Introduction
Automobile companies BMW and Mercedes-Benz presented annual reports for 2021 at the beginning of 2022. Both organizations use IFRS standards to describe financial information, and neither resorts to GAAP standards. This information is contained at the beginning of the documents, describing their structure and audit principles (BMW Group, 2022; Mercedes-Benz, 2022). However, the presentation format of the income statement and balance sheet differs between companies. This paper presents these differences and analyzes the financial performance and relationships of both automotive organizations to compare their liquidity, efficiency, profitability, and solvency.
Financial Reporting Structure
Mercedes-Benz provides an abbreviated financial reporting format, as its product line is less diversified, unlike the BMW Group. Mercedes makes premium cars and buses, while BMW makes cars, engines, motorcycles, and even bicycles (BMW Group, 2022; Mercedes-Benz, 2022). As a result, both BMW’s income statement and balance sheet are divided into columns, which provide departmental reporting and overall performance. Accordingly, the structure of the description of profits and expenses is generalized, with costs classically differentiated into sales, operating, and tax expenses (BMW Group, 2022; Mercedes-Benz, 2022). The balance sheet and cash flow statement are similar except for BMW’s segment format.
Shareholders most often analyze debt-to-equity ratios in the automotive industry. In the current global crises, the availability of opportunities and free capital for development are key indicators of competitiveness and stability in the market (Llopis-Albert et al., 2021). Return on equity (ROE) is also important for understanding the return on investment—the higher the ROE, the more attractive the brand is for the investor.
Finally, inventory turnover reflects the efficiency of the automotive industry. Although this indicator is quite significant for this business area, it regulates and reflects production and sales within the company, allowing investors to predict short-term growth or recession. It is also worth noting the importance of R&D, as the rapid growth of technology and the transition to renewable energy sources are becoming essential success factors for an automobile company (Llopis-Albert et al., 2021). This industry reflects costs in the cash flow, as well as the costs of equipment and intangible assets.
Liquidity, Solvency, and Efficiency Indicators
A company’s liquidity is reflected in its current ratio, which is calculated by dividing current assets by current liabilities. This instrument at Mercedes-Benz is higher than BMW by about 4 points – 1.17 versus 1.13 (BMW Group, 2022; Mercedes-Benz, 2022). However, BMW has had an upward trend over the past two years, while Mercedes’ assets and liabilities have been falling. This fact suggests that both companies are stable in covering their short-term financial obligations, and the differences between the indicators balance each other in this period.
Solvency is indicated by the debt-to-equity ratio, which reflects a company’s ability to cover future payments and ensure long-term financial stability. In both cases, organizations are recovering from the 2020 pandemic crisis. BMW has a more reliable figure of around 1.04, compared to 1.35 for Mercedes-Benz (BMW Group, 2022; Mercedes-Benz, 2022).
However, the repercussions of the crisis are likely still affecting Mercedes’ sales as a more premium and less diversified brand, as evidenced by the dynamics since 2020 (BMW Group, 2022; Mercedes-Benz, 2022). It is important to note that Mercedes’ debt is dropping at a faster percentage rate, while equity was at about the same level in 2020. Therefore, this factor will be more evident in future years, particularly with a larger sample for long-term stability.
Efficiency is described by the inventory turnover indicator, which is calculated as the ratio of the cost of sales to inventories at the end of the period. The figure for Mercedes is slightly higher, at 5.6 versus 4.8 for BMW (BMW Group, 2022; Mercedes-Benz, 2022). However, BMW has three times this amount of assets, which is very likely due to the broad diversification of the business.
At the same time, in percentage terms, Mercedes optimizes its internal processes and expenses more effectively, which is reflected in the gross profit indicator. Most likely due to the brand’s strength, products have a higher markup and lower production volumes, which also speaks in favor of Mercedes. In addition, compared to 2020, BMW still needs to reduce its inventory indicator in assets. Nevertheless, both companies remain confident about further growth, as sales continue to grow steadily.
Conclusion
For investors, the most apparent profitability ratio is ROE, equal to the ratio of net profit to total equity. Mercedes is almost twice as outperforming BMW, with a 32% share compared to BMW’s 17% (BMW Group, 2022; Mercedes-Benz, 2022). Even though the previous relationship puts the company in a relatively equal position, balanced by diversification from BMW and premium from Mercedes, the latter uses its capital more efficiently. As a result, in the short term, Mercedes is a more profitable investment and more attractive to potential investors, which means it has more future development opportunities. However, for the industry as a whole, BMW performs well, and the shares of this company can be used to diversify the portfolio.
References
BWM Group. (2022). BMW Group Report 2021. Web.
Llopis-Albert, C., Rubio, F., & Valero, F. (2021). Impact of digital transformation on the automotive industry. Technological Forecasting and Social Change, 162, 120343. Web.
Mercedes-Benz. (2022). Mercedes-Benz Group Annual Report 2021. Web.