Table of Contents
Performance of Toyota Motor Corporation is going to be considered in this report. The company has begun to experience some difficulties because of the global financial crisis and internal reasons. Since the company is very powerful, its experience may interesting and useful for other companies and us. It was the main reason to choose the company. The overall situation in the industry is going to be considered, financial performance of the company will be analyzed, etc. The purpose is to propose solutions to the company’s problems and define whether it is safe to invest in the company.
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We have chosen the following company for the analysis – Toyota Motor Corporation. This company has been chosen because of the range of reasons. First of all, it is a well-known company, a global leader, which experience may be interested not only for us, but also for the other companies. Second of all, it is quite easy to get required information about the company. Finally, w are personally interesting in investigation of its performance and current problems.
We would like to begin our paper with providing some background information about the analyzed company – Toyota Motor Corporation. It is a Japanese company. Toyota Motor Corporation is a leader of the world’s automobile industry. According to statistics it is the world’s leader by sales and production. It has more than 300 000 employees. It also has branches and sales representative probably in every country in the world. However, Asia generates almost 40% of the company’s sales. Among the company’s most famous brand we may differentiate the following ones: Toyota Camry, Toyota Corolla, Land Cruiser, Lexus etc.
“Toyota Motor, the world's largest automotive manufacturer (overtaking GM in 2008), designs and manufactures a diverse product line-up that includes subcompacts to luxury and sports vehicles, as well as SUVs, trucks, minivans, and buses. Its vehicles are produced either with combustion or hybrid engines, as with the Prius. Toyota's subsidiaries also manufacture vehicles: Daihatsu Motor produces mini-vehicles, while Hino Motors produces trucks and buses. Additionally, Toyota makes automotive parts for its own use and for sale to others. Popular models include the Camry, Corolla, Land Cruiser, and luxury Lexus line, as well as the Tundra truck” (Toyota motor corporation profile).
The Toyota Company was founded in 1937. Since that time the company has demonstrated really prosperous times that has let it to become the world’s leader. However, the company’s performance has become a little bit worse in the recent years. It can be proven looking at the performance of the company’s shares. Also we can use ratio analysis of the company’s financial statements to find out the reasons for such situation. In fact, performance of the company has no been very successful in the recent years, and the task of this report is to say why.
The company’s shares’ price fell from a high of $137.15 per share on 16.02.2007 to a low of $63.60 on 09.03.2009. There are a few reasons of such poor performance of the company’s shares during the last years. Of course, the main reason is the global financial crisis that has affected positions of the most countries of the world. One of the main consequences of this crisis was fall of the world’s fund markets. Investors were disappointed with a poor quality of majority of financial assets and their desire to invest into them has fallen. On the other hand, the risk of investing into financial assets in general and fund market, in particular, has grown significantly. Combination of these factors has led to significant decline of the global fund market and respectively the price of shares of different companies.
On the other hand, the automobile industry was among those industries that have been damaged the most by the global financial crisis. Since the banks stopped provide credits for people their demand on the automobiles has fallen. As a result, the company’s sales decreased at it experienced great financial losses. For example, the company reported record net losses of $4.2 billion in 2009.This is an objective explanation of a poor performance of the company’s shares. However, there are a lot subjective reasons for such situation. These reasons are related to the features of the company’s performance, relations with clients and shareholders etc. Among these reasons we may differentiate the following ones.
For example the company was forced to recall about 400 000 of its vehicles in 2010. These vehicles were Prius hybrids with faulty brake problems. Moreover, it was the third major recall in 2010. Of course, such problems affect the corporate image and brand of the company and price of its shares, respectively.
That is why it is not surprisingly that the company has launched special advertising campaigns for the purpose of reassuring its consumers in a quality of the company’s cars. However, it is going to take some time to bring back the consumers’ trust.
A lot of experts and analytics also tend to criticize the company’s management. We mean, first of all, performance of the company’s top-managers. For example, Akio Toyoda has been criticized for inability to implement needed anti crisis actions and inability to forward needed messages to the company’s clients in different regions of the world.
Other experts say that his silence about the recall problems is not a great surprise, because he is focused on more important strategic goals. However, we believe that the modern top-manager should be a great public-relations man. Because forwarding right messages to a society is one of the main indicators of the company’s brand and corporate image. As you probably know, positive corporate image is nowadays probably one of the main determinants of the price of the company’s shares.
