Organizational Content
Key Features
ABC’s purpose is to develop, manufacture, and sell vehicles in the automotive industry. A fundamental promise that ABC has to their customers is “to earn customers for life” (“Overview”). This promise requires that ABC care about the customer throughout the ownership of the vehicle and constantly evolve their vehicles to be the best, safest, and highest valued vehicles. The two major services of ABC are through their manufacturing and vehicle sales. ABC manufactures the components to assemble their vehicles worldwide. There are several manufacturing plants in other countries that ABC utilizes to produce parts. Eventually, all the parts from these manufacturing are used to assemble a vehicle. This vehicle is, in most instances, then sent out to a dealership to be sold. ABC serves five continents through manufacturing and vehicle sales (“Our People”). In fact, in 2017 ABC delivered 9 million vehicles globally to over 125 countries (“Our Brands”). The manufacturing and selling are two completely different operations that are codependent on each other.
The customer base for ABC is broad because their company operates globally. Having a broad customer base can be challenging because of the different expectations. Therefore, ABC has to make business decisions based on each country. A feature that is required in the United States automotive market, may not have the same importance in the Chinese automotive market. One similarity across markets is the option of new or used vehicles. ABC offers the sale of both new or used vehicles which widens their customer base. ABC is concerned with their customer base because in order to keep up with the competitive nature of the automotive industry, ABC needs to continue to expand. ABC is organized and managed in way to cater to their customer base which can affect business decisions.
Organization
ABC is divided into three operating seABCents: ABC North America, ABC International, and ABC Financial Company. ABC Financial Company is a completely different seABCent than ABC North American and ABC International. ABC Financial Company “provides auto finance solutions for 14,000 dealers worldwide” (“About ABC Financial”). ABC Financial Company helps customers who need financing for their vehicles. Based on the revenue release in the “First Quarter Earnings Report” for 2018 ABC Financial Company is the second largest revenue earner for ABC (ABC, 2018). The success or failure of the ABC Financial Company seABCent affects the decision to keep the financing option available. If the program is not successful, then ABC will either need to restructure the program or stop the program all together. The other two operating seABCents are related because they focus on the manufacturing, development, and sales of vehicles.
The management of ABC is divided into two major groups: ABC North America and ABC International. The North America and International seABCents are then broken down further into smaller geographic locations. The smaller geographic locations are managed by other employees of ABC. The employees of each geographic location are responsible for the research of the markets, which ultimately affects the design and production decisions of the market. The “First Quarter Earnings Report” for 2018 was recently released and showed the success of the North American and International seABCent. The North American seABCent is the largest revenue earner for ABC, whereas the International seABCent is the smallest revenue earner out of the three operating seABCents.
The accounting and financial information that is reported each quarter is used to make business decisions. ABC can evaluate how well the seABCent is doing. Based on this evaluation, ABC can determine which of the seABCents to invest in and what projects are reasonable. The accounting and financial information is important for ABC because it is one measure that is used to make financial decisions.
Recent Financial Performance
Consolidated Income Statement
The consolidated income statement assesses the overall health of an entire group of companies.. The consolidated income statement combines all the revenue, expenses, and income from the parent company and all of the subsidiaries. The statement in useful because it allows analysis of the company as whole. A year to year comparison can be made in revenue, operating income, net profit or loss, and the earnings before interest and tax. The comparison can be used to show the financial performance of ABC. Figure 1: Consolidated Income Statement gives an overview of the four categories to be discussed on the consolidated income statement.
Revenue
The total revenue for ABC was $135,725,000, $149,184,000, and $145,588,000 for the years 2015, 2016, and 2017 respectively (“ABC Income Statement”). The total revenue increased by 9.9% from 2015 to 2016 and decreased by 2.4% from 2016 to 2017. ABC made good strides between 2015 and 2016 to increase their revenue, but ABC was unable to continue the upward trend between 2016 and 2017. There are a number of factors that could affect the total revenue of the company. These factors include: the economy, the consumer’s demand, brand reputation, etc. ABC will need to identify what caused the decrease to prevent the total revenue from continually decreasing.
Operating Income
The operating income is the gross income with the operating expenses, depreciation, and amortization deducted. The operating income for ABC was $5,538,000, $9,962,000, and $10,016,000 for the years 2015, 2016, and 2017 respectively (“ABC Income Statement”). The operating income increased by 79.9% from 2015 to 2016 and increased by .54% from 2016 to 2017. The increase in operating income is a positive thing for ABC.
