Financial Ratios of Toyota Company - Statistics Project Example

Toyota Introduction Financial ratios are mathematical relationships between toe or more elements of a company’s financial statements; in particular, the consolidated statement of income, consolidated statement of shareholders’’ equity and consolidated statement of cash flows. In this regard, financial ratios are applied in preparing financial reports as they facilitate in analyzing the success, failure and the going concern of business entity. Therefore, such financial analysis facilitates the management of a company to establish the trends in business environment and make a comparison of its economic performance with the prevailing conditions in the market and/or industry. Majorly, such financial analysis reports are used by creditors, suppliers, customers, investors, stockholders, and government authorities (Horne & Wachowicz 2001). Classification of financial ratios is done according to the type of financial information they provide. The most common financial ratios used in financial analysis are the profitability, liquidity/solvency, working capital efficiency, long term financial structure and the investors’ ratio. Liquidity ratios depict how a firm is able to make use of current assets to meet short term financial obligations. The activity ratio depicts how well an entity can utilize its assets whereas the leverage ratio facilitates in determining the long-term solvency of an entity. The benefits that accrue to investors are measured by calculating the investor’s ratio such as dividends per share, market price per share and earnings per share (Penwell 1994). In this regard, financial analysis of Toyota Company is taken a closer look at to establish the financial performance (trend analysis) in the years ranging from 2008, 2009 up to 2010. Task One Performance and Profitability Ratios 1. Return on Capital Employed a. Toyota Component 2009 2010 Operating profit x 100 461011x 100 2.496% 147516 x 100 0.75% Total capital employed (29062-10589293) (303449287-10686214) b. Ford Company Component 2009 2008 Operating profit x 100 25233x 100 18.87% 29633 x 100 27.57% Total capital employed (194850-61193) (218328-110829) Total Capital Employed = Total Assets – Current Liabilities ROCE or Return on Assets measures the efficiency with which a company uses its assets to generate profit (Engel 1996). In the year 2010, the profitability of Toyota reduced to 0.75 compared to the year 2009. This may have been as result of decreased unit sales in the years subsequent to 2009. In comparison, profitability of Ford, increased during the same years. 2. Gross Profit Margin Component 2008 2009 2010 Gross profit x 100 (2482050-20452338)x 100 17.60% (19173720-17468416) x 100 8.89% (17724729-15971496)x 100 9.89% sales 24820510 19173720 17724729 Decreased strengthening of the Japanese Yen during 2009 and 2010 as well as decrease in unit sales (due to recalls) may was attributed to the sharp in gross profit margin. 3. Mark-up Margin Component 2008 2009 2010 Gross profit x 100 (24820510-20452338)x 100 21.36% (19173720-17468416) x 100 9.76% (17724729-15971496)x 100 10.98% Cost of sales 20452338 17468416 15971496 Along side the gross profit margin, the mark-up depicts the extent to which a company may quote the price of its products in order to make profit (Horne & Wachowicz 2001). The same as gross profit, margin, mark-up for the Toyota decreased considerably in period form 2008 to 2009. 4. Operating Profit Margin Component 2008 2009 2010 Operating profit x 100 2270375 x 100 9.147% (461011) x 100 -2.4% 147516 x 100 0.83% sales 24820510 19173720 17724729 The amount of operating profit as a percentage of total sales that the company made in the years 2008, 2009, and 2010 reduced significantly. In the year 2009 during which vehicle recalling started, operating profit margin reduced to negative value although at the end of year 2010, it increased slightly to 0.83%. 5. Return On Equity Component 2009 2010 Profit After Tax x 100 (436937) x 100 4.12% 209456x 100 1.92% Equity 10600737 10930443 The returns on shareholders funds decreased form 4.12% to 1.92 % from the year 2009 to 2010. It means that shareholders were experiencing loss or decrease in the interest they had in the Company. Liquidity/ Solvency Ratios 1. Working Capital (or Current) Ratio Component 2009 2010 Current Assets 11298929 1.07: 1 13073604 1.22:1 Current Liabilities 10589293 10686214 In order for a company to able to cover its short term liabilities, it requires to necessarily have a current ratio of 1:1 (Penwell 1994). Thus, during the years 2009 and 2010, Toyota had enough liquid assets to cover short term obligations; 1.07:1 and 1.2:1 respectively. 