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Toyota Motor Corporation (TMC) is selected to present financial research report for this assignment. The company designs, manufactures, assembles and minivans, vehicles, and commercial vehicles and related accessories and parts. The report analyzes the company as a potential investment opportunity. Since 2011, Toyota’s revenues have increased by 30.25% whereas it main competitors have growth rates at 10.49% on average. From financial point of view, Toyota leads the automotive industry with its better margins as compared to its two main competitors Ford and General Motors and generates sufficiently more net income. After covering the basic ratios and analyzing their values, it is evident that risk of investing in Toyota Motors Corporation is moderate one. The company’s liquidity ratios indicate that it is in fairly good position to meet its financial obligations. Although Toyota is a great investment option with stable financial position and future growth. Investors needs to understand the uncertainty facing the auto industry and consider the companies that have financial stability for adapting to the changing industry trends.
Corporate finance is primarily concerned with a corporation’s capital structure including its funding and action that management take to increase the value of the company. It also includes the analysis and tools used for prioritizing and distributing financial resources. The ultimate focus in the field of corporate finance is to maximize the value of a business by planning and using the management resources while balancing profitability and risk. There are three main activities that govern corporate finance; capital budgeting and investment, capital financing and dividends and return of capital. Capital budgeting and investing includes planning about where to place the long-term capital assets of the company for generating the highest possible risk-adjusting returns. This basically is deciding about whether or not to go for an investment opportunity through detailed financial analysis. A company identifies its capital expenditures and estimates cash flows from available capital projects, planned investments are compared with available income and projects are finalized to be included in capital budget (Brealey et al., 2012).
The next primary activity is capital financing. It includes decisions about how to finance capital investments optimally using the debt, equity or mix of both. Long term funding for major capital expenditures can be obtained through multiple sources i.e., issuing debt securities or selling company stocks in the market through investment banks.
Dividends and return of capital is third primary activity. This requires corporate managers to decide whether to retain the excess earning for operational requirements and future earnings or to distribute the earning to shareholders in form of share buybacks or dividends. If the company decides not to distribute retained earnings to shareholders, the money can be used for funding the business expansion activities. This generally is considered the best source of funds, without occurring any additional expenses in form of additional debt or diluting the value of equity by issuing shares.
Toyota Motor Corporation (TMC) is selected to present financial research report for this assignment. The company designs, manufactures, assembles and minivans, vehicles, and commercial vehicles and related accessories and parts. The company operates through financial services, automotive and all other segments. The company was incorporated in 1937 by Kiichiro Toyota, as a spin-off of his father’s company “Toyota Industries” to develop and offer efficient and quality automobiles. Since its incorporation, the company has faced multiple ups and downs. However, the company has been successful to spread its business across the globe. The company experienced significant growth when it went to produce small sized cars at early 70s (TOYOTA & Guide, 2001).
Toyota Motors Corporation became popular in USA as well as in Europe, in automotive business by offering cars at reasonable prices. In 1982, Toyota Motors Sales and Toyota Motor Co. merged into a single company Toyota Motors Corporation. Till 21st century, the company started several non-automotive operations as well i.e. leasing and purchasing vehicles, web-based vehicles information networks, property development, marine and aerospace businesses. The company is listed on all stock exchanges of Japan, New York and London Stock exchange.
Main competitors of Toyota Motor Corporation include the following:
Toyota Motors Corporation is known as a company steeped in traditions, values and reversed work ethic in its corporate culture among it employees and officials. It is guided by a code of conduct that intends to create a very lively and harmonious work environment for all in all its manufacturing sites, corporate offices and affiliate companies. Japanese Management style is a firm believer of the workplace being an extension of family life. In this way, Toyota promotes working culture where friendly, long-term and harmonious relationship exists among workers.
Toyota Motor Corporation possesses reputation of high-quality vehicles and excellent workmanship. However, in the recent years, some massive recalls, have damaged the company’s reputation to large extent. However, the company has been successful to regain its lost reputation by taking active measures to address the issue.
With a long history of success and stable position in the market, Toyota is a great investment option. For the previous some years, the company had been one of the Japan’s biggest success stories, rising to become the world’s biggest automaker on the basis of its excellent production system and a prolonged period of beneficial exchange rate movements.
Toyota is having a strong record of increasing profits and revenues over a long period. The company possesses explicit competitive advantages i.e., the company possessed leaner cost structure and excellent production system when foreign rivals were pushed with healthcare and pension expenses for former employees.
The primary and best indicators of Toyota’s financial health is its revenue growth. This indicator is critically important for finagling the investment decision. Since 2011, Toyota’s revenues have increased by 30.25% whereas it main competitors have growth rates at 10.49% on average. This significantly higher revenue growth indicates that the company has continued making smart business decisions to support their efforts (Marberger, 2015). The company also possesses great potential for growth in future with its plans to evolve with changing technology by reducing the number of gas fueled cars. This is one of explicit ways in which Toyota is expected to maintain its revenue growth and remain at the top of the market.
