Toyota vs. Honda Companies’ Financial Analysis

Introduction

Toyota Motors is one of the largest motor companies in Japan and it started back in 1933 as part of Toyoda automatic loom works. It is recorded as the leading and largest auto manufacturer in the entire world. Apart from being auto manufacture the company also conducts other businesses like offering financial services and operating other industries. The company markets and sells its products all over the world in more than 170 countries. The major markets for Toyota products include Japan, North America, Europe and Asia, the headquarters of its operations is in Japan. The company is potential employer since it has more than 320,000 employees all over the world. (Kendra, 2009)

The company has penetrated in 26 countries where it has over 50 production sites and its distribution network is the largest in Japan. The company has established a distribution system which is made up of 290 dealers whereby they have over 40,000 sales personnel. It also operates around 4,800 sales and service outlets world wide. The ownership share of the company is 19 outlets out of the 4,800 outlets established worldwide. This has enabled the company to control its great production and distribution all over the world. (Kendra, 2009)

Methodology

Data collection methods

Methods of data collection used in this study were qualitative because of the nature of the study. The data was collected using qualitative data collection methods. The study was based on secondary data and the data was collected mainly using archival measurers. Archival measurers includes usage of historical records, the data was gathered through study of past records of both companies i.e. past financial reports, company journals and online information. These are basically the three data collection techniques which are used.

Data interpretation

The data collected was interpreted using both charts and tables; the reason is that use of these two methods enables easier interpretation of the financial data collected. The charts focus mainly on financial performance of both companies over a period of five years. On the other hand tables are used to show different financial data collected including balance sheets, cash flow statements and ratio analysis for both companies.

Results

Based on financial performance charts it is clear that both companies have undergone through different economic situations. This is evident in the performance charts whereby the companies’ financial performance has not been constant at times very low at other financial years it is high. From both charts it is clear that it is during the same years that the financial performance was low and the same for the high performance.

The company achieved revenue of $205,295.7 million in 2009 financial year; this was a decline of 21.9% as compared to 2008. The reason for decrease in revenue was basically because of the decline in vehicle unit sales, fluctuations in foreign currency translation rates which were not favorable to the company and also decrease in parts sales in 2009. Because of these factors the company experienced decrease in its revenue which affected its operations and activities since this means decrease in profitability of the company. (Financial summary FY2010, 2010)

The company suffered losses and the operating loss that was recorded during the 2009 financial year was $4,610.1 million as compared to the operating profits of $22,703.8 million in the previous year. The net loss which the company suffered in 2009 financial year was $4,369.4 million compared to the net profit which was gained in the previous financial year of $17,178.8 million. This shows that for the last one year Toyota motors operations were a bit low due to the external factors which affected. (Mashiq Report Clound service, 2010)

Current capital market analysis for both Toyota UK and Honda UK between financial years 2005 and 2009 shows that Toyota had $225.39 billion while that one of Honda UK is $17.58 billion. This shows that the Toyota UK is far much better compared to Honda UK and it can attract more investors. (Financial summary FY2010, 2010)

Analysis and discussion

Based on financial ratios for both companies it is clear that both companies have no much difference in terms of their ratios. Based on profitability ratios it is clear that the Toyota Company is far much ahead of Honda Company, for instance gross profit margin for Toyota is 22.3% while that of Honda is 13.63%. It is clear that Toyota’s profitability is higher than that one of Honda Company.

Based on growth rates for both companies it shows that the Honda Company for the last five years has grown at a higher rate as compared to Toyota Company. It is clear that though Honda Company may be smaller than Toyota Company it has been growing over time. On financial structure Toyota has recorded higher sales of $240.8 billion as compared to Honda which recorded $110.6 billion. On aspect of income Honda has a higher income of $7.4 billion as compared to Toyota which has $6.6 billion.

Net income for both companies has been changing over the years at one point it is low while in other years it is high. This shows that both companies have been affected by similar market challenges hence their net income have been changing over time.

The company has been ahead of Honda its competitor in several aspects, for instance the revenue growth which is analyzed quarterly for Honda is around 12% while that of Toyota UK is 15.20%. This shows clearly that the Toyota UK is far ahead of Honda in terms of growth as well as production hence being preferred by many investors.

