Managerial Accounting Paper / Financial Analysis
soccer821
EXAMPLE.docx
Term Project
Financial Statement Analysis of Autonation and Lithia Motors Inc.
Prepared by
Monica Galindo
For
Professor C.E. Reese
in partial fulfillment of the requirement for
ACC 770 – Managerial Accounting
School of Business/Graduate Studies
St. Thomas University
Miami Garden, Fla.
Term A2/Spring, 2017
May 11, 2017
Table of Contents Introduction 1 Business history and future 2 Financial analysis 6 Liquidity analysis 12 Activity analysis 14 Solvency analysis 15 Profitability analysis 16 Comparative analysis 18 Summary and Conclusions 21 Appendices 22 References 29
3
Term Project
Financial Statement Analysis of Autonation and Lithia Motors Inc. 2014 - 2016
Prepared by
Carlos Flores
For
Professor C.E. Reese
in partial fulfillment of the requirement for
FIN 751 – Managerial Accounting
School of Business/Graduate Studies
St. Thomas University
Miami Garden, Fla.
Term A2/Spring, 2017
May 11, 2017
Table of Contents Introduction 2 Business history and future 3 Financial analysis 7 Liquidity analysis 14 Activity analysis 15 Solvency analysis 16 Profitability analysis 18 Comparative analysis 19 Summary and Conclusions 22 Appendices 24 References 31
Introduction
a. Objective
b. Scope
This financial analysis is conducted to understand key business ratios to understand AutoNation and Lithia Motors stability and compare business's financial performance to competitors and the industry as a whole. In the end, creditworthiness is assessed for both companies to determine if credit should be extended as well as the recommendations for both companies after all of the data has been analyzed and interpreted. c. Methodology
The information from balance sheet, income statement and other financial statements will be used to calculate the relevant ratios to complete these analyses. The relevant ratios that will be used are the liquidity, activity, solvency and profitability ratios. The financial statements will then be used to conduct vertical and horizontal analyses to indicate any changes in the companies’ accounts and evaluate which accounts uses much of the companies' money. The various computations and websites references will be employed to analyze the data and make sound interpretations, recommendations and conclusions.
Business History and Future
a.Industry
The automobile industry is made up of several companies in USA as well as in the global arena. Currently the US sector market cap stands $61 billion with annual sales at 7.7 million cars. The motor vehicles and parts are offered mostly through franchises network. Although there exists variations in many companies operations under the automobile industry, most of the companies like Lithia and AutoNation deal in both new and used cars. It is estimated that new cars make up to 60% of the market whereas used cars fills the remaining 40%.The vehicles being offered come from the leading global brands such as GM, Toyota, BMW, Honda, Volkswagen, Porsche as well as Mazda.
The franchise form of business has enabled many automobile oriented firms like Lithia and AutoNation to benefit from opportunistic capital allocation strategy, including acquisitions and share repurchases, and which have began to reduce the cost structure and inventory levels to the current industry quality levels.
b. Auto Nation
AutoNation is are renowned motor company and is currently the largest automotive dealer in the US as well as the leading provider of new and second-hand vehicles. The company has organized its business through franchise as it is estimated that the firm owns more than 310 franchises in USA. The current President and CEO is Mike Jackson, who was the former CEO of Mercedes-Benz in North American region (Calta & Kleiner, 2001).
The started back in 1996, when entrepreneur H. Wayne Huizenga ventured in a waste management company that subsequently changed its name to Ft. Lauderdale and then to FL.-based Republic Industries, Inc. It would then go ahead to acquire about 300 new vehicle franchises, making it to be the first nationwide auto dealer in the U.S. as well as the first to go public. It was until April 1999, when Republic changed its name to the current "AutoNation, Inc., the company we are currently evaluating.
AutoNation currently operates over 300 franchises across the USA, and has about 87,500 employees. It specializes in selling 35 different manufacturer brands across 15 states. The company is currently ranked at #136 in the 2016 Fortune 500.It has personalized its operations with a large internet presence, offering its entire inventory for online searching. Due to this efficiency the company current stock price is at $40.26 reported a revenue increment of 4.2% to $5.44 billion and net income of $ 112 million which represents a slight drop of 2.7%.
c. Lithia Motors
Lithia Motors was founded by Walt DeBoer in 1946 as a Chrysler-Plymouth-Dodge dealership mainly based in Ashland, Oregon. Currently, Lithia is among America’s largest automotive dealers featuring most domestic and import franchises. The Lithia stores serve rural and urban populations across the Western and Midwest United States.
