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Research and Analysis Project
BUSINESS AND FINANCIAL ANALYSIS OF:
Toyota Motors (Toyota)
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Table of contents
1. Research Objectives and overall research approach1.1. Reason for Choosing Topic and Company1.2. Research objectives and research questions1.3. Overall research approach1.4. Information gathering and Business / Financial Techniques1.5. Sources of Information1.6. Method of Collecting Information and their Limitations1.7. Ethical Issues1.8. Business Techniques Applied for Research1.9. Financial Techniques Applied for Research
2. Result, Analysis, Conclusions and Recommendations2.1. Business Performance2.2. Review of Industry2.3. SWOT Analysis2.4. Porter’s Five Forces Analysis2.5. Pestel Analysis2.6. Financial Performance2.7. Quantitative Analysis for FY 2013 – 20152.8. Qualitative Interpretation of Quantitative Analysis2.9. Competitor Comparison
3. Conclusions and recommendations
4. References
5. Annexes
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1. Research objectives and overall research approach
1.1 Reason for choosing Topic and Company
The auto industry is often thought of as one of the most global of all industries (UNIDO, 2003). Its
products have spread around the world and thanks to the value chain; the outcome of this industry
over the entire GDP is remarkable.
According to KPMG (KMPG, 2013), the industry is going to be shaped by significant challenges and
features in the next years; on one side, the growth of the demand by emerging markets, on the other
different powertrain technologies, fuel consumption issues, M&A strategies and the race for market
share until 2020. Finally, operational efficiencies related to platform standardization and
rationalization of the production facilities and technology efforts to improve the self-driving car
project are likely to influence the behaviour of all the players of this industry according to the KPMG
survey.
The worldwide automotive market is highly competitive and very volatile; the competitive arena is
characterised by players facing intense competition all around the world; further, competition is likely
to increase in the future as soon as new players coming from emerging countries will start to operate
outside their national borders (Toyota, 2015). All these features will cause volatile financial
performances with effects on the prices of their shares and the return to their investors.
Some points will be covered in this document with the purpose to analyse the performance and the
effects of the strategies for Toyota; one of the most important players of this industry, but also of the
world of the most know corporations.
I have selected the Topic 8 that is, “An analysis and evaluation of the Business and Financial
Performance of an Organization over three years period” in the context of Toyota financial statements.
My interest in automotive industry is driven by the features of this industry: one of the most
challenging, competitive and strategically integrated industries of the world business.
Within this dynamic and extremely complex industry, I have chosen Toyota Motors as the primary
target organization while Nissan Motors has been selected as a competitor for the comparative
analysis. Through this research report, the medium term financial and business performance of Toyota
motors will be analysed and the outlook will be presented about its future prospects.
There are several reasons for choosing “The business and financial analysis” basing on the financial
dimensions of Toyota. These reasons entail the following:
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1. Financial ratio analysis is a vast and deeply related technique to assess performance of a
company. It permits to evaluate the effects of past strategies over the financial results and
helps in understanding the company’s actions. Financial results are the outcome of strategies
which are deeply linked to the constraints and opportunities offered by the industry and by the
competitive positioning that result from the actions of the other players that operate in the
same business.
2. Although financial ratios are calculated according to historical figures, they improve
knowledge about the company and highlight relationships between operations and capital
structure of the business. This is a potential help in order to assess and predict future
performance and for operational management.
3. Toyota is a multinational company, which has its operations in most of the countries of the
world (Aoki, Delbridge and Endo, 2011); this increases the interest about its operations and in
particular on how it is managed, how it is viable, according to liquidity and solvency and how
the impact of fluctuations of the economy changes its results.
4. The automotive industry is perceived to be one of the most competitive segments of the
business. At the same time it is perceived as one of the less lucrative. Is this perception real or
is it related to a common perception which is influenced by the fluctuation of the economies?
5. The industry has been characterized by some important acquisitions in the last years. In 2014
according to PWC, global automotive deal volumes grew by 17%, closing at 543 deals and USD
38.7 billion; the highest value in the last three years (PWC, 2015). 6 megadeals occurred with
an aggregated and disclosed value of USD 25.1 billion thanks to the contribution by the
acquisition of Scania by Volkswagen and Chrysler Group by Fiat.
1.2. Research objectives and research questions
Research objectives
1. Analysis of Toyota could offer an opportunity to understand why this company has been able
to set its competitive positioning and to become a leading player in this industry.
2. It would help to understand how companies in automotive industry operate.
3. It would help to assess the main aspects in managing such kind of companies.
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4. To conduct company corporate appraisal in order to identify company strengths and
opportunities, to highlight weaknesses and threats that could affect its operations.
5. To analyse the company business and financials over the three year period in order to assess
for profitability, solvency, liquidity, capital structure and highlights relationships between the
different types of ratios.
6. Analyse the industry competitive environment according to the Porter’s five forces and
highlights these point with the strategies pursued by Toyota. This would help to understand
how this company is defending its competitive advantage over other competing players.
Research questions
1. Is the competitive positioning and leadership of Toyota related to financials and value creation
for its shareholders?
2. Is the actual financial performance sustainable?
3. Could the financial situation lead to risks of liquidity and solvency that could create problems
to the company in the ability to pursue new investments and to undertake strategies to
improve its competitive positioning?
4. Should be Toyota considered a potential target for other automotive companies or could be a
potential actor driving a further consolidation of the industry?
5. What competitive advantages does Toyota Motors have over Nissan?
6. Which are strengths, opportunities, weaknesses and threats for Toyota?
7. How is Porter Five Forces model for the automotive industry?
1.3. Overall research approach
A bottom up approach has been used to conduct the analysis. Firsts of all, I have analysed the last years
company financial reports, management messages, press releases and investors presentations of
Toyota. After this, I have analysed the same documents for three comparable companies (Nissan);
finally I analysed some researches and articles about the industry in order to confirm my analyses and
my conclusions about the companies and the industry.
