Section Three

Financial Analysis:

Profitability Ratios

Gross Profit Margin:

Gro ss Pro fi t M a rg i n
25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
2020 2019 2018

Volkswagen Group BMW Group

Volkswagen Group’s gross profit margin had a falling trend over the last three years from
19.65% in 2018 to 19.45% in 2019 and then to 17.47% in 2020.

In 2020, gross profit margin fell to 17.47%. Sales revenue fell by 11.78% (Other calculations,
Appendix) from prior year. The Group’s business was adversely impacted by coronavirus
outbreak which caused reduced sales volume and revenue levels in the fiscal year 2020
(Volkswagen Group Annual Report, 2020). In the period of initial nine months, delivery levels
had fallen by 18.7% and revenue levels fell by 16.7% as compared to the similar period from
previous year. This is mainly because of a big reduction in demand from customers specifically
after the first quarter. (Automotive World, 2020)

However, cost of sales fell by 9.61% (Other calculations, Appendix) from 2019 to 2020. This
is because of the massive adverse effects of the rapidly spreading coronavirus leading to
production stoppages and fall in demand levels of customers. (Volkswagen Group, 2020)
In 2019, gross profit margin fell to 19.45%. Sales revenue increased by 7.12% (Other
calculations, Appendix) from 2018 to 2019. This is attributable mainly to increased sales of
high profit generating cars such as SUVs to 40% of sales of passenger cars in 2019 from under
25% in the previous year. (Reuters Staff, Reuters, 2020)
Additionally, Volkswagen Group had an increase of 1.6% in the worldwide sales level mainly
because of the Group’s expansion in the market of China. (ET Auto, Economic Times, 2019)

Furthermore, cost of sales increased by 7.38% (Other calculations, Appendix) from 2018 to
2019. The reason for an increase in cost of sales was an increase in volumes as well as a large
increase in Automotive Division’s capital expenditure which led to increased amortization and
depreciation costs. (Volkswagen Group Annual Report, 2019)

In 2018, gross profit margin increased to 19.65% because of an increase in sales revenue.
Worldwide delivery levels increased by 10% in January on comparison with January of 2017
mainly because of 16% increase in sales level in China and increased sales of SUVs. (Charles
Riley, CNN, 2018) This led to an increase in sales revenue in 2018.

However, cost of sales increased in the Group’s Automotive Division in 2018 primarily because
of expansion as well as increased researching and developing expenses and amortization and
depreciation charges. (Volkswagen Group Annual Report, 2018) This led to an increase in cost
of sales in 2018. Gross profit margin increased in 2018 because of a larger increase in sales
revenue as compared to cost to sales.

On the other hand, BMW Group’s gross profit margin had a falling trend over the last three
years from 18.97% in 2018 to 17.33% in 2019 and then to 13.72% in 2020.

In 2020, gross profit margin fell to 13.72%. This is because of 5.01% (Other calculations,
Appendix) reduction in sales revenue from 2019. The fall in sales revenue is because of Covid-
19 pandemic which led to lockdowns being imposed reducing the sales especially in quarter-two
of the financial year. (Reuters, 2020)

However, cost of sales had a minor fall of 0.86% (Other calculations, Appendix) in 2020 from
2019. This was because increased expenses for risk-provisioning, primarily due to
measurement of residual value and credit risks, were offset against the fall in manufacturing
expenses because of reduced volumes of production. (BMW Group Annual Report, 2020)

In 2019, gross profit margin fell to 17.33%. Sales revenue increased by 7.59% (Other
calculations, Appendix) in 2019 as compared to prior year. This was because BMW Group
had a rise of 1.2% in the global vehicle deliveries in 2019 as compared to the previous year.
The major contributing factor to this increase was the newly launched models of BMW X series.
(Xinhua, China Daily, 2020)

Additionally, cost of sales increased by 9.77% (Other calculations, Appendix) in 2019 as

compared to 2018. This was because the Group had increased production expenses due to
increased cost of raw material purchases and rising percentage of electric automobiles
produced. (David McHugh, The Associated Press, 2019)

In 2018, gross profit margin fell to 18.97%. In 2018, the strong competition in the market due to
competitor’s reaction to WLTP rules implementation reduced the positive effect of growth in
delivery volumes. Additionally, selling prices were negatively affected by trade disputes. (BMW
Group Annual Report, 2018) This led to a small fall in sales revenue in 2018.

Furthermore, cost of sales increased slightly in 2018 from prior year. Increased costs were
incurred mainly because of rise in deliveries and raw materials cost. In 2018, 25% tariff was
imposed on steel by US Government which made it costly for local market. Additionally, coking
coal prices increased by 10%. (BMW Group Annual Report, 2018) This led to a rise in cost of
raw materials.

