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Financial Statement Analysis, FINA 3314 Section 201 Comparative Ratio Analysis Project between General Motors and Toyota Rasha Bubshait - 200901816 Deemah AlRumaih - 200800279 Leena AlShibil - 200900172 Ruqaya AlHaj Ibrahim – 200900531 Abstract This paper will compare between the performances of General Motors with a company that has its same size, which is Toyota. In order to accurately compare between General Motors and Toyota we considered having the four types of ratio. Liquidity, activity, leverage and profitability ratios are the four different types of ratios that we will consider when comparing the two companies. After defining each ratio we compare the performance of General Motors with Toyota for two years 2009 and 2010. It was found that GM is better investment if you are willing to take a big risk and Toyota will be the choose if not. 2 II. Table of Contents I. Abstract ................................................................................... 2 II. Table of Contents …...................................................................3 III. Introduction …........................................................................... 4 IV. Liquidity Ratio .......................................................................... 5 V. Activity Ratio ............................................................................ 8 VI. Leverage Ratio ........................................................................ 11 VII. Profitability Ratio ....................................................................13 VIII. Findings. ………………………………….…………………. 14 IX. Conclusion .................................................................................14 X. References ................................................................................. 15 3 Introduction General Motors (GM) and Toyota are both automaker companies. GM and Toyota are both highly competitive in the automobile market. General Motors was founded in 1908 and headquarter is in Detroit, Michigan. GM manufactures and designs cars, trucks, crossovers and automobile parts all over the world. The company has so many vehicles like; Buick, Cadillac, Chevrolet GMC, Opel, Daewoo and many more. GM also has General Motors Financial Company, inc. it provides automotive financing services and products through GM dealership in connection with the sale used in the automobile. Toyota was founded in 1933 and headquarter is in Toyota City, Japan. Toyota designs, manufactures and sales different types of vehicles. It has passenger cars, minivans and commercial vehicles. It has many parts all around the world; in Japan, North America, Europe and Asia. It has car brands like Corolla, Camry, Lexus, Vitz, FJ cruiser and many others. Toyota also offers financial services. Ratio analysis 1. Liquidity Ratios Liquidity ratio it also knows as acid test ratio it is used to evaluate the company’s ability to pay off its short terms debts obligations. The two types of liquid ratio are current ratio and quick ratio. Current ratio measures the relationship between the current assets and current liabilities; however, the quick ratio measures the relationship between current assets excluding inventory over current liabilities. The rule of this ratio is the higher the value of the ratio the better and safer to the company in covering its short term and to meet its obligations. Current ratio 4 = Current assets ÷ Current liabilities Years GM Toyota 2011 1.2312 1.0962 2010 1.1250 1.2234 Current ratio 1.25 1.231239271 1.223409465 1.2 1.15 1.125029158 1.1 GM toyota 1.096267281 1.05 1 2011 2010 The performance of GM during 2010 and 2011 was good without any big difference in ratio; nevertheless Toyota showed a bigger different comparing it with GM, the overall performance GM was doing well in 2011 however Toyota did better in 2010. Quick ratio (Current assets – inventory) ÷ current liabilities Years GM Toyota 5 2011 0.9385 0.9753 2010 0.8679 1.0903 Quick ratio 1.2 1 0.8 GM 0.6 Toyota 0.4 0.2 0 2011 2010 The current ratio performance was better than quick ratio, Toyota did well comparing it with GM. The best performance was in 2010 with 1.0903 for Toyota, however GM did well in 2011 than in 2010. 2. Activity Ratio: Activity ratios determine the ability of a firm or company to turn it’s accounts to revenue. It shows how effectively can a company generate revenue in a form of cash and sales based on its asset, liability and capital share accounts. Activity ratios are very important in evaluating the company’s essentials, because other than showing how well the company generates revenues it will also show how well the company is being managed. There are two basic activity ratios: - Fixed Asset Turnover 6 - Total Asset Turnover The higher the ratio the better the company is. - Fixed Asset Turnover = Net Sales / Net property, Plant and Equipment Years GM Toyota 2011 6.5459 3.0105 2010 7.0492 2.8239 8 7 6 5 4 GM 3 Toyota 2 1 0 2011 2010 GM is able to generate revenue from its fixed assets more than Toyota. Even though GM in 2010 was doing better than 2011, it is still doing better than Toyota. Toyota improved in 2011 from 2010. - Total Asset Turnover = Net Sales / Total Assets 7 Years GM Toyota 2010 0.9762 0.6244 2011 1.0392 0.6369 1.2 1 0.8 GM 0.6 Toyota 0.4 0.2 0 2,011 2,010 GM is able to generate revenue from its total assets better than Toyota. There is an increase in the ratios for both of GM and Toyota from 2010 to 2011. Even with the increase GM is doing better than Toyota in generating revenue. 