2.General Description of Financial Analysis Methods

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VSB — TECHNICAL UNIVERSITY OF OSTRAVA FACULTY OF ECONOMICS

DEPARTMENT OF FINANCE

Assessment of the Financial Position of Selected Company Posouzení finanční pozice vybraného podniku

Student: Jinyu Liu

Supervisor of the bachelor thesis: Ing. Karolina Lisztwanová, Ph.D

Ostrava 2019

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1. Introduction

The financial analysis is based on the financial statements which are the balance sheet, income statement, and cash flow statement. A series of specialized analytical techniques and methods are used to conduct past and present fundraising activities, investment activities, business activities, etc. Economic management activities for analysis and evaluation of profitability, operational capability, and solvency.

Financial analysis provides accurate information and evidence for companies' investors, creditors, operators and other organizations or individuals who care about the company to understand the past, evaluate the current situation of the company, and predict the future decision of the company.

The goal of this bachelor thesis is to assess financial position of Great Wall Motor Co., Ltd. to assess the financial status of the selected year. In the financial analysis, we used Great Wall Motor's 2013-2017 annual report as the selected data.

The five parts of the sequence from theory to practice constitute the structure of this paper. Chapter 1 is an introduction to the entire paper. This section refers to the purpose and structure of the paper. Chapter 2 is the theoretical part. The theoretical section includes three basic financial reports, including a balance sheet, a profit and loss statement, and a cash flow statement. In addition, the theoretical analysis includes three main methods of financial analysis, including common size analysis and financial ratio analysis and pyramid decomposition involving equity returns. Chapter 3 introduces the basic background of Great Wall Motor Co., Ltd in the first place. Next, in this chapter, we analyze the financial status of Great Wall Motor Co., Ltd. using the common common scale analysis method. Chapter 4 uses the financial ratio analysis method and pyramid decomposition to analyze the financial status of Great Wall Motor Corporation from 2013 to 2017. Finally, this chapter will summarize the financial situation of Toyota Motor Corporation and make some suggestions. Chapter 5 is the conclusion part, making some conclusions and suggestions for Great Wall Motor Company.

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2.General Description of Financial Analysis Methods

This chapter includes an introduction of three financial statements, and studies financial analysis methods for assess the effectiveness of company's operations and management. The main three methods include common- size analysis, financial ratios analysis and pyramidal decomposition. This chapter lays the groundwork for the analysis of selected companies in the next chapter.

2.1Description of Financial Analysis

Financial analysis is based on statement data and other relevant information.

Through a series of specialized analytical techniques and methods, financial analysis analyzes and evaluates the past and present fundraising activities, investment activities, solvency, profitability and operational capability of economic organizations such as enterprises. “Financial analysis is a process of judgment, whose main purpose is to make the best forecast of the company's future status and business performance.”(J.

FABOZZI., 2006, p. 32)

2.1.1Body of financial analysis

The main body of financial analysis, including equity investors, creditors, managers, government agencies and other people who have an interest in the business. They use financial statements for different purposes, require different information, and use different analysis procedures.

2.1.2Financial analysis for the purpose of the company

“Financial analysis reflects the status quo of the company's production management, reveals the existing problems, and distinguishes the company's strengths and weaknesses from the business projects. It can help the company to make correct decisions and improve management capabilities.”(DLUHOŠOVÁ, Dana et al., 2014, p.

101)

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Through financial analysis, we can grasp the internal links of economic activities, distinguish the integrity and deficiencies of production and operation activities, and identify the favorable and unfavorable factors affecting the financial situation.It good for company to achieve the financial management objectives of enterprises and improve the economic benefits of enterprises.

2.2Financial statement

The financial statements are a written record of the financial status of the business.

They include standard reports such as balance sheets, income or income statements, and cash flow statements. They are one of the most important components of business information and the primary means of communicating the financial information of an entity to external parties. “In general, financial statements are designed to meet the needs of many different users, especially existing and potential owners and creditors.”(Erich A., 2000, p. 305)

“Financial three statements”, which refers to the three most basic financial statements using in the corporate financial reporting. These three statements are balance sheet, cash flow statements and income statement. Wherein, the “cash flow” is obtained by the calculation between “balance sheet” and “income statement”, which has the effect of checking computations.

2.2.1Balance sheet

The Balance Sheet, also known as the Statement of Financial Position, represents the principal accounting statements of a company's financial position on a given date.

In addition to the internal debugging, business direction, and prevention of malpractices, the function of the report also allows all readers to understand the business situation in the shortest time.The balance sheet is an invaluable piece of information for investors and analysts.

“The balance sheet uses the principle of accounting balance to divide the trading subject of assets, liabilities and shareholders' equity into two major blocks: assets and liabilities and shareholders' equity. ”(J. FABOZZI., 2006, p. 45) After a series of

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accounting procedures, it is based on the static enterprise status on a specific date.

Concentrate into a report that reflects the overall size and structure of the company's assets, liabilities, and owner's equity. However, since it is just a snapshot in time, it can only use the difference between this point and time and another single point in time.

Many financial ratios draw on data included in both the balance sheet and the more dynamic income statement and statement of cash flows to paint a fuller picture of what's going on with a company's business.

Table 2.1 Balance sheet structure

Source: Own construction based on Dluhošová (2014) p. 59

Assets in total Liabilities and Equity

A. Fixed assets A. Equity

A1. Fixed intangible assets A1. Registered capital A2. Fixed tangible assets A2. Capital funds

A3. Financial assets A3. Funds from profit

A4.Economic result in accounting period

A5. Economic result in previous period

B. Current assets B. Current liabilities

B1. Inventories B1. Reserves

B2. Long-term receivables B2. Long-term liabilities B3. Short-term receivables B3. Short-term liabilities

B4. Financial assets B4. Bank credit

C. Other assets C. Other liabilities

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Asset

Assets are things that a company’s own. They are the resources of a company, which have monetary value. Asset is normally separated according to their liquidity. In simpler terms, how quickly can the asset be turned into cash. Current asset is the term to label those assets which can be easily converted / sold for cash.