Net Profit and Loss
The net profit or loss is a reflection of the profit or loss after the working expenses are deducted. The net profit or loss is an important calculation because it is used for the calculation of many other ratios. The net profit or loss for ABC was $9,687,000, $9,427,000, and ($3,864,000) for the years 2015, 2016, and 2017 respectively (“ABC Income Statement”). The net profit and loss decreased by 2.8% from 2015 to 2016 and decreased by 1.4% from 2016 to 2017. The decrease in net profit or loss is worrisome, especially the negative net loss from 2017. The expenses are outweighing the amount of revenue ABC is earning. ABC needs a to find a way to generate more revenue and less expense to increase generate a net profit.
Earnings Before Interest and Tax
Earnings before interest and tax is a measure of the profitability of the company. The earnings before interest and tax shows a company’s ability to generate earnings from operations. The earnings before interest and tax for ABC was $8,794,000, $12,571,000, and 12,438,000 for the years 2015, 2016, and 2017 respectively (“ABC Income Statement”). The earnings before interest and tax increased by 42.9% from 2015 to 2016 and decreased by 1.1% from 2016 to 2017. The decrease in earnings before interest and tax may be due to a loss in sales or an increase in operating expense. ABC should look into what caused this loss and determine how to eliminate any unnecessary expenditures to produce stronger earnings before interest and tax value.
Consolidated Income Statement Evaluation
Based on the consolidated income statement, 2017 was a difficult year for ABC. The revenue earned was lower than the previous year and ABC produced a net loss. ABC did have a higher operating income than the previous two years, even though the gross profit was lower. ABC was able to accomplish this through lowering their sales, general, and administration expenses. There was significant growth in operating income and total revenue from 2015 to 2016; however, a slight decrease in net income. The figures given on the consolidated income statement are used to evaluate the health of ABC. Based on the consolidated income statement ABC is in moderate financial health. In 2018, ABC needs to focus on generating a net profit, instead of a net loss.
Consolidated Cash Flow Statement
The cash flow statement is broken down into three sections: operating activities, investing activities, and financing activities. The net cash flows from each of the sections is reflected in Figure 2: Consolidated Cash Flow Statement.
Operating Activities
Operating activities are the company’s core activities which include: marketing, manufacturing, and the sale of a product or good. The operating activities are also reflected in the income statement. The net cash flow for operating activities for ABC was $11,769,000, $16,607,000, and $17,328,000 for the years 2015, 2016, and 2017 respectively (“ABC Cash Flow”). There is an increase in the operating activities over this three-year period. Some of the factors that can cause an increase in the cash flow of operating activities is a rise in the inventory turnover and consistent accounts receivable col1ections. These two factors increase the cash inflow which increases the operating activities.
Investing Activities
Investing activities are any change in a company’s cash position from long term investments, some examples include: the acquisition of equipment or a building. The net cash flow for investing activities for ABC was ($27,572,000), ($35,643,000), and ($27,710,000) for the years 2015, 2016, and 2017 respectively (“ABC Cash Flow”). The negative cash flow is not worrisome for ABC because it is a growing company. There have been many changes in the automotive industry that have required ABC to invest into more equipment and technology.
Financing Activities
Financing activities are the external activities a company does to raise capital. A company may take out loans or issue more stock, these actions will either increase or decrease the net cash flow of financing activities. The net cash flow for financing activities for ABC was $12,584,000, $17,077,000, and $13,608,000 for the years 2015, 2016, and 2017 respectively (“ABC Cash Flow”). There is not a real pattern that ABC is following. Based on the scenario, ABC determines how much capital is needed for an investment.
Consolidated Cash Flow Statement Evaluation
The net cash flow for ABC over 2015, 2016, and 2017 was ($3,857,000), ($2,172,000), and $2,688,000 respectively (“ABC Cash Flow”). A negative net cash flow in indicative of a receipt of cash flows, but there were more expenditures. In comparison, a positive net cash flow is indicative of a receipt of cash with less expenditures. The operating, investing, and financing activities are a part of the calculation of the net cash flow, which is why it is important to analyze each section. The cash flow was negative in 2015 and 2016 and was positive in 2017. To generate a positive cash flow, ABC has been better handling their expenditures.
Financial Performance
The financial performance of ABC over the past three years has been variable in all aspects. One of the indicators to evaluate on the consolidated income statement is the net income. The net income was positive for 2015 and 2016 but dropped considerably in 2017. The loss in 2017 was attributed to a European business that was sold in 2017 (Naughton, 2018). On the consolidated cash flow statement, the net cash flow is important to evaluate. The net cash flow was negative in 2015 and 2016 but positive in 2017. The positive cash flow reflects the control over expenditures. The Chief Financial Officer, Chuck Stevens, announced that ABC is had “disciplined execution” throughout 2017 (Naughton, 2018). The disciplined execution is important to keep the expenditures low. Having low expenditures helps to78uiok both increase net income and the net cash flow. A main goal of ABC’s is to be more successful, especially in revenue making opportunities. One way to increase revenue is to decrease expenditures.