Net Profit Margin:

Ne t Pro fi t M arg i n
8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
2020 2019 2018

Volkswagen Group BMW Group

Volkswagen Group’s net profit margin increased from 5.01% in 2018 to 5.28% in 2019 and then
fell to 3.74% in 2020.

In 2020, net profit margin fell to 3.74%. This was largely because of adverse effects of Covid-19
pandemic which led to a fall of €8.7 billion in operating profit prior to considering special items.
Covid-19 outbreak led to decreased sales volume because of reduction in demand from
customers. Income of €0.8 billion was generated because of subsidiary AID’s contribution to
Argo AI. But an additional cost of €0.9 billion was incurred in connection with the issue of diesel
which reduced operating profit. (Volkswagen Group Annual Report, 2020)
Additionally, profit from operating activities had a fall of almost fifty percentage. The Group
faced several problems from insufficient supply of chips which are required in production
process, outbreak of Covid-19 and strong competition in the field of electrical and autonomous
vehicles development. (Reuters, 2021)

In 2019, net profit margin increased to 5.28%. Operating profit of Volkswagen Group before
considering special items had an improvement of €2.2 billion primarily because of increased
volumes, favorable mix effects, impairment losses reversal after development expenses
remeasurement, optimizations of product cost as well as measurement of derivatives at fair
value. Operating profit improved to €17 billion in 2019. (Volkswagen Group Annual Report,
2019) This led to an increase in net profit.

In 2018, net profit margin increased to 5.01%. Revenue levels had an increase of €6.3 billion.
There was an improved mix and volume, and good performance by Financial Services segment
which balanced the negative impact of exchange rate. Additionally, financial result had an
increase of €1.9 billion because of reduction in interest expenses, measurement of foreign
currency and reduced expenses relating to derivatives measurement. (Volkswagen Group
Annual Report, 2018) All this led to an increase in net profit.

On the other hand, BMW Group’s net profit margin had a falling trend over the last three years
from 7.20% in 2018 to 4.72% in 2019 and then to 3.81% in 2020.

In 2020, net profit margin fell to 3.81%. This was because of closure of franchises and reduced
sales volume caused by Covid-19 pandemic. In the initial six months, the Group had significant
impact because of closure of showrooms and impacted factories when restrictions were
imposed by governments globally. (AFP, 2021)
Furthermore, costs of researching and developing had a fall of four percentage from the
previous year but was still a significant expense of €5.7 billion due to investment in autonomous
vehicles technology, electrification as well as connectivity. (CNA, 2021)

In 2019, net profit margin fell to 4.72%. This was because in the initial three months, operating
profit had a fall of seventy-eight percentage due to a provision for legal expenses of €1.4 billion
and increased investment expenditure. European Commission alleged BMW Group of
participation in collusion with technology for filtering emissions. Additionally, expenditure on
property, plant and equipment increased by 36% in first quarter because of launch of new
automobiles and for manufacturing electric as well as hybrid cars. (The National, 2019)

In 2018, net profit margin fell to 7.20%. In this year vehicle exports from America reduced by
50% when China imposed an additional tariff of 25% on cars made in America as a response to
the ongoing trade dispute. Six out of ten most famous American automobiles exports to China
were sold by Daimler and BMW. The trade dispute between US and China led to an expense of
€300 million for BMW Group. (Bloomberg, 2019) This negatively impacted net profit.
 Liquidity Ratio

Current Ratio:

Current Ratio
1.20

1.18

1.16

1.14

1.12

1.10

1.08

1.06

1.04
2020 2019 2018

Volkswagen Group BMW Group

Volkswagen Group’s current ratio had an increasing trend over the last three years as it
increased from 1.09 in 2018 to 1.12 in 2019 and then to 1.18 in 2020.

In 2020, current ratio increased to 1.18. Lower capital expenditure and €7.6 billion cash inflow
from financing activities such as issuance of hybrid notes and green bonds improved the gross
liquidity position. (Volkswagen Group Annual Report, 2020). Cash, cash equivalents and time
deposits increased by 30.81% (Other calculations, Appendix) in 2020, which was the main
contributing factor to improved current ratio.

In 2019, current ratio increased to 1.12. Total assets of Volkswagen Group increased by 6.5%
from prior year because of increased volume of business in Financial Services Segment, effect
of currency translation and IFRS 16 application. (Volkswagen Group Annual Report, 2019)
These factors have contributed to an increase in current assets such as higher financial
services receivables due to high business volume of Financial Services segment leading to an
increase in current ratio.

