Toyota Motor Corporation - an Overview of the Company - Assignment Example

Toyota Motor Corporation Provide an overview of the company, the type of business it engages in, and any significant recent events affecting the company’s operations or financial position. Toyota is a leading brand in the automobile industry and it holds a strong identity for its strong, fuel efficient, and environment friendly cars. Toyota was incorporated in Japan but has emerged as a global corporation catering to different markets. It is interesting to say that United States is one of the largest markets of Toyota. The company is accomplishing the mission to “make better cars and contribute to the society”. Its business model is based on designing, manufacturing and selling automobiles. All these automobiles can be classified into four categories; Cars, Trucks, SUVs and Vans, and hybrids. The leading brands for Toyota corporation include; Toyota, Lexus, Scion and Hino. Its market share in Japan is approximately 45% while in United States its market share in the automobile industry is 15%. In addition to that, Toyota also owns nearly 23% of Denso which is a supplier of parts (Whiston, 2010). Toyota is well known for its quality products, but it is also recognized for its reliability and affordability. But this philosophy implied a different kind of consumer than would likely buy a luxury vehicle. As a result of this, Lexus was established which began its operations in 1983 and the brand is valued for luxury and quality which is evident through its record of winning four awards from IntelliChoice.com in various “Best Overall Value of the Year” categories (Lexus Home Page, 2010). Significant recent effects affecting company’s operation It was just a few years back Toyota Motors overshadowed General Motors as the world’s largest auto manufacturer. But suddenly consumer perceptions have changed as Toyota is reeling from quality concerns. Since the end of 2009, it has recalled more than 8.5 million cars because of faulty gas pedals, problems with sticking accelerator pedals, and braking concerns (Dalvagas, 2010). The company also paid $16.4 million in fine for failing to notify US authorities about the problems with its accelerator pedals which had a significant impact on company’s operation. As a result of this, consumer preferences have shifted from Toyota to the rival American Competitors. This had a significant impact on the consumer’s views of an American automobile. A recent research conducted by GfK Roper in March revealed that 38% of Americans believe that American Cars are the best-made vehicles, while 33% said Asians are the best. In December 2006, only 29% were favoring American Cars and 46% reported that Asians were the best (Dalvagas, 2010). This changing perception can have serious repercussion on Toyota’s operation now and in the future. 2. Does the company produce a Corporate Social Responsibility (CSR) Report? Contrast this report to the 10K. Toyota has a corporate social responsibility section incorporated in its annual report which aims for the long-term growth of the international society. Toyota believes that it is essential for them to remain in harmony with society and for the purpose they have formed range of committees responsible for monitoring activities pertaining to social responsibility. The success of Toyota can also be attributed to the fact for its philanthropic and environmentally protected acts. The company has launched several initiatives such as educational scholarship and promotes safety among the youth through programs like Toyota Teen Driver and Mothers against Drunk Driving (MADD) (Bruner, Epperson & McNany, 2009). It is also concerned about the environment as it home page dictates that “Toyota strives to create clean and efficient products, and to conserve resources before our vehicles even hit the road,” (Toyota Home Page). Contrast to this, Form 10-K is a report submitted to Securities and Exchange Commission and includes information about company’s history, its line of business, subsidiaries, and audited financial statements and other information. 3. Discuss the auditor’s report, the role of the auditors, and the significance of the report to the corporation and to the external users of the financial statements. Toyota has always been a responsible corporation by complying with the regulatory requirements put forth by the respective authorities. It has always engaged in fair and timely disclosure of corporate information. In order to ensure transparency, Toyota has established a disclosure committee which is headed by the chairman of accounting department. The committee is responsible for reporting financial information under the authority of Financial Instruments and Exchange Law of Japan. The company has adopted an auditor system based on Japanese corporation act. Four out of the seven corporate auditors are external auditors which indicate how much the company stresses on transparency. The auditors reported that all the information with respect to Toyota Motor Corporation is in conformity with the generally accepted accounting principles. The company had maintained an effective internal control over the financial reporting during the fiscal year. The auditors for a company provide a formal opinion after auditing all the financial information which is provided to the end user (Investors) as an assurance to make a decision based on the data provided in the report. The auditor’s report is regarded as an indispensable tool for decision making since financial information without any auditors opinion is considered to be essentially worthless for making analysis. 