Analysis and evaluation of the business and financial performance of toyota

b’Subject: Finance’
b’Topic: AN ANALYSIS AND EVALUATION OF THE BUSINESS AND FINANCIAL PERFORMANCE OF TOYOTA MOTOR CORPORATION FROM 2017 TO 2019′
b’financial analysnyzis part 3 is what i need help with’

 

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BSc (Hons) in Applied Accounting

 

Research and Analysis Project (RAP)

 

 

 

 

 

 

 

RESEARCH TOPIC

 

AN ANALYSIS AND EVALUATION OF THE BUSINESS AND FINANCIAL

 

PERFORMANCE OF TOYOTA MOTOR CORPORATION

 

FROM 2017 TO 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REG NUMBER: 2089363

 

WORD COUNT: 7450

 

MENTOR

 

 

Table of contents

 

Chapter 1:  Project objectives & overall research approach  
1.1 Introduction 2
1.2 Reasons for choosing RAP topic 2
1.3 Reasons for choosing Toyota Motor Company 2
1.4 Research objectives 2
1.5 Research questions 2
1.6 Research approach 2
Chapter II: Information gathering and accounting /business techniques  
2.1 Sources of information 2
2.2 Methods used to collect data 2
  2.2.1 Books 2
  2.2.2 Internet 2
2.3 Ethical issues 2
2.4 Business analysis techniques 2
2.5 Accounting techniques 2
  2.5.1 Ratio analysis 2
Chapter III   Results, analysis and conclusions  
3.1 SWOT analysis 13
     
3.3 PESTEL analysis 17
3.4 Revenue analysis 20
3.5 Ratio analysis 19
3.6 Conclusions 30
3.7 Recommendations  

 

 

 

 

 

 

 

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CHAPTER I

 

PROJECT OBJECTIVES & OVERALL RESEARCH APPROACH

 

1.1. Introduction

 

The analysis and evaluation of the business and financial performance of an organization provides stakeholders with information about a business for use in decision making. There are various stakeholders concerned and affected by a business and its overall performance.

 

For external and connected stakeholders the most readily available data about a company’s performance is the financial statements, which are subjective to management’s choice of applying accounting standards and rules. Sophisticated financial and business analysis goes beyond looking at accounting results to make an evaluation of the performance of an organization as this only gives a partial view. A sophisticated analyst has to look beyond this readily available data and also take into consideration non financial performance indicators to make a complete analysis and evaluation of the business and financial performance on an organization (Helfert E, 2001).

 

1.2. Reason for choosing RAP topic

 

The Researcher chose RAP Topic 8, this topic gave the researcher an opportunity to develop and strengthen practical analytical skills in analysing and evaluating financial statements and the business environment in which an organization operates in. For a financial professional knowing how to effectively analyze and evaluate financial statements is very crucial as it enables one to accurately interpret accounting ratios and trends patterns underlying the data available in financial statements (Masson, 2018).

 

1.3. Reason for choosing Toyota Motor Company

 

Toyota is one of the biggest companies in the world ranked according to its sales, profits, assets and market value. And it’s on top of the list in the automotive industry (Forbes,2020).Toyota being a multinational company and the biggest in this competitive, most innovative and fast evolving industry, the Researcher was intrigued to know how the vast changes in technology over time has impacted its operation, if the economic fluctuations impacted its financial and business performance, how the trade wars between China and the United States of America has affected its business and how it deals with the intense competition and yet manage to be the leaders of the industry. Nissan Motor Corporation was used as the comparator.

 

 

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1.4. Research objectives

 

  • To examine Toyota’s strengths, weaknesses, opportunities and threats using SWOT analysis.

 

  • To analyse the business performance of Toyota using Porter’s 5 forces and PESTEL analysis to assess the external environment in which it operates in.

 

  • To analyse and evaluate the financial performance of Toyota using past trends of liquidity, profitability, debt and investor ratios comparing these ratios with Nissan’s and industry averages.

 

  • To draw conclusions based on the research findings and make relevant recommendations based on these finding.

 

1.5. Research questions

 

  • How has been Toyota’s financial performance for the past three years based on profitability, liquidity, investor and debt ratio as compared to Nissan’s performance?

 

  • What are the external factors that affect the automotive industry and how do they affect

 

Toyota’s performance?

 

  • What are Toyota’s strengths, opportunities, weaknesses and threats and how do these affect its business and financial performance?

 

  • What conclusions can the researcher make based on the research findings?

 

  • What recommendations can be made to improve the overall performance of Toyota?

 

1.6. Research Approach

 

The main objective of this research project was to evaluate and analyse the business and financial performance of Toyota from April 2016 to March 2019 using Nissan as the comparator to reach a conclusion and make appropriate recommendations based on the research findings. Research questions were set based on the project’s main objective. Secondary data was collected to answer the research questions set and hence satisfy research objectives. Secondary data was collected from various sources verifying the authenticity of the sources, its ability to answer research questions and also taking into consideration the limitations associated with each source used. Making all the above mentioned checks to the secondary data collected before deciding on using it is very crucial (Walliman, 2011).

 

Qualitative analysis on the non quantifiable data collected was performed using business techniques SWOT, PESTEL and Porter’s 5 forces. To analyse the financial performance quantifiable data for both Toyota and Nissan was then analyzed to using ratio analysis. Toyota’s ratios were compared with its own ratios for three successive years and also with Nissan’s ratios and to establish and analyse trends in the calculated information. Based on the analysis conducted the researcher reached conclusions and made recommendations.

