Analysis of Hyundai Motor Company - Essay Example

? Analysis of Hyundai Motor Company The main purpose of this paper is to analyze a company’s performance to see if it current share value is fairly reflecting its financial performance. The company chosen for this paper is Hyundai Motor Company. Hyundai motor company is one of the most appreciated automotive companies in the global market. In this paper it has been analyzed that the company’s performance over the years from 2008 to 2010 has been improved on its operational side but the company has not been able to demonstrate the same performance in managing its finances. It has not been able to maintain the dividends competitively as it has been focusing on retaining the profits in the company to make its financial performance look better, thus a fall in the share price can be anticipated, which is in reality reflected by a decrease of 2.14% of its share value. Background analysis The company in focus for this paper is Hyundai motors. Hyundai is a Korea based company but it has grown steadily in the automotive market over the past few years. Automotive industry is highly competitive these days, according to Bloomberg Businessweek (2012), the US automotive market is highly competitive these days, home companies like General Motors, Ford Motor Co. and Chrysler Group LLC are expected to lose market share to companies like Toyota and Honda. Hyundai Motor Co. has reported to have doubled its share in US automotive market as compared to their share in 2005. It is still expected to gain 0.1 % market share more than the last year. According to the customer retention study carried out by J.D. Power and associates in 2011, Hyundai has been declared to be number one in customer retention. According to the study Hyundai’s customer retention rate has increased by 4 points thus raising it to 64% in the year 2012, which implies that among the automotive brands customers were the most loyal towards Hyundai. Its brand name is currently measured to be nearly $5 billion. As the future of every company is based on the relations it has with its customers, thus it’s safe to say that Hyundai's future seems even more promising. In this paper the company’s performance will be analyzed as to see whether its market share value, which is currently $ 203.16 (Won 229,000), according to the company’s overview, reflects the actual performance of the company or not. As the consolidated reports for the year ended 2011 are not available yet, so the analysis will be carried out for the year ended 2008 to year ended 2010. Along with the comparison with last years, the performance of the company will also be compared with the financial performance of Toyota Corp. Financial Analysis As the purpose of this paper is to evaluate the reflection of the company’s performance on its share value, the basic analysis will be carried out on the profitability of the company with relation to the shareholders’ equity. Keeping the performance of the company from the year 2008 to 2010 in mind, it will be analyzed how the company is performing over the past few years as well as with its competitor Toyota Corp. The profit margin of the company drastically fell to 4.42% from 13.7% in 2009. The company has been able to recover a bit, the profit margin has increased to 7.09% in 2010, and even though the consolidated statements of the company for the year 2011 are not yet released, it has been reported that Hyundai has broken its sales records in the year 2011, so a probable increase in profitability can also be predicted. As opposed to the sketchy performance over these years, the company is still doing better as compared to Toyota Corp., which reported a profit margin of only 1.54% in the year 2010. A company’s revenue is highly dependent on the fact that how the company is utilizing its assets for generating sales every year, as is defined by the net return on assets, which has prominently increased for Hyundai over these three years from 2.71% to 19.3%, it would have been better if the profitability was reflecting this increase as well. In the case of Toyota Corp., it can be seen that it was able to utilize 2.5% of its assets to generate a profitability of 1.54%. And even though the value is low as compared to Hyundai, it must be observed that at least it is reflecting the profitability fairly. The assets are not being over utilized to generate lower profits, as is the case with Hyundai Corp. Every share holder is interested in the fact that how much profit the company is generating on his/her investments, and Hyundai’s had been able to increase the return on its shareholders equity from 4.31% to 21.7% over the years of 2008 to 2010, which is a lot better as compared to Toyota Corp., whose reported return on shareholder’s equity is only 2.7% for the year 2010. The basic reason is the increase in profitability of Hyundai Corp. as compared to Toyota Corp., which is matching the increase in its equity rather reasonably as compared to that of Toyota Corp. The company is trying to make it evident to its shareholders that they are generating a promising return on their investments, which they are sadly not able to reflect in the dividend payments. The dividend payout ratio has fallen from 36.9% to 3.97%. One must argue that even though the profitability is increasing and the sales along with the profits are being reported to be rising over these years, then why the dividends are not reflecting that increase in return. It can also be observed through the pattern between the earnings that are generated per share with the patterns in dividend payments. In theory even though the earnings per share have increased from $1.99 per share to $17.61, still the dividends that are paid out to the shareholders are continuously decreasing over these years. The only reason that is evident from the financial statements for this irregular pattern in performance is that the increased profits are being kept in the company as part of the equity reserves, to be utilized in the operations, as is further proved by observing that the equity portion of the company is constantly increasing even the number of shares issued in 2010 have fell to 208,959,792 as compared to the last year’s figure of 209,252,481. This might be a reason of shareholders’ pulling their investments out of the company because of its low dividend count. Now keeping the performance of Toyota Corp. in mind it can be seen that even though the company’s reported earnings per share for the year 2010 is only $0.72, still it is paying