CIMA SCS: AutoAuto Financial Analysis

The below article on the CIMA August 2017 SCS exam AutoAuto has been kindly provided by the good people at Viva Tuition.

CIMA SCS August 2017

The August 2017 Strategic Case Study deals with AutoAuto, an electronics and design company that sells to large car manufacturers. In this article we’re going to look at the financial statements presented in CIMA’s pre-seen for both AutoAuto and one of its main rivals, Primnav.

Income Statement Analysis – AutoAuto

AutoAuto’s Consolidated Statement of Profit or Loss signals trouble in the form of falling revenues and an even bigger decline in net profits in 2017.

Revenues declined 7% in 2017 while net profit fell by 19%.

We can really only speculate as to why this might be, but there is reason to suspect that AutoAuto lost one or more of its major car manufacturer customers in the past year.

Numerous references are made throughout the pre-seen as to the size of AutoAuto’s customers and also to the company’s reliance on relatively few of these. It’s also plausible that one or more of these large car manufacturers put pressure on AutoAuto to lower its prices and this has negatively affected their revenues and profits in 2017.

Whereas some years ago the four products that AutoAuto currently sells would have been considered cutting-edge and they could have charged a premium price for each, these products have all started to become commonplace in the industry, affecting AutoAuto’s ability to charge high prices for them.

This is another possibility for the poor performance in 2017.

AutoAuto – Research & Developement down

Looking elsewhere in the income statement, it’s concerning that the company’s research and development expense has declined by 7% in 2017. A company like AutoAuto relies on its intellectual property which forms the basis for future product developments and assures their continued growth.

The company’s researchers are being asked to do more with less now.

Income Statement Analysis – Primnav

Primnav’s income statement makes for far happier reading.

Revenues rose by almost 9% in 2017 while their net profit rose by almost 7%. The fact that Primnav’s revenues are over twice as high as AutoAuto’s may very well be a result of the fact that they serve the aftermarket (i.e. end consumers and garages) whereas AutoAuto does not.

Primnav has also taken care to ramp up its R&D expenditure over the year – the spent 22% more on R&D in 2017 than in 2016 which means they are preparing for the future by innovating and generating fresh ideas.

Statement of Financial Position – AutoAuto

The Consolidated Statement of Financial Position for AutoAuto again shows signs for concern. Total assets rose by just 0.2% in 2017 with indications that the company may be divesting physical assets as property, plant and equipment have fallen by 6% over the last year.

AutoAuto needs to take care that it does not fall into a vicious cycle whereby a lack of investment leads to weak or negative revenue and profit growth which in turn leads to less being available to make the necessary investments to position the company well for the future.

The one bright spot is that AutoAuto has paid down long-term debt over the last year with gearing (long-term debt / [long-term debt + equity]) falling from a very high 64% in 2016 to a more sustainable 50% in 2017.

Statement of Financial Position – Primnav

Primnav’s Consolidated Statement of Financial Position indicates that they are investing much more aggressively, with total assets rising 9.8% in 2017.

A good chunk of that investment has gone into intangible assets, meaning that Primnav is acquiring intellectual property in the form of patents, software etc all of which are playing an increasingly important role in a car industry in which software competence and the electrical components that go into cars are key differentiators.

Primnav issued shares in 2017 and it’s noteworthy that they pay out a very generous 85% of net profits in the form of dividends to their shareholders. This may make them an attractive stock to own as investors are guaranteed a yearly payout which may make attracting equity funding easier.

Financial Analysis Summary

In summary, there are reasons to be concerned for AutoAuto.

They may need to consider moving into aftermarket sales to generate another revenue stream. The pre-seen indicates that the company is positioning itself for big developments in the area of self-driving vehicles and it has already invested significantly in this area. However, the return on those investments are far from guaranteed and may be a long way off. It seems AutoAuto is noted for the quality of its products but those products are becoming common features of today’s vehicles. The company needs to innovate to survive and I’m concerned that their lack of investment in R&D expenditure and intangible assets over the last year may hurt them in the long-term.

This article was a snippet of what’s available from VIVA Tuition’s SCS AutoAuto materials for the upcoming August exam.

You can also visit their YouTube channel for more information.

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