An Analysis of the Financial Statement of the DB Group

Table of Contents

Executive Summary

List of Abbreviations

List of Figures

List of Tables

1 Introduction
1.1 Facts about the Deutsche Bahn Group
1.2 The structure and strategy of the Deutsche Bahn Group

2 Problem definition

3 Objectives

4 Methodology

5 Financial statement analysis
5.1 Fundamentals
5.2 Users and their goals
5.3 Financial Ratios

6 Investment analysis

7 Financial analysis

8 Profitability analysis

9 Liquidity Analysis

10 Conclusion

Appendices
A.1 Organizational chart of the DB Group
A.2 Numbers and calculation of investment ratios (part 1)
A.3 Numbers and calculation of investment ratios (part 2)
A.4 Numbers and calculation of financial ratios
A.5 Numbers and calculation of profitability ratios (part 1)
A.6 Numbers and calculation of profitability ratios (part 2)
A.7 Calculation of the working capital ratio
A.8 Development of investments XXIV

Bibliography

Executive Summary

This assignment deals with the evaluation of the performance of the DB Group. Since the financial statement provides a lot of important data and information about the economic performance of a company a financial statement analysis will be performed to get an idea about the financial situation of the DB Group.

Since the DB Group is a 100% government-owned holding company the equity investors are all German. Therefore each German should have an interest in the performance of the DB Group.

The analysis is mainly based on a financial ratio analysis because the examination of key ratios provides in an easy way insights into how a firm is performing relative to former years, competitors and the industry. The benchmark company is the Deutsche Post DHL because it is the number one transport and logistic company in Germany (regarding revenue) followed by the DB Group.

The financial statement analysis will show the development of the assets and the profitability in the last decade. Also it creates a feeling for the growth and risks of the company. Therefore an investment, a financial, profitability and a liquidity analysis is performed to demonstrate the strength and weaknesses of the DB Group.

List of Abbreviations

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List of Figures

Figure 1: Differentiation current assets and non-current assets to total assets (own creation)

Figure 2: Multi-period overview about revenue, cash flow, EBIT and profit of the DB Group (own creation)

Figure 3: Organizational chart of the DB Group

Figure 4: Development of net and gross investments of the DB Group. (own creating)

List of Tables

Table 1: Multi-period overview on assets

Table 2: Ratios to the investment analysis of the DB Group 2012

Table 3: Ratios to the financial analysis of the DB Group 2012

Table 4: Ratios to the profitability analysis of the DB Group 2012

Table 5: Ratios to the liquidity analysis of the DB Group 2012

Table 6: Numbers and calculation of investment ratios (part 1)

Table 7: Numbers and calculation of investment ratios (part 2)

Table 8: Numbers and calculation of financial ratios

Table 9: Numbers and calculation of profitability ratios (part 1)

Table 10: Numbers and calculation of profitability ratios (part 2)

Table 11: Calculation and comparison of the working capital from the DB and the Deutsche Post

1 Introduction

1.1 Facts about the Deutsche Bahn Group

Permanent price increasing, failures, delays and stances! For almost all German people these four words are apparently linked forever with the biggest German railway company the Deutsche Bahn AG. But the company is more than that.

The Deutsche Bahn Group (DB Group) with the headquarters in Berlin is a global mobility and logistical services provider that operates in over 130 countries worldwide with around 300,000 employees, of which about 194,000 are located in Germany. The DB Group performed its services in three main sectors: Passenger transport, Infrastructure and Transport & Logistics.

Every day the Passenger transport division of the DB Group transports in its trains and busses in Europe over 11 million passengers with an average punctuality from about 95%. In the Transport & Logistics segment around 400 million tons are transported via rail and around 95 million shipments with land transport annually in the European network. In addition to these services in passenger transport and freight traffic the DB Group runs the infrastructure and also offers other services. Overall the DB operates over 5,600 train stations and more than 30,000 trains run daily on the biggest rail network in Europe with approximately 34,000 kilometre.^[1]

In 1994 the DB Group has been established from the “Reichsbahn” and the “Bundesbahn” into a private company. In 2008 the former CEO Hartmunt Medorn intended to a company’s IPO (Initial Public Offering). The planned capital privatization has been postponed because of the financial crisis for an indefinite period. According to German Transport Minister Peter Ramsauer, the IPO is not an issue for the foreseeable future. "With me as the Minister of Transport, there won’t be an IPO of Deutsche Bahn AG or individual parts. That I can exclude for the entire next legislative session”^[2] Since 1994 the federal government is the owner of all the shares and no trading takes place, so the company is called due to the ownership structure a state-owned company under private law.

