Financial Analysis of Toyota Motor Corporation - Case Study Example

Financial Report analysis: Toyota Motor Corporation By Financial Report: Toyota Motor Corporation Introduction Toyota Motor Corporation (TMC) is a multinational company that operates in the automotive industry, and is headquartered at Toyota in Japan. Toyota is the largest automobile manufacturer in the world in terms of sales and production, and the company employed 317,734 people globally as of late 2010. This paper will analyse the latest published financial information of the TMC covering the last three years. Corporate governance, legal and regulatory requirements Toyota Motor Corporation gives particular focus to its corporate governance policies with intent to enhance its competitiveness as a multinational corporation. Toyota’s corporate governance specifically aims to increase corporate values in the long run. As part of its corporate governance policy, the company strives to build strong relationships with its stakeholders including shareholders, customers, employees, business partners, and local communities. As per the Toyota Corporate governance (n.d.) report, the organisation has established a unique management system to promote prompt decision making, which is vital to develop a global strategy and to speed up its operations. The company has many long-standing in-house committees and councils that are responsible for reviewing the firm’s management and corporate operations in the perspectives of various stakeholders to make certain that the Toyota maintains heighted transparency and fulfils its social obligations effectively (Ibid). In addition, the company’s corporate governance emphasises the significance of enhancing problem solving and maintaining preventive measures. The pictorial representation (below) of the Toyota’s corporate governance is given below. (Source: Toyota Corporate governance) Similarly, the company is to comply with a range of legal and regulatory requirements because it has a worldwide market presence. Since Toyota operates in the automotive industry, the company is legally required to limit its CO2 emissions to the level specified. In addition, the firm must adhere to other environmental laws and energy conservation policies of various national governments. Roles of managers in making business decisions While analysing Toyota managers’ accountability for and roles in making decisions, it seems that the organisation has well structured management system to enhance sound decision making. According to the Toyota’s current managerial system which was introduced in 2003, the Chief Officers (directors) have the highest authority across the entire organisation whereas non-board Managing Officers are responsible for executing the actual operations. This managerial system is centred on the company’s philosophy of emphasising developments on the site. Instead of exclusively regulating the management, the Chief Officers act “as the link between management and on-site operations” (Ibid). This system greatly assists managers to form decisions directly in connection with on-site operations. In other words, it enables managers to consider the opinions of on-site work personnel on current management policies and to efficiently implement the decisions formed. Managers are accountable for their decisions, and Toyota follows an auditor system based on the Japanese Corporation Act to monitor and review management operations. Structure of financial statement Toyota’s published financial statement is structured in an efficient way to make its contents useful and easily understandable to all. The company’s financial statement starts with president’s message or chairman’s message or both to give stakeholders an extensive view of the firm’s global vision, current challenges, and future scope (Toyota Annual Report 2013). In the next part, the company’s consolidated performance highlights and recently implemented growth initiatives are described. In addition, specific technological developments and product innovations are also presented in this section. This part helps stakeholders to understand the market competitiveness of the organisation. In the third part, management and corporate data/information are discussed so as to keep the stakeholders informed of the management policies and corporate values of the company. The final part of the published financial statement contains financial reporting and investor information. The financial reporting includes consolidated cash flow statements, consolidated balance sheet, and other key financial statements. The current fiscal years’ financial data are compared with those of last two fiscal years in order to assist investors and shareholders to obtain a detailed view of the current financial position of the firm. This part is regarded as the central point of the financial statement because investors and shareholders decide whether to withdraw their money or to invest in the firm further based on the analysis of this section. Stakeholders of financial information According to Menipaz and Menipaz (2011, p. 858), the key stakeholders of published financial or other business information include shareholders, investors, employees, creditors, suppliers, customers, and the general public. When shareholders analyse the published information to decide whether to sell holding shares or to purchase new shares, investors evaluate this information to make sound investment decisions that would add to their profitability. Creditors are also interested in the published information of the firm as they rely on these reports to determine whether or not to extend further credit to the organisation. It is clear that creditors including banks and other financial institutions would be reluctant to lend money to customers who are not capable of repaying the debt. Generally employees evaluate the company’s published information to identify the changes in employment policy (if any) and to ensure that their organisation is in competitive position to meet their long term career development goals. To illustrate, based on the analysis of the firm’s published information, employees may choose to leave the company if they think that the business would not be successful in the future. Suppliers also use this report for the same purpose. Suppliers would not like to deliver materials to firms that constantly post net losses. In addition, customers use the company’s published information to evaluate whether the organisation is able to address their price and quality concerns. Finally, such reports are also used by the general public to assess how the company performs its social responsibilities as a corporate citizen. Sources of long-term and short-term finance Toyota raises both short-term and long-term finance to fuel its