Chapter 1 – Introduction and Aims of the Study
The investment analysis consists of an assessment of the viability of a chosen business group. The viability of investing in the industry and the returns of the outlay to prospective investors will be evaluated carefully; the value of their stocks, the policy on dividends and the equity of the shareholders.
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United Kingdom was selected by the researcher as a research goal for this region or country is known for its strong economy and fast technology. Also considered are demographic factors, for UK is a populated and civilized place. Almost all of its population are working in the Metro and hence, have their own mode of transportation, car. The researcher has selected the automotive industry here, because it has one of the most commonly used goods, automobiles. Automotive manufacturing companies such as the Ford Motor Company, Hyundai Car (UK) Ltd, Toyota Manufacturing UK Ltd, and Nissan Motor Manufacturing (UK) Ltd will be the research correspondent. The businesses will be evaluated in terms of productivity, competence and profitability, based on their published facts and figures.
This paper is intended to be a useful tool for those interested in investing in the sector by looking at the financial ratios to be presented as to its profitability. It aims to be valuable aid for investment decisions. It also aims to be a valuable reference research for those hoping to carry out such a similar analysis in the future.
Chapter 2 – Review of Related Literature/Studies
A study conducted by Ernst and Young, a world –respected accounting and auditing firm, shows that the United Kingdom is Europe’s favorite destination in terms of monetary investments. After learning of this new research, Secretary of Trade and Industry Stephen Byers announced that this would be a “ringing endorsement” for foreign companies to set up shop in the UK. This recognition comes when alternative choices were made by many EUROPEAN countries. In fact, the Ernst and Young company’s Investment Monitor Report shows that the UK had an increase in foreign investments by as much as thirteen percent in 1999. This UK ratio is double the European investment rise. Also, the market share of the foreign investments has also risen. The accounting firm explained their by findings by stating that there were two thousand two hundred forty three that entered into the European arena which represents a five percent increase in 1999. However, there were five hundred seventy five investments that specifically reached the United Kingdom. This represents a chunky thirteen percent increase for from the prior year investments of only five hundred eight investments in this land of the King Arthur fame in the same year -1999. However, the UK companies have also spent twenty-six per cent in the other European countries. This is an expenditure rise of two per cent (Autoindustry, May 2, 2001).
In Southeast Asia’s article Development and Dependency: the Automotive Industry Case, 1988 saw the Malaysian national car, Proton, gain seventy-three percent share of the Malaysian automotive industry market. A good reason is that the company is the beneficiary of the exemption of its governments from dealing with the forty per cent ID of the Malaysian government. Many automobile manufacturers within Malaysia pay this tax. In addition, the company’s foreign competitors are imposing very high import duties on their CBUs that enter the Malaysian circuit. In the past, Proton was ridiculed by his opponents when he began operations because he had to suffer huge defeats that would be less courageous for others and ambitious companies in this Southeast Asian Country to fold their operations. Happily, Proton was able to survive its real world test and transform a losing automotive venture into a profit generating endeavor with a stroke of luck, perseverance and hard work in the year 1989. Furthermore, the Malaysian government even started exporting its Proton cars outside the Malaysian shores. The Japanese car manufacturer, Mitsubhishi, did not expect that the Malaysian Car manufacturers would export cars this early in their business life. More importantly, the Japanese Competitor did not expect that the Malaysian Car company, Proton, would be very successful, business –wise, in the UK car market (Abbot, 2002; p. 131).
In another article, the statement goes “The view that a multi-stage production process should be treated as an integrated process leads naturally to the realisation that any such process is only as good as its weakest link. A zero-defect philosophy and the view that workers need to be encouraged to take responsibility for the total activity through training and communication, disseminated to both suppliers and competitors (Norman, 1989:9).
The above Norman statement only shows that investments into the car manufacturing business in the United Kingdom must continue to flow into the United Kingdom. Thus, the Japanese car manufacturers will be bound to continue their investments in there with Britain as its main European factory site. In terms of obstacles, the Integrated Japanese automotive manufacturing facilities are not as transient as a screwdriver assembly plant. Also, the British government has to give a helping hand in order to make sure that Britain will be Europe’s best place to set up a Japanese car assembly plant. Thus, Britain will surely benefit if it increases its efforts to influence the Japanese car giants like Nissan, Toyota and Honda to set up shop in Britain when it was not able to exercise a slight influence to Ford, Vauxhall and Chrysler motors. To ensure a viable British investment, the policy makers in Britain had to meet halfway with what the Japanese car manufacturers proposed. Thus, the Department of Trade and Industry and other top level British Government official ought to develop and implement investment policies that would give leeway for the implementation of the Japanese car manufacturers’ own company goals and objectives. This came about because many of the British car manufacturers had decreased its local production. In addition, Some British foreign policies were damaging or unpopular that emanated to a number of serious economic problems for the British Government. Evidently, British business policy was not focused on implementing a vibrantly strong national industry like Germany, France and Italy. Advantageously, The British government was able to apply to the Japanese car policies inside its realm without a strong complaint from the current local car manufacturers. Next, the British policy makers enticed the Japanese car manufacturers to invest in a United Kingdom outfit. Complementarily, the Japanese car manufacturers need a strategic European facility to produce their cars in order to penetrate the European Car market and Britain is strategically located for such Japanese intentions(McLauglin, 1999; p. 87).
Many factors encourage direct contacts between large companies and British policy makers in the political system. When the government makes decisions for ideological reasons to downgrade meetings with trade organizations, just like what Prime Minister Margaret Thatcher implemented in the 1980s, many of the companies increased their capacity to deal with the government. In fact, Vogel debated that the liberal ideology of the industry people made them doubtful of the partnerships with the government through on a direct basis. Clearly, the automobile industry is one of the major income generating activities for the Exchequer and it is involved in the complicated set of tax interactions that require an individual to talk with the government. A few of the policies have been aimed at some firms. This encourages independent political activity. Furthermore, many large car manufacturing companies have business dealings such as large procurement issues with the government. This situation warrants that companies have a department or unit that will mainly interact with the concerned government workers and political personalities.