The company also has kept a good record in terms of earnings per share (EPS) as compared to Honda in the industry market. Toyota’s EPS 8.42 while that of Honda lies in the industry average of 1.51. Because of the company’s EPS being higher even than the average industry it has resulted to many investors considering Toyota hence being better placed in the market. (Financial summary FY2010, 2010)
The Toyota Company UK believes in quality production and it is because of its quality vehicles it has been producing to the market that have seen it become more popular. The company employs total quality management whereby it gets quality raw materials and appoints Technicians who are skilled to make the vehicles, hence high quality vehicles. The Toyota Company UK has continued to open new plants in United States; this is as a result of the fluctuations in the currency which has been affecting the company’s pricing strategy. For instance when vehicles are exported it means that they are valued using the Yen and when being priced in UK its in dollar form, so when there is an appreciation it means that the company has to sell its products at a higher price in order to compensate. This problem has been minimized by opening plants in United States. (Kendra, 2009)

Financial performance between 2005 and 2010, chart 1 & 2

The following charts show the stocks trade for the last five years for the Toyota company UK. Based on the chart it is clear that 2007 is the year that the company traded most in stocks since has the highest figure while 2009 recorded the lowest figure in stocks trade. This is almost similar with Honda company since it recorded highest stocks in 2007 and lowest in 2009.

Actual events in Toyota company between 2005 and 2009

For the Toyota Company UK to achieve the financial data we have seen above there are several events over the last five years which have played a great role in this. In 2005 the company started production of its Toyota Aygo which is famous with young people especially urban. Production of this car has seen the company increase its productivity and sales. Also in the same year the company released Peugeot 107and Citroen C1, release of these products has attracted many customers hence gaining popularity in the auto industry market. (Ken, 2010)
In 2008 the company launched the Toyota Research institute of North America; the reason of the company launching such institute sin different countries is to enable the company to effective and efficient in its production from within certain region to avoid exportation of its products. This research institute has enabled the company to know the needs of its customers and to come up with high quality products, at the same time to know the market stability. In the same year the company began testing Plug-in Hybrid vehicles in United Kingdom, this has seen the company improve its financial statements since its hybrid vehicles are highly demanded in the market. (The associated press, 2008)
In 2009 the company established Toyota Motor sales and marketing, this has enabled the company to continue marketing its products allover the world effectively hence increasing its sales against its competitors like Honda.

Toyota motors versus Honda motors

Both are automotive companies which have there basis in Japan and they have been competitors in the auto market over the last couple of years. Research shows that both companies have experienced almost similar challenges over the last few years, due to changes in global economy as well as currency fluctuations. Though there has been challenges the companies have continued to invent new ways of maintaining there standards in the market. (World ranking of manufacturers’ year 2009, 2010)
Over the past five years between 2005 and 2009 the global economy slowed down and this affected greatly the revenue output of both companies. Toyota sales fell from 26.3 to 20.5 trillion yen while its operating income was reported negative, it drop from 2,270 billion yen to 461 billion yen. On the other hand Honda also experienced challenges and recorded a drop in its revenue which declined from 12.0 trillion yen to 10.0 trillion yen. Though Honda’s revenues declined its operating profits still showed a positive figure of 190 billion yen, though it dropped from 953 billion in 2008. (Taylor, 2008)
In terms of profits the Toyota Company is the largest auto maker hence records the highest profits through sales and production. Hence because of the economic depression the company’s revenues and profits also declined. In analysis of 2009 financial year profits the company achieved a gross profit and operating profit of 2.7 trillion yen. Because of this decline the Toyota Company has input a lot of management efforts in order to reduce its operating costs. On the other hand Honda Company managed to shrink its operations and it was able to sustain profits even in 2009 financial year. (Financial summary FY2010, 2010)

SWOT Analysis

Strengths

Toyota being the leading auto manufacture company has certain strengths which have enabled it to stand the stiff competition in the market. It is through these strengths that the company has been always ahead of Honda its competitor and other major competitors in the market. The company has been identifying new investment opportunities in factories in past few years in United States and China. The investments resulted to increase in profits in 2005 which was not expected based on world’s trend in motor industry. It’s because of these investment opportunities the company has utilized, that have enabled it to stay ahead of its competitors and to capture large market share. The profits of the company also improved by 0.8% to 1.17 trillion yen while sales improved by 7.3% to 18.55 trillion yen. (Financial summary FY2010, 2010)
The success of the company is highly associated with its definition of the market niche and target customers hence being in a position to market its products intensively; this has resulted to increased sales. Also this can be associated with having right product mix which suits different customer needs in the market. Using the right product mix for any product in the market helps in building product value as well as customer value. Also the company has employed focused segmentation of the target market and right positioning of its products where the intended customers can easily access them. (AutobloGreen, 2009
The company has a very strong industry position which it has achieved through developing a diversified product range. The company has developed different types of products which meet different customer needs hence a wide variety of products to choose from. For instance it develops automobiles to suit both private customers as well as commercial customers. This has enabled the company to capture large market share, hence high revenue and profits. (Valdes-Depena, 2010)
The company also uses highly targeted marketing technique which helps in capturing specific customers. In addition it has a commitment to lean manufacturing and quality; this is usually achieved through use of total quality management techniques hence high customer satisfaction is transformed to increased sales.

