Ratio Analysis
Before Chysler merged to become DaimlerChrysler AG, they were presented with a takeover bid of $55 per share by MGM billionaire Kirk Kerkorian and former Chrysler chairman Lee Iacocca. Kirk Kerkorian was a stockholder in Chrysler and an experienced takeover financier who apparently found Chrysler to be a good buy. Chrysler rejected the offer, however, stating that the firm was not for sale. Further, many Wall Street experts felt that Kerkorian could not come up with the $20 billion necessary to complete the deal.
After Chrysler rejected Kirk Kerkorian’s bid of $55 per share, Kerkorian decided to have his people repeat the analysis of the firm’s financial performance over the two most recent years to determine if he should increase his bid in this friendly takeover attempt. To measure the financial performance of Chrysler over the past two years, key financial ratios will have to be computed and compared with industry averages. To help in this endeavour, Chrysler’s financial statements are found on the following pages.
Chrysler Corporation’s Balance Sheet
for the year ending December 31 (in millions)
????????????????????????????????????????? ?????????????????? This? ?????? ?????????????? Last
??? ???????????????????????????????????????????????????????? year??? ??????????????????? year
Assets
Current Assets
?Cash and cash equivalents?????????? ???????? $ 5,543??? ?????????????? $ 5,145
?Marketable securities???????????????? ??????????? $ 2,582? ?? ?????????????? $ 3,226
?Accounts receivable?????????????????? ?????????? $ 2,003?? ? ?????????????? $1,695
?Inventories?????????????????????????? ???????????????? $ 4,448?? ? ?????????????? $3,356
?Prepaid taxes???????????????????????? ????????????????????????????? $?? 985?? ? ?????????????? $1,330
?Finance receivables?????????????????? ????????????$13,623??? ?????????????? $12,433
? Total Current Assets???????????????? ??????????? $29,184??????? ?????????? $ 27,185
Property & equipment?????????????????? ????????? $20,468??????? ?????????? $ 18,281
Less: Accumulated Depreciation??????? ???? $ 7,873??? ?????????????? $? 7,208
? Net Plant & Equipment??????????????? ?????????$12,595?????? ??????????? $?11,073
Other Assets
?Special tools???????????????????????? ?????????????????????????????? $ 3,566? ?? ?????????????? $ 3,643
?Intangible assets???????????????????? ???????????????????????????? $ 2,082? ?? ?????????????? $ 2,162
?Deferred tax assets?????????????????? ??????????? $?? 490? ?????????????????? $?? 395
?Other assets????????????????????????? ???????????????????????????????$ 5,839? ?? ???????????????$ 5,081
Total Assets?????????????????????????? ???????????????????????????????$53,756? ? ???????????????$49,539
Liabilities
Current Liabilities
?Accounts payable????????????????????? ?????????? $ 8,290? ?? ?????????????? $ 7,826
?Short-term debt?????????????????????? ???????????????????????????? $ 2,674? ?? ?????????????? $ 4,645
?Accrued liabilities?????????????????? ????????????????????????????? $ 7,032? ?? ?????????????? $ 5,582
?Other payments??????????????????????? ???????????? $ 1,661? ?? ?????????????? $?? 811
? Total Current Liabilities??????????? ??????????????$19,657? ? ???????????????$18,864
Long-term Liabilities
?Long-term debt??????????????????????? ???????????????????????????? $ 9,858? ?? ?????????????? $ 7,650
?Accrued employee benefits???????????? ????? $ 9,217? ?? ?????????????? $ 8,595
?Other non-current liabilities???????? ??????????? $ 4,065? ?? ?????????????? $ 3,736
? Total Long-term Liabilities????????? ???????????$23,140? ? ???????????????$19,981
Total Liabilities????????????????????? ?????????????????$42,797? ? ???????????????$38,845
Stockholder’s Equity
?Preferred stock?????????????????????? ???????????????????????????? $???? 0? ??????????????????? $???? 2
?Common stock (at $1 par)????????????? ?????? $?? 408? ?????????????????? $?? 364
?Additional paid-in capital??????????? ?????????? $ 5,506? ?? ?????????????? $ 5,536
?Retained earnings???????????????????? ???????????? $ 6,280? ?? ?????????????? $ 5,006
?Treasury stock??????????????????????? ??????????????????????????????($1,235)??? ???????????????($ 214)
? Total Shareholder’s Equity?????????? ?????????$10,959? ? ???????????????$10,694
Total Liabilities and Share. Equity??? ????????$53,756? ? ???????????????$49,539
Chrysler Corporation’s Income Statement?
