Financial Management Analysis of Toyota and General Motors - Research Paper Example

Financial Management Analysis of Toyota and General Motors Introduction With the changing of the modern day business, companies have become more focused towards determining a sustainable position for themselves in comparison with their respective competitors. Notably, owing to the presence of multiple players in almost all the industry sector, the competition amid the companies has become more fierce and intense, which further encourages them to assure greater operational effectiveness in every domain of business. This particular aspect is required to be taken into concern for gathering the attention and trust of the investors, which help in accomplishing the funding needs of business. In this regard, it will be worth mentioning that the success or failure of any business unit can be largely depicted from the facts presented in the financial reports of the companies. This approach is often regarded as financial management analysis of any business, depicting its current business positioning. Contextually, the role of conducting financial management analysis is deemed to be quite effective in this modern day business. The effectiveness of the performance of any business can mainly be determined through a comprehensive analysis of varied financial reports comprising capital management, income statement, balance sheet and statement of funds (Nieuwenhuizen, 2007). With this concern, the research paper intends to conduct an effective analysis of financial management, which compares and contrasts two particular companies namely Toyota Motor Corporation and General Motors Company (GM). The analysis will mainly address analyzing the financial data of previous three years of both the companies in terms of capital management, balance sheet, income statement and statement of funds. Company Overview: Toyota and GM Both Toyota and GM are recognized as the leading market players operating in the automobile sector for numerous years. These companies have been able to attain superior competitive position in terms of delivering quality products and/or services to their respective customers worldwide. Evidently, Toyota is a Japanese based automobile manufacturer, which enraged its customer base through offering quality products to them. The company is also widely recognized for its adoption of lean manufacturing approach along with the practice of Total Quality Management (TQM). These aspects further ensure that the company could be able to deliver quality products to the customers with utmost consistency, thereby gaining maximum profitability. Specially mentioning, Toyota became much renowned in applying effective corporate governance related strategies, making sure that its operational aspects impose minimum negative impact on the people of the society and the environment altogether (Toyota, 2014). Similar to Toyota, GM is also one of the renowned market players operating in the automotive sector. GM is an American based multinational business corporation, which deals in manufacturing along with designing and marketing world-class vehicles. Identifiably, the company distributes its products in a widespread manner in various nations of the world. The company has major market share in the US and other nations. It is worth mentioning that the company holds the record of being selling huge figure of vehicles, further raising its brand positioning to the highest level. The company continuously seeks to provide high quality products and after sale services to the customers with the intention of maintaining sustainability in this competitive landscape (General Motors, 2014). Financial Management Analysis of Toyota and GM: Compare and Contrast It has been earlier mentioned that Toyota is recognized as one of the most effective players in the automotive industry. In relation to its financial position, the company has been able to maintain consistent growth in its financial results over previous few decades. This can be better comprehended from analyzing the financial results of the past three years of the operations of Toyota that will be discussed later. On the other hand, similar results relating to the three years financial operations data have also been depicted in the case of GM. Identifiably, the company i.e. GM experienced immense growth in most sections of its business owing to continuous increase in sales and global expansion. To acquire a better understanding about the effectiveness of the financial operations of both Toyota and GM, it will be useful to conduct a thorough financial analysis of both the companies and comparing the same. It will be vital to mention that the comparison amid the two companies will be conducted based on certain financial aspects including working capital management, income statement, balance sheet and statement of funds among others. Working Capital Management In order to start any business, initial capital is deemed to be one of the major aspects, which depicts its overall success as well as failure in long run. Hence, proper management of working capital is indeed quite crucial. Specially mentioning, the approach of working capital management is concentrated towards maintaining a proper level of working capital as well as current liabilities within any particular company (Bull, 2007). Consequently, there exist certain ratios that require to be taken into concern for discussion while analyzing the working capital management of both GM and Toyota. This has been discussed in the following. Working Capital Turnover Working capital turnover is regarded as an indicator, which depicts how efficient a particular company is with regards to the use of its working capital. It will be vital to mention that when the value of this particular indicator is found to be higher, companies are believed to be in a better position irrespective of any operating segment. The above figures portray the working capital turnover of the companies including Toyota and GM. Notably, both the companies have shown fluctuating results in this particular domain. Specially mentioning, during the period 2012-13, Toyota experienced a considerable decline in terms of working capital management (23.97%) as compared to that of the preceding year (32.45%). On the other hand, the working capital turnover of GM depicts steady decline in the previous three years. Thus, it can be affirmed that Toyota has been able to make better use of working capital by a certain degree as compared to GM during the preceding three years. Inventory Turnover Ratio It is also a particular indicator, which portrays the rate along with the level of inventory used in any business. It is directly associated with the aspect of working capital management of businesses. Proper and effective flow of