It is the 7th largest automotive retailer in the US and was ranked #14 as Fortune’s Most Admired Companies in 2013.It then broke into Fortune 500 list at #482 in 2015 making it one of the only three Oregon-based companies in the Fortune 500.https://en.wikipedia.org/wiki/Lithia_Motors - cite_note-sale_final-5 This came following a year that saw the acquisition of the DCH Auto Group, which was one of largest dealer groups in the country with 27 dealership outlets, before being acquired by Lithia Motors.
Lithia specializes in new cars from Toyota, General Motors, Toyota, BMW, Honda, Volkswagen, Porsche and Mazda, among others. New cars make up 58% of auto sales, with second hand cars making up 42%. The firm gets extra revenues from auto repair at the dealerships, financing, and insurance sales.
Financial Analysis
The financial analysis will cover the key aspects of ratio analysis and insights then the computation of horizontal and vertical analysis tables. The liquidity ratios often evaluate business's ability to pay off or service its short-term debt. The two ratios used to evaluate the liquidity ratios business are the current ratio and quick ratio. This will be followed by the activity ratios to assess how Lithia Motors and AutoNation often convert different assets, liabilities, and capital accounts into cash.
Additionally, the solvency ratio which covers TIE and debt ratio will show us how AutoNation and Lithia Motors can meet their long term debt or their ability to sustain operations into unforeseen future. We will then evaluate the profitability ratios which aims at maximizing shareholder value as well as the investment potential ratios. In the end the horizontal and vertical statement analyses are presented to enable us to see the variations in various economic items as well as the amount of money a company spends in the key items of the financial statements.
The following sections thus discusses the financial analysis in more details.
IV. Liquidity Ratios and Analysis
|
Liquidity Ratios |
2014 |
2015 |
2016 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
Current Ratio |
1.13 |
1.02 |
1.24 |
1.08 |
1.03 |
1.12 |
1.05 |
0.91 |
1.18 |
|
Quick ratio |
0.22 |
0.22 |
0.22 |
0.23 |
0.23 |
0.23 |
0.21 |
0.19 |
0.22 |
As aforementioned, the liquidity ratio covers current and quick ratio. The current ratio measures the ability to pay current liabilities with reference to current assets whereas the quick ratio evaluates the ability to pay all current liability if they come due immediately; the relevant assets to use are the business's cash, short-term investments, and net current receivables. In our case we are evaluating the liquidity ratio with reference to AutoNation and Lithia Motors as well as a brief insight on the industry.
a.Industry
The above table highlights the liquidity ratio for automobile industry. The current ratio, 1.13 and quick ratio is 0.22.Almost average to the most industries in the USA. The current ratio reflects that the two firms has a very low liability base and the ratio could only reduce if the companies enters into short debt obligations. Thus the two firms are very liquid and stable in the automobile sector as reflected by the strong base of current assets compared to current liabilities.
However, the quick ratio is too low. This implies that it is not easy to convert the account receivables into cash quickly and it reflects the ideal conditions of operations since motor vehicles are less liquid assets (long term assets). However, the industry quick ratio remained consistent in the subsequent years being reported at 0.23 in 2015 and a slight drop which brings it to 0.21 in fiscal year 2015.The current ratio on the other hand has shown a declining trend reported at 1.08 and 1.05 respectively in 2015 and 2016 respectively may be due increased cash expenditure.
b. AutoNation
AutoNation’s current ratio shows a good trend of liquidity. The ratio stood at 1.02 in 2014, 1.03 in 2015 and a slight drop at 1.05 in 2016. On the same note its quick ratio were far much lower implying a lesser degree of cash conversion and limited short term investments. The quick ratio increased slightly to 0.23 in 2014 from 0.22 the previous year, but it then closes in 2015 by a drop to 0.19.The current ratio shows a lower value of current liabilities and the firm need to enhance its marketable securities as well as the receivables to improve the quick ratio.
c. Lithia Motors
Lithia motors quick ratio exhibits the same trend as AutoNation. They are at par with its quick ratio reflected at 0.22 in 2014; 0.23 in 2015 and closing at 0.22 in 2016.Lithia Motors however shows little stability compared to AutoNation in the quick ratio trend. The firm also needs to leverage on its receivables and short term investments to enhance the too low quick ratios.
When it comes to current ratio Lithia Motors performed extremely well above both the AutoNation and the industry average. Its ratio stood at 1.24 in 2013; 1.12 in 2015 and ending at 1.18 in 2016.This indicates that the firm has enhanced its working capital position and is in a better position to service its debts compared to its peers in the industry such as AutoNation.