Thus, the recalls of the bad vehicles was one of the main reasons of a bad performance of the company’s shares during the last years. According to the experts, such situation could have been avoided, if the company had performed an appropriate public relations policy. However, the company’s managers, including Mr. Toyoda, have not managed to forward needed messages to the company’s clients, suppliers and society in general. It has harmed the company’s corporate image that is one of the main determinants of the company’s shares’ price. In general, we support this opinion of the experts.
After analyzing the main reasons of the company’s shares’ bad performance now we are going to conduct a ratio analysis of its financial statements. We are going to use the last company’s annual report, retrieved from its official website. We are going to analyze the company’s performance in terms of its profitability, liquidity and financial stability.
Le us us, first of all, pay some attention to the company’s level of liquidity. Liquidity is an ability of the company’s assets to be turned into cash without significant losses of time and money. As you probably know, the most popular measurement of liquidity is current ratio (current assets/current liabilities).
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Thus, the company’s current ratio was 0.57. We should say that this is quite low level of liquidity since the level of 1.2-1.3 is considered as normal. The current ratio was 0.67 in 2009. It was also a low value, but it has even fallen more, probably because of the recall problems. Such insignificant level of the company’s liquidity may be a bad sign for the company’s creditors since its ability to pay off its debts seems to be suspicious. For the purpose of evaluating this problem more deeply, we also have to look at the of the company’s financial stability. To do it we are going to use a ratio of financial autonomy or independence (equity/total assets). This ratio is quite similar to the so-called debt ratio. Because using it we also may evaluate the share of financial debt in the company’s assets.
Thus, the company’s financial independence ratio was 0.36 in 2010 and 2009. Again we should say that this is quite low level since the normal value is about 0.5. It means that the company is characterized with a big share of financial debt in its total assets. It is not good, especially in the circumstances of the global financial crisis, when the value of debt financing has significantly grown. Moreover, we should say that such high level of debt financing is not typical for the large manufacturing companies.
Also it means that the company is not able to generate needed cash flow to finance its production and performance, in general. To prove it we have to estimate the company’s profitability, using such financial ratio as ROA (return on assets). This ratio is calculated using the following formula: net income/((total assets in 2010/total assets in 2009/2).
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Thus, the company’s ROA was 0.72% in 2010. We should admit that it is not an impressive level of profitability. On the other hand, it is a sign that the company’s performance in terms of profitability was improved in 2010. Because the company declared losses of more than 400 million of Yen in 2009.
The main reason for growth of the company’s profitability this year is a general trend to recovery in the automobile industry. Moreover, the company was able to earn even more, but the recall problems have undermined such possibility. Thus, we can characterize this year as a year of lost possibilities for the company in terms of profitability. Taking into account that the company has lost a high level of brand loyalty its sales, as for us, are not going to increase significantly in the upcoming years. That is why we assume that the company is going to show the average levels of profitability.
To conclude with this particular question we would like to say the following. As for us, the main company’s problem is a high level of debt financing and low level of profitability. In addition the company is characterized with a low level of liquidity. In general, it is a bad sign for the company’s investors, because there is a possibility that the company won’t be able to pay off its debts.
The current year has shown some improvements in the company’s performance. Probably if the situation on the global markets improves the company will show great profits. However, its performance should be constantly monitored for the purpose of avoiding unpredictable losses.
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Some of the experts tend to believe that the features that have made a company the world’s leader now have become the factors that undermine the company’s success. Our opinion can be proven with the following words.
“Even in Japan, where media coverage of the overseas recalls has been restrained, questions are beginning to surface about Mr. Toyoda’s leadership. “Toyota tries to be cosmopolitan but in many ways they are an insular local company,” says a senior government official who has worked closely with the group. “His message is not getting through at all.” Even normally ultra-loyal Japanese suppliers were complaining openly of “confusion” (Man in the news: Akio Toyoda).
After analyzing the company’s financial performance of the last years we are now able to answer the second question of this research paper. Some of the experts tend to believe that the features that have made a company the world’s leader now have become the factors that undermine the company’s success. Our opinion can be proven with the following words.
“Toyota’s speed to market, lean manufacturing, and ground breaking technology has helped to attain near legendary status in the industry. But many of the features that made it the largest, and until last year, the most profitable car maker in history started to look more like liabilities this week” (Reed).
