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Toyota Corporate Valuation Model
Sep 14, 2017 in Marketing
Corporate valuation model can simply be defined as method that a company or an organization uses to know its value. It has become very important in the recent past with the amalgamations and mergers in the world. Companies are being acquired and for the buyers to do that they need to know the real value of the company they want to acquire. A business uses various business statements to analyze its worth among them being ratios, financial statements, relative valuation, discounted cash flow statements and financial reporting quality, (Borowski, 2010). Â Â
In this paper am going to base my research on Toyota Company. The company has been in existence for the last seventy five years and itâ€™s an international company known for its management philosophy and also for the mass market hybrids. The company has subsidiaries in almost all parts of the world and itâ€™s said to be doing very well in the market compared to its competitors.
Financial statements can be said to be records that give the financial status of a business at certain period of time, usually one financial year. Among these statements are balance sheets, stamen of cash flow, retained earnings statement and statement of income. To explain this, balance sheet shows the companyâ€™s assets and liabilities at a given period of time. Statements of income provide details on the companyâ€™s revenue at certain period of time. All these are prepared annually in most companies Toyota being one of them. We are going to look at Toyota company financial statement in the year 2012, (Agar, 2005).
Looking at Toyota Company, in year 2012 it had a consolidated balance sheet with total assets being 372,928 million us dollars, total liabilities being 238, 283 million us dollars and total shareholdersâ€™ equity being 134,645 million us dollars. The balance sheet equation is given by subtracting liabilities from assets which should give capital and in the case of Toyota company shareholders equity.
$372,928,000,000 - $238,283,000,000 = $134,645,000,000
A company that would have its capital figure in such a case is not a healthy company and the more the capital the better. This is because the company has working capital and it cans expand and invest using this capital. It can thus be concluded that Toyota Company is doing well on the basis of the balance sheet equation and it is worth investing in on the same basis.
Statements of cash flow show how the cash flow moves in and out of the company. The records include information from the investments, operations and financial activities. Whenever the company intends to determine whether it can afford to pay bills, handle expenses or acquire assets, the statement is always referred to. Net cash increase or decrease can be found in the statement as well.
Looking at the cash flow statements of the Toyota Company in its last financial year we see the following balances.
Balance from operations= $17,672,000,000
Balance from investments= ($17,553,000,000)
Balance from financing activities=$20,431,000,000
Consolidating the three we will get net cash flow of $20,550,000,000. This shows that the Toyota Company has a positive net cash flow. This can be interpreted to mean that itâ€™s generally healthy and any investor will be interested to invest in such a company. Companies with a negative net cash flow are not healthy to invest in and something needs to be done to them to ensure they donâ€™t collapse. Looking at the Toyota Company you can note from its investing activities that itâ€™s spending more of its capital in investments. This is a clear indication that the company is growing economically.
Statements of income provide the information on revenue the company earns in a given period of time. The expenses that the company spends to attain the income and the shareholder earnings per share are reflected in the income statement. The amount earned or lost is also included. The income statement is often a record of revenue over one year time. The company we are looking at in this paper, Toyota, had net income attributable to it of $283,559,000,000.
Retained earnings can also be used by investors to determine which company is worth investing in and which one is not. The changes in retained earnings in a company are shown in the retained earnings statements. Common-size financial statements differ from financial statements since they are usually applied in comparison purposes. In case an investor needs to compare between two companies, the common size financial statement is considered in decision making. A scale is provided to aid in comparing the two companies. Companies may be different in size and unrelated, thus, the decision to invest in one precise company may be misleading. Use of trends, ratio analysis, and common-size statements can be applied to help the investor to choose the best company for investment. All items in a company are displayed as a percentage of the common base figure.
Ratios provide a standardization method and mostly the companyâ€™s economic characteristics and competitive strategies are provided. The ratios include activity ratio, liquidity ratios, debt and solvency ratios, and profitability ratios.
Activity ratios deal with the liquidity of specific assets and the efficiency to manage assets. The activity ratios may be long-term or short-term. In short-term ratio, inventory turnover ratio measures the efficiency of a fir to manage and sell inventory. It can represent tied-up inventories of fewer funds or an under stock and lost order. The average number of inventory in stock is 365 days. Receivable turnover are also used in short term to represent the number of times the receivables are turned into cash. Low turnover ratios may imply the firmâ€™s income could be overstated, future production cutbacks and liquidity problems. In long-term ratio, fixed or total turnover ratios are determined. In case the turnover ratios are found to be low, in relation to the firm, the investment in assets is too heavy or sales are sluggish. It would imply that the firm had applied an expensive modernized plant.