 

CHAPTER II

 

INFORMATION GATHERING & ACCOUNTING /BUSINESS TECHNIQUES

 

 

 

2.1. Sources of information

 

To answer the research questions and fulfill research objectives data was collected using secondary sources of data. Data sources can be classified as primary or secondary. Secondary data is readily available that was collected for some other purpose but can be used for another research. Sources of secondary data include books, newspaper articles and magazines. For research purposes secondary data sources has to be reviewed to determine the credibility of the source, the intended audience and the duration of time since the data was published (Cooper and Schindler, 2017).

 

2.2. Methods used to collect data

 

2.2.1. Books

 

The researcher used ACCA text books and other books because they provided a good pool of information and deep knowledge on various topics of the research analysis. Text books have been extremely helpful on refreshing the business and accounting techniques applied on the data collected. Although books provided a starting point for research analysis they also had limitations

 

.Their timeliness had to be considered for the data collected for this research report to be up to date .The publishing process is time consuming and by the time a book is published the information will be a bit dated hence the need to update the information when necessary (Alderman, 2014).

 

 

2.2.2. Internet

 

The internet is loaded with various sources of information and this information being only a click away makes sourcing information from the internet quicker. It enabled the researcher to access a variety of sources listed below

  1. Corporate websites

 

The researcher was able to gather information about Toyota and its comparator using their respective corporate websites. Their Investor Relations libraries contained very useful data that enabled the researcher to conduct an in depth research analysis. Although these websites were helpful in gaining a better understanding about the organisations the researcher could not

 

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rely on this information alone. Management uses these platforms as communication mediums between the organisation and stakeholders therefore they might be tempted to only disclose positive information to keep current stakeholders happy and lure prospective ones.

 

  1. b) Business Magazines

 

Business magazines analyse various business sectors and give up to date news and trends on what is happening around the world. These business publications enabled the researcher to have an appreciation of the automobile industry globally as well as gaining an insight on the factors affecting Toyota, Nissan and the whole automobile industry. As a secondary source of data the reliability, accuracy and efficiency of the data obtained from business magazines in answering set research questions was an issue to consider before using them as authentic sources.

 

  1. Online journals

 

Online journals are used for academic data collection. Journals were very handy because of their availability as topic based. The researcher found journals on specific research topics and this helped save time on data collection. Unlike books they do not have to go through the whole publishing process which is quite tedious consequently resulting in up-to-date data. However subscriptions are often required to get hold of the latest journals (Muhammad, 2016).

  1. Educational Institution website

 

The OBU and ACCA websites had all the information needed about the Research Analysis Project. The researcher found the information pack, exemplars and webinar materials very informative and made use of them as guidance throughout this research and analysis project.

 

 

2.3. Ethical issues

 

Ethical issues arise when one’s actions and decisions are in conflict with certain set moral standards. In the initial stage the researcher had challenges on the proper ways of acknowledging the sources used in the research. Failure to cite, reference or list as bibliography these sources, it would have been assumed that the opinions are not borrowed resulting in a huge breach of honesty and integrity. Thus the researcher had to refer back to the OBU information pack and webinar materials on citing and referencing for guidance on the Harvard Referencing System before proceeding. The researcher preferred to have a Mentor of a certain race and sex not giving thought that this was an act of discrimination. Advice on choosing a mentor and their purpose from

 

 

 

 

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the University’s website and the information pack changed the researcher’s criterion used for selecting a Mentor.

 

2.4. Business analysis techniques

 

2.4.1. S.W.O.T Analysis

 

SWOT is a strategic business analysis technique, used to analyse issues arising from an organisation’s internal capabilities and its external environment in comparison with its competitor’s for strategic planning purposes (Johnson, Scholes and Whittington, 2008). SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats.

 

  • Strengths are favorable qualities that differentiates an organisation from its competitor’s and enables it to achieve set goals and objectives examples include a good brand image or huge

 

financial resources (Kareh,2019).

Diagram 1: SWOT Analysis

 

 

 

 

 

 

 

 

 

 

 

Internal Origin

 

 

 

 

 

 

 

Internal Origin

 

 

 

 

 

 

(Attributes of the environment)    (Attributes of the organization)

 

  Harmful
Helpful
to achieving the objective to achieving the objective

 

 

 

 

 

Strengths Weaknesses
W
S
Opportunities Threats
T
O

 

 

Source: (Imke, S. (2020).

 

 

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  • Weaknesses are an organisation’s unfavorable elements hindering the achievement of set goals and targets. Assessing the internal weaknesses enables management to understand

 

and rectify areas affecting the overall performance. But identifying weaknesses can be difficult as management will be reluctant to admit that they have faults.

 

(Cadle, Paul and Turner, 2014) described the external factors as follows

 

  • Opportunities: beneficial external elements in the environment in which an organisation conducts its business in.

 

  • Threats: uncontrollable external elements that may cause problems for the organization. (Kareh, 2019) acknowledges that ‘A comprehensive SWOT analysis provides significant insights into a brand’s product and positioning in relation to its competitors.’ This makes SWOT useful during performance analysis.

 

Limitations

 

Despite being easy to use SWOT analysis does not differentiate between important factors which need to be prioritized and less important issues. Though all factors identified need to be addressed, prioritizing the more important internal and external factors helps an organization to effectively create a competitive advantage over its rivalries faster.