In 2018, current ratio increased to 1.09. In 2018, Group’s grossed cash flow increased by 9.1%
from prior year. Working capital levels increased in the year due to a significant fall in diesel
issue related cash outflow and increased inventory due to WLTP implementation. Cash and
cash equivalents significantly increased from prior year end. (Volkswagen Group Annual
Report, 2018). This led to an increase in current ratio.
On the other hand, BMW Group’s current ratio fell from 1.19 in 2018 to 1.10 in 2019 and then
increased to 1.14 in 2020.

In 2020, rise in net operating cash inflows was mainly related to business reduction in segment
of Financial Services due to Covid-19 outbreak. Trade payables reduced in the year, but it only
had a balancing effect as inventory and sales financing receivables reduced. (BMW Group
Annual Report, 2020) This resulted in a small increase in current ratio.

In 2019, additional bonds were issued which led to a significant increase in financial liabilities as
compared to prior year. (BMW Group Annual Report, 2019) This resulted in a fall in current
ratio.

In 2018, there was a significant increase in sales financing receivables primarily because of
higher volumes of credit financing in UK, China, and USA which led to a growth of 7% in
contract portfolio. (BMW Group Annual Report, 2018) This resulted in an increase in current
ratio.
 Gearing Ratios

Debt-to-Equity Ratio

Debt-To-Equity
2.00 1.97
1.95
1.90
1.85
1.81
1.80 1.78
1.75 1.74
1.75 1.72
1.70
1.65
1.60
1.55
2020 2019 2018

Volskwagen Group BMW Group

Volkswagen Group’s debt-to-equity ratio had a small increase from 1.74 in 2018 to 1.78 in 2019
and then fell to 1.72 in 2020.

In 2020, debt-to-equity ratio fell to 1.72. Equity of the automotive segment was €96.7 billion at
the financial year end and had increased by 4.3% from prior year because of an issue of hybrid
notes in June, positive impact from derivatives measurement that were directly recognized in
equity and the profits that were generated. (Volkswagen Group Annual Report, 2020) This led to
a fall in debt-to-equity ratio.

In 2019, debt-to-equity ratio increased to 1.78. Due to the application of IFRS 16, lease liabilities
had to be recognized as financial liabilities. This led to €5.4 billion increase in Automotive
Division’s level of borrowings from third party as compared to prior year. (Volkwagen Group
Annual Report, 2019)

In 2018, debt-to-equity ratio increased to 1.74. Volkswagen Group took out 13 billion funding
swoops as equivalent to euros in four currencies which enabled it to obtain as much as five
times the money in Euros as compared to prior year. (Marcus Ashworth, Bloomberg Opinion,
2018) This led to an increase in financial liabilities resulting in higher debt-to-equity ratio.

On the other hand, BMW Group’s debt-to-equity ratio increased from 1.81 in 2018 to 1.97 in
2019 and then fell to 1.75 in 2020.
Debt-to-equity ratio fell to 1.75 in 2020. In 2020, financial liabilities reduced during the year.
Cash outflow related to financing activities incurred during the year primarily because of
reduced need for finances in the Financial Services Division which led to lower issue of bonds
and payment to banks for settling liabilities. (BMW Group Annual Report, 2020)

Debt-to-equity ratio of 1.97 in 2019 and 1.81 in 2018 means that for every Euro in equity, the
company has got 1.97 and 1.81 Euros in debt respectively. (Corporate Finance Institute, n.d)

Interest Cover

Interest Cover
30.00

25.00 25.94

20.00

15.00
15.26
12.40
10.00 11.11
8.27
5.00 6.09

0.00
2020 2019 2018

Volkswagen Group BMW Group

Volkswagen Group’s interest cover had a falling trend over the last three years from 11.11 times
in 2018 to 8.27 times in 2019 and then to 6.09 times in 2020.

In 2020, interest cover fell to 6.09 times. Operating profits fell massively in 2020. The spread of
covid-19 pandemic led to suspension of production facilities in Europe. It led to many problems
for Volkswagen Group such as the need for taking actions against the widespread virus, rapidly
falling demand levels and disrupted supply networks. (Rachel Siegel, The Washington Post,
2020)

In 2019, interest cover fell to 8.27 times. Interest costs increased significantly in the year
because of an increase in the extent of refinancing, application of principles of IFRS 16 and
increased provision related interest costs. (Volkswagen Group Annual Report, 2019)

In 2018, interest cover increased to 11.11 times. Interest rates were low in 2018 because of the
overall challenging economic situation and the globally continued expansionary monetary
policy. Overall, key rates of interest were at a historically low level in major industrialized
countries of the West. (Volkswagen Group Annual Report, 2018) This led to a fall in interest
expenses in 2018.

