the stability of the company.

Whereas the horizontal comparisons show different changes in the company finances. The company's
sales fell by 10.17% in FY 2020, owing to global economic uncertainty, which was perhaps worsened by
the COVID-19 pandemic. However, there was a considerable return in revenue in FY 2021, with a 16.41%
growth, demonstrating resilience and adaptation. Gross profit margins fluctuated, falling by 19.30% in
fiscal year 2020 then rebounding strongly with a 25.78% gain in fiscal year 2021. This shows that
Volkswagen handled expenses successfully and enhanced operating efficiency. Operating income fell by
41.92% in FY 2020, probably as a result of the pandemic's influence on production and sales. However,
FY 2021 saw a remarkable recovery, with operating income soaring by 106.59%, indicating effective cost
controls and operational adjustments.

Debt Ratios:

Times Interest Earned:

2019 2020 2021

Volkswagen -10.50 -6.45 -19.12
Ford -8.88 -1.84 -5.81
General Motors -25.06 -17.71 -22.50
BMW -26.90 -23.96 -120.64

Debt-to-Capital Ratio (calculated as BV Debt / (BV Debt + MV Equity):

2021
Volkswagen 1.22
Ford 0.65
General Motors 1.15
BMW 0.83

For the debt-to-capital ratios, we simplify and use only LT Debt from simfin (rather than a more accurate
but also more complicated calculation that includes short-term debt and leases). The TIE table also has
data leading upto 2021 as Volkswagen data for 2022 and onwards is not available, so the most recent 3
years are taken into consideration.

Comments:

Volkswagen's negative Times Interest Earned (TIE) ratios from 2019 to 2021 show a worrying trend. A
negative TIE indicates that the company's earnings were unable to cover its interest expenditures,
indicating financial trouble. This condition demands attention and may indicate difficulties in satisfying
debt commitments. In comparison, competitors like as Ford, General Motors, and BMW saw TIE ratio
changes, but none recorded persistently negative levels like Volkswagen. BMW saw a significant drop in
2021, signaling probable financial difficulty.

The 2021 Debt-to-Capital Ratio demonstrates that Volkswagen's BV Debt is 122% of total capital,
showing a high debt load in comparison to rivals. In terms of business, this implies that Volkswagen is
heavily reliant on debt financing, thus exposing the corporation to higher financial risk and reducing its
financial flexibility.

To achieve financial stability and sustained growth, Volkswagen should prioritize correcting the negative
TIE ratios and controlling the high Debt-to-Capital Ratio. Monitoring and strategic changes are critical,
since Volkswagen's reliance on debt may limit its capacity to weather economic uncertainty and invest in
future undertakings.

Profitability Ratios:

Net Margin (aka, profit margin):

2019 2020 2021

Volkswagen 5.50% 3.98% 6.15%
Ford 0.03% -1.01% 13.16%
General Motors 4.91% 5.25% 7.89%
BMW 4.72% 3.81% 11.13%

Gross Margin (calculated as gross profit / revenues):

2019 2020 2021

Volkswagen 19.45% 17.47% 18.88%
Ford 13.60% 11.32% 15.91%
General Motors 10.18% 20.37% 20.83%
BMW 17.33% 13.72% 19.76%

Comments:

Volkswagen's steady increase in Net Margin, from 5.50% in 2019 to 6.15% in 2021, indicates successful
cost control and profit development. In comparison, Ford had a huge change from negative margins to a
solid 13.16%, showing a significant rebound. Over the years, General Motors and BMW have maintained
reasonably consistent and competitive Net Margins.

In terms of Gross Margins, Volkswagen's progressive improvement indicates operational efficiency, which
is consistent with the general favorable Net Margin trend. In comparison, General Motors' Gross Margin
climbed significantly, showing better cost reduction and enhanced profitability. Ford and BMW also
improved their gross margins, reflecting the industry's emphasis on operational efficiency and cost-
effective manufacturing.
Overall, Volkswagen's strong developments in Net and Gross Margins point to effective tactics for
increasing profitability and operating efficiency in a competitive automotive industry.

Valuation Ratios:

PE Ratio:

2021
Volkswagen 4.75
Ford 4.09
General Motors 8.62
BMW 4.71

Market / Book Ratio: (calculated as market value equity / book value equity)

2023
Volkswagen 0.77
Ford 1.71
General Motors 1.29
BMW 0.77

Comments:

The Price-to-Earnings (P/E) ratios for major automakers in 2021 provide fascinating information.
Volkswagen has a cheaper value than its peers, with a P/E ratio of 4.75. A lower P/E ratio suggests that
the market values Volkswagen less in comparison to its profits, which might be due to reasons such as
perceived risk, industry circumstances, or market sentiment. P/E ratios for Ford, General Motors, and
BMW are 4.09, 8.62, and 4.71, respectively. Ford and BMW have comparable prices to Volkswagen;
however General Motors has a higher P/E ratio, indicating perhaps better investor confidence or
expectations for future profits growth.