for the year ending December 31, (in millions)
???????????????????????????????????????? ??????????????????? This???? ?????????????????? Last
????????????????????????????????????????? ??? ?????????????? year???? ??? ?????????????? year
Sales revenue????????????????????????? ????????????????????????????? $53,195? ? ?????????????? $52,235
Less: Cost of goods sold?????????????? ????????$41,304? ? ???????????????$38,032
Gross profits????????????????????????? ?????????????????????????????? $11,891? ? ?????????????? $14,203
Less: Operating expenses???????????
?Selling & admin.?????? ???????????????????????????? $4,064? ?????????????????? $3,933
?Pension??????????????? ??????????????????????????????? $? 405? ??????????????????? $? 714
?Nonpension post ret.?? ????????????????????????? $? 758? ??????????????????? $? 834
?Depreciation?????????? ????????????????????????????????????????????? $1,100? ?????????????????? $? 994
?Amort. of tools??????? ?????????????????????????????????????????????$1,120? ???????????????????$? 961
Total operating expenses?????????????? ?????????$ 7,447? ?? ???????????????$ 7,436
Operating profits?????? ??????????????????????????????????????????? $ 4,444? ?? ?????????????? $ 6,767
Less: Interest expenses??????????????? ??????????$?? 995? ???????????????????$?? 937
Net profit before taxes??????????????? ?????????? $ 3,449? ?? ?????????????? $ 5,830
Less: Taxes (40%)????????????????????? ????????????$ 1,380??????????????????? ?$ 2,332
Net profit after taxes???????????????? ?????????????????????????????$ 2,069? ?? ???????????????$ 3,498
Industry Average Financial ratios this year and last year
??????????????????????????????? ??????????????????????????????????????????? This???? ?????????????????? Last
???????????????????????????????? ??????????????????????????? year???? ?????????????????? year
Liquidity
Current Ratio??????????????????? ????????????????????? 1.78????? ????????????????? 1.69
Quick Ratio (Acid Test)????????? ???????????????? 1.55????? ????????????????? 1.51
Activity
Inventory Turnover????????????? ??????????????????? ?7.41????? ? ?????????????? 7.58
Average Collection Period??????? ????????????? 22.8????? ????????????????? 23.4
Fixed Asset Turnover?????????? ?????????????????? ??1.54????? ?????????????? 1.62
Total Asset Turnover??????????? ?????????????????? ??.89???? ?????????????????? ??.91
Debt
Debt?????????????????????????? ?????????????????????????? ?75%??????? ?????????????? ?????????????? 77%
Times Interest Earned??????????? ???????????????? ?6.4?????? ????????????????? 7.0
Profitability
Gross Profit Margin???????????? ?????????????????? ??24%?????? ?????????????? ?????????????? 28%
Net Profit Margin?????????????? ???????????????????? ?4.7%?????? ?????????????? ?????????????? 4.9%
Return on Total Assets????? ???????????????????? ?4.6%????? ?????????????? 4.7%
Return on Equity??????????????? ??????????????????? 20.7%????? ?????????????? ?????????????? 33.8%
Questions
- Compute Chrysler’s financial ratios for the past two years.
- Compare these ratios to the industry’s average.
- Comment on Chrysler’s strengths and weaknesses by ratio category.
- Should Kerkorian have pursued the purchase of Chrysler? [please support your answer with any 2 reasons].