V. Activity Ratios and Analysis
|
Activity Ratios |
2014 |
2015 |
2016 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
Inventory Turnover |
4.96 |
5.65 |
4.27 |
4.98 |
5.63 |
4.33 |
5.17 |
5.41 |
4.92 |
|
Day's Sales In Receivables |
6.26 |
3.8 |
8.71 |
9.01 |
2.25 |
15.77 |
8.14 |
2.26 |
14.01 |
Activity ratios will show us how Lithia Motors and AutoNation can convert different assets, liabilities, and capital accounts into cash and how soon that can be the conversions are done. The common ratios in this category are the inventory turnover and days' sales in receivables. The inventory turnover the number of times an enterprise sales its average inventory levels in a given fiscal year whereas the days' sales in receivables reflects how many days it takes to earn the receivables.
a. Industry
It is clear that inventory turnover (4.96 in 2013;4.98 in 2014 and 5.17 in 2015) in Automobile Sector in USA is average to most of the other industries. This is because as much as the companies order vehicles it is less frequent to the industries dealing with fast-moving goods. The receivable days (6.26 in 2013; 9.01 in 2014 and 8.14 in 2015) is also relatively high in comparison. This is because the firm deal in high valued items (motor vehicles) which it is comparatively rare for the customers to pay everything on spot. Further most firms use installment payments or sales on account when selling the vehicles. The firms in the sector can thus put incentives to ensure the receivable days are reduced to enhance cash flows.
b. AutoNation
AutoNation inventory turnover ratio seems to be slightly above the industry average standing at 5.65 in 2014; 5.63 in 2015 and finally dropping to 5.41 in 2016. However, the firm’s sales remained in account receivable less long at averagely 2 days than the industry norm, which is averages at 5 days. AutoNation is thus much more efficient in receiving cash from its customers earlier and enhance its liquidity position compared to its competitor Lithia Motors.
c. Lithia Motors
Lithia Motors is slightly below the industry level of inventory turnover with the latest ratio in 2016 standing at 4.92 compared to industry’s 5.17. The low turnover implies less sales and explains why the firm is not properly servicing its short-term debts. The much worrying trend on Lithia Motors is its receivable days which is far much longer than the industry level. Funnily the trend is upward as the ratio stood at 8.71 in 2014,increased to 15.77 in 2015 and remained further up at 14.01 in 2016.The longer a company gets paid by its customers, the less likely it will be able to pay it short-term debt (becomes less liquid).
VI. Solvency Ratios and Analysis
The solvency ratio will show us how AutoNation and Lithia Motors can meet their long term debt or their ability to sustain operations into unforeseen future. The key ratios to measure solvency are the times interest earned and the debt ratio. The debt ratio indicate what percentage assets are financed with debt. If the percentage is less than 50%, then the business is sustained by its equity, whereas a percentage of greater than 50% means implies the business is using debt cover its assets.
|
Solvency Ratios |
2014 |
2015 |
2016 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
Debt |
0.42 |
0.48 |
0.36 |
0.46 |
0.51 |
0.40 |
0.44 |
0.53 |
0.35 |
|
TIE |
7.14 |
5.27 |
9.00 |
7.72 |
5.87 |
9.56 |
6.79 |
5.84 |
7.73 |
a. Industry
The automobile industry's average debt in all the three years lie below 50% implying that most firms in the sector are able to fund the business more with equity compared to debt. The industry's times-interest-earned (TIE) ratio stood at 7.14 in 2013; 7.72 in 2015 and 7.73 in 2016 and indication that the firms in the industry are much efficient in managing their debt repayment .The degree of consistency is also stable a reflection of a well performing industry.
b. AutoNation
The AutoNation’s debt ratio is at a risky point. Its debt ratio started at 0.48 or 48 % slightly below the 50% but rose rapidly to 51% and then to 53% implying that the debt obligations are increasing. AutoNation thus appears to be more dependent on debt compared to equity. Further, the ratios are above the industry level and implies that the company will have to pay more interest due to more debt financing which can lead to a decline in net income. TIE often indicates how many times a company can cover its interest charges on a pretax earnings basis. AutoNation has performed dismally in this case due to its TIE lying below the industry average implying it did not adequately cover the interest expenses.
c. Lithia Motors
Lithia Motors have shown outstanding performance on TIE .The firm reported an increasing performance of interest earned compared to the interest obligations. The ratio stood at 7.14 in 2014; 9.00 in 2015 and then closes at 9.56 in 2016 way above the industry average. Further the firm’s debt ratio is also appealing lying below 50% in all cases showing that it heavily relies on equity for its financing and this is efficient it the company enhancing its retained earnings due to low interest obligations.