Liquidity ratios measure the ability of a company to meet its debts requirements as they approach payment. For a merchandise company, the length of cash cycle could be calculated by adding the number of days of inventory in stock to the days the receivable outstand, and subtracting the number of days that the payable accounts outstand.
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â In the case of our company, Toyota,
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â The current assets = $149,911,000,000
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â And current liabilities=$143,346,000,000
Calculating the current ratio we get; 149,911,000,000/143,346,000,000 = 1.046
Current ratio is used to test how capable the company is to pay its debt. A company with a current ratio of is less than one means that the company is not financially health. In the case of Toyota Company the current ratio as calculated above is 1.046 and this shows that the company has good financial health. The company is in a position to pay its debts.
Quick ratio is used in a company to indicate its short term liquidity. Itâ€™s used to see whether the company can be able to meet its short term obligations using its short-term assets. Itâ€™s given by the formula;
In the case of the company Toyota,
Total current assets = $149,911,000,000
Total inventory= ($17,553,000,000)
Total current liabilities= $143,346,000,000
Calculating the ratio we get: $149,911,000,000--$17,553,000,000/$143,346,000,000 = 1.168
The greater the ratio the more the company is healthy financially. If the ratio is less than one then the company is not healthy financially and itâ€™s not a good sign. The Toyota company can be said to be healthy financially basing our argument on the quick ratio calculated above.
Other ratios that may be used under the category of liquidity ratios are as explained below.
Inventory turnover ratio shows the how many times the inventory of a company is sold and replaced within a certain period of time. Toyota Kenya has been known in the whole world of its massive sales and profit making. The higher the ratio, the better the company is positioned
These ratios above are compared with the industry average. If the ratios are less than the industry average then the company is not doing very well and itâ€™s not healthy financially. The opposite means that the ratios are more than the industry averages and thus the company is healthy financially and such a company which Toyota is, is worth investing in. investors are greatly attracted in investing in such companies.
Profitability analysis allows user in reporting of sales and profit data by use of different customized characteristics and key figures like cost. A business must learn to how achieve a satisfactory level of profit in its operations. Therefore, it should determine the areas that need improvement and those that work as required. This profit is determined by its revenues and costs. In gross profit, costs of sales of the business are deducted from the turnover (sales revenue), while in operating profit, overhead expenses are taken away from the gross profit, (Brealey 1991).
Working capital= current assets â€“ current liabilities
In Toyota company;
Current assets = $149,911,000,000
Current liabilities= $143,346,000,000
Working capital is thus given by subtracting current liabilities from the current assets and we will get a working capital of $6,565,000,000. The current assets must be more than the current liabilities to have a working capital that sustains the running of the business. The capital is used in payment of bills and wages. Price setting helps determine profit. The price determines the amount a business should charge on a commodity to help it maximize profits. In the case of Toyota Company the current assets are more than the current liabilities and thus the company can be able to sustain its current liabilities from its current assets. This is a clear indication that the company is healthy.
The price that the customer is willing to pay for the commodity should be determined first before the commodity is offered to the market. Income must exceed expenses for the company to become profitable. In case a company has any cost saving measures, the expenses are brought down thus increasing profitability. In this case the commodity is the motor vehicles that Toyota Company sells. The company first gives so many considerations before giving it a selling price. This will give the outcome of a fair price to both the company and the customers. This can be clearly seen in the large sale made by Toyota Company. The large sales show that the customers believe that the price is fair and also they trust the products of Toyota Kenya which have been contributed by the marketing activities of the company, (Ross, 2000).
Gross profit margin ratio is the amount left on subtracting the cost of goods from the net sales. Cost of goods sold includes raw materials and production labor, but selling expenses are exempted.
Gross profit margin = 100 Ã— Gross profit Ã· Net revenues
= 100 Ã— -199,399 Ã· 226,106 = -88.19%
Toyota Company has a gross profit margin ratio of -88.19% which is deteriorating as compared to 2011 ratio analysis. This is not a good sign to the Toyota Company. The higher the ratio the better and this will show or will be an indicator that the company is healthy financially.
Operating profit measures the ability of a company to turn sales into pre-tax profits. One can use the ratio in comparing the competitive position of the company with the others.
We can calculate the operating profit margin ratio for Toyota Company as follows;
Operating profit margin = 100 Ã— Operating income (loss) Ã· Net revenues
= 100 Ã— 4,327 Ã· 226,106 = 1.91%
The company again had an increased operating profit margin ratio in 2011 as compared to 2010 but in the case of 2012 the ratio slightly deteriorated. This shows that something need to be done on maybe marketing to increase sales or even on the products. The deteriorating of this ratio shows that the company is not doing as well as before.