 

 

 

 

 

3 PESTEL analysis

 

The macro environment was analysed using PESTEL analysis. Businesses thrive in the environment by grabbing the opportunities presented and minimising the impact of threats posed by the same environment. PESTEL analyses how the changes in Political, Economic, Social, Technological, Environmental and Legal factors might pose threats or avail opportunities to an organisation. Focusing on the industry’s key drivers for change will help management to focus on PESTEL factors that are imperative (Johnson, Scholes and Whittington, 200

 

 

  • Political and legal forces: Factors that may impact an organization whether positively or negatively resulting from political and legal developments (Cadle, Paul and Turner, 2014).

 

 

 

  • Economic Forces: Changes in the economic growth and inflation to name a few factors, have an impact on the welfare of an organisations and industries (Cadle, Paul and Turner, 2014).

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  • Social Forces: refers to how the change in social behaviours and values impacts an industry. Assessing whether the change is an advantage or a disadvantage to the organization (Hill. Jones, 2009)

 

  • Technological Forces: The change in technology has changed how organisations conduct The internet has changed the qualities of opportunities and threats technology pose to organisations (Hill. Jones, 2009).

 

  • Environmental Forces; Environmental laws have got a huge impact on how organisations conduct business.

 

 

 

 

Limitations

 

It might not be easy for a larger firm which operates across more than one market to identify the industry it operates in. And since identification of key drivers for change is industry specific and affects overall analysis results PESTEL analysis might be less useful to these large organisations (Johnson, Scholes and Whittington, 2008).PESTEL analysis only focuses on six factors influencing the external environment for strategic planning and performance appraisal purposes this information is not sufficient. For a full comprehensive analysis more external factors have to be analysed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The macro environment comprises of two components the competitive environment and the general environment (white, 2004).This is also shown in the diagram 3:

 

 

 

 

 

 

Diagram 3: Role of the microenvironment

 

 

DEMOGRAPHIC FORCES

 

GLOBAL FORCES

POLITICAL AND LEGAL FORCES

 

RISK OF

ENTRY

BY

POTENTIAL

CUSTOMERS

 

 

 

 

 

BARGAINING INTENSITY OF BARGAINING
RIVALRY POWER OF
POWER OF
AMONGST BUYERS
SUPPLIERS
ESTABLISHED  
   
  FIRMS  

 

 

 

 

 

 

THREAT OF

 

SUBSTITUTES

 

 

 

 

MACROECONOMIC TECHNOLOGICAL FORCES
FORCES
FORCES
SOCIAL FORCES
 

 

 

Source: (Hill and Jones, 2009)

 

 

 

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2.5. Accounting Techniques

 

 

2.5.1. Ration analysis

 

Toyota’s financial performance was measured and analysed using ratio analysis. Ratio analysis involves comparing financial statement`s line items to create ratios, and analysing an organization’s performance by comparing the ratios against industry average ratios or competitor’s ratios or against its own ratios for several consecutive years (BPP, 2017). Trend analysis helps focus on how a ratio is falling, rising or remaining constant showing a reflection of good or bad management(Gibson, 2011).

 

 

Diagram 4 Ratios pyramid

 

 

 

RETURN ON EQUITY

 

 

 

 

 

 

 

RETURN ON INVESTMENT                    X                   TOTAL ASSETS ÷ EQUITY

 

 

 

 

 

 

 

RETURN ON SALES

 

 

 

 

 

X

 

 

 

 

 

ASSET TURNOVER

 

 

(PROFIT MARGIN)

 

 

 

 

 

 

NET INCOME         ÷            SALES                                            SALES                 ÷      TOTAL ASSETS

 

 

 

 

 

 

 

SALES    –   TOTAL COSTS NON CURRENT  +    CURRENT ASSETS
  ASSETS

 

 

 

Source: (BPP, 2017)

 

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Ratios are can be grouped into the following categories

  • Profitability ratios: Measures the earning ability of a firm’s operating activities (Palepu. Healy.

 

Peek, 2013)

 

  • Liquidity & efficiency ratios: Used to calculate a firm’s capacity to satisfy its current obligations (Gibson, 2011).

 

  • Leverage ratios: These measures the proportion of debt finance a company is using compared to its equity finance (BPP, 2017).
  • Investor ratios: Used to calculate investor returns.

 

Limitations

 

Ratio analysis also has its limitations, for ratios to be meaningful comparability is essential. But because two companies in the same sector may use different accounting methods and principles ratio analysis may not be meaningful. The use of industry averages should be done with great caution. Companies with different accounting policies may also be grouped in the same industry average. Information on how industry how an industry average is calculated or disclosure of the financial policies adopted by the companies grouped is not easily accessible (Gibson, 2011).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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CHAPTER III

 

RESULTS, ANALYSIS, CONCLUSIONS RECOMMENDATIONS

 

 

3.1 Business analysis

 

3.1.1 SWOT analysis

 

SWOT analysis was used to analyse Toyota in comparison with Nissan to assess its strengths, weaknesses, opportunities and threats to assess how these factors strategically align Toyota as one of the biggest car manufactures.

