Financial analysis describes and clarifies a business's operating situation. Financial information gives a big picture about the company to leaders, stockholders, investors and employees. This essay is product of study of financial statement of Toyota and their competitors' under present economic phenomenon. Having analyzed a large number of financial information and surveys, this essay attempts to reflect the difficulties, challenges and advantages of Toyota: Yen exchange rate is the key issue for the business's profit; reducing customer demand impacts company's benefits directly; their strength of cost control system.
It is considered that Toyota is one of the largest automobile industries in the world. Toyota has been established for 70 years. It has 53 overseas manufactories in 27 different countries and regions. Moreover, they sell their products to 170 countries and regions. Their cars have high market share in Asia, America and Europe (more than 50% of their all sales). Their main products include automobile (compact cars, mini-vehicles, sports and specialty cars), materials handling equipment, logistics and textile machinery. (Khalid 2009). Expect the automotive department, the company operates other two divisions: one is financial service department which provides finance to customers for the sales and lease of the company's vehicles, another is 'other' division includes its telecommunications (Toyota data book).
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The company occupies an advanced place in production system and business principles. Many businesses emulate the way of Toyota (Figure 1). 'The Toyota Way can be briefly summarized though the two pillars that support it: "Continuous Improvement" and "Respect for People"' (Jeffrey 2004). They have high level control system to eliminate waste during the production. Besides, their "lean production" is well-known and unique to their manufacturing. They enforce consistently their long-term philosophy business principles. The company has staggering growth in recent years. In 2008, Toyota's sales surpassed G.M. and became the world largest automaker. However, global finanical crisis has negative influence on the company's performance in the 2009 fiscal year (from 1-April-2008 to 31-Mar -2009).
Toyota has solid business result over the years, their financial indicators remained a stable and good level from 2006 to 2008 (Figure 2). At the same time, the business's net income increased from 18551 billion to 26289 billion during the same period. Moreover, Toyota set a new record of their net income in 2008 (Figure 3). However, there is no surprise that Toyota has undergone an extremely difficult period from the end of 2008 caused by financial crisis. Obviously, the company's net revenue declined 21.9% compared with 2008 fiscal year, and the net loss of 444.8 billion. Therefore, the business's ROSF, ROCF, operating profit margin posted negative value (-4%, -2.4%, -2.2% respectively) that is the first time in their 71 years. Meanwhile, the business's average inventories turnover period prolonged 4 days compared with the prior fiscal year (28.5 days); and impacted liquidity requirement of the company.
The key ratios (Figure 4) show that the company experienced a tough period since 2008. A large number of reasons attributed to the actual result in 2009 FY. According to their financial report and other statistics, the main reasons included the effect of decreasing customer demand, the effect of appreciating Yen against Dollar or Euro.
Low customer demand
Gloomy growth of economy caused by financial crisis has substantial effects on automobile sales volume. According to the Toyota's income statements from 2008 to 2009, the net revenues of the 2009 were $208995 millions, a decrease of 21.9% compared with the last fiscal year. Specifically, the company's vehicle sales volume declined 15.1% (from 8913 thousands of units to 7567 thousands of units). The IMF forecasts the world GDP will decrease 1.3% in 2009; and it is the first time during the 50 years. The deteriorating financial phenomenon impacts the consumers' confidence and purchase power. At percent, customers consider carefully due to the decrease of their salary and the increase of car cost.
Secondly, the soaring fuel price is another component of the reason of lower sales volume. The gas price is twice as much of ten years ago (Figure 4). When customers enable to buy a car, they think about not only the price of car, but also the oil consumption whether they can afford to the spending. Firstly, if Toyota intends to attract customers, they must improve their product in order to decline the consumption of fuel that can increase the company's cost. Moreover, the customers are prone to shifting away from trucks and SUVs which are gas consumers. Small vehicles and low-price vehicles are in the highest flight in present market structure.
Appreciating Yen exchange rate
Always on Time
Marked to Standard
The next key reason is increasing Yen exchange rate. Yen against the Dollar and Euro are on an increase, therefore, the contribution from North America and Europe slump nearly 30%. Particularly, the North American and European market are the main market of Toyota, which occupy 40% of the whole company's contribution. Simply, the increase of Yen exchange rates equal to advance the price of their products. Consequently, the business loses their price superiority in the market. Moreover, the North America and Euro are the worst areas during the financial crisis. Customers enable to compare the price between different automobile industries carefully before make a decision. Therefore, vehicle sales slipped 25.2% (North America) and 17.3% (Europe) compared with 2008 fiscal year.
Appreciation of Yen not only has negative influence on export, but also increases the company's expense. According to the company's financial report, the business lost 760 billion Yen because of the effects of foreign exchange rates: increasing valuation losses from interest rate swaps, depreciation expenses and capital expenditures (Toyota Annual Report 2009). Ichimaru, executive vice president of Toyota, announced that at an exchange rate of 90 to the dollar, it's hard to make a profit.
Cost of production plays a crucial role in an industry. It relates primarily to the price superiority in the market. It has directly relationship with the company's profit and performance (Peter: 2008, P268). Toyota is famous with their production system-eliminating waste. In the 1950s, the business began to implement just-in-time (JIT) in their business system in order to save time and materials as much as possible: no overproduction, no waiting, no unnecessary transport or conveyance, no overprocessing or incorrect processing, no excess inventory, no unnecessary movement, no defects and no unused employee creativity.
Attributing to effective measures of controlling cost, the increasing prices of material have a few negative influences on their cost of products. The prices of the products basically level off the same level. Recently, the company launched cost-cutting approach in order to decrease the effects caused by financial crisis in 2009 fiscal year. It is one of the largest actions to plan to withdraw from Formula 1 at the end of the 2009 season, although they considered that F1 is the best way to advertise and flourish their car culture.
Toyota had strong performance in the past decade. In the fierce competition, the company has become the largest automaker in the world. Automobile industry is one of the biggest victims in the financial crisis. A number of automakers suffer from heavy losses, besides; some of them are on the edge of bankruptcy. Having analyzed the gloomy situation in 2009 fiscal year, the business must implement some actions to stop this deteriorated situation. The company already carried out the cost-cutting plan. They need to adjust their market strategy in order to meet and satisfy the customer's needs. They must focus on the adversely effect of foreign exchange rate. It is necessary for the business to figure out an approach for this issue.
- Philp R 2001 Financial Information Analysis Jhon Wiley & Sons Ltd.
- Jeffery L 2004 The Toyota way: 14 Management Principles from the World's Greatest Manufacturer McGraw-Hill
- Peter A & Eddie M 2008 Accounting and Finance for Non-specialists Pearson Education Limited
Annual Report 2008
Annual Report 2009
Fall-out of financial crisis adds to pressure on auto industry 2008