Many American multinational companies have placed importance on government dealings in order to ask the politicians’ help regarding possible investment localities. But, it is a better alternative not make sweeping interpretations that cover everything and concentrate on a small business community. For, different business sectors have different styles and approaches. As evidence, Ford motor company is taking a proactive role in its government negotiations. On the other hand, Vauxhall is working with a meager unit to interact with government agencies and personalities and is not in favor of adopting a more strict side on many major political issues. For starters, “in spring 1993 Ford UK circulated a letter critical of the government’s approach towards Japanese imports to other manufacturers, requesting the other companies to sign it. Vauxhall refused. The decisive factor in the development of independent contacts between British Leyland and the government was the consolidation, nationalization and privatization of the company”.
Salisbury stated that the basic point of all political actions is focused on the large companies’ ‘institutional interests’ that would be instrumental to their implementation of policy –related jobs. An effective political representation emphasizes that the companies must nurture some political maneuverings or strategies. Some of these strategies include joining many business organizations, developing a government communications department, the hiring of consultants and even reaching the point of donating money to political parties. This ‘horses for courses’ strategy is successful when there is no rigid structure of representations in business. Sargent even insists that there should be a future United Kingdom government that does not allow dealings directly with each company and makes it compulsory policy that they will join a representative organization in one way or another in order for other forms of talks with each company not to grow.
Thus, many companies in the United Kingdom had set up a unit that will concentrate on British independent political activities in order to bring their company closer to the government regulatory and other activities. And, this company unit will lobby for its side whenever the British policy makers craft statutes and regulations and other British government implementing agencies. As proof, the British government’s Vehicles Division had been set up to ‘sponsor’ issues in many aspects of the United Kingdom automotive industry. This government division has is segregated into the three sections. One section caters to the automotive policy needs of the American Multinational Companies that have set up its car manufacturing facilities in the United Kingdom like Ford motor company. Another section concentrates on filling the automotive policy needs of British Leyland which later included dealing with Nissan also. The third and last section of the Vehicles division looks into the policy needs of the components section. As far as the European car market is concerned, Directorate-General III is also responsible for the automotive sector while Directorate-General IV is responsible for State aid needs cases(Maloney, 1999; p. 92).
Further, the monetary success in the automotive industry in the United Kingdom symbolizes many of the changes that are occurring in the manufacturing atmosphere starting in the 1980s. Sadly, the manufacture of passenger cars here had dropped from the high one million nine hundred thousand units in 1972 to the very low nine hundred thousand units only in 1982. Consequently, many of the automotive manufacturing employees were unceremoniously retrenched to lessen labor costs and thereby also decrease the company’s net losses. This has occurred specifically in the West Midlands area. But, things got better in the 2000s. Car output started to climb up until it reached the one million seven hundred thousand car mark in 1997. This had been forecasted to increase to the two million car benchmark when the first half of 2007 arrives. But, the employment rate continued to decrease at this time. The main reason for the automotive comeback of the United Kingdom’s car industry is because the three major Japanese car manufacturing companies have decided to use Britain as the production outfit to sell their smaller and lower priced cars. Nissan motors started putting out cars in Sunderland in 1986 until today. Toyota and Honda started producing its units at Burnaston in Derbyshire and Swindon starting in 1992. Starting in 1995, these Japanese companies had increased production to fill the automobile needs of the European Union members. Nissan infused more than ₤ 1,500,000,000 itself alone. The three Japanese companies were putting out more than five hundred thousand cars between them in an average year. Most of these British made Japanese cars were sold outside the United Kingdom. These Japanese car exports increase the United Kingdom’s trade balance in the manufacturing industry. Furthermore, Nissan and Honda had started production on a new car model. Toyota also started setting up a new plant for its third car model in Lens which is located inside France. Also, BMW bought Rover in 1994 from its British Aerospace owners and was inking a ₤ 3 billion car manufacturing program in the year 2000. At the same time, Ford motors and General Motors (Vauxhall) promised to funnel more investments in the United Kingdom car industry for their new car models. Employment -wise, the entry of the Japanese car manufacturers into Britain has created more than twelve thousand jobs for the locals here in Britain. More than eighty percent of the materials used in making the Japanese cars are coming from European suppliers. Thus, these cars can be classified more as European – produced cars and less as Japanese cars because Japanese cars produced in Japan use raw materials found. Japan is going about the limit of cars imported from Japan this way. The Japanese factories in the UK are giving them first-hand contact with European suppliers of car components. While European car component suppliers lagged behind Japanese car component suppliers ‘ standards, relative to their Japanese rivals, European suppliers were slowly gaining ground. Thus, the jobs insured in the European Union will keep the economy growing and glowing. Meaning, more investors will be enticed to join the British business environment, specially in the automotive industry.
And, the part of the value –added amount under the Foreign Direct Investment scheme had reached its highest in Scotland as well as Northern Ireland representing thirty five percent. This is followed by Wales, the North East and the South East that had reached the thirty percent mark. At the lower end, the South West and the East Midlands generated a sixteen percent share whereas Yorkshire and Humber got a higher seventeen percent mark. Furthermore, the jobs were also equally located within the European countries as well. From 1982 to 1992, there were more than fifty percent of jobs were the by products of foreign direct investments established in the Wales, the North and the Scotland localities which is definitely higher than the sixteen percent ratio established in Southern England (Gardiner, 2000; p. 140).
There has been an upstream development of the vehicle industry in the United Kingdom that influences the competitive situation of the United Kingdom components suppliers. The OE automotive components suppliers in the United Kingdom have increased their profits to form fifty-five per cent of the European vehicles. This is due to the increase in European vehicle sales that involves the three Japanese cars Honda, Nissan and Toyota as discussed previously. The UK car parts suppliers obviously depend on the European car manufacturers to make a living. In the same light, the component parts suppliers of the European vehicles will have a decline in sales and income if the sales of the European vehicles first decrease in terms of sales and net income. In addition, the competition between the component suppliers is a healthy situation because the car manufacturers can choose one of the many alternative suppliers that will give the best in terms of quality combined with another factor which is reasonable price.