1.2 The structure and strategy of the Deutsche Bahn Group

Following the restructuring in 2008 the business portfolio of the DB Group is essentially structured into nine business segments with different brands. The Deutsche Bahn AG is responsible for the infrastructure. This includes the DB Netze Track, DB Netze Stations und DB Netze Energy. The remaining six divisions are combined under the leadership of the 100% subsidiary DB Mobility Logistics AG (DB ML AG). That subsidiary bundles the mobility and logistics activities of the DB Group. The DB AG and DB ML AG function as a management holding company in the DB Group (see appendix A.1 “Organizational chart of the DB Group”).

Since March 2012 the DB Group has a new strategy focused on sustainability. Over all stand the vision to get the global leader in the mobility and logistics market. The new strategy considers three dimensions with different ambitious goals. In the dimension economics the company wants to be a profitable market leader with a focus on customer and quality, in the dimensions social and ecology the DB Group seeks for a top employer and an eco-pioneer.^[3] With the new strategy the firm positions itself for the big present and future challenges.

2 Problem definition

If you want to evaluate the financial performance of the DB Group it is necessary to generate data and information on the economic situation of the DB Group, the annual financial statements provides basically the possibility. However, in order to obtain a true and fair view of the assets-, financial- and earnings position of the DB Group, it is not sufficient to consider only the annual financial statement. Rather, it is necessary to split the annual financial statements into individual information and to sort them depending on the information needs to create meaningful and relevant information units. Thus, depending on interest different ratios can be calculated to make an accurate judgment on the economic position of the DB Group. Such a performance or investigation of the annual financial statements is considered as financial statements analysis.

3 Objectives

The objective of this assignment is to evaluate the economic performance of the DB Group by analysing the financial statement 2012.

4 Methodology

In order to analyze the financial statement of the DB Group in a first step it is necessary to define a goal of the analysis which is determined by the user of the analysis and furthermore gather and collect all general and specific essential data and information. In a second step, the data of the annual report are recorded, processed and related to each other to select and calculate some key ratios. In a last step, the calculated ratios will be interpreted to get an overall economic judgement.

The entire work is based on secondary data in this case on the financial statement 2012 of the DB Group; therefore no primary data was collected.

5 Financial statement analysis

5.1 Fundamentals

A financial statement analysis is the process to examine and evaluate an annual report, sometimes even the stock exchange price and other information executed mostly by outsiders. The goal of the analysis is it to reduce uncertainty and increase confidence in business decisions also to make a statement about the current financial position e.g. the financial risk and the performance e.g. profitability of the investigated company.

According to the disclosure requirements of § 325 HGB only corporation are subjected to publish an annual report. Since 1994 the DB Group is a private company and has to disclose those information’s. The management of the company issues the financial statement and is responsible for their form and content. In mostly cases the financial statement includes:

1) A balance sheet that reports assets, liabilities and stockholders’ equity.

2) An income statement that shows revenues, expenses and gain and losses.

3) A statement of comprehensive income that illustrates all income and expenses recognized during specified period of time.

4) A statement of cash flows, that includes operating, investing, and financing inflows and outflows.

5) A statement of stockholders equity that reports capital transactions with owners.^[4]

5.2 Users and their goals

The financial statement analysis is interesting to a wide range of users. Therefore the first step of a financial analysis is it to determine the user of the analysis. This is important because the different users have variant goals and objectives in mind. The wide range of users can be grouped mainly into three interested parties. That would be the creditors, the management and the equity investors.^[5]

The creditors are mostly interested in the solvency of the corporation because it shows the ability to repay principal and interest on debt. But also they are focussing on the liquidity. To the creditors count e.g. bankers, bondholders or credit rating companies such as Standard & Poor’s.

The Management uses the financial statement to focus on the efficiency, which includes the profitability, solvency and the operating performance of the company. Thru the preparation and analysis of the financial statement the management gets specific informations about segments, product lines and divisions of the organization and can base strategic and operating decisions on this data basis.

