Automobile Industry Average Financial Ratios

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Automobile Industry Average Financial Ratios

The automobile sector is made up of various enterprises from all over the world, with a total worth of $2.7 trillion. The industry encompasses not just the main automakers, but also a wide range of companies whose primary activity is tied to the production, design, or marketing of automotive components or automobiles.

Financial experts use a range of criteria to evaluate specific businesses in the sector since they create comparable goods and operate in the same market segment. This enables individuals to assess their own performance in comparison to their classmates.

The debt-to-equity (D/E) ratio, inventory turnover ratio, and return on equity (ROE) ratio are three of the most important financial statistics used by investors and market analysts to analyze firms in the car sector.

Key Takeaways

  • With an estimated $2.7 trillion in worldwide commercial activity, the automobile industry is one of the world’s major sectors.
  • Financial analysts compare various organizations with their rivals using a number of performance criteria.
  • The debt-to-equity ratio assesses a firm’s financial health and capacity to repay creditors.
  • Inventory turnover shows a company’s ability to sell automobiles rapidly and acts as a warning indicator if sales plummet.
  • Return on equity is a broad measure of profitability that indicates how much shareholders get in return for their investment.

Auto Industry Overview

The United States alone has 16 automakers that will build about 9.2 million cars in 2021, with the majority coming from the “big three” automobile manufacturers. The production and sale of vehicles and light trucks is the most significant aspect of the business. Large semi-trucks, for example, constitute an essential secondary component of the business.

Another critical feature of the auto business is the interaction between major automakers and original equipment manufacturers (OEM), since big automakers do not produce the majority of the parts that go into a car. The global car industry is capital-intensive, spending more than $120 billion on research and development each year (R&D).

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One of the most significant market segments is the automobile industry. It is one of the most profitable industries and is seen as a barometer of both consumer demand and the general health of the economy. Historically, the sector accounts for around 3% of US GDP. Analysts and investors depend on a variety of important measures to assess automotive firms.

9.2 million

The number of vehicles the United States produces annually.

Key Financial Ratios

The following are the key financial measures that investors and analysts use when assessing the car sector.

Debt-to-Equity Ratio

Because the car sector is capital-intensive, the debt-to-equity ratio (D/E) is a significant indicator for analyzing auto firms, as it measures a company’s overall financial health and capacity to satisfy financing commitments. A rising D/E ratio implies that a corporation is increasingly being funded by creditors rather than its own equity. As a result, lower D/E ratios are preferred by both investors and prospective lenders.

A corporation with a D/E ratio of one has equal assets and liabilities. However, since various businesses have varied debt needs, it’s crucial to compare D/E ratios to firms in the same industry.

The average D/E ratio is often greater for bigger enterprises, especially those in more capital-intensive sectors like car manufacture. General Motors reported a debt-to-equity ratio of 1.768 in the first quarter of 2022. The number for Ford was 3.010, whereas Stellantis had a ratio of 0.556.

The debt-to-capital ratio and the current ratio are two alternative debt or leverage ratios that are often used to analyze firms in the car industry.

Inventory Turnover Ratio

The inventory turnover ratio is an essential assessment indicator for vehicle dealerships, particularly in the auto sector. If auto dealerships begin keeping much more than 60 days’ worth of inventory on their lots, it is typically seen as a negative flag for vehicle sales.

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The inventory turnover ratio computes how many times a year a company’s inventory is sold or turned over. It is a useful indicator of how effectively a firm handles ordering and inventory, but more crucially for car dealerships, it indicates how quickly they sell their current inventory of automobiles on their lot.

For the first three months of 2022, the average inventory turnover ratio was 10.11. In other words, the typical automaker had sold through its entire inventory slightly over 10 times in the preceding year.

Examining the days sales of inventory (DSI) ratio or the seasonally adjusted yearly rate are alternatives to assessing the inventory turnover ratio (SAAR).

30%

The average rise in used automobile prices during the COVID-19 epidemic.

Return on Equity Ratio

The ROE is a significant financial ratio for assessing practically any firm, and it is undoubtedly regarded as an essential indicator for studying automakers. The ROE is particularly significant to investors since it evaluates a firm’s net profit returned in ratio to shareholder equity, or how successful a company is for its shareholders.

Higher returns on equity are preferred by investors and analysts. For the first three months of 2022, the industry average was 15.86%.

Analysts may also include the return on capital employed (ROCE) ratio or the return on assets (ROA) ratio in addition to the return-on-equity ratio.

Which Financial Ratios Are Important for the Automobile Industry?

In addition to the financial ratios described above, there are other measures unique to the automotive business. The utilization rate, for example, illustrates how well a corporation uses its production capacity, while the downtime rate reveals how often a company must shut down its facilities for maintenance and repairs. The yield rate shows the proportion of automobiles that match a company’s criteria, whereas the recall rate shows how many of those vehicles are unsatisfactory.

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What Is a Good ROA for the Automotive Industry?

In the first quarter of 2022, the average return on assets (ROA) for firms in the automotive sector was 3.87%, down from 6.04% the previous quarter. Any firm with a higher number is likely to be more profitable than its rivals.

Is the Automobile Industry Capital-Intensive?

Because of the high capital expenses for enterprises in the sector, the car industry is considered particularly capital-intensive. When compared to labor or raw material expenses, property, plants, and machines consume a considerable portion of the company’s expenditures.

What Is a Good Profit Margin in the Auto Industry?

In the five years leading up to 2020, the average net profit margin for the car sector was 7.5%, with most businesses getting at least 4%. Premium brands are often more lucrative. Tesla had the lowest profit margins, at -11%.

The Bottom Line

Many financial statistics must be examined in order to acquire an overall picture of how a firm is operating. The three ratios presented here are significant in the car business and serve as a solid measure of how a firm operates. However, in order to establish a company’s genuine financial health, one must examine its particular dynamics as well as other measures.

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