Historically, France and Germany were the major vehicle manufacturers at the start of the twentieth century filling over fifty eight percent of the world’s needs for vehicles in 1906. Further, Britain also advocated that the world should have a free trade policy and therefore each country should not implement tariffs on car imports. This was the British policy until World War I. However, modern age caught up with the medieval ideals of the past. Modern age is centered on competition or the will to outshine the competitors. Thus, from the aforementioned European countries, the United States car companies took away the leadership spot in the automotive industry. Ford’s Model T was very popular because it revolutionized the method of producing automobiles. The unique United Stated method was to use a continuous assembly production line to speed up car production at lesser direct labor costs between the years 1910 to 1921.
The experiences of Ford of the United States benefited because Ford could produce more cars with its modern production process. Its modern plants were vertically fusing together its expertise to reduce cost of buying its raw materials, remove model changes and increase as much as five times its market share. This modern manufacturing process had reduced costs by as much as seventy five percent. Secretly, the United States companies implemented a scientific management approach to solving car manufacturing problems and obstacles. One fact of this scientific process involves division of manufacturing expertise and the repetitive performance of complex job descriptions. This was developed in the 1920s by Alfred Sloan at General Motors Company. The market dominance because of this scientific approach made the United States car manufacturers the leaders in term of sales until the year 1955. In answer, the car manufacturers from countries outside the United States started waking up and find ways to get back their earlier share of the world vehicle market. The table below shows the actual figures on the American’s domination of the vehicle industry.
Table 1 : Car production 1929-1955 (thou’ units)
|N. America/world %||89||70||85||75|
|W. Europe/world %||10||29||14||23|
|UK/W. Europe %||39||47||36|
|Source: SMMT Yearbooks|
The Above table 1 shows that the United States is took the number one spot in terms of units produced in the commercial vehicles cluster. However, the United Kingdom’s place where was even stronger. And, the United States put out more than one million two hundred fifty thousand commercial vehicles which is very much higher than the three hundred forty thousand units produced by the United Kingdom. The third spot goes to the waking economic tiger, Japan, with only forty nine thousand units produced.
Expectedly, the European countries that have their own competing vehicle manufacturing facilities and Japan fought back by increasing the tariff on United States cars imported in their country as well as other protective measures. The high tariffs would discourage the local populace to buy the imported United States vehicles.
Britain, for its part, imposed a thirty three percent tariff on imported United States cars thereby making such luxuries too expensive for the British people to buy one. This was continued until the year 1960. Plus, the British government imposed a horsepower tax that was disadvantageous to the United States and lastly, very high tariffs were implemented on imported tires and other United States Car’s spare parts entering the British, German and other European countries. In counter attack fashion, both Ford Motors and General Motors answered back by setting up its own manufacturing plants inside some of the complaining countries like Britain and Germany from 1925 to 1934. But, the protectionism policy of Japan prevailed making it a dream (not reality) to set up shop inside Japan. Thus, the Presence of the United States car manufacturing companies in Europe sparked attempts to close the gap between the best car manufacturing practices of both the United States Side and the European Side. This involved both technology transfer and management style transfer. For, the United States multinational companies had a major influence on the profitability as well as the survival of the European vehicle components suppliers. The car component suppliers included “Champion (spark plugs), Timken (tapered roller bearings), Borg Warner (gearboxes), and Cummins (engines)”.
Further, the marketing of the new ford Model T triggered the competitive spirit in the European economy. Thus, many European brands appeared in the market like Morgan, Mercedes and Lotus. Ford’s volume sales took a big chunk of the European car market away from its competitors. However, Ford’s volume sales had to contend with the pursuance of scale economies connected to the need to preserve flexibility in the arenas of manufacturing and sales activities. Surprisingly, Ford’s insistence to change its volume sales strategy to supply what the market needs resulted to a shut down of the company. This shut down was needed in order to renovate its operations to the new market oriented strategy where production is based on what the market needs and not the other way around. This close down of ford was inevitable because Ford had now been dislodged from its number one slot in terms of units produced and sales figures. Also, the new rationalization and concentration strategies had been precipitated by the search for scale economies where flexibility sometimes has to be sacrificed in terms of General Motors sales. In fact, OECD stated in 1983 that the United States vehicle manufacturers dropped drastically declined from the high of eighty in 1920 to a low of thirty in 1930 and further down to only nine companies in the year 1950.
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The heterogeneous markets in Europe, which includes the United Kingdom, have blocked the arrival of scale economies that is similar to the United States even when progress appeared in other areas. In fact, competition variance that started before World War II was still prevalent even in Ford’s Dagenham modern car manufacturing facilities. For clarity, Ford’s delivery expenses were higher if the cars are produced in the European Union as compared to when the cars are imported directed from the United States, specifically the Detroit Michigan locality. This delivery cost analysis includes the higher United States wages. Happily, the European vehicle industry literally bounced back from the ravaging effects of World War II. Rapidly, it rose from its poor sales performance for the next fifteen years chopping taking back a large portion of the United States car manufacturers’ share of the car sales market. On the other side of the coin, the United States’ car manufacturers rapidly suffered a decreasing sales performance as the European share of the car market increased.
Table 2 below shows the improving performance of the European vehicle manufacturers in relation to the United States car manufacturers.
Table 3.2 : Car production 1955-1970 (thou’ units)
|N. America/world %||75||54||52||33|
|W. Europe/world %||23||39||39||46|
|UK/W. Europe %||36||26||23||16|
|Source: SMMT Yearbooks|
As shown above, the quickest rising markets in Europe are being walled in by high tariff rates on imported vehicles until the year 1960. Nevertheless, the United States Car manufacturers still kept their eyes over into the European horizon. The marketing strategy of the United States car companies is to focus on satisfying the discriminating tastes of the European market place in terms of car size.
Noticeably, the intra –European trade had grown fast due to the decreasing of internal tariff barriers. Immediately, all the foreign car manufacturers, specifically the United States car competitors, jumped into the European Market to promote their special vehicle goods in large volume to obtain a good production economy. However, as the volume sales in the car industry improved, The flexibility of the European car manufacturers made it the better choice to buy as compared to the imported United States car brands( Carr, 1990; p. 63).