The Equity investors have their priority on the valuation of the company because they are interested to purchase or sell ownership in the corporations through common stock, merger or acquisition. To estimate the value of the firm the Equity investors are focusing on the profitability, financial analysis and investment analysis.^[6]

As the DB Group is a 100% government-owned holding company the equity investors are all German. Thus all German should have an interest in the performance of the company. Therefore, the analysis will take place in the following mainly from the perspective of equity investors. In addition to the analysis of the profitability, financial and investment an analysis of the liquidity will be performed to get a wider picture of the DB group.

5.3 Financial Ratios

Financial ratios often used to evaluate, analyse and interpret the overall financial condition of a corporation. The examination of key ratios provides in an easy way insights into how a firm is performing relative to former years, competitors and the industry. Therefore it is necessary to have a benchmark company. The benchmark company in this case will be the Deutsche Post DHL because it is the number one transport and logistic company in Germany (regarding revenue) followed by the DB group.^[7]

6 Investment analysis

The investment analysis is an analysis of the asset structure of the balance sheet. It will be set in relation to each other parts of the assets and to parts of the income statement. In addition, the investment analysis examines the nature and composition of assets and the duration of the asset lock. An investment analysis is a look back at previous investment decisions.^[8]

This look back shows that the total assets have been increased by almost 10% in last decade and reached its peak in 2012 with 52.4 Mil. € as Table 1 “Multi-period overview on assets” illustrates. Even if the non-current assets have been raised in total numbers in this time period as well, figure 1 “Differentiation current assets and non-current assets to total assets“ shows that relative to the total assets the non-current assets have been decreased by almost 6%. This could be an indication for disinvestment and investment backlog.

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Figure 1: Differentiation current assets and non-current assets to total assets (own creation)

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Table 1: Multi-period overview on assets (Numbers in Mil. EUR)

Table 2 ”Ratios to the investment analysis of the DB Group 2012” illustrates the calculation and the results for 2012 as well as the trend of the most important ratios for the investment analysis. The numbers for the calculation can be found in appendix A.2 and A.3 “Numbers and calculation of investment ratios (part 1+2)”.

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Table 2: Ratios to the investment analysis of the DB Group 2012 (own creation)

The assets structure ratio of the DB Group dropped dramatically from 1023% in 2005 to 534% in 2012. Similar happened to the assets intensity which slightly decreased form 91% in 2005 to 84% in 2012.^[9] Both ratios show in a first step that the DB Group operates in asset-intensive industry. Regarding this fact the company is with high fix cost really inflexible what makes it difficult to react to market volatility. In a second step the ratios can indicate overage equipment and decreasing willingness to invest. Slightly decreasing values in the figures, "Depreciation to total operations expense and Depreciation to sales" also point to outdated plants and equipment and a decreasing willingness to invest in the railways.

The investment ratio indicates the percentage of investment on fixed assets. The low 8% is for a non-current asset intensive company as the DB Group is a weak ratio, because that also manifests outdated plants and equipment.

The growth rate from 105% demonstrates that the company invested more in the non-current assets as it depreciated in 2012. A closer look at the development of the investments show that till 2007 the gross- and net investments decreased, this could be a consequence of the saving measures for the intended IPO in 2008. Since 2009 the investments rising slowly but steady (see appendix A.8 “Development of investments). It seems the DB Group is willingness to use the opportunities for new investments and related rationalization and productivity gains.

7 Financial analysis

In the financial analysis or capital structure analysis, the composition of the capital detached by the asset side is investigated. Therefore the liabilities side of the balance sheet is considered analytically. The goal is the estimation of financial risks within the capital structure of a company. Therefore the analysis creates clarity about the nature, safety and maturity of the capital. A high financial risk exists when a company has a high percentage of short-term liabilities, as a follow-up financing and the interest rates are not backed up. Therefore, in long-term debt and equity, these risks are far lower or equal to zero.^[10]

The following table 3 “Ratios to the financial analysis of the DB Group 2012” shows a few financial ratios of the DB Group, the trend and the benchmark. The numbers for the calculation can be found in appendix A.4 “Numbers and calculation of financial ratios”.

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Table 3: Ratios to the financial analysis of the DB Group 2012 (own creation)

The equity ratio expresses the relationship between equity and total capital. General, a high equity ratio has a positive evaluation, since the higher equity, the greater the liability and the higher a company's creditworthiness.^[11] The equity ratio of the DB Group has been rising form 15% in 2004 to 30% in 2012. This is a relative solid value and close to the benchmark of 36%.

