Managerial Finance: General Motors vs Toyota Motors
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This report provides a detailed analysis of the overall performance of General Motors and Toyota Group. It includes ratio analysis, liquidity, profitability, solvency, and activity ratios. It also provides recommendations for improving liquidity. The report also includes a financial analysis of a project.
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Running head: MANAGERIAL FINANCE MANAGERIAL FINANCE (GENERAL MOTORS VS TOYOTA MOTORS)
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Running head: MANAGERIAL FINANCE Table ofContents Overview..........................................................................................................................................3 Part I.................................................................................................................................................3 Ratio Analysis..................................................................................................................................3 Liquidity..........................................................................................................................................3 Profitability......................................................................................................................................4 Solvency..........................................................................................................................................5 Activity ratios..................................................................................................................................6 Part II...............................................................................................................................................8 References......................................................................................................................................12
Running head: MANAGERIAL FINANCE Overview In the concept of the financial statements it is important for the accountants to prepare the correct financial statements as then they are available for the comparison. For the purpose of the in- depth communication and the understanding the company adopts some kind of the techniques in order to give a detailed insight to the users of the financial statements as well. In this report a detailed analysis has been undertaken to evaluate the overall performance of the General Motors and the Toyota Group. Both the companies belong to the same industry and are involved in the manufacturing of the automobiles (Robinson, Henry, Pirie & Broihahn, 2015). Part I Ratio Analysis The ratio analysis is the analysis which is undertaken with an aim to find out the overall financial performance of the companies. This technique makes use of the different ratios of the different categories such as profitability, efficiency, solvency and the overall liquidity position of the company (Boyas & Teeter, 2017). The ratio analysis can be conducted either on the basis of the industry benchmarks or on the basis of the comparison with the other company belonging to the same industry. In this report the detailed ratio analysis is undertaken for the two renowned companies namely GENERAL MOTORS AND TOYOTA GROUP. Liquidity The liquidity ratios are the ratios that are used to measure the performance of the enterprise with respect to how well the company is able to pay back the short term and the contractual obligation
Running head: MANAGERIAL FINANCE via generation of the cash from the sale of the inventory or sales made to the accounts receivables. Under this section the liquidity ratio consists of the current ratio. The current ratio is the ratio which determines the ability of the company to realize the cash from the current assets and pay the current liabilities. This also indicates the generation of the cash in the fastest manner (Williams & Dobelman, 2017). General MotorsToyota Motors 0.86 0.88 0.90 0.92 0.94 0.96 0.98 1.00 1.02 1.04 Liquidity Current Ratio Axis Title Form the table below it can be seen at the current ratio of the General Motors is 0.92 whereas that of the Toyota Motors is 1.02. The current assets are less than the current liabilities in case of the GM hence, the ratio is low. In case of the Toyota the ratio is not equivalent to the benchmark, however, it is sound in comparison to the GM. This indicates that the GM Company is failing to pay the liabilities on time. In this area Toyota wins and the investor can give a point extra (Ko, Fujita & Li, 2017). Strategy to improve the performance of GM as it’s quite close to Toyota Group The company shall focus on the long term liabilities to avid the short term financial burden.
