Table of Contents
TOC o “1-3” h z u Introduction PAGEREF _Toc517063888 h 2Return on Capital Employed and Asset Turnover Ratios PAGEREF _Toc517063889 h 4Gross profit margin PAGEREF _Toc517063890 h 6Gearing Ratio PAGEREF _Toc517063891 h 13Efficiency Ratios and Overall Ratios Analysis PAGEREF _Toc517063892 h 15Days Outstanding Sales PAGEREF _Toc517063893 h 15Days Inventory Ratio PAGEREF _Toc517063894 h 16Payable Inventory Ratio PAGEREF _Toc517063895 h 17Receivables Turnover Ratio PAGEREF _Toc517063896 h 17Asset Turnover Ratio PAGEREF _Toc517063897 h 19
Organisations around the globe look to achieve their objectives by establishing funds and then investing them in different types of assets, for example, buildings, machinery, vehicles. Financial Management is all about preparing, directing and controlling the money activities of a company. Notably, the aim of Financial Management is to also maximise wealth and to determine the performance and stability. According to Mr Brian Finch “Financial management is crucial at all stages in the business cycle and whatever the state of the business” (Finch, 2010)
The purpose of this essay is to choose two real life companies and evaluate their financial performance and management practices in which includes ratio analysis, beta estimation and business valuation for better understanding of how these two companies perform and compete. This does not focus upon the competition with each other, but as a whole industry itself.
This report will compare the performances of two automotive industry giants, Audi and PSA Group (Peugeot and Citroen). Audi is a German car manufacturer and specialises in the premium and supercar segment since the 19th century. (Audi.com, 2018) PSA Group is a French car manufacturer, whose strategy is to adapt to the times and customer needs. (Groupe PSA, 2018)
Automotive Industry has a ripple effect on most economies throughout the world, with both companies competing in most markets, including USA and China markets in which are considered the largest in the world.
Profitability ratios are one of the most frequently used tools of financial ratio analysis, and is used to measure a company’s overall efficiency and performance. Profitability ratios are divided in two categories: margins and returns. Ratios that show margins represent the firm’s ability to translate sales into profits at various stages of measurement. Ratios that show returns represent the firm’s ability to measure the overall efficiency of the firm in generating returns for its shareholders. (Anon, 2018)
Table 1 Profitability ratios
Profitability ratio Audi Peugeot and Citroen
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
ROCE (%) 21.53 17.49 16.07 13.74 7.57 -20.28 -11.89 1.90 10.67 10.55
Asset Turnover 1.95 1.73 1.63 1.66 1.47 2.39 4.13 4.57 2.95 2.18
NPM (%) 12.21 10.67 11.14 9.04 5.14 -9.24 -4.13 -1.01 2.44 4.34
GPM (%) 19.94 18.42 17.42 19.47 16.74 14.18 14.42 16.50 18.59 19.10
OPM (%) 11.03 10.09 9.57 8.28 5.15 -8.47 -2.88 0.42 3.61 4.83
Figure 1 ROCE margin
Return on Capital Employed and Asset Turnover RatiosROCE is mainly used by existing or potential investors to find out what return is generated from a company’s capital in use. As seen from the chart, Peugeot group has steadily increased their ROCE from -20.28% to 10.55% whilst Audi’s ROCE decrease from a healthy 21.53% to 7.57%. During 2012 Peugeot group reported a significant loss when sales dropped by 10.5% (Globalcapital.com, 2018) due to auto industry crisis across Europe, which saw car sales dropped by 8% in entire Europe’s market. (Pfanner, 2018) It led to almost 8000 job cuts to save 1 billion euros in costs. It managed to recover, and increase their ROCE to 10.55% in 2016. This is due to their new “Push to Pass” plan, a new 6 years’ strategy, which focuses on meeting its customers’ mobility needs as well as cutting company’s carbon footprint. The different strategies were implemented for different regions. (PSA Group – Push to Pass, 2018) On the other hand, Audi had a high 21.53% ROCE ratio in 2012. It appeared to be a result of an increase in sales by 11.70%, but it significantly decreased over the next 2 years because of the drop in sales in China’s market. The reason behind this is the overall market’s slowdown. Despite the fact China’s market is considered the largest automobile market in the world. (Ft.com, 2018) Also, Audi being a part of Volkswagen group, was affected by diesel emission scandal in 2015 which led to operating losses. (Ft.com, 2018) Since then Germany-based company has invested $3bn to keep up with technologies which influenced Audi’s financial situation. (Ft.com, 2018)
Figure 2 GPM and NPM
Gross profit margin
Gross profit margin is a key measure of profitability by which investors compare similar companies. Gross profit margin is calculated by subtracting cost of goods sold from total revenue and dividing that number by total revenue. The gross profit margin percentage tells us what percentage of every euro of sales revenue remains after the cost of purchasing or manufacturing the inventory.