Thus, the lesson to be learned here is that poor labor performance in terms of quality and number of units finished are weaknesses that the foreign buyers look for. Thus, modern management strategies must be implemented to maintain and increase one ‘s share of the car clients’ market. Cost -wise, one of the reasons for the decline in the British manufacturing sectors is not arguable. For, some companies have transferred their facilities to countries where labor costs are cheaper. This includes setting up shop in China, India and the like. However, the best way to keep a European car manufacturing facility profitable is to a very good strategic management policy combined with the implementation of the four P’s of marketing. Not forgetting, the key is the maximization of labor costs in the factory where cost is kept to the bare minimum. In comparison, the United States car manufacturing companies are eighty percent more productive than the European car manufacturing companies’ productivity (Dorgan, S., 2002; p. 129).
The article A Tale of Two Cycles: Closure, Downsizing and Productivity Growth in U.K. Manufacturing, 1973 -1989 shows that
“Contrary to a commonly held view, closures did not play a major role in accounting for productivity growth in 1979-89. Establishments which shut had lower productivity than survivors but the exits were replaced by entrants whose productivity was also lower. Hence most of productivity growth was due to growth within survivors. Most productivity growth occurred in establishments which reduced employment. But despite an overall fall of a quarter in employment, 16 per cent of productivity growth occurred in establishments which expanded employment. The main difference between 1973-9 and 1979-89 was in the productivity growth rate amongst survivors. In 1973-9, it was negative overall and over half of employment in 1973 was in establishments where productivity subsequently fell.”
(Haskel, 1991; Redding and Proudman, 1998).
The above quote that if chosen between closing down a car manufacturing shop or to reduce costs to the bare minimum, the better alternative here is to continue the operations of the car manufacturing company and reduce costs to a bare minimum.
In Another Article, it is Stated that
“There is no way of knowing from the published data whether the establishments which were closed had lower or higher productivity than those which survived. Nor can one tell whether plants which were large in 1979, assuming they survived, enjoyed higher or lower productivity growth over the next decade than smaller ones” (Oulton, 2000; p. 1).
The above quote shows that labour productivity is arrived at by dividing the number of units produced or worked on by each labour in a workplace. To be sure, there ought to be an individual research on each company to determine if the closure was due to higher or lower productivity. For the bottom line is to close the shop if the past, current and future expenses and costs are greater than the total sales figures.
The Conclusions of the Study Shows that
“1 Over 1979-89, the dispersion of productivity across establishments actually increased. The so-called long tail of under-performers lengthened. There was huge variation in the growth of productivity. Amongst surviving establishments, a quarter experienced negative productivity growth and these accounted for 18 per cent of employment in 1979 and 21 per cent in 1989.
2 Over 1979-89, closures are not able to explain the upsurge in productivity which occurred. True, establishments which disappeared had lower productivity than those which survived. But this by itself would have had only a small effect on overall productivity. New entrants played a bigger role, accounting for 28 per cent of the aggregate productivity gain. But the bulk of the gain, 65 per cent, was due to productivity growth within surviving establishments. This last point holds true even for the recession period 1979-82.
3 The bulk of productivity growth can be ascribed to establishments where employment fell. This is true both in aggregate and at the sectoral level. Nevertheless, establishments in which employment grew accounted for 16 per cent of productivity growth, despite the 25 per cent fall in employment in manufacturing as a whole.
4 Productivity growth was highest in the largest establishments. In fact, the top 36 establishments, each with 7,500 or more workers and employing 17 per cent of the 1979 workforce, accounted for almost a third of aggregate productivity growth. These establishments also had large declines in employment.
5 In the earlier cycle of 1973-9, productivity growth was quite rapid in those establishments where it rose at all. The problem was that amongst survivors, over half of employment was in establishments in which productivity fell”.
(Oulton, 2000; p. 5).
Surprisingly, the above research shows the data had uncovered unorthodox findings. For, some are contrary to common opinion. Thus, it is highly recommended that
More extensive research work be done by concentrating on the subsequent cycle from 1989 until the onwards. The future research work ought to focus on the entry and exit as well as the growth of productivity.
“Financial analysis is an information processing system used to provide relevant information for decision making. The main source of information is published financial statements. Basically, various accounts from published financial statements are evaluated in relation to each other to form performance indicators, which are then compared to ‘‘established’’ standards. These performance indicators are better known as ratios, and constitute the main tools of conventional financial analysis. Some of the ratios are particularly relevant to the prediction of economic events. It is therefore the purpose of this chapter to elaborate on financial analysis and the predictive approach.
Financial Statements and Accounting Data
The financial statements included in annual reports generally include a balance sheet, an income statement, a statement of changes in the financial position, notes to the financial statements, a reconciliation of retained earnings, an auditor’s opinion, and supplementary information on the effects of changing prices. These reports are discussed next.
The Balance Sheet
The balance sheet, or statement of financial position, expresses the financial position of a firm at the end of the accounting period, a moment in time. More precisely, it presents both the assets of a firm and claims on those assets (liabilities and owner’s equity) at a point in time. Two major questions of interest to the reader are (1) which resources of a firm are recognized as assets and which claims against the firm’s assets are recognized as liabilities? and (2) what valuations are placed on these assets and liabilities?
Four characteristics must be met for a resource (other than cases) to be recognized as an asset: (1) the resource must, singly or in combination with other resources, contribute directly or indirectly to future net cash inflows (or to obviating future net cash outflows); (2) the enterprise must be able to obtain the benefit from the resource and control the access of others to it; (3) the transaction or event giving rise to the enterprise’s claim to or control of the benefit must already have occurred; and (4) the future benefit must be quantifiable or measurable in units of money.
The assets are broken down into further, more specific categories by order of decreasing liquidity.
Current assets is ‘‘used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.’’ 1 Current assets consist generally of cash, marketable securities held as short-term investments, accounts and notes receivables net of allowance for uncollectible accounts, inventories of merchandise, raw materials, supplies, work in process and finished goods, and prepared operating costs.
Investments is used to designate the investments in securities of other firms to be held for a long term and whose financial statements have not been consolidated with the parent or investor firm. Long-term investment of 50 percent of the voting stock of a corporation (subsidiary) calls for consolidation of the financial statements of the subsidiary with the parent firm.
