Financial Ratio Analysis: An Empirical Study On Chinese Automotive Companies

This paper investigates on the Chinese automotive companies by using financialratios analysis and sample data from10publicly listed automotive companies’ financialreports over a range of5years from2006-2010. It also investigates the potential size andproduction capabilities of Chinese automotive companies to gain understanding incharacteristics and performance in the global market. These analyses include elementsratios which have been categorized into four major groups: liquidity, profitability,solvency, and activity by using SPSS software package. It will focus on quantifyingcompanies’ performance such as a comparison of the company’s ability to make a profit(profitability), ability to pay off debts due within a year (liquidity), ability to pay off debtsdue after a year (solvency), and the ability to manage financial resources (activity orefficiency).The result in this empirical study indicates that the performance financial ratios forChinese automotive companies show ratio mean of liquidity position such as current ratio,quick ratio, and cash ratio to have perception and ability to convert into cash to payexpense and short-term debts. We find that the Chinese auto companies maintain a low netprofit margin and gross margin, but with a higher asset turnover. The average collectionperiod of Chinese automotive companies is87days, the maximum is376days, and theminimum is10days. The statistic shows that the companies have higher averageInventory period with less Inventory turnover, on the other hand, companies have loweraverage Inventory period with high Inventory turnover. Inventory conceals bad businessperformance, but the average statistics also show the comparatively big potentials andpossibilities for most Chinese automotive companies to improve their inventorymanagement and control. Finally, financial ratio displayed positive results by T-statisticanalysis showing that Chinese automotive companies’ liquidity (current ratio, and quickratio), profitability (net profit margin, asset turnover, and gross profit margin), activity(collection period, inventory turnover, and inventory period) are less than their mean.Further, solvency, debt ratios are more than mean, and debt to equity is less than mean.The results and ensuing discussion in this paper advocates that a successful andcomprehensive analysis of Chinese automotive company financial ratios can only be conducted with an understanding of the essential accounting standards, business practices,and economic environments which influence them. Several explanations are possible forthe deviation from company norms.