Long-term activity analysis measures how the company efficiently generates revenue from its investment whether as total or in fixed assets. It deals with ratios, net fixed asset turnover, total asset turnover and equity turnover. Net fixed asset turnover is an activity ratio calculated by dividing total revenue by the net fixed assets.
Total asset turnover is an activity ratio that is calculated by dividing the total revenue in a company over a specific period of time by the total assets. Lastly, the equity turnover is calculated by dividing the total revenue by the shareholdersâ€™ equity. Other Toyota company ratios are return on equity which is 2.69% lower than that of previous year 3.95$. Return on assets is 0.93$ as compared to that of previous year 1.37$.
Net profit margin = 100 Ã— Net income (loss) attributable to Toyota Motor Corporation Ã· Net revenues = 100 Ã— 3,450 Ã· 226,106 = 1.53%. Net profit margin is the indicator of profitability in a company. That one of Toyota Company is $1.53. This shows that the company has stable financial health but all the same, comparing the ratio with that of the previous financial year its lower. This means that the company is not doing as well as it was doing in the previous financial period.
Leverage and Solvency
A combination of debt and equity is used in a business or organization in beginning and maintaining of the business operations. In purchasing equipment, inventory and fixtures, loans can be obtained but owners or shareholders contribute equity to build earnings that are retained for growth. Leverage is the ability of a business to produce income by using debts, which impacts solvency. Therefore, a company must manage making principal and interest payments while continuing with profitable operations even through economic downturns. In case a company becomes highly leveraged, it may become financially unstable leading to its bankruptcy. In solvency ratio analysis, a measure a companyâ€™s ability to use a successful debt strategy and remain solvent in the long-run is provided.
Looking at Toyota Company, recorded total shareholdersâ€™ equity is 134,645 million us dollars. The company in the investing activities has used the capital to invest and is getting large income from the investments. Itâ€™s as the result of the equity that the company has working capital which a company cannot do without, otherwise that may lead to a collapse of the company.
The purpose of using the debt ratio is in accessing debt structure. Total liabilities represent a total on the balance sheet which includes short-term and long-term liabilities. They also represent all assets of a company. Lease obligations are also included in the analysis. Therefore, debt ratio indicates the percentage of a firmâ€™s assets which are financed through debt. A business that is financed by debt is indicated by a ratio that approaches 1. Limit of the amount of cash in hand can be caused by large interest payments which result into a cut into profits. Toyota Company has the following debt ratios;
Debt to equity = Total debt Ã· Toyota Motor Corporation shareholdersâ€™ equity
= 146,071 Ã· 128,364 = 1.14
Debt to capital = Total debt Ã· Total capital
= 146,071 Ã· 274,435 = 0.53
Interest coverage = EBIT Ã· Interest expense
= 7,951 Ã· 279 = 28.51
All the above debt ratios are indicators of a well performing company. The company debt ratios have improved compared to the previous yearâ€™s financial analysis. The company is thus doing very well in terms of debt management and thus its worth investing in. this shows the investors that the company is at lower risk of having losses due to bad debts, (Agar, 2005).
Times Interest Earned Ratio or the Interest Coverage Ratio
The interest coverage ratio is used in measuring the ability of a company to pay interest payments. The number of times that operating income covers interest expense is also measure using this ratio. A high ratio shows that a company can pay interest while a low number show the possibility of future problems. The ratio should be higher than 1.5, although, it varies depending on the type of industry. Basing the calculations on common-size financial statements, solvency ratio analysis is the best in helping to access a companyâ€™s long-term well-being.
Net Tangible Assets Ratio
Total tangible assets of an organization minus all liabilities divided by the number of ordinary shares give the net tangible assets ratio. It provides the actual amount of tangible assets for every ordinary share of the company. It indicates how each share in a company is worth. They also help investors determining the attraction towards the stock valuations of the company thus, its credit worthiness can be determined.
In conclusion corporate valuation model is the way of knowing how much a company is worth. The method is very important since the information about the value is very important and to so many people and companies. Among them are shareholders, investors, employees, the management team and also the customers. The shareholders will be at a better position if they know the value of the company since they have their money in the company. They will know whether it was worth the investment and they will know what at least to expect as dividends in the next financial year.
The investors need to know the worth of the company so as to know whether or not to invest in the company. They would not like to invest in a company that will collapse or that is likely not to perform well. The management team will need the information to know whether they are doing well. If they are doing well or bad they will be in a position to take the necessary step. This will ensure that the company is always on the right track. The employees also need to know whether the company is doing well to ensure that their jobs are secure and that they going to be sure that the company will not be laying off workers, Â (Borowski, 2010). Â