Assessment on "Comparing and Contrasting GM With Toyota"

Assessment 12 pages (3237 words) Sources: 10

[EXCERPT] . . . .

GM and Toyota

General Motors (GM) and Toyota are not only two of the car companies that dominated the American automotive market for generations, but also two of the largest car companies in the world. As a result, they are oftentimes considered two of the major players in the global automotive market. However, both companies have faced significant challenges in the last several years. By examining their working capital management, income statements, balance sheets, and statements of funds, this essay hopes to compare and contrast the financial health of the two companies.

Working Capital Management

Working capital is "a measure of both a company's efficiency and its short-term financial health" (Investopedia, Working capital, 2013). Determining the working capital is a mathematically simple process, as Working Capital = Current Assets -- Current Liabilities (Investopedia, Working capital, 2013). A positive working capital means that the company can pay off its short-term liabilities and is indicative of financial health, while a negative working capital means that a company cannot pay off its current short-term liabilities with its current assets and is indicative of potential financial problems (Investopedia, Working capital, 2013). Therefore, working capital provides a snapshot of a company's financial health, particularly when used in conjunction with other measures of economic health.

"If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short-term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller" (Investopedia, Working capital, 2013). Therefore, it may be critical to examine not only a company's working capital, but also the changes to that working capital over time in order to determine whether a company's short-term solvency is improving or declining over-time.

In addition to providing a window into a company's financial health, the working capital ratio also provides a window into the company's operations. "Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations" (Investopedia, Working capital, 2013). Therefore, this tool can not only provide insight into a company's finances but also into its operations.

GM's working capital is 14.48 billion. "This is 44.75% lower than that of Consumer Goods sector, and 87.29% lower than of Auto Manufacturers- Major industry, the Working Capital for all stocks is 2474.35% lower than the firm" (Macroaxis, GM working capital, 2013). Even more important than GM's working capital at this moment in time is the trend in its working capital, which reflects positive changes in the company. In 2009, GM was in serious trouble, so much so that it did not appear that the company would be able to survive. However, GM "has been through bankruptcy and back, exiting Chapter 11 reorganization in 2009. Since then, the manufacturer of automobiles under brands such as Chevrolet, Buick, and Cadillac has done well and was the largest auto manufacturer by vehicle unit sales in 2011"(Chu, 2012). Part of this success has come as a result of the bankruptcy, which relieved GM of many of its costly obligations, such as pension and health liabilities (Chu, 2012). This changed the ratio of assets to liabilities, and had a positive impact on the company's working capital.

Toyota's working capital is roughly half that of GM. "Toyota Motor Corporation has Working Capital of 6.56 B [billion]. This is 74.99% lower than that of Consumer Goods sector, and 94.24% lower than that of Auto Manufacturers- Major industry, the Working Capital for all stocks is 1065.43% lower than the firm" (Macroaxis, Toyota working capital, 2013). Like GM, Toyota faced a significant financial crises in 2009. However, unlike GM, Toyota did not undergo a bankruptcy. At first blush, it may seem as if by avoiding bankruptcy, Toyota was able to more consistently keep a better working capital, so that its financial performance should be seen as better than GM's. However, that ignores the fact that filing for bankruptcy protected GM and removed many of its liabilities from its current balance sheet. Like other companies who experienced the downturn, Toyota was impacted by the overall drop in the car industry. Moreover, trying to match up supply and demand without putting assets into unsold products was one of the challenges that the company faced (Johnson, 2009).

Income Statements

An income statement is a "financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year" (Investopedia, Income statement, 2013). Moreover, an income statement is generally divided into two parts: the operating and non-operating sections (Investopedia, Income statement, 2013). While both sections impact income, the operating section is generally of far more interest and use to potential investors. "The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment" (Investopedia, Income statement, 2013). In contrast, the non-operating section does not provide information about the daily business. "The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section" (Investopedia, Income statement, 2013). Of course, investors still want to be aware if a company is liquidating assets in order to determine why it might be doing so.