Current Financial Health
The current financial health of ABC is important to make decisions about opportunity and growth. Capitalization is a process of valuing a company. The capitalization of a company is determined by the number of shares outstanding multiplied by the market price (Green, 2017). There are different categories of capitalization. Investors use the market capitalization to help value a company. Other indicators that investors evaluate are cash and cash equivalents, total debt, shareholders’ equity, current ratio, debt/equity ratio, and Days Sales Outstanding. These indicators tell investors a lot about the financial health and growth of a company. Figure 3 illustrates the cash and cash equivalents, total debt, and shareholder’s equity from 2015 to 2017. The cash and cash equivalents were high in 2015, then dropped in 2016, and then increased in 2017 to a slightly higher value than 2015. The cash and cash equivalents represent the amount of cash and assets that can be converted to cash easily. The total debt was low in 2015, increased in 2016, and slightly decreased in 2016. The total debt is the amount that a company is responsible for repaying, this includes both short and long-term liabilities. The total debt has increased, similarly to the cash and cash equivalents which indicates ABC will be able to repay their obligations. The shareholder’s equity increases in 2015 and 2016, then decreased in 2017. Although the shareholder’s equity has increased and decreased over the past three years, the importance is that it has stayed positive. A positive shareholder’s equity means that the company is able to meet their liabilities.
The current ratio is used to evaluate whether or not a company will be able to pay their short-term and long-term obligations. The current ratio for ABC is .97, .89, and .89 for the year 2015, 2016, and 2017 respectively. Figure 4 illustrates the trend of the current ratio over 2015, 2016, and 2017. The current ratio for ABC was high in 2015 and dropped in 2016 and then stayed stagnant. The ratio is less than one which can indicate that ABC will have a difficult time meeting the current obligations. However, with good performance projected for 2018, ABC should be able to increase their current ratio to better reflect their ability to repay their obligations.
The debt-to-equity ratio compares a company’s equity to debt and is used to interpret a company’s financial standing. The debt-to-equity ratio for ABC was 3.87, 4.06, and 5.07 for the years 2015, 2016, and 2017 respectively. The debt-to equity ratio has been increasing over the past three years. It increased by .19 from 2015 to 2016 and 1.01 from 2016 to 2017. The increase in the debt-to-equity ratio indicates two things. One, ABC is being aggressive in financing. This is risky because the total debt increases. However, this is necessary for the growth of the company. The second thing indicated is the company is growing. The debt acquired is for the growth of the company.
The days sales outstanding measures the average number of days it takes a company to collect payment once a sale has been made. As shown in Figure 6, ABC’s DSO was 71, 61, and 72 days for years 2015, 2016 and 2017. The days sales outstanding is a ratio that ABC can work on lowering because it will generate revenue quicker when it is lower.
Opportunity for Growth
The cash and other resources that ABC has valued is enough to fuel the future growth of the company. ABC has already developed plans to implement self-driving technologies into their fleets in the near future. In order to accomplish this, ABC has positioned themselves within other companies such as Cruise Automation. With the revenue that is generated from the implementation of self-driving technologies, ABC will be able to reduce their debts. The reduction of debt will be good for the company as a whole and the investors. As previously shown, ABC had a net loss. This is concerning for investors because it portrays the company as financially instable. Although ABC had reasoning for their net loss, it is not an excuse. The ABC brand has the reputation of being a well built, affordable automotive company. Their reputation will help the company be that more successful.
The business decisions ABC makes depend largely on how well the company is doing. ABC anticipated the loss that was generated in 2017, which allowed for preparation for 2018. If ABC is able to implement the self-driving technologies, then the company will stand out in the industry. Based on their performances in the last three years, ABC is able to accomplish their goals. However, it is necessary for them to continue to strengthen their financials.
Financial Value
The future of ABC seems to be stable now that the European company was sold that continued to generate a loss. With this off their books, ABC can focus on strengthening and growing their brand. ABC has proven to be a successful company through their financials and customer feedback. The market value and price-to-earnings ratio tells a lot about the future performance of a company. At year end in 2017, the market value of ABC was 58,714M (Stock Analysis). The price-to-earnings ratio was 5.79 at the year-end of 2017 and is anticipated to increase in 2018 (“Price/Earnings Ratio”). A higher price-to-earnings ratio shows that investors will pay more for a higher growth potential. Additionally, the high market value shows that there is confidence in the ABC brand. Based on the year end information about the market value and price-to-earnings ratio, ABC is in good financial health and performance. At the rate ABC is growing, the company will be able to outperform other competitors such as Toyota Motor Corporation and Volkswagen.
