16May

Task-1: Ratio Analysis of TOYOTA Motor Corp

It is a commonly used tool to conduct a quantitative analysis of the financial situation of a company. The data for the ratios are generally available in the annual report of the company in their financial statement. They can be used to compare the performance with other companies in the same industry & also to compare the current performance with their previous year’s performance. Ratio analysis has been widely used by many financial analysts who believe in fundamentals rather than market sentiments.

They can be Broadly Classified as

• Profitability Ratio – these ratios gives the capability of the company to generate profit and return to the investments in terms of margin.
• Activity Ratio – these ratios show the efficiency of a company in terms of its ability to turnover its assets and other items.
• Liquidity Ratio – shows the company’s ability to meet short term requirement of funds and indicate the short term solvency in terms of financial position.
• Debt Ratio (or Leverage Ratio) – it shows the structure of financing of the company and indicate the leverage level in terms of how much debt it has used against equity.

The data for the ratio analysis has been taken from the Final statement appearing in the annual report of TOYOTA Motor Corporation (all the values are in US dollar in million.)

See Here : Toyota Marketing Analysis

Profitability Ratios

Gross Profit Ratio: Gross Profit Ratio indicates the profit margin on the sales of the company before taking into account non-manufacturing expenses. Gross Profit Ratio can be calculated in the following manner: –

Gross Profit Ratio = Gross Profit/Net Sales x 100

= (Sales-COGS)/Net sales X 100

= (203,687-171,663)/ 203,687 X 100

=32024/203,687

= 15.72%

It is believed that the gross profit ratio of a company should be high as the company has to cover marketing and other non-manufacturing expenses through gross profit. The ratio should also be maintained high as the fall in this ratio might result into the dangerous situation for the company.

Net Profit Ratio: Net Profit Ratio indicates the net profit margin on the sales of the company. Net Profit ratio is calculated to judge the overall profitability & efficiency of the concern.  Net Profit Ratio can be calculated in the following manner: –

Net Profit Ratio = Net Profit (PAT)/Net Sales x 100

= 2,652/203,687

= 1.30%

Return on Investment or Return on Capital Employed

This ratio shows the percentage of return (reward) that the company gets for its investments in the business. The investment for the company is the capital it employs in the business while the reward is the profit i.e. earnings before interest and tax. The higher the ratio, the better it is.

Return on Capital Employed = PBIT/Capital Employed x 100

Where Capital Employed = Fixed Assets + Current Assets – Current Liabilities

Or, Shareholders’ Equity + Long-term Loans – Fictitious Assets

=117,481+93,859-0

=211,340

PBIT=PAT + Interest expense – interest income + Income Tax

=2,652+359-841 + 996

=3,166

ROI=3,166/211,340

= 1.489%

Return on Equity

The shareholders of company are more concerned about this ratio as this reflects the return to their investment in the company. Here, the profit available to equity shareholder is the reward for the equity shareholders against their investments. The ratio gives the percentage of return that the company generates against its equity capital.

Return on Equity = (PAT- Preference Dividend)/Equity Shareholders’ Funds x 100

=2,652/117,481

2.26 %

Comments on TOYOTA’s Profitability Ratio: currently the profit is low and this is due the economic downturn, profit has increased as compared the previous year. The ROE & ROA are currently very low, but in the previous year they were negative. So we can say there is some improvement in the earnings as the economic conditions are improving.

Activity ratios

Activity ratios measure the operational efficiency of the organisation. These ratios, basically, measures the ability of company to utilize its resources efficiently. These ratios are more concerned about the turnover of the resources.

Fixed-Asset Turnover

It tells about the ability of the fixed assets of that organisation to generate revenues (sales). It tells how efficiently are they using their resources i.e. Fixed Assets. There is no exact number that determines whether a company is utilizing their Assets efficiently or not as it is very much depended on the nature of the industry. So, to determine the efficiency of the company with respect to assets utilization, we can set some benchmarks like industry average, competitors’ ratio or our own historical ratios.

Fixed-Asset Turnover ratio= Net Sales Revenue/Total Fixed assets

= 203687/72,129

=2.82 Times

Inventory Turnover Ratio

It tells about the company’s efficiency in managing their inventories

Inventory Turnover Ratio = Sales (or COGS)/Average Inventory

= 171,663/15,228

=11.27 Times

Inventory Days = 365/ITR

=365/11.27

=32.38 Days

Comments on TOYOTA’s Activity Ratio: The Turnover ratios are in line with the industry. As this is a capital intensive Industry so the assets turnover ratio is low. Toyota turned over its inventory 11.27 Times and had 32 days of inventory in hand and this is again comparable with the industry. It

Liquidity Ratios

Liquidity ratios represent the company’s ability to pay off their short-term liabilities in time. Both higher & lower liquidity ratios are not preferable.

Current ratio

This is one of the most popular ratios for measuring the short term liquidity of a company.