The company also has experienced great growth during 2017. The company shares are up 20 percent in the last twelve months excluding the current 3.4 percent dividend yield paid by the company (Marberger, 2015). The following chart indicates the revenues growth of Toyota from 2006 to 2018.
Although Toyota’s sales have suffered a lot because of its multiple recalls, and most of the company’s profit increases have been driven by multiple factors that are outside its control. It is still a good option to invest in with its trailing Price-to-Earnings ratio of 8.6 which positions it higher than most of its competitors (Marberger, 2015). Toyota Motors Corporation possesses a strong financial base and the companies with such a reliable financial base potentially prove to be good investment portfolios. Such companies are referred as blue-chip companies and trades only on selective markets. They rarely are involved in any compliance issues and are preferred by investors.
As a finance manager, I will recommend Toyota Motor Corporation as a buy option because the company has been part of news for all of the right reasons and for its extensive plans for future growth, equipped with strategic acquisitions and mergers. The new product ranges of the company, especially the new line of green automotive have caught the fancy of its customers across the globe. Company’s promised high returns for shareholders (22 percent) are also another key attractive element for potential investors.
Investment decisions are critically important for any organization and it requires careful analysis of available investment opportunities. For this analysis, the most important thing is to collect required information which also includes being aware of client’s financial situation and investment objectives and preferences. The process starts with selection of an appropriate asset allocation. A client’s profile includes details about what client wants to achieve through investment, perhaps, a less volatile strategy of investment as compared to a bond portfolio and traditional stock. They are basically looking for protecting from long-term decline in bond and stock market and not skipping the short-term investment opportunities to secure investment gains. Mostly the clients are primarily concerned about preservation of capital and purchasing power.
Another important factor is considering the future outlook of the stock, it is particularly important when the ultimate objective of investment is portfolio growth. Although value investors generally hold the view that intrinsic value matters the most, a more compelling thesis would have a high growth potential at a cheap price.
From financial point of view, Toyota leads the automotive industry with its better margins as compared to its two main competitors Ford and General Motors and generates sufficiently more net income. Like several other international companies, Toyota also adopts a variable dividend policy and so the payouts tend to vary year to year. However, on the basis of its net income, the company targets a 30 percent payout ratio, with necessary adjustments to reflect business conditions. This factor gives Toyota sufficient flexibility to afford massive investments which are necessary for supporting its research and development activities and experiment cutting-edge technologies i.e., artificial intelligence and driverless vehicles. With recent, gradual increase in dividends, Toyota seems like to be a predictable, stable stock that investors can appreciate (Otani & Yamada, 2017).
| Column1 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2018 |
| Interim dividends | 35 | 50 | 60 | 60 | 70 |
| Year-end dividends | 50 | 60 | 60 | 65 | 80 |
| Annual dividends | 85 | 110 | 120 | 125 | 150 |
(Caplinger, 2018).
The profile of a suitable investor for Toyota Motors Corporation would include being a conservative risk taker as one of the most prominent characteristics. Such an investor would like to buy the stock and hold it in long-term so as to enjoy the dividends offered to stockholders on periodic basis. The historical stock price and dividends data indicates that the stock has been progressive in long run, rewarding the investors for their buy and hold strategy.
| Period Ending: | Trend | 3/31/2018 | 3/31/2017 | 3/31/2016 | 3/31/2015 |
| Liquidity Ratios | |||||
| Current Ratio | 102% | 103% | 113% | 109% | |
| Quick Ratio | 88% | 89% | 100% | 96% | |
| Cash Ratio | 32% | 34% | 34% | 32% | |
| Profitability Ratios | |||||
| Gross Margin | 19% | 18% | 20% | 20% | |
| Operating Margin | 8% | 7% | 10% | 10% | |
| Pre-Tax Margin | 9% | 8% | 11% | 11% | |
| Profit Margin | 8% | 7% | 8% | 8% | |
| Pre-Tax ROE | 14% | 13% | 18% | 17% | |
| After Tax ROE | 13% | 10% | 14% | 13% | |
When deciding to invest in any organization, it is important and necessary that investors understand the risks associated with a concerned investment opportunity. Risk is always there, no matter how safe an investment is. However, once investors are aware of the related risks, they are in better position to take appropriate steps to mitigate the risk and maximize related rewards. After covering the basic ratios and analyzing their values, it is evident that risk of investing in Toyota Motors Corporation is moderate one. The company’s liquidity ratios indicate that it is in fairly good position to meet its financial obligations.
Toyota is considered as very conservative one in respect to its strategy about international dealings of cars. The international transactions leaves company with market risk due to changing foreign currency exchange rates, equity security prices and prices of some particular commodities. In order to manage the risks arising due foreign currency exchange rate and interest rate risks, Toyota Motors Corporation uses several derivative financial instruments (Majid, 2017).
