Beuth University of Applied Sciences

MBA Renewables

Written Assignment

Module 3: Accounting

By

Mario Maras

20th January 2013

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Table of contents 1. Task 1………………………………………………………………………….….3

1.1. Subtask 1.a)……………………………………………………………….3

1.2. Subtask 1.b)……………………………………………………………….4 2. Task 2………………………………………………………………………….….4

2.1. Subtask 2.a)……………………………………………………….………4

2.2. Subtask 2.b)…………………………………………………………….…5

2.3. Subtask 2.c)……………………………………………………………….7

2.4. Subtask 2.d)……………………………………………………………….8

3. Task 3……………………………………………………………………………..8

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1. Task 1 - In order to simplify the analysis the comparison of

financial indicators should be based on the key figures in the

financial report of Gamesa on page 1

1.1 Subtask 1.a) - Compare all financial indicators included in Gamesa’s key

figures for both companies. Please specify exactly what values you were using for

Vestas and where they come from!

Financial figures 2011 Gamesa Vestas

Revenues (€mn) 3,033 5,836

MW equivalent sold 2,802 5,054

EBIT (€mn) 131 (38)

Net profit (€mn) 51 (166)

Net debt/EBITDA 2,0 1.8

Share price at 31st Dec (€) 3,21 8.3

Earnings per share (€) 0,21 (0,8)

Gross dividend per share

(€) 0,05 0,0

Indicators where can they be found - Revenues and EBIT (Income statement), MW

equivalent sold (Non-financial figures), Net profit (Consolidate income statement 1

January – 31 December), Net-interest bearin-debt/EBITDA before special items

(Financial ratios), Share price at 31st December, Earnings per share and Gross

dividend per share (Share ratios).

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1.2. Subtask 1.b) - Compare the financial situation of the companies based on

these indicators!

Comparing these indicators it is obvious that Gamesa stands better financially. It is

smaller company with less sell out and less revenue, but Gamesa gained a profit and

Vestas gained a loss. EBIT which shows operating profit before interests and taxes

goes into favor for Gamesa. Net debt/EBITDA ratio is very similar for both

companies meaning that both companies will pay their debts in similar time. Share

prices are higher for Vestas but Gamesa’s shareholders and stakeholders earn money

unlike Vestas’ shareholders and stakeholders who lose money.

2. Task 2 - The investment fund is interested in a long-term

investment in one of the two companies.

2.1. Subtask 2.a) - What ratios or indicators do you suggest to use for supporting

the decision? Name five ratios or indicators and explain why they are useful in

your opinion!

Ratios used in this assignment for comparing companies are current ratio, debt ratio,

acid test ratio, rate of return on net sales, total assets usage and earnings per share.

Current ratio can be used to estimate company’s liquidity. Liquidity is a term used for

being able to convert asset to cash quickly. This ratio shows the extent to which

current assets meet current liabilities. This ratio also is used as snapshot at the end of

last business year but it doesn’t show anything concerning liquidity status during last

business year.

Formula for calculating current ratio is:

!"##$%&  !"#$% =  !"##$%&  !""#$"!"##$%&  !"#$"!"%&'

Debt ratio shows the proportion of assets financed from creditor’s money. Higher debt

ratio, lower assets financed by shareholder’s money. This ratio is good for external

shareholders to estimate company’s financial risk.

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Formula for calculating debt ratio:

!"#$  !"#$% =  !"!#$  !"#$"!"%&'!"!#$  !""#$"

Acid test ratio shows liquidity from short-term point of view. It shows a liquidity

status in which company cannot sell its inventories to pay its short-term debts.

Formula for calculating acid test ratio:

!"#$  !"#!  !"#$% =  !"##$%&  !""#$" − !"#$"%&'!$(

!!""#$%  !"#$"!"%"&'

Rate of return on net sales is used to show company’s competitiveness in market. It

shows if company can sell products with higher prices than competitors because of

superiority of products or if it is able to reduce its expenses; its operating margin

should be higher than profit margin of its competitors.

Formula for calculating return on net sales:

!"#$  !"  !"#$!%  !"  !"#  !"#$! =  !"#$%&'()  !"#$%&  (!"#$%"  !"#$%$&$#  !!"  !"#)

!"#"$%"

Total assets usage ratio shows how well a company has used its total assets in order to

generate revenue.

Formula for calculating total assets usage:

!"!#$  !""#$"  !"#$% =  !"#"$%"

!"!#$  !""#$"

2.2. Subtask 2.b) - Calculate the 2011 values of the chosen indicators!

Data for liabilities for both companies can be found in:

Vestas

• Consolidated balance sheet 31 Dec – Equity and liability

o Total current liabilities – 4,040 m€

o Total liabilities – 5,113 m€

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• Consolidated balance sheet 31 Dec – Assets

o Total current assets – 4,167 m€

o Total assets – 7,689 m€

• Inventories

o Inventories – 2,546 m€

• Consolidated income statement 1 Jan – 31 Dec

o Operating profit (before interest and tax) – (38)

o Revenue – 5,836 m€

Calculations:

!"##$%&  !"#$% =  !"##$%&  !""#$"!"##$%&  !"#$"!"%&' =

4,167m€4,040m€ = 1,03

!"#$  !"#$% =  !"!#$  !"#$"!"%&'!"!#$  !""#$" =

5,113m€7,689m€ = 0,66

!"#$  !"#!  !"#$% =  !"##$!"  !""#$" − !"#$"%&'!$(

!"##$%&  !"#$"!"%"&' =4,167m€− 2,546m€

4,040m€ = 0,40

!"#$  !"  !"#$!%  !"  !"#  !"#$! =  !"#$%&'()  !"#$%&  (!"#$%"  !"#$%$&$#  !"#  !"#)

