Financial Evaluation of Toyota Motor Corporation
Introduction.
Toyota Motor Corporation started its operations on 28TH August the year 1937. Its current president and representative is Akio Toyoda. The corporation has its head office in Toyota City in Japan. It has a workforce of 325,905 employees worldwide. Its major business activity is the manufacture of the Toyota branded Motor vehicles.
The main reason why I opted to choose the Toyota Motor Corporation for my financial comparisons is mainly because of its dominance in the Motor vehicle market in most parts of the world. Its rich tradition of efficiency, reliability, durability and low purchase value makes it ideal for many people in most parts of the world notwithstanding its efficiency in fuel consumption, affordable and available spare parts.
The corporate, social and environmental values of Toyota Motor Corporation are well founded on ideal principles and practical considerations in its management structures. Towards achieving an enriched society, equal and fair sustainable development, Toyota strives in cooperation with the society to effectively and efficiently use its resources harmoniously and to engage in activities that contribute positively to the changes affecting all its stakeholders. This activities target alleviation of persistent societal problems, and negative issues affecting the immediate community. Toyota encourages and nurtures initiatives aimed at developing of potential personnel, Protecting and maintaining high environmental standards.
Toyota, as a Global company engages the society in creating and fostering sustainable growth from the broad perspective of the current and the future of the earth and humanity. Toyota participates in philanthropic activities and also engages in disaster prevention and recovery activities in the event of such calamities.
Justify and detail the evaluation methods used.
Profitability ratios.
Financial statement evaluation includes analyzing the corporations’ financial statements to get and extract the financial information that can be used in decision making. For instance, an evaluation of the financial statement can reveal whether the company can afford to pay its long term liabilities, whether the Corporation is efficiently utilizing its physical assets, whether it has maximum financial mix in capital structure and whether it’s generating enough income for its shareholders. Investors would be interested in information touching on the profitability of the company and the financial ratios. Toyota Motor Corporations’ sales decreased by 2.2% for the period between 2012 and 2011 but it had improved by 0.23% for the previous period i.e. 2011-2010. The sales of Toyota Motor Corporation are more than twice the combined sales of its competitors Honda and Ford for the year 2012. Its profitability ratios reveal an interesting scenario. Toyota Motor Corporation has also a market capitalization of slightly more than 12 billion compared to 5.6 billion and 48.6 million of Honda and Ford respectively. It’s obvious that Toyota’s market capitalization is twice the combined market capitalization of both Honda and Ford. The cost of production accounts for 79.25% of the total sales for the year 2012 and 78% for the year 2011 for Toyota Motor Corporation. Honda’s cost of production compared to sales is 67.8% and 66.4 for 2012 and 2011 respectively, while Ford is 81.6% and 82% for the years 2012 and 2011 respectively. This represents a very high percentage in the production department’s costs that may call for additional efficiency in Toyota and Ford’s management. The Gross profit margin for the years 2012, 2011, and 2010 were 20.75%, 22.03% and 23.19% respectively for Toyota Motor Corporation. Honda’s gross profit was 32.2%, 33.61% and 32.57% for the similar period respectively while Ford’s was 18.43%, 18.12% and 20.28%. Total sales less cost of production equals to the gross profit.( Khan, 1993).
The operating profit margin (profit before tax/turnover * 100) increased to 2.97% in 2012 from 1.54% in 2011 for Toyota Motor Corporation while Ford Motor Group decreased to 5.75% from 6.37% in for the years 2012 and 2011 respectively. Honda’s Operating Profit Margin decreased to 3.24% from 7.06%.
The Net Profit Margin (profit after taxes/turnover * 100) was 0.92%, 1.32% and 1.51% for the years 2012, 2011 and 2010 respectively for Toyota. This represents a decrease in net income in the year 2012. Ford experienced more than 10% decrease in net income from 14.84% in 2011 to 4.22% in 2012. While Honda also experienced a 3.21% drop in net income from 4.74% to 1.53% in the year 2012 and 2011 respectively. (Vance, 2003)
Comparisons for Toyota, Ford and Honda for the year 2011.
In the year 2011, the net income of Honda surpassed those of Toyota by 30.8%. Considering that Toyota has slightly more than twice the market capitalization and even turnover of Honda and even the turnover of Toyota is also rated similarly i.e. its twice that of Honda. There are only three possible explanations in this case that is: a.) Honda is highly efficient compared to Toyota b.) Toyota engages in expansion activities or c.) The philanthropic nature of Toyota Motor Corporation in its corporate social responsibilities is having a negative effect in its business operations. These will be clearer in the final conclusion of Toyota Motor Corporation financial evaluation.( Ehrhardt and Brigham, 2008).
Return on Equity (ROE) is arrived at by dividing the profit after taxes and the Shareholders equity were 2.42%, 3.11 and 1.65% for the years 2012, 2011, and 2010 respectively for Toyota Motor Corporation. Honda’s ROE was 3.27%, 7.99% and 4.25% for the years 2012, 2011, and 2010 while Ford’s ROE was 7.47, 9.4% and 7.05%. This implies that Ford has the highest returns on the actual capital employed while Toyota has the lowest returns.
Liquidity stems from the liquid assets and investments that can be quickly converted into cash. The current ratio is arrived at by dividing the current assets and the current liabilities. While quick ratio is calculated by dividing the current assets stock and the current liabilities. Liquidity ratios reveal the company’s readiness and ability to pay its current liabilities. Efficiency ratios are calculated to show how efficient the company is utilizing its resources and assets. The current liabilities and assets for Toyota in 2012, 2011 and 2010 were 11,781,574,000, 10,790,990,000, and 10,686,214,000 while assets were 12,321,189,000, 11,829,755,000, and 17,125,239 respectively. For the year 2012, current assets/current liabilities equals to 12,321,189,000/11,781,574,000 = 1.05 which is above the normal 1:1 ratio normally recommended the quick ratio is 0.91.Honda’s current ratio and quick ratio for the year 2012 were 1.32 and 1.03. While Ford’s were 1.36 and 1.26 for the same period respectively.