The gross profit margin of Audi was at the lowest point at 16.74% during the 5-year period while Peugeot achieved the highest point of 19.10%. According to the 2016 annual report, there was a decrease of 3.48% of Audi’s net profit margin. Meanwhile, Peugeot achieved a high profit margin of 8.51% within the same period.
It is very important to emphasize the factors of healthy profits. It is more accurate to say that Audi’ positive annual profit depended on combined manufacturers like VW, Skoda, Seat, Lamborghini and Bugatti. Audi were facing legal action alongside VW, Seat and Skoda by the 2015 emission scandal. It been confirmed that has affected more than 3 million cars across Europe and hundreds of thousands in the UK. (Patrick Sawer, 2018) Emission scandal is one of the reasons of the lower gross profit margin and significant decrease of net profit margin. Despite being embroiled in the scandal, the group’s larger luxury brand holding a strong position in China as well as in Europe and even showed recognition in the U.S.
During the last 5 years Peugeot significantly increased its profits. However, the company has experienced difficulties during 2012-2013 when Peugeot’s gross profit margin reached the lowest point of 14.10% and the net profit margin faced a loss of 7.93%. The implications encountered was the 8000 job cuts and the closure of a plant as they undergone serious losses during 2012. According to Eric Hauser, a London –based auto analyst, “This is a company that has run out of options, Peugeot has lost the plot in European small cars, which were its traditional mainstay.” (U.S., 2018) The PSA group reported net gross profit margin at 4.91% at 2015, it is a 5.18% increase from the previous year which gave historical high increase in the company’s past performance. At 2016 Peugeot accounted the net profit margin of 8.51% and has a 3.60% increase from the previous year. The reason of the higher profits and revenue figures is that the French car maker cut the costs, increased productivity and reduced discounts on vehicles. Increase in the profit and revenue highlights the company’s transformation under Mr. Tavares, who took the top job at Peugeot in 2014. He implemented a turnaround plan to transform the former money-loser into a player in the cut-throat auto industry. “Surprisingly, we’ve had our biggest amount of improvement in Europe,” said Carlos Tavares, chief executive at the company in an interview with The Wall Street Journal. (MarketWatch, 2018)
Liquidity ratios analyse the ability of a company to pay off both its current liabilities as they become due as well as their long-term liabilities as they become current. In other words, these ratios show the cash levels of a company and the ability to turn other assets into cash to pay off liabilities and other current obligations. (My Accounting Course, 2018)
Liquidity Ratios Audi AG(€m) Peugeot (Group PSA) (€m)
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
CURRENT RATIO (%) 1.45% 1.54% 1.51% 1.43% 1.56% 1.04% 1.02% 1.04% 1.01% 1.04%
QUICK RATIO (%) 1.17% 1.26% 1.24% 1.14% 1.22% 0.87% 0.87% 0.46% 0.57% 0.83%
WORKING CAPITAL 6916 8816 9506 9246 11698 1530 725 1451 165 791
Table 2 Liquidity Ratio
Figure 3 Audi Liquidity Ratios
Peugeot (Group PSA)
Figure 4 Peugeot Liquidity Ratios
The current ratio measures a company’s ability to pay off its current liabilities (payable within one year) with its current assets such as cash, accounts receivable and inventories. (Anon, 2018)
The biggest change in Current Ratio of Audi was 0.13% during 2015-2016. In 2016 securities which include fixed or variable-interest and shares in equity increased from €4782m (2015) to €6028m (2016) (Annual Report 2016, 2016) Overall, current ratio of Audi in 2016 was 1.56% which generally indicates good short-term financial strength while current ratio of Peugeot in 2016 was 1.04% and the biggest difference in Current Ratio was exactly the same within the 2015-2016. During this time, the current ratio of Peugeot increased by only 0.03% which was the highest positive jump in the current ratio since 2012. It is due to the establishment given on the 6th February 2015 of a new syndicated loan and the repayment and cancellation of the syndicated term loan and syndicated back-up credit facility, the system in force ensures the financing over the next 12 months. (Groupe PSA, 2018) Negative change in current ratio of Audi AG happened during 2014-2015 when it dropped by 0.80%. According to Automotive News. (Automotive News, 2018)