Current assets include cash and cash equivalents, account receivable, inventory, temporary investment.

Other assets are less liquid in comparison. These include liquid plant, property, equipment, investment. All these could be classified as fixed assets.

Lastly, trademark / brand such as Nike and Coca-Cola is a form of intangible assets.

Asset is always listed on the left side of balance sheet, starting with current assets and follow by fixed assets.

Liability

Liability refers to how much a company owes to other parties. Together with equity, liability is the source of company’s asset. For instance, if a company has Euro1 million worth of asset and 60% is funded by debt, this signifies that the company has a total liability of Euro600,000. The remaining 40% is then funded by equity. Another simple ratio to judge the liability of a company is by looking at gearing ratio. Since liability provide the money for a company to purchase asset, liability is also being regarded as the claim on a company’s asset.

Similarly, liability is categorized according to their time frame. Current liability generally consists of debts due within one financial year. This includes account payable, salaries payable, interest payable. On the other hand, longer term liability includes bank loans and mortgage.

Equity

Equity is the second source to fund a company’s asset. Equity is funded by owner (for sole proprietorship) or shareholders (for public listed companies). Unlike liability that is funded by debtor, a shareholder / owner does not demand for interest on the fund borrowed. The reward for owner / shareholder is to see the increase in earnings, and sometimes, shareholders are rewarded by the payment of dividend.

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“Theoretically, equity can be viewed as the leftover of assets minus liabilities. In simpler terms, when selling off all your assets and pay off all your debts, that is the amount left as equity.”(J. FABOZZI., 2006, p. 60)

The basic equation for the balance sheet is:

Total assets = Total equity + total liabilities (2.1)

2.2.2 The Income Statement

Since balance sheet is just a snapshot in time, many financial ratios draw on data which be included the more dynamic income statement and statement of cash flows to paint a fuller picture of what's going on with a company's business.

The Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time, which highlights the changes over time in two especially important balance The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

The income statement is one of three statements used in both corporate finance and accounting. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit, in a coherent and logical manner.

The income statement is divided into two parts: operating and financing activity; In its most basic form, an income statement can be expressed as follows:

Revenues－Expenses＝Profits . （2.2）

If the net amount of revenues and gains minus expenses and losses is positive, the bottom line of the profit and loss statement is labeled as net income. If the net amount (or bottom line) is negative, there is a net loss.

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Table 2.2 Income statement structure

Revenues

- Costs of goods sold

= Gross profit

- Operating expenses (accounting,advertising, depreciation expenses)

= Operating income (earnings before interest and taxes, EBIT)

- Non operating expenses

= Earnings before taxes (EBT) - Income tax

= Net income (EAT)

Source: Own construction based J. FABOZZI. (2006, p. 98)

2.2.3 Cash flow statement

Cash flow statement, as it's commonly referred to, is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.

during a given time period.The main categories found in a cash flow statement are the operating activities, investing activities and financing activities of a company and are organized respectively. The total cash provided from or used by each of the three activities is summed to arrive at the total change in cash for the period, which is then added to the opening cash balance to arrive at the cash flow statement’s bottom line, the closing cash balance.

One of the primary reasons cash inflows and outflows are observed is to compare the cash from operations to net income. This comparison helps company management, analysts, and investors to gauge how well a company is running its operations. The cash flow statement reflects the actual amount of money the company receives from its operations. The reason for the difference between cash and profit is because the income statement is prepared under the accrual basis of accounting, where it matches revenues

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and expenses for the accounting period, even though revenues may actually not have yet been collected and expenses may not have yet been paid.

Table 2.3 Cash flow statement structure

Items

Net Income

+ depreciation

+/- Decrease (increase) in a account receivable +/- Increase (decrease) in liabilities

+/- Decrease (increase) in inventories

= Net cash flow from operating activities

- long-term investments

= Net cash flow from investing activities

+/- Increase (decrease) in debt

+/- Increase (decrease) of profit from previous years - Dividends

+ Sale of stock

= Net cash flow from financing activities

= Net increase (decrease in cash )

Source: Own construction based on Dluhošová (2014) p. 86 2.3 Theoretical concept of three financial analysis methods

2.3.1 Common-size analysis

Common-size analysis, also referred as vertical analysis, is a tool that financial managers use to analyze financial statements. It evaluates financial statements by expressing each line item as a percentage of the base amount for that period. The analysis helps to understand the impact of each item in the financial statement and its contribution to the resulting figure.

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One of the benefits of using common size analysis is that it allows investors to identify drastic changes in a company’s financial statement. It mainly applies when the financials are compared over a period of two or three years. Any significant movements in the financials across several years can help investors decide whether to invest in the company.

Common-size analysis is also an excellent tool to compare companies of different sizes but in the same industry. Looking at their financial data can reveal their strategy and their largest expenses that give them a competitive edge over other comparable companies.

Common-size analysis have horizontal common-size analysis and vertical common- size analysis these two types to be conducted.

Vertical common-size analysis

Vertical analysis refers to the analysis of specific line items in relation to a base item within the same financial period. Vertical analysis common-size is a technique used to identify where a company has applied its resources and in what proportions those resources are distributed among the various balance sheet and income statement accounts. In other words, it is often used in one basic financial statement and compare data with other companies.