The basic intention of this project is to create a comprehensive and well integrated business report
that can present an accurate fundamental position of Toyota Motors to its shareholders and other
internal and external stakeholders.
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I have selected the financial performance measures according to ratio analysis and cash flow analysis.
The business performance has been measured according to SWOT analysis and PESTLE analysis. In
order to conduct the quantitative financial analysis, the published financial results were restated to
highlight profitability, asset efficiency, gearing, and capital structure and liquidity performance.
1.4. Information gathering and Business / Financial Techniques
Taking into consideration the requirements of the research analysis project and the topic, I collected
data from the various sources confirming their validity and suitability for accurate analysis.
This is being a crucial step involved verification and determining validity, reliability, relevance and
accuracy of the data to be used. The source of collecting data is most important in regard to this. Taking
into consideration the requirements of the research analysis project and the topic.
1.5. Source of information
Most of the data and information have been taken according to the disclosure published by the
automotive companies in the investor relations section of their corporate website and in particular
data disclosed in their annual reports and investor presentations. Other data and have been taken
according to published articles and researches by consultancy companies such as PWC, KPMG.
1.6. Method of Collecting Information and their limitations
As mentioned, the reliability of information is a critical concern when conducting any research and this
is even so the case when the research relies solely on secondary data collection process. Even though I
have tried my best to extract the most relevant and most reliable information, it is important to further
focus on the potential limitations of the data collection process so that the users of this information are
mindful of the limitations that can have on their decision making.
1. Corporate Website: Even though the annual reports are considered, the most audited and
reliable, information regarding the organization, a number of factors limit its use for
conducting meaningful performance analysis. Firstly, belonging to the field of accounting
myself, I understand strongly the impact of window dressing processes that could be done to
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make the corporate information look better to the investors. This not only misdirects the
business and financial performance analysis from the actual performance of the organization
but also increases concerns regarding the ethics of the accounting processes in the
organization. Moreover, the annual reports do not take into account the qualitative and
intangible factors such as employee efficiency, management integrity and failure and value of
potential R&D into account. These factors are important elements of business performance and
thus the published corporate information is limited in this aspect.
2. Internet: Internet along with being an excellent source of all kinds of information is also
limited because of its aspects. Firstly, the pool of information is so extensive that it becomes a
challenge to extract the relevant information. Secondly, Internet is known to provide
misleading and conflicting information and thus reliability becomes an issue.
1.7. Ethical Issues
Professionals have to adhere to codes of professional ethics and conduct. We as accountants are
trained to maintain the highest levels of professional ethics while collecting and analysing the data. On
the basis of my professional training, I have incorporated the same principles in creating this
performance analysis report. For this, the sources that I have used are effectively referenced and I have
tried to be extremely cautious of not misstating and misusing any information.
1.8. Business techniques applied for research
SWOT Analysis
This analysis provides vital information for the company to make decisions regarding the available
company resources, capabilities and its underlying competitive environment. SWOT analysis can be
referred to corporate appraisal attributed to its evaluation of strengths and weaknesses, opportunities
and threats in the context of a company. SWOT analysis has a number of advantages which entails
application neutrality because it is conducted with specific objectives, considering both internal and
external factors impacting on the organization (Hill and Westbrook, 1997).
The advantages entail the following:
1. It provides opportunity analysis, competitive analysis and multi-level analysis essential for
strategic planning and business and development processes.
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2. It integrates company data reports making use of organization quantitative and qualitative
information from the organization various dimensions useful in determining the company
strategic position.
3. This analysis involves the use of company information and its compilation is vital for company
decision making at the company level planning and policy making.
4. The opportunities analysis component of SWOT analysis facilitates company diversification
and considerations on how to effectively its resources and investments within the industry.
Disadvantages of SWOT analysis:
1. SWOT analysis has the tendency of overlooking key strategic aspects of company internal
factors. This is attributed to the fact that it sometimes views complex circumstances and trends
in simple perspective.
2. The categorization of company internal aspects as strengths, weaknesses, opportunities and
threats may not be valid because they are subjective attributed to the uncertainties in the
industry.
3. This analysis does not take into account organizational factors it only lists strengths,
weaknesses, opportunities and threats. It does not provide a priority significance of these
factors and the real impact of each factor to the organization hence lacking clarity.
4. The analysis has a lot of ambiguities attributed to its one dimensional model adopted in the
analysis where each organizational problem is viewed as strength, weakness, opportunity or
threat.
5. SWOT analysis is a subjective process because of its tendency of reflecting biasness of
individuals collecting data because the data used might be outdated and does not reflect the
true company and industry trends.
Porter Five forces model
This model determines primary forces, which plays significant roles in a company’s underlying
competitive industry. The analysis provides a model showing the relationship of these forces and the
competitive strategic position of the company (Porter, 2008).
Advantages:
1. It provides an insight understanding of rules of competition in an industry pointing out its
attractiveness.
2. This analysis model helps strategic managers understand the various competitive forces that
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influence the success or failure of a company.
3. Porter’s five forces analysis model provides a framework on how a company strategic position
is evaluated.
4. Its provision of a sophisticated analysis gives an insight in regard to the company strategic
position in the industry (Coyne and Balakrishnan, 1996).
Disadvantages:
1. The analysis assumes that market structures are relatively static while in real markets are
shaped by continuous changes.
2. With this assumption in regard to market structures, hence, the analysis cannot provide a
meaningful prevention measures.
3. The analysis mainly focuses on competition and that companies are seeking competitive
advantage while ignoring other company objectives.
PESTLE analysis
PESTLE analysis is also a strategic analysis framework that primarily looks at the Political, Economic,
Social, Technological, Legal and Environmental factors affecting the performance of the organization.
As can be seen, PESTLE analysis looks at the macroeconomic and macro environmental factors
relevant to the performance of the organization (CIPD).