2. Quick Asset (or Acid Test) Ratio Component 2009 2010 Current Assets-Inventory (11298929-1459394) 0.93:1 (13073604-1422373) 1.09:1 Current Liabilities 10589293 10686214 In the year 2009, it seems that Toyota had a slightly less liquid resource to meet its short term obligations compared to the year 2010. However, this is risky for the business, because in the short term all the available liquid assets may become depleted and thus the company may not be able to meet its obligations. Asset Efficiency Ratios 1. Stock Turnover Component 2009 2010 Cost of sales 17468416 11.97 times per annum 15971496 11.23 times per annum Closing stock 1459394 1422373 Days in year 365 30 days 365 33 days Stock turn 11.97 11.23 There was no much big difference in the year 2009 and 2010 for Toyota in terms of number of terms of number of times it sold out its stock. 2. Debtors Turnover Component 2009 2010 Credit sales 19173720 13.77 times per annum 17724729 9.40 times per annum Closing trade creditors 1392749 1886273 Days in year 365 26.5 days 365 39 days Stock turn 13.77 9.40 In the year 2010, the number of days that the debtors took in order to clear their debts increased for 27 days in the year 2009 to 39 days. That means the overall cash the company received was less compared what its customers owed the company. 3. Creditors Payment Period Component 2009 2010 Cost of sales 17468416 13.44 times per annum 15971496 8.16 times per annum Closing trade creditors 1299455 1956505 Days in year 365 27 days 365 45 days Stock turn 13.44 8.16 In the year 2010, Toyota took longer than usual to pay its suppliers and this worked to its advantage in that it was more predisposed at using creditors’ money to generate income. 4. Working Capital Operating Cycle 2009 2010 2003 Stock takes 30 days to sell after it has been manufactured, then 33 Debtors take 27 days to pay, meaning that 39 57 days will have elapsed before any cash arrives 72 but Creditors are paid in (27) days, which means that the business has to finance (45) 30 days of activity from cash reserves or overdraft 27 The working capital management policy of Toyota improved in the year 2010 and this is favorable in that the number of days required being financed form cash reserves reduced for 30 in 2009 to 27 in 2010. 5. Asset Turnover Component 2009 2010 Revenue 1717879 0.093 times 209456 0.012 times Total capital employed (29062037-10589293) (30349287-10686214) In the year 2010, the management of Toyota became inefficient in managing the assets of the company. Asset turnover decreased to 0.012 up from 0.093. Capital Structure Ratios 1. Gearing Ratio Component 2009 2010 Loans and borrowings (10589293 +7872007)x100 99.94% (10686214+8732630)x 100 98.76% Total capital employed (29062037-10589293) (30349287-10686214) The gearing ration of Toyota in the years 2009 and 2010 was extremely high meaning that it had large amount of loans compared to its own equity. This is however tolerable for a company in the auto-industry as it requires huge capital investment which ultimately imply potential to make huge profits. 2. Fixed Interest Cover Component 2008 2009 2010 Operating profit 2270375 49 times (461011) (9.83) times 147516 4.42 times Interest payable on borrowings 46113 46882 33409 In the year 2008, Toyota had sufficient operating profit to cover the interest it was supposed to pay on loans and other borrowings. However, in the years 2009 and 2010, the reduced significantly to less than 0 and 4.42 respectively hence it incurred a lot of loss in paying for loan interest. Investor’s Ratios 1. Dividend per Share (DPS) DPS = Earnings Distributed to Shareholders/Number of Shares This is given in the consolidated income statement: for the year 2008, 2009 and 2010 DPS amounted to ¥ 140, ¥ 100, and ¥ 45 respectively. An increase in dividend per share implies increased value of shareholders wealth in a company. For Toyota DPS decreased sharply for the years 2008, 2009, and 2010. This can be attributed to decreased unit sales as a result of vehicle recalls in the years 20009 and 2010. 