VII. Profitability Ratios and Analysis
The profitability ratios are used to evaluate a company’s ability to generate earnings in a given fiscal year. Many ratios are employed to determine a firm’s profitability. The ratio we will discuss here include Return on Assets (ROA), Return on Equity (ROE ),Return on Sales as well as the Earnings Per Share (EPS) .The rate of return on net sales indicates the measure the net income earned per dollar of sales.
The ROA on the other hand indicates how effectively a company is using its assets to generate earnings before contractual obligations must be paid. Next is the rate of return on common stockholders' equity which evaluates how much income is earned with the money invested by common shareholders and finally the earnings per share of common stock gives the amount of net income for one share of the business's common stock.
|
Profitability Ratios |
2014 |
2015 |
2016 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
Return (Net Sales) |
2.40% |
2.14% |
2.65% |
2.38% |
2.19% |
2.57% |
2.23% |
2.12% |
2.33% |
|
Return Rate (Total Assets) |
5.78% |
4.96% |
6.59% |
5.58% |
5.13% |
6.02% |
5.46% |
4.93% |
5.99% |
|
Return Rate (Stock Eq.) |
21.01% |
19.99% |
22.02% |
21.62% |
20.26% |
22.97% |
22.20% |
20.02% |
24.38% |
|
EPS |
3.55 |
3.04 |
4.05 |
4.39 |
3.52 |
5.26 |
5.40 |
3.89 |
6.91 |
a.Industry
The automobile industry profitability ratios are as reflected above. Return on Equity seems to have been enhanced across the automobile industry averaging about 20%, with return on assets following but the return on sales is so dismal and needs to be enhanced. The EPS is on an increasing trend showing good returns to shareholders.
b. AutoNation
AutoNation appear to be less profitable according to all of the ratios. Its rate of return of net sales (2.12% in 2014; 2.19% in 2015 and 2.12% in 2016) and total sales are indicators of the business which has not enhanced its return on sales in contrast to the automobile industry figures. The rate return on total assets also stood at 4.93% in 2015 compared to 5.46% automobile industry norms. The return on equity however stands less at par with the industry average and its peer Lithia Motors reported at 20.02% in 2015 to industry’s 22.02%.Nevertheless, the company has shown good performance by of its progressive EPS increasing from 3.04 in 2013 to 3.89 in 2016.
c.Lithia Motors
Lithia Motors appears to be more profitable than AutoNation with its all its profitability ratios above the industry level. The company’s return on sales closed at 2.33% in 2016 compared to automobile industry average of 2.23% .The return of equity is also impressive shooting from 22.02% in 2013 to 24.38% in 2016.The same trend of above the industry average is exhibited by its EPS and return on total assets.
VIII. Horizontal and Vertical Analysis
Overview
The horizontal and the vertical evaluation provides a good insight on business performance. Horizontal analysis is used to compare historical financial information over a period of time. The purpose for doing so is to observe whether there was a significant increase or decrease in that time of financial performance. It is crucial to conduct horizontal analysis of all of the financial statements at the same time so that AutoNation and Lithia motors can see the complete impact its operational results over the 3-year period (Pellinen, Teittinen, & Järvenpää, 2016).
The vertical analysis similarly highlights the relationship between accounts on the same financial statement by expressing all amounts as a percentage of one account that is chosen on the statement. Generally, the account selected is the revenue, or sales, on the income statement. Vertical analysis can be created to compare two businesses, of same or different sizes, to show how much percent each business use on a given account. We will employ vertical analysis to identify the proportions between 2013 and 2015 as highlighted.
Complementary Application
Complementary application refers to the use of horizontal and vertical analysis to interpret the inconsistencies in the ratio analysis. Inevitably, there will be some inconsistencies when multiple ratios are used to calculate a business's profitability or liquidity. Thus, other analytical approaches must accompany the financial ratios. This holistic approach will give a business a more complete gauge of its financial status.