inventory of any business certainly results in better working capital management (Bull, 2007). The inventory turnover ratio for both Toyota and GM has been recorded in the following. The above figures portray the inventory turnover ratio of the two companies i.e. Toyota and GM. Notably, the figures are fluctuating for both the players during the previous three years. Again, it has also been noted that both the companies have yielded positive results in the operational year 2012-13. Thus, it can be affirmed that the management of working capital of both the companies seem to be quiet fluctuating, which has been determined in terms of calculating inventory turnover ratio. Income Statement This is regarded as one of the most vital statements in the domain of financial reports, as it directly depicts the aspect of profitability. It also portrays the revenues obtained as well as the expenses incurred while performing varied operational functions (Bull, 2007). In this similar concern, the gross profit margin of both Toyota and GM has been recorded in the following. Gross Profit Margin The ratio of gross profit margin depicts the percentage of funds that any company currently possess in order to meet its operational and other business related expenditures (Bull, 2007). The above table depicts the gross profit margin of both the companies i.e. Toyota and GM. It is apparent from the above table that a fluctuating trend in terms of gross profit margin can be ascertained over the preceding few years i.e. 3 years in both Toyota as well as GM. Specially mentioning, the gross profit margin of Toyota was seen to be quite high in the operational year o 2012-13 as compared to the previous two years. On the other hand, the gross profit margin of GM can also be seen fluctuating during the previous three years in the global automobile sector. In this regard, the gross profit margin of GM has shown a considerable hike in the operational year 2012-13 as compared to the preceding year i.e. 2011-12. Hence, it is apparent that both the companies have experienced similar sort of gross profit margin in the previous three years. Operating Profit Margin Operating profit margin is regarded as the approach of determining profitability of a company prior to tax settlement. Notably, the financial element of operating profit margin is depicted in the process of dividing the total operating income of the company with that of the overall revenue obtained (Bull, 2007). The table above portrays a commendable increase in the operational income of Toyota in 2012-13 in comparison with its preceding year of performance i.e. 2011-12. Additionally, as far as the overall operating profit margin is concerned, the company has showed fluctuating trend in the preceding three years. On the other hand, operating profit margin of GM has showed a severely fluctuating trend in the previous three years. Notably, the company has experienced a drastic fall in the figure of operating profit margin during the period 2012-13 as compared to 2011-12. Again, drastic negative changes have also been apparent in the operating performance of GM in between the period 2010-11 and 2011-12. Hence, it can be affirmed that the performance of Toyota seems to be quite better over the preceding three years in terms of its operating profit margin as compared to GM. Net Profit Margin It is one of the most prominent indicators of profitability. It will be vital to mention that higher the profit margin of a company, greater will be its financial stability. Net profit margin is a particular indicator, which is determined or calculated by dividing the overall income of a business with that of the revenue obtained. The figure presented above depicts the net profit margin of both Toyota and GM. As per the figures, the net profit margin of Toyota can be found marginally fluctuating with ups and downs over the previous few years. Notably, in 2012-13, the net profit margin of the company accounted to 4.36% as compared to marginal 1.53% in the preceding year. On the other hand, the figure GM might be disappointing for the investors and other stakeholders. As per the figures provided above, the net profitability margin of the company was recorded to be 3% during 2012-13 as compared to 4% in the preceding operational year. The overall result for the preceding three years depicts a declining trend in terms of net profit margin for GM. Hence, it can be affirmed that Toyota is a more successful performer in the previous three years in terms of net profit margin than GM. Return on Equity (ROE) ROE is duly considered to be one of the most prominent indicators, which tends to assist the investors in deciding whether to make future investments in any business. ROE is a profitability ratio, which is being considered as the rate of return that investors can expect from the overall operations of a company. The above depicted figures depict that the ROE of Toyota has shown both ups and downs in the preceding three years. Apparently, in 2012-13, the company has a ROE of 7.92%, which was higher as compared to 2011-12, which accounted 2.69%. In contrast, GM has shown a declining ROE margin in the previous three years, which is again a matter of concern for its business as well as investors. Hence, it can be affirmed that Toyota performed quite well than GM in terms of ROE in the preceding three years. Balance Sheet Balance sheet provides a summary of the financial position of a business. It is regarded as one of the imperative financial statements, which presents the financial positioning of any business. In any standard balance sheet, three most prominent components include assets, liabilities as well as equities. The components of balance sheet amid two companies can be mainly analyzed with the assistance of examining varied liquidity ratios (Bull, 2007). These ratios include current ratio along with quick ratio and cash ratio. These have been discussed in the following. Liquidity Ratio Liquidity ratio depicts the ability of a business to pay back its short-term debts. It is vital to mention that when the value of this particular ratio gets higher, the companies will be considered to be in a better performance in terms of paying off their respective short-term debts (Bull, 2007). The current ratio of both Toyota and GM has been recorded in the following. Current Ratio Current ratio is a particular indicator, which measures the financial performance of a business in terms of determining its liquidity position. It indicates the ability of a company to meet its short-term financial needs and debts repayment. From the above depicted figures, it is apparent that the current ratio of Toyota seems to be fluctuated over the past three years. On the other hand, an inclining trend in the current ratio over the previous three years can be