Property, plant, and equipment designates the long-lived assets, generally termed fixed assets, acquired for long-term use rather than resale, and generally include land, buildings, machinery, and various equipment. With the exception of land, these assets are carried at original cost less accumulated depreciation.
Intangible assets designates resources that lack physical existence and includes copyrights, patents, trademarks, goodwill, organization costs, franchises, lease holds, and similar items.
Four characteristics must be met before an obligation is recognized as a liability: (1) the obligation must involve a probable future sacrifice of resources—a future transfer of cash goods or services (or a foregoing of a future cash receipt); (2) the obligation must be one of the specific enterprise; (3) the transaction or event giving rise to the enterprise’s obligation must already have occurred; and (4) the amount of the obligation and the time of its settlement must be measurable with reasonable accuracy.”(Belkaoui, 1998; p. 1 -4)”
The above discussion explains the basic tenets of financial statement analysis. For the financial statement analysis explains why there is an increase in the assets, liabilities, capital, sales, expenses, costs and net income. What ever happens, the accounting numbers follow the formula of Assets is equal to liabilities and capital.
Chapter 3 – Methodology
This investigation adopted the compare and contrast qualitative research method as this is the most appropriate way in determining the effect the type of business to the success of the business.
The Archival Research is defined by Bordens, Kenneth S., and Abbott, Bruce B., (1999) as a non-experimental strategy that involves studying existing records. These records may be historical records of events, census data, court records, reports of police crime, or any other archived information.
The researcher took pains in reading, searching and analysis of the financial statement data of Nissan Motors UK, Toyota Motors UK, Hyundai Motors and Ford Motors UK in this study. The researcher examined the comparison and contrast of the Profitability of The Automotive Industry in The United Kingdom.
The location the companies and the type of business is one of the main focused of this study including their success. The final phase was the analysis, presentation and the drawing of the findings and conclusions.
The secondary research instruments and technique were used in the gathering of data for this study. The researcher used secondary sources taken from books and journals. These secondary sources had guided the researcher to broaden the point of understanding specifically the Use of financial statement analysis to determine Profitability of The Automotive Industry in The United Kingdom.
The researcher seeks the secondary materials as the best way to examine the effect of the type of business on the success of the business taking into consideration the financial statement analysis of the car manufacturing companies in the United Kingdom. After a through studying, reading and scrutinizing the different data, it is best to use the secondary sources as a basis for company business analysis and then coming up with the output Profitability Of The Automotive Industry In The United Kingdom.
Chapter 4 – Systematic Presentation of the Data
A. Critical investigation of the automotive industry itself and its market performance.;
B1. Evaluation of the financial ratios and profitability of a chosen company of the industry
Nissan Motor co. United Kingdom
Financial Ratios (Profitability):
Current ratio. It is arrived at by dividing current assets by dividing total current assets.
Total current liabilities. The current ratio is 1.24 as October 10, 2007. this shows that there are 1.24 times current assets that will be able to pay for the current liabilities of the company. The theory here is that the higher the current ratio, the better the company stands in the eyes of the users of the financial statement users.
Quick ratio. It is arrived at by dividing the sum of cash plus marketable securities and receivables by the total current liabilities. For the year 2006, cash of $2,94,60 plus receivables of $ 19,600.90 are added to arrive at $21, 695.50 This is then divided by current liabilities of $23,835.60 to get a quick ratio of .91. This shows a bad picture of the company. Because this means that there is a possibility that the company is not liquid enough or has the available cash to pay the current liabilities in case the creditors come around to collect their debt.
Debt to net worth ratio. This is arrived at by dividing the total debt by the net worth. The debt of the company amounting to $41,235.50 is divided by the net worth amounting to
$15,170.7 to arrive at the result of 2.718 times. This is a good impression of the company because it shows that that there are more assets that can be used to pay the creditors. However, the best ratio of debt to net worth would be a fifty –fifty ratio. Meaning, for every cent of total debt, there is an equal cent credited to the net worth. The higher the debt to net worth ratio, the better the company will look in the eyes of the users of the financial statement users.
Return on investment. This is arrived at by dividing the net profit by the investment.
Thus, the net income after tax for 2006 amounting to $2,724.8 is divided by the investment amounting to $15,170.70 gives us a result of $ .06 per share.
Operating profit to net sales ratio. This is arrive at by dividing operating profit for the year 2006 amounting to $ 4,283.2 by the net sales amounting to $46,319.50 to get a ratio of .09 times. This shows that the profits are too low. The company must increase its sales in order to increase this ratio. The higher the ratio here would be better for the users of the financial statement users.
Net profit to net worth ratio. This is arrived at by dividing the net profit by the net worth.
Thus, the net income for 2006 amounting to $2,545.1 is divided by the investment amounting to $15,170.70 gives us a result of $ .1700 per share.
B2. The feasibility of investing to the industry
|Last Close 10-Oct-2007||£9.94||Price/Sales Ratio||0.01|
|52-Week High||£12.54||Price/Book Ratio||0.04|
|52-Week Low||£9.06||Price/Earnings Ratio||—|
|60-Month Beta||1.0||Price/Cash Flow Ratio||0.16|
|Market Cap (mil.)||£0.0||Return on Assets||0.0%|
|Shares Outstanding (mil.)||—||Return on Equity||0.0%|
|Dividend Rate||0.25||Current Ratio||1.24|
|Dividend Yield||1.2%||Long-Term Debt/Equity||—|
|# of Institutional Holders||—||% Owned by Institutions||—|
|Latest Short Interest Ratio||—||Latest Net Insider Transactions||—|
|Growth Rates||12 Month||36 Month||60 Month|
The above data shows that the market price of each share of stock is $ .01 when divided by the sales. Also, the market price of each stock is worth $.04 of each net book value of the stocks traded in the stock exchanges. The stock market price of each Nissan Share of stock traded in the London stock exchange shows that it has a one year highest stock price of ₤ 12.54 and a 52 week low of ₤ 9.06.The beta for the stocks traded in the stock exchanges is 1.0. This is a very good beta and will be a good picture of the company whenever future stockholders would be interested to invest in Nissan stocks. The dividends paid out is ₤,25 per share of stock. This is a good indicator that the company is making lots of money to pay its costs and expenses. In the end, dividends are paid out only if the company generates a net income for the past year or years or operations. Thus,
B3 Returns of the outlay to the prospect investors will be carefully analyzed;
The company generated returns of $ 2,545.100 for the year 2006. This is what we call in accounting parlance as the bottom line. For, the management of the company is graded by the users of the financial statements on it was able to generate a net income for the past year or years of operations. Obviously, the prospective investors will be more than happy to invest their hard earned funds in Nissan. Trend analysis tells them that the company will have a high probability of generating income for the coming year or years of car manufacturing operations.