To answer this we, first of all, have to say that the company’s positions, of course, are not so powerful nowadays as it was a few years ago. On the other hand, it still remains the world’s leader and unlike many other companies it has survived the global financial crisis and has not got bankrupt. Of course, there are some factors that undermine the company’s performance and these factors are going to be analyzed below.
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One of the company’s traditional competitive advantages was the level of technological development of its cars. However, this asset has become a problem, when the company was forced to recall almost 8 million of cars because of technological problems. For example, a lot of consumers and experts tend to relate the problems with the company’s cars to their electronic systems. Our opinion can be proven with the following words.
“Toyota blamed floor mats, the gas pedal and the brake mechanicals for its problems. But some customers assert, and government safety officials seem to be implying, that a software glitch is causing the throttle to kick wide open when the gas pedal is not being touched. A software glitch, a ghost in the machine, is to blame” (Flint).
As we have already said, one of the reasons for the company’s problems was an incorrect position of its top-managers relating to the recall problems. We can even call it not incorrect position, but rather traditional way of doing business and cooperating with publicity and officials.
Such traditional, conservative and reasonable approach of the company’s top-managers to cooperation with publicity has always helped the company to remain cool, create an image of the confident company, and calmly explore a society’s needs. However, the global financial crisis and the recall problems required more active position of the company’s managers in the context of sending messages to the publicity. The company’s consumers, clients and society in general have not received such messages. As a result, the company’s image has been damaged that has been reflected in the price of its shares.
The next reason is quite similar to the previous one. Because of the recall problems and some other factors the company has lost the high level of the brand loyalty. The company’s name has always been associated with a high quality and reliability. Nowadays the company has lost part of it. Consumers were disappointed with the mentioned problems and now it is going to take a lot of time to return their loyalty and trust.
“A warning sign for Toyota, though, is that the latest report from Kelley Blue Book shows Toyota falling from the top spot in brand loyalty. Hyundai was number three, but now Toyota occupies that spot and Hyundai is number one, and Honda second. Given the circumstances, being third is still a very good showing” (Motavalli).
Thus, the company’s competitive advantages that have always been the main drivers of its success have now become the obstacles on the company’s way towards renewing of its positions as the world’s leader. Among these advantages we may differentiate high technological level of its cars (unreliable technology has led to unpredictable problems, for example, unintended acceleration), conservative position of the company’s top-managers in relations with publicity (the managers have not managed to send the right messages to publicity), the brand loyalty (because of the all mentioned problems the company has lost its brand loyalty).
Now it is a time to make some conclusions and recommendations. Toyota Motor Corporation has always been the world’s leader in the automobile industry. Its cars have been always considered as a standard of a high quality. However the recent years have been not so successful for the company.
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First of all, the company has been damaged by the global financial crisis. Demand on the cars has fallen around the world. As a result, the company’s sales and profits have also fallen.
Second of all, there are a lot of internal factors that undermine the company’s success. The factors that have always been the main drivers of the company’s success are now factors that limit the company’s possibilities. Among these factors we may differentiate unreliable technology, conservative strategy of the company’s top-managers and unusual low level of brand loyalty. All these factors can be seen looking at the recent recall problems of the company.
As a result of these and some other factors the price of the company’s shares has fallen significantly. Their price has fallen by more than 50% during the last 5 years. This performance can be seen on the graph, provided in the appendix. This performance has been improved this year, but it still remains quite low.
Taking into account all the mentioned factors, it is quite reasonable to state a question whether investors should buy, hold or sell the company’s shares. Our position is the following. We believe that this is a good time to buy the shares of a good company, when the price of these shares is quite low. Despite the fact that the company experiences some problems it still remains one of the most famous and outstanding companies in the world. Such company just cannot go bankrupt or something. The question when the price of its shares will begin to rise is only a question of time.
As for us there are a few reasons to buy the company’s shares:
Recalls are typical for majority of the companies in the automobile industry. Moreover other companies experience even bigger problems in this context. That is why we should not consider the recall problems as something crucial;
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Toyota unconfident financial performance is also typical for the whole industry. Because, as we have already said, it has been caused by the global financial crisis;
Despite the losses in level of brand loyalty it still remains one of the best in the industry;
Despite some technical problems in general the company’s cars are still quite good and competitive.
Thus, despite unconfident performance in the recent years, in our opinion, the company’s shares are still really attractive for investors. Now it is probably the best time to buy these shares.