In the vertical analysis, each element of financial statements are shown as a percentage of another item. The assets, liabilities and share capital is represented as a percentage of total assets. In case of Income Statement, each element of income and expenditure is defined as a percentage of the total sales. When using the vertical analysis, the percentage is counted by using the following formula:

Percentage of base=Amount of individual item

Amount of base ∙100. (2.3)

Horizontal common-size analysis

Horizontal analysis (also known as trend analysis ) is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items

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over a period of time. It is a useful tool to evaluate the trend situations, which can compare growth in amounts over time for the company.

The statements for two or more periods are used in horizontal analysis. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with items on the statements of the base period.

There are two ways to perform the horizontal analysis: Absolutely comparison and relative comparison. The formula is as follows^：

Absolue change =I_ap−I_ap−1 = ∆I_ap, (2.4) Relative change =Îâp^−Iâp−1

I_ap = ^∆I^ap

I_ap−1. (2.5) where I_apis value of selected item in actual period and I_ap_₁ is value of selected item before actual period.

2.3.2Financial ratio analysis

A financial ratio can be well defined as a comparative magnitude of two selected statistical values taken from the financial statements of a business enterprise. Being used in accounting very often, numerous standard ratios are used for evaluation of the overall financial condition of an organization or corporation. These financial ratios might be used by the managers of a firm, creditors of a firm, and current and potential shareholders of a firm. Moreover, these financial ratios are also used by security analysts to contrast the strengths and weaknesses of various companies.

The main sources used to calculate financial ratio include balance sheet, cash flow statement and income statement. The data of these sources is based on the accounting methods and standards used by the organization.

2.3.2.1Profitability ratios

Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a

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specific period of time. They show how well a company utilizes its assets to produce profit and value to shareholders.

A higher ratio or value is commonly sought-after by most companies, as this usually means the business is performing well by generating revenues, profits, and cash flow.

The ratios are most useful when they are analyzed in comparison to similar companies or compared to previous periods. The most commonly used profitability ratios are examined below.

Operating profit margin (OPM)

Operating margin is equal to operating income divided by revenue. Operating margin is a profitability ratio measuring revenue after covering operating and non- operating expenses of a business. The operating income is the basis of how much of the generated sales is left when all operating expenses are paid off. It shows the operating income (i.e. EBIT, or earnings before interests and taxes) to revenues. As a result, it shows how the company manages and operations, and the formula is as follows,

Revenue profit Operating Revenue OR

) EBIT margin(OPM profit

Operating 

. (2.6) Net profit margin (NPM)

The net profit margin is a number which indicates the efficiency of a company at its cost control. A higher net profit margin shows more efficiency of the company at converting its revenue into actual profit. This ratio is a good way of making comparisons between companies in the same industry, for such companies are often subject to similar business conditions, and the formula is as follows,

venue NPM EAT

) Re margin(

profit

Net 

. (2.7) Gross profit margin(GPM)

The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells. The higher the percentage, the more the company retains on each dollar of sales.

Companies use gross margin to measure how their production costs relate to their revenues. For example, if a company's gross margin is falling, it may look for processes that allow it to cut labor costs or for suppliers who offer lower costs on materials.

Alternatively, it may decide to increase prices to boost revenue, and the formula is as follows,

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Revenue

sold goods of Cost - revenue Total

margin profit

Gross  . (2.8)

Return on Assets (ROA)

Return on Assets (ROA) is a type of return on investment (ROI) that measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing by comparing the profit it’s generating to the capital it’s invested in assets. The higher the return, the more productive and efficient management is in utilizing economic resources. we can calculate the return on assets (ROA) as follow formula,

assets Total

income ) Net

assets(ROA on

Return 

. (2.9) Return on Equity (ROE)

Return on Equity (ROE) is a measure of a company’s annual return (net income) divided by the value of its total shareholders’ equity, expressed as a percentage. A sustainable and increasing ROE over time can mean a company is good at generating shareholder value because it knows how to reinvest its earnings wisely, so as to increase productivity and profits. In contrast, a declining ROE can mean that management is making poor decisions on reinvesting capital in unproductive assets, and the formula is as follows,

Equity ) EAT equity(ROE on

Return  . (2.10) Return on capital (ROC)

Return on capital is a profitability ratio. It measures the return that an investment generates for capital contributors, ie bondholders and stockholders. Return on capital indicates how effective a company is at turning capital into profits.

Return on capital is especially useful for companies that invest a large amount of capital, like oil and gas firms, computer hardware companies, and even big box stores.

As an investor（bondholders and stockholders）, it's imperative to know that if a company uses their money , they will get a respectable return on your investment, and the formula is as follows,

Totalcapital income Net

capital on

Return 

(2.11)

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Return on capital= ^{Net income}

Interest−Bearing debt+Total equity. (2.12) 2.3.2.2 Liquidity ratios

The liquidity ratio indicates whether the company's current assets are sufficient to meet the company's obligations at maturity. Liquidity is a determining factor in demonstrating a company's debt capacity. Assets are highly liquid if the company's assets can be easily converted into cash. If the company's liabilities must be repaid in the near future, the liabilities are liquid. In day-to-day operations, liquidity management is often achieved through the efficient use of assets. The liquidity ratio includes three ratios: current ratio, quick ratio, and cash ratio.

Current ratio

The current ratio is the ratio of a company's current assets to current liabilities. The current ratio is an important indicator to measure the financial security status and short- term solvency of enterprises.

If the liquidity ratio is high, it means that it has a greater ability to meet short-term obligations. The formula is as follows,

s liabilitie Current

assets Current ratio

Current 

. (2.13) Quick ratio

The quick ratio is a financial ratio used to gauge a company's liquidity. It means that this ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.The quick ratio is also known as the acid test ratio.The quick ratio is more stringent than the current ratio because the quick ratio needs to be deducted from stock, which means that stocks may not be converted into cash quickly and easily, and the formula is as follows,

Quick ratio =current assets−inventories

current liabilities . (2.14) Quick ratio =Cash+marketable securities

current liabilities . (2.15)

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Cash Ratio

The cash ratio is a more rigorous test that measures a company's ability to repay debt.