Profitability and Liquidity Ratios for the year 2012.
From the above diagram it’s obvious that Ford has the highest returns on the shareholders funds. While the net assets per share percentages are almost similar between Honda and Toyota while Fords are far below them. The current ratios are all almost similar at an average of slightly over 1.The price earnings ratio is calculated by dividing the market capitalization and the net income. For Toyota it has the highest PE ratio between them. (Vance, 2003).
The efficiency calculations are the inventory turnover = cost of goods sold/ Average inventory. For 2012 these were 14,728,088,000 divided by 1,622,282,000 = 9.1 times for Toyota while Honda and Ford’s were 5.2 and 14.9 times respectively. These ratio the number of times stock is resold to generate sales. A higher ratio means more efficiency in managing the stocks. Ford has the highest turnover in sales i.e. the stock turns 14.9 times in a year.
The Total Assets Turnover = Sales/Average Total Assets. Toyota’s total asset turnover for 2012 was 0.6 for every dollar invested. While Ford and Honda were 0.7 each respectively for the same period. (Khan, 1993). Days in inventory = Days in a year / inventory turnover. For Toyota 365/9.1 = 40.1 while Ford and Honda are 70.2 and 24.5 respectively. Ford had the longest shelf life for its products at 70.1, followed by Toyota at 40.1 days while Honda had the shortest period at 24.5 days. (Mocciaro, Picone and Minà, 2012).
The Gearing ratios are Noncurrent liabilities + loans/ Shareholders funds. Toyotas gearing ratio reduced by slightly more than 9% in the year 2012 i.e. from 122.02 % in 2011 to 113.65% in 2012. These are a remarkable improvement as it reveals that Toyota Motor Corporation reduced some of its liabilities. Ford is highly geared at 736.32% in the year 2012 and the trend is worrying as the ratio indicates there’s in an increment in its debt portfolio of about 1.4% from the previous year while Honda’s gearing ratio stands at 128.9% and 126.1 % respectively.
Toyota Motor Corporation performance is impressive. The financial statement indicates a sustainable trend in the short and long run period. The firm’s gearing ratio is low compared to the other two companies. Though the net income is high compared to its competitors its relative low compared to its market capitalization. Toyota Motor Corporation is behind its competitors who are utilizing their assets and debt portfolio efficiently.
International Financial Reporting Standards practice is a set of rules that govern the reporting and presentation of financial records. The requirements of IFRS are contained in the IAS1.10. It includes a statement of the financial position i.e. the balance sheet at the end of the financial period. Also a statement of the comprehensive income for the financial period i.e. profit and loss account.
Ratio analysis assists the management in making critical decisions and to plan strategically the future of the company. Ratios highlight and evaluate the company’s performance that enables different external and internal parties i.e. investors, creditors, shareholders and even employees to have an insight of the firms operations and activities. However, they also have some drawbacks as the comparisons between companies cannot be conclusively rated on the basis of ratios alone, they are subjectively involved. If a firm is engaged in several product lines, it may be difficult to calculate with utmost accuracy the profitability of each product, some products may perform very well others poorly but it may not be possible to identify the exact product and the amount of loss or surplus involved. Ratios calculated are based on the past financial information not the future. Estimates, forecasts and analysis will only be accurate if the records and operations are stable.
Ratios should not be used in isolation but they should be used together with other analytical methods for comparisons. Ratios don’t reveal extra ordinary items. For instance, the profitability ratios reveal that, Ford had the highest return on its shareholders equity relatively more than Toyota Motor Corporation and even Honda. But also the ratios also show than Ford has a very high gearing ratio at 736% and is still going higher. These two ratios points out that the high returns to share holders can also be partly attributed to the high levels of debts.
From the above we can conclude that Toyota Motor Corporation, despite having a huge market capitalization, its efficiency in its production is slightly lower than Honda. While Ford has the lowest Market capitalization but has the highest returns to its shareholder. Ford and Toyota have a combined market capitalization of less than half of Toyota Motor Corporation yet in the year 2012 Ford’s return to share holders was three times relative to its share holder’s equity. This shows a higher level of efficiency in the management of Ford Motor Corporation.
Ford has the highest gearing ratio which stands at 736% and is still increasing. These is a very unstable situation as most investors will in the short run start selling their shares which might cause a panic among its major share holders and may lead to its eventual collapse. Among the three companies, Honda has a moderate level which is slightly lower than that of Toyota Motor Corporation.
On average Toyota is well managed and highly funded. It has a very high potential of developing and expanding even more than its current state provided, its management adopt more efficiency control measures in its production department and staff expenses.
Reference.
Drucker, F. (1999) Management Challenges of the 21st Century. New York: Harper Business.
Ehrhardt, M., Brigham, E. (2008). Corporate Finance: A Focused Approach (3rd Ed.). p. 131.
Garrison, H., Noreen, E., Brewer, C. (2009) Managerial Accounting. McGraw-Hill Irwin.
Khan, M. (1993). Theory & Problems in Financial Management. (Boston: McGraw Hill
Higher Education.
Mocciaro A., Picone P. & Minà (2012). A Bringing Strategy Back into Financial Systems of Performance Measurement: Integrating EVA and PBC, .Business System Review, Vol 1, Issue 1. Pp.85.
Vance, D. (2003). Financial analysis and decision making: tools and techniques to solve
financial problems and make effective business decisions. New York: McGraw-Hill.
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