The returns on assets of the General Motors had an average of 0.8% for the last five years. The returns received on the ordinary shares equity had an average of 8.8%, with the highest returns of 42.7% recorded in the year 2015. The profitability ratios of General Motors showed that the operation profits had an average of 1.877, and the gross profits had an average of 1.151 over the five years. The net income ratio had an average of 1.2% for the five years. The revenue growth had an average percentage of 2.5 % recording a negative growth in the year 2015. The net income had an average growth rate of 93% with only years 2011 and 2015 having a positive growth rate while operating profits had an average growth of 3.9%. General Motors had an average of 1.08 and 0.63 for current and quick ratios in the five years. The operating cash flow to current liabilities had an average of 2% over the five years. The accounts receivable turnover ratio had an average of 16 in the five years. The days receivables held, days payable, days sales held in cash, and networking capital days had an average of 5days, -66 days, 39.9 days, and 54 days respectively. The inventory turnover accounts payable turnover had an average turnover of -10.8 and -5.6 over the five years. General Motors had an average of 78.5%, 378.3%, and 12.9%, for total liabilities to total assets, total liabilities to shareholders equity, and long-term debt to long-term capital ratios over the five years chronologically. It also had 16.2%, 1.6%, and -133.82 for long-term debt to shareholders equity, operational cash flow total liabilities, and interest rate coverage. The Altman z- score had an average of 1.12. The current assets and total assets had an average growth rate of 3.6% and 0.1% respectively while total liabilities and shareholders capital had average growth rates of 3.6% and -9.7 % respectively.
On the other hand, Toyota had an average ROA and ROE of 155.1% and 450.3%. It had average operation ratios of 181.1%, 200%, and 204% of gross profit, operating profits and net income all to revenue respectively. The average growth rate for revenue and net income were 5.22 % and 5.77 % for four years excluding the year 2014 because of difference in the currency used in accounting. The accounts payable turnover ratio had an average of 113.7. The current ratios had an average of 0.8 over the five years while the quick ratios had an average of 0.45. The operational cash flow to current liabilities had an average of 425.1 %. The accounts receivable had an average turnover of 9.9 and inventory turnover average of -270.1 over the five years. Toyota had an average of 38 days accounts receivable and an average of 871 days payable over the five years. The average net assets turnover ratio was 2.7. The total assets to total liabilities ratios had an average of 65.7 % and totals liabilities to shareholders equity of 192.6 %. The long terms debt to long-term capital had an average of 38.5 % as compared to 62.9 % for long-term debt to shareholders capital. The company had an average operational cash flow of 24.1 % and interest rate coverage ratio of 1984.39. It had an average Altman z-score of 5.22.
Address of the Company and Industry Analysis
The return on assets of Toyota was highest in the year 2014 while in the other four years it was almost the same. The ratios indicate that the company was effective in managing the assets towards generation of profits. On the other hand the return on assets of General Motors had an average of 0.8%. The company had a negative return on asset in the year 2012 and the highest return was reported in the year 2011 with a return of 7.3 %. Comparing the two companies, Toyota had a far much good performance in utilization of the available assets than General Motors. The Efficiency of Toyota is recommendable since all the assets available are well utilized towards generation of profits. Investors are interested in the returns on their investment in accompany. A high returns on shareholder is better than a lower one. The returns on shareholder equity at Toyota were better than the ones of General Motors.
The net income to revenues ratios of General Motors was not consistent over the five years. Since 2013 the net income ratios increased, this indicates that the revenues converted into profits were increasing. In comparison to Toyota, the net income ratios were lower in General motors showing Toyota was doing better the in conversion of sales into profits. The growth of revenue of General Motors was highest in the year 2011, after that the average growth rate of income was 0.4 % for the remaining four years. The lowest growth rate was recorded in the year 2015. The reduction in the growth rate of revenues indicates challenges the in operation of the organization. On the other side, the growth rate of Toyota of revenue was highest in the year 2011. In the year 2012 the income had a negative growth possibly because of the growth recorded in the year 2011. The growth rate registered in the year 2015 was relatively high. The growth rates in the year 2011 were high because of the impact of recovery from recession of the year 2010. Toyota however had a better growth rate over the period in comparison to General Motors. A higher growth rate than competitors in an industry indicate better performance of the company.