On the other hand, BMW Group’s interest cover had a falling trend over the last three years as it
fell significantly from 25.94 times in 2018 to 15.26 times in 2019 and then to 12.40 times in
2020.

In 2019, interest cover fell significantly to 15.26 times. Interest costs increased in the year
because of applying IFRS 16 which led to lease liabilities being recognized and increased
interest unwounded on non-current provisions relating to warranties obligated by statute as well
as those not obligated by statute. (BMW Group Annual Report, 2019)
 Investor Ratios

Earnings Per Share (EPS)

Earnings Per Share

26.60
23.57

16.60

10.6
7.47
5.73

2020 2019 2018

Volkswagen Group BMW Group

Volkswagen Group’s EPS increased from €23.57 in 2018 to €26.60 in 2019 and then
significantly fell to €16.60 in 2020.

In 2020, EPS fell to €16.60. Revenue from sales fell by 11.8% because of negative impact of
exchange rate changes and reduced sales volume. (Volkswagen Group Annual Report, 2020)
Euro had appreciation against many currencies in 2020 such as sterling, real of Brazil, rand of
South Africa, among a few. The uncertain situation relating to the results of Brexit discussions
affected the exchange rate between euro and sterling. (Volkswagen Group Annual Report,
2020) This led to a fall in total earnings of the Group.

In 2019, EPS increased to €26.60. Volkswagen Group had increased its market share in
declining markets and had increased sales of profitable vehicles leading to an increase of 24%
in second quarter’s net profits. In the initial six months of the financial year, sale of Porsche and
high-priced SUVs increased by 9%. (David Mchugh, Associated Press, 2019) This led to an
increase in total earnings of the Group.

In 2018, EPS increased to €23.57. In the initial six months of the financial year, the Group had
high operating profits and increase in revenues. CEO of Volkswagen Group stated that the
increase in sales of vehicles was because of positive reaction of customers to the newly
launched models. (Xinhuanet, 2018) All this contributed to an increase in total earnings.

The number of ordinary shares remained same in the last three years.
On the other hand, BMW Group’s EPS had a falling trend over the last three years from €10.60
in 2018 to €7.47 in 2019 and then to €5.73 in 2020.

EPS fell to €7.47 in 2019. Net other income along with expenses from operating activities fell
greatly from €123 million in 2018 to -€1285 million in 2019 because of recognizing provision of
around €1.4 billion for antitrust legal action taken by EU Commission. However, this expense
was not deductible for tax relief. This was one of the reasons for an increase in the effective rate
of tax. (BMW Group Annual Report, 2019)

The number of ordinary shares remained same in the last three years.

Price to Earnings Ratio (P/E Ratio)

Price to Earnings Ratio

12.61

10.25
9.79

6.51 6.67
5.90

2020 2019 2018

Volkswagen Group BMW Group

Volkswagen Group’s P/E ratio had an increasing trend over the last three years from 5.90 times
in 2018 to 6.51 times in 2019 and then to 10.25 times in 2020.

In 2020, share price of ordinary shares fell to €170.10 from €173.25 in 2019. Losses suffered by
the Group in the financial year led to a fall of 2% in ordinary shares price from prior year. Share
price was affected by the coronavirus outbreak related uncertainty in automobiles demand
worldwide and heavy investment requirements caused by the changing automobile industry.
(Volkswagen Group Annual Report, 2020) EPS had a greater fall than share price leading to an
increase in P/E ratio.

In 2019, share price of ordinary shares increased to €173.25 from €139.10 in 2018. Good
business performance was the main reason for an increase in share price in 2019.
(Vollkswagen Group Annual Report, 2019) This led to an increase in P/E ratio.
In 2018, share price of ordinary shares reduced to €139.10 from €168.70 in 2017. Generally,
share prices fell in the equity markets internationally in 2018. Share price of ordinary shares of
Volkswagen AG fell in line with the falling trend in market. (Volkswagen Group Annual Report,
2018)

On the other hand, BMW Group’s P/E ratio also had an increasing trend over the last three
years from 6.67 times in 2018 to 9.79 times in 2019 and then to 12.61 times in 2020.

The increase in P/E ratio in 2019 was because of an increase in share price from €70.7 in 2018
to €73.14 in 2019. Expansionary monetary policy was adopted by central banks in 2019. Central
bank of Europe decided to have 0.10% reduction in deposit rate and continue bond purchasing
programme. Additionally, interest rates were reduced by Federal Reserve of US with 0.25%
reductions thrice in the year. (BMW Group Annual Report, 2019) So, the rise in share price can
be attributed to this economic factor.