In the former case, we are essentially interested in the degree to which firms operating in Germany have fundamentally different financial structures and performance compared to firms located elsewhere. With respect to this view of competitiveness, if one were to invest or operate in Germany, how would the firm’s asset structure likely vary compared to a firm operating in some other country in Europe or average location in the world? In Germany, do firms typically hold more cash and other short term assets, or do they concentrate their assets in physical plant and equipment? On the liability side, do firms operating in Germany have a higher percent of payables compared to other firms operating in Europe, or do they hold a higher concentration of long term debt? The structure of the income statement is also telling. Do firms operating in Germany have relatively higher costs of goods sold, operating costs, or income taxes compared to firms located elsewhere in the region or the world in general? Are returns on equity higher in Germany? Are profit margins greater? Are inventories held longer? Chapters 2, 3, 4 and 5 are designed to answer these and similar questions that naturally affect one’s decision to invest or operate in Germany.
In many instances, people make all the difference. In addition to financial competitiveness, this report considers the extent to which labor deployment and productivity in Germany differs from regional and global benchmarks. In this case, we are interested in the amount of labor required to operate a typical business in Germany and the likely returns on this human investment. What is the typical ratio of short-term and long-term assets to employee? What are typical capital-labor ratios? How different are these ratios to those in Europe in general and the world as a whole? What are the average sales and net profits per employee in Germany compared to regional benchmarks? Again, these and over 50 other measures of labor productivity are considered in Chapters 6, 7, and 8.
The goal of this report is first to assist managers in gauging the competitive performance of Germany at the global level. With the globalization of markets, greater foreign competition, and the reduction of entry barriers, it becomes all the more important to benchmark Germany against other countries on a worldwide basis. Doing so, however, is not an obvious task. First, one needs to aggregate across firms in Germany. Second, one needs to control for exchange rate volatility. Finally, one needs use comparable financial standards.
This report generates international benchmarks and measures gaps that might be revealed from such an exercise. First, data is collected from over 26,000 companies across all regions of the world. For each of these firms, data are standardized into comparable categories (assets, liabilities, income and ratios), by country, region and on a worldwide basis. From there, we eliminate all currency effects by standardizing within each category.
Though we heavily rely on historical performance, the figures reported are not historical but are forecasts and projections for the coming fiscal year.
1.1 Financial Returns and Gaps: Methodology
The approach used in this report to evaluate the competitiveness of Germany is called "vertical analysis." For those unfamiliar with this type of analysis, frequently taught in graduate schools of business, the reader is recommended Jae K. Shim and Joel G. Siegel’s recent book titled Financial Management.[
A common-size statement is one that shows each item in percentage terms. Preparation of common-size statements is known as vertical analysis, in which a material financial statement item is used as a base value and all other accounts on the financial statement are compared to it. In the balance sheet, for example, total assets equal 100 percent, and each individual asset is stated as a percentage of total assets. Similarly, total liabilities and stockholders’
The authors suggest that vertical analyses involve industry-based comparisons. Such a comparison “allows you to answer the question, ‘How does a business fare in the industry?’ You must compare the company’s ratios to… industry norms.” (p. 43-44) This approach is extended to country competitiveness. This involves calculating country, regional and global norms. In what follows, this introduction will describe the six-stage methodology used to perform this analysis. Each stage should be seen as a working assumption behind the numbers presented in later chapters.
Stage 1. Firm-level Data Collection. A global search is conducted across over 20,000 companies in over 40 major economies, including Germany, for those that report financials (balance sheet and income statements). It should be noted that the public-domain financials can be either historic or projections. It should also be noted that even historic figures can be modified in the future and often represent “estimates”
Stage 2. Standardization. Once collected, public domain financial figures of firms identified in Stage 1 are standardize into comparable categories (assets, liabilities, and income). From there, we eliminate all currency effects by standardizing within each category (creating ratios). In order to maintain comparability over time and across countries, vertical analysis is used. In the case of a firm’s assets, I treat the total assets as equaling 100, irrespective of the value of the local currency. All other assets are then calculated as a percent of total assets. In this way, the structure of the firm’s assets can be easily interpreted and compared with international benchmarks. For liabilities, total liabilities and equity are indexed to equal to 100. For the income statement, total revenue is indexed to equal 100, and all other figures are calculated as a percent of these figures.
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