business operations. The company’s major sources of short- term financing include short-term loans and short-term borrowings (Financial summary 2012). Toyota depends on local banks for short-term loans. Other main sources of short-term financing include cash reserves, general reserves, and contingency reserves. The company mainly uses short-term finance to accomplish its short term objectives and to respond to new trends emerging in the market environment. Toyota also raises short-term finance to deal with unforeseen contingencies. At the same time, the company depends on national and international banks and large investment firms to raise long-term finance. Since Toyota is a reputed MNC with a strong presence in almost all countries, the company maintains a great credibility, and therefore it would not face any difficulty raising long-term finance. The organisation mainly uses the long-term finance to add value to its global vision and to increase shareholder values in the long run (Stewart & Raman, July 2007). Another major use of long-term finance is to support business expansion. Key financial ratios As per the report published on Morningstar (n.d.), Toyota’s gross margin increased from 12.52% in 2011 to 15.51% in 2013 when its operating margin improved from 2.47% in 2011 to 5.99% in 2013. The company’s asset turn over ratios were 0.63%, 0.61%, and 0.67% respectively for the fiscal years 2011, 2012, and 2013 whereas the return on equity ratio for the same periods were 3.95%, 2.72%, and 8.48% respectively. Similarly, the firm’s EPS (earnings per share) was increased by 236.78% in 2013 as compared to the previous year. The free cash flow as a percentage of sales rose from -0.43% in 2012 to 2.16% in 2013 while the free cash flow as a percentage of net income increased from -0.28% in 2012 to 0.50% in 2013. The organisation’s current ratio slightly declined from 1.10% in 2011 to 1.07% in 2013 when the quick ratio dropped from0.87% to 0.84% over the same period. The same trend was noted in case of debt to equity ratio too as it decreased from 0.62% in 2011 to 0.60% in 2013. It is hopeful to see that Toyota’s receivables turnover ratio improved from 10.78% in 2012 to 12.82% in 2013 when the inventory turnover ratio slightly fell from 11.20% in 2012 to 11.17% in 2013 (Ibid). The analysis of the key financial ratios over the last three years indicates that Toyota is in a better financial position to propel its future growth. Methods of capital projects appraisal There are a range of methods that could be used for appraising capital projects including net present value (NPV), internal rate of return (IRR), pay back period, profitability index, equivalent annuity, and real option analysis. NPV is the most commonly used capital project appraisal technique and it measures the cash in-flow after all the financial commitments are met. Capital projects with a positive NPV are taken for execution. The major strength of this technique is that it is simple to calculate and easy to understand (Capital Investment Appraisal / Appraisal Techniques, n.d.). According to Sheeba (2011, p. 391), IRR is defined as the interest rate that gives a zero value to NPV. If the cost of capital investment is predicted to be greater than the IRR value, then that particular project is most likely to be rejected (Ibid). The most potential strength of this method is that it takes into account the time value of money over the project lifetime. The payback period method is considered to be the easiest capital projects appraisal method as it simply considers the time that would be taken to obtain returns on the initial investments (Götze, Northcott, and Schuster, 2007, p.14). The major advantage of the equivalent annuity method is that it expresses NPV with regard to annualised cash flow (Chaturvedi, 2009, p.203). Weaknesses of published financial information While evaluating the weaknesses of the Toyota’s published financial information, it seems that the company does not provide a detailed view of the threats it is facing currently. It is evident that strict environmental regulations, growing costs of materials and fuel, and cut-throat market competition raise a set of potential challenges to the market dominance of Toyota. However, the Toyota management simply ignores these key challenges in its published financial statements, and thereby those crucial problems go unnoticed by stakeholders. Similarly, the company deliberately keeps silence on some serious product quality issues in the financial report as it does not want to harm its brand image. However, this practice is unfair because stakeholders, particularly shareholders and investors, have the right to obtain a true and comprehensive view of the current market position of the firm. Conclusion From the above discussion, it is clear that Toyota gives great emphasis to its corporate governance practices and Toyota managers are accountable for their decisions. The company has to comply with a range of legal and regulatory requirements such as restricted CO2 emissions. The Toyota management has structured its financial statement in a thoughtful way to make the contents useful to different stakeholder groups. The main stakeholders who would use the published information include shareholders, investors, suppliers, creditors, employees, customers, and the public. The financial ratio analysis makes it clear that the company’s financial position is strong and secure. However, it is identified that the organisation does not disclose the negative aspects of its business adequately in its published financial information. References Capital Investment Appraisal / Appraisal Techniques. Available at: http://www.capital-investment.co.uk/capital-investment-appraisal.php Chaturvedi S (2009) Financial Management: Entailing Planning for the Future. Global India Publications. Götze U, Northcott D and Schuster P (2007) Investment Appraisal: Methods and Models. US: Springer Science & Business Media. Financial summary 2012. Toyota Corporation. Available at: http://www.toyota-global.com/investors/financial_result/2012/pdf/q4/summary.pdf Menipaz E & Menipaz A (2011) International Business: Theory and Practice. US: SAGE. Stewart, TA & Raman AP (July 2007) “Lessons from Toyota’s Long Drive”. Harvard Business Review. Available at: http://hbr.org/2007/07/lessons-from-toyotas-long-drive/ar/1 Sheeba K (2011) Financial Management. New Delhi: Pearson Education India. Toyota: Corporate governance. (n.d.) available at: http://www.toyota-global.com/sustainability/csr_initiatives/activities/management/governance/ Toyota Annual Report 2013. Available at: http://www.toyota-global.com/investors/ir_library/annual/pdf/2013/ Toyota Motor Corp ADR. Morningstar. Available at: http://financials.morningstar.com/ratios/r.html?t=TM Read More