Presented below is the Income statement, Balance sheet and other financial data to prove that investing Nissan is a very wise decision indeed.
Annual Income Statement
All amounts in millions of except per share amounts.
|View: Annual||Mar 06||Mar 05||Mar 04|
|Cost of Goods Sold||34,591.1||—||27,432.5|
|Gross Profit Margin||25.3%||—||28.5%|
|Depreciation & Amortization||3,274.6||—||2,453.7|
|Income Before Taxes||3,974.7||—||3,804.8|
|Net Income After Taxes||2,724.8||—||2,673.2|
|Total Net Income||2,545.1||2,535.0||2,602.0|
|Net Profit Margin||5.5%||6.0%||6.8%|
|Diluted EPS from Total Net Income (£)||—||—||—|
|Dividends per Share||0.25||—||0.18|
Annual Balance Sheet
All amounts in millions of except per share amounts.
|View: Annual||Mar 06||Mar 05||Mar 04|
|Other Current Assets||3,682.9||—||2,202.9|
|Total Current Assets||29,586.3||—||19,460.3|
|Net Fixed Assets||21,807.1||—||16,548.1|
|Other Noncurrent Assets||5,012.9||—||4,595.9|
|Liabilities and Shareholders’ Equity|
|Other Current Liabilities||2,652.9||—||2,197.6|
|Total Current Liabilities||23,835.6||—||16,027.5|
|Other Noncurrent Liabilities||6,465.9||—||5,365.4|
|Preferred Stock Equity||—||—||—|
|Common Stock Equity||15,170.7||—||10,456.0|
|Shares Outstanding (mil.)||50.5||—||24.8|
B4. Valuation of its stocks. The shares of stock is valued at ₤ 300 per share.
This is arrived at by dividing the common shares value of 15,170.70 by the shares outstanding of 50.50.
B5. Policy on dividends
The company has given declared the payment of dividends amounting to .18 per share in 2004 and .25 per share in 2006.
B6. Equity of the shareholders. The common stock of Nissan is pegged at 15,170.70.
C. Latest innovations and developments in the industry
IN TERM OF NISSAN MOTORS UK, The main goal of Nissan Motors UK is to be the company that changes with the times: one that helps create social values(Corporate citizenship). Also, the company is committed to protecting and sustaining the environment. For, the Nissan UK company believes the core of sound business practice is sound environmental policy. Further, the company is always gearing for improvement along the way thus the company continues to enhance and refine its existing models and progress by creating new ones. In the end, Nissan UK eagerly designs vehicles in the UK but make them in UK too. The company also restructured itself for greater operating efficiency never removing their sight to invest additional funds in new technologies needed for the company’s future success(www.nissan.co.uk).
D. Evaluate how it managed competition among similar industries.
The company has managed well against the competition among similar industries. This is shown by the income statement figures. The net profit margin for 2004 is 6.8 percent with a net income of 2,602 and a sales of 38,379.6. As for the year 2005, the net profit margin is 6. percent with a net income of 2,525 and sales of 42,438.8. As for the year 2006, the net profit margin was lower at the rate of 5.5 percent only and the net income is 2,545.1 and the sales of 46,319. 5.
The following shows that Toyota made good for the year ended 2006 with a total revenue of 21, 036,90 and a net income of 4,091,965. The balance sheet shows that total assets of 28,731,595 is greater than the total liabilities of 18,171,146. Furthermore, the total equity for the same year is 10,560,449.
(In millions of JPY)
|Total Current Assets||12,453,663.00||11,784,123.00||10,735,222.00|
|Total Current Liabilities||12,258,995.00||11,767,170.00||10,028,735.00|
|Net Income/Starting Line||–||1,644,032.00||1,372,180.00|
|Cash from Operating||–||3,238,173.00||2,515,480.00|
|Cash from Investing||–||-3,814,378.00||-3,375,500.00|
|Cash from Financing||–||881,768.00||876,911.00|
|Net Change in Cash||–||330,992.00||85,634.00|
Key Stats & Ratios
|Net Profit Margin||6.67%||6.20%||6.42%|
|Return on Average Assets||5.23%||4.84%||5.07%|
|Return on Average Equity||16.35%||14.68%||15.52%|
The following shows that the price of each share of stock of Toyota shares divided by the earnings per share of stock is 12.13. however, the industry ratio is 20.15 and the sector ratio is 21. 32. The company’s standard and poor stock market ratio is 21.24. However, for the last five years, the price earnings ratio of Toyota has reached as high as 17.71 per share where the industry ratio is 25.14 and the sector ratio is 12.62. The company’s beta is .57. This is lower than the beta of the industry which is 25.14 showing that Toyota should do better in order to reach the industry ratio.
|P/E Ratio (TTM)||12.13||20.15||21.32||21.24|
|P/E High – Last 5 Yrs.||17.71||25.14||28.18||32.62|
|P/E Low – Last 5 Yrs.||11.41||10.97||12.62||13.99|
|Price to Sales (TTM)||0.86||0.99||1.76||3.05|
|Price to Book (MRQ)||1.74||6.04||4.69||4.35|
|Price to Tangible Book (MRQ)||1.74||7.38||9.24||8.40|
|Price to Cash Flow (TTM)||NM||17.28||15.99||15.21|
|Price to Free Cash Flow (TTM)||NM||21.84||27.26||35.79|
|% Owned Institutions||3.41||71.67||43.63||71.25|
Learn about Valuation Ratios
Likewise, the above ratio computation shows that the market price of the stock divided by the sales is equal to .86 for the company which is lower than the .99 of the industry and the sector ratio of 1.76. The market price per share when divided by the book value shows that the company ratio is 1.74 whereas the industry ratio is 6.04 and the sector ratio is 4.69. Furthermore, the company generated a Yield of 1.98 which is higher than the industry yield of 1.43 and the sector ratio of 1.86. The payout ratio for the company is 21.81 for the company which is far lower than the industry ratio of 35.74 and the sector ratio of 23.91. As for the sales figures, the company generated a five year growth rate of ll.03 whereas the industry growth rate was double at 41.02 and the sector ratio is 25.73. The capital spending of the company shows that a five year growth rate of 12.86 which is higher than the industry growth rate of 11.6 and the sector growth rate of 10.64.