The cash ratio is the ratio of the company's total cash and cash equivalents to its current liabilities. Since other assets (including accounts receivable) are excluded, cash ratios are generally more conservative in responding to a company's debt ability compared to many other liquidity ratios,and the formula is as follows,

Cash ratio =cash+marketable securities

current liabilities . (2.16) 2.3.2.3 Solvency ratios

Solvency ratio is a key metric used to measure an enterprise’s ability to meet its debt and other obligations. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations.

The solvency ratio is only one of the metrics used to determine whether a company can stay solvent. Other solvency ratios include debt to equity, total debt to total assets, and interest coverage ratios.

However, the solvency ratio is a comprehensive measure of solvency, as it measures cash flow – rather than net income – by including depreciation to assess a company’s capacity to stay afloat. It measures this cash flow capacity in relation to all liabilities, rather than only short-term debt. This way, solvency ratios assesses a company's long- term health by evaluating its long-term debt and the interest on that debt.

Debt to equity ratio

The debt to equity (D/E) Ratio is calculated by dividing a company’s total liabilities by its shareholder equity. These numbers are available on the balance sheet of a company’s financial statements. The ratio is used to evaluate a company's financial leverage. The debt/equity ratio is also referred to as a risk or gearing ratio. The formula for calculating the D/E ratio is:

equity rs' Shareholde

debt Total ratio

equity

Debt to 

.

(2.17)

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Debt to assets ratio

Total debt to total assets is a leverage ratio that defines the total amount of debt relative to assets. This metric enables comparisons of leverage to be made across different companies. The higher the ratio, the higher the degree of leverage and, consequently, financial risk. The total debt to total assets is a broad ratio that includes long-term and short-term debt (borrowings maturing within one year), as well as all assets – tangible and intangible, and the formula is as follows,

asset Total

debt Total ratio

Debt 

. (2.18) Interest coverage

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The method for calculating interest coverage ratio may be represented with the following formula:

Interest expenses

profit Operating expensesOR

Interest ratio EBIT

coverage

Interest 

. (2.19)

Financial leverage

Financial leverage shows the total assets of each equity unit. Companies with high financial leverage may face bankruptcy risk if they are unable to pay their debts.

However, financial leverage is not always a bad thing; it can increase the return on investment of shareholders, and often there are tax incentives related to borrowing.

Equity assets Total leverage

Financial 

(2.20)

2.3.2.4 Activity ratios

Activity ratio, also known as asset management ratio. Activity ratios measure how much a company uses its assets. It can help companies assess the benefits of a particular asset, such as inventory or accounts receivable, as well as the revenue

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generated by the asset and the distribution of the asset. Activity ratios tell companies how their assets are effectively generating sales. There are two types of activity indicators: days and turnover.

Average collection period(ACP)

The average collection period shows the time it takes for the company to achieve credit sales. Simply, how long does it take to resume credit sales from the debtor? The average collection period highlights the management of the company's accounts receivable. This is a measure of the efficiency of credit operations by calculating the average length of time a customer pays a bill. If the company recovers the receivables more quickly, the collection period will be shorter.

The formula to compute this ratio is:

360 Revenues ·

s receivable Account

ACP

. (2.21)

Total assets turnover(TAT)

The Total Assets Turnover Ratio shows how efficiently the total assets of the firm are employed to generate sales.A higher ratio indicates greater efficiency. Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales. This ratio gives an idea to the investor and the creditor about how the firm is managed, and the assets are utilized to generate revenues, and the formula is as follows,

assets total

Revenues turnover

assets

Total 

. (2.22) Account receivable turnover (ART)

The receivables turnover rate measures the efficiency with which the company collects receivables or the credit it provides to customers. The ratio also measures the number of times a company's accounts receivable are converted to cash over a period of time. The receivables turnover rate can be calculated on an annual, quarterly or monthly basis.

If the company has a high receivables turnover rate, this means that the company's collection of accounts receivable is valid, and the company has a high percentage of

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quality customers to quickly repay debt. A high receivables turnover rate may also indicate that the company operates on a cash basis. A high ratio may also indicate that the company is conservative in terms of conservation. The formula is as follows:

s receivable Account

Revenues RT)

Turnover(A s

Receivable

Account 

. (2.23) Inventory turnover ratio(IT)

Inventory turnover (also known as inventory turnover) shows how frequently the inventory is converted to sales. Simply, inventory turnover (IT) is the ratio of total revenues to inventory. If inventory turnover is high, this usually means that the company sells goods very quickly and there is a demand for its products. On the other hand, low inventory turnover may indicate weak sales and a decline in demand for company products. Inventory turnover can provide information about whether a company is properly managing inventory. The formula is as follows:

Inventory turnover=Total revenues

Inventory . (2.24) Working capital turnover

Working capital turnover rates measure the extent to which a company uses its working capital to support a particular level of sales. Net Working Capital (NWC) is the difference between current assets and current liabilities in the company's balance sheet. . The working capital turnover rate reflects the relationship between the funds used to fund the company's operations and the company's revenue.

If the turnover rate is too high, this indicates that management is very effective in using the company's short-term assets and liabilities to support sales. Conversely, lower ratios indicate that companies are investing too much of accounts receivable and inventory assets to support their sales, which may eventually lead to excessive bad debts and outdated inventory. The formula is as follows:

s liabilitie Current

- assets Current capital

g

Net workin  (2.25) capital

g Net workin

Revenues turnover

capital

Working 

. (2.26) Operating cycle

An Operating Cycle (OC) refers to the days required for a business to

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receive inventory , sell the inventory, and collect cash from the sale of the inventory. The cycle plays a major role in determining the efficiency of a business, and the formula is as follows,

Operating cycle = Inventory conversion period + Receivables conversion period. (2.27) where Inventory Period is the amount of time inventory sits in storage, Accounts Receivable Period is the time it takes to collect cash from the sale of the inventory.

