Ratio Analysis

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 endeavor, Chrysler's financial statements are found on the following pages.

Chrysler Corporation's Balance Sheetfor the year ending December 31 (in millions) This Last

year year

AssetsCurrent 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 $11,073Other Assets

Special tools $ 3,566 $ 3,643

Intangible assets $ 2,082 $ 2,162

Deferred tax assets $ 490 $ 395

Other assets $ 5,839 $ 5,081Total Assets $53,756 $49,539LiabilitiesCurrent 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 $18,864Long-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 $19,981Total Liabilities $42,797 $38,845Stockholder'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 $10,694Total Liabilities and Share. Equity $53,756 $49,539

Chrysler Corporation's Income Statementfor the year ending December 31, (in millions) This Last

year yearSales revenue $53,195 $52,235

Less: Cost of goods sold $41,304 $38,032Gross 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 $ 961Total operating expenses $ 7,447 $ 7,436Operating profits $ 4,444 $ 6,767

Less: Interest expenses $ 995 $ 937Net profit before taxes $ 3,449 $ 5,830

Less: Taxes (40%) $ 1,380 $ 2,332Net profit after taxes $ 2,069 $ 3,498

Industry Average Financial ratios this year and last year This Last

year year

LiquidityNet Working Capital $5,056 $4,892

Current Ratio 1.78 1.69

Quick Ratio (Acid Test) 1.55 1.51

ActivityInventory Turnover 7.41 7.58

Average Age of Inventory .021 .021

Average Collection Period 22.8 23.4

Fixed Asset Turnover 1.54 1.62

Total Asset Turnover .89 .91

DebtDebt 75% 77%

Times Interest Earned 6.4 7.0

ProfitabilityGross 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%

Industry Average Financial ratios this year and last year This Last

year year

LiquidityNet Working Capital $5,056 $4,892

Current Ratio 1.78 1.69

Quick Ratio (Acid Test) 1.55 1.51

ActivityInventory Turnover 7.41 7.58

Average Age of Inventory .021 .021

Average Collection Period 22.8 23.4

Fixed Asset Turnover 1.54 1.62

Total Asset Turnover .89 .91

DebtDebt 75% 77%

Times Interest Earned 6.4 7.0

ProfitabilityGross 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%

1 .Compute Chrysler's financial ratios for the past two years.

2 .Compare these ratios to the industry's average. Comment on Chrysler's strengths and weaknesses by ratio category.

3. Should Kerkorian have pursued the purchase of Chrysler?4. If Kerkorian did not want to takeover Chrysler, what other reasons might he have had for trying to convince other people that Chrysler was a takeover candidate?