2. Market Price Per Share (MPS) MPS = value of common stock/ Number of shares issued For 2010, MPS = 397049000000 / 3447997492 = ¥ 115 3. Earnings Per Share (EPS) EPS = Net Profit after Tax & Preference Dividends / Number of Ordinary Shares x 100 For 2008, EPS = ¥ 540 For 2009, EPS = ¥ 139.13 For 2010, EPS = ¥ 66.79 In the same respect as dividend per share, the earnings per share decreased sharply from the years 2008 to 2010. Therefore profitability of Toyota on a per share basis reduced drastically during the year not tot the favor of investors. Task Two Over the years, Toyota has emerged and managed to maintain high standards for reliability, efficiency and quality in the automobile industry among other factors which have facilitated Toyota Company to win a lot of trust in sizeable clientele base. Some of the high-end vehicles that To0yota has managed to sell are for instance Lexus IS, GS saloons (Jonathan 2010 p. 16), Prius (John 2010a, p.20), Avlon and Crown passenger cars, Highlander pickups and Alphard vans (Jonathan 2010 p. 16), corolla and Camry sedans, as well as RAV sport utility vehicles. The major market for Toyota cars has been in the United States and Japan and it is in these countries where most of the vehicles were recalled (Jonathan 2010, p. 16). In North America, around 750, 000 vehicles, were recalled whereas in Japan, Europe, China, Australia and other Asian countries they totaled up to 600000, 50000, 60000, 30000 and 50000 respectively (Ibid, 2010, p. 16). Among the recalled vehicles included Toyota’s priciest models such as Prius and this was after it was discovered that there has been flaws in the fuel injection systems as well as brakes. The vehicle recalling exercise was a big blow to the success of Toyota in the year 2010 and the subsequent years considering that the car industry faces a stiff competition for Ford and General motors. Besides, the company’s reputation across the world and especially in North America was significantly damaged. In November 2009, Toyota was forced to recall up to 12.4 million vehicles because of sub-standard out-of-position floor mats that posed a potential danger. Most of these quality related issues have been numerous complains from Toyota customers. Quite a number of accidents involving Toyota cars since 2002 were linked to these quality issues. Most of the complaints involved 15 Toyota models that were built between the years 2002 and 2006. In regard to the brake system there has been ‘faulty rubber seal on affected vehicles brake cylinders which can cause fluid leaks and in extreme cases fuel pumps’ which were subject to melting and thus could lead to failure of the engine (Jonathan 2010, p. 16). In one case, it was found that nearly five million vehicles had accelerator pedals probable of jamming by the all weather floor mats and this could have led to unintended acceleration. It is in the year 2007, that almost 55, 000 vehicles were recalled in order to replace their floor mats. Subsequently, in the year 2009, a Lexus Sedan crushed in California and the accident was blamed for the out-of-place mat. Lexus has been making significant sales in the United States since 1989 when it was launched to become a luxury vehicle. Regulators in the United States made a quick response and pressurized Toyota to re-design the accelerator pedals. In the United States, it is required by law for an automaker like Toyota to report a suspected safety defect within a period not exceeding five days. In most instances, Toyota was cau8ght off-guard and such were the reasons it was fined heavily (Bernard 2010, p. 18). Secondly, Bernard notes that recalls were made with respect to possible loss of steering control in some vehicles. Although Toyota had admitted, the problem was in vehicles sold out in Japan, it later acknowledged that there were some quality defects for some models sold in the United States and this resulted in recalling up to one million vehicles. In the recent past, Toyota has managed to win a special class of customers for its Prius, a petro-electric hybrid vehicle (Bernard & Jonathan 2010b). However, the late acknowledgement by the company in design flaws of Prius’ brake system evoked fears among the public. This impacted heavily on the sales made by the company out of this high-end model among others. Considering that brake system is sufficiently crucial in petro-electric hybrid vehicles, some potential customers kept off form buying Peius. Toyota had over the years enjoyed quick embracement of its high end vehicles and Prius had been introduced into the market only in the year 2009. Prius became the world’s best selling hybrid vehicle and it had made 41% sales out of the total sales thus leading in all Toyota sales especially in Japan (Bernard, 2010 p. 18). These design flaws affected Toyota in all aspects especially from financial perspective. During the recalling exercise, the company had to employ more engineers as well as send them to overseas markets in order to monitor quality-related issues and audit parts suppliers. This