OC provides an in-depth understanding of the company's operational efficiency. A shorter cycle is preferred, indicating that the business is more efficient and successful.

A shorter period indicates that the company will be able to quickly recover the investment and have enough cash to meet its obligations. If the company's OC is long, it means that the company will take stock purchases into cash for a longer period of time.

Net operating cycle

The NOC, also known as the cash conversion cycle or cash cycle, indicates how long it takes for the company to receive cash from inventory sales. The operating cycle (OC) is often confused with the net operating cycle (NOC). The business cycle represents the length of time between the purchase of inventory and the cash collected from inventory sales. The net operating cycle represents the length of time between payment of inventory and cash received from inventory sales, and the formula is as follows,

Net operating cycle = Operating cycle - Payables deferral period, (2.28) 2.3.3Pyramidal decompositions of ROE

Pyramidal decompositions also called the Dupont model is a financial ratio based on the return on equity ratio that is used to analyze a company's ability to increase its return on equity. In other words, this model breaks down the return on equity ratio to explain how companies can increase their return for investors.This allows an investor to determine what financial activities are contributing the most to the changes in ROE.

An investor can use analysis like this to compare the operational efficiency of two similar firms. Managers can use DuPont analysis to identify strengths or weaknesses that should be addressed.

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DuPont analysis is a useful technique used to decompose the different drivers of return on equity (ROE) . There are three major financial metrics that drive return on equity (ROE): operating efficiency, asset utilization efficiency and financial leverage.

Operating efficiency is represented by net profit margin. Asset utilization efficiency is measured by the asset turnover ratio . Leverage is measured by the equity multiplier, which is equal to average assets divided by average equity.

The equation for the basic DuPont model is as follows:

ROE=Net profit margin·Total asset turnover·Equity multiplier (2.29) We can also represent these components as ratios:

Revenues

· EBIT EBIT

·EBT EBT EAT Equity

ROE EAT 

. (2.30)

If we want to separate the effects of taxes and interest, we can decompose the profit margin as follows:

Revenues

· EBIT EBIT

·EBT EBT

EAT  EAT . (2.31)

where EAT divided by EBT is tax burden,EBT divided by EBIT is interest burden, EBIT divided bu Revenues is operating margin.

This formula can transfer into DuPont analysis we get,

Equity assets Total assets· Total

Revenues Revenues·

· EBIT EBIT

·EBT EBT EAT Equity

ROE EAT 

. (2.32) leverage Financial

· turnover Assets

· margin EBIT

· burden Interest ·

burden Tax

ROE

(2.33)

In order to quantify the impact on net profit margin, asset turnover, and financial leverage on economic entities, I will introduce pyramid functional decomposition in the four methods of pyramid analysis.

There are some steps to solving this problem.

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Firstly, we should calculate the absolute and relative changes in ROE for each time period. Secondly, we will decompose the ROE ratio and calculate the relative change in the ratio of components. Finally, we need to sort by their impact on the base ratio.The last step is to rank the ratios according to their impact on the basic ratio.

The formula for absolute change in ROE should be:

0 1

abs ROE ROE

ROE  

 (2.34) The formula for relative change in ROE and variable should be:

0 0 1

ROE

ROE ROE

R

ROE^rel  _x  



(2.35) The formula for function decomposition method should be:

3 , 1 2

1 2

1 1 R

X 1

3 2 3

2 1

1

x

a

R

_a

R

_a

R

_a

R

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   X



 



       







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1 2

1 1 R

X 1

3 1 3

1 2

2

x

a R_a R_a R_a R_a R_a X



 



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





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3. Characterization of selected company

First of all, this chapter introduces the basic background of Great Wall Motor Co., Ltd. Next, in this chapter, we use the common common-scale analysis method to analyze the financial status of Great Wall Motor Co., Ltd.

3.1Background of Great Wall Motor Company

3.1.1Overview of Great Wall Motor Company Limited

Great Wall Motor is a Chinese automobile brand established in 1984. It mainly produces pickup trucks, SUVs, cars and new energy vehicles. Great Wall Motor is the largest professional pickup truck and multinational company in China.

Great Wall Motor Co., Ltd. was listed in Hong Kong H shares and domestic A shares in 2003 and 2011 respectively. By the end of 2017, the total assets reached 110.547 billion yuan. The company is known for its steady development and strong economic strength. It has achieved high growth and profitability for more than ten consecutive years.

Since 2004, the development potential of Great Wall Motor has been widely recognized and recognized by the outside world. It has been selected as one of the “Top 500 Chinese Enterprises”, “Top 500 Chinese Machinery” and “Top 500 Chinese Manufacturing Enterprises”. “Good listing company”, “Forbes 2000”, “Fortune China Top 500”, “BrandZ Top 100 Most Valuable Chinese Brands”, etc.

Since 1998, Great Wall pickup has maintained its market share and sales volume in China for 11 consecutive years; and it has also demonstrated its unique competitiveness in the international market, which has made it impossible for foreign pickup trucks to enter China.

Since 2003, the Great Wall SUV has maintained a national sales champion for four consecutive years; it has maintained a leading position in both international and domestic markets. In the international market, Great Wall is the Chinese automobile brand with the largest export volume and export volume. Exporting countries and regions as many as one country.

On July 10, 2018, China Great Wall Motor Co., Ltd. and BMW (Netherlands) Holding Co., Ltd. formally signed a joint venture contract to establish a beam car company.