dividends to its investors at a rate of 59.2%. Company’s foreseeable future is of great importance. If the company is seemed to be facing financial problems, its solvency can be in danger. Hyundai’s debt as compared to its equity was reported to be 114% in the year 2008, which even though has fallen to 96% but still it is very high, where as the debt to equity ratio of Toyota Corp. has been recorded at 79.8% for the year 2010. It is a difference of approximately 16%. This much high debt to equity ratio might create solvency problems for company in the future if the company does not stabilizes its financial situation soon. The high equity to debt ratio and the retention of profits in the company for further investment reflects the possibility that the company might be facing some financial difficulties. It can be confirmed further by observing the patterns in the interest cover that the profits are able to provide to the interest expense. As it can be seen, the interest cover in 2008 was only 1.5 times, which started to increase steadily from 1.5 in 2008 to 4.63 and then eventually 22.7 times in 2010. Even though the interests cover for Toyota Corp. is 8.72 times still, by keeping the overall performance of the company in mind, it can be seen that the company has a lower gearing ratio as compared to that of Hyundai, and even though it has a low profitability ratio, still it is able to cover its interests cost quite fairly. Even though the debt has been increased since 2008 from $23,055,019 to $31,134,872 in 2010, the debt to equity ratio has been decreased. And as seen previously that the number of equity shares have been decreased as well, it means that the low debt to equity ratio can be a result of retention of profits in the company. This does not reflect the better control on the company’s financing but an attempt to make it look better, by retaining profit inside the company, thus increasing the equity element as the debt element increases as well. Share Valuation The current market of the company’s share has been currently reported to be $203.16 (Won 229,000). A decrease of 2.14% has been reported in the share value as at 26 January 2012, which in light of its financial performance seems fair. Keeping in mind the company’s performance for the duration of 2008 to 2010, the company has been managing its financial situation poorly. It seems like it is just acquiring more loans at a relatively lower interest rate rather than paying them back. Further more, the company is not able to compete with the competitors’ dividend rates even though its earnings per share are relatively higher. Thus it seems like that a relatively better return on equity does not make up for the lower dividends especially when they are been held back to cover up the flaw in the control on the financial resources. So it will be advised to not further invest in the company but wait and see its financial performance for the year ended 2011, as in the year 2011 the company has reported record sales. If there are shares already in the company, then it will be advised that the shares should be retained till after the release of the company’s latest financial statements, if the company is still in as much financial trouble as it is right now then the shares should be disposed off as soon as possible, as the share price is already decreasing, so as not to bear greater losses. The investor could have advised to dispose off the shares straight away but the record sales and the prospective increase in the automotive market share are the factors that should be considered also. Conclusion Observing the company’s performance over all it can be seen that the company is trying to make its financial situation look good. The company has reported increased sales over the period of these three years and according to the news the company has reported increased sales in the current year as well, it may seems like that the over utilization of its assets over the last few years have finally paid back. The company has a relatively higher return on equity as compared to the last years as well as compared to the financial performance of Toyota Corp for the year 2010. Even though the company is paying lower dividends as compared to that of Toyota, still its generated earnings per share are not only higher as compared to the last year but are greater than that of Toyota Corp too. The main concern as it may seems, is the equity to debt proportion of the company which is fairly high. And a deeper analysis of other financial performance indicators like earnings per share and dividends pay out also suggest that the company is in financial trouble and rather than solving it, it is currently trying to cover it by retaining profits in the company, apart from paying the fair share to the shareholders, so that it can increase its equity portion while the debt portion is continuously being increased. The company has to pay more attention towards its financial makeup. Appendix A Name of Ratio Formula used Company/Year 2010 Company/Year 2009 Company/ Year 2008 Company/Year 2010 TOYOTA CORP Net profit margin Net Income Sales $ 7,009,328 $ 98,858,266 = 7.09% $ 3,550,299 $ 80,308,248 = 4.42% $ 868,828 $ 63,408,629 = 13.7% $ 3,133 $ 203,687 = 1.54% Net return on Assets Net Income Total Assets $ 7,009,328 $ 36,322,730 = 19.3% $ 3,550,299 $ 34,966,092 = 10.2% $ 868,828 $ 31,994,446 = 2.71 % $ 3,133 $ 125,161 = 2.5% Return on Equity Profit after Tax Equity $ 7,009,328 $ 32,255,335 = 21.7% $ 3,550,299 $ 25,429,502 = 13.96% $ 868,828 $ 20,160,554 = 4.31% $ 3,133 $ 117,481 = 2.7% Dividend Payout ratio Dividends paid Net income $ 278,513 $ 7,009,328 = 3.97% $ 206,967 $ 3,550,299 = 5.8% $ 320,988 $ 868,828 = 36.9% $ 1,854 $ 3,133 = 59.2% Earnings per share Profit available to Equity Shareholders Number of Equity Shares $ 3,678,956 208,959,792 = $ 17.61 $ 2,011,323 209,252,481 = $ 9.61 $ 415,071 208,838,563 = $ 1.99 $ 2,251 $ 3,135,986 = $ 0.72 Gearing Ratio Debt Equity $ 31,134,872 $ 32,255,335 = 96% $ 26,261,160 $ 25,429,502 = 103% $ 23,055,019 $ 20,160,554 = 114% $ 93,859 $ 117,481 = 79.8% Interest Cover Net income Interest Expense $ 7,009,328 $ 308,313 = 22.7 times $ 3,550,299 $ 765,239 = 4.63 times $ 868,828 $ 574,249 = 1.5 times $ 3,133 $ 359 = 8.72 times Bibliography Bloomberg Businessweek, 2012, U.S. Automakers Seen Losing Market Share Amid 2012 Growth: Cars, available at: [accessed at: 26-Jan-2012] Costa Mesa, Calif., Jan 2012, Hyundai is # 1 in Customer Retention According to J.D. 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