In terms of financial strength, the company shows the following financial statement ratios.
This only shows that in terms of quick ratio, the Toyota quick ratio of .86 that is lower than the quick ratio of the industry of 1.51 as well as the sector quick ratio of 1.66. The current ratio of the company is 1.02 which is also lower than the quick ratio of the industry of 1.77 and the sector ratio of 2.56.
|Quick Ratio (MRQ)||0.86||1.51||1.66||1.27|
|Current Ratio (MRQ)||1.02||1.77||2.56||1.79|
|LT Debt to Equity (MRQ)||0.55||1.08||0.79||0.57|
|Total Debt to Equity (MRQ)||1.06||1.86||0.96||0.75|
|Interest Coverage (TTM)||NM||6.18||7.85||13.16|
Learn about Financial Strength
|Gross Margin (TTM)||19.70||14.69||33.15||44.96|
|Gross Margin – 5 Yr. Avg.||19.81||16.65||32.79||44.06|
|EBITD Margin (TTM)||NM||6.27||13.09||23.18|
|EBITD – 5 Yr. Avg.||14.70||9.07||12.61||21.33|
|Operating Margin (TTM)||9.67||4.22||10.50||19.70|
|Operating Margin – 5 Yr. Avg.||9.06||3.95||9.58||19.21|
|Pre-Tax Margin (TTM)||10.34||4.58||9.86||18.61|
|Pre-Tax Margin – 5 Yr. Avg.||9.57||4.40||9.21||18.01|
|Net Profit Margin (TTM)||6.42||3.04||6.74||13.67|
|Net Profit Margin – 5 Yr. Avg.||5.88||3.04||5.99||12.45|
|Effective Tax Rate (TTM)||37.87||31.51||31.78||29.89|
|Effective Tax Rate – 5 Yr. Avg.||38.51||29.19||32.85||30.86|
Learn about Profitability Ratios
|Return On Assets (TTM)||5.07||3.88||8.62||8.46|
|Return On Assets – 5 Yr. Avg.||4.68||3.28||7.52||7.15|
|Return On Investment (TTM)||8.08||7.17||11.78||12.49|
|Return On Investment – 5 Yr. Avg.||7.38||4.94||10.40||10.72|
|Return On Equity (TTM)||15.52||45.30||23.01||21.36|
|Return On Equity – 5 Yr. Avg.||13.72||12.89||16.76||18.52|
Learn about Management Effectiveness
|Net Income/Employee (TTM)||45,497||38,874||46,584||117,460|
|Receivable Turnover (TTM)||13.80||7.83||8.82||10.36|
|Inventory Turnover (TTM)||11.15||15.31||8.10||12.16|
|Asset Turnover (TTM)||0.79||0.93||1.23||0.96|
Annual Income Statements
All amounts in millions of British Pounds except share amounts
|Year||Revenue||Gross Profit||Operating Income||Total Net Income||Diluted EPS (Net Income)|
The above data shows that the company ( United Kingdom) generated revenues for 2005 of 33,492.50 and a net income of 2,276.6. this is higher than the revenue of 2004 amounting to 26,310.80. this is definitely lower because the net income generated is only 1,610.4. also, the revenue for the year 2003 is 21,926.6 and the net income is only 1,486. Thus, Nissan company is doing good in the United Kingdom car manufacturing industry.
All amounts in millions of except per share amounts.
|View: Annual||Dec 05||Dec 04||Dec 03|
|Cost of Goods Sold||—||19,532.0||15,437.7|
|Gross Profit Margin||—||25.8%||29.6%|
|Depreciation & Amortization||—||1,014.7||—|
|Income Before Taxes||—||1,347.7||1,270.3|
|Net Income After Taxes||—||923.1||963.2|
|Total Net Income||1,323.0||835.8||835.6|
|Net Profit Margin||4.0%||3.2%||3.8%|
|Diluted EPS from Total Net Income (£)||—||—||—|
|Dividends per Share||—||—|
|Net Profit Margin||4.0%||3.2%||3.8%|
- The company generated a net profit margin of 4. 0, 2, and 3.8 percents proving that the company is doing well in the United Kingdom.
Annual Balance Sheet
All amounts in millions of except per share amounts.
|View: Annual||Dec 05||Dec 04||Dec 03|
|Other Current Assets||—||1,315.5||903.1|
|Total Current Assets||—||10,678.2||9,098.9|
|Net Fixed Assets||—||9,811.8||8,228.2|
|Other Noncurrent Assets||—||8,430.0||8,037.2|
|Liabilities and Shareholders’ Equity|
|Other Current Liabilities||—||1,713.7||2,813.1|
|Total Current Liabilities||—||13,240.3||11,915.9|
|Other Noncurrent Liabilities||—||3,384.9||8,908.0|
|Preferred Stock Equity||—||0.0||0.0|
|Common Stock Equity||—||6,458.1||5,805.8|
|Shares Outstanding (mil.)||—||—|
The above data shows that the total assets for the two accounting periods amounting to 28,920 and 25,533.8 is higher than the total liabilities amounting to only 20,432.4 and 17,883.60. This shows that the company is doing well in the car manufacturing industry.
However, the Hyundai car manufacturing company is not doing well in the European Market. For, its net income has declined from 3,487,000 in 2004 to a lower 1,440,000 in 2005 and a much lower 12,613,000 in 2006. It is best that the company lessen all expenses to a bare minimum in order to survive for another day. For, the sales may increase in the near future when the economic conditions in the United Kingdom are brighter.