Volkswagen's lower P/E ratio may indicate that the market is undervaluing the firm in comparison to its
peers. This may present an opportunity for investors seeking for possibly discounted equities, but it also
necessitates a deeper look at the variables driving the market's opinion of Volkswagen, such as its
growth prospects and risk profile.
Payout Ratios:

Dividend Payout Ratio (sometimes just called, ‘payout ratio’):

2019 2020 2021

Volkswagen 16% 25% 15%
Ford 65% -112% 22%
General Motors 32% 8% 0%
BMW 46% 44% 10%

Total Payout Ratio (calculated as [Dividends + Repurchases] / Net Income)

2019 2020 2021

Volkswagen 16% 0% 20%
Ford 3126% -47% 2%
General Motors 42% 12% 2%
BMW 32% 32% 8%

Comments:

For automotive firms, the Dividend Payout Ratio and Total Payout Ratio give insight into their capital
allocation methods. Volkswagen's dividend payout ratio is lowering from 25% in 2020 to 15% in 2021,
indicating a trend toward preserving more earnings for internal investments or other financial goals.
Ford's negative Dividend Payout Ratio in 2020 implies that the firm paid out more dividends than it
earned, indicating financial stress or exceptional circumstances. Volkswagen's Total Payout Ratio of 20%
in 2021 demonstrates a prudent strategy to distributing income to shareholders when both dividends
and share repurchases are included. Ford's unusually high Total Payout Ratio in 2019 and negative value
in 2020 may imply financial concerns, whereas General Motors and BMW kept their ratios largely steady,
matching with more sustainable capital distribution methods.

These measures demonstrate the many ways organizations take in balancing shareholder returns,
reinvestment in the business, and financial health for investors. Volkswagen's cautious payment policy
may be viewed as smart, allowing it flexibility in handling industry problems and pursuing strategic
objectives.

Return-on-Invested-Capital (ROIC):

2019 2020 2021

Volkswagen 5.04% 2.74% 5.37%
Ford -0.03% -2.26% 2.07%
General Motors 2.58% 2.67% 3.71%
BMW 2.65% 1.81% 4.97%
Here we are using the formula for invested capital = BV Debt + BV Equity – Cash +BV Other LT Liabilities
from simfin financial statements.

The numbers for Volkswagen are calculated and shown on the spreadsheet on the ‘Financial Ratios’ tab.
For purposes of brevity, numbers for the other firms are simply taken from an anonymous online source.
As before, for each firm the latest available three years data are shown.

The return-on-invested-capital (ROIC) statistic measures a company's efficiency in earning returns on its
invested capital. Examining the ROIC reveals important information about their operational efficiency
and capital use. Volkswagen's ROIC has shown varied results over the last three years, rising from 2.74%
in 2020 to 5.37% in 2021. This advancement indicates that Volkswagen has effectively improved its
capacity to create returns on capital invested, demonstrating strong operational management or
strategic efforts. Ford, on the other hand, encountered difficulties, with a negative ROIC in 2019 and
2020. The upward move to 2.07% in 2021, on the other hand, implies probable measures to bring the
firm around, albeit obstacles remain.

General Motors and BMW maintained very steady ROIC numbers during the time, indicating sustained
capital usage efficiency. The incremental rise by General Motors from 2.67% in 2020 to 3.71% in 2021
demonstrates a small but encouraging trajectory. BMW demonstrates better capital efficiency, maybe
through efficient cost management or successful business strategies, with a noteworthy rise from 1.81%
in 2020 to 4.97% in 2021.

Volkswagen's increased ROIC indicates effective attempts to maximize capital use, which might be
accomplished through better operational efficiency, strategic investments, or cost-cutting activities. The
disparities in ROIC trends among peers show the unique operational and strategic difficulties that each
firm encounters. These measures may be important to investors and stakeholders in analyzing the overall
financial health and efficiency of these automotive giants.

Working Capital Management Ratios:

Cash Conversion Cycle:

Volkswagen Ford General Motors BMW

Days Sales
Outstanding
(DSO) 101.61 128.91 98.13 125.53
Days Inventory
(DOH) 76.05 34.81 38.84 61.20
Days Payable 41.09 67.81 67.43 40.03
Cash Conversion
Cycle 136.58 136.57 152.7 146.7

Comments:

The Cash Conversion Cycle (CCC) for major automobile businesses gives insight into the effectiveness of
their working capital management. A lower CCC often suggests better cash flow management and a
faster conversion of resources to cash. Volkswagen and Ford have comparable CCCs of 136-137 days,
implying equal efficiency in the cash conversion process. The breakdown of components, however,
shows discrepancies. Volkswagen has a lower Days Sales Outstanding (DSO) and a longer Days Inventory
(DOH) than Ford, indicating a more efficient sales collection procedure but a possible need for inventory
management improvement.