ascertained in case of GM. From the above table, it can be affirmed that Toyota lacks in the domain of paying off short-term debts during the preceding three years, while GM proved to be quite effective in this regard, as it shown improvements in terms of its ability to pay back short-term debts. Quick Ratio It is a particular indicator, which determines short-term liquidity of any form of business. Moreover, it depicts the ability of a business to meet its short-term financial requirements with regards to liquid assets. The figures presented above depict the quick ratio of the two companies including Toyota and GM. Notably, a fluctuating trend is observed in the quick ratio of Toyota during the previous three years. However, the company showed improvement in 2012-13 in terms of quick ratio as compared to its previous year of performance i.e. 2011-12. On the other hand, according to the above table, a considerable inclining rate in terms of quick ratio over the previous three years can be ascertained in case of GM. With each passing year, the company has shown a consistent and stable growth in terms of quick ratio. Hence, in terms of quick ratio, GM can be duly considered to be in a better position. Cash Ratio It is a particular financial indicator of business units, which is often used to measure the liquidity of any business. Its primary task is to determine the ability of companies to repay their respective short-term loans or debts. The above table presents the cash ratio analysis of the two companies i.e. Toyota and GM for the previous three operational years. The results suggest that a declining trend in terms of cash ratio during the preceding three years is apparent in Toyota. Therefore, it is clear that Toyota is not capable enough reduced ability to repay back its loan. On the other hand, the table depicts that GM remained inconsistent in terms of its cash ratio with figures showing fluctuation in the past three years. Hence, it can affirmed that both the company showed equal performance in the domain of cash ratio. Statement of Funds Statement of funds in any business depicts the performance of businesses, which is relevant with the overall monetary operations. It is strongly believed that funds management is one of the major and imperative aspects towards determining the overall effectiveness of any business. It is again important to depict that the statement of funds mainly attracts the investors to invest more in a particular business. The statement of funds can be simplified with the assistance of assessing the ratios like debt to equity ratio, price to earnings ratio and earnings per share among others (Bull, 2007). These ratios have been discussed in detail in the following. Debt to Equity Ratio It is a particular ratio, which presents a comparison amid the liabilities of a business with that of the equity of the shareholders. It determines the commitment of the shareholders made towards the company about making further investments in future. The figure below depicts the debt to equity ratio of the two companies i.e. Toyota and GM. From the above table, a fluctuating trend is apparent with regards to debt to equity ratio for both Toyota and GM. Notably, Toyota has shown a marginal growth in 2012-13 as compared to 2011-12. On the other hand, GM has showed a considerable incline in its debt to equity ratio in the year 2012-13 in comparison with that of 2011-12. Hence, it can be affirmed that both the companies have performed equally in terms of debt to equity ratio. Earnings per Share (EPS) EPS depicts the profit of a company, which it made in a particular operational year with regards to the number of shares presented in the market. The below table reveals EPS of both Toyota and GM during the previous three years. Based on the above table, it can be affirmed that Toyota has experienced considerable growth in terms of EPS during the preceding years of its operations. Notably, the figure in 2012-13 showed a growth as compared to that of the preceding year i.e. 2012-11. However, the result for GM for the past three years can be stated as quite steady as compared to the EPS of Toyota during preceding three years. Price Earnings per Share This represents current share price of a business in comparison with its per-share earnings. The below table provides an understanding of the price earnings per share of Toyota and GM for the past three years. Notably, the figures presented in the table reveal that Toyota had consistently shown decline in price earning share in preceding three years. However, on the other hand, the figures presented for GM depict a consistent growth for the company over the previous three years. Sources: (Barchart, 2014; General Motors, 2014) Conclusion From the above analysis and discussion, it can be ascertained that in the present day business scenario, companies need to be more efficient in every domain of business for ensuring gaining overall effectiveness. It has been apparently observed that the financial reports prepare by business units largely determine the financial stability of business. It will be vital to mention that numerous stakeholders especially the investors determine their financial decisions through taking into concern the facts as well as the figures presented in the financial statements of the companies. In order to acquire a comprehensive understanding in this regard, the study has provided a thorough comparison about the financial statements of the two most reputed players of the automobile sector i.e. Toyota and GM. Notably, both the companies have shown both favorable as well as unfavorable performance in terms of their respective financial performance during the previous three years. However, with the challenging nature of the modern day business, these companies need to be more effective in their respective operations so that they can improve their overall financial performance and attain long-term sustainability. Hence, it can be concluded that both the companies will need to more efficient in performing their respective business functions worldwide. References Barchart. (2014). Toyota Motor Corp. Ltd Ord (TM). Retrieved from http://www.barchart.com/profile.php?sym=TM&view=ratios Bull, R. (2007). Financial ratios: How to use financial ratios to maximize value and success for your businesses. US: Elsevier. General Motors. (2014). About GM. Retrieved from http://www.gm.com/company/aboutGM.html Nieuwenhuizen, C. (2007). Business management for entrepreneurs. US: Juta and Company Ltd. Stock Analysis on Net. (2014). General Motors Co. (GM). Retrieved from http://www.stock-analysis-on.net/NYSE/Company/General-Motors-Co/Ratios/Short-term-Operating-Activity#Inventory-Turnover Toyota. (2014). Company profile. Retrieved from http://www.toyota-global.com/company/profile/ Read More