Introduction
This paper seeks to conduct an analysis for the financial performance of the Toyota Motor Corporation and General Motors Company for their financial years ended in 2015. In order to arrive at objective results, the analysis will compare different financial and performance ratios for both businesses. It is a purely objective analysis that will be based on the figures presented on the annual audited final accounts of the companies.
A.Ratios
Liquidity ratios
These are financial metrics used to assess and determine an entity’s ability to meet its short term debt obligations. They include:
Current ratio
Quick ratio/Acid test ratio
Profitability ratios.
These are also financial metrics used to assess and determine the ability of an entity to generate earnings above the expenses. They include the following:
Gross profit margin ratio
Net profit margin ratio
Return on Assets
Financing practices
Return on equity
Debt equity ratio
Current Ratio
Current ratio= Current assets/ Current liabilities.
This ratio compares the total current assets and total current liabilities of a specific company. The current ratio is a reliable determinant for whether the business is able to meet its all its current liabilities with the current assets only. This ratio also indicates the magnitude of liquidity for the entity.
Toyota: = 149,563,000/ 137,015,000 = 1.09
G M = 78,007,000/ 71,466,000 = 1.09
This ratio gives a more objective test and therefore more reliable indicator because it takes into account all the company’s current assets.
Gross profit Margin
Gross profit Margin= Gross profit/Sales.
This ratio serves as a test of how the company is efficient in managing its inventories and production and the tact in charging those costs on the final products. A rising/high gross margin indicates a higher level of efficiency for the company. A lower margin on the other hand indicates a poor/slow performance.
Toyota: = 44,968,000 /227,096,000 =0.20
G M = 18,302,000/ 152,356,000 =0.12
The GP margin for Toyota is higher than that of GM.
Quick ratio/Acid test ratio
This ratio indicates the level of liquidity in the business. It illustrates the company’s ability to meet its short term obligations using its liquid assets.
Quick ratio = (current assets – inventories) / current liabilities
Toyota: = 149,563,000 - 17,825,000/ 137,015,000=0.96
G M = 78,007,000- 13,764,000 / 71,466,000 =0.90
GM has a higher quick ratio than Toyota implying that it has a higher degree of liquidity .
Return on Equity
Return on Equity= Net income/ Shareholders equity
It measures and indicates the total return/reward on investors’ money. It basically shows the total amount of gain that can be attributed to every dollar invested in the business by the shareholders. It is the basis on which the investors can decide whether or not to invest in a particular company. A positive and incremental return on equity indicates that the investment is making profits whereas a negative ROE shows that the investment is making losses.
Toyota: = 18,122,000/ 139,989,000 =0.13
G M = 9,687,000 / 39,871,000 =0.24
The return on equity for GM (0.24) is relatively high compared to that of Toyota.(0.13)
Net profit Margin
Net profit Margin= Net income/sales
This ratio shows how each sale represents itself in the net income. It indicates the overall gain derived from each sale. It basically indicates how a company controls its costs by translating each element of the revenue to profits. Higher net profit margin implies that the company is more efficient in translating its sales revenue to profit. The ratio is useful for comparing business performance over multiple periods.
Toyota: = 18,122,000/ 227,096,000 =0.08
G M = 9,687,000 / 152,356,000 =0.06
In the case of the two companies, Toyota had a higher NP margin of 0.08 compared to that of GM at 0.06.
Debt to equity ratio
D/E Ratio= Total Liabilities / (Total Assets - Total Liabilities)
Toyota = 258,008,000 /(397,997,000 -258,008,000)=1.8
GM = 154,649,000/(194,520,000)=3.8
This ratio indicates the financial leverage for the company. A higher debt to equity ratio indicates a higher risk on the part of lenders to the business. The business with a higher debt to equity ratio means that it has a high level of debt.
Return on Assets
= Net income/Total Assets
This ratio determines the profitability of a company in relation to its assets. The basic idea behind this ratio is to determine the level of management efficiency in utilizing her assets to generate profits.
Toyota = 18,122,000/397,997,000=0.05
GM = 9,687,000 /194,520,000=0.05
Both companies display equivalent ROA for the year.
B. P/E RATIO
P/E Ratio = Price per shareEarning per share
Toyota = 139.89/13.3=10.5 x
GM = 33.59/5.91=5.68 x
The PE ratio serves as a reliable stock valuation tool for pricing purposes. It is an indication of how cheap or expensive a company’s shares are.
This implies that the investors are all willing to pay up to 10.5 times for Toyota and 5.68 times for GM, of the company’s earning to purchase that stock
C. EVA
EVA= Net operating profits after tax-invested capital *WACC
Toyota =( 18,122,000- 3,311,000)*0.08=1,184.88
GM = (9,687,000- 15,000 )*0.08=773.
References
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