Audi said its operating profit fell 6.1% to €4.84 billion on emissions-related costs of €228 million, combined with provisions for recalls of cars fitted with Takata Corp. airbags. The biggest negative change in current ratio of Peugeot was 0.03% within 2014-2015. One of the reasons of decrease in current ratio is that the shares of European carmakers, including PSA Peugeot Citroën and Renault has also declined, highlighting investors’ fears that the VW scandal will speed the decline of diesel. (Ft.com, 2018)
The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets and therefore excludes inventories from its current assets. It is also known as the “acid-test ratio.” (Anon, 2018)
Peugeot had a very challenging quick ratio performance during the 5 years. In 2012 Peugeot had a quick ratio of 0.87% which remained exactly the same in 2013. In 2014, the quick ratio decreased significantly due to a huge drop in net profit: “Taking into account the net income tax benefit of €160 million, determined in accordance with the rules governing the tax consolidation of Peugeot S. A. and its 95% or more controlled subsidiaries, Peugeot S. A. reported €300 million in net profit, compared with €454 million for 2013” (Audi.com, 2018)
In 2015 it increased by 0.11% and was 0.57% and then later in 2016 it jumped to 0.83%. High increasing ratio generally indicates that a company is experiencing solid top-line growth. (Gurufocus.com, 2018)
In terms of Audi’s quick ratio performance, the company didn’t experience any volatile movements. The highest quick ratio of 1.26% that Audi had in 2013, which had increased by 0.09% from 2012. The reason for the slight increase was that: “In 2013, Audi opened a research and development centre in Beijing to develop technology that will aim to monetise in China first, and then export globally. Also, Audi has already been successful developing technology in China and then deploying it elsewhere.” (Ft.com, 2018) In the following year, the quick ratio dropped only by 0.02% and the year after it decreased by 0.10% leading to a quick ratio of 1.14% in 2015. This was caused by the Audi scandal in which thousands of luxury car models sold in Britain were requested to be recalled amid the continuing scandal over fake emission results. (Patrick Sawer, 2018) In 2016, quick ratio increased by 0.08% and stayed at 1.22%. Decreasing the quick ratio generally suggest that a company is over-leveraged, struggling to maintain or grow sales. (Gurufocus.com, 2018)
Companies have the right to decide whether to issue dividends to investors, to retain and reinvest its earnings to start new projects or to acquire new assets such as new innovative technology. In the understanding of shareholders, profitability does not necessarily add values to their overall wealth unless it converges into dividend payment. Therefore, insinuating that profitability without dividend and increasing the share price may not be applicable to shareholders. (Berk and DeMarzo, 2017) Throughout 2012 and 2015, Peugeot did not pay cash dividends on its common stock, but shareholders should expect changes within the near future. Any future declarations and payments of dividend is determined by the board of directors. Managing boards gave more priority to allocating financial resources to the group’s development (Jiraporn, P, Kim, 2011), for example the ‘push to pass’ strategic plan. Moreover, Peugeot has directed its focus on 3 internal areas: digital transformation of the group, internal performance culture and corporate social responsibility (PSA Group, 2018). This should continue attracting positive present value projects with the aim of generating sufficient profits to make it worthwhile to Peugeot investors.
On the other hand, Audi is owned and controlled by Volkswagen, as they hold 99.55% of the shares of Audi (Audi Annual report, 2016). This means that Audi has to provide the parent company with its annual profits. Due to the acquisition, Audi has a limited degree of control in comparison to Peugeot, which is 100% responsible for its decision making.