Current ratio= Current Assets/ Current Liabilities

= 140516/114856

1.22 times

Quick ratio

This is another indicator of firm’s liquidity. It takes into consideration only the liquid current assets i.e. it ignores inventory and other current assets such as pre-paid expenses, which cannot be easily converted into cash.

= (20053+19273+20274+45244+3873)/114856

=108717/114856

= 0.95 Times

Comments on TOYOTA’s Liquidity Ratio: Both the Liquidity Ratios are approximately equal to 1, so we can say it is almost the ideal situation. We can conclude that company is not expected to face any cash crunch and any default in meeting the short term obligation is very much unlikely.

Solvency ratios

These ratios tell about the capital structure of the firm. They help in determining the overall level of financial risk (bankruptcy) that the company and its shareholders face. Up to a certain limit debt is desirable, but after that the financial risk of company increase by the increase in the amount of debt in the total capital invested in the business.

Debt Equity Ratio

This ration tell how much the company has borrowed (suppliers, lenders, creditors and obligatory have committed) as compared to what has been invested by the shareholders. This ration is commonly considered whenever any firm wants to raise funds from market.

Debt Equity ratio=Total outside liabilities (long term + short term / Shareholders’ equity

= (114856+93859)/117481

= 208715/117481

= 1.78

Interest Coverage Ratio : This ratio indicates the ability of a company to afford its interest payment against the profit from the operation. The company certainly cannot afford to pay the interest more than its profit. Thus, this ratio should always be greater than 1.

= 3,166/359

=8.82 Times

Comments on TOYOTA’s Solvency Ratio: The Debt Equity ratio is slightly less than 2, so we can say that they are not very high on debt & can easily borrow more money if required. They are also having sufficient profit to meet their Interest liabilities. The Interest Coverage ratio of about 9 means that there is very low probability that the company will default on the interest payment.

The assets that made Toyota the most successful car maker in the world:

Toyota is regarded as one of the most respected car maker in the world. They have achieved this stage with continuous improvement and greater efforts. The journey to the top was slow but steady. So, let us glimpse through the past of Toyota and analyze what actually they did which helped them to attain the top position in the world of car manufacturing.

Quality Revolution

Quality Revolution is like a synonym to Toyota. They entered into the automobile industry with an aim to become the car maker with 100% customer centric approach. This was supported by the actions like customer feedback and innovation through research and development. They have always been trying to delight the customer through the innovation and product offerings with the highest quality in town. The adoption of lean manufacturing, Six Sigma, Total Quality Management and other tolls to improve quality supported their constant pursuit of perfection. All these efforts put together forced the industry experts and academician to regard it as quality revolution. They have set such a high quality standards that they were used as the benchmark for other companies in the world. The height of perfection is such that people call it Toyota ‘evolution’ rather than ‘revolution’ (Clark, 1979).

Focus on Customers

Customer has remained the centre for the constant efforts of Toyota to the perfection. As they say, customer is the only motivation for them to set the highest standards for quality. Research and development is a separate department for Toyota where they identify the needs of the customers and then try to delight the customers with innovation in the product offerings. There are many evidence of Toyota’s customer centric approach. They have even recalled the models n case of just a small defect (Womack, et al., 1990). Read about Customer Service Assignment Help.

Toyota Production System (TPS)

Toyota implemented all that tools and techniques that were, initially, regarded as just the jargons. These tools and techniques are JIT (Just In Time), Andon, Genchi Genbutsu, Heijunka, Hoshin, Jishuken, Kanban, Kaizen, Muda, Muri, Mura, Nemawashi, Pokayoke, Six Sigma and Total Quality Management (TQM). All these were embedded in the production system of Toyota which is better known as TPS. All these led to the delight to customers which resultantly earned respect for the company in the world where quality drives the customers (Mehri, 2005).

Innovation

Innovation drives the efforts at Toyota. Their employees and management are driven in a culture where innovation is the key. The Toyota has a reputation of offering the most innovative products which is truly appreciated and accepted by customers (Womack, et al., 1990).

There are many such factors which serve as an asset to the company. The above mentioned are the key factors. These factors led to the top most position in car makers of the world. They have continuously focused on the above factors and tried to improve at every phase of the growth.

Why and how these assets are turning into liabilities

In the recent past, certain events have happened which have raised serious doubts over the operations of Toyota. Toyota has recalled two models in the recent past due to some defects in the manufacturing. This is the least a customer expects from a brand like Toyota as they are considered as the best in the industry as far as quality is concerned. This quality is the only factor that justifies the high prices of the Toyota cars. The developments have led to the doubts in the minds of investors which have resulted into the sharp decrease in the stock prices of Toyota on the stock exchange.

