The current report examines the financial performance of a top carmaker in the motor industry. The company to be analysed is Toyota Motor Corporation, Japan. A number of financial ratios will be analysed with a view of understanding the company’s profitability, earnings, risks, and cash flow in the last year. The evaluation will use the company’s financial statements and reports. With the help of the evaluation, the report will provide a transparent and balanced overview of the motor company and its viability. The analysis will give an informed insight on whether or not to acquire or invest in Toyota Company. To this end, the viability of this firm will be analysed. The report will be prepared for Ford, the company intending to invest in Toyota.
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Toyota Motor Corporation: Background Information
Toyota Motor Corporation was founded in 1937. The company is one of the most prominent players in the global automotive industry. In addition, Toyota has business interests in finance and other industries. The organisation markets its products in over 190 countries around the world. The traditional markets targeted by the firm include Japan, Europe, North America, and Asia (Nkomo n.d). The automotive department deals with the design, assembly, and sale of the firm’s trademark passenger and commercial vehicles. It also deals with the manufacture and distribution of minivans and related parts. Toyota has a number of subsidiaries operating in different countries around the world.
They include Daihatsu Motor Company, which deals with the assembly and distribution of minivans. Another subsidiary is Hino Motors. The company deals with commercial vehicles. Hino focuses on the production and sale of trucks and buses. The company also produces motor vehicle parts for its consumption and for other automotive firms (Nkomo n.d).
Toyota’s financial sector provides services to dealers with regards to the purchase and lease of Toyota models. The company offers credit and leasing through contracts initiated by the dealers. In addition, the firm provides insurance services. The services are provided through a subsidiary called Toyota Motor Insurance Services [TMIS] (Nkomo n.d). The major activities of TMIS involve offering marketing, underwriting, and claims management.
Toyota Motor Corporation: Financial Analysis
Profitability ratios are used to indicate the financial health of an entity. They are also used to show how successful the managers of an organisation have been in the generation of profits (Tracy 2012). In this section, the report will take a look at Toyota Motor Corporation’s return on capital (ROCE) and Operating Profit Margins for the last five years.
Gross Profit Margin
Gross profit margin = gross profit/ sales x 100
The table below is an illustration of Toyota’s gross profit margin:
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Table 1. Toyota Motor Corporation’s gross profit margin.
|Gross profit margins||11.81||15.51||19.03||19.80|
From the above figures, it is apparent that Toyota Motor Corporation has recorded a steady growth over the last four years. The company registered the highest growth in 2015, attaining a gross profit margin of 19.80%. The lowest was 2011. The dismal performance is perhaps as a result of the 2008 global economic crisis, which affected the company’s traditional markets. The crisis had significant impacts on the economies of Western Europe, America, and Asia (Mejorado & Roman 2013). However, the firm has demonstrated its resilience by posting steady growth in the last three years.
Net Profit Margin
The net profit margin ratio is a measure of profitability. It is a percentage of the profits generated from the operations of the firm. It is computed by deducting the organisation’s operating expenses and taxes from the profits (Tracy 2012). Net profit margin is calculated using the formula below:
Net profit Margin = net profit before taxation and interest/ Sales x 100.
The table below represents the net profit margin for Toyota Motor Corporation:
Table 2. Net profit margin for Toyota Motor Corporation: 2012-2015.
|Net profit before taxation||3,446.093||10,208.549||17,693.37||18,164.759|
|Net profit margin||1.52||4.36||7.09||7.97|
According to the table above, Toyota Motor Corporation has reported growth in its net profit margin. The growth is tremendous given that the company reported only 1.52% net profit margin in 2012. The figure rose to 7.97% four years later. The low net profit margin in 2012 can also be attributed to the 2008 global money market crisis, which impacted on most markets (Nkomo n.d).