4. How many shares of common stock did the company have outstanding? Year Outstanding Shares (In Thousands) 2009 3,135,882 2008 3,149,279 2007 3,197,936 5. Does the company have any preferred stock outstanding? The company does not have any preferred stock outstanding. 6. What is the company’s total paid-in capital? Year Total Paid in Capital (In Millions) 2009 $107,917 2008 $118,470 7. What was the total amount of dividends declared in the most recent year reported? Year Dividends Paid (In Millions) 2009 $4,479 Evaluate and comment on the following: a. Liquidity: ability to meet short-term obligations as they come due; b. Solvency: asset management, debt management and interest coverage; c. Profitability: this should include return on assets and equity, and earnings per share; d. Cash position: this should include a discussion of the Statement of Cash Flows, whether it is in the direct or indirect format, and the primary sources and uses of cash for the period. a) Liquidity Ratio The current ratio of Toyota Motor Corporation has improved over the period of time because it has more of current assets that can cancel out the current liabilities. Hence it can fulfill the claims of short term creditors better with its assets that can be converted quickly into cash. B. Solvency Ratios Toyota Motor Corporation has become more leveraged from the period of 2007 to 2009 as its Debt to Equity Ratio has been increasing. This can have a crucial impact on credit rating of Toyota Motor Corporation The Times interest earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest expense (Brigham & Gapenski, 1994). In this case Toyota Motor Corporation had a better time interest earned ratio as it was highly profitable in year 2008. Profitablity Ratios The glimpse of profitability ratios shows that Toyota corporation has been able to utilize its and equity only in year 2008 while the crisis in 2009 had a drastic impact on the revenues of the company which affected its EPS. d) Toyota Motor uses an indirect form of cash flows where it divides it into three categories; Cash flow from operations, Cash flow from Investment, and Cash Flow from Financing. The primary sources of cash are income, receivables, proceeds from the sales of equipment and the issuance of long-term debt. The uses of cash have been to invest in to buy fixed assets, marketable securities, pay long-term debt and dividends. 8. How does the company’s performance compare to similar companies and/or industry standards? Industry Quartiles 2009 2008 2007 Statement Sampling: 57 Statement Sampling: 58 Statement Sampling: 70 Solvency Upper Median Lower Upper Median Lower Upper Median Lower Quick Ratio (times) 2.4 0.5 0.3 1.2 0.4 0.2 0.9 0.4 0.2 Current Ratio (times) 2.9 1.7 1.1 2.3 1.7 1.1 2.7 1.6 1.1 Current Liabilities / Net Worth (%) 29.2 102.6 233.7 56.8 116.7 277.6 50 151.6 319.5 Current Liabilities / Inventory (%) 75.3 100.5 182.9 74.9 113.7 158 66.9 104.8 143.7 Total Liabilities / Net Worth (%) 44.3 124.5 347.9 73.7 167.7 442.3 57.8 166.5 380.3 Fixed Assets / Net Worth (%) 14.5 34 94.4 14.8 32.5 82.9 10.1 23.1 58.6 Efficiency Upper Median Lower Upper Median Lower Upper Median Lower Collection Period (days) 14.2 20.8 31.4 9.5 18.6 38.3 6.2 13.9 26.3 Sales / Inventory (times) 10.9 7.3 3.9 10.7 6.4 4.3 9.1 6.6 4.7 Assets / Sales (%) 29.7 38.7 67.6 27.9 36.4 53.5 23.3 31.6 47.7 Sales / Net Working Capital (times) 15.8 6.7 3.5 23.7 8.7 5 30.1 9.9 4.7 Accounts Payable / Sales (%) 1.4 2.8 5.4 1.3 3 5.6 1.1 2.6 4.9 Profitability Upper Median Lower Upper Median Lower Upper Median Lower Return on Sales (%) 2.9 1.1 -0.4 3.2 1 0.3 3.3 1.4 0.0 Return on Assets (%) 12.3 2.3 -0.9 9.3 3 0.8 10.7 4.5 0.1 Return on Net Worth (%) 22.6 6.6 -0.4 23.1 9.8 2.2 29.8 11.1 2 Figure 1: Industry Averages (Source: Dun & Bradstreet Key Business Ratios) Direct Competitor Comparison (2010)   TM Fords PVT1 Honda Industry Market Cap: 114.62B 55.27B N/A 65.62B 53.99M Employees: 320,590 198,000 217,0001 176,815 35.00 Qtrly Rev Growth (yoy): 27.00% 30.80% N/A 9.50% -47.30% Revenue (ttm): 245.92B 133.74B 104.59B1 112.38B 3.92M Gross Margin (ttm): 13.58% 15.84% N/A 27.35% 21.30% EBITDA (ttm): 23.71B 14.27B N/A 12.93B -10.52M Operating Margin (ttm): 2.77% 6.41% N/A 7.35% -272.44% Net Income (ttm): 5.88B 6.57B 105.22B1 7.57B N/A EPS (ttm): 3.75 1.68 N/A 4.18 -0.12 P/E (ttm): 19.50 9.57 N/A 8.72 N/A PEG (5 yr expected): 0.55 0.56 N/A 0.45 N/A P/S (ttm): 0.47 0.42 N/A 0.58 13.77 Figure 2: Direct Competitor Comparison (Source: Yahoo Finance) Looking at the current industry standards, it is evident that the performance of Toyota Motor Corporation has been weak significantly in year 2009. Its Quick ratio has been on the lower side in the industry in all the three years. However, in year 2008 it has outperformed the market since it had the best Return on Assets and Equity. We can also infer that Toyota Motor Corporation is highly leveraged but most of the debt comprises of short term which is not an ominous sign. However, leverage does have widespread repercussion in recessionary periods which was evident from the performance of the corporation in 2009. However, the performance of Toyota has significantly improved in year 2010, where it has outshined the industry and provided a stiff competition to its major competitors Ford & Honda (Figure 2). The revenue growth has been immense and operating margin has also improved. 