This report focuses on the analysis of the financial performance of Volkswagen AG using financial ratios and horizontal analysis. The horizontal analysis demonstrated that Volkswagen recovered from the crisis associated with the COVID-19 pandemic, as its revenues and profits increased significantly. The company managed to increase its sales and decrease all types of costs due to optimization of the supply chain. Moreover, Volkswagen AG continued its course of increasing the production capacity of electric cars without increasing the role of debt in its capital structure. The company’s performance in terms of liquidity and efficiency was stable, with slight growth in all the ratios. While Volkswagen’s financial leverage decreased, the role of debt in the capital structure remained high. At the same time, the company’s attractiveness for investments decreased due to the disproportionate growth of share prices in comparison with dividends and profits.Introduction
This report aims at evaluating the financial health of Volkswagen AG in 2021 in comparison with 2020. The COVID-19 pandemic had a significant impact on the automobile sales in 2020, which cause a significant decline in profitability of automotive companies around the globe (Morgan Lewis, 2022). In 2021, the trend to recovery prevailed in the industry, which caused significant improvement in financial health of automotive companies around the globe (Morgan Lewis, 2022). This report focuses on demonstrating how the automotive industry recovered from the influence of the pandemic based on the example of Volkswagen AG.
The report is divided into several sections. First, the report provides a brief overview of Volkswagen AG and its history with mentions of financial milestones and significant mergers. Second, the report provides a horizontal analysis of key financials between 2021 and 2020. Third, the report analyzes the company’s financial performance in terms of profitability, liquidity, leverage, efficiency, and investment using appropriate financial ratios. Fourth, the report provides brief conclusions. The paper is concluded with a set of recommendations for Volkswagen AG to improve its financial performance.
Company Overview
Volkswagen AG is a multi-national company operating in the automobile industry, as its primary operations are associated with producing, marketing, and servicing vehicles (Volkswagen AG, n.d.). The company operates in four segments, including Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering, and Financial Services (Yahoo Finance, 2022). The company operates under ten brands, which are subdivided into volume brands (Volkswagen, Volkswagen Commercial Vehicles, Skoda, SEAT, and CUPRA), premium brands (Audi, Lamborghini, Bentley, and Ducati), and sport (Porsche). The company has 120 production plants in Europe, Asia, Americas, and Africa with 51.5% of the plants concentrated in Europe (Volkswagen AG, n.d.). The company’s long-term strategy is “NEW AUTO – Mobility for Generations to Come,” which emphasizes the importance of sustainability in the automobile production (Volkswagen AG, n.d.). The company set a high goal of becoming a world leading provider of sustainable mobility (Volkswagen AG, n.d.).
Volkswagen AG is considered one of the top employers in the world, and it currently employs 662,575 workers worldwide (Volkswagen AG, 2022). Its total revenues increased from €222,884 million in 2020 to €250,199 million in 2021 and its net profit was €14,843 million in 2021, which was the highest during the past five years (Volkswagen AG, 2022). Thus, there is a strong basis to state that the company has recovered from the effect of the pandemic.
Company History
The company was formally established on May 28, 1937 as the ‘Company for the Preparation of the German Volkswagen Ltd.’ (Volkswagen Newsroom, n.d.). In 1938, the name was changed to ‘Volkswagenwerk GmbH’, as the company built its first plant in Wolfsburg (Volkswagen Newsroom, n.d.). World War II had a significant impact on the company’ operations, and it was forced to use its facilities to build armed vehicles (Volkswagen Newsroom, n.d.). After the war, the British instructed the company to focus on production of two models of vehicles, including Käfer and transporter, which became a symbol of German economic miracle (Volkswagen Newsroom, n.d.). Further, in the 1960s, the company tuned into a joined stock company and added Passat, Scirocco, Golf and Polo models to production in the 1970s (Volkswagen Newsroom, n.d.).
In 2015, Volkswagen AG experienced a turning point in its modern history. In September, the Environmental Protection Agency (EPA) found that Volkswagen used software that could determine if the engine was tested (Hotten, 2015). The device would change the performance of the engine to provide better environmental test results (Hotten, 2015). The scandal had a devastating effect on the company’s reputation and financial performance (Volkswagen AG, 2016). As a result, Volkswagen changed its long-term strategy to move to sustainable mobility through development, production, and marketing of electric cars (Volkswagen AG, 2016).
