Assignment Three

ACC11059: Using Accounting for Decision Making

Course Coordinator: John McGrath

Due Date: 13th February 2017

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Assignment Three

STEP 1

Ratio Analysis : Daimler AG

Overall I’m looking forward to undertaking this third assessment. Analyzing and

becoming more efficient at ‘trend spotting’ is something I feel I will use a great deal

within my chosen career path. As they say, without further ado – let’s get stuck

into it!!

Profitability Ratios

Profitability Ratios 2015 2014 2013 2012Net Profit Margin 6.7% 6.4% 8.4% 6.8%Return on Assets 4.0% 3.8% 5.2% 4.2%Table 1 : Profitability Ratios

Daimler’s Net Profit Margin, whereby how much profit for each dollar of sales

earned is shown, I can see it is fairly consistent over the years other than the 2013-

year, where it was quite a bit higher. Considering the net profit margin is based on

sales and net profit figures, Daimler could have either had an exceptional year in

sales or had significantly less expenses or a combination of the two. Upon further

investigation and comparing the 2013-year with 2012, there was only a partial

increase in sales of €3,063m. However I’ve noticed the expenses fell quite

substantially, in fact it fell in the vicinity of $ 2 billion dollars with ‘Profit/loss on

equity method investments, net’ being the contributing factor. So I surmise they

made a further profit on equity method investments, (which include currency

translations) which contributed overall to this spike in 2013. On average across

the four years, Daimler had a net profit margin of 7.1% - would I be happy with

making 7 cents per dollar sold??? I would have thought this to be quite low,

however as Maria mentions in her lecture video a very broad range for net profit is

0 - 10%. After delving further and googling (as we all do), I found Yahoo Finance

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disclosing an industry average for Major Auto Manufacturer’s of only 5%; I

instantly was extremely happy with 7.1%.

Similarly, the returns on assets (ROA) for 2013 were again higher then the other

comparable years. ROA did however, take a small dive in 2014, to then regain

some ground in 2015 to almost bringing it back into alignment with 2012 figure. I

couldn’t find a benchmark for ROA (only ROE), so I compared this with some other

peers (Kym Cook, Courtney Honnery). I found Damiler’s ROA range to be quite low

compared with Kym’s (not taking her 2015 into account as it was negative – I

wonder what happened there – note to self: go check it out!!) and also considerably

lower than Maria’s Wesfarmers. Looking at Courtney’s ROA for her company,

Sinotruk, (which is a heavy truck manufacturer and could be considered a similar

industry), it was around the 1% mark. I’m aware that ROA gives an idea of how

profitable a company is relative to their assets and upon reflection I feel Daimler

would have had a higher ROA, however I'm not disappointed with this result after

doing some further research.

Efficiency Ratios

Efficiency (or Asset Management) Ratios 2015 2014 2013 2012Days of Inventory 73.70 74.89 68.49 72.82Total Asset Turnover Ratio 0.60 0.60 0.61 0.62

Table 2 : Efficiency Ratios

Days of inventory trend have been quite consistent which I believe also shows

stability. Initially I thought Daimler’s range of 68-74 days was quite high, however

after considering this would include work in progress for a manufacturing

company, I’ve now changed my mind and find these figures are quite favourable.

The total asset turnover (TATO) ratio, being a reflection on how efficient a

company uses its assets in generating sales, Daimler produces a very consistent

result. However, in comparison with Wesfarmer’s TATO where they reach an

average of 1.42 over the four years, Daimler’s result is little to be desired to say the

least. I have done a little research and found that this ratio can be quite different

depending on different industries. For example, companies in the retail industry

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can reach an TATO figure of around 2 while those in the financial sector may only

produce a figure of around 0.08 of a percent. With this quite convergent range,

comparable industries should be chosen when looking at an TATO for a company.

So Dailmer’s compared with Sinotruk’s TATO is a little low, however it is still

within the same vicinity, maybe not quite the same industry, however it is a lot

closer than Wesfarmers.

Liquidity Ratio

Liquidity Ratio 2015 2014 2013 2012Current Ratio 1.19 1.15 1.19 1.15

Table 3 : Liquidity Ratio

The current ratio, considers the current assets and current liabilities of a firm

which depicts how liquid it is; meaning are they able to pay their financial

obligations within the current period using their current assets. I’ve learnt a ratio

of 2:1 is ideal however anything above 1.1 is suitable. Daimler’s shows a current

ratio of between 1.15 – 1.19. While this is just a little above suitable I still notice it

is on the lower side of where I would like to see it. I am somewhat comfortable to

see that Daimler’s result is above the 1:1 threshold.