!"#"$%"

=(38)7,689 = (0,007)

!"!#$  !""#$"  !"#$% =  !"#"$%"

!"!#$  !""#$" =5,836m€7,689m€ = 0,76

Gamesa

• Consolidated balance sheets at 31 Dec 2011 and 2010 – Equity and liabilities

o Total current liabilities – 2,624 m€

o Total liabilities (Total equity and liabilities – Total current liabilities) –

3,939 m€

• Consolidated balance sheets at 31 Dec 2011 and 2010 – Assets

o Total current assets – 4,218 m€

o Total assets – 5,631 m€

• Inventories

o Inventories – 1,116 m€

• Consolidated income statements for the years ended 31 Dec 2011 and 2010

o Operating profit (EBIT) – 131,433 t€

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o Revenue – 3,026,616 t€ = 3,027 m€

Calculations:

!"##$%&  !"#$% =  !"##$%&  !""#$"!"##$%&  !"#$"!"%&' =

4,218m€2,624m€ = 1,61

!"#$  !"#$% =  !"!#$  !"#$"!"%&'!"!#$  !""#$" =

3,939m€5,631m€ = 0,70

!"#$  !"#!  !"#$% =  !"##$%&  !""#$" − !"#$"%&'!$(

!"##$%&  !"#$"!"%"&' =4,218m€− 1,116m€

2,624m€ = 1,18

!"#$  !"  !"#$!%  !"  !"!  !"#$! =  !"#$%&'()  !"#$%&  (!"#$%"  !"#$%$&$#  !"#  !"#)

!"#"$%"

=131,433

3,026,616  !€ = 0,043

!"!#$  !""#$"  !"#$% =  !"#"$%"

!"!#$  !""#$" =3,027m€5,631m€ = 0,54

Indicators Vestas Gamesa

Current ratio 1,03 1,61

Debt ratio 0,66 0,70

Acid test ratio 0,40 1,18

Rate of return on net sales (0,007) 0,043

Total assets usage 0,76 0,54

2.3. Subtask 2.c) - What investment would you suggest?

When looking first ratio – current ratio, it can be seen that Gamesa stands better in

liquidity. Assets are pretty much the same for both companies but Gamesa has less

liabilities. Liabilities show present obligation of the company, i.e. money that has to

be paid to creditors, government (taxes) etc. After looking current ratio Gamesa is

better choice for investment. Debt ratio is pretty much the same for both companies.

As it shows the proportion of assets financed from creditor’s money and ratio is

similar, it is better to look into the numbers of total liabilities and total assets. Gamesa

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has less liabilities than Vestas so from that point of view Gamesa could be safer

investment. After looking into acid test ratio it is obvious that Gamesa is in much

healthier situation than Vestas. After selling all inventory to meet current liabilities

there would be much more money left for Gamesa for future liabilities. Rate of return

on net sales shows that Gamesa’s products stand much better in the market. Their

products are more superior concerning quality and price, they are more recognized by

consumers and therefore more valuable. When looking at total assets usage, Vestas in

in better position than Gamesa as it can use more assets to generate more revenue. But

looking into prior ratios it is obvious that with current situation Gamesa operates

business more efficient than Vestas and Gamesa would be more recommended for

long-term investment.

2.4. Subtask 2.d) - Explain the limitations of supporting long-term investment

decisions with the calculated indicators!

All these indicators take a snapshot of end of last business year. They don’t show in

details how business was operated and they don’t show previous business years to

check if the company is going up or if it is going down in last few years period nor

they show estimations how will business of previous years affect business in the

future.

3. Task 3. - Compare the situation of the two companies in terms of

cash flows!

Categories Gamesa Vestas

Operating activities (513,917) t€ = (514) m€ 840 m€

Investing activities (237,921) t€ = (238) m€ (761) m€

Financing activities 438,250 t€ = 438 m€ (13) m€

These comparisons show Vestas had generally more cash flow in last business year

especially in operating and investing activities while Vestas had more cash flow in

financing activities.

 9    

When looking at operating activities Gamesa had major cash outflow of 513,917 t€

mostly because of change in inventories and change in trade and other receivables.

Vestas had major cash inflow of 840 m€ mostly due to change in net working capital.

Investing activities show for Gamesa show cash outflow of 237,921 t€ due to

investment in intangible assets and investment in property, plant and equipment.

Vestas had major cash outflow of 761 m€ mostly due to purchase of intangible assets

and purchase of property, plant and equipment.

Financing activities show cash for Gamesa inflow of 438 m€ due to new banking

borrowings and Vestas had small cash ouflow of 13 m€ due to acquisition of treasury

shares.

Ratio that can be used to evaluate company’s ability to turn revenues into cash or cash

equivalents.

!"#$%&'()  !!"ℎ  !"#$ !"#$!  !"#$% =!"#$%&'()  !"#ℎ  !"#$

!"#"$%"

Ratio for Gamesa:

!"#$%&'()  !"#ℎ  !"#$ !"#$!  !"#$% =!"#$%&'()  !"#ℎ  !"#$

!"#"$%" =513,917 !€3,026,616!€

= 0,17

Ratio for Vestas:

!"#$%&'()  !"#ℎ  !"#$ !"#$!  !"#$% =!"#$%&'()  !"#ℎ  !"#$

!"#"$%" =840  !€5,836  !€ = 0,14

When comparing this ratio for both companies it seems that both of them can convert

revenues into cash pretty much the same. This process might be more complicated for

Vestas as there is more operating cash flow and revenue through the year.