The pay-out ratio above illustrates the pay-out percentage Volkswagen has received from Audi as part of the acquisition. The pay-out ratio is used to measure the proportion of earnings paid out as dividend to shareholders. The profitability transfer is used in this case because it reflects the quantity of shares owned by Volkswagen. The pay-out ratio has been significantly disproportionate to the percentage of ownership owned by Volkswagen (99.55%). For instance, from 73% in 2012 to 44% in 2016 which is less than the acquired demand from Volkswagen. It implies that Audi is retaining more profits for growth and development. For example, in 2012, Audi acquired Ducati for 860 million euros in order to expand its portfolio (Ash, K, 2012). This suggests that Volkswagen is allowing Audi to use its retained earnings for growth and development purposes instead of using a constant dividend policy.
Gearing ratio is a measure of financial leverage and is considered as a key ratio that concentrates on the proportion of assets invested in a business that is funded by the long-term borrowing. (McLaney and Atrill, 2014) The ratio focuses on the stability of a business long term as well as the overall means by which a business finances its operations. Gearing has significant consequences on the long-term stability of a company because of its effects on financial risk since both debt and equity have quite different characteristics. Since the automotive industry is capital-intensive and that debt is a major source of funding, it is evident that both Audi and Peugeot will rely on debt. As shown above, the gearing ratio of Peugeot shows a decreasing trend from 2013 to 2016, indicating financial safety of the company. The possible cause of the decreasing trend is the decreasing long-term liabilities from 2013 to 2016 and also the increase in capital employed. (Bowhill, 2008) Thus reducing the amount of debt, which can reduce the overall capital of the business. Nevertheless, reduction in gearing levels indicates a stronger profitability since interest on funds reduced.
When it comes to Audi, their leverage ratio is much lower and consistent, slight increase approaching the year 2014. Between the last three financial years Audi’s gearing ratio decreases from 40.09% (2014) to 37.17% (2016). The observed trend was caused by a decrease in levels of long-term debt in 2012. The ratio presents a slight fluctuation throughout the 5 years and is flowing around the 40.00% line. The financial implication of the slight decrease is that less capital is available to facilitate projects.
Efficiency Ratios Analysis
Table: Efficiency ratios for Audi and Peugeot
Efficiency Ratios 2012-12 2013-12 2014-12 2015-12 2016-12
Days Sales Outstanding Audi 19.68 19.86 23.15 24.19 27.62
Peugeot 13.32 11.78 9.81 9.26 10.46
Days Inventory Audi 40.7 39.58 39.31 44.18 50.07
Peugeot 49.1 46.93 40.04 33.58 34.83
Payables Period Audi 39.56 42.31 45.15 50.54 53.99
Peugeot 69.53 66.02 66.57 69.76 76
Inventory Turnover Audi 8.97 9.22 9.28 8.26 7.29
Peugeot 7.43 7.77 9.12 10.87 10.47
Asset Turnover Audi 1.26 1.17 1.12 1.09 1.01
Peugeot 0.83 0.87 0.89 0.99 1.15
It was mentioned by H. Agha, (Agha, 2018) that the efficiency ratios are used by the financial managers to investigate how effectively the business uses its resources and assets, and how efficiently it manages its liabilities.
Days Outstanding Sales
Days Outstanding SalesThe day outstanding sales (DOS) for Audi increased in the 5 years trend, from 19.68 to 27.62 days implying that a negative main reason could be the 2015 emission scandal and car recalls. (U.S., 2018)
In case of Peugeot this indicates that sales in the past years increased more than credit sales and the ratio decreased from 13.32 to 9.26 days positively and last year increased to 10.46 days which had a negative impact on DOS. This means that customers of Peugeot are more satisfied as compared to Audi’s. (Owolabi and Obida, 2018)
Days Inventory RatioThe days’ inventory ratio for Audi increased for the past 5 years (41 to 50 days) while Peugeot’s decreased for the last 4 years (49 to 34 days) but the slight increase was noticed in 2016 (34 to 35 days) because of the held inventory. As per Vernimmen, (Vernimmen et al., 2014) this indicates that Peugeot is more efficient in turning its inventory into cash. Audi’s figures are showing a high rate of increase in inventory numbers which is higher than the increase in cost of goods sold. Also, Peugeot has a better and more streamlined relationship with dealership stores and suppliers enabling them to move stock faster and/or undertake better price adjustments on the actual car sales to boost revenue figures. (PSA Peugeot Citroen 2014 registration document).