 

Strengths

 

  • Strong brand image

 

According to (Interbrand, 2019) Toyota has become the most valuable brand in the automotive

 

industry. Worth $ 56.246 million US dollars it is the 7th most valuable brand in the world. (Forbes 2018) consumer reports stated that Toyota and Lexus were ranked the most reliable car brands. Toyota’s good reputation has helped in strengthening its brand image and

 

maintaining a strong competitive advantage in the industry. Nissan is the 10th most valuable brand in the industry according to (Interbrand, 2019) and was ranked the 14th reliable car brand on Forbes list. (Hill and Jones, 2011) asserted in the price a company can charge its product or service is affected by how the consumers value its products or services, the higher the value placed the stronger the competitive advantage. Consumers regard Toyota’s brand valuable due to its good reputation. Comparing with Nissan and the whole industry this has given Toyota a strong competitive advantage and a stronger brand image.

 

  • Strong distribution and marketing network: Toyoda Toyota’s president mentioned their global network as one of their strengths that helps Toyota maintain its competitiveness in his 2019 financial results remarks. (Car Sales Statistics, 2018) ranked Toyota as the bestselling car brand worldwide with a 3% increase from the previous year, Nissan was number 5 and sales declined by 2%. Toyota managed to increase its market share in 2019 despite a decline in the global market (Focus2move, 2020).
  • Toyota Production System (TPS)

TPS a combination of their just in time and jidoka principal elements is one of Toyota’s strengths. This system helps maintain operating efficiency and cost reduction by avoiding defects hence in turn preventing wastage of materials. Hill and Jones in 2018 stated efficiency in production as one of the factors a company can adopt to build competitive advantage. Efficiency will have a positive impact on gross profit (Toyota, 2019).

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Weaknesses

  • Bad publicity due to large vehicle recalls

 

This is very common in the automotive industry but draws negative publicity to the company which in turn affects sells and brand image. From the 2013 through 2019 model years Toyota and Lexus are recalling approximately 1.8million vehicles because of faulty fuel pumps and the company currently does not have a solution for the issue (Barry, 2020). This can significantly reduce demand and in turn reduce sales. Nissan due to a braking system defect was forced to recall nearly 400 000 vehicles in the U.S and this isn’t the first time the company has had to recall vehicles because of the braking system problems (Cole, 2019). Both companies are at the risk of losing revenue to loss of sales and increases in operating costs

  • Declining sales in primary markets

 

According to Toyota global, for the year ended March 2019 Toyota recorded a consolidated vehicle sales of 8 977 000units from all its markets which was an increase of about 0.14% from sales recorded in 2018, the company experienced a decrease in sales compared to sales recorded in 2018 in some of its primary markets .In Japan sales decreased by 29000 units, in North America sales declined by 61000 units and in other markets namely Central and South America, Oceania, Africa and The Middle East sales declined by 65000 units. For that same year Nissan vehicle sales declined by 4.4% although vehicles sales in Japan increased by 2% the decline in other markets could be covered by an increase in one market. Both companies are having problems in their primary markets (Toyota, 2019).

Opportunities

  • Growing demand for electric cars and autonomous cars

 

Car manufactures are now focusing on electrification because electric cars are environmental friendly due to less pollution and use of renewable energy. Toyota is now focusing on Electric Vehicles (EV) (Lambert, 2019). From a Forbes article written by Scott in 2019, EVs are estimated to make up more than 50% of the car sales globally. Growth in demand for electric vehicles is a great opportunity for both Nissan and Toyota.

Threats

  • Intense competition reference

 

The automotive market is highly competitive, and competition in this industry is set to increase due to further globalization in the automotive industry. Factors which may affect competition are quality and feature, safety and fuel economy to name a few. Toyota has to keep up with changes in the automotive industry to maintain its competitiveness and its market share.

 

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Toyota has to keep up with changes in the automotive industry to maintain its competitiveness and its market share. In 2018 BMW sold the most number of Electric Vehicles in Europe and it is expanding its market share in other global markets (Car Sales Statistics, 2019). Other car brands dominating the EV market poses a huge threat to Toyota sustaining its market share.

 

Natural pandemics

 

The COVID 19 pandemic has taken the global economy by surprise. A natural pandemic like this one is unprecedented and many companies and economies do not know how to deal with its effects. Most governments have ordered national shutdown to curb the spread of the disease, this has had an adverse impact on almost all industries. The automobile industry has been greatly affected sales have been affected, supply of materials has been disrupted manufacturing has stopped. Vehicle sales February 2020 have dropped by 20% in comparison with February 2019 (Accenture, 2020). The full impact of the pandemic and when business operations are likely to return to normalcy is not yet known. This has adversely affected the industry that was already facing a global shrinkage in vehicle demand.

 

 

3.1.2 PESTEL analysis

  • Political factors

 

The automotive industry is subject to various laws and governmental regulations. Toyota and Nissan both conduct business in various markets worldwide and they exposed to different political environments and regulations. In Japan under the Road Transport Vehicle Act every automobile should comply with set safety and environmental standards to be legally used on the roads. The process is complicated and rigorous creating a barrier for new entrants.

 

The US China trade wars pose a huge threat to the automobile industry. The imposition of tariffs on Chinese goods has an adverse effect on the industry. The US is a primary market for both Nissan and Toyota. Raising the cost of raw materials has an effect on the prices of vehicles and this might result in a reduction of sales. The trade wars pose a threat to profitability.

