STEP 7 | THREE PRODUCTS/SERVICES OF GROUPE PSA
ASSIGNMENT 2 | STEPS 7-10Natalie Schiffke | CQUniversitySTEP 7 | THREE PRODUCTS/SERVICES OF GROUPE PSAMy company, Groupe PSA, has many subdivisions of the company that made it quite hard to choose only three products/services to discuss. I chose one from three of the brands beneath the company, from Peugeot, Eurorepar and Vauxhall. I also decided to leave the country I was ‘shopping’ in as France, as Eurorepar is only available in Europe but Peugeot is available in Australia. From both Peugeot and Vauxhall, I found two similar products to show how different/similar the contribution margin may be.PEUGEOT0285750The first product I chose was this small, run-around car from Peugeot, called the Peugeot 108. The car starts at a retail price of €11 950, which is the selling price. There was no variable cost stated on the website, but if you think about all the modifications and accessories that can be added to a car, which could mean more materials and labour needed to produce the product, variable cost changes. Also, considering this is the baseline model of this vehicle and it would be quite a popular vehicle as it is most affordable, I’ve decided to make the variable cost 70% of the selling price. The vehicle is not limited edition, so it would be mass-produced and shipped off to various countries that offer the product.Variable cost = selling price x 70%Variable cost = €11 950 x 70%Variable cost = €8 365Now that I have my selling price and variable cost, I can calculate the contribution margin. The formula for contribution margin is CM = SP – VC.CM = SP – VCCM = €11 950 – €8 365CM = €3 585EUROREPAR0285750Eurorepar is Groupe PSA’s accessories brand. The product I chose from this brand were their Eurorepar Reliance Summer tyres, as everyone who has a vehicle needs tyres. The website said that these tyres were their most popular brand of tyres, which means they would be produced in high volume. There was no price on the website, so I guesstimated the price for these tyres at €600. A normal set of tyres in Australia is around the $800, so by changing the currency and adding a little on (I would say these are premium types – they are specific to the brand and are not generic), I came to my answer. I believe that variable cost for this product would also be high, higher than the previous product of a vehicle, as cheaper products means more produced and more focus on selling a higher volume than profit from one unit. I have set variable cost at 90% of total product price.Variable cost = selling price x 90%Variable cost = €600 x 90%Variable cost = €540From this, I calculate contribution margin.CM = SP – VCCM = €600 – €540CM = €60VAUXHALL0285115The final product I chose was from Vauxhall, another of Groupe PSA’s branches that specialises in automobiles. I chose a product similar to my first – a small, run-around car. This vehicle retails for €15 550, and my reasoning for variable cost is the same as my first. The vehicle would be mass-produced due to being a baseline product and the most affordable product the company offers. I estimate variable cost to be 70% of total selling price.Variable cost = selling price x 70%Variable cost = €15 550 x 70%Variable cost = €10 885From this, I can calculate the contribution margin.CM = SP – VCCM = €15 550 – €10 885CM = €4 665STEP 7 | DISCUSSION ON CONTRIBUTION MARGINThe contribution margin of the Peugeot vehicle, Eurorepar tyres and Vauxhall vehicle were calculated at €3 585, €60 and €4 665 respectively. Considering Groupe PSA’s brands produce many different kinds of products at very large volumes, it is easy to conclude that the Eurorepar tyres would not contribute as much as either of the vehicles would. Yes, many people would need tyre replacements but there would need to be at least 78 to meet the contribution margin for the Vauxhall vehicle and 60 for the Peugeot vehicle. The contribution margin for both vehicles are similar because most cars would have very similar or the same variable costs – materials and labour being two that would apply to every product ever created but would be similar from vehicle to vehicle. So, why don’t we produce less tyres and more vehicles? Because if consumers are purchasing vehicles, it is obvious they will need replacement tyres in the future. Where will they purchase them from? If they have already purchased a vehicle with any one of Groupe PSA’s branch companies, consumers may feel more secure purchasing from a brand they already trust. If tyre production was limited, less consumers would have the opportunity to purchase the product and thus, less sales would be made. Also, if the profit on tyres was only small in comparison with variable and fixed costs, more production of the tyres changes variable cost. This may mean the company would make a higher profit when producing more tyres.STEP 7 | CONSTRAINTSOne major constraint to all three products is availability. Certain products from Groupe PSA’s brand/s are not available in most countries – with some only being available in Europe. The brand Eurorepar is not available in Australia, which can limit potential consumers. Competition is another major constraint – there are hundreds of different kinds of vehicles on the market, not only