CCCs for General Motors and BMW are 152.7 and 146.7 days, respectively. The extended CCC of General
Motors is mostly driven by a longer Days Payable period, which may indicate advantageous payment
arrangements with suppliers. Meanwhile, BMW's CCC is impacted by both a longer DSO and a higher
DOH, indicating opportunities for improvement in sales collection and inventory turnover.

Companies with shorter CCCs, like Volkswagen and Ford, are more likely to satisfy short-term obligations
and reinvest in the business more swiftly. Analyzing the CCC components identifies particular areas
where businesses may improve efficiency and optimize their working capital cycle. Focusing on inventory
management might be a strategic concern for Volkswagen, while General Motors may look into ways to
streamline payables. These insights are critical for businesses seeking to manage liquidity, operational
efficiency, and profitability.

VALUATION
Using simfin standardized financial statements and an assumed tax rate of 22%, the following input is
obtained:

• FCFF (2021): Approximately, $45.214 Billion.

In addition, simfin shows the firm having $45 billion in cash. The figure of firm debt as of 2021 is $40
Billion, which is calculated per the firm’s actual financial statements as explained in the WACC PP rather
than only using the “Long Term Debt” figure from simfin. Yahoo Finance lists the firm as having non-
diluted shares outstanding of 5013 million.

For Estimate I, the calculation uses the FCFF calculation for 2021 as above and assumes only a constant,
long-term growth of 2.5%, roughly in-line with WACC of the company and long-term growth of
automotive industry.

For Estimate II, we consider a short term growth rate of 4% given the expansion in EV cars from the firm
and also given rise to investment by many countries to change to EV cars to reduce emissions.

For Estimate III, we use for the short-term ROIC our figure of 5.37%, obtained above. For the long-term
ROIC, we subjectively set ROIC to approximately half of the ROIC 5.37% and its WACC of 5.7% which is
2.5%.

The price per share from each estimate and the actual price per share (as of December 31st, 2021) are
presented below:

Estimate I Estimate II Estimate III Actual Value (Dec 31st, 2021)

$277.07 $306.32 $31.76 $195

Observations:

Comparing these estimates to the Actual Value of $195 on December 31st, 2021, indicates a variance in
market expectations. This discrepancy could be influenced by factors such as market sentiment,
economic conditions, or specific events affecting the automotive industry.

Such diverse valuation estimates underscore the inherent complexity and subjectivity in determining a
company's worth. It's crucial for investors and stakeholders to consider various valuation models, market
dynamics, and industry trends when making informed decisions about Volkswagen and its peers. The
variations in estimates highlight the importance of thorough analysis and a comprehensive
understanding of factors shaping the company's financial standing and market perception.

CONCLUSIONS
In conclusion, Volkswagen's journey in the automotive sector reflects a dynamic interplay of business
strategy, financial decisions, and technological innovation. The financial analysis reveals a nuanced
perspective on Volkswagen's performance. Despite facing challenges, such as the "Dieselgate" scandal in
2015, the company demonstrated resilience and adaptability. Key financial metrics, including profitability
ratios, debt ratios, and return-on-invested-capital, highlight both positive trends and areas for
improvement. Notably, Volkswagen's consistent improvement in net and gross margins reflects effective
cost control and operational efficiency.

However, the negative times interest earned (TIE) ratios and a high debt-to-capital ratio raise concerns
about the company's financial risk and debt management. Addressing these issues is crucial for
Volkswagen to enhance financial stability and withstand economic uncertainties. The valuation estimates
further underscore the complexity of determining a company's worth. The variations in estimates,
ranging from $31.76 to $306.32, emphasize the subjective nature of market expectations. While
Estimate I and Estimate II suggest a relatively optimistic outlook, Estimate III and the actual market value
present a more conservative valuation.

Volkswagen's cautious dividend payout and total payout ratios demonstrate a prudent approach to
capital allocation, allowing flexibility for internal investments and strategic goals. The company's lower
price-to-earnings (P/E) ratio, compared to peers, may indicate an undervaluation, presenting
opportunities for investors but necessitating a deeper understanding of market sentiments.

In the ever-evolving automotive landscape, Volkswagen's financial decisions and strategic initiatives play
a crucial role. Navigating the shift to electric mobility, managing global supply chains, and addressing
regulatory requirements are pivotal challenges. The analysis provides a comprehensive overview of
Volkswagen's financial intricacies, allowing stakeholders to make informed decisions in the dynamic
intersection of business and finance. As Volkswagen continues to shape the future of the automotive
industry, a strategic focus on financial health and sustainable practices will be essential for long-term
success.