 

 

 

 

 

 

 

 

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  • Social Factors

 

Customers need to feel safe when using a product and if they perceive that their safety is at risk they are less likely to buy that product. Although vehicle recalls are quite normal in the automotive industry, admitting that your product is faulty or does not meet safety standards after you already sold it reduces brand confidence in consumers. This has an adverse effect on Toyota’s sales. Hill and Jones in 2018 stated that reliability and quality excellence are some of the building blocks that build an organization’s competitive advantage. Society associates luxury vehicles with sophistication. The need to be regarded as sophisticated and wealthy pushes the sales of luxury brands and for Lexus, Toyota’s luxury brand. Carbon emissions from vehicles are hazardous to the environment and the society wants to associate its self with environmental products friendly products. This increases the growth in demand for Electric Vehicles.

  • Technological factor

 

Technological advancements have brought both threats and opportunities for industries. Changing cost positions, bringing new markets and creating new competitive advantages (David, 2011). Technological advancements brought changes to the automotive industry, we have now seen electric cars and fuel being replaced. Self-driving cars manufacturing has increased, smart technology being implemented. All these bring opportunities to the industry. Toyota has grabbed the opportunity posed by technology is planning on investing $400million in a self-driving start up with a Chinese company (Hawkins, 2020).

  • Environmental Forces

 

Factors brought by issues to do with the environment and for the automotive industry increase of pollution from both manufacturing plants and emissions from vehicles (Cradle and turner). Since 2015 Europe has applied carbon emission laws and their due for tightening January 2021(Topham, Harvey, 2020). For the industry this pushes the production of electric and solar powered vehicles. The tightening laws on emissions create an opportunity for an increase in demand for environmentally friendly electric vehicles.

  • Legal forces

 

Both political and legal forces emanate from regulations and laws (Hills and Jones). Toyota  has

 

been sued by consumers because of accidents that were caused by vehicle malfunction (Toyota, 2019). The huge legal fees and settlements and the bad publicity pose a threat to Toyota’s competitiveness.

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3.2.2. Revenue and financial analysis results

 

 

3.2.1 Revenue analysis

 

Diagram 5 shows that Toyota`s total revenue in 2018 increased by 6.5% compared to the previous fiscal year. Although the total consolidated vehicle sales decreased by 7000 units roughly 0.1% comparing with vehicles sold during the year ended March 2017 product sales revenue increased by 6% (Toyota, 2018). Revenue from financing operations increased by 6.2%, but this was only 10% of the 6.5% increase in the total revenue collected meaning that 90% of the increase in revenue was from product sales and Toyota mentioned the favourable impact of fluctuations in foreign currency translation rates and the impact of changes in vehicle unit sales and sales mix as the main reasons for the increase in revenue (Toyota, 2018). Toyota’s revenue marginally increased by 3% as compared to revenue collected in 2018. Toyota in their 2019 SEC filings stated the increase in  revenue from financial services and the impact of changes in vehicle unit sales and sales mix which resulted in an increase in revenue from product sales as the main reasons for the growth in revenue for fiscal year 2019 (Toyota, 2019).

 

Toyota Revenue analysis Table

Year Toyota sales product Toyota financing operations Toyota Total revenue
2017 0 0 0
2018 6 10 6.5
2019 2 8 2.9

 

 

Diagram 5

 

Toyota revenue analysis

 

 

 

 

 

% change

 

12                
      10        
10              
        8      
8              
               
      6.5        
               
6               Toyota sales product
             
      6  
           
4       2.9     Toyota financing operations
           
2     0   2     Toyota Total revenue
         
0              
    0          
             
           
  2017 2018 2019      

 

Year

 

 

Source: (Researcher, 2020) Appendix 3

 

 

 

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Nissan Motor Corporation`s net sales revenue increased by 2% in 2018 in comparison with the previous fiscal year, the Researcher perceives that this was due to the increase in sales of products in China and Japan(Nissan,2018). Nissan`s total industry volume rose 1% from 6.1 to 6.2% Nissan’s global sales volume increased by 2.6% to 5.77 million units (Nissan, 2018). Hiroshi Karube Nissan’s CFO alluded that the increase in revenue was due to the acceptance of the  Nissan Intelligent Mobility offensive, led by Note e-POWER, Serena with ProPILOT, and the new Nissan LEAF by their customers. Although Nissan’s vehicles sales increased by 0, 9% and performed better than Toyota in terms of vehicles sales Toyota’s increase in revenue collection was better than Nissan’s (Nissan 2018).

In the following fiscal year Nissan sales dropped by -3% whilst its market share dropped by 1% and car sales volume dropped by 4.4% (Nissan, 2019). Following the dismissal of Carlos Ghosn Nissan’s former chairman in November 2019, flaws in Nissan’s corporate governance were exposed and a result some of its stakeholders lost confidence in it (Toyoda,2019). During the year ended March 2019 Nissan experienced a decline in sales in China, the USA and the UK (thejapantimes, 2019).