in Europe but all over the world. Groupe PSA must think – what makes our vehicles stand out? Why would consumers choose our products over another company’s? The company does have one thing going for them, they’ve been around since 1810. That is a long time for customer loyalty!The economy plays a massive role in whether people decide to purchase a new vehicle. Most adults have some kind of an idea on how the economy is faring, and when the economy is weak there will be less sales for more luxury vehicles and more for smaller, more affordable vehicles. Groupe PSA must think about the future economy and their strategies to combat an economic downfall. They could start pushing more luxury vehicles when the economy is doing well, so that when things start to fall it wouldn’t matter if they only sold cheaper vehicles.STEP 8 | DISCUSSION ON RATIOSAfter finally calculating my ratios (it took way longer than I expected), I have come to a few conclusions. Firstly, the trend for the profitability ratios (net profit margin and return on assets) both began at their lowest point in 2015 and increased by around 2% in 2016 to only go down again in 2017. After looking at the net profit, assets and sales from the original financial statements, it is clear that net profit went up more in 2016 than it did in 2015 and 2017, while assets and revenue continued to increase over the four years. This also tells me that Groupe PSA had more expenses in 2017 than it did in 2016.The first efficiency ratio – days of inventory – shows that in 2015 it took approximately 33 days to sell inventory, but by 2018, it took 41.5 days to sell inventory. As Maria said in the video on ratios – it is good for a business to have a turnover rate that isn’t low but isn’t high. A low turnover would mean the company is not selling all the products made earlier on, and vehicles are updated almost every year. 41.5 days is not a long time in terms of selling vehicles if they are updated once a year.The total asset turnover ratio measures sales from assets, for example, in 2015 each dollar of assets generated €1.11 in sales. This figure increased to €1.20 in 2016, lowered to €1.13 in 2017 and €1.19 in 2018. This is good for the firm – they are making more in sales from assets. The liquidity ratio, current ratio, measures assets divided by liabilities. This shows us whether the firm has borrowed more than they currently own. For three of the four years, Groupe PSA has greater liabilities than assets (2015, 2017 and 2018). In the long-run, this could be bad for the business if liabilities continue to be more than assets.Debt/equity ratio shows that for every dollar of the company owned by shareholders, the business owes whatever the ratio is to creditors. Comparing 2015 to 2018, the ratio has slightly improved. For every dollar owned by the company, they owed €2.69 to creditors in 2015. By 2018, the company only owed €2.16 to creditors. Considering that Groupe PSA almost went into liquidation less than 10 years ago, I think that these figures are reasonable.The equity ratio shows how much of a company is being funded by equity and not creditors. Groupe PSA is heavily funded by creditors, with a rising equity ratio of 24.9% in 2015 to 31.6% in 2018. This means that only 31.6% of assets are being funded by the company themselves – the other 68.4% funded by creditors. As I stated above, the company has recently almost liquidated the company, so the figure isn’t going to be amazing.The three market ratios – earnings per share (EPS), dividends per share (DPS) and price earnings ratio – all show how the company is going in terms of the share market. Firstly, the EPS ratio is calculated using net profit after tax and the number of issued ordinary shares. This figure had a similar trend to the profitability ratios calculated at the beginning. The figures dropped both in 2015 and 2017 due to a lower net profit figure over assets figure. In the case of this ratio, it is also because more shares were issued in 2017 with a lower net profit which means lower earnings per share. Dividends per share is how much the company actually paid to shareholders, and for Groupe PSA, the figures vary greatly. In 2015 the company paid out €0.92 per share, to €1.46 in 2016 and a staggering €5.02 in 2017. This rose to €5.51 in 2018. By looking at the statements of movements in equity, it is clear why the figures jumped so greatly in 2017 – an added layer of dividend payments were made of around €450 in both 2017 and 2018. The final market ratio, price earnings ratio, shows how long it would take a shareholder to get their money back (per share) that they invested into the company. For example, in 2015 it would’ve taken around 383 days to get your money back for a share. In 2018, this figure has declined to 0.62, around 220 days. This could mean either of two things – share prices are going down or dividends are paying more. Dividends are paying more and share prices are rising – but the company is paying out more in dividends when compared with the jump in market price for shares.The final six ratios that were calculated were done so using the restated financial statements. Firstly, return on equity (ROE) shows how much profit each dollar of stockholders’ equity makes. A