Horizontal Analysis
This section focuses on the horizontal analysis of the company’s income statement. The analysis aimed at determining how the company’s ability to generate income during the past three years. Horizontal analysis provided in Table 1 below focuses on the central figures included in the income statements, such as net sales, COGS, operating profit, and net profit. The data utilized for calculations was extracted from the company’s annual reports and reports for FY2021 and FY2020. All the crucial financial data is provided in Appendix A.
Table 1. Horizontal analysis
In 2021, Volkswagen experienced a significant rise in sales in comparison with 2020. In particular, sales increased from €222,884 million in 2020 to €250,199 million in 202, which signified a €27,315 million (12.26%) increase. The increase in sales is associated with the overall market recovery after the pandemic and an increase in sales of electric cars (Morgan Lewis, 2022; Volkswagen AG, 2022). While the increase is significant, the sales did not return to the pre-COVID levels of €252,633 million (Volkswagen AG, 2021).
The cost of sales increased from €183,937 million in 2020 to €202,959 million in 2021, which signified a €19,022 million (10.34%) increase. Cost of sales grew disproportionately with sales, which allowed the company to increase its gross profit faster than sales. In particular, the company’s gross profit grew from €38,947 million to €47,240 million, which was a 21.29% increase. This implies that the company’s gross profit grew almost twice as faster as sales. Net income grew even faster after the pandemic, as it increased from €8,334 million in 2020 to €14,843 million in 2021, which signified a 78.1% or €6,509 million net increase in the net profit. This implies that the company was able to reduce operating, administrative, and direct production cost despite the shortage of semi-conductors in the world (Volkswagen AG, 2021). The central reason for the reduced cost is the course to optimization of the supply chain and increased emphasis on labor efficiency through employee training and education (Volkswagen AG, 2021).
While the income statement demonstrated significant victories of the company, the balance sheet had fewer remarkable figures. The company’s total assets increased from €497,114 million in 2020 to €528,609 million, which was a 6.34% or €31,495 million. The increase in total assets was largely to the growth of non-current assets, which increased from €302,170 million in 2020 to €328,261 million in 2021, which was a 8.63%. Current assets grew only by 2.77%; however, since current liabilities decreased by 0.61%, slow growth of current assets was not a concern. The growth in total assets was due to continues growth of electric car manufacturing capacities in China and the rest of the world. Volkswagen AG continues converting its plants producing vehicles with internal combustion engines to production of electric cars (Volkswagen AG, 2022).
Total liabilities grew from €368,331 million in 2020 to €382,455 million in 2021, which accounted for €14,124 million o 3.83% increase. The increase was associated with the company trying to take an advantage of low interest rates after the pandemic and financing its long-term assets with debt (Volkswagen AG, 2022). However, it should be noticed that the company’s shareholders’ equity grew at a faster pace, as it increased from €128,783 in 2020 to €146,154 in 2021, which was a 13.49% growth. This implies that the company decreased risks associated with high financial leverage. Volkswagen AG’s management realized the eminent danger of future waves of the pandemic and decided to reduce its risks by reducing the role of debt in the capital structure and increasing liquidity.
In summary, horizontal analysis of the company’s key financials demonstrated that 2021 was a year of recovery after the devastating effect of the pandemic. The company managed to increase its sales and decreased all types of costs due to optimization of the supply chain. Moreover, Volkswagen AG continued its course on increasing the production capacity of electric cars without increasing the role of debt in its capital structure.
Ratio Analysis
This section of the report focuses on the discussion of the company’s financial health using ratios. The section is subdivided into five subsections according to the type of ratios, including profitability, liquidity, efficiency, leverage, and investment ratios. Volkswagen’s ratios for 2021 are analyzed against the company’s ratios for 2020 and against the ratios of BMW, when of the largest Volkswagen’s competitors. The calculations of all the ratios for Volkswagen AG are provided in Appendix B. The summary of all the ratios against BMW’s ratios is provided in Appendix C.
Profitability
The company’s profitability was measured using four ratios, including gross profit margin (GPM), net profit margin (NPM), return on capital employed (ROCE), and return on equity (ROE), which are recommended for use by Gowthorpe (2021). The ratios are provided in Table 2 below.
Table 2. Profitability ratios
The company’s GPM increased from 17.47% in 2020 to 18.88% in 2021, which demonstrates that the company managed to decreased its direct production costs in 2021. Volkswagen’s GPM was close to that of BMW’s GPM with a difference of less than 1%. However, Volkswagen’s NPM was almost twice as low as BMW’s NPM in 2021. The implies that despite Volkswagen’s increase in NPM from 3.74% in 2020 to 5.93% in 2021, the company was unable to decrease its administrative and other costs to match BMW’s NPM.