Advantages:
1. Identify the existing external factors influencing the performance of the organization
2. Identify the future external factors influencing the performance of the organization in terms of
opportunities and threats
Disadvantages:
1. Since PESTLE is a dynamic analysis tool, it needs to be conducted on a continuous basis
2. The external fields affecting the performance of the organization may not be openly known to
the researcher
3. Analysis is run according to several assumptions, which might present a different situation of
the organization than what it is in reality.
1.9. Financial techniques applied for research
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Accounting analysis
Toyota financial analysis has been conducted according to the public disclosed financial reports issued
by the company, according to the Annual Reports, 20-F and interim period reports issued. Annual
financial figures for Toyota are related to accounting values reported in March the 31st, 2015, 2014 and
2013 and have been analysed in order to see if accounting policies were changed or if the company
changed some assumptions used to estimate some liabilities such as pension debts or goodwill
impairments.
Financial Ratio analysis
The financial analysis is based on the performance of Toyota over three financial years, from 2013 to
2015 with the purpose of evaluating strategies, business and financial performance for the period of
analysis. Strategy and business aspects will allow appreciating the impact of the organization and
external factors that have affected the performance of the company.
This business accounting technique facilitated me to carry out various ratio analyses from the
company audited financial statements. This study of business and financial analysis and profitability
provides that ratio analysis of a company can be used to analyse and evaluate various dimensions of a
company. These dimensions include evaluation of past performance, evaluation and determination of
the company current financial position and finally it aids in the projection of the anticipated future
results.
The financial ratios identified using this technique provides an insight regarding the micro-economic
relationship that exists in Toyota. This is essential in the projection of the company’s future revenues,
cash flows and profitability. Secondly, concerning financial ratio analysis in the study of multinational
company’s management provides that comparison of the various financial periods, ratios give insight
on the management ability.
These ratios have been calculated:
- Liquidity
- Efficiency/operational performance
- Risk expectations / gearing
- Profitability
- Dividend policy
2. Result, Analysis, Conclusions and Recommendations
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2.1. Business Performance
Toyota was founded by Kiichiro Toyoda in 1937 (Monden, 1983) and by 2012 was named the largest
automobile manufacturer in the world by the virtue of its production (Kato and Smalley, 2013). It is
interesting to note that the organization was ranked to be higher in its production capacity than the
giants Volkswagen and General Motors Group. However, in terms of revenue, the organization ranked
at the 11 place in the world’s largest organization ranking. The organization provides employment to
over 338,875 employees and operates through 545 subsidiaries around the world (Toyota Motor
Corporation, 2015).
The group distributes vehicles under the Lexus, Toyota, Daihatsu and Hino brands. Toyota’s flagship
models are Corolla and Prius (Aoki, Delbridge and Endo, 2011)
Revenues come from all around the world with Japan and North America covering most of the sales.
Country Revenues Segmentation
Yen bln 2013 2014 2015 2013 2014 2015Japan 7,910 8,533 8,339 35.9% 33.2% 30.6%North America 6,168 7,939 9,430 28.0% 30.9% 34.6%Europe 2,003 2,614 2,691 9.1% 10.2% 9.9%Asia 4,059 4,475 4,531 18.4% 17.4% 16.6%Other 1,924 2,131 2,243 8.7% 8.3% 8.2%Revenues 22,064 25,692 27,235 100.0% 100.0% 100.0%
Source: company 20 F
Business operated by Toyota covers all the different phases of the industry cycle: both research,
procurement of parts, assembly, distribution and finally financing of the purchase of the vehicles
(Stewart, 2011). The automotive sales however represent the main share of the group’s revenues.
Revenues segmentation
Yen bln 2013 2014 2015 2013 2014 2015Automotive 20,379 23,734 25,006 92.4% 92.4% 91.8%Financial services 1,150 1,379 1,622 5.2% 5.4% 6.0%Other 535 579 607 2.4% 2.3% 2.2%Revenues 22,064 25,692 27,235 100.0% 100.0% 100.0%
Source: company 20 F
During the 2013 – 2015 periods, Toyota sales increased by 16% and by 6% in 2015. The table
discloses the factors behind this growth, explaining how the largest contribution to growth was
attributable to price mix.
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Sales growth and price vs volume changes
Yen/units 2013-14 2014-15Revenues growth 16.4% 6.0%
Units sold increase 2.8% -1.6%Price mix 13.3% 7.7%
(Source: Toyota Financial Results, 2015)
The price mix increase was essentially linked to changes that occurred in all the regions where Toyota
manages the distribution (Dawson, 2004). Changes in 2014 were driven by the introduction of new
models and higher contribution by Lexus and Toyota brands that have higher value compared to other
group’s brands such as Daihatsu and Hino. Finally weakening of the average Yen change versus the
USD and € resulted into higher sales in 2014 once they were translated into Yen. In fiscal 2014 and
2015, the Japanese yen was, on average, and at the end of the fiscal year weaker against the U.S. dollar
in comparison to fiscal 2013 and 2014, respectively. In fiscal 2014 and 2015, the Japanese yen was, on
average, weaker against the euro in comparison to fiscal 2013 and 2014, respectively (Toyota
Financial Results, 2015).
Volume changes Price changes
thousands 2014 2015 thousands 2014 2015Japan 3.8% -9.0% Japan 3.9% 7.3%North America 2.5% 7.3% North America 25.6% 10.7%Europe 5.6% 1.8% Europe 23.6% 1.1%Asia -4.5% -7.4% Asia 15.4% 9.4%Other 7.8% -0.8% Other 2.7% 6.1%
(Source: Toyota Financial Results, 2015)
As previously stated the company manages different brand that have a different positioning according
to the perceived price to quality ratio.
Price
Quality
(Source: Toyota Financial Results, 2015)
Toyota is currently pursuing strategies to optimize production costs thanks to lean management
strategies (May, 2008). During 2013 – 2015 the company was able to optimize costs thanks to efforts
in the design of the products, plants reduction costs and logistic synergies. These cost reduction efforts
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related to ongoing value engineering and value analysis activities, the use of common parts resulting in
a reduction of part types and other manufacturing initiatives designed to reduce the costs of vehicle
production.