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Running head: MANAGERIAL FINANCE Obsolete assets must be eliminated from the company so that the proper cash is generated. The assets shall be used to the fullest capacity and the smart manner. Profitability Profitability is the king of the company and it is the most interesting factor of the company. Everybody looks forward to the profits may it be the investors, suppliers, key customers and majorly the management? The profitability determines the three major parameters in this report such as operating margin, return on equity and return on assets. The overall profitability would indicate how well the company performs after making the raw and the regular expenses (Khan, & Ali, 2016). General MotorsToyota Motors 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% Profitability operating margin Return on Equity return on net asset Return on Equity would describe how well the returns are availed by the shareholders against the money invested by them in the business. The return on equity of the General Motors is 30.9% whereas in case of the Toyota Motors the ratio tends to be 13.3%. In this area GM wins as the
Running head: MANAGERIAL FINANCE ratio of the net income in comparison to the equity invested by the investors is smooth. Almost 31% returns are being availed by the shareholders after the entire expenses have been entertained (Edem, 2017). Solvency Solvency proportions or the capital structure proportions reflect how the business is financing the advantages of the organization like General Motors and Toyota Group to survey the degree of the business chance and the long term solvency ratio. The outfitting proportion can quicken the profits of the proprietors when the profits produced by means of the acquired assets are unreasonable of cost and the interest payment capacity of both the companies (Small, Dollie, & Yasseen, 2019). Capital Structure GENERAL MOTORS TOYOTA GROUP GENERAL MOTORS TOYOTA GROUP Debt to Equity RatioDebt7865100063740.310.53 Equi ty2557718735982 Times interest coverage ratio EBI T21948239986233.5187.00 Inter est65527586 The solvency ratios depict the two major parameters in this case analysis which are debt to equity ratio and the times interest coverage ratio. The debt to equity ratio determines the proportion of the funds acquired by the debt and the equity. In the present case the debt acquired by the General Motors is $7865 and the equity is $85577 in million whereas that of the Toyota is $10006374 and $18735982 which gives the 0.53 as the ratio. This reflects that the company
Running head: MANAGERIAL FINANCE makes use of the debt and the equity in almost equal manner. This is the reason the return on equity was lower. In case of the general motors is 0.31 thus indicating the debt portion is lower than the equity. Hence in this scenario the General Motors is one point ahead from the point of view of the investment (Volpe & Banfi, 2017). Activity ratios The activity ratios are the ratios which are used to calculate the efficiency of the organizations by calculating the number of the days they are able to realize the cash.In the present case three ratios have been calculated identify the efficiency of both General Motors and the Toyota group. Activity Ratios GENERAL MOTORS TOYOTA GROUP GENERAL MOTORS TOYOTA GROUP Returnon salesNet sales147049293795100.650.58 Total Assets22733950308249 Inventory TurnoverInventory * 365358284092702298529.6938.81 Costofgoods sold12065623889153 Accounts Receivable Accounts Receivable* 36512190635 312727182 082.90106.44 Net Sales14704929379510 The inventory turnover ratio is the ratio which indicates that in how many days the organization is able to realize the cash from the inventory. The inventory turnover ratio of the General Motors
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Running head: MANAGERIAL FINANCE is 29.6 whereas that of the Toyota Company is 38.81 days. The General Motors is able to realize the cash easily as the cost of the goods is lower and the inventory is not piled up. In case of the Toyota the company is taking more time to realize the cash from the market due to the wide business operations and also due to the inventory in the warehouse. Further, the accounts receivables of the General Motors are 82.9 days whereas that of the Toyota Group is 106.4 days which is beyond the acceptable level. The company’s cash conversion cycle would see an impact due to the low speed of the process (Olesen, Petersen & Podinovski, 2015). Lastly the return on sales is also one of the ratios which determine how well the company has generated the net sales with the use of the assets. The company is able to generate the sales efficiently and still ahead of the Toyota Motors. From the point of the investment the investor shall choose General Motors. The organization can begin by setting up the aging schedules to figure out for how much time the receivables are extraordinary. The approach of the audit can be seen on the consistent premise to recognize for the examples in the reprobate records. Developing a technique to distinguish the feeble clients and the reprobate records can be one of the arrangements to improve the delinquent of the clients. The client will be given receipt as indicated by the significant timespan (Pratt, 2016). The arrangement of presenting the client impetuses is one of the most significant factors in deciding the brief installment techniques and the limits and the extra items. From the overall analysis it can be stated that the General motors is performing well than the Toyota Motors in all aspects except the liquidity position. Apart from that the profitability, solvency as well as the efficiency the company is smooth and sound form the point of view of