Financial Structure Ratios

Financial Structure Ratios 2015 2014 2013 2012Debt/Equity Ratio 297.6% 325.3% 288.6% 314.6%Equity Ratio 25.2% 23.5% 25.7% 24.1%

Table 4 : Financial Structure Ratios

With the Debt/Equity (D/E) ratio displaying how much is funded compared with

what the shareholders have put in, Daimler sure has a lot of debt. Further

investigations into this ridiculously high D/E ratio, I find Daimler has a massive

credit line (9 billion Euros to be exact) which have a five year tenor with 2 x 1 year

extension options. Daimler had exercised the second of the two options in 2015

extending this credit line to 2020. Although Daimler has this credit line, they

additionally disclose in their financial reports they have not utilized this facility.

This being the key impact for the D/E ratio. Daimler also has a financial services

division, which plays a big roll in this extortionately high ratio. Again stating in

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their financials that the ‘cash outflows mainly resulted from the portfolio growth of

the leasing and financing activities of Daimler Financial Services’.

Equity ratio shows how much of the company is funded by the shareholders as

apposed to lenders (ie banks). While I’m happy that Daimler is somewhat

consistent, shareholders only owning 25% of the company is a little unsettling.

Again I would imagine the Daimler Financial Services Division would greatly

impact this figure. Maybe I need to do some research on financial service aspect of

Daimler.

Market Ratios

Market Ratios 2015 2014 2013 2012Earnings per Share (EPS) (in Euros) 8.14 6.81 8.15 6.40Dividends per Share (DPS) 2.71 2.40 2.45 2.56Price Earnings Ratio 9.53 9.23 7.72 6.46

Table 5 : Maret Ratios

The Earnings per Share (EPS) for Daimler again follows the same trend of the net

profit, which is to be expected. The number of ordinary shares increased from

2012 to 2013 however, remained the same for the following three years. The

earnings per share in my calculations do not equal what is disclosed in the

Consolidated Statement of Income, which is 7.87 for 2015. However Daimler does

declare the figure of 7.87 is for ‘profit attributable to shareholders of Daimler AG’.

If you took out the non-controlling interest net profit of €300 million for the 2015

year, it equates to 0.28 EPS and this subtracted from the figure above gives a result

of 7.86. I’m pretty happy with that!!

Daimler finished quite strong in 2015 with regards to their Dividends per Share

(DPS). Daimler actually discloses in their financial statements that during the

second quarter during a shareholder’s meeting a dividend of 2.45 per share had

been approved, and a further dividend payment in the fourth quarter of 3.25,

which was ‘by far the highest dividend payout in Daimler’s history’. The financials

also stated that the stock prices were ‘significantly impacted’ by the Greek debt

crisis along with China’s market turbulence, finding many investors pulled out of

the market in the short term. This being said, Daimler did finish stronger thanks to

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being the runner-up in the International Motor Show in Frankfurt, together with

more substantial gains in the international stock markets in the fourth quarter.

The Price Earnings Ratio for Daimler increases over the four years by 1.48% from

2012 to 2015. Considering the share price itself increased 52%, 10% and 12%

consecutively over the 2013, 2014 and 2015 years, this is expected. It can be seen

that the company as a whole is also generating more investor and shareholder

confidence in the market due to this share price increase. Daimler discloses such

in their financials that throughout these years, the stock ‘developed very

positively’.

Reformulated Financial Statement

Overall looking into the reformulated financial statement ratios, I was somewhat

pleased that most of the trends were consistent. Down in 2012, higher in 2013,

then taking quite a dive in 2014 to then regain some ground in 2015 and finishing

quite strong. The ratio that jumps out the most that doesn’t follow this trend is the

Net Borrowing Cost (NBC), which actually follows the trend in the opposite

direction.

Return on Equity (ROE)

Return of Equity 2015 2014 2013 2012

Return on Equity23.55

% 8.34%21.11

%12.02

%Table 6 : Return on Equity

The ROE measures the efficiency of a company’s use of shareholders funds in

generating profits and the general growth of the company. Daimler’s ROE jumps

around a little from year to year, however compared to the industry average of

major auto manufacturer I’m somewhat pleased with these results. The industry

average according to Yahoo Finance is 12.4% and while the 2012 figure is close to

this being 12.02%, 2013 & 2015 both display very rewarding results of 21.11%

and 23.55% respectively. The year that creates most interest is 2014 with a low

8.34%. This is attributable to the comprehensive net profit after tax (CI) for this

year also showing the lowest of the comparable years. Further investigation into

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the reason for the CI being the lowest was due to the ‘unrealized gains from

derivative financial instruments’ taking a massive dive. Daimler uses derivative

financial instruments for hedging purposes, whereby limiting risks such as market

price risk, interest rate risks, currency risks and commodity price risks.