So, the assets which secured the top most position in the world of car manufacturing for Toyota are becoming its liabilities. Let us analyze how and why is this happening:

• Toyota is known as the synonym of quality. The customers pay giant amount of money for the cars manufactured by the company because they see the quality of the product that the Toyota provides. Now, when they found defects in the product, they regret their purchase of Toyota product by paying such a high price. Even if the defect is small, it is very big when it is done by the company like Toyota which so proudly and loudly talks about quality in public. When you don’t stand by your words, the customers will not come to you again and pay the same price. Thus, the customer-centric approach that Toyota employs results into a total failure as the customer perceives the company as fraudulent (Lim, 2010).
• The company has faced the setback two times in very recent past. If the failure happens for the first time, the customers might ignore it. But, two setbacks in very short time period are what concern the customers and the whole world as this the least that one expects from the company like Toyota. They always talked about the manufacturing system or production system that does not allow the mistake or defect to happen. Now, they are faced with defected cars two times. They have employed the quality standards which are used as a benchmark in the industry and these quality check-ups produce defected cars. This is something which a customer cannot digest. If the same thing would have happened with some other car manufacturing company, the customers would not have reacted so aggressively, but when it comes to Toyota, a synonym of quality, this is the biggest issue. Thus, the so called lean manufacturing and quality management is becoming the liabilities for the company. They cannot afford to make mistake wearing such tags as lean manufacturing and quality management (Reed, Soble, 2010).
• The share prices of the company can only be justified by the brand image that it possesses. The normal car manufacturing of the size of Toyota cannot have such a high share prices. But, Toyota has built the trust among the customers and this trust has transformed into the trust among the investors. It is common sense that in such a situation if the customers’ trust breaks, the investors’ trust will break. The investors’ trust will break even before hand as they are more skeptical than the customers. So, the brand image which has led to the trust in the minds of customers is turning into the liability for the company. This is evident from the stock price data for the company in the recent times. The share prices have shown downward direction. The decrease is huge and due to the defects made by Toyota which has affected its brand image negatively (The Economist, 2010).
• When the company made first mistake, it has recognized its impact and came up with damage control through roll back of the models. This rollback was regarded as the wonderful response and seen as the care that Toyota has for its customers. But, now the company is facing the same situation again in very short time span. Although, the company is doing damage control through roll back, but now the customer perception will change. They will not see this rollback as care for the customers. Now, they will raise concern over the quality control mechanism of the company. This is exactly what is happening. There have many researches available which talks about the quality revolution that the Toyota is implementing. The same amount of research will be done on what went wrong at Toyota. Some of the research articles have already raised concern about the quality standards adopted by Toyota. Thus, the damage control that was perceived as the care for customers is being reconsidered as the damage control only (The Economist, 2010).
• The company is known for its innovation and customer delight through this innovation. But, innovation cannot hide the defects. The innovation helps in making customer happy as the company understands the needs of the customer and then develops the product through innovation which satisfies the needs of the customers. If you identify the needs of the customers rightly and then fail to deliver it rightly, it is same as not understanding the needs of the customers. Thus, the innovations that helped the company secure the brand equity is turning into liabilities (Lim, 2010).

Toyota has secured the top most position in the industry but to sustain that it has to deliver which it has promised and delivered in the process of securing the top most position. It has delivered and promised quality with a focus on customers’ delight. Now, the recent events do not support the stand of Toyota as the best in industry standards. At this juncture, the assets that secured the top most position for the company will well become the liabilities for the company.

If we reiterate the current situation of Toyota, it is facing some serious reaction from its customers and the investor as well. The share prices have decreased sharply due to raising concerns over the quality of Toyota products. At this juncture, the investor is facing a tough decision as to what to expect in the future to come. Will the share prices of the company regain its peak? Will the company be able to retain the trust that it has built over the years? Or will the prices drop further in the near future?

The above two task reflect two extreme opinions. The first task i.e. ratio analysis for Toyota clearly indicates strong financial position of the company while the second task, which presents the analysis of the strategic position of the company in response to the recent setback faced by the company, clearly reflect the fall of the company as the customers are raising concern over the quality of the products. Read about New Child Pram Development Assignment.

Thus, considering the capabilities of the company, we can say that if any company can revitalize the position, it is only Toyota. If any other company would have faced the same situation, the company might have disappeared. But, considering the strong financial fundamentals of the company that is presented in the first task and the capabilities of the company, we recommend the HOLD option to the investors of the company. The share prices have fallen drastically in the recent past, but there is high probability that the company may regain its lost ground and will generate, in that case, high returns for its shareholders. In case if the company fail to regain the lost ground, the investor will have enough time to sell the shares as the prices have already hit the minimum level considering the size of the company.

References

• Annual Report, 2009-10, Toyota Corporation
• Annual Report, 2008-09, Toyota Corporation
• Lim, K. (2010). Toyota fights to save reputation. Media. Hong Kong: Feb 11, 2010. pg. 2
• Reed, J., Soble, J. (2010). Toyota’s stumbling scion; The aloof chief executive needs to engage with the public.Financial Times. London (UK): Feb 6, 2010. pg. 7
• The Economist. (2010). Business: No quick fix; Toyota’s troubles deepen.London: Feb 6, 2010. Vol. 394, Iss. 8668;  pg. 71
• Clark, R. (1979). The Japanese company. New Haven: Yale University Press.

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