HORIZONTAL ANALYSIS
The horizontal and vertical analysis has reflected many trends, differences, and similarities between AutoNation and Lithia Motors. At the inception, the horizontal analysis of balance sheet will be evaluated. Further, the two companies also experienced significant growth in their assets. AutoNation’s assets increased by 13.79% whereas Lithia Motors ones also grew by 16.30%.The growth was also experienced in stockholders' equity. There only limited variations between the two in Automobile Industry. AutoNation’s cash and cash equivalents is on the decline whereas Lithia Motors cash is growing at a higher rate. In 2016 for instance, Lithia Cash and equivalents rose by 50.54% whereas AutoNation’s cash declined by 1.72%.AutoNation also has a long term which is being reduced whereas Lithia Motors has no long term debt obligations (Rugraff, 2012).
On the statement of income, both firms recorded increase in annual total revenue. However, Lithia Motors revenue is growing at a very high rate and percentage compared to AutoNation. In 2016, Lithia Motors recorded a 45.9% increase compared to AutoNation’s 9.17% increase. The same trend is exhibited in net earnings whereby Lithia Motors expanded its earnings by 31.92 % in 2016 compared to AutoNation’s only 5.71%.
|
|
HORIZONTAL ANALYSIS |
|||
|
Balance Sheet items (%) |
AutoNation |
Lithia Motors |
||
|
2015-2016 |
2015-2014 |
2015-2016 |
2015-2014 |
|
|
-1.72% |
8.96% |
50.54% |
26.21% |
|
|
11.05% |
10.38% |
21.87% |
50.71% |
|
|
24.59% |
2.54% |
12.54% |
16.21% |
|
|
-43.43% |
7.42% |
4.43% |
73.22% |
|
|
17.81% |
4.42% |
3.91% |
42.10% |
|
|
10.13% |
8.35% |
56.52% |
76.51% |
|
|
6.07% |
4.37% |
17.71% |
45.48% |
|
|
24.02% |
5.85% |
|
|
|
|
11.65% |
21.65% |
-12.47% |
23.48% |
|
|
13.79% |
6.14% |
16.30% |
49.37% |
|
|
|
|
|
|
|
|
20.34% |
2.25% |
17.14% |
10.12% |
|
|
13.30% |
0.65% |
6.94% |
302.71% |
|
|
|
|
|
|
|
|
-46.40% |
-16.94% |
|
|
|
|
6.89% |
15.22% |
3.75% |
133.40% |
|
|
33.16% |
3.47% |
12.02% |
67.00% |
|
|
-16.63% |
16.22% |
0.03% |
38.49% |
|
|
-43.00% |
18.37% |
9.25% |
64.07% |
|
|
1.62% |
17.21% |
11.48% |
65.11% |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share; 5,000,000 shares authorized; none issued |
|
|
|
|
|
-25.00% |
0.00% |
10.28% |
65.34% |
|
|
-91.59% |
44.39% |
-0.43% |
148.12% |
|
|
-28.05% |
12.54% |
- |
- |
|
|
Treasury stock, at cost; 9,758,091 and 50,248,909 shares held, respectively |
-79.41% |
32.36% |
7.67% |
88.29% |
|
13.38% |
0.50% |
24.14% |
9.76% |
|
|
13.79% |
6.14% |
12.02% |
67.00% |
|
|
HORIZONTAL ANALYSIS |
||||
|
Income Statement Items (%) |
AutoNation
|
Lithia Motors |
|||
|
|
2014-2015 |
2013-2014 |
2014-2015 |
|
2013-2014 |
|
9.17% |
9.08% |
45.90% |
|
34.56% |
|
|
|
|
|
|
|
|
|
9.18% |
9.23% |
46.46% |
|
35.33% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.84% |
7.47% |
42.79% |
|
30.49% |
|
|
19.18% |
12.17% |
57.81% |
|
31.54% |
|
|
|
|
|
|
|
|
|
-3.76% |
73.83% |
- |
|
- |
|
|
6.37% |
10.87% |
26.45% |
|
19.81% |
|
|
|
|
|
|
|
|
|
9.38% |
-0.19% |
46.59% |
|
34.96% |
|
|
4.84% |
-1.81% |
30.55% |
|
26.36% |
|
|
|
|
|
|
|
|
|
-50.00% |
0.00% |
24.80% |
|
26.97% |
|
|
-144.83% |
-48.21% |
-131.56% |
|
7.02% |
|
|
|
|
|
|
|
|
|
6.29% |
14.83% |
8.72% |
|
13.98% |
|
|
5.69% |
11.71% |
35.02% |
|
28.83% |
|
|
|
|
|
|
|
|
|
5.71% |
11.68% |
31.92% |
|
30.87% |
VERTICAL ANALYSIS
As we mentioned earlier, vertical analysis computes the proportions of balance sheet and income statement items by comparing them with the total assets and total revenue respectively. It therefore also indicates the similarities as well as the differences between the AutoNation and Lithia Motors. The key similarity is that both companies did not experience significant changes in their accounts in the income statements during the three years. For instance the proportion of coast of sales remained stable around 84% for in the entire 3 year-period. The same trend being seen at Lithia Motors whose cost of sales stabilized around the same percentage. The most visible difference between the two businesses is in the net income. For instance, AutoNation net income was slightly low and stable standing at around 2.12% in 2013; 2.19% in 2015 and 2.14% in 2016. This is in comparison to Lithia Motors whose net income is increasing from 2.33% in 2015 to 2.65% in 2016.