Return on Net Operating Assets (RNOA)

Comparative Return on Assets 2015 2014 2013 2012Return on Assets 4.0% 3.8% 5.2% 4.2%Return on Net Operating Assets 9.15% 4.52% 8.50% 4.74%Table 7 : Return on Net Operating Assets

Looking at the RNOA and again as I would expect this follows the same trend as

ROA. Considering RNOA is the result of isolating just the operating activities from

the financing activities of a business, therefore this is the reason I would expect it

to follow the same trend as ROA but with a slightly higher result. This actually

shows that the operating assets are working a little better than our overall assets,

which is a good thing.

Net Borrowing Cost (NBC)

Net Borrowing Cost 2015 2014 2013 2012Net Borrowing Cost 0.34% 2.30% -0.20% 0.22%Table 8 : Net Borrowing Cost

Essentially, the net borrowing cost to a firm is their interest rate on their financial

obligations. It was quite pleasing to see in Daimlers situation that these figures are

quite low. The figure in 2013 is of particular interest as it falls below zero and into

a negative figure. I understand that this actually has to do with the Financial

Services Division within Daimler. The NBC jumps quite significantly in 2014 to

then come back to a satisfying 0.34% in 2015. As mentioned earlier I find it

interesting that the NBC trend travels in the opposing direction to the PM, RNOA &

ROE.

Profit Margin

Comparative Profit Margins 2015 2014 2013 2012Net Profit Margin 6.7% 6.4% 8.4% 6.8%Percentage increase - Using 2012 as base year 0.99% 0.94% 1.24% 100%

Restated Profit Margin10.08

% 4.80% 8.71% 4.84%Percentage increase - Using 2012 as 2.08% 0.99% 1.80% 100%

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base yearTable 9 : Comparative Profit Margins

Comparing my restated profit margin with my original profit margin, as Maria

points out there shouldn’t be a great deal of different in the trends. Well guess

what…. I feel like the differences in my figures are all over the shop. I can see the

increases and decreases follow the same trend but incrementally there are massive

differences. So lets look what happened with the operating activities.

Operating Figures2015€’m

2014€’m

2013€’m

2012€’m

Operating Income152,04

5132,52

8122,85

7117,00

2Operating expenses 138,84

2122,24

3111,69

7107,72

0Total other operating comprehensive income 4,138

(1,896) (412)

(2,783)

Table 10 : A closer look at Operating Figures

Daimlers operating income gradually rose from 2012 through to 2014, together

with their expenses gradually rising during these years, which all makes sense and

I am happy with this so far. Looking deeper, ‘total other operating comprehensive

incomes’ was the contributing factor. Specifically the ‘unrealized losses from

currency translation adjustments’ and ‘actuarial gains (losses) from pensions and

similar obligations’ are what impacted these figures.

Asset Turnover (ATO)

Asset Turnover Comparison 2015 2014 2013 2012Total Asset Turnover Ratio 0.60 0.60 0.61 0.62Asset Turnover (From Reformulated Figures) 0.91 0.94 0.98 0.98

Table 11 : Asset Turnover Comparision

Looking at the ATO whereby just the operating assets have been isolated I’m happy

to see these figures remain pretty constant. Although the ATO does fall slightly

over the four years, no really big drops have occurred. This also show Daimler is

perhaps a little more efficient in the use of their operating assets. I’ve also learnt

that companies that are ‘asset intensive’ tend to result in lower ATO figures.

Subsequently, I’m satisfied with these results.

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Economic Profit

When preparing to calculate the economic profit for Daimler, I sort to find if

Daimler had disclosed a cost of capital in their financial reports. I was thrilled that

this proved to be an easier task that initially thought, moreover that this figure was

the same for all four years. I found Daimler had disclosed their cost of capital to be

eight percent and therefore chose to adopt this as my cost of capital rather than the

10 percent suggested.

Considering the economic profit (EP) for a firm is the balance left over after the

cost of equity or capital is taken out of the accounting profit, EP is a great indicator

of where the firm is heading. Maria suggests in her lecture that most companies

only earn enough to cover an economic profit and wind up finding themselves with

a negative EP. While this isn’t a terrible thing, I was quite pleased to see in

Daimler’s situation, they have achieved a positive economic profit for two out of

the four years in review.