added a financial constraint to the company’s budget. Besides, that the public image of Toyota since then has been affected ten-fold. For instance, United States’ transport secretary, Ray Lattood, while giving a testimony, once suggested because of array of problems facing Toyota cars, it was high time for Toyota owners to stop driving them. Although he later retracted his comments, the market value of Toyota had been reduced by nearly $ 4 billion (n.a. 2010b. P. 12). Consequently, Toyota has continued to face a range of court cases form its customers as well as fines especially form the United States government. According to Bernard, (2010, p. 18) in an article, Toyota was fined $ 32.4 million by the United States government in April 2010 for failing to comply with laid out rules and regulations on vehicle recalls (Bernard & Jonathan 2010a). Besides, the company had previously been penalized $ 16.4 million on these quality defects related problems and this totaled up to $ 49 million (Bernard, 2010, p. 18). According to a financial times article, there was approximately 227 lawsuits filed against Toyota in the year 2010 (n.a. 2011a, p. 16). Since the year 2008, when Toyota overthrew General Motors from its 77-years reign on car industry, the company has faced a lot of challenges for instance strong Yen, economic crisis, and recalls in the recent past (AFP 2010). However, the most significant impact has been on the company’s market performance. In December 2010, the company’s sales figures recorded a major drop by an average of 5.5 per cent. Accordingly, the 2010 market share for Toyota decreased by 1.8 percent according to Autodata and the company came second to one of its competitors, Ford. Besides, the negative impact on the company’s sales, 2010 was the toughest year; due to the quality defects on Toyota cars, the company was forced to stop the sales and production of certain car models especially Corolla and Camry and concentrate on the 12 million vehicle recalls. Thus, the overall market performance of Toyota decreased during the year (n.a 2011, p. 16). In the same respect, the sales figures of Toyota in the United States continued to fall and the company was displaced to position three by its rivals Ford and General Motors -the market leader. Similarly, in November 2010, the company’s sales dropped by 7.3 percent while the market share reduced by 17 percent (AFP 2010). This reduction was especially significant in North America. On the other hand, Toyota has not been favored by the currency amid recall issue. For instance, 7 % out of 10% percent fall in the United States revenues was attributed to a strengthened Yen especially between the first and second quarter in the year 2010. However, the cost of incentives and services in the market which accounts for 30% group sales implied that earnings were savaged. Besides, the company had 4.3 % operating income margin during the first quarter which was far much below the company’s 7 % to 8 %, which was also further reduced to 3.3 % during the second quarter (ending September 2010). This was almost half of the peer-group average (n.a. 2011a, p. 16). It was not until in the late 2009/2010 period, that Toyota admitted to having quality defects on its vehicles. This can be attributed to the company’s misunderstanding of the consumer psychology especially in the United States Safety concerns by the customers had the greatest impact as they take a life of their own (n.a 2010b. P. 12). For instance, John (2010b p. 25) argues that Toyota lost its market share during the last one year in Europe and United States to its competitors, Ford and GM, and lately Hyundai which recorded more sales in Europe than Toyota ever since. However, although Toyota Company has faced a lot of challenges in the past few years, the company still has a chance to revive and top in the auto-industry market share. Nevertheless, Toyota still enjoys some strongholds; both form industry and financial perspectives. In the company’s balance sheet, it is clear that there is a large amount of liquid reserves whereas form the industrial perspective, the company has a remarkable position in all major markets across the world. Although it has lost trust especially in Europe and America, it can still redeem itself but the company’s corporate culture has to be changed in this regard. Besides, continued innovation in other technologies such as electric cars may somehow help. In the recent past, Toyota seems to have changed its market focus and now prefers China to United States. Thus, according to AFP (2010), the company gears on launching