Weaknesses

The company is large in size and though it is an advantage on the other hand has its own problems. The company is large and its production is huge and in the current world the world market for cars is experiencing over supply hence high competition form other manufacturers like Honda. Due to over supply every company wants to develop models which suit customer needs. This in itself is a weakness since controlling production of a large company like Toyota to produce exactly what the customers want is a challenge. (Financial summary FY2010, 2010)
The Toyota Company markets its products mostly in United States and Japan hence it’s faced with a possibility of fluctuating economic conditions as well as political conditions. In order to overcome the company should have a wide scope of its market and market intensively in the entire world.
Since the company is large it takes time to accommodate changes which comes on the way, for instance the car plants incur huge investments which require high fixed costs and also high costs of retaining labor. So whenever the car market experiences down turn the company has an over capacity which is a burden to the company at the time since no way it can regulate or reduce its costs. While on the other hand if there is an upturn the company may end up loosing potential sales since it is under capacity to produce. (Grant, 2003)

Opportunities

The company has been identifying any eminent opportunity whether in technology or market hence being in a position to stay ahead of its competitors like Honda and others. So far the Toyota Company has gained good market reputation from production of environmentally friendly vehicles. This company has been using advanced technology to develop its products hence being in a position to capture the market easily. Also it has been selling its technology to other companies like Ford hence increasing its revenue levels. (Valdes-Depena, 2010)
The company is developing products which target the youths in the city and for a start it initiated a new product for the youth the Aygo. This type of a vehicle has certain features which suits that group of youth.

Threats

The major threat to the Toyota Company like many other car manufacturer is the product recalls. In 2005 financial year the company had to recollect more than 880,000 of its vehicles in the market which included sports service vehicles and pick up trucks. This is usually a great blow to the company because it is costly. The other major threat to the Toyota Company is the high competition experienced in the market. Of late there are many manufacturers and the more they penetrate to the market the higher the competition. (Valdes-Depena, 2010)
Also increased cost of raw materials is another threat of the company; this is because increase in cost of raw materials translates to increased cost of production hence if not careful results in decline in revenue as well as profits.

Conclusion

The major purpose of the study was to carry out financial analysis of the Toyota Company as compared to the Honda Company. Also to show how the main company in our study the Toyota Company has been performing over the last five years. From the study it is clear that the Toyota Company has performed financially well in the industry market as compared to the Honda Company. Analysis on profitability the Toyota Company has performed far much better as compared to the Honda Company and many other companies in the industry. On the aspect of company’s growth it is clear that the Toyota’s company has not faired well over the last five years as compared to the Honda Company. Generally the Toyota Company has performed well in the market except for the years when the economic conditions have not been favorable. However research can be carried in future to tackle issues which have been affecting the industry operations especially on Toyota Company.
In order for the company to survive in the highly competitive business environment the company should employ measures to see that some of the weaknesses and threats are handed in near future. In conclusion both companies in 2010 financial year have kept slow growth but focused on emerging opportunities of the electric operated vehicles and new markets like China and India.

Reference list

AutobloGreen., 2009. Toyota tops 2 million hybrid sales worldwide. Web.

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Grant, R. M., 2003. Cases in contemporary strategy analysis (3^rd ed.). Willey-Blackwell. Web.

Honda Motor Company. 2010. Company Report. Web.

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Kendra M., 2009. Toyota passes GM as Worlds largest Automaker. The Washington Post. Web.

Mashiq Report Clound service., 2010. Industry Analysis, Toyota vs. Honda; which managed better the demand decline? Web.

Taylor, A., 2008. Americas most admired companies: Honda. CNNMoney.com. Web.

The associated press., 2008. Toyota slashes profit forecast amid slump. Web.

Toyota company financial information, 2010. Web.

Toyota Motor Corp. 2010. Web.

Valdes-Depena, P., 2010. Witnesses: Toyota problems could be electronics. CNN. Web.

World ranking of manufacturers’ year 2009., 2010. Web.

Honda Motor Company. 2010. Company Report. Web.