Managerial Finance: General Motors vs Toyota Motors

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.

Running head: MANAGERIAL FINANCE
MANAGERIAL FINANCE
(GENERAL MOTORS VS TOYOTA MOTORS)

Running head: MANAGERIAL FINANCE
Table of Contents
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 Motors Toyota 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.

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 Motors Toyota 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
Ratio Debt 7865 10006374 0.31 0.53
Equi
ty 25577 18735982
Times interest
coverage ratio
EBI
T 21948 2399862 33.51 87.00
Inter
est 655 27586
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
Return on
sales Net sales 147049 29379510 0.65 0.58
Total Assets 227339 50308249
Inventory
Turnover Inventory * 365 3582840 927022985 29.69 38.81
Cost of goods
sold 120656 23889153
Accounts
Receivable
Accounts
Receivable *
365 12190635
312727182
0 82.90 106.44
Net Sales 147049 29379510
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

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
the investors. Also, the recommendations have been provided for the purpose of the
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
purchase price which is $20000 and hence the depreciation amount is (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 4th year.
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. The net present value means 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).
The internal rate of the return is 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).
The Profitability index, also known as profit investment ratio or value investment ratio
is used to determine 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 Price 200000
Shipping charges 10000
Installation charges 30000
Initial outlay 240000
Life of asset 4 years
Salvage Value 25000
Cost of capital 10%
Sales 0 1 2 3 4
Unit price 1250 1288 1326 1366

Running head: MANAGERIAL FINANCE
Units 200 200 200 200
Total Sales 250000 257500 265225
273181.7
5
Cost of sales (units) 100 100 100 100
Cost of sales 125000 128750 132613 136591
Gross Profit 125000 125000 125000 125000
Expenses
Depreciation
7.41
% 12967.5 12967.5 12967.5 12967.5
PBT 112033 112033 112033 112033
Less: tax @ 40% 44813 44813 44813 44813
Profit after tax 67220 67220 67220 67220
Net working
Capital 30000 30900 31827 32782
125509
Annual cash flows -240000 80187 80187 80187 205696
Initial outlay
Discounting factor 1.000 0.909 0.826 0.751 0.683
Present value
(240,000.00
0) 72897.27 66270.25 60245.68
140493.1
4
Cumulative cash
flows
-
167102.73
139167.5
2
126515.9
3
200738.8
2
Net present value 99906
IRR 14%
PROFTABILITY INDEX
PV of future cash flows 0.42
Initial Investment
PAYBACK PERIOD 2.70

Running head: MANAGERIAL FINANCE
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Running head: MANAGERIAL FINANCE
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