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3.1.2.Strategy of Great Wall Motor Company Limited

Great Wall Motor's corporate philosophy of "focus, professionalism, and expertise".

These corporate concepts reflect Great Wall Motor's strategic vision of focusing on philosophy, achieving professional operations management, and building a world- leading expert brand, and the professionalism that the Great Wall advocates.

Since 2012, Great Wall Motor has established a marketing strategy with "customer satisfaction" and "market leadership" as its main objectives. Through the innovative transformation of marketing services, Great Wall Motor enhances the terminal image and service quality, creates surprises for customers with value-added services, and continuously improves customer satisfaction.

Great Wall's product philosophy is "positioning in the global market, integrating the latest technology, creating high-quality and innovative products with innovative technology." In the next step, It will continue to develop the advantages of pickup trucks and SUVs while developing varieties of cars and family cars that are more suitable for domestic and foreign markets. It is the consistent aim of Great Wall Motor to improve the quality of the brand image and to promote and promote the development of the whole industry in terms of quality.

In the future development strategy, Great Wall will continue to play an advantage in the pickup and SUV industries, and become more sophisticated and stronger, further enhancing the core competitiveness of the company. Great Wall Motor's overseas strategy has developed in all directions and has made rapid progress in the “quality” of exports. It has changed from “simplified vehicle trade” to “systematic overseas market”, brand building, sales and service. Network expansion, technology export, establishment of parts center library, overseas construction and other projects are carried out in all aspects.

3.1.3Major events of Great Wall Motor Company Limited

Great Wall's products have been certified by 3C, SASO, GCC, UKAS, ISO9001 and other export authorities since 1995. The current export areas are mainly concentrated in Africa, the Middle East, Central and South America and the Caribbean, Central Asia, Southeast Asia, Russia and Eastern Europe. In other countries, the corresponding exhibition halls and maintenance service centers have been established, forming a solid international marketing network.

Great Wall Motor Co., Ltd. was listed in Hong Kong H shares and domestic A shares

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in 2003 and 2011 respectively. By the end of 2017, the total assets reached 110.547 billion yuan.

As of the end of 2017, Great Wall Motor has applied for a total of 7,480 patents and authorized 5,704 patents covering more than 60 countries and regions. Great Wall Motor has increased its R&D facilities. In addition to establishing R&D centers in Japan, the United States, Germany, and India, with the official operation of the Austrian and Korean Technology Centers in 2017, there are 6 Great Wall Motor Overseas Technology Centers, and the global R&D layout has been further improved.

On July 10, 2018, under the joint witness of Premier Li Keqiang and German Chancellor Merkel, China Great Wall Motor Co., Ltd. and BMW (Netherlands) Holding Company formally signed a joint venture contract to establish Beam Motor Co., Ltd.

3.1.4Subsidiaries

There are four well-known subsidiaries in Great Wall Motor Company Limited:

Great Wall Company, Harvard, WEY and Euler.The first one is the company's real name Great Wall Company. This brand mainly includes and includes the sedan model of the Great Wall and the Great Wall brand.

The second one are Harvard, this is the suv off-road model, this model gradually surpassed the Great Wall sedan model from the popularity rate, and the Haval brand is also independent from the Great Wall brand. Haval has an independent logo and independent product development team and independent production system and service system. Now it is mainly engaged in the production and sales of off-road vehicles.

Haval's products include F-series, H-series and M-series. , are more popular models.

The third is WEY, the brand was established in 2016. This brand is inspirational to be the benchmark for Chinese luxury off-road vehicle SUVs. The design of the off-road vehicle of WEY, the configuration of the vehicle, and the technical sense of the whole vehicle are excellent.

The fourth is Euler, which is not as well known as the top three brands. The reason is that the brand's models are not too popular, because the models of this brand are all pure electric models, advocating fashion environmental protection and post-service.

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3.2Common Size Analysis

In this section, we will conduct a horizontal analysis of Toyota's balance sheet, income statement and cash flow statement. We will also use vertical co-analysis to analyze the ratio of balance sheet items to assets, etc. This analysis helps us understand the impact of each item in the financial statements and its contribution to the number of results, and understand the company's financial situation, and explore the reasons of these data changes in depth.

3.2.1Horizontal common-size analysis

The horizontal analysis will analyze the absolute and relative changes in the three financial reports for four periods over a five-year period.

3.2.1.1 Horizontal analysis of balance sheet

In this part, It shows absolute and relative change of items in balance sheet of Great Wall Corporation, which is numbered as Table 3.1 and Table 3.2.

Table 3.1 Absolute changes and relative changes in balance sheet Unit: RMB in millions

2013-2014 2014-2015 2015-2016 2016-2017

Absolute change

Relative change

Absolute change

Relative change

Absolute change

Relative change

Absolute change

Relative change Total assets 874,044

16.62%

1,056,538

17.22%

2,039,853

28.37%

1,823,791

19.76%

Total non-current

Assets 445,289

20.64%

548,912

21.09%

686,050

21.77%

287,262

7.48%

Total current assets 428,755

13.82%

507,626

14.37%

1,353,803

33.52%

1,536,530

28.49%

Total liabilities 323,000

13.13%

569,690

20.47%

1,143,181

34.10%

1,633,359

36.33%

Total noncurrent liabilities -7,523

-4.28%

5,516

3.28%

-3,399

-1.96%

70461

41.37%

Total current

liabilities 330,523

14.47%

564,174

21.58%

1,146,580

36.07%

1,562,898

36.13%

Source: own elaboration based on company’s financial statements

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In Tables 3.1, we show the horizontal common size analysis of Great Wall Motor's balance sheet. This indicates that Great Wall Motor's total assets project has increased year by year from 2013 to 2017. In each year from 2013 to 2016, non-current assets increased rapidly, 20.64% during 2013 to 2014, 20.64% during 2014 to 2015 and 21.77 % during 2015 to 2016.