Efficiency Ratios: Receivable Turnover
The receivable turnover ratio is used to monitor and measure how an organisation deals with its receivables (Geiger 2011). To this effect, a low figure with regards to the amount of money that remained uncollected from customers translates to a higher ratio. On the other hand, if an organisation has more money that is uncollected or awaiting receipt, the ratio is lower. The receivable ratio is referred to as the debtor’s turnover ratio (Tracy 2012). As such, the receivable ratio is an indicator of how the company handles its credit and collection of debts.
Receivable turnover = average receivable/ Sales x 365 (days).
The table in Appendix 1 is an illustration of Toyota’s receivable turnover for the years 2014, 2015, and 2016.
Toyota Motor Corporation’s debts for 2014, 2015, and 2016 have remained low (refer to Appendix 2). What this means is that the company’s debt collection is healthy.
Financial Risk Ratios
Financial risk is a broad term that also embraces the added threat of defaulting. It comes into effect when an organisation’s expansion is funded through the help of financial leverage. It is also noted that the ratio includes risks that are not covered by the gearing ratio. Such risks include investments that may be made on other companies (Corelli 2015).
In this report, the financial risk ratio is used as a measure of Toyota Motor Corporation’s capital structure (Corelli 2015). It also evaluates the level of current risks in relation to the organisation’s debt (Batten, Mackay & Wagner 2013). The organisation’s ability to manage the outstanding debts is an important factor when it comes to the analysis of the firm’s financial health. To this end, debt management and debt levels significantly affect the organisation’s profitability. The reason is that the money that goes to servicing debts impacts on the firm’s net profit margin. In addition, such money cannot be invested to support the growth of the company (Corelli 2015).
The capital structure and financial leverage looks at the utilisation of debts and capital in Toyota Motor Corporation. Financial leverage is the utilisation of debts and borrowed funds to enhance the sales volume of the firm. The aim is to increase the profitability of the firm (Corelli 2015). For instance, Toyota may increase the financial leverage by taking a bank loan to purchase production equipments with the view of increasing productivity.
The gearing ratio is used to compare Toyota’s equity to the borrowed money. The ratio will also be used by Ford, the potential investor, to evaluate how Toyota Motor Corporation can survive an economic crisis, such as the one that took place in 2008 (Batten, Mackay & Wagner 2013).
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Gearing ratio = long term debt/ Equity x 100.
The following is Toyota Company’s gearing ratio for the year 2016:
Toyota gearing ratio = 90,460.0078/ 159,467.6875 x 100 = 56%.
The figure above shows that Toyota has an average gearing ratio. What this implies is that the company seeks to maintain a debt position that is manageable in order to maximise its shareholders’ value (Nkomo n.d). Compared to the industry’s gearing ratio of 65.11, it is apparent that Toyota has a healthy practice of managing its debts.
Cash Interest Cover
The cash interest cover is used to determine the amount of cash available to Toyota to help the company meet its borrowing interests. It is shown as a ratio of the available cash to the interest to be paid. To demonstrate the ability to pay interests, the ratio should be higher than 1:1. The following formula will be used to determine Toyota’s cash interest cover for 2016:
Cash interest cover = profit before interest and tax/ Interest.
Toyota’s Interest cover = 18,164.759/ 333 = 54.54.
The figure above reveals that Toyota Motor Corporation has a high interest cover. The high ratio is probably as a result of the profitability of the organisation. The company has enough cash to meet the interest rates of its debts. In addition, it is observed that the firm’s debts are low. As such, the interest rate covers are adequate (Nkomo n.d).
Liquidity ratio will be used to measure the ability of Toyota to pay its short-term debts. The measure is computed by comparing the organisation’s most liquid assets and its short-term liabilities. A higher coverage of liquid assets to short-term debts is preferred (Piratesh & Fox 2010). The message is that the organisation can meet its short-term obligations and still manage to fund its current operations (Brigham & Daves 2012). However, an organisation with a low ratio should be concerned since the figure signals to investors, such as Ford, that the company is likely to face financial difficulties. In addition, the ratio indicates that the firm is likely to fail in meeting its debt obligations. In essence, the current ratio is used to measure the ability of Toyota to meet its debt obligations within a 12 months period. The ratio also demonstrates the level of protection the organisation has for each $1 borrowed.