low-cost vehicles and models customized to fit in the Chinese market. Besides, the proposed launch of eleven new petrol-electric models by the end of 2012 will also revive its image and increase sales. In this respect, the company has to aim at improving the technology of its vehicles being as well as respond or acknowledge customer complains in the earliest time possible. This will improve the company’s public image among potential customers. Task Three The management of Toyota Company requires improving of change completely its policy especially with regard to its corporate culture. The speed with which the management responds as depicted in task two did not do any favor for the company’s image. It is in the recent past -2009 and 2010- that the company recalled a sizeable number of vehicles because of design flaws in the fuel-injection and braking system. This led to a range of legal suits and fines by respective governments especially in the United States and ultimately impacted negatively on the financial performance of the company. Majorly, a number of factors affect the profitability of automotive operations of Toyota and such include: number of vehicle units sold, mix of vehicle options and models, level services and parts sales, costs incurred in client warranty claims and customer satisfaction and the performance of Japanese Yen in the foreign market. However, one of the major impacts on the profitability of Toyota has been the vehicle recalling which has drastically reduced the number of vehicle units that the company sold in the years 2009 and 2011. This is illustrated in the figure below. Figure 1. Global sales by Toyota form year 2000 to 2010 Note: John Reed & Bernard Simon 2010, ‘Toyota’s long climb comes to an abrupt halt’, Financial Times, 5 February. For instance, the dividend per share in the years 2008, 2009 and 2010 reduced with ¥ 140, ¥ 100, and ¥ 45 respectively. Besides, the earnings per share in the years 2008, 2009 and 2010 reduced by ¥ 540, ¥ 139.13 and EPS = ¥ 66.79. This means that for a potential investor, it is not favorable to invest in the company in the meantime until the company repositions itself back in the market by resolving some of the outstanding design flaws. References AFP 2010, ‘Toyota still facing trouble: analysts’, viewed 13 January, < http://news.ninemsn.com.au/article.aspx?id=8182323>. Bernard S 2010, ‘Latest Toyota recall affects 1.1m vehicles across the US and Canada’, Financial Times, 27 August, p. 16, viewed 13 January, < http://0-proquest.umi.com.alpha2.latrobe.edu.au/pqdweb?did=2122704891&sid=6&Fmt=3&clientId=20828&RQT=309&VName=PQD>. Bernard S & Jonathan S 2010a, ‘Toyota fined $32m over recalls failings’, Financial Times, 22 December, p. 18, viewed 13 January 2011, < http://0-proquest.umi.com.alpha2.latrobe.edu.au/pqdweb?did=2219833381&sid=6&Fmt=3&clientId=20828&RQT=309&VName=PQD >. Bernard S & Jonathan S 2010b, ‘Brake problem hits hybrid image’, Financial Times, 5 February, p. 18, viewed 13 January, < http://0-proquest.umi.com.alpha2.latrobe.edu.au/pqdweb?did=1955996571&sid=4&Fmt=3&clientId=20828&RQT=309&VName=PQD>. Engel P 1996, Budgeting and finance, McGraw Hill, New York. Horne, JC. & Wachowicz, JM 2001, Fundamental of financial management, 11th Ed, Prentice Hall, New York. John R 2010a, ‘Toyota to repair Prius pump fault’, Financial Times, 1 December, p. 20, viewed 13 January 2011, < http://0-proquest.umi.com.alpha2.latrobe.edu.au/pqdweb?did=2201930031&sid=6&Fmt=3&clientId=20828&RQT=309&VName=PQD>. John R 2010b, ‘Toyota is still on alert one year after crisis hit’, Financial Times, 25 November, p. 25, viewed 13 January 2011, < http://0-proquest.umi.com.alpha2.latrobe.edu.au/pqdweb?did=2197560271&sid=6&Fmt=3&clientId=20828&RQT=309&VName=PQD>. John R & Bernard S 2010, ‘Toyota’s long climb comes to an abrupt halt’, Financial Times, 5 February, viewed 13 January, < http://www.ft.com/cms/s/0/f980d1b6-128c-11df-a611-00144feab49a.html#axzz1AjqbaUdM>. Jonathan S 2010, ‘Toyota dealt further blow with fresh recall in US’, Financial Times, 22 October, p. 16, viewed 13 January 2011, < http://0-proquest.umi.com.alpha2.latrobe.edu.au/pqdweb?did=2170253141&sid=6&Fmt=3&clientId=20828&RQT=309&VName=PQD>. n.a. 2011a, ‘Toyota’, Financial Times, 6 January, p. 16, viewed 13 January 2011, . n.a. 2010b, ‘Toyota recall’, Financial Times, 5 February, p. 12, viewed 13 January, < http://0-proquest.umi.com.alpha2.latrobe.edu.au/pqdweb?did=1955998091&sid=4&Fmt=3&clientId=20828&RQT=309&VName=PQD>. Penwell, TC 1994, Credit process: A guide for small business owners, Federal Reserve Bank of New York. Read More