Payable Inventory RatioThe payable inventory ratio for both Audi and Peugeot indicates similar trends which shows that both companies extended time in paying the payables (Audi 39.56 to 55.28 days; Peugeot 69.53 to 76 days). Audi’s days payable outstanding (DPO) increased more than Peugeot DPO even though overall it is shorter compared to Peugeot. The main reason is the rate of increase in payable is higher than the rate of increase in cost of goods sold. Peugeot’s DPO is higher than Audi’s which means that Peugeot holds cash longer which can be used for current investments and positively increase working capital. (Capitaliq.com, 2018) This indicates that the problem can be in the policies of both companies and/or the suppliers have provided leniency to both companies regarding the payables arrangements. (Brigham and Ehrhardt, 2013)
Chart is missing for receivables turnover
Receivables Turnover Ratio Audi’s trend decreased whilst Peugeot’s trend has a slight increase in the last 2 years. The ratio for Audi declined from 18.54 to 13.22 times in 1 year but Peugeot increased in the first 4 years (from 27 to 39 times per year) while in last 1 year decreased to 35 times per year. Therefore, both companies need to review their credit policies for improvement of collection procedures and their overall efficiencies. (Higgins, 2012)
In this case Peugeot Receivable Turnover is more efficient and is improving year by year with the main reasons strict credit policy and aggressive collection department policy, in addition high quality customers positively influence situation. Audi is in opposite position; receivable turnover increased meaning cash collection days are longer, i.e. the credit policy is weaker including collection procedures. (Bragg and Bragg, 2018)
Inventory Turnover Ratio
The trend for inventory turnover ratio of Audi for 5 years indicates that it was stable for 3 years between 2012 and 2014 but then started to decrease in 2015. It means that it has become less efficient in converting its inventory into the sales according to the increase on inventory and decrease on sales. The reason of this is 2015 emission scandal when Audi had to recall cars manufactured between 2009 and 2013. (U.S., 2018)
The trend line for Peugeot shows that the inventory turnover ratio was increasing for 4 years, which means it was turning inventory into sales efficiently but in 2016 it started to decree. (Wright et al., 2007) The reason of this was the compensation for the problems in China where the sales dropped by 48.60%.Audi AG Business Valuation
There are many business valuation models but none of them provides a final answer regarding a businesses true value. The Price to Earnings ratio gives investors an idea of what the market is willing to pay for the company’s current earnings. (Macroaxis, 2018)
Audi AG stock valuation is based on the price-earnings ratio and price-earnings ratio multiples.
Year EPS (€m) P (€) P/E Year EPS (€m) P/E P (€)
2012 99.62 525.10 5.70 2012 99.62 5.70 567.79
2013 92.13 638.05 6.28 2013 92.13 6.28 578.86
2014 101.55 649.95 6.65 2014 101.55 6.65 675.01
2015 97.78 678.00 14.69 2015 97.78 14.69 1,436.20
2016 46.16 631.00 7.63 2016 46.16 7.63 352.24
2017 82.69 725.95 2017 82.69 549.65
Figure 1 Audi AG Price-Earnings Ratio and Price-Earnings Ratio multiples
Figure 2 Audi AG Price-Earnings Ratio
In 2012, Audi AG generated a record of 5.3b euros in operating profit and exceeded its predicted return on sales by almost 3%. Such a success was made by increase in sales in China’s and USA markets. (Ft.com, 2018) The company continued its success throughout 2013 (AG, 2018) and 2014breaking their own sales records in all different markets around the world, which is also clearly reflected in a stock market. The price-earnings ratios show a steady growth between 2012 and 2014 for Audi AG. The highest Audi AG price-earnings ratio was in 2015 when it hit the price-earnings ratio of 14.69 and price-earnings ratio multiples – around €1400. “In Europe and China, Audi confirmed its position as the most successful premium brand and exceeded their strategy 2015 target by 300,000 units.” (Audiusa.com, 2018) This indicates that in this year Audi AG had a high growth rate, which generates cash well more than their investment needs , so that they can maintain high pay-out ratios.