 

Nissan Revenue analysis

Year vehicle sale % change net revenue
2017 5516 0
2018 5770 2
2019 5626 -3

 

Diagram 6

 

5800       3
      Nissan Revenue Analysis
5700   2    
       
5600   5770    
  0   5626 0
5500       vehicle sale
5400 5516     % change net
        revenue
5300     -3 -3
  2017 2018 2019  

 

Source: (Researcher, 2020) Appendix 3

 

 

 

 

 

 

 

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3.4.2 Financial Ratio Analysis

 

Profitability ratios

  • ROCE

In the Strategic reporting text book, BPP describes ROCE as a ratio which measures how efficiently a company uses its capital to generate profits. As shown in diagram 7 Toyota`s ROCE from 2017 to 2019 steadily increased then became static. Toyota focused on long term investments rather than short term profits, its drive for investments resulted in capital expenditure. Toyota invested close to $500 million in Uber Technologies for the R& D of autonomous cars (THE WALL STREETJOURNAL, 2018). Looking at Toyota’s capital expenditure table below although their capital expenditure for 2018 and 2019 increased, ROCE was higher during those years compared to 2017 ROCE. This was due to the increase in operating profits as a result of the successful cost reduction efforts Toyota has been making using the TPS and also due to foreign currency gain which resulted in an increase in operating profits even though there was a reduction in vehicles sales (Forbes, 2018).Toyota’s Production System(TPS) mainly focuses on efficient cost reduction and production of quality products (Toyota, 2019).

 

 NISSAN CAPEX                                                                                   TOYOTA CAPEX

 

YEAR                 CAPEX              % OF REVENUE                         YEAR         CAPEX         % OF REVENUE

   2017   16,147 B             15,3%
   2018   17,215 B             15,3%
   2019   15,532 B             14,9%

 

Source (Finbox, 2020)                                                                  Source (Finbox, 2020)

As shown by diagram 7 Nissan’s ROCE is on a downward slope. Compared to Toyota Nissan’s capital expenditure in proportion to revenue collected is higher than Toyota’s and it is shown by the above tables. The decline in Nissan’s ROCE could have been a result of the increase in raw materials caused by the trade wars between China and the USA combined with the decline of demand in global markets

( NIKKEI ASIA, 2018). “Major profit-decreasing factors were the unfavourable foreign exchange rate, the cost for tighter environmental regulations mainly in Europe, as well as the increase of raw materials cost” (Nissan 2019 page 2). Resulting in capital employed yielding a lower return. Toyota’s ROCE is favourable as it is rising and a bit stable.

ROCE analysis

year Toyota Nissan
2017 6.30% 8.50%
2018 7.40% 5.90%
2019 7.30% 4.30%

 

 

 

 

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Diagram:7

 

 

 

 

 

 

 

 

 

 

 

ROCE %

 

10.0%      
  ROCE  
8.50%  
8.0%      
  7.40% 7.30%
     
6.30% 5.90%  
6.0%    
     
     

 

4.30% Toyota

4.0%

Nissan

 

 

2.0%

 

 

0.0%

 

2017                                                2018                                                 2019

 

Year

 

 

 

Source : (Research,2020).Appendix 3

 

 

 

  • Operating Profit Margin

 

Diagram 8 below shows that Toyota`s operating profit margin marginally increased by 1% to 7.4% from 2017 to 2018 then remained static from fiscal year 2018 to 2019.In their 2018 Financial summary cost reduction efforts was one of the reasons they mentioned as to why operating income increased with regards to the automotive operations, and for the financial services there was an increase in financing volume and decrease in credit losses as compared to the previous fiscal year (Toyota, 2018). Diagram 5 on page 19 shows that Toyota’s revenue increased by 2,9% from 2018 to 2019 but Diagram 8 below shows that operating profit margin remained static .

 

 

 

 

 

 

 

 

22

 

    Nissan operating profit
year Toyota operating profit margin % margin %
2017 7.2 6
2018 8.2 6.4
2019 8.2 3
     

 

Diagram:8

 

 

 

 

 

 

 

 

 

 

 

 

% ratio

 

 

 

9

 

8

 

7

 

6

 

5

 

4

 

3

 

2

 

1

 

0

Operating profit margin

 

 

 

 

 

 

 

Toyota operating profit margin

%

 

Nissan operating profit margin

%

 

 

 

 

 

2017                 2018                 2019

 

 

 

Source: (Researcher, 2020) Appendix 3

 

 

 

 

Nissan`s operating margins are on a downward slope. From fiscal year 2017 to 2019 operating profit margins marginally increased then decreased. In their financial statements Nissan stated that the vehicle inspection issue, increase in sales and marketing expenses and increase in raw material costs were the major factors that contributed to the decrease in profits (Nissan, 2018). An increase in purchase costs is one of the reasons why gross profit margin might decrease or remain constant. Though their global sales improved by 2.6% in the fiscal year 2018 the new import quotas on auto parts introduced by Trump increased raw material costs and hence production costs also increased there by producing only 0.4% increase in net profit (NIKKEI ASIA, 2018).

Toyota managed to maintain its operating profit margin regardless of the harsh environment as compared to Nissan whose margins decreased between 2018 and 2019.

 

 

 

23

 

 

  • Net Profit

Looking at diagram 9 below, Toyota’s net profit margins marginally increased in 2018 by 1.8 from the previous fiscal year then decreased by 2.2% to 6.6%. For Nissan a similar trend was witnessed first there was a rise followed by a 3.4% decline in the margin.