Forbes makes the income statements of companies available on its website. GM's income statement is below:

View: Annual Data | Quarterly Data

All numbers in thousands

PERIOD ENDING

09/2012

06/2012

03/2012

12/2011

Income Statement

Operating Revenue (Revenue/Sales)

37,576,000

37,614,000

37,759,000

37,990,000

Total Revenues

37,576,000

37,614,000

37,759,000

37,990,000

Cost of Sales

33,046,000

32,946,000

33,158,000

25,852,000

Cost of Sales with Depreciation

33,046,000

32,946,000

33,158,000

33,396,000

Gross Margin

4,530,000

4,668,000

4,601,000

12,138,000

Gross Operating Profit

4,530,000

4,668,000

4,601,000

12,138,000

Selling, Gen. & Administrative Expense

2,849,000

2,847,000

2,988,000

3,253,000

Operating Income

1,603,000

1,821,000

996,000

450,000

Operating Income b/f Depreciation (EBITDA)

1,681,000

1,821,000

1,613,000

8,885,000

Depreciation

7,544,000

Operating Income After Depreciation

1,681,000

1,821,000

1,613,000

1,341,000

Interest Income

318,000

139,000

(213,000)

Other Income, Net

418,000

300,000

680,000

572,000

Other Special Charges

(78,000)

(617,000)

(891,000)

Special Income/Charges

(78,000)

(617,000)

(891,000)

All numbers in thousands

Total Income Avail for Interest Expense (EBIT)

2,339,000

2,260,000

1,676,000

809,000

Interest Expense

128,000

118,000

110,000

135,000

Pre-tax Income (EBT)

2,211,000

2,142,000

1,566,000

674,000

Income Taxes

357,000

241,000

216,000

(73,000)

Minority Interest

21,000

55,000

35,000

22,000

Income before Income Taxes

1,793,000

1,842,000

1,143,000

165,000

Net Income from Continuing Operations

1,833,000

1,846,000

1,315,000

725,000

Net Income from Total Operations

1,833,000

1,846,000

1,315,000

725,000

Total Net Income

1,833,000

1,846,000

1,315,000

725,000

Normalized Income

1,911,000

1,846,000

1,932,000

1,616,000

Net Income Available for Common

1,476,000

1,846,000

1,004,000

472,000

Preferred Dividends

357,000

311,000

253,000

Income Statement - Year-to-Date

Revenues Year-to-Date

112,949,000

75,373,000

37,759,000

150,276,000

Income Year-to-Date fr. Total Ops.

4,994,000

3,161,000

1,315,000

9,190,000

* = Data not available

(Forbes, General Motors Company income statement, 2013).

Examining GM's income statements, it becomes clear that GM has experienced a dramatic increase in income from the first reporting period measured, which was at the end of 2011. This is true despite a different trend in overall revenues, reflecting a possible change in operations that has positively impacted efficiency and profitability.

Fortunately, Forbes has an income statement for Toyota as well, which allows direct comparison of the two companies across all measures contained within the income statement. Forbes' version of Toyota's income statement is as follows:

View: Annual Data | Quarterly Data

All numbers in thousands

PERIOD ENDING

12/2012

09/2012

06/2012

03/2012

Income Statement

Operating Revenue (Revenue/Sales)

61,857,087

69,639,340

68,950,657

58,399,703

Total Revenues

61,857,087

69,639,340

68,950,657

58,399,703

Cost of Sales

50,791,268

55,522,699

55,391,653

47,724,978

Cost of Sales with Depreciation

53,475,393

58,958,239

58,564,130

50,409,024

Gross Margin

11,065,819

14,080,247

13,559,004

10,674,724

Gross Operating Profit

11,065,819

14,116,641

13,559,004

10,674,724

Selling, Gen. & Administrative Expense

6,930,770

6,294,082

5,960,621

5,191,418

Operating Income

1,450,923

4,387,018

4,425,905

2,799,260

Operating Income b/f Depreciation (EBITDA)

4,135,048

7,822,558

7,598,383

5,483,305

Depreciation

2,684,124

3,435,540

3,172,477

2,684,045

Operating Income After… READ MORE

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