A Year after, Audi AG price-earnings ratio dropped significantly to 7.63, which is nearly two times lower than it was in 2015. The main reason for a change in price-earnings ratio is that “Audi’s stock has been punished since the VW CO2 emissions scandal in September 2015 as investors fear large fines and customer backlash.” (seekingalpha.com, 2018) It is possible to assume that Audi AG price-earnings ratio will slightly increase or remain the same depending whether Audi will approach new strategies to resolve existing issues.
Beta and CAPM
Managers and shareholders both hold the same ambition and goal to maximize shareholders’ wealth whilst ultimately lowering risk. The element of risk that lurks around and influences the market is in turn unavoidable and is a principle that can’t be foreseeable. As well as this, in the perspective of investors, tend to try and avoid the uncertainty from investments in the pursuit to try and expand their portfolio. In the provided section, the element of Beta and systematic risk has been analyzed of the company researched as well as ultimately analyzing and highlight the difficulties surrounding it.
Beta is a measurement of the volatility of a security or a portfolio in comparison to the market. The element of Beta is also an influence in the CAPM model that calculates the expected return of an asset, whilst also proving the coefficient in the model. Within the usage of the index, the past 5 years has been analyzed within different periods and events in which have had some substantial or minimal effects upon the market. The primary index used by Audi that has been integrated into the analysis is DAX.
If the BETA is greater than one; the stock is riskier / volatile than the market. For example, if the beta is 1.3, this means it is 30% more risky than the market.
If it is the same; the stock will move the same direction with the market.
Less than 1, the stock is less volatile / risky than the market.
Audi AG DAX 2012-2016
Audi shares have been persistent within its past record of figures. Where Report 1 analyses and presents the Betas from 2012 to 2016, the figurers have fluctuated from its monthly and weekly premise. Whilst focusing upon the position of the Monthly Dax- Index, the figures of 0.41 within the period of 2012 – 2016, shows that the security is less volatile than the market, as well as a theoretical assumption of the security being a specific 59% less volatile than the market. Investors ultimately value securities on its potential expected rate of return as the main pursuit is profitability. Where these securities lay low risks, the outcome of investments signalizes a low return on the securities (Spatz, J, 2002). Even though the payout upon low Beta stocks are not amplified, those willing to invest may see an option that in fact immensely reduce the probability of losing money upon these low risk stocks.
Audi AG DAX 30 2007-2011
Report 2 focuses and analyses the Betas from 2007 – 2011. The figures are also in relation to Report 1, are of a lower caliber, and the changes do remain at a relative robust significance. Where figures remain as being less than 1, the Beta have become less volatile as the years go on. The monthly – Dax index Beta during the period of 2007 – 2011 are at the figure of 0.68, higher figure then the period motion in Report 1. Therefore, this shows that the security is 32% less volatile than the market. It can be evident that in fact throughout the years the Beta in the German index have decreased, in which can be apparent within the reports stated. In this circumstance, specifically for Audi, the reasoning can be relatively coherent following the different events that in fact address the changes.
In terms of the weekly figures, within Audi the statistics showed that during the period of the years of 2012 – 2016 the figures were still less volatile than the market but still managed to be adjacent to the market fluctuations. The figures calculated on a weekly Dax index are 0.24 showing a great reduction in relation to the monthly figures, specifically resulting in a 0.17% drop when focusing on the weekly interval, in comparison to the monthly Beta. This means that it has become a more vulnerable component to market risk. Conversely, the weekly Dax Index of the period from 2007 – 2011, the figure calculated is 0.29 in which also signalizes an increase in volatility in relation to the market, specifically a 1.12% increase in comparison to the monthly Dax index Beta. In conclusion to the weekly intervals, within the two periods in the reports presented, the different notion of reduction in the volatility, as well as the increase in the volatility of the Beta figures are presentable within the reports. Therefore, this is a result computes the comparison in which displays a relative distinguishable pattern between the two periods. An event in which masked and manipulated the Beta figures for the Audi is the notorious crash in 2008, where Dax faced one of its highest drops note till this date because of the recession (Spiegel. G, 2007). However, Audi focused on elements to hold its sovereignty within the markets. Where other car companies were struck via the harsh recession, Audi managed to record one of its greatest revenue figures via the usage of marketing strategies. The company was successful in improving its return on investment ratio and successfully increased its market share in important markets in January and February of the following year, which can be seen within the consistency of the Beta figures.