It must be remarked that Toyota has a long-term history as a constant innovator. The company was
the first to introduce lean manufacturing, Kaizen, Kanban and Total quality Management systems in its
organization (Hino, 2006). The company has been the first to mass-produce and sell hybrid vehicles
too, and at this time is the leader in “green” car development (Besser, 1996). This is a part of a
strategy to improve its competitive advantage as soon as Toyota understands that customers that have
become very focused about the CO2 emissions and the fuel-efficiency of their cars require
environmental friendly cars.
2.2. Review of Industry
Toyota operates an industry, which is characterized by a several players that compete in order to offer
vehicle solutions to people, both private and corporate. The worldwide automotive market is highly
competitive and it has a demand that is strictly related to the fluctuations of the economy (Yong,
1995). As soon as the automotive is a vast industry, according to the type of the vehicles, players
choose to position themselves on some activities of the value chain (e.g. sport, trucks, cars, bus) or to
operate the full cycle. Usually, the most important players such as Toyota, Renault-Nissan, Daimler,
Fiat, General Motors, Volkswagen and PSA operate the entire value chain trough different brands
(Shimokawa, 2010).
According to KPMG the industry is shaped by several key trends that are going to affect the current
strategies of the automotive players, and in particular:
- Growth of emerging markets and the need to be present on these markets
- Procurement policies as a key strategy to minimize costs
- The ability in downsizing and optimizing the engines would be a competitive
advantage strategy
- Increasing use of platforms and standardization of modules will be essential to
minimize productive costs
- Small and basic car segment is expected to have a high growth potential both in
established and in emerging markets over the next five years
- High lower polluting cars (e-cars) market shares will rise to about 11-15% of the
market
Finally, the automotive industry could be shaped by consolidation as soon as many players could find
difficult to survive alone (Domansky, 2006). For some brands such as BMW, Volkswagen but also
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Toyota, KPMG highlights that these players are likely to become independent while many other OEMs
with a limited global presence, such as producers from China and mature Asian Countries, could be
merged by the big players in order to survive.
Due to these features, the Porter Five Forces model seems quite useful to highlight and to summarize
the main factors that are affecting the competitive positioning of the different players in this industry.
2.3. Toyota SWOT Analysis
Strengths
- Innovative and continuous improvement culture as resulting by its long term history as
innovator.
- Brand reputation: Toyota’s brand is the most valued automotive brand in the world.
The business is known for its environmentally friendly, safe and durable cars that are
sold in more than 170 countries.
- Industry leader in production and sales. As already stated, Toyota was the first
company to introduce lean manufacturing and total quality management practices in
manufacturing process. For some time, the company was the only practitioner of these
practices and had the lowest manufacturing and production costs worldwide. Although
many manufacturers were able to replicate Toyota’s lean manufacturing system, the
company is still one of the most profitable manufacturers in the world.
- Strong brand portfolio. Toyota currently sells about 70 different models of cars under
its namesake brand. This does not only increase brands awareness but also satisfies
nearly every consumer group needs. Toyota’s flagship models are Corolla and Prius.
- The leader in “green” cars development. Toyota understands that environmental
friendly cars are the necessity nowadays. Consumers are more selective in terms of
CO2 emissions and fuel-efficiency of the cars they buy and Toyota’s early move
towards selling hybrid and efficient cars is the strength few competitors can match.
- Toyota operates globally and it has been in the automotive for a long time. This has
enabled the company to establish a strong trademark in the global markets (Lu and
Kyōkai, 1989)
- Toyota has a good corporate public image enabling gaining of a large customer base.
This has further given it a strong market position hence gaining sustainable
competitive advantage over its competitors (Mehri, 2005).
- Toyota has a long term history of strong financial performances and a low risk
features
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- The company has a long time presence in the hybrid segment (Kevin, 2009).
Weaknesses
- Large scale recalls: Toyota had quite a few large-scale vehicle recalls over the past few
years. The business recalled 9 million vehicles in 2009-2010 and 7.43 million cars in
2012. With the result of causing additional costs and affecting the brand
- Weak presence in the emerging markets. Toyota’s main markets are Japan, US and
Europe, while China and India make only a small percentage of all Toyota’s sales. Thie
creates some issues in the competitive positioning against a global leader such as GM
who has a great market share in these countries.
- Being a multinational company the company faces administration challenges since
different nations have varying regulations and difference in uniformity of emission
standards (Kevin, 2009).
Opportunities
- Positive attitude towards “green” vehicles. Today consumers are more aware of the
negative effects (air pollution) caused by cars and they are more likely to buy new
hybrid and electric cars that emit less pollutants
- Increasing fuel prices. Increasing fuel prices open up large markets for Toyota’s hybrid
cars as consumers shift towards efficient cars
- Potential acquisitions and joint ventures enhance the company to acquire new market
shares and new oil and gas fields
- Changing customer needs. By introducing new car models, Toyota could satisfy varying
consumers’ tastes and needs and access wider customer group
- Growth through acquisitions. Toyota has successfully acquired other car companies in
the past and should continue doing so to grow, gain new skills, assets and access to
new markets (Martin and Fernando, 2011).
Threats
- Economic downturn in Europe and USA could limit growth opportunities and increase
competitive pressures
- Decreasing fuel prices; whenever this would occur fuel-efficient hybrid and electric
cars could become less attractive to cost conscious consumers that are the main
customer group for Toyota’s Prius model
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- Environmental regulations in most countries could tighten the rules and this leads to
increase in capital and expenses to meet the underlying requirements
- Rising raw material prices. Rising raw material prices are especially important to
automobiles manufacturers
- Intense competition. Toyota faces more intense competition from other auto
manufacturers more than ever
- Natural disasters. Toyota’s has manufacturing facilities could be subject to natural
disasters that could disrupt manufacturing in the facilities and decrease Toyota’s
production volumes and causing restoration costs
- Appreciating yen exchange rate. Most of Toyota’s revenue comes from foreign
countries operations with the result of causing fluctuation translations adjustments in
the company financial results
2.4. Porter’s Five Forces Analysis
Threat of new competitors: low
Barriers of entry to the sector are quite high with issue relate to capital needed to undertake
investments, to set up production facilities, develop projects and settle a global distribution network.