consistently growing ROE can be good for a company as it shows they are good at reinvesting earnings to increase profits. For Groupe PSA, this figure overall rises when you compare just 2015 with 2018 (11.48% to 17.30%), but the ratio did decline from 2016 to 2017. This is due to greater liabilities and expenses than assets and revenue in 2017.The return on net operating assets (RNOA) ratio measures operating income after tax against net operating assets. This figure gives us what the return on assets are compared to operating income. It is more focused than the return on assets ratio that measures net profit after tax and assets, as this ratio takes into consideration income and assets that aren’t for every day, operating needs. For Groupe PSA, this figure doubled from 2015 to 2018, but, similar to the ROE and net profit margin ratios, rose greatly in 2016 and fell in 2017.The next ratio, net borrowing cost (NBC) measures net financial expenses after tax against net financial obligations. For Groupe PSA, the figures followed the same pattern as the net profit margin and ROE ratios – they were both lower in 2015 and 2017 when compared with 2016 and 2018, which is due to expenses being so high in 2017.Profit margin ratio (PM), refers to the percentage of income remaining after all expenses have been deducted. This ratio is more concentrated than the net profit margin ratio, as the PM ratio is split into operating income after tax rather than net profit after tax, which takes into account financial income and expenses. The PM ratio is highest in 2018, at 4.98% (which means that there was 4.98% of income left over after all expenses are taken out). The trend for this ratio is similar to the previous ratio (due to it taking into account profit, which was lower in 2017 than 2016.The asset turnover ratio (ATO) measures similar areas to the total asset turnover ratio (TATO), which are sales and assets. The difference is that the ATO ratio uses net operating assets while the TATO ratio uses all assets. The ATO ratio is more precise because of this. For Groupe PSA, the trend is the exact same as the ratios before this one – 2018 was the best year at 6.28, 2016 the next best at 6.05, while 2017 dropped to 5.55 and 2015 being the lowest at 4.74.The final ratio – economic profit – calculates the amount that income from products that exceed opportunity costs incurred from creating said products. From the ratios I calculated, it is clear that Groupe PSA had a really good year in 2018. Compared with 2017, where the company made €865 million, the figure was more than doubled in 2018 at €2.5 billion. This is a good sign, as it means the company has spent more time investing in products that get the most out of materials to minimise opportunity cost.STEP 8 | DISCUSSION ON ECONOMIC PROFITTo calculate Groupe PSA’s economic profit, I decided to use the standard 10% figure as stated in the study guide because after reading through the company’s annual reports, I could not find the figure used.Looking at the return on net operating assets ratio (RNOA), the two components of this are operating income after tax (OI) and net operating assets (NOA). Over the four years analysed throughout the assignment, it is clear that the ratio itself is heavily influenced by the OI figure. The trend shows that from 2015 to 2016, OI increased, but from 2016 to 2017, the figure decreased. From 2017 to 2018, the figure jumped over €1 billion. Comparing this trend with the trend of NOA, which from 2015 to 2016 decreased dramatically but picked up again to 2015 levels in 2017 and 2018, it is clear that the ratio results are heavily affected by OI. The 2015 ratio of 15.83% is the lowest figure over the four years, and this is because OI was at its lowest point in 2015, but NOA was at its third-highest, which was significantly higher than the figure in 2016. In 2016, the ratio increased to 26.27% due to NOA decreasing significantly to €8.9 billion from the €11.5 billion in 2015. In 2017 the ratio decreased to 17.36%, similar to the 2015 figure because OI and NOA were similar in both years. The ratio reached its highest point in 2018 at 31.3%, which was heavily influenced by an OI figure that went up over €1 billion in a year (€2 billion in 2017 and €3.6 billion in 2018).Major drivers for considerably higher economic profit in 2018 compared to the previous three years are profit margin (PM) and asset turnover (ATO) ratios. Both ratios are at their highest point in 2018, where economic profit also skyrockets. In 2018, for every dollar of assets that Groupe PSA owned, they were generating €6.28 in sales. Likewise for PM, which peaked at 4.98% in 2018, which means that after all opportunity costs are taken out from profit, the company was still left with 4.98% (which, from looking at how much Groupe PSA makes in a year, is an astonishing amount). By comparing these figures from 2018 with the figures from 2017, which were an economic profit of €865 million, RNOA of 17.36%, PM of 3.13% and an ATO of 5.55, all of which are smaller than 2018 figures, goes to show that economic profit is heavily influenced by these accounting drivers. Furthermore, OI seems to also play a massive role in ratio outcomes, as it is used to calculate RNOA and PM, both of which