Report 3: shows the graphic relationship between Dax 30 and Audi AG share price over a 10-year period (2007-2016)
Beta is focused upon historic data and cannot account for future changes within market conditions and other elements they can indefinitely influence stock prices. As well as this, the time intervals could also prove to be a difficulty, as the comparison does not align with the different results. Where it focuses upon the comparison to the stocks to the market instead of the industry, it cannot compensate for the competitiveness between the companies and how it is doing in relation to them (Eubank Arthur, A, 2001).
The DAX30 focuses upon only 30 companies in which provides a boundary within the element of reliability and range to compare with. Where alternative indexes can provide companies in the multiples, a more representative, more reliable may yield better results and can aid on a much stronger scale.
CAPM: The Capital Asset pricing model
CAPM Monthly Weekly
2012-2016 E(R)= 0.38+0.40*(13.73-0.38)
E(R)= 5.79 E(R)=0.38+0.24*(15.53-0.38)
The CAPM model describes the relationship between risk and expected return and that it is used in the pricing of risky securities. It creates the expected returns of a security provided the risk of the security and computing of cost of capital. (Fama and French, 2004)
Above illustrates the formula to determine the expected return of securities considering its risk.
In understanding the two intervals, there is change in the systematic risk for Audi’s computation of the model. The primary variable responsible for the changes in the betas was due to the relationship between every period’s returns of the securities and those of the general market i.e. Dax 30. The risk-free rate hasn’t changed thus meaning that both equity risk premium and debt hasn’t changed. The Dax 30 experienced a slight drop of 1.8% rate of return from the previous year signaling potential issues for companies representing the index, nonetheless Audi AG managed to make a higher expect return of 1.74. Since Audi AG is a subsidiary of Volkswagen AG. The changes in the market haven’t significantly impacted the stocks of Audi.
The analysis of Audi and Peugeot companies highlights how changing and unstable automotive industry is. Audi had a very strong performance between 2012-2014. The company exceeded predictions and expectations in all aspects whilst Peugeot was opposite. The company experienced major losses and needed to approach a different strategy to be able to improve the overall performance. 2015 and 2016 were game changing years for the both companies. Audi experienced losses due to an emission scandal in 2015 and Peugeot managed to recover by introducing new “push to pass” strategy. It is necessary to include that automotive industry experiences high rivalry within the field because of the new innovations such as electrical and self-driving cars as well as trying to reduce carbon footprint. Audi competes in a luxury carmaker industry and must maintain high standards on the daily basis providing the best comfort and quality cars with reasonable prices. Even though both companies may be immediate competitors, there will never be a truly fair comparison as financial performances of these companies are different as well as targeted groups of customers.
Through examining the beta, Audi’s seems to be less volatile/ risky than the market. Those willing to invest can see an option that in fact enormously reduces the probability of losing money upon these minimum risk stocks.
Another key point of the financial management of Audi is to recommend carrying out effective and detailed financial planning so that useful financial policies can be developed for improving its financial efficiency to influence the overall growth and development of Audi into the future. Also, the company will need to focus on improving existing strategies to remain even more competitive in a dynamic market.
In addition, there are many business valuation models but none of them can provide a final answer regarding a stock’s exact value. Therefore, evaluating Audi’s performance was based on the Price to Earnings ratio model which gave investors an indication of what the market is willing to pay for the company’s current profits.
It can be concluded from the report above that both companies had the ups and downs during the compared period. Both car manufacturers achieved a place in the market and made their names well-known around the world. As an illustration, looking at the various aspects of the areas analysed, Audi has proved it is one of the leaders in carmaker industry.