These entire barriers make the potential risk of new global competitors can be ranked as low.
Threat of substitute products or services: medium to low
At this time, common concerns about the effects of automotive effects on the environment have risen;
further concerns about reserves for the long run of these resources have increased with the results
that new substitute products such as biofuel or electricity are starting to occur. But these features have
an effect on the engine not on the vehicle demand. According to this, there is a limited risk that these
new substitute products would reduce significantly the demand of vehicles. For this reason, the
substitute risk can be ranked from medium to low.
Bargaining power of customers (buyers): high
The automotive demand is a traditionally characterized by a quite elastic demand curve since people
have a higher willingness to purchase a new car when they feel good about the economy (Yong, 1995).
Further, Customers can select from many suppliers at this time they can find many different options
according to price, quality and brand. For these reasons, the bargaining power of customers can be
ranked as high.
Bargaining power of suppliers: medium to low
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The automotive companies need to secure spare parts, which are supplied by third party OEM
producers. At this time there are quite a lot of OEM producers and for this reason the bargaining
power of suppliers can be ranked as medium to low.
Degree of competition: high
Competition among oil and gas companies is high among all the segments of the automotive industry.
Vehicles require high marketing efforts in order to differentiate the product and raise awareness
among final customers (Toyota - 20F).
2.5. Toyota PESTEL Analysis
Politics
Toyota faces some significant political factors such as:
- Political stability in the countries where it operates- Free trade agreements- Government support for eco-friendly vehicles
Political stability in major markets is an opportunity for Toyota to grow with minimal political tension.
In addition, free trade agreements involving Japan and other countries in which Toyota operates can
increase the market penetration. In addition, government support for eco-friendly products is an
opportunity for the company to raise sale volumes thanks to the features of its hybrid cars (Martin and
Fernando, 2011).
Economical
For Toyota, the most significant economic external factors are:
- Economy in the USA- Developing countries growth
Toyota could take profit whenever US economy recover since the US are the second largest market for
the company, after Japan. In addition, the rapid growth of developing economies presents an
opportunity for the company to improve revenue based on these markets thanks to the
internationalization strategy pursued by the group.
Social
These following social and cultural factors can affect Toyota’s performance:
• The growing interest in hybrid cars
• The growing interest in electric cars
• Widening wealth gap
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Toyota has the opportunity to offer more products to meet the growing customer interest in hybrid
and electric vehicles. The middle class is the main source of income for Toyota and whenever the
middle class share would reduce this could have an adverse impact on the group’s results (Martin and
Fernando, 2011).
Technology
The following are the most notable technological factors:
- Increased use of electronic commerce - Trends in mobile technology - Cybercrime
Toyota has the opportunity to improve their e-commerce capabilities or service providers exploit e-
commerce third for the sale of some of its products, such as spare parts. In addition, Toyota has the
opportunity to enhance their mobile applications to increase customer engagement and loyalty.
However, the company must deal with the threat of cybercrime, including corporate cyber espionage.
This dimension of the analysis model shows great technological opportunities, although the company
is facing the threat of cybercrime through measures appropriate security technology.
Environmental
Toyota has to include environmental concerns in their strategic decision-making. This scale model
identifies concerns about the environment in relation to business. For Toyota, the main external
factors ecological / environmental in the macro environment - Remote or are:
- Climate change - The decline in world oil reserves - Increased emphasis on business sustainability
Toyota has the opportunity to offer more products that respect the environment, such as electric cars
or cars with greater fuel efficiency. The company also has the opportunity to increase their
sustainability performance through improvements in the efficiency of business processes. In this
dimension of analysis present opportunities that the company can use for growth.
Legal
For Toyota, the following are the most important on the remote control or external macro-
environment legal factors:
- Improve intellectual property laws - Increasingly complex environmental laws
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- Laws of increasingly complex consumer
Toyota has the opportunity to grow with few concerns arising from the violation of their intellectual
property rights, because governments are working to improve the protection of intellectual property.
Toyota also has the opportunity to offer higher quality products that meet or exceed the requirements
based on environmental laws. In addition, the company can take the opportunity to provide safer and
more satisfactory to meet or exceed the laws of the consumer. This dimension of the model shows that
external factors have important legal opportunities for the firm.
2.6. Financial Performance
Toyota financial analysis has been conducted according to the public disclosed financial reports issued
by the company, according to the Annual Reports, 20-F and interim period reports issued by the
company. Annual financial figures for Toyota are related to accounting values reported in March the
31st 2015, 2014 and 2013. Toyota financial data have been used to calculate profitability ratios,
solvency, and liquidity and efficiency ratios and to be compared with the same ratios taken from a
comparable competitor (Nissan).
Global Growth5 year 1 year
Toyota Motor Corp 12.12% 1.50%Nissan Motor Corp 3.77% -2.74%
Industry 7.34% -3.89%
Toyota Motor Corp
Nissan Motor Corp
Industry
-0.04
-0.02
0
0.02
0.04
0.06
0.08
Global Growth 5 yearGlobal Growth 1 year
(Data Source: Toyota Financial Results, 2015; Nissan Annual Report)
The performance of Toyota has been compared with its major competitor Nissan in terms of the
revenues generated by these firms during last three days
Revenue (JPY)2013 2014 2015
Toyota Motor Corp
22,064,192.00
25,691,911.00
27,234,521.00
Nissan Motor 20
Corp 9,629,574.00 10,482,520.00 11,375,207.00
2013 2014 2015
22,064,192.0
0
25,691,911.0
0
27,234,521.0
0
9,629,574.00
10,482,520.0
0
11,375,207.0
0
Revenue (JPY)Toyota Motor Corp Nissan Motor Corp
(Data Source: Toyota Financial Results, 2015; Nissan Annual Report)
Toyota 20-F reports follow US GAAP; independent registered public accounting firm is
PriceWaterhouseCoopers Aarata that issued its positive judgement on company accounts. During the
period, 2013 – 2015, Toyota did not make any significant change in accounting principles except an
updated guidance on uncertain tax positions. Toyota adopted this guidance on April 1, 2014. The
adoption of this guidance did not have a material impact on Toyota’s consolidated financial statements
(Toyota 20-F, page 156).