To the balance sheet items, much variations is seen. If we begin with inventory we realize Lithia Motors spent about 45.58% of money on inventory compared to AutoNation’s 37.79% in 2016.Since inventory is a key current asset, its differential composition has led to a big variation in current assets between the two firms. Some instances of variation is also seen in the stockholders equity where AutoNation reported its composition at 24.58% compared to Lithia Motors 25.66%.
|
|
VERTICAL ANALYSIS |
|||||
|
|
AutoNation |
Lithia Motors |
||||
|
Balance Sheet Items (in %) |
2014 |
2015 |
2016 |
2014 |
2015 |
2016 |
|
Cash & Short-Term Investments |
0.87 |
0.9 |
0.78 |
1.37 |
1.04 |
1.39 |
|
Accounts Receivable |
9.36 |
9.74 |
9.5 |
9.88 |
10.25 |
9.56 |
|
Inventory |
35.72 |
34.51 |
37.79 |
49.79 |
43.38 |
45.58 |
|
Other Current Assets |
2.43 |
2.46 |
1.23 |
1.64 |
1.41 |
1.69 |
|
Total Current Assets |
48.39 |
47.61 |
49.29 |
62.69 |
56.08 |
58.22 |
|
Net PP&E |
28.24 |
28.83 |
27.91 |
27.89 |
28.35 |
27.16 |
|
Intangibles |
20.15 |
19.87 |
19.19 |
7 |
12.16 |
11.49 |
|
Other Long-Term Assets |
3.21 |
3.68 |
3.61 |
2.41 |
3.42 |
3.13 |
|
Total Assets |
100 |
100 |
100 |
100 |
100 |
100 |
|
Accounts Payable |
30.24 |
28.04 |
29.98 |
2.97 |
2.46 |
2.2 |
|
Short-Term Debt |
0.38 |
0.3 |
6.41 |
41.79 |
42.02 |
41.92 |
|
Taxes Payable |
— |
— |
— |
— |
— |
— |
|
Accrued Liabilities |
— |
— |
— |
5.46 |
5.33 |
5.18 |
|
Other Short-Term Liabilities |
16.79 |
17.88 |
17.69 |
0.36 |
0.26 |
— |
|
Total Current Liabilities |
47.41 |
46.22 |
54.08 |
50.58 |
50.07 |
49.29 |
|
Long-Term Debt |
22.87 |
25.04 |
18.35 |
14.23 |
21.14 |
18.79 |
|
Other Long-Term Liabilities |
3.67 |
4.07 |
2.99 |
4.2 |
5.42 |
6.25 |
|
Total Liabilities |
73.95 |
75.33 |
75.42 |
69 |
76.64 |
74.34 |
|
Total Stockholders' Equity |
26.05 |
24.67 |
24.58 |
31 |
23.36 |
25.66 |
|
Total Liabilities & Equity |
100 |
100 |
100 |
100 |
100 |
100 |
|
|
VERTICAL ANALYSIS |
|||||
|
Income Statement Items (%) |
AutoNation |
Lithia Motors |
||||
|
Fiscal Year |
2014 |
2015 |
2016 |
2014 |
2015 |
2016 |
|
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
100.00% |
|
|
|
|
|
|
|
|
|
|
84.37% |
84.36% |
84.24% |
85.05% |
84.73% |
84.25% |
|
|
|
|
|
|
|
|
|
|
15.63% |
15.64% |
15.76% |
14.95% |
15.27% |
15.75% |
|
|
10.85% |
10.88% |
11.05% |
10.31% |
10.48% |
10.61% |
|
|
0.61% |
0.56% |
0.54% |
0.53% |
0.49% |
0.50% |
|
|
0.07% |
0.00% |
0.00% |
|
|
|
|
|
-0.09% |
-0.10% |
-0.06% |
0.26% |
0.00% |
0.06% |
|
|
4.19% |
4.30% |
4.23% |
3.85% |
4.30% |
4.58% |
|
|
-0.28% |
-0.28% |
-0.30% |
- |
- |
- |
|
|
-0.44% |
-0.45% |
-0.50% |
- |
- |
- |
|
|
0.00% |
-0.01% |
0.00% |
0.00% |
0.00% |
0.00% |
|
|
0.00% |
0.00% |
0.00% |
-0.01% |
0.06% |
0.07% |
|
|
-0.01% |
0.02% |
0.03% |
3.34% |
3.91% |
4.14% |
|
|
3.46% |
3.57% |
3.45% |
2.33% |
2.51% |
2.63% |
|
|
1.34% |
1.37% |
1.30% |
0.00% |
0.00% |
0.00% |
|
|
2.13% |
2.20% |
2.15% |
2.33% |
2.51% |
2.63% |
|
|
-0.01% |
-0.01% |
-0.01% |
0.00% |
0.06% |
0.02% |
|
|
2.12% |
2.19% |
2.14% |
2.33% |
2.57% |
2.65% |
IX. Comparative Analysis
a. Creditworthiness Evaluation
i. Short term