9. Does this company observe socially responsible operating policies? Give examples. Toyota is recognized as one of the most socially responsible corporate citizens. Its operating policies are in full compliance with that of a socially responsible corporation. For instance, it was named among the 40 Best Companies for Diversity by Black Enterprise (Toyota Home Page, 2010). This annual list includes the companies which have a significant proportion of African Americans and other Ethnic minorities in employment. Toyota was awarded for its achievements in the areas of supplier diversity and senior management. In addition to that, its socially operating policies can also be recognized through its aim for protecting the environment. The US Environment Protection Agency (EPA) has awarded Toyota Manufacturing in North America with a 2010 Energy Star Sustained Excellence Award for its achievements in protecting the environment through energy efficiency and management. 10. Describe unique opportunities available to this company or industry. Has the company capitalized on these opportunities? Toyota has several core competencies and it can utilize them to take advantage of the opportunities. Being the first company to release a hybrid, Toyota has moved ahead of its competitors. The company also needs to mark its footsteps in another virtually untapped market: the youth segment. The core focus should be on marketing and product design as the youth has a different mindset. Scion has proved to be a grassroots revolution. It is compatible with the latest trend and being low cost and customizable at the same time; no other competitor has a product that is customizable and low cost while still being hip. In addition to this Toyota can target emerging economies and countries where it has not marked its footsteps yet. China is a feasible option as its per capita income is increasing therefore Toyota needs to manufacture within that boundary. South America’s economy has strengthened recently and demand has increased in this region for Toyota’s full-size trucks. In addition, the organization is experiencing increased demand for Toyota full-size SUVs in the Middle East. Consequently, Toyota acknowledges these opportunities and is acting accordingly by streamlining its exporting system (Bruner, Epperson & McNany, 2009). 11. What current or potential threats exist for this company or industry? Risks are imminent in every industry especially automobile industry is exposed to terrible risks. First of all, being a cyclical industry its demand depends on how economy is performing. The loss suffered by Toyota Corporation for fiscal year 2009 is primarily due to the impact of flagging economy. In addition to this, US administration has issued strict fuel efficiency rules for 2016 cars which can be a threat to the whole industry. Toyota is the market leader in one of the largest city of United States, California, so will severely suffer from such stringent regulation. This will give rise to increasing fixed costs which will create a high degree of operating leverage that can cause profits to shrink with small changes in demand. Furthermore, profits can also plunge because of a strong yen relative to the dollar in the future since Toyota’s most of sales does not stem from Japan. 12. Based on all your analysis, what strengths and weaknesses, if any, do you see in the financial status, operating performance, or cash position of the company, and what steps would you recommend for improvement? There is a strong perception in consumers mind that Toyota brand embodies quality. The demand for Toyota’s vehicles is generated because consumers feel that they are reliable and will last for a long time. I believe that Toyota needs to expand its production horizon to growing emerging markets which will push up its sales and mitigate the impact of downturn in US market. Toyota’s strength lies in the fact about its manufacturing expertise which has been developed through its state of the art technology. As the CEO of Ford, Alan Mulally, cited that Toyota should be a model for how Ford should operate (Whiston, 2010). Japanese manufactures always rely on the concept of Kaizen which means continuous improvement and it can be observed in Toyota’s operation as it constantly revamps its floor operations to minimize the costs. More Plants outside can US can also mitigate the impact of a weakening dollar therefore Toyota should build a long term plan for that. In Fiscal year 2010, only 42% of the Toyota’s production was outside Japan (Whiston, 2010). References Brigham, E. F. & Gapenski, L. C. (1994), Financial Management, USA: Dryden Press Bruner, K., Epperson, L., & McNany, M. (2009), Toyota Motor Corporation. Retrieved from: http://www.plu.edu/~brunerkm/Final%20report-toyota.pdf Dalavagas , I. (2010). U.S. Auto Companies Improving Their Image as Toyota’s Quality Issues Mount. Retrieved from: http://www.valueline.com/Stocks/Commentary.aspx?id=8916 Key Business Ratios (2010), Dun & Bradstreet Key Business Ratios, Retrieved from: http://kbr.dnb.com.ezproxy.apollolibrary.com/KBR_Main.asp Lexus Home Page (2010). Lexus in the News. Retrieved from: http://www.lexus.com/tomorrow/in_the_news.html Toyota Home Page (2010). Lexus in the News. Retrieved from: http://www.toyota.com/ Toyota Homepage (2010). Toyota Named Among Best Companies for Diversity by Black Enterprise. Retrieved from: http://pressroom.toyota.com/pr/tms/toyota-named-among- best-companies-161014.aspx Whiston, D. (2010). Toyota Motor Corporation, Morning Star: Investment Research Center. Retrieved from: http://library.morningstar.com.ezproxy.apollolibrary.com/stocknet/MorningstarAnalysis.aspx?Country=USA&Symbol=TM Yahoo Finance 2010, Toyota Motor Corporation: Competitors, Retrieved from: http://finance.yahoo.com/q/co?s=TM+Competitors Read More