3. Leverage ratio Leverage Ratio is one of the sorts of financial ratio that is using to measure the company’s ability to cover the financial commitments and debit on time. Leverage ratio has 3 measurements methods debt ratio, debt to equity and times interest earned. We choose to calculate debt ratio to figure out weather the firm has more debit or credit and then determine the leveraged of a firm. Also, debt to equity identifies that the more leveraged the ratio, the higher risk for the investors. 8 Debt Ratio: According to the table above we can tell that the debt ratio for Toyota Motor Corporation decreased slightly between 2010 and 2011 from 0.633 to 0.639 and that leads to declining the Leverage Ratio for Toyota Motor Corporation 2010 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Total Assets = Leverage Ratio for General Motors Company 2011 2010 2011 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = Total Assets 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = Total Assets 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = Total Assets 228,018,000 = 0.633 359,775,000 102,718,000 = 0.739 138,898,000 144,603,000 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 Debt Ratio 207,822,000 method Debt 324,800,000 = 0.639 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 106,483,000 = 0.736 To Equity method = 207,822,000 110,870,000 = 1.874 = 228,018,000 124,667,000 = 1.829 = 102,718,000 36,180,000 = 2.839 = 106,483,000 38,120,000 9 = 2.793 debt and less financial risk. Furthermore, GMC’s. in compare the TMC and GMS, it’s obvious that GMS hold a higher debt than TMC, which indicates that they have higher risk for bankruptcy. 0.76 0.74 0.72 0.7 0.68 GM 0.66 TM 0.64 0.62 0.6 0.58 2011 2010 Debt To Equity: Between 2010 and 2011 TMC’s debt has a decreased marginally which is in benefit for the company to reduce the risk for the investors. Moreover, GMC’s debt ratio has a big dropped too. GMC has a greater debt to equity comparing with TMC. This illustrate that the company holds a high amount of debt to the equities and that will make the investors in a risky situation. 10 3 2.5 2 GM 1.5 TM 1 0.5 0 2011 2010 4. Profitability Ratios Profitability ratios usually show if the company is well managed by measuring the overall efficiency of its performance. The following tables will show two types of profitability ratios. The first is the return on assets, which calculates all the company’s profit in relation to its resources. The second is the return on equity, which calculates the percent of the shareholder’s equity from its income. In both cases the higher the result is, the better the company runs. Return on Assets (ROA) = Net Income ÷ Total Assets Years GM TM 2010 0.0444 = 4.4% 0.0136 = 1.4% 2011 0.0635 = 6.4% 0.0092 = 0.9% 11 0.07 0.06 0.05 0.04 GM 0.03 TM 0.02 0.01 0 2011 2010 Return on Equity (ROE) = Net Income ÷ Shareholder’s Equity Years GM TM 2010 0.1705 = 17.1% 0.0395 = 4.0% 2011 0.2410 = 24.1% 0.0268 = 2.7% 12 0.3 0.25 0.2 GM 0.15 TM 0.1 0.05 0 2011 2010 The previous numbers show an increase by 2% in ROA, and 6% in ROE of GM from the year of 2010 to 2011, which shows a very good performance of the company. This states that the company is making more cash on less investment. Also, the company manages the use of its equity efficiency. However, TM’s dropped by 0.5% in ROA, and 1.3% in ROE. This means that TM should improve their management and the overall performance in order to sustain their success in the future. Findings After calculating the four types of ratio which are liquidity, activity, leverage and profitability. We found that GM did better than Toyota in activity, leverage and profitability, however, Toyota did better in liquidity ratio. Yet, this shows that GM take more risk that Toyota, and higher risk means higher returns. 13 Conclusion General Motors and Toyota Motors are a huge and well-known successful motors companies. They have been operating since a long time now. Both companies provide unique and special services to their costumers specially their loyal customers. Definitely, in every case all investors are looking for a firm that has a strong stock in the market to invest and play their money with. Moreover, it depends on the investor’s personality. Some investors are welling to take all kinds of risks, and some accept low returns, but not getting involved with high risks. This report collected financial data of both GM and TM, and then calculated about eight types of ratios from liquidity ratios, activity ratios, leverage ratios, and profitability ratios. As a result, this report discovered that GM operating perfectly based on the resulted numbers of the ratios, which have shown how very well the company has been managed to gain even more returns in the future. So, to invest, this report suggests going with GM. But also, the report shows that investing in GM are riskier than investing in TM. 14 References General Motors Company (GM. (n.d.). Retrieved December 13, 2012, from Yahoo Finance: http://finance.yahoo.com/q?s=GMToyota Motor Corporation (TM). (n.d.). Retrieved December 13, 2012, from Yahoo Finance: http://finance.yahoo.com/q?s=TM Liquidity Ratios Definition. (n.d.). Investopedia.com - Your Source For Investing Education . Retrieved December 22, 2012 from http://www.investopedia.com/terms/l/liquidityratios.asp#axzz1fC0oz6XJ 15