To evaluate short-term creditworthiness of AutoNation and Lithia Motors then the short-term ratios must be employed specifically the current and quick ratio. The Automobile industry norm for the current ratio and quick ratio was averagely at 1.05 and 0.21 respectively. If we begin with AutoNation, in 2014, its current ratio reflected at1.02 in 2014; 1.03 in 2015 and closing at 0.91 in 2016 whereas the quick ratio stood at 0.22 in 2014,0.23 in 2015 and 0.19 in 2016. In this evaluation, AutoNation only met the industry standards in quick ratio but it fell much below on the current ratio. Thus, I would rule suggest that AutoNation is not creditworthy in the short run.
However, Lithia Motors has had consistent current ratio and quick ratio above the industry level in all the three years. The current ratios were 1.24, 1.12 and 1.18 in 2014, 2015, and 2016 respectively whereas the quick ratio stood at 0.22 in 2013, 0.23 in 2015 and 0.22 in 2016 all these above industry norm. Thus I can say that Lithia Motors is credit worthy in the short run.
ii. Long term
In this case we employ the long-term ratios. These are the debt ratio and return rate on nets sales. The AutoNation’s debt ratio is at a risky point. Its debt ratio started at 0.48 or 48 % slightly below the 50% but rose rapidly to 51% and then to 53% implying that the debt obligations are increasing. AutoNation thus appears to be more dependent on debt compared to equity. Further, the ratios are above the industry level and implies that the company will have to pay more interest due to more debt financing which can lead to a decline in net income.
Lithia Motors debt ratio is appealing lying below 50% in all cases showing that it heavily relies on equity for its financing and this is efficient it the company enhancing its retained earnings due to low interest obligations. Thus AutoNation did not meet the industry norms in either of the three years thus still uncreditworthy whereas Lithia Motors is better off in terms of long term credit worthiness.
c. Investment Attractiveness Analysis
|
Investment Ratios |
2014 |
2015 |
2016 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
P/E |
7.67 |
3.04 |
12.3 |
8.06 |
3.52 |
12.6 |
7.35 |
3.89 |
10.8 |
|
Div. Yield |
10.3% |
12.04% |
8.49% |
10.1% |
12.46% |
7.74% |
10.0% |
11.98% |
7.96% |
|
Book Value |
18.04 |
16.49 |
19.59 |
20.77 |
17.76 |
23.78 |
25.24 |
20.44 |
30.04 |
Lithia Motors seems to be a good business to invest in. It has a high P/E ratio standing above the industry level in the three years at 12.3 in 2014; 12.6 in 2015 and 10.8 in 2016.Its book value seems to be in the same trend as it also stands above the industry level at 30.04 in 2016 compared to industry level of 25.24%.
However, if we disregard the poor performance in P/E by AutoNation, the firm has reported a good book value and the highest dividend yield. The firm too is an attractive investment and mostly contributed by the high dividend yield standing at 12.04% in 2014; 12.46% in 2015 and 11.98% in 2016.
c. Recommendations
I would recommend that both AutoNation and Lithia Motors improve their strategies to enhance their financial performance. The shareholders especially at AutoNation should increase their financial incentives to prevent the firm from lying on heavy interest obligations. The two companies should also explore the option of reducing prices of the motor vehicles or coming up with sales incentives to see if their profits could increase. Lastly, the two companies should enhance collaboration and negotiate with its suppliers and contractors in the automobile sector to reduce the inventory and accounts payable costs (Anwar & Hasnu, 2016).