The Altman Z-score of Toyota had an average of 5.22 while General motors had an average of 1.12. The scores indicate that General Motors has a higher possibility of becoming bankrupt more than Toyota (Wahlen, Baginski, Bradshaw, & Stickney, 2014). The worse period was in 2012. An average of z-score below 1.8 indicates a higher possibility of a company to become bankrupt while one higher than 3.0 shows that the chances of the company becoming bankrupt are low. The assets to liabilities ratio of Toyota had an average of 65.7% recording the highest in the year 2015. I t indicates that the companys debt was increasing. On the other hand, General Motors total assets to total debt had an average of 78.5% with the highest recorded in 2014. The comparison of the two companies in the industry shows that Toyota had lower debt than General Motors. The lower the debt to assets ratios, the better for the investors since the risk of losing their investment to financiers is lower.
The current ratios of Toyota had an average of 0.8, with the lowest ratio recorded in the year 2014. The Quick ratios had an average of 0.45. General Motors had current ratio of 1.08 and quick ratio of 0.63. The ratios indicate that General Motors had performed better in management of working capital than Toyota. It would be faster for the General Motors to convert working capital into cash than Toyota since it has a higher quick ratio. Over the past five years, the current and the quick ratios of the General Motors were in line with the industry ratios ("General Motors Co (GM) Current Ratio", 2016).
The best company to choose for investment
For one to choose between the two companies to invest in, it is advisable to invest in Toyota. Toyota had a better performance than General Motors in many ratios. According to Baker and Powell (2009), ratios indicate the strength or weakness of an investment in market (p. 46). Favorable ratios indicate that the company is a good investment and the investors are expected to consider such a company first in their ranking of investment. A combination of the ratios shows the strength of the given company in different sections. The best investment between two companies depends on the ratios and the variance from the industry ratio. In case of mixed ratios strength, the company with the highest strong variance and indicators of higher return on assets is preferred (Baker and Powell, 2009, p. 47).
The return on equity is an important ratio is determination of whether to invest or not. High return on equity indicates a better investment. A company that shows higher returns on equity over a longer period shows that there is possibility it will remain more beneficial to the investors in the long run. The companies in the same industry that have different returns on assets show different performance in the utilization of their asset. It is because the external factors facing the company are almost the same. Investing in the company with the higher return on asset is preferably better and shows possibility of higher growth of investment (Damodaran, 2012, p. 291). Toyota has a higher return on equity as compared to General Motors. It therefore, preferable to invest in it as compared to General Motors because Toyota has almost double the rate of return on equity.
The growth of revenues shows that a company is growing positively towards achievement of the companys goals. The higher the growth of revenues the better since it indicates that the company management is aiming at improving the market position of the company. Toyota had a higher growth than General Motors. The growth indicated that Toyota is gaining more market share rapidly and hence a better investment. Moreover, Toyota had better net income to revenues ratios indicating a better performance in the management of cost. The higher the net income to revenue ratio, the higher the efficiency of operation in minimizing cost. In terms of the profitability ratio, Toyota has performed better than General Motors.
In choosing the company to invest in, it is important to consider the risk of bankruptcy. It is because in case of bankruptcy, the shareholders are the last to receive their investment and in most occasions they receive lower value than expected. General Motors is at a higher risk to become bankrupt than Toyota. According to Altmans z-score, the score of General Motors over the five years indicate that the company is at risk of being bankrupt. Toyotas score is above 3.0 meaning its possibility of being bankrupt is low. Z-score incorporates several aspects of financial statements in measuring the risk of being bankrupt of a firm (Wahlen, Baginski, Bradshaw, & Stickney, 2014). Therefore, the score is considered a relatively perfect measure of riskiness of bankruptcy. According to the Altmans, z-score it is, therefore, advisable for one to invest in Toyota.
The current and quick ratios measures the possibility of a firm to meet the current obligations when due. A high current ratio or quick ratio indicates that a company is better for investment (Lee, Lee, & Lee, 2013). Companies with lower current or quick ratios than the industry are expected to have low cash flow and hence may have financial difficulties. General Motors has better Current and quick ratios than Toyota. However, Toyota is a better choice for investment considering the other financial ratios analyzed above and the riskiness of being bankrupt.
Baker, H. and Powell, G. (2009). Understanding financial management. 2nd ed. Malden, MA: John Wiley & Sons.
Damodaran, A. (2012). Investment valuation. Hoboken, New Jersey: Wiley.
General Motors Co (GM) Current Ratio. (2016). Gurufocus.com. Retrieved 29 April 2016, from http://www.gurufocus.com/term/current_ratio/GM/Current-Ratio/General-Motors-
Lee, C., Lee, J., & Lee, A. (2013). Statistics for business and financial economics. New York, NY: Springer.
Wahlen, J., Baginski, S., Bradshaw, M., & Stickney, C. (2014). Financial reporting, financial statement analysis, and valuation (8th ed.). Mason, OH: Cengage Learning.
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