follow the trend of OI itself.STEP 9 | CAPITAL INVESTMENT DECISIONGroupe PSA are looking into investing in either a new hydrogen vehicle or electric vehicle for consumers in Norway due to high demand for more sustainable automobiles. The investment would start on 1 January 2020. The Groupe is undecided on whether to invest in one vehicle over the other as in the long-run, both options are cheaper, more efficient and environmentally friendly than gasoline vehicles. With a rapidly growing demand for sustainable vehicles in Norway, this is a good move for the firm.It is assumed that initial investment costs for both options would include the advanced technology needed to implement in both vehicles, design, concept vehicle, materials needed to mass-produce finished product. The company would also need backing from investors to promote either product. It is also assumed that there would be more investment in the electric vehicle as there has been more research and stability from electric vehicles compared with hydrogen vehicles, in which the technology still needs testing and adapting.Expected cash flows from both potential investments do not surpass ten years due to the technology becoming outdated and new products entering the market. Groupe PSA will have to continually advance the technology in both vehicles to meet consumer demand for higher powered vehicles. It is assumed that the cash flow period for the electric vehicle is seven years, while the hydrogen vehicle is at ten years. This is because technology for electric vehicles is advancing faster than that for a hydrogen vehicle. It is also assumed that the residual value of both vehicles will decrease from the cost due to being technology that is constantly updated and made out-of-date. At the end of the seven year period for the electric vehicle, it is assumed that the vehicle will be taken off the market to make way for newer, more advanced electric vehicles. At the end of the ten year period for the hydrogen vehicle, it is assumed that the vehicle rights will be sold to another company that wishes to continue advancing hydrogen vehicle technology.The cash flow for both options would predominately be comprised of consumer purchases of the product less costs to produce the product itself and wages.It is assumed that the initial investment cost for the hydrogen vehicle would be more than that of the electric vehicle due to being more advanced technology available for the electric vehicle, thus more funding being put into the product due to a lesser risk. It is also assumed that there will be a negative cash flow for the hydrogen vehicle for a number of years due to the product being a newer concept for consumers and less heard of.The initial investment cost, estimated life, residual value, and estimated future cash flows are shown in the below table for both options.Note that all figures are in Euros.OPTION 1OPTION 2Hydrogen VehicleElectric VehicleInitial Investment Cost-€110 million-€80 millionEstimated Life10 years6 yearsResidual Value€12 million€8 millionEstimated Future Cash Flows2021-€5 million€5 million2022-€2 million€17 million2023€2 million€29 million2024€8 million€36 million2025€16 million€44 million2026€25 million€32 million2027€27 million€26 million2028€30 million2029€32 million2030€29 millionThe net present value (NPR), internal rate of return (IRR), and payback period for both investment options are in the below table. Please note any currency values are in Millions of Euros.OPTION 1OPTION 2Hydrogen VehicleElectric VehicleNet Present Value (NPV)-€32.58€43.70Internal Rate of Return (IRR)5%22%Payback Period8 years3 yearsThe net present value (NPV) for option one does not prove to be fruitful, as if Groupe PSA went through with the hydrogen vehicle they would lose €32.58 million in present value. This is a huge determinant of choosing this option when option two, the electric vehicle, has a NPA of positive €43.7 million. Coupled with this, is the internal rate of return (IRR) ratio. The outcome of this ratio for option one is only 5%, when the cost of capital is 10%, option one is not a viable option for Groupe PSA. Option two has a 22% IRR, which is more than the 10% cost of capital. The payback period does not favour option one either, with a payback period of 8 years and 103 days (or 3.4 months). Option two has a payback period of only 3 years and 295 days (or 9.7 months).Overall, it would be best for Groupe PSA to choose option two as their investment. All three calculations for net present value, internal rate of return and payback period work in favour of the guidelines, whereas option one only meets the payback period. A major strength in my analysis is that I favoured one option of ‘winning’ over the other. I did this because I know that in real life, electric vehicles are favoured by consumers and I didn’t even know hydrogen vehicles existed before completing this assignment. It was clear to me from the start that electric vehicles were the go-to – they already make up 10% of Norway’s vehicles. This is also my weakness, I put more emphasis on option two being more suitable for the company and I left option one with no fighting chance.STEP 10 | FEEDBACK ................
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