The relationship of equity to debt is a good indicator that the company has been financing its growth with debt. By doing so, the DB group has increased its leverage because it could invest in business operations without increasing its equity. A low equity ratio also will produce good results for stockholders as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditors.

The ratio “self-financing” reflects the relationship between retained earnings and total equity and is the degree what percentage of capital is being supplied from outside the company.^[12] The last 3 year that ratio decreased and reached in 2012 a value from 33%. This value is more than 40 percentage points below the benchmark and can be considered to be insufficient.

The static debt ratio demonstrates the relationship between debt and equity and can be interpreted similar to the equity ratio. The ratio has been dropped form 574% in 2004 to 229% in 2012 and is still almost 50 percentage points over the benchmark. That means the DB Group is still financing its growth by debt, one reason therefore can be, that the interest for debt is lower than for equity.

A comparison of the short-term and long-term debt ratio shows that the DB Group has with 67% a big part on long-term debt and just 33% on short-term debt. In this point the DB Group is better than the benchmark because the Deutsche Post DHL has a bigger part on short-term debt (43%) as on long-term debt (57%). That means the company has a higher financial risk as the DB Group, because a follow-up financing and the interest rates are not backed up.

The liability structure ratio illustrates the relation between long-term debts and short-term debt. The long-term observation of the key figure "liability structure" shows a slight change (6%) of long-term debt to short-term debt. But a ratio from around 206% in 2012 is a better value that the benchmark value of 135% from the Deutsche Post DHL.

8 Profitability analysis

To get an idea about the success of a company, a profitability analysis has to be performed, since this reflects the ability of a company to generate earnings as compared to its expenses and other relevant costs during a specific period of time.^[13] Therefore figure 2 “Multi-period overview about revenue, cash flow, EBIT and profit of the DB Group” displays the performance of same key figures.

The year 2012 was for the DB Group the most successful year in the history. The profit has increased more than eightfold since 2004 and reached in 2012 with 1.477.000 EUR its peak. Also the revenue has risen from 23.962.000 EUR in 2004 to 39.296.000 EUR in 2012. The EBIT and the cash flow have increased by a constant growth rate since 2009 and reached in 2012 their peak as well.

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Figure 2: Multi-period overview about revenue, cash flow, EBIT and profit of the DB Group (own creation)

The in table 4 “Ratios to the profitability analysis of the DB Group 2012” used ratios give a good understanding of how well the company utilized its resources in generating profit and shareholder value. The numbers for the calculation can be found in appendix A.5 and A.6 “Numbers and calculation of profitability ratios (part 1+2)”.

A key figure that reflects the interest on total bound capital, which comprises both total equity and liabilities, is the return on total capital. In this ratio, taxes and interest expense are added to net income in order to achieve better comparability. Observing this ratio over a specific time period shows the ability of the firm to converting investor capital into profits.^[14] The return on total capital from DB Group is with 4% in the last four years stable but also low. The return on total capital is thus 6% percentage points below that of the benchmarks and can be considered as quite poor.

The return on equity demonstrates the relationship between the net income excluding extraordinary items to the total equity. It is an important indicator for the return on shareholders’ capital within a period. The goal must be at least the level of the interest rate on the capital markets.^[15] The return on equity of the DB Group is in 2011 and 2012 stable at 9%. This is still under the high 15% of the Deutsche Post DHL.

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Table 4: Ratios to the profitability analysis of the DB Group 2012 (own creation)

The key figure “Return on sales” is the result of the division of net income to sales and shows which percentage of sales accrues to the company as profits after the deduction of all costs.^[16] With solid 4% in the years 2011 and 2012, the DB Group performs better in this measure than the benchmark.

The return on capital employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency. A higher ROCE indicates more efficient use of capital. ROCE should be higher than the company’s capital cost; otherwise it indicates that the company is not employing its capital effectively and is not generating shareholder value.^[17] The ROCE of the DB Group has increased from 6% in 2009 to 8% in 2012. This is a good value but still under the 10% of the benchmark.