Some particularities in the accounting statements are related to some accounting criteria which are
peculiar for companies operating in the automotive:
- Toyota has many agreements under which the company share control with another party.
Whenever these joint ventures are not controlled and hence consolidated, they are accounted
for using the equity method. According to disclosure in the notes (page 166) the assets of the
Associates cover the liabilities; hence no significant potential risks are disclosed in these notes.
- Inventories are valued according to LIFO. Had the “first-in, first-out” basis been used for those
companies using the LIFO basis, inventories would have been Yen 46,244 million and Yen
39,165 million higher than reported at March 31, 2014 and 2015 (page 154)
- Goodwill is not material to Toyota’s consolidated balance sheet
- The company holds a significant amount in securities, as marketable securities which are
valued according to market value
- The company recognizes provisions related to product warranties recorded as liabilities for
quality assurances. These provisions have increased during 2013- 2015 as a result new
provision estimates.
2.7. Quantitative analysis for FY 2013-2015
21
Financial analysis will cover the following themes in order to assess Toyota’s ability to manage:
- Liquidity
- Efficiency/operational performance
- Risk expectations / gearing
- Profitability
- Dividend policy
Liquidity
Liquidity analysis provides an insight about the company’s ability to face short term liabilities thanks
to cash provided by the company’s short term assets. Both Toyota and Nissan operate with positive
working capital that it means the company have receivable higher those payables due to the fact that
both Toyota and Nissan offer finance facilities to the buyers of vehicles. This mismatch requires
companies to finance this, according to financial strategies.
Payable days are longer for Nissan while receivable days are almost the same due to the incidence of
the finance trade receivable. Inventory turnover for Nissan is higher; reflecting a higher level of
finished products stored which could reflect some more issue in selling the completed vehicles. In any
case the inventory turnover is quite low and this reveals that both companies should not have issues
related to the sale of out of market products.
Liquidity ratios
2013 2014 2015 2013 2014 2015Current Ratio 1.06 1.06 1.09 4.50 4.46 4.28Quick ratio 0.83 0.82 0.84 3.50 3.50 3.36Acid ratio 0.25 0.28 0.31 0.46 0.44 0.34
Receivable dd 239 229 241 197 201 230Inventory dd 35 35 37 52 49 52Payable dd (cost of sales) 43 40 42 59 70 69Cash Cycle 231 223 236 191 180 212
TOY NIS
(Toyota Financial Results, 2015)
The analysis of liquidity ratios does not reveal particular differences in the business model and hence
differences in cash cycle and longer receivable days for Toyota cannot be related to a different
business model.
All the companies have important cash and cash equivalent amount and both trade receivables and
inventories are highly liquid. For this reason, Both Toyota and Nissan can turn quickly into cash their
short term assets and avoid potential risk arising from lack of liquidity. At this time, liquidity risk is
very low.
22
Operational Performance
Efficiency ratios for Toyota and Nissan need to be calculated in order to assess the operational
performance of the company taking into account for the intense and significant development
strategies pursued by the group to develop their business and to reduce operational costs.
All the companies had stable efficiency ratios and incurred in significant investments in order to
manage their strategies.
Efficiency ratio
2013 2014 2015 2013 2014 2015
Fixed asset turnover 3.22 3.36 2.93 2.09 2.20 2.16LT asset turnover 1.01 1.00 0.91 1.60 1.65 1.64Total asset turnover 0.62 0.62 0.57 0.70 0.71 0.67Capital exenditures / Sales 6.3% 7.7% 9.6% 9.0% 9.6% 8.4%
TOY NIS
(Toyota Financial Results, 2015)
Toyota efficiency ratios were in line with the values of its main competitor.
Solvency/risk ratios
Solvency/risk ratios attempt to analyse the ability of the companies to meet their long-term liabilities.
Some ratios have been calculated for the sample such as:
- Financial gearing (net financial position / (net financial position + group equity) where
net financial position = financial borrowings – cash and marketable financial securities
- Debt / Equity (total debt, both operating and financial / equity)
- LT financial borrowing / total financial borrowing
All the companies in the sample have a mixed capital structure with the use of financial debt, operating
debt and equity. Financial debt is mainly related to finance opportunities offered to their customers
and to investments to realize new facilities and manage the business. Gearing ratios are sustainable
according to the ability of both Toyota and Nissan to have positive operating cash flow.
Solvency ratios
2013 2014 2015 2013 2014 2015
Financial Gearing 31.9% 26.8% 26.7% 27.9% 26.9% 28.0%Debt / Equity 1.9 1.9 1.8 0.4 0.5 0.4LT borrowings % 64.2% 63.9% 66.5% 79.8% 83.1% 78.6%Interest Coverage Ratio 57.5x 116.8x 120.3x 16.7x 17.4x 20.2xFinancial Debt / OCF 84.5x 22.4x 49.5x -15.5x -25.5x -27.6xDividend / OCF 113.6% 54.3% 144.6% -30.7% -53.5% -56.5%Dividend Pay-out n.a. 36.6% 30.4% n.a. 31.7% 33.9%
TOY NIS
(Toyota Financial Results, 2015)
23
Composition of borrowings is characterized by maturities longer than 1 year with Toyota financing its
operations thanks mainly with long term notes for about the 66% of its debt. Hence financial gearing
seems backed by adequate operating cash flow generation capacity and a strong financial structure.