The analysis of ROCE revealed that Volkswagen improve its ability to convert capital into profit. In particular, the company’s ROCE increased from 3.03% in 2020 to 4.38% in 2021, which signified an increase in ROCE by 135 percentage points. However, Volkswagen’s ROCE was more than twice as low as BMW’s ROCE.
Similar situation concerned Volkswagen’s ROE, which increased from 6.47% in 2020 to 10.16% in 2021. According to Elliott and Elliott (2015), the higher a company’s ROE, the higher its ability to use shareholders’ equity to generate income. In 2021, Volkswagen’s ROE grew by 57% or by 369 percentage points, which is a significant increased in one year. However, Volkswagen’s ROE was significantly lower than that of BMW of 16.48% in 2021.
In summary, Volkswagen demonstrated a large increased in profitability according to all four metrics utilized in this report. However, all Volkswagen’s ratios were below that of BMW, which shows that there is further potential for development.
Liquidity
A company’s liquidity measured demonstrates if a company has enough current assets to cover its current portion of debt. There are two ratios that are usually used to measure a company’s liquidity, including current ratio and quick ratio (Arkan, 2016). Current ratio is calculated by dividing the current assets by current liabilities. Today, many companies consider current ratio of ‘1’ optimal for operations, as it implies that the company has just enough money to cover its current debt without attracting additional capital (Gowthorpe, 2021). While this ratio is easy to calculate, there is significant danger in relying on current ratio only for measuring a company’s liquidity. The problem with the current ratio is that it considered inventory in its calculations, which may difficult to convert into cash. Therefore, this report uses quick ratio in combination with the current ratio. Quick ratio is calculated by current assets less stock divided by current liabilities. The primary advantage of this ratio in comparison with the current ratio is that it does not take into consideration inventories, which may be difficult to convert in cash and use to cover the current expenses. The ratios for Volkswagen and BMW are provided in Table 3 below.
Table 3. Liquidity ratios
Volkswagen’s current ratio increased from 1.18 in 2020 to 1.22 in 2021, which demonstrated a mild increase. The increase in the current ratio was due to the slight growth in current assets and a slight decrease in current liabilities demonstrated in Table 1. Volkswagen’s current ratio in 2021 was also slightly above BMW’s current ratio, which was 1.13. Volkswagen’s quick ratio of 0.95 in 2021 was also above BMW’s quick ratio for the same year and Volkswagen’s quick ratio in 2020. In summary, Volkswagen’s liquidity measured using current and quick ratio was close to the benchmark of ‘1’ and to BMW’s liquidity. This implies that Volkswagen’s performance in terms of liquidity was solid.
Efficiency
Volkswagen’s efficiency was measured using five ratios, including inventory turnover ratio, asset turnover ratio, receivables turnover ratio, payables turnover ratio, and revenue to capital employed. The results of ratio calculations are provided in Table 4 below.
Table 4. Efficiency ratios
Volkswagen inventory turnover ratio increased significantly from 4.23 in 2020 to 4.68 in 2021. This implies that the company’s ability to sell of its inventory remained roughly the same. Despite a mild increase, Volkswagen’s stock turnover ratio was below BMW’s stock turnover ratio in 2021 by 18.5%. In 2021, Volkswagen’s asset turnover ratio remained roughly the same with 0.47 and 0.45 in 2021 and 2020 correspondingly. The ratio was comparable to that of BMW’s, demonstrating a solid performance in Volkswagen’s ability to use its assets to generate revenue. Similarly, Volkswagen’s revenue to capital employed ratio also remained roughly the same, growing from 0.67 in 2020 to 0.69 in 2021, which was comparable to BMW’s ratio of 0.73. This ratio demonstrated that Volkswagen’s ability to use capital to generate sales was stable and satisfactory.
In 2021, Volkswagen demonstrated outstanding performance in terms of payables and receivables turnover ratios. The company’s receivables turnover ratio increased from 13.04 in 2020 to 15.75 in 2021, demonstrating a solid growth in company’s ability to collect payments from its customers. The ratio was 15 times higher than that of BMW’s (1.3), which signifies Volkswagen’s excellent efficiency of payment collection.
Volkswagen also demonstrated an excellent ability to pay for the purchases, as the company’s payables turnover ratio increased from 10.76 in 2020 to 12.78 in 2021. The performance was optimal, as it took around one month for the company to pay for the purchases bought on account. Additionally, the ratio was comparable to that of BMWs.