Toyota possesses the foreign currency exposures related to selling, buying and financing in currencies other than the local currencies in which it operates. Foreign currency risk also comes into play in respect to assets and liabilities or future earnings and multiple financial instruments that are dominated in foreign currencies. The most important foreign currency exposures Toyota faces is related to US dollar and Euro (Majid, 2017). Commodity price risk is the possibility of increasing or decreasing costs because of the changes in the prices of commodities such as precious metals, non-ferrous alloys and ferrous alloys which are used in production of motor vehicles.
Toyota Motors Corporation does not use derivative instruments as tool to hedge the price risk associated with the commodity purchases and controls its commodity price risk by holding minimum stock level. The company possesses a diverse investment portfolio by holding investments in several available-for-sale equity securities that are subject to price risk. All these risks have a significant effect on investment process and stock and investors closely consider these risks are part of their investment portfolio (Otani & Yamada, 2017).
The future of auto industry is filled with uncertainty and speculation. Automobile companies and investors are actively looking for incorporating technological advancements in automobiles, electric vehicles is an example. Although Toyota is a great investment option with stable financial position and future growth. Investors needs to understand the uncertainty facing the auto industry and consider the companies that have financial stability for adapting to the changing industry trends. The future demand for technologically equipped vehicles is being driven by anticipated government regulations. In respect to the costs of these vehicles, the lack of charging infrastructure and risk associated with buying a car with very brief history, electric vehicles are not a practical option for most of the car buyers. However, with successful incorporation of technology in vehicles, Toyota possesses great potential for growth.
Toyota is also one of the most reputable brands in the automobile industry. Over its 75 years’ history, the company has been investor’s favorite option due to its competitive position in vehicle design, safety, manufacturing operations and environment-friendliness (Betancourt, Mooney & Ross, 2018).
Toyota faces significant competition from other automobile manufacturers in the markets where it operates. Although, the global economy is gradually recovering, competition in this industry has made the overall market conditions even more difficult. In addition, competition is likely to further intensify in respect to increasing globalization in the automotive industry globally, possibly resulting in industry reorganizations. Some basic and important factors affecting the competition levels include fuel economy, product features and quality, reliability, safety, financing and customer services terms, pricing, and amount of time required for innovation and development (Betancourt, Mooney & Ross, 2018). Increased competition potentially can lead to lower sales experienced by Toyota and it may result in a further downward price pressure. This may affect the financial conditions of Toyota in negative way. Toyota’s ability of adequately responding to recent quick changes in the automobile industry and maintain its competitive edge will be fundamental to its future success in the new and existing market and to maintain its market share. In the current perspective, Toyota can be confidently considered as the potential investment option.
The ultimate focus in the field of corporate finance is to maximize the value of a business by planning and using the management resources while balancing profitability and risk. There are three main activities that govern corporate finance; capital budgeting and investment, capital financing and dividends and return of capital. Toyota Motors Corporation became popular in USA as well as in Europe, in automotive business by offering cars at reasonable prices. Toyota Motors Corporation is known as a company steeped in traditions, values and reversed work ethic in its corporate culture among it employees and officials. With a long history of success and stable position in the market, Toyota is a great investment option. The primary and best indicators of Toyota’s financial health is its revenue growth. This indicator is critically important for finagling the investment decision. As a finance manager, I will recommend Toyota Motor Corporation as a buy option because the company has been part of news for all of the right reasons and for its extensive plans for future growth, equipped with strategic acquisitions and mergers. Investment decisions are critically important for any organization and it requires careful analysis of available investment opportunities. For this analysis, the most important thing is to collect required information which also includes being aware of client’s financial situation and investment objectives and preferences. However, once investors are aware of the related risks, they are in better position to take appropriate steps to mitigate the risk and maximize related rewards.
Betancourt, P., Mooney, J., & Ross, J. W. (2018). Digital Innovation at Toyota Motor North America: Revamping the Role of IT.
Brealey, R. A., Myers, S. C., Allen, F., &Mohanty, P. (2012). Principles of corporate finance. Tata McGraw-Hill Education.
Caplinger, D. (2018). Better Buy: Toyota Motor Corporation vs Ford. from https://www.fool.com/investing/2018/01/23/will-2018-be-toyota-motor-corporations-best-year-y.aspx
Majid, A. (2017). Financial Statement Analysis 2012-2016: Toyota Indus Motor Comapny.
Marberger, D. (2015). Toyota Motor Corporation: The Smart Investment. Retrieved https://seekingalpha.com/article/3592296-toyota-motor-corporation-smart-investment
Otani, S., & Yamada, S. (2017). An analysis of automobile companies’ intensity targets for CO2 reduction: implications for managing performance related to carbon dioxide emissions. Total Quality Management & Business Excellence, 1-20.
TOYOTA, M. S., & Guide, C. D. (2001). Toyota Motor Corporation. Torrance, CA, USA.
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