 

 

 

       Net profit Margin Table

year Toyota profit margin %   Nissan profit margin %
2017   7 6
2018   8.8 6.4
2019   6.6 3

 

Diagram: 9

 

 

 

 

 

 

 

 

 

%ratio

Net profit margin

10            
    8.8      
9          
           
           
8            
7   6.4 6.6    
7      
  6    
       
6          
           
           
5            
        Toyota profit margin %
4        
           
      3 Nissan profit margin %
3      
       
           
2            
           
1            
           
0            
2017   2018 2019    
       
        Year    

 

Source: (Researcher, 2020). Appendix 3

 

 

 

A close microscopic examination of the interest expense reviews that both companies had an increase in interest expenditure adversely impacting net income. Their long term borrowings increased as capital expenditure increased. Industry average net profit margin ratio was 3.3% (Ready ratios, 2020), so both companies’ ratios were within the average.

 

Liquidity & Efficiency

  • Acid tests ratio

This ratio analyses the overall liquidity of an organization by comparing the most liquid assets to current liabilities (Gibson, 2011).

 

 

23

 

 

 

 

 

 

Acid test ratio

  Toyota ratios Nissan ratios
2017 0.9 1.4
2018 0.9 1.5
2019 0.9 1.3

 

 

Diagram: 10

 

Acid test ratio

 

  1.6
  1.4
  1.2
ratio 1.0
0.8
 
  0.6

 

0.4

 

0.2

 

0.0

 

2017                                                  2018                                                  2019

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Toyota ratios

 

Nissan ratios

 

 

 

Source: (Researcher, 2020).Appendix

 

 

 

 

(Ready ratios, 2020) pointed out that the average automotive industry quick ratios for the years under analysis ranged from 1 to 1.1. As shown above by diagram 10 acid test ratios remained static below industry average for Toyota for the three years being analysed.

Although current asset ratios for Nissan were higher than Toyota`s and were in line with industry average both companies have a low liquidity risk

Nissan appears to be doing better than Toyota and is able to meet its financial obligations better than Toyota. Creditors of short term loans will prefer Nissan to Toyota.

 

 

 

 

24

 

 

 

 

  • Total asset turnover

 

Assets turnover table

Year Toyota   Nissan
2017   0.88 1.30
2018   0.90 1.00
2019   0.90 1.03
       

Diagram: 11

 

Asset turnover ratio

 

  2.00          
    1.30      
ratio 1.50   1.00   1.03
1.00 0.88 0.90 0.90
           
  0.50          
           

 

   
2017 2018 2019

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Toyota

 

Nissan

 

 

 

 

Source: (Researcher, 2020). Appendix 3)

 

Looking at the above Asset turnover ratio on diagram 11, from the year ended March 2017 to March 2019 asset turnover for both Nissan and Toyota marginally changed or rather remained static. With the automobile industry shrinking posing huge threats to the economy this has had a negative impact on their revenue collection resulting in both companies having little or no change in their asset turnover ratios (Winck, 2019).2018 was a tough year for the automobile industry, the trade wars between the world’s largest economies China and the USA resulted in a fall in demand whilst the new CO2 emission standards reduced the demand for diesel vehicles and pushed both companies to go electric(Thomas,2019). As a result both companies were forced to increase their investments in electric cars to produce environmentally friendly products whilst demand in the global markets was falling so there is little to no sales growth resulting in a reduction in net sales revenue.

 

 

 

25

 

  • Working capital cycle

 

Working capital cycle was analysed using calculations presented in appendix 1 and 2 .This shows the time between the purchase of inventories and the receipt of cash from sales and is also known as the cash operating cycle (BPP, 2017). This cycle factors in inventories days, payables days and receivables days. Receivables days refer time taken from credit sales to receiving cash (Gibson, 2011). Payables days refers to the time taken to settle creditors (BPP, 2017)

 

Toyota’s working capital cycle days ranged from 107 to 109 compared to Nissan’s which ranged from 242 to 246. Toyota’s ability to convert purchases into sales is faster than its comparator’s and this can be could be attributed to the efficiency of the Toyota Production System coupled with its strong distribution network and strong supply chain, the production system helps reduce days inventories are in stock whilst the marketing and distribution system pushes sales(Pratap, 2020).

 

Leverage

  • Debt/Equity ratio

 

Debt/ Equity Table

Year Toyota ratio %   Nissan ratio%
2017   55% 55%
2018   67% 49%
2019   68% 41%

 

Diagram: 12

 

  80%         Debt/Equity Ratio        
        67%     68%      
  70%                
                       
  60%                      
    55%                  
                       
ratio 50%                      
                     
40%                      
    55% 49%            
%           41%      
30%                 Toyota ratio %
                   
                     
  20%                     Nissan ratio%
                   
  10%                      
                       
  0%                      
    2017   2018     2019      

 

Year

 

 

 

         Source: ( Researcher, 2020) Appendix 3

 

 

26

 

 

Diagram 12 shows a chart of Toyota and Nissan’s debt to equity ratios from 2017 to 2019.Although Toyota’s debt/equity ratios are above Nissan’s their ratios are below industry averages according to (Ready ratios). This ratio compares total debt with shareholder’s equity to assess how well a company can settle its long debt liabilities (Gibson, 2011).

 

Nissan having lower ratios means their liquidity position is better than Toyota’s. Toyota is highly leveraged using more debt to finance its operations. Although debt finance is inevitable in the automobile industry  as vehicle manufacturing is capital intensive

 

 

 

  • Interest cover

 

  • A company should be able to pay its debts as they fall due and asset turnover ratio asses the number of times a company could pay its interest expense using its profit before interest and tax (BPP, 2017).