Current ratio = current assets/ current liabilities.
Toyota’s current ratio is shown below:
Current ratio= 168,565.8281/149,246.0938 = 1.1.
The figure above shows that Toyota Motor has healthy debt coverage, which can comfortably service the firm’s debt. A current ratio that is within the range of 1:1 is considered to be balanced. As such, the figure is desirable to Ford. Toyota Motor Corporation’s ratio is within the required bracket. As such, the organisation is in a position to meet its obligations.
Operating Cash Flow to Current Liabilities
The operating cash flow to current liabilities is an alternative measure to the current ratio. The current ratio measures current assets against current liabilities. On its part, the operating cash flow to current liabilities applies direct measure of the cash inflow arising from the ordinary operations of the business (Piratesh & Fox 2010). It is noted that current debts and liabilities are paid in cash. As such, the ratio provides information on whether or not Toyota is making enough money from its activities to meet its debts. In addition, not all current assets can be easily converted into cash. Consequently, using the operating cash flow to current liabilities gives a better picture of the solvency and liquidity of Toyota than the current ratio (Hooke 2010).
Operating Cash Flow to Current Liabilities = net cash flow from the operation/ Current liabilities.
The operating cash flow to current liabilities for Toyota is calculated below:
Operating cash flow to current liabilities = 41,294.1523/ 149,264.0938 = 0.27.
If the ratio is under 1, which is the case for Toyota Motor Corporation, it means that the company may not have generated enough money to meet its debts and other obligations. However, the money may have been invested back into the company (Hooke 2010).
The dividend per share is the sum total of the dividends paid by Toyota in a given year. Dividends are paid once or twice in a year. Toyota’s dividends are paid twice per year. They include interim and end-of-year dividends (Nkomo n.d). The organisation’s dividend has steadily increased over the years. The figure stood at 50 yen in 2012. However, it rose to 200 in 2015 (Nkomo n.d). The ability of the company to pay dividends is taken as a sign of financial health. The steady increase in the payment of the dividends for the last few years is an indication that Toyota Motor Corporation is a profitable company that can be acquired by Ford Motors. The firm serves the interests of its investors. As such, Ford’s shareholders and stockholders stand to benefit from the Toyota portfolio.
The dividend cover, which is also known as the dividend coverage, is a ratio of the organisation’s net income and the dividend paid to the stockholders and investors (Puntaier 2010). The ratio is calculated as the net profit that can be attributed to the ordinary shareholders by sum of the ordinary dividend (Puntaier 2010). The dividend coverage demonstrates how many times Toyota can cover the payment of dividend. Coverage of less than 1.5 is taken as a significant threat to the shareholders. Such a figure can impact negatively on the payments. On the other hand, a coverage that is more than 2 is considered as strong.
Dividend Cover Ratio= Profit after tax- Dividend paid on Irredeemable Preference Shares/ Dividend paid to Ordinary Shareholders
In this report, the financial statements and annual reports for Toyota Motor Corporation were reviewed. The reviewed covered 2012, 2013, 2014, 2015, and 2016 financial years. The report provides conclusions regarding the profitability, efficiency, financial risk, liquidity, and investment potential for Toyota. The results of the ratios examined reveals that Toyota is a viable investment vehicle. As such, Ford should consider acquiring the company. The major ratios show a company that is on a growth path. As the global economy improves, the profitability of the company is expected to rise. The combined global sales of Ford and Toyota products in the various market segments should deliver “a solid value” to the shareholders.
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Corelli, A 2015, Understanding financial risk management, Routledge, New York.
Geiger, F 2011, The yield curve and financial risk premia: implications for monetary policy, Springer-Verlag, Berlin.
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Mejorado, A & Roman, M 2013, Profitability and the great recession: the role of accumulation trends in the financial crisis, Routledge, New York.
Nkomo, n.d. Analysis of Toyota Motor Corporation. Web.
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