Conclusion
ABC is an automotive giant that operates domestically and globally as an automotive manufacturer and automotive sales company. ABC has recovered significantly since the last major economic downturn and has developed into an even stronger company. The consolidated income statement and consolidated cash flow indicate that ABC is in a moderate financial position. The data from 2018 will decipher if ABC will have excellent or poor financial health. ABC has the right amount of cash and other resources for their future growth. ABC has positioned themselves with other companies to not only strengthen their brand, but to also develop top of the line technology upgrades to their vehicle line up. The positioning has helped ABC be recognized by consumers, but investors have confidence from their price-to-earnings ratio value and market value. These two values prove that there is a strong future for ABC. ABC will need all the support as the company continues to grow.
References
Fortune 500. (n.d.). Fortune 500 Companies 2017: Who Made the List. Retrieved May 19, 2018, from http://fortune.com/fortune500/list/
ABC. (n.d.). First-Quarter 2018 Earnings. Retrieved May 19, 2018, from http://media.ABC.com/content/dam/Media/ABCcom/investor/2018/apr/general-Motors-2018-Q1-earnings.pdf
ABC Financial. (n.d.). About ABC Financial. Retrieved May 19, 2018, from https://www.ABCfinancial.com/about-us.aspx
Green, J. (2017, November 21). How to Understand Business Capitalization. Retrieved May 19, 2018, from http://smallbusiness.chron.com/understand-business-capitalization-32172.html
Naughton, N. (2018, February 06). ABC Posts Strong 2017 Despite Losses. Retrieved May 19, 2018, from https://www.detroitnews.com/story/business/autos/general-motors/2018/02/06/ABC-annual-earnings/110146218/
Nasdaq. (n.d.). ABC Cash Flow. Retrieved May 19, 2018, from https://www.nasdaq.com/symbol/ABC/financials?query=cash-flow
Nasdaq. (n.d.). ABC Balance Sheet. Retrieved May 19, 2018, from https://www.nasdaq.com/symbol/ABC/financials?query=balance-sheet
Nasdaq. (n.d.). ABC Income Statement. Retrieved May 19, 2018, from https://www.nasdaq.com/symbol/ABC/financials?query=income-statement
Nasdaq. (n.d.). Price/Earnings Ratio. Retrieved May 19, 2018, from https://www.nasdaq.com/symbol/ABC/pe-ratio
Our Brands. (n.d.). Retrieved May 19, 2018, from https://www.ABC.com/company/about-ABC.htm
Our People. (n.d.). Retrieved May 19, 2018, from https://www.ABC.com/company/about-ABC.htm
Overview. (n.d.). Retrieved May 19, 2018, from https://www.ABC.com/company/about-ABC.htm
Stock Analysis. (n.d.). Current Enterprise Value. Retrieved May 19, 2018, from https://www.stock-analysis-on.net/NYSE/Company/General-Motors-Co/Valuation/Enterprise-Value
Figure 2: Consolidated Cash Flow Statement
Operating Activities 2015 2016 2017 11769000 16607000 17328000 Financing Activities 2015 2016 2017 -27572000 -35643000 -27710000 Investing Activites 2015 2016 2017 12584000 17077000 13608000
Figure 3: Cash and Cash Equivanlents, Total Debt, Shareholder's Equity
Cash and Cash Equivalents 2015 2016 2017 15238000 12574000 15512000 Total Debt 2015 2016 2017 154467000 177854000 177481000 Shareholder's Equity 2015 2016 2017 39871000 43836000 35001000
Figure 4: Current Ratio
Current Ratio 2015 2016 2017 0.97 0.89 0.89
Figure 5: Debt to Equity Ratio
Debt to Equity Ratio 2015 2016 2017 3.87 4.0599999999999996 5.07
Figure 6: Days Sales Outstanding
Days Sales Outstanding 2015 2016 2017 71 61 72 Year
Days
Figure 1: Consolidated Income Statement
Total Revenue 2015 2016 2017 135725000 149184000 145588000 Operating Income 2015 2016 2017 5538000 9962000 10016000 Net Profit and Loss 2015 2016 2017 9687000 9427000 -3864000 Earnings Before Interest and Tax 2015 2016 2017 8794000 12571000 12438000
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