2012 2013 2014 2015(6,000.00) €

(4,000.00) €

(2,000.00) €

0.00 €

2,000.00 €

4,000.00 €

(3,340.25) €

531.55 €

(4,206.31) €

1,655.29 €

Economic Profit (in € m)

Economic profit _x000d_(in million euros)

Figure 1 : Economic Profit

When considering the trends for the EP of Daimler, it was quite interesting to put

the reformulated figures for ‘Profit Margin (PM)’, ‘Return on Net Operating Assets

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(RNOA)’ and ‘Return on Equity (ROE)’ on a graph as depicted in Figure 2 below. As

you can see these trends are almost identical to that of the EP. Bingo!!! I think I

have just found my ‘drivers’.

2012 2013 2014 20150.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%

12.02%

21.11%

8.34%

23.55%

4.74%

8.50%

4.52%

9.15%

4.84%

8.71%

4.80%

10.08%

Comparable Economic Profit Drivers

Profit Margin (PM)Return on Net Operating Assets (RNOA)Return on Equity (ROE)

Figure 2 : Comparable Economic Profit Drivers

In the consideration of profit margin, it can be seen when the PM was strong, so too

was the EP, and vice versa, when the PM was weak this was also reflected in the

EP. As can be seen, 2015 was the strongest PM year for Daimler; similarly it was

the strongest EP year as well. This makes logical sense when considering the more

(or less) accounting profit that is made is used to pay off the cost of capital. Should

I be reviewing any business, I believe this direct unison between the PM and the EP

should be investigated.

Furthermore, I like the fact that the ROE follows the same trends. If the company is

making a healthy ROE, I like to see that at least of portion of this return being

returned to the business for further growth.

Additionally, I find it comforting that the RNOA too follows the same trend. When

RNOA increased, so does the EP and conversely, when RNOA is at it’s weakest, so is

EP. This tells me that after separating out the financial activities, the operating

activities are still consistent and compatible to the remainder of the company.

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2012 2013 2014 20150

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

102,619 106,197120,990

143,958

Net Operating Assets (NOA)

Net Operating Assets (NOA)

Figure 3 : Net Operating Assets

As the graph depicts above, the net operating assets (NOA) for Daimler doesn’t

seem to be a congruent trend for EP. I do like to see that the NOA is on the rise,

however it doesn’t portray to being a specific driver for Daimler’s EP.

Comments On Other Blogs:

Still to come….

STEP 2

Capital Investment

The two options I have chosen for this exercise are a highly sophisticated piece of

machinery and/or the acquisition of 50% of shares in a web-based mapping

company. These two items are independent and not mutually exclusive. The

sophisticated piece of machinery will allow Daimler to produce items for their

vehicles in a much more timely manner and therefore will increase the rate of

production. The acquisition of 50% of share in a web-based mapping company will

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allow Daimler to have input with regards to their innovation requirements for

future vehicles, as well as be apart of a new dynamic company.

The useful life of the machinery is 7 years with the first year of acquisition earning

a little less then optimum due to staff training and getting used to the machine.

Daimler expects to see the most profitable years for the machine to peak between

years 3-5 before the machine will need significant repairs and maintenance and

therefore decreasing its cash flow after these years.

The acquisition of a new mapping company could hold great potential success for

Daimler and their automobiles. This company not only produces these products

for wholesale automobile business but also for handheld interactive devices to be

retailed to consumers.

The investment decision will be made on 30 June 2017 and all estimated future

cash flows are expected to be received on 30 June of each year.

Investment DetailsInvestment #1Sophisticated

Machinery

Investment #2Acquisition of 50% Share in Mapping

CompanyOriginal Cost € 3.5m € 52.5mEstimated Life 7 years 1 10 years 2

Residual Value 3 € 0.75m € 73.0 mEstimated future cash flowsYear 1 € 0.50m € 4.35mYear 2 € 0.65m € 5.0mYear 3 € 0.75m € 5.75mYear 4 € 0.75m € 6.62mYear 5 € 0.75m € 7.61mYear 6 € 0.65m € 8.75mYear 7 € 0.54m € 10.07mYear 8 € 11.58mYear 9 € 13.31mYear 10 € 15.31m

1 Estimated life for machinery is based on disclosures in Daimlers financial Statements (pg 208 – 2015 Financial Report) being 6-25 years from

Technical equipment

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2 Daimler would have no plans to sell this acquisition however for the purpose of this exercise we’ll say Daimler estimates it will keep this

company for 10 years. After which time the mapping company would actually be worth more than it does at present.