In fact, through Annex 1, especially in 2016, Great Wall Motor's investment real estate, goodwill projects, and fixed assets increased significantly. Among them, real estate investment increased by 705.2%. At the same time, liquid assets have also maintained substantial growth during the five-year period. Even in 2015-2016, the relative change in current assets reached 33.53%, which is almost twice that of the previous two years.

The relative change in non-current assets from 2013 to 2016 has remained above 20%, which is very high. Combined with this and the balance sheet of Annex 1, mainly due to the large increase in bill receivable.

In fact, in the past few years, the SUV has become the favorite model of the Chinese people, and the 2013 Great Wall Motor launched the SUV Haval series, which has greatly increased the sales of Great Wall Motor. After 2014 and two years of purchase in 2015, the Haval series has accumulated a good reputation, so in 2016, sales growth in 2017 was even faster, and liquid assets increased faster.

During 2015-2017, total current liabilities increased significantly, with 36.07% in 2015-2016. According to Annex I, we can see that this is due to the large increase in accounts payable, and the accounts payable increased from 1560325 to 2500734 in 2015 to 2016. Years. The upward trend of accounts payable indicates the funds that Great Wall Company used well in this year.

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Graph 3.1 Absolute change in balance sheet (2013-2017)

According to the chart, the absolute change from 2013 to 2016 is a rapid upward trend, but the relative change from 2016 to 2017 begins to slow down compared to the previous years.

3.2.1.2 Horizontal analysis of income statement

Then we will discuss horizontal analysis of income statement. And it is shown in Table 3.2 and table 3.3.

Table 3.2 Absolute changes in income statement Unit: RMB in millions

2013-2014 2014-2015 2015-2016 2016-2017

Absolutely change Absolutely change Absolutely change Absolutely change

Revenue 581,479 1,343,404 2,258,256 255,379

Total costs 471,377 1,161,215 1,749,631 760,668

Gross profit 110,102 182,189 508,625 -505,289

Expenses(operating costs) 321,240 976,392 1,548,377 586,809

Administrative expenses 107,492 20,826 54,410 38,834

Costs of sales 18,950 75,681 33,385 123,098

Income(operating profit) -41,474 6,709 297,608 -637,689

EBT -27,964 4,849 279,449 -625,009

Income tax expense -8,871 2,933 30,090 -73,953

Net profit -19,093 1,916 249,359 -551,056

-5,000 195,000 395,000 595,000 795,000 995,000 1,195,000 1,395,000 1,595,000 1,795,000 1,995,000

2013-2014 2014-2015 2015-2016 2016-2017

Total assets Total non-current assets Total current assets Total liabilities

Total noncurrent liabilities Total current liabilities Total equity

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Graph 3.2Absolutely change in income statement

Source: own elaboration based on company’s financial statements Table 3.3Relative changes in income statement

2013-2014 2014-2015 2015-2016 2016-2017

Relatively change

Relatively Change

Revenue 10.24% 21.46% 29.70% 2.59%

Total costs 11.63% 25.66% 30.77% 10.23%

Gross profit 6.78% 10.50% 26.53% -20.83%

Expenses(operating costs) 9.47% 26.30% 33.03% 9.41%

Administrative expenses 39.12% 5.45% 13.50% 8.49%

Costs of sales 10.00% 36.30% 11.75% 38.77%

Income -4.28% 0.72% 31.88% -51.80%

EBT -2.82% 0.50% 28.84% -50.07%

Income tax expense -5.26% 1.83% 18.48% -38.34%

Net profit -2.32% 0.24% 30.94% -52.21%

From Tables 3.2and 3.3, we can easily see that Great Wall Motor's revenue has been growing in 2013-2016. At the same time, although the income of Great Wall Motor has been growing, the total cost has also increased, leading to the fluctuation of the

-800,000 -400,000400,000800,0000 1,200,000 1,600,000 2,000,000 2,400,000 2,800,000

change change change Change

Absolutely Absolutely Absolutely Absolutely

2013-2014 2014-2015 2015-2016 2016-2017

Revenue Total costs

Gross profit Expenses(operating costs)

Administrative expenses

Costs of sales Income(operating profit)

EBT Income tax expense

Net profit

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operating profit of the enterprise.

In particular, we can clearly see that although income is growing between 2016 and 2017, the growth rate of income lags far behind the growth rate of total expenses, which leads to a relative change of gross profit of -20.83%.

At the same time, at this stage, the cost of sales increased by 38.77%, so the relative change in income this year was -51.8%, the relative change in EBT was -50.07%, and the relative change in net profit was -52.21%. In order to solve this problem and seek long-term profit growth, Great Wall Motor should take effective measures to control operating costs to achieve long-term profit growth.

In addition, Great Wall Motor's revenue, gross profit, and EBT increased significantly during 2015-2016, indicating that the company's profitability is good. In fact, this stage is a major breakthrough for Great Wall Motors in recent years. In 2016, Great Wall Motor launched nearly 20 new and redesigned models, with a total sales of 1.0745 million units, an increase of 26.01% year-on-year, exceeding the annual sales target.

Great Wall Motor achieved a sharp increase in sales and performance, and achieved brilliant results with an annual sales of one million units and a net profit of 10.551 billion. 2016 Great City Auto achieved a total operating income of 98.616 billion yuan, an increase of 29.70%; total profit of 12.438 billion yuan, an increase of 28.84%; basic earnings per share of 1.16 yuan.

3.2.1.3Horizontal analysis of cash flow statement

Cash flow statement can be divided by different activities which include operating activities,investing and financing activities.