The financial structure is quite balanced with long term liabilities and equity financing long term
assets while current liabilities (trade payables and other short term non-financial liabilities) financing
short term assets. Both inventories and receivables are liquid and this gives Toyota a quite good
ability to convert short-term assets in cash without big issues and time delays.
Toyota common size balance sheet
2013 2014 2015ASSETSCurrent AssetsCash 4.8% 4.9% 4.8%Cash 0.3% 0.4% 0.3%ST financial assets 4.1% 4.9% 5.8%Receivables 21.2% 19.3% 18.4%Inventories 4.8% 4.6% 4.5%Other ST assets 3.2% 3.5% 3.7%Current Assets 38.5% 37.7% 37.6%
Intangible Assets 0.0% 0.0% 0.0%Property, Plant & Equipment 19.3% 18.4% 19.5%Investments in Associates 5.9% 5.9% 5.6%Investments in Associates 19.6% 19.6% 19.3%Investments in Associates 14.6% 16.3% 16.0%Other LT assets 2.1% 2.1% 2.0%Long Term assets 61.5% 62.3% 62.4%
ASSETS 100% 100% 100%
LIABILITIESCurrent liabilitiesPayables 6.0% 5.3% 5.1%Other ST liabilities 11.3% 11.3% 10.6%Investments in Associates 7.6% 7.1% 8.2%ST Interest Bearing 11.5% 11.7% 10.6%Current liabilities 36.4% 35.4% 34.4%
LT Interest Bearing 20.7% 20.6% 21.0%Other LT liabililities 6.9% 7.2% 7.6%Long term liabilities 27.6% 27.8% 28.6%
Shareholders' equityCapital stock 1.1% 1.0% 0.8%Retained earnings 33.1% 34.0% 34.3%Demant Holding Equity 34.2% 34.9% 35.2%Minority Interests 1.8% 1.8% 1.8%Equity 36.0% 36.7% 37.0%
SOURCES 100% 100% 100%
Toyota Motor Corporation, 2015)
These findings support the great credit rating of Toyota both for short term and long term borrowings:
(Toyota Annual reports 2013, 2014, 2015)
Looking at non-financial debts, Toyota has the ability to finance operations thanks to supplier’s credit.
Looking at some non-financial debts such as the pension liabilities some considerations could be made.
24
In 2015 the company reduced its unfunded pension liability by about Yen 139 billion as a result of an
increase in pension assets due to an increase in equity security prices, which was able to
counterbalance the increase in the pension liability obligation due to the decline of the discount rate.
According to the notes of the report, plan assets are invested in a balanced manner (50% equities, debt
securities 30%, insurances 20%) with an expected cost and return of these assets backed by
reasonable assumptions. This results in a fair, accurate estimation of the pension liability and a good
balance of assets with risks that can be controlled.
(Toyota Financial Results, 2015)
Further, taking into account the company’s cash flow generation ability, the employee liability amount
should not create potential risks to the company solvency and liquidity.
The company is not exposed to significant contractual obligations (Toyota F 20, page 90) that could
result into solvency and liquidity issues, or to liabilities for quality assurances.
Finally, it is useful to make an analysis of cash flow statement in order to assess the company’s ability
to generate operating cash flow and uses/sources of these cash flows according to these ratios:
- Financial Debt / Operating Cash Flow
- Dividend Paid / Operating Cash Flow
- Dividend Pay-Out (dividends paid in year t / net income year t-1
These figures allow appreciating the ability of the company to make changes to the financial policy and
the ability to limit the financial exposition in terms of operating cash flow. Further, the dividend policy
gives insight about the use of operating cash flow; high dividend pay-out that could be reduced
whenever financial resources could be required to finance extraordinary strategies.
Solvency ratios
2013 2014 2015 2013 2014 2015Financial Debt / OCF 84.5x 22.4x 49.5x -15.5x -25.5x -27.6xDividend / OCF 113.6% 54.3% 144.6% -30.7% -53.5% -56.5%Dividend Pay-out n.a. 36.6% 30.4% n.a. 31.7% 33.9%
TOY NIS
(Toyota Financial Results, 2015)
25
Both Toyota and Nissan had important pay-out ratios and were able to keep their financial debt under
control. Sometimes they operated buy backs in order to redistribute capital to shareholders and
change the capital structure.
Taking into account for these points, the Toyota solvency risks appears very low.
Profitability ratios
Profitability comparison of the companies has been made according to Ebitda figures which have been
reclassified according to homogeneous standards. Amortization and depreciation and revenues from
associates accounted according to the equity method are not part of the Ebitda.
In 2013 - 2015 Toyota profitability, according to Ebitda improved as a result of operational efficiencies
related to savings in the supply of spare parts and the adoption of lean management techniques.
Nissan on the other side was unable to achieve such values and it was unable to improve its
profitability.
Profitability ratios
2013 2014 2015 2013 2014 2015Ebitda mrg % 11.0% 13.8% 15.3% 5.6% 5.2% 5.6%
Ebit mrg % 6.0% 8.9% 10.1% 5.0% 4.8% 5.2%Pretax income % 7.4% 10.7% 11.8% 6.0% 5.1% 6.0%
Net Income % 4.4% 7.1% 8.0% 3.9% 3.7% 4.0%
TOY NIS
(Toyota Financial Results, 2015)
Unfortunately the financial reports do not give adequate disclosure about the cost differentiation and
for this reason it is not possible to analyse better the profitability drivers.
It is possible to calculate return on assets and to assess how the company has employed its capital in
order to generate profits. High profitability on sales could not be related to efficiency in the use of
capital and hence low value generation could occur since the company would pay a higher cost for its
non-efficient use of capital.
