Company Financial Analysis: Toyota Motors - Case Study Example

Company Financial Analysis: Toyota Motors Company Financial Analysis: Toyota Motors Background Information The automobile industry is a highly competitive market; hence, actors within this is market often struggle with the constant increasing costs of developments, production, and mature market (Damodaran, 2013). The most mature markets that increases the competitive nature of the automobile markets are constituted mainly by the western countries including Europe and North America markets. These markets subjects other automobile producers with challenging environment in their decision-making in their management and production lines as well as how to be profitable (David, 2013). However, market-leading companies are capable of organizing their strategies towards maintaining competitive position within the market. Therefore, this easy aims at analyzing the competitive advantage and financial position of Toyota in this competitive market. Toyota has remain in the market for a longer time despite the global financial and environmental challenges that often affect its operation and market. To ensure that it operation and sales are not affected immensely, Toyota often lower its prices without compromising quality and efficiency of production (Damodaran, 2013). Additionally, Toyota has ensured that it implements continuous improvement on its cars for it to supply new and improved products to the market. This strategy increases market and creates new market nearly per its new production. Notably, many automobile industries often copy the benchmarks that Toyota often implement in meeting its strategies (Brigham and Ehrhardt, 2013). Nonetheless, like other automobile companies that research on their brands within their operation model and to the external market, Toyota should imitate the research practices to enable it improve its quality across the board and provide the market with what the market expect from it. Introduction Toyota is the biggest Japanese automobile company that is second largest car company after the General Motors. Its production is rated at nearly eight million cars annually that is nearly a million less of what GM produces annually. Toyota dominates its home market with 2004 financial statistics indicating that its sales within Japan stands at 40 per cent (David, 2013). Moreover, Toyota has large market shares in both Europe and the United States. Its South East Asian market shares is known to indicate a significant growth. Toyota has ever enjoyed its varied production of cars that are regarded of high quality, value, and engineering. In addition, the company designs are accepted globally and are regarded to be of standard safety and reliability as well as easy to maintain (Damodaran, 2013). The company’s philosophy lies in its service delivery where it values quality service provision to all stakeholders including serving the company properly, proper service to the employees, consumers, and the society. The Toyota Company was founded in the year 1937 as Toyota Motor Corporation (David, 2013). Since its incorporation, Toyota has been known to design, manufacture, assemble, market, and sell its cars. Toyota deal on passenger cars, commercial vehicles, minivans, and their related parts and accessories. Toyota have since been having increasing consumers due to its reasonable prices and its parts and accessories are ready available thereby making its car easy to maintain (Brigham and Ehrhardt, 2013). Toyota has markets not only in Asia but also in other continents and countries including North America, Africa, and Europe. It is worth noting that Toyota is the eighth largest selling company. The March 31, 2013 annual revenue of Toyota Motor Corporation was at $213 billion with 333,498 employees globally. External Environment of Toyota Industry It is worth noting that for the last five years, automobile industries including Toyota has being facing tumultuous operations that have been characterized by increased fuel prices, growing in environmental concerns, and shift in the preferences of consumers. Notably, many consumers have shifted from fuel guzzling vehicles to smaller cars that are fuel-efficient. Most of the automakers including Toyota have since responded to the shift of customer’s preferences by increasing their small car portfolio as well as diversifying into hybrid electric motor vehicles’ production (Damodaran, 2013). Notably, just like other markets and businesses, Toyota motors was also affected by the global financial recession that started by US financial crisis. This 2008 recession led to the decline of Toyota’s revenue by about 15.4 percent by 2009. However, the 2013 pent up demands led to the industry’s revenue growth by nearly 2.1 percent (David, 2013). The 2013 2.1 percent growth brought the overall Toyota’s estimated revenue to be at $2.3 trillion. Therefore, despite the decline that was prompted by the global recession, the industry has since experience gradual recovery that have been estimated at 2.2% for the last seven years. This growth have been aggravated by the increased income in some of the Toyota’s markets thereby creating the demand for using motor vehicle. Additionally, Toyota have since cut costs on its production line that makes it sell its cars at relatively low prices. This has increased sales especially within the emerging economies; hence, increasing the industry’s general revenue (Brigham and Ehrhardt, 2013). Notably, the emerging economies are expected to grow even for more than five years to come. This fact translates to the fact that they will demand vehicles thereby making Toyota to project its annual growth to be at 2.5% to lead it to an estimated total revenue of nearly $2.6 trillion by 2018. Poor Allocation of Resources Toyota has relatively low equity and assets compared to its peers that are calculated based on return on equity (ROE) as well as return on assets (ROA). For a period of 5 year until 2013, the company’s ROE is estimated at 2.7 percent in FY2012 (Damodaran, 2013). On the other hand, its competitors including Nissan Motor and Honda Motor have higher ROE tan Toyota; for example, Honda’s ROE is estimated at 4.8% while the Nissan’s ROE is at 8% in FY2012 for the same period. The lower values of ROE and ROA of Toyota compared to its peers indicate that Toyota has not been using the stakeholders’ funds efficiently; therefore, it is not generating high returns for the company’s stakeholders (David, 2013). Moreover, it is can be assumed that the company has poor allocation of resources a factor that is also injurious to the stakeholders. Therefore, if the company do not change on this factor, the long-term confidence of stakeholders may be affected. However, the April 17, 2015 weighted average cost of total is at 3.18% while the return on the invested capital is at 6.11%. This is an indication that the company has higher return than in the previous years (Brigham and Ehrhardt, 2013). Therefore, it is worth noting that Toyota has seen remarkable improvement since the 2008 effects of global financial crisis. 12 months ended 2013 2012 2011 2010 2009 Net cash provided by operating activities 26,034 17,672 24,342 27,499 15,035 Free cash flow to equity (FCFE) 18,693 2,764 17,738 16,587 9,545 Toyota’s free cash flow to equity for the period reflected above indicates a continuous increasing trend. This shows that Toyota being a multinational corporation, it enjoys world’s financial market that some financial challenges that might affect small and less exposed company may not affect it (Damodaran, 2013). Additionally, its investment projects are attractive and enjoy long discounted net values projected on its cash inflow. In other words, the net discounted values are highly discounted compared net investment required values. It is also assumed that the attractiveness of Toyota’s single project increases the magnitude between ROE and ROA (Damodaran, 2013). This variation is an indicator that any project that is capable of increasing the cash inflow is capable of covering outlays; therefore, if NPV = zero, the project that is being undertaken is neither expected to increase nor decrease the value of the company. In such vases, the management is expected to be indifferent in agreeing in such purchases. For the values NPV > 0, the intended project is expected to enhance the firm’s value; thus, the management will unanimously accept such projects. Generally, the acceptable projects usually fall within the values PI> 1 and IRR> K; however, the firm should reject values fallowing within NPV Read More