Liquidity in BMW and Daimer

Name

Course

Tutor

Date

3.1. Current ratio

BMW: Calculating current assets

Item 20122013

Inventories 9.73 9.58

Trade receivables 2.54 2.57

Receivable from sales financing 20.61 20.79

Financial assets 4.61 4.65

Current tax 0.97 0.97

Deferred tax assets 0.00 0.00

Other assets 3.69 3.73

Securities 0.00 0.00

Cash and cash equivalents 8.37 9.37

Total current assets 50.52 51.67

BMW: Calculating current assets

Other provisions 3.28 3.31

Current tax liabilities 1.48 1.50

Financial liabilities 30.41 30.21

Trade payables 6.43 6.48

Other liabilities 6.82 6.88

Total current liabilities 48. 43 48.39

BMW: Current ratio 2012

Current ratio= current assets/current liabilities

Current assets= 50.51

Current liabilities= 48.43

Current ratio= 50.51/48.43

Current ratio=1.042

BMW: Current ratio 2013

Current ratio 51.67/48.39

Current ratio=1.068

Daimer consolidated financial statements

Current ratio= current assets/current liabilities

Daimer current assets calculation

Item 2013 2012

Inventories 19,246 17,720

Trade receivables 7,884 7,543

Receivables from financial services 22,120 21,998

Cash and cash equivalents 11,607 10,996

Marketable debt securities 5,532 4,059

Other financial assets 2,411 2,070

Other assets 3,160 3,072

Total current assets 71,960 67,458

Daimer current liabilities calculation

Trade payables 10,381 8,832

Provisions for income taxes 869 1,006

Provisions for other risks 5,913 6,292

Financing liabilities 34,021 32,911

Other financial liabilities 6,382 6,699

Deferred income 1,867 1,640

Other liabilities 1,687 1,336

Total current liabilities 61,120 58,716

Daimer Current ratio 2012

Current ratio= current assets/current liabilities

Current ratio = 61,120/58,716

Current ratio=1.041

2013

Current ratio 71,960/67,458

Current ratio = 1.067

3.2. Acid Test Ratio

Acid test ratio= (Current assets – Inventory) / Current Liabilities

BMW

2012

Acid test ratio = 50.51-9.73/48.43

Acid test ratio =0.842

2013

Acid test ratio=51.67-9.58/48.39

Acid test ratio =0.870

Daimer

Acid test ratio= (Current assets – Inventory) / Current Liabilities

2012

Acid test ratio = 61,120-17,720 /58,716

Acid test ratio= 0.740

2013

Acid test ratio 71,960-19,246 /67,458

Acid test ratio = 0.781

Suggestions or comments based on the calculation

Liquidity ratios show whether or not a company is able to meet its short term obligations. Current ratio demonstrates capability of a company to pay its short term debts such as payables using its liquid assets. The standard ratio is 1:1. From the figures above all the companies have a higher than 1:1 ratio. This shows that in the two years, the companies were able to meet all their short term obligations without need for external financing. In the case of BMW, the Current ratio grew from 1.042 in 2012 to 1.068 in 2013. Similarly, for Daimer, the current ratio rose from 1.041 in 2012 to 1.067 in 2013.

Evidently, the two companies did not experience any cash and liquidity issues in the two years, even if the debtors failed to honour their bargain on time. However, these figures should not rise higher. A higher current ratio would mean that a lot of liquid assets are held at hand. If the ratio rises further, the companies may opt to invest them in money markets where they can earn some short term interests.

Acid test ratio on the other hand is a more conservative measure of a firm’s liquidity. This liquidity measure eliminates inventory from current assets. Inventory, as compared to other current assets, cannot be quickly converted into cash, thus removed. In all the years, the acid test ratio grew by a small margin. However, the figures are all less than 1. For example, in the case of Daimer in 2013 the acid test ratio was 0.781. That is, for every euro of Daimer’s current liabilities, the company has 0.781 euros of very liquid assets that can be used to cover any immediate obligation. On the other hand, for BMW in 2013, the acid test ratio was 0.870. That is, for every Euro of BMW’s of current liabilities, has 0.870 euros of very liquid assets that can be used to cover any immediate obligation. Comparatively, BMW has a better acid test ratio as compared to Daimer. This is because higher acid test ratio demonstrates a condition of better financial security in the short term.

The low acid test ratios that the two companies are over-leveraged as they struggle to maintain sales levels or grow sales, pay bills quickly or collect the receivable slowly. As a suggestion, the companies should raise the acid test ratio. Since the ratios are less than 1, the companies may not have enough quick /most liquid cash to meet their accounts payable, interest expenses and other current bills as their accrue. Further, the higher inventory levels may be held as security against stock out costs. With the higher inventory value, the management may be seeking to avoid possible high costs of stock out. However, they may still incur more costs of stock storage. While lower inventory level shows that less cash is tied in stock; implying higher liquidity, the companies need to have optimum inventory levels so as to manage their liquidity effectively.

References

BMW 2014 Financial Report 2014

Daimer 2014 Interim Report Q2 2013