In summary, analysis of Volkswagen’s efficiency revealed a steady growth in all ratios. The strongest side of Volkswagen’s performance was receivables turnover ratio, while the weakest spot of the company in terms of efficiency was inventory turnover ratio. It is worth mentioning, however, that the company produced two million cars fewer than it planned to produce due to semiconductor shortages in 2021 (Volkswagen AG, 2022). This demonstrates that the company sees the current inventory management as optimal and would have more inventory if it was possible.
Financial Leverage
A company’s financial leverage demonstrates how aggressively it uses debt to finance its assets. Volkswagen’s financial leverage was measured using debt (debt-to-assets) ratio and interest cover ratio. The results of ratio calculations are provided in Table 5 below.
Table 5. Financial leverage ratios
The analysis of ratio demonstrated that Volkswagen’s performance in term of financial leverage improved in 2021. The company’s debt ratio decreased from 0.74 in 2020 to 0.72 in 2021, which demonstrated a lower reliance on debt. Moreover, the company’s ability to pay interest measured in the interest cover ratio increased from 4.39 in 2020 to 8.77 in 2021. While Volkswagen’s performance in terms of financial leverage improved, the company is still behind BMW, which had a debt ratio of 0.67 and interest cover ratio of 57.01 in 2021.
Investment Appraisal
Volkswagen’s attractiveness for investors was measured using earnings per share (EPS), price-to-earning (P/E) and dividend yield ratios demonstrated in Table 6 below.
Table 6. Investment ratios
Volkswagen’s EPS increased from €1.66 in 2020 to €2.96 in 2021 due to a rise in net profit, while its total shares outstanding remained the same. At the same time, due to a significant increase in share price, the company’s P/E ratio also increased from 9.73 in 2020 to 11.1 in 2021. Such an increased in the P/E ratios demonstrates that the company’s stocks are highly overvalued. BMW’s P/E ratio was 4.75, which is closer to the benchmark of ‘1’. As a result, investors may believe that Volkswagen’s shares are not a reliable investment and may decide to sell them. Moreover, Volkswagen’s attractiveness from the viewpoint of dividend yield ratio decreased from 3.5% in 2020 to 1.78% in 2021. For comparison, BMW’s dividend yield ratio was 4.25% in 2021, which is almost three times higher than that of Volkswagen’s. In summary, even though Volkswagen’s EPS grew in 2021, the company’s share became less attractive due to a dipropionate growth in share price from €16.17 per share in 2020 to €32.88 per share in 2021.
Conclusions
The analysis of Volkswagen’s financial performance demonstrated a recovery from the crisis associated with the COVID-19 pandemic. Volkswagen’s profitability, efficiency, and financial leverage demonstrated a slight to moderate improvement, while the company’s liquidity remained roughly the same. The only major concern was associated with the company’s performance in 2021 was attractiveness to the investors, as the share prices grew disproportionally in comparison with profits and dividends. At the same time, when compared to the financial performance of BMW for the same year, Volkswagen has potential to grow in terms of profitability, and financial leverage.
Recommendations
Considering all the aspects of Volkswagen’s financial performance, the following recommendations were developed.
- Volkswagen should search for ways to reduce administrative costs. The analysis of GPM and NPM demonstrated that the company demonstrated outstanding performance associated with decreasing the direct cost sales. However, Volkswagen appeared to spend more on administrative costs in comparison with BMW, which revealed an area fir further improvement.
- Volkswagen should dedicate to reduction of the role of debt in its capital. While Volkswagen managed to decrease its debt ratio and improve its interest cover ratio, the company still relies on debt more than its competitor. Considering growing uncertainty associated with the COVID-19 pandemic and the situation in Ukraine, it is crucial to continue decreasing risks associated with debt.
- Volkswagen should increase its dividends. Currently, the company’s shares do not look attractive in comparison with the competitors. Therefore, the company should consider increasing dividends since the company’s profits grew significantly.
- Investors should consider selling the company’s shares. Volkswagen’s stock is currently overpriced. Therefore, investors should consider searching for other possible investors.
References
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BMW Group. (2022). Annual report 2021.
Elliott, B. & Elliott, J. (2015). Financial accounting and reporting. Pearson.
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Morgan Lewis. (2022). Automotive industry: Year in Review 2021.
Volkswagen AG. (2016). Annual report 2015.
Volkswagen AG. (2021). Annual report 2020.
Volkswagen AG. (2022). Annual report 2021.
Volkswagen AG. (n.d.). Group.
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Yahoo Finance. (2022). Volkswagen AG.
Crucial Financial Data
Note: All numbers in million except per share value. Currency is Euro.