Running head: MANAGERIAL FINANCE theinvestors.Also,therecommendationshavebeenprovidedforthepurposeofthe improvement of the liquidity. Hence, the General Motors is the acceptable choice. Part II 1.If the company spends $40000 the company shall not include in the cost of the initial outlay as this cost is a variable cost or say one time investment which is bound to be done. At times it may also happen that the company may not incur this cost in the later years, henceforth this cost shall not be included in the cost of the outlay. 2.The depreciation of the machinery is charged on the overall cost of the machinery. The overall cost does not include any shipping charges or installation charge. Hence the purchasepricewhichis$20000andhencethedepreciationamountis(200000- 25000)*7.41%. The reason behind taking the 7.41% is the use of the MACRS asset for the period of the three years. The rate of the depreciation associated with the period of the three years is 7.41% hence the value of the deprecation is 12968. 3.The annual sales are $250000 in the first year and thereafter there was an increase of the 3% annually. The cost of the sales is $125000 and thereafter they are increased by 3% every year. 4.The calculations have been presented in the table below. 5.The net required working capital would be $125509 which is to be recovered at the end of the 4thyear. 6.The after tax cash flows has been calculated in the table below. 7.The calculations have been presented in the table below. 8.The methodology of the payback period alone is not sufficient to decide whether the project shall be accepted or rejected. If the net present value comes to
Running head: MANAGERIAL FINANCE 9.Thenet present valuemeans the summation of the cash inflows as well as the cash outflows of the company. The positive net present value indicates the project shall be accepted whereas the negative net present value indicates the project will not provide the fruitful benefits to the company ((Gabriel Filho, 2016). Theinternal rate of the returnis the one which indicates how much potentiality and the profitability of the investment is there in the project. If the internal rate of the return is more than the cost of the capital than definitely there is a yes to the acceptability of the project (De Souza & Lunkes, 2016). TheProfitability index, also known as profit investment ratio or value investment ratio is used todetermine the value of the investment with respect to the present value. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment (Yuan, Yuan, Dai & Gong, 2017). The payback period is the period which indicates the time in which the full cost of the investment can be recovered (Bornholt, 2017). In all the four parameters accept the profitability index the project shall be accepted as per the rules. However, the profitability index can be used as an exception. Machinery Price200000 Shipping charges10000 Installation charges30000 Initial outlay240000 Life of asset4 years Salvage Value25000 Cost of capital10% Sales01234 Unit price1250128813261366
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Running head: MANAGERIAL FINANCE Units200200200200 Total Sales250000257500265225 273181.7 5 Cost of sales (units)100100100100 Cost of sales125000128750132613136591 Gross Profit125000125000125000125000 Expenses Depreciation 7.41 %12967.512967.512967.512967.5 PBT112033112033112033112033 Less: tax@ 40%44813448134481344813 Profit after tax67220672206722067220 Net working Capital30000309003182732782 125509 Annual cash flows-240000801878018780187205696 Initial outlay Discounting factor1.0000.9090.8260.7510.683 Present value (240,000.00 0)72897.2766270.2560245.68 140493.1 4 Cumulative cash flows - 167102.73 139167.5 2 126515.9 3 200738.8 2 Net present value99906 IRR14% PROFTABILITY INDEX PV of future cash flows0.42 Initial Investment PAYBACK PERIOD2.70
Running head: MANAGERIAL FINANCE References Bornholt, G. (2017). What is an Investment Project's Implied Rate of Return?.Abacus,53(4), 513-526. Boyas,E.,&Teeter,R.(2017).TeachingFinancialRatioAnalysisusingXBRL.In Developments in Business Simulation and Experiential Learning: Proceedings of the Annual ABSEL conference (Vol. 44, No. 1). DeSouza,P.,&Lunkes,R.J.(2016).CapitalbudgetingpracticesbylargeBrazilian companies.Contaduría y Administración,61(3), 514-534. Edem, D. B. (2017). Liquidity Management and Performance of Deposit Money Banks in Nigeria (1986–2011): An Investigation.International Journal of Economics, Finance and Management Sciences,5(3), 146-161. Gabriel Filho, L. A., Cremasco, C. P., Putti, F. F., Goes, B. C., & Magalhaes, M. M. (2016). Geometric Analysis of Net Present Value and Internal Rate of Return.Journal of Applied Mathematics & Informatics,34, 75-84. Khan, R. A., & Ali, M. (2016). Impact of liquidity on profitability of commercial banks in Pakistan: An analysis on banking sector in Pakistan.Global Journal of Management and Business Research. Ko, Y. C., Fujita, H., & Li, T. (2017). An evidential analysis of Altman Z-score for financial predictions: Case study on solar energy companies.Applied Soft Computing,52, 748-759.
Running head: MANAGERIAL FINANCE Olesen, O. B., Petersen, N. C., & Podinovski, V. V. (2015). Efficiency analysis with ratio measures.European Journal of Operational Research,245(2), 446-462. Pratt, J. (2016).Financial accounting in an economic context. John Wiley & Sons. Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015).International financial statement analysis. John Wiley & Sons. Small,R.,Dollie,Z.,&Yasseen,Y.(2019).Independentreview–understandingratio analysis.Professional Accountant,2019(35), 12-13. Volpe,A.,&Banfi,S.(2017).Financialanalysisof100majorlightingmanufacturers worldwide(No. W29). CSIL Centre for Industrial Studies. Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis.World Scientific Book Chapters, 109-169. Yuan, Y., Yuan, Y., Dai, Y., & Gong, Y. (2017). Economic profitability of tilapia farming in China.Aquaculture international,25(3), 1253-1264.