The return on investment (ROI) is a widely liked and used key figure which is calculated by the return on sales multiplied with the turnover of total equity and liabilities. With this addition to the return on total capital it is better track changes in the value drivers.^[18] The DB Group has a ROI of 3% in 2012, compared to the benchmark of 5% it is an insufficient value.

From the ratio “cash flow return on sales” and “cash flow return on total capital” can be seen, the percentage of revenues or total capital that is available for investment, loan repayment and profit distribution. Since the cash flow is less affected in the accounting policy as the profit, the cash flow return on sales is a good indicator of the operational profitability and financing of a company.^[19] The 10% cash flow return on sales and the 8% cash flow return on capital of the DB Group are quite good values. However, the 0% and the -1% of the Deutsche Post DHL indicate to a pretty weak profitability of the company.

9 Liquidity Analysis

The liquidity shows the ability of a company to pay off its liabilities when they fall due. The ability depends on different factors such as the cash resources, current assets, current liabilities etc. Mainly short-term lenders and creditors (such as suppliers) are interested in this kind of analysis but also banks and rating agency. To evaluate the liquidity there are general used many different ratios. Table 5 “Ratios to the liquidity analysis of the DB Group 2012” shows a few liquidity ratios of the DB Group, the trend and the benchmark. The numbers for the calculation can be found in appendix A.7 “Calculation of the working capital ratio”.

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Table 5: Ratios to the liquidity analysis of the DB Group 2012 (own creation)

The working capital ratio form the DB group was 2011 and 2012 stable at around 5%; it means a part of the current assets is financed by long term capital. If the result would be negative, it means that the working capital would not sufficient to cover the total short-term liabilities. A portion of the fixed assets would thus finance in the short term. This would violate the golden rule of financing. As a consequence the company could get quick in cash flow problems. But the 5% in 2012 is a good value benchmarked to the 7% of the Deutsche Post DHL in 2012.^[20]

[...]

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^[1] Cf. http://www.deutschebahn.com/en/group/ataglance/facts_figures.html 03.11.2013

^[2] Cf. http://www.spiegel.de/wirtschaft/unternehmen/deutsche-bahn-ramsauer-schliesst-boersengang-vorerst-aus-a-917205.html 04.11.2013 (own translation)

^[3] Cf. http://www.deutschebahn.com/ecm2-db-de/ir/db_konzern/strategie.html 08.11.2013

^[4] Cf. White, Gerald I., Sondhi, Ashwinpaul C., Fried, Dov (2003), P. 2-5

^[5] Cf. Temte, A. (2005), P. 74, 75

^[6] Cf. Temte, A. (2005), P. 75 - 77

^[7] Cf. http://de.statista.com/165802/umfrage/top-10-der-deutschen-logistikunternehmen-nach-inlands-umsatz/ 29.12.2013

^[8] Cf http://www.investopedia.com/terms/i/investment-analysis.asp 05.01.14

^[9] Cf. Wiehle U., Diegelmann M., Deter H., Dr. Schömig P., Rolf M. (2010), P. 161, 163

^[10] Cf. http://www.investopedia.com/terms/f/financial-analysis.asp 05.01.14

^[11] Cf. Wiehle U., Diegelmann M., Deter H., Dr. Schömig P., Rolf M. (2010), P. 145

^[12] Cf. http://www.welt-der-bwl.de/Selbstfinanzierungsgrad 05.01.13

^[13] Cf. http://www.investopedia.com/terms/p/profitabilityratios.asp 05.01.13

^[14] Cf. Wiehle U., Diegelmann M., Deter H., Dr. Schömig P., Rolf M. (2010), P. 101

^[15] Cf. Wiehle U., Diegelmann M., Deter H., Dr. Schömig P., Rolf M. (2010), P. 103

^[16] Cf. Wiehle U., Diegelmann M., Deter H., Dr. Schömig P., Rolf M. (2010), P. 113

^[17] Cf. Wiehle U., Diegelmann M., Deter H., Dr. Schömig P., Rolf M. (2010), P. 109

^[18] Cf. Wiehle U., Diegelmann M., Deter H., Dr. Schömig P., Rolf M. (2010), P. 111

^[19] Cf. http://www.controllingportal.de/Fachinfo/Grundlagen/Kennzahlen/cash-flow-umsatzrendite.html 06.01.14

^[20] Cf. Wiehle U., Diegelmann M., Deter H., Dr. Schömig P., Rolf M. (2010), P. 155