3 Residual value is the expected cash flow when each investment reaches the end of its ‘Estimated life’

Summary of ResultsInvestment #1 Investment #2

Net Present Value € 0.06m € 14.35mInternal Rate of Return 10% 13%Payback Period 5.15 years 8.21 years

Net Present Value

Net Present Value (NPV) measures the profitability of an investment. It is an

approach that considers all future expected cashflows and discounts it back to a

present value using a discount rate typically a company’s cost of capital. If a

positive figure is reached, this means an investment adds value to an organization

and contrastingly if a negative figure were reached the investment would result in

a loss to the organization. In the two scenarios I’ve chosen for Daimler, both

investments have resulted in a positive outcome – at least that is a good start

(albeit Investment #1 just scrapes in). It can be clearly seen that Investment #2

would be a more favourable scenario as it has a much higher NPV and therefore

would add a great deal more value than that of Investment #1. As can be seen on

my spreadsheet, out of interest, I calculated the NPV using Daimlers disclosed cost

of capital rate, which considerably changes the result in an opposing direction,

which make logical sense. The higher the cost of capital, the less NPV; and the

lower cost of capital (akin to the second scenario) results in a higher NPV outcome.

Internal Rate of Return

The internal rate of return (IRR) also measures the profitability of an investment

by way of its cashflow allowing for the time value of money. Again, the higher the

percentage, the more profitable and desirable an investment will be. Considering

the two scenarios above, again Investment #2 produces a higher IRR of 13 percent

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compared to Investment #1 only resulting in an IRR of 10 percent. If the Daimler

had a decision rule in place that any new investment needs to cover the company’s

cost of capital, in consideration of this example, the cost of capital is 10%, its quite

evident that investment #1 just meets this criterion. However, Daimler’s does

disclose in their financial report their cost of capital is actually 8%, therefore

Investment #1 does meet this condition quite comfortably. Comparing the two

different results in my spreadsheet with regards to using 10% and 8% as the cost

of capital, the IRR did not change.

Payback Period.

While the payback period analyses how long it is expected for a company to pay

back its costs for an initial investment, this method of evaluation does not consider

the time value of money. In the two scenarios for Daimler, Investment #1 results

in a payback period of 5.15 years whilst Investment #2 produces a payback period

of 8.21. Clearly, the results of investment #2 show a lengthier payback period then

that of Investment #1. With these results, Investment #1 is far more attractive on

this occasion, as the risk born to Daimler will only be 5 years as apposed to 8 years.

The drawback using this analysis tool is that the payback period only takes into

account the years up to the payback and disregards any forthcoming years.

Investment Outcome Decision

Based on the above information, Investment #2, acquiring 50% shareholding in a

mapping company, looks to be the more lucrative investment. While neither

investment would impact Daimler negatively, and both investments contributing

to the overall value of Daimler, Investment #2 would supersede the profitability of

Investment #1. Even though Investment #1 would regain the initial cost of

acquisition in less the amount of time then Investment #2, Investment #2 resulted

in a stronger and more beneficial outcome in both NPV and IRR. Therefore, in

conclusion to the examples and figures put forth (and possibly very unrealistic

figures), I would have no doubt in vesting the finances of Daimler in the acquisition

of 50% share in a mapping company.

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STEP 3

Feedback

Still to come….

Feedback - Received

Still to come…..

Reflections on Feedback

I really enjoy giving and receiving feedback and I feel this segment is of great

support. I find it comforting and ensuring particularly being a distance student

without much interaction with other students. Sometimes it is extremely

challenging studying via distance and the interaction this segment creates, I

believe is not only beneficial to this course, but if we could all adopt this in our

daily lives along with our internal working environments as well as our external

working environments, there will be momentous benefits. I enjoy the feelings of

supporting and being supported that this segment creates.

Reflections on the Course…

This is a totally different learning concept to what I have experienced from other

subjects. With the high level of workload and assessment criteria this subject

requires, I found myself constantly challenged with juggling this with my other

commitments. One aspect of this course I personally would like to see being

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reviewed is the ‘Please allow about # - # hours to complete this step’. I found this

framework to be nowhere near what was required to complete the task

‘successfully’ and found this timeframe was extremely misleading. However as a

whole, I found this interactive real life learning style to be interactive and

integrative. I feel this course may be a prototype for other subject (or course

coordinators) that might want to adopt, and I can only assume the overall result of

student are indicative of this.

All in all a very ‘Special Thanks’ to Martin & Maria for the creation, delivery

coupled together with the display of support they collectively have given

throughout this course, not only to myself, but trust all students have felt this.