Three measures are calculated:
- ROE: Net Income / Equity shareholders
- ROIC: Net Income / Net Invested Capital
- ROI: Ebit / Total Assets
All these measures refer to accounting measures with ROE and ROIC that takes into account net
income, a measure subject to the effect of the financial expenses, extraordinary gains and the taxes. For
this reason the results of the sample are not really comparable due to the effect of different tax
regimes. Finally, these ratios are subject to some extraordinary gains as already disclosed when
speaking about profitability differences.
26
Return on capital ratios
2013 2014 2015 2013 2014 2015ROE % 8.9% 13.8% 13.7% 4.2% 4.1% 4.1%ROIC % 5.9% 9.7% 9.7% 3.0% 2.9% 2.9%ROI % 3.7% 5.5% 5.8% 3.5% 3.4% 3.5%
ROIC = NI / Invested capital
TOY NIS
(Toyota Financial Results, 2015)
The most comparable measure is hence ROI which shows as Toyota is the most efficient company.
Return on capital ratios were largely influenced by the efficiency in employing the capital; some ratios
already disclosed help to appreciate the higher efficiency of Toyota in employing its capital and to
explain the ROE composition according to the DuPont formula.
The main points were related to positive incidence on non-operating incomes (e.g. Interest Burden)
which accounted significantly. Increase in ROE % for Toyota was mainly explained by higher
profitability and stable financial leverage, the same features that occurred to Nissan.
ROE Disaggregation
2013 2014 2015 2013 2014 2015EBIT Margin 6.0% 8.9% 10.1% 5.0% 4.8% 5.2%Interest Burden 123.8% 120.4% 116.4% 119.3% 106.2% 116.6%Pretax Margin 7.4% 10.7% 11.8% 6.0% 5.1% 6.0%Tax Burden 66.3% 72.2% 72.1% 69.4% 78.3% 71.3%Profit Margin 4.9% 7.8% 8.5% 4.2% 4.0% 4.3%Total Asset Turnover 0.62 0.62 0.57 0.70 0.71 0.67Return on Assets 3.1% 4.8% 4.8% 2.9% 2.8% 2.9%Financial Leverage 2.92 2.86 2.84 1.44 1.46 1.42Return on Equity 8.9% 13.8% 13.7% 4.2% 4.1% 4.1%
TOY NIS
(Toyota Financial Results, 2015)
2.8. Qualitative interpretation of quantitative analysis
In the period 2013-2015 Toyota financial performance was characterized by a strong increase in sales
thanks to almost stable volumes sold, higher price mix and some contribution by exchange rate
fluctuations. Toyota maintains a strong market share in Japan and North America.
Market share held
thousands 2013 2014 2015Japan 48.4% 46.7% 46.0%North America 13.8% 13.6% 13.6%Europe 4.6% 4.7% 4.8%Asia (excluding China) 16.5% 16.0% 15.1%Source: company 20 F
(Toyota Financial Results, 2015)
Profitability has increased as a result of reorganization, lean management strategies and supply
savings. During the period cash flow generation were positive at operational level and this allowed
strengthening the financial structure, reducing both in absolute terms the financial debts and in
27
relative term according to financial gearing. The company was however able to pay significant
dividend pay-out and to make son buy back policies. Investment policies were not affected by financial
conditions with the company that continued to invest important sums.
Taking into considerations the financial ratios for the period, Toyota has a low risk profile thanks to
high liquidity and low solvency risks; the financial structure is well balanced with short term assets
financed by short term liabilities and long term assets covered by long term liabilities and equity
sources. Finally long term debts are related mainly to borrowings with maturities longer than 3 years
and this is going to reduce the solvency risk.
2.9. Competitor comparison
Results from comparable companies will be highlighted to conduct a benchmark analysis. The
companies represent quite good comparable criteria according to business and geographical presence
(e.g. global presence) although Nissan has sales about 3 times lowers than Toyota.
The Toyota 20-F report is based upon financial data according to US Gaap while Nissan reports are
based according to Japanese Gaap. No significant material differences arise, however for the sample
and reclassification criteria have been similar: hence ratios for all the companies on the panel are
comparable.
Both the companies close financial year in March the 31th and all of them operate globally, although
Toyota maintains a stronger presence in Japan while Nissan is more dedicated to foreign countries.
Country Revenues Segmentation: 2015
TOY NISS
Japan 30.6% 19.1%
North America 34.6% 46.0%
Europe 9.9% 15.0%
Asia 16.6% 9.8%
Other 8.2% 10.1%
Revenues 100.0% 100.0%
(Toyota Global, 2015)
The comparison is taken according to absolute values for all the companies of the panel according to
Yen figures; hence no currency translation has been required.
All the comparable companies operated important capital expenditure related to organic growth.
All the companies finally had quite low financial gearing rations with Toyota being able to strengthen
its capital structure.
28
3. Conclusions and recommendations
Thanks to global presence and a long term history of leadership and innovation, Toyota has become a
recognized leader within the automotive industry. The company is pursuing strategies in order to
improve its competitive positioning thanks to the entry in new markets, the launch of new innovations
(e.g. hybrid cars) and the development of lean management techniques. Looking at financial reports
for the period 2013 – 2015, the company disclosed a good profitability, cash flow generation and
efficient return on invested capital. One of its competitors, Nissan, reported on the same period lower
profitability and a worse usage of its capital.
Thanks to good operational cash flow generation, despite important organic investments, Toyota was
able to maintain a stable and satisfactory dividend pay-out policy with a limited financial gearing and
very low risks concerning liquidity and solvency. Potential value creation in the next years is being
related to market demand fluctuations, but also to the ability to continue the operational efficiency
strategy and the innovation.
Toyota represents a medium risk investment and a good dividend opportunity.
Limitations to this analysis are related to the use of accounting figures and to historical ratios; future
unexpected shifts of the business model are not incorporated in these figures and could hence lead to
unpredictable effects whenever the consolidation area or the strategies pursued by the company
should change significantly. The financial analysis has been taken according to the public information
available at this date, November the 13th 2015.
29
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5. ANNEXES
32