 

Interest cover Table

  Toyota ratios Nissan Ratios
2017 67 53
2018 87 45
2019 88 24

 

 

Diagram: 13

 

Interest cover ratios

 

 

 

 

 

 

 

 

Ratio

100

87                                                          88

 

80

67

 

60

 

40 53 Toyota ratios
   
    45
   
      Nissan Ratios
20     24
   

 

 

0

 

2017                                                     2018                                                      2019

 

Year

 

 

Source: (Researcher, 2020). Appendix 3

 

27

 

A company should be able to pay its debts as they fall due and asset turnover ratio asses the number of times a company could pay its interest expense using its profit before interest and tax (BPP, 2017). The average industry interest cover ratios from 2017 to 2018 averaged 1.8 to 2.02 (Readyratios, 2019). As illustrated in diagram 13, both companies ability to pay debts using earning is well above industry average.

 

 

Investor Ratios

  • Earnings Per Share ratios

 

EPS measures the return available for each share (Gibson, 2011) According to (Macrotrends, 2020) Toyota`s earnings per share grew by 34.49% from year 2017 to 2018 and took a dip by 24.% between year 2018 and 2019.The major reason could have been the increase in the number of shares against a back a drop of static earnings levels over the three year period in analysis . The fall was as a result of an adverse impact from unrealised gains and losses in securities and a fall in sales in Japan and North America (Dalugdug, 2019). Earnings per share increased by 11.34% from 2017 to 2018 for Nissan. For the fiscal year ending 2019 earnings per share ratio substantially declined by 57.26% from year 2018 .Toyota from earnings per share perspective it is doing better than its comparator.

 

 

Conclusions

 

The researcher will conclude according to the research objective 1 that focused on the SWOT as reported on page 3. As alluded above on page SWOT analysis identifies strengths, weaknesses, opportunities and threats. .”In order to maximize its competitive advantage, a company must find the best way to position itself against its rival “Hill and Jones page 110. Toyota’s success can be attributed to its cost leadership strategy. For Toyota it is well positioned to leverage its manufacturing capabilities. The President of Toyota in his year ended 31 March 2019 speech in speech confirmed that TPS, strong distribution network and units in operation are the three strengths and it gives them a competitive edge. The issue of vehicle recalls due to faulty fuel pumps negatively affects their strong brand image and customer loyalty. This can also be attributed to the fall of sales in Northern America given the fact that nearly 400 000 vehicles were in recalled the United States. Both companies are at risk of losing revenue due to vehicle recalls with regards to repairs and lost sales.

 

28

 

The growth in demand for autonomous cars and electric vehicles pose good opportunities but with the COVID 19 pandemic, business operations have been put on hold and the future after the pandemic is uncertain. It is most likely that there is going to be a global recession, both companies have huge manufacturing plants and infrastructure to maintain whilst business has been paused. Capital investment to explore into the development of electric and autonomous vehicles might not be readily available.

 

Objective 2 was to analyse the external and competitive environment using PESTEL and Porter’s 5 forces. The macro and competitive environment analysed seem to be creating more constraints on Toyota and other players within the industry. The competition in the industry is very intense. As shown from page 15 to 17. Toyota suppliers, substitute products and other industry players weaken Toyota’s competitive advantage .There is an inverse proportion between the intensity of the threat the posed by each force and Toyota’s profitability. Toyota’s macro environment is also a cause of concern .Although some of the environmental forces help create a growth in demand of Electrical Vehicles which is a niche Toyota must take advantage of. Threats from the political and economic forces are very intense and have a huge adverse impact on Toyota’s performance.

 

The political tension between the United States and China might worsen as Mr. Trump blames China for the outbreak (HKFP, 2020). There could be a world recession because of the COVID 19 pandemic. Toyota is facing various law suits due to accidents caused by vehicle malfunctions. This weakens its brand image one of its major strengths. Reliability of products and customer loyalty go hand in hand. In light of the issues highlighted above the researcher will conclude that the forces seem to be posing a difficult trading environment than opportunities which will have implications on cost increases and reductions in margin.

 

Lastly the researcher will conclude on the financial performance of Toyota. Toyota’s profitability ratios marginally increased whilst Nissan’s ratios were on a downward slope. Nissan’s efficiency ratios were above Toyota’s and in line with the industry averages. The researcher concluded that Toyota based on the profitability ratios calculated Toyota is performing better than Nissan. Toyota’s TPS has good a good effect on the company’s operating profit margin. Although both companies faced a tough 2019 which resulted in a decline of sales, Nissan’s poor performance is also the vehicle inspection issue which further tarnished its image following their former CEO’s scandal. Toyota is focusing on capital expenditure whilst sales are declining reduces its efficiency ratios. Overall Toyota’s performance has been above average, with the forces from the macro environment and its own weaknesses adversely impacting its competitive advantages; their business strategy has positioned has Toyota well positioned as one of the industry leaders.

 

29

 

 

 

Recommendations

 

  • Toyota needs to invest more in the production of Electric Vehicle and autonomous vehicles as these seem to be the future trend.

 

  • Toyota is incurring huge repair costs and fees due to faulty vehicle parts their TPS should be efficient and prevent the manufacture of faulty vehicles

 

  • Toyota’s strengths have given them a strong competitive advantage and they should continue focus on strengthening their competitive advantage.

 

  • Toyota should plan for natural disasters so that when if another pandemic hits it will minimise the effects.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

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