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Table 3.4 Absolutely changes in cash flow statementUnit: RMB in millions 2013-2014 2014-2015 2015-2016 2016-2017 Absolutely

change

Absolutely change

Absolutely change Net CF from

operating

activities -294,326 393,791 -119,828 -991,208

Net CF form investing

activities -51,360 69,306 -185,057 531,184

Net CF from financing

activities 109,556 -280,289 299,572 720,559

Table 3.5 Relatively changes in cash flow %

2013-2014 2014-2015 2015-2016 2016-2017 relatively relatively relatively relatively

change change change change

Net CF from operating

activities -0.32562 0.64601 -0.11943 -1.12186

Net CF form investing

activities 0.07670 -0.09613 0.28397 -0.63482

Net CF from financing

activities -0.45559 2.14098 -0.72852 -6.45471

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Graph 3.3Absolutely change in cash flow statement

From table 3.4 and 3.5, we can easily see in 2013-2016 that the net cash flows of the three major economic activities have varying degrees of change. The increase in net cash flow from operating activities was mainly due to the increase in cash received from the sale of goods, the provision of services and the receipt of other cash related to operating activities.

According to Annex III, we can know that the net cash flow from operating activities is positive, but except for 2014 to 2015, the absolute change in net cash flow from operating activities is negative, and reached -991208 in 2016-2017. This indicates that the business activities of Great Wall Motor Co. need further adjustment.

The decrease in net cash flow from investing activities is mainly due to the fact that

-1,200,000 -1,000,000 -800,000 -600,000 -400,000 -200,000 0 200,000 400,000 600,000 800,000 1,000,000

Absolutely change Absolutely change Absolutely change Absolutely change

2013-2014 2014-2015 2015-2016 2016-2017

Net CF from operating activities Net CF form investing activities Net CF from financing activities

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the cash inflow from investment activities is less than the cash outflow from investment activities.

Through Annex III, it is clear that the net cash flow of investment activities is negative, which means that Great Wall Motor Co. is investing in order to expand market share. From table 4.5 and 4.6, we can see that the absolute change in net cash flow from investing activities between 2013-2014 and 2015-2016 is negative, but in 2016-2017, the absolute change in net cash flow from investing activities is Positive value, reached 531,184.

According to Annex III, we can know that the financing activities of Great Wall Motor Co., in addition to the positive value in 2016-2017, are negative in other years.

The decrease in net cash flow from financing activities was due to the decrease in borrowings obtained during the period compared to the previous year, and the increase in cash paid for dividends, profits or interest payments.

From Table 3.5 and 3.6, it is clear that the net cash flow from financing activities was negative between 2014 and 2015, with positive growth during the rest of the period.

In particular, the net cash flow from financing activities from 2016 to 2017 has reached a maximum of 720,559.

3.2.2 Vertical common-size analysis

Vertical analysis refers to the analysis of specific line items of basic items in the same financial period. In a vertical analysis, each element of a financial statement is displayed as a percentage of another item. In the balance sheet, assets, liabilities and equity as a percentage of total assets. In the income statement, each item of income and expenses is defined as a percentage of total sales. And vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total cash inflows.

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3.2.2.1 Vertical analysis of balance sheet

Table 3.6 The proportion of each item in total assets

2013 2014 2015 2016 2017

current assets 59% 58% 56% 58% 63%

inventories 5.25% 5.66% 5.73% 6.57% 5.04%

bill receivable 33.36% 38.07% 39.16% 43.10% 44.39%

accounts receivable 1.25% 1.19% 0.94% 0.56% 0.79%

prepayments 0.85% 1.18% 1.22% 1.15% 0.52%

on-current assets 41% 42% 44% 42% 37%

intangible assets 4.64% 4.58% 4.36% 3.48% 2.96%

long-term equity investment 0.10% 0.11% 0.03% 0 0

goodwill 0.0041% 0.0035% 0.0030% 0.0054% 0.0020%

long-term prepaid expenses 0.05% 0.08% 0.08% 0.06% 0.12%

deferred tax assets 0.76% 0.72% 0.99% 1.04% 0.63%

total assets 100% 100% 100% 100% 100%

From Table 3.6, we can see the main items that make up the total assets. I will focus on analyzing and discussing the reasons for the changes in current assets, accounts receivable, prepayments, inventory, and long-term equity investments of these projects.

Through Table 3.6, we can see that the total assets of the Great Wall Motor Group accounted for about 15% of the total assets in total from 2013 to 2016. The total current assets of the Group are relatively high, and the proportion of non-current assets is relatively low. . In 2017, the total proportion of current assets in total assets exceeded the total proportion of non-current assets in total assets by about 26%, and the proportion of liquid assets soared.

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A higher proportion of current assets will take up a lot of funds and reduce the turnover rate of current assets. Thereby affecting the efficiency of capital utilization of enterprises. The low proportion of non-current assets will affect the profitability of enterprises, which will affect the future development of the company. During 2013 to 2016, the balance of total assets and non-current assets of Great Wall Motor Group is balanced, indicating that Great Wall Motor Group has a higher The efficiency of capital utilization and the profitability of enterprises are considerable. However, the proportion of current assets increased sharply in 2017, and the proportion of non-current assets decreased.

Graph 3.4 Vertical analysis of total assets (2013-2017)

Through the graph3.3, we can see that the proportion of current assets has not changed much between 2013 and 2017, and the overall proportion is stable at around

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017

Current assets Inventories bill receivable

accounts receivable Prepayments Non-current assets Intangible assets Long-term equity investment Goodwill

Long-term prepaid expenses Deferred tax assets

2.General Description of Financial Analysis Methods

Contents

1. Introduction

2.General Description of Financial Analysis Methods

3 , 1 2

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3. Characterization of selected company