Summary and Conclusion
This analysis has exhibited the benefits of financial analyses for the purposes of comparison of the two automobile companies with each other as well as the company performance with the industry level. At glance, we can say that AutoNation and Lithia Motors appeared to be sustaining themselves, because financial ratios insights with vertical and horizontal analyses, reflect that both companies are performing averagely well. None of the firms is at a brink of insolvency. Objective, informed decisions must be made to drive these two lucrative automobile firms into a world of greater business success so that they can enhance their participation not only in USA but the entire globe (Calta & Kleiner, 2001).
References
1. Anwar J. , & Hasnu S. , (2016) .Business strategy and firm performance: Automobile Industry Analysis. Journal of Strategy and Management, 9(3),361 – 382.
2. Asongu A.S., (2015).Finance and growth: new evidence from Financial Analysis. Managerial Finance, 41(6), 615 – 639.
3. http://www.emeraldinsight.com/author/Calta%2C+MichaelCalta M., & Kleiner B., (2001).Managing automobile dealerships effectively. Management Research News, 24(3/4), 22 – 28.
4. Pellinen J., Teittinen H.,& Järvenpää M., (2016). Performance measurement system in the situation of simultaneous vertical and horizontal integration. International Journal of Operations & Production Management, 36(10), 1182 – 1200.
5. Rugraff E., (2012) .The new competitive advantage of automobile manufacturers. Journal of Strategy and Management,5 (4), 407 – 419.
6. https://www.sec.gov/index.htm
Appendices
|
Liquidity Ratios |
2013 |
2014 |
2015 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
Current Ratio |
1.13 |
1.02 |
1.24 |
1.08 |
1.03 |
1.12 |
1.05 |
0.91 |
1.18 |
|
Quick ratio |
0.22 |
0.22 |
0.22 |
0.23 |
0.23 |
0.23 |
0.21 |
0.19 |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
Activity Ratios |
2013 |
2014 |
2015 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
Inventory Turnover |
4.96 |
5.65 |
4.27 |
4.98 |
5.63 |
4.33 |
5.17 |
5.41 |
4.92 |
|
Day's Sales In Receivables |
6.26 |
3.8 |
8.71 |
9.01 |
2.25 |
15.77 |
8.14 |
2.26 |
14.01 |
|
|
|
|
|
|
|
|
|
|
|
|
Solvency Ratios |
2013 |
2014 |
2015 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
Debt |
0.67 |
0.88 |
0.46 |
0.96 |
1.02 |
0.90 |
0.74 |
0.75 |
0.73 |
|
Times Interest Earned |
7.14 |
5.27 |
9.00 |
7.72 |
5.87 |
9.56 |
6.79 |
5.84 |
7.73 |
|
|
|
|
|
|
|
|
|
|
|
|
Profitability Ratios |
2013 |
2014 |
2015 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
Return (Net Sales) |
2.40% |
2.14% |
2.65% |
2.38% |
2.19% |
2.57% |
2.23% |
2.12% |
2.33% |
|
Return Rate (Total Assets) |
5.78% |
4.96% |
6.59% |
5.58% |
5.13% |
6.02% |
5.46% |
4.93% |
5.99% |
|
Return Rate (Stock Eq.) |
21.01% |
19.99% |
22.02% |
21.62% |
20.26% |
22.97% |
22.20% |
20.02% |
24.38% |
|
EPS |
3.55 |
3.04 |
4.05 |
4.39 |
3.52 |
5.26 |
5.40 |
3.89 |
6.91 |
|
|
|
|
|
|
|
|
|
|
|
|
Investment Ratios |
2013 |
2014 |
2015 |
||||||
|
|
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
Industry |
AutoNation |
Lithia |
|
P/E |
7.67 |
3.04 |
12.3 |
8.06 |
3.52 |
12.6 |
7.35 |
3.89 |
10.8 |
|
Div.Yield |
10.3% |
12.04% |
8.49% |
10.1% |
12.46% |
7.74% |
10.0% |
11.98% |
7.96% |
|
Book Value |
18.04 |
16.49 |
19.59 |
20.77 |
17.76 |
23.78 |
25.24 |
20.44 |
30.04 |
|
|
|
|
|
|
|
|
|
|
|