Likewise, its total assets have decreased from 292,654,000 in 2004 to the lower 278,554,000 in the year 2006. This only shows that the company is losing assets because the company is not getting enough sales to pay for the daily operating expenses. The company must indeed tighten its belt to save whatever can be saved.
What is Surprising to Note is that
The company’s earnings per share had an increasing trend from -3.02 in 2001 to the higher – .55 per share to the still higher .27 in 2003 and the highest of 1.91 earnings per share before the company profits plunged into a slow bankruptcy run.
|EARNINGS PER SHARE|
Ford Motor Company (NYSE: F)
|Last Close 10-Oct-2007||$8.23||Price/Sales Ratio||0.10|
|52-Week High||$9.70||Price/Book Ratio||—|
|52-Week Low||$6.85||Price/Earnings Ratio||—|
|60-Month Beta||2.1||Price/Cash Flow Ratio||3.29|
|Market Cap (mil.)||$15,167.9||Return on Assets||(3.7%)|
|Shares Outstanding (mil.)||1,843.0||Return on Equity||(162.1%)|
|Dividend Rate||—||Current Ratio||0.53|
|Dividend Yield||—||Long-Term Debt/Equity||(87.38)|
|# of Institutional Holders||481||% Owned by Institutions||80.0%|
|Latest Short Interest Ratio||4.26||Latest Net Insider Transactions||5,719.00|
|Growth Rates||12 Month||36 Month||60 Month|
Chapter 5 – Discussion, Analysis and Interpretation of Data
The findings such as the income statements, balance sheets, current ration, and other financial statement ratios show that all automotive companies are generating profits in the United Kingdom car industry EXCEPT Hyundai company. In order for Hyundai to bounce back from the failing financial performance grade, the company must tighten its belt and try to increase profits. For one, the company the research chose which is Nissan Motor company has been doing well in terms of generating sales and lessening expenses. In fact, the main reason for Nissan’s success is because many of the component parts were bought from suppliers within the European Union. So, the Nissan cars are technically European cars that are owned by the Japanese foreign direct investors. Ratio wise, more of the car manufacturing companies are doing well in the United Kingdom car manufacturing industry. This is because the government policy makers of the United Kingdom have met halfway with the wants of the Japanese car makers to set up shop in the United Kingdom. Also, American car companies like General motors and Ford had already set up shop the United Kingdom before to circumvent the quotas on imported cars. This circumvention resulted to the purchase of European components parts. These parts were incorporated into the Ford and General Motor cars to help increase the sales of the European Component parts suppliers.
Chapter 6 – Summary, Conclusions and Recommendations.
Nissan Motor co. United Kingdom
Financial ratios (PROFITABILTIY):
Current ratio. This shows that there are 1.24 times current assets that will be able to pay for the current liabilities of the company. The theory here is that the higher the current ratio, the better the company stands in the eyes of the users of the financial statement users. The company got a good current ratio rating.
Quick ratio. For the year 2006, cash of $2,94,60 plus receivables of $ 19,600.90 are added to arrive at $21, 695.50 This is then divided by current liabilities of $23,835.60 to get a quick ratio of .91. This shows a bad picture of the company. Because this means that there is a possibility that the company is not liquid enough or has the available cash to pay the current liabilities in case the creditors come around to collect their debt. This shows that the company is doing good in the United Kingdom market.
Debt to net worth ratio. The debt of the company amounting to $41,235.50 is divided by the net worth amounting to $15,170.7 to arrive at the result of 2.718 times. This is a good impression of the company because it shows that that there are more assets that can be used to pay the creditors. However, the best ratio of debt to net worth would be a fifty –fifty ratio. Meaning, for every cent of total debt, there is an equal cent credited to the net worth. The higher the debt to net worth ratio, the better the company will look in the eyes of the users of the financial statement users. This shows that the company is doing well in the United Kingdom car manufacturing industry.
Return on investment. The net income after tax for 2006 amounting to $2,724.8 is divided by the investment amounting to $15,170.70 gives us a result of $ .06 per share. This shows that the company is doing well in the United Kingdom car industry.
Operating profit to net sales ratio. This shows that the profits are too low. The company must increase its sales in order to increase this ratio. The higher the ratio here would be better for the users of the financial statement users. This shows that the company must double its efforts to increase sales and lessen expenses.
Net profit to net worth ratio. The net income for 2006 amounting to $2,545.1 is divided by the investment amounting to $15,170.70 gives us a result of $ .1700 per share. It shows that he is doing well in the car manufacturing business in the UK.
Based on the above findings, the automotive industry in the United Kingdom is very profitable. Thus, Nissan has been successful in the UK market because the main goal of Nissan Motors UK is to be the company that changes with the times: one that helps create social values(Corporate citizenship). Also, the company is committed to protecting and sustaining the environment. For, the Nissan UK company believes the core of sound business practice is sound environmental policy.
Many of the competitors of Nissan in the UK car manufacturing market are also doing good. Ford has been generating profits since their setting up of car manufacturing operations for more ten years ago. Also, Toyota has been making it good in the UK car manufacturing market for many years now. On the other hand, the Hyundai has not been doing good. This shows that some competitors will get only a small share of the markets while there will always be the leaders who “own” a big chunk of the market. Hyundaii, like other losing competitors in any industry, must muster all its forces to create a niche in the market so that the market will start buying more from them. One possible alternatives that Hyundaii can do is to decrease their current car prices. For economics tells us that as the prices of goods decrease, the demand for such products increase. Another possible alternative is for the company shower never before offers to clients like free after sales repairs and maintenance for a five year period. Still, another alternative would be to splash the television, radio and newspapers (tri–media) with advertisements of the luxurious benefits of owning a Hyundaii car. What is important is to implement the better choice between the alternative (a) Closing down the UK car manufacturing plant and (b) Continue operations but decrease expenses and costs to the bare minimum and increase its marketing strategy in the areas of Product, Price, Place and Promotion. The second choice is better, obviously. EVIDENTLY, THE AUTOMOTIVE INDUSTRY IN THE UNITED KINGDOM IS PROFITABILITY.
The following recommendations are in order:
- More studies should be done on the relation on the purchasing power of the people on the sales of the car manufacturing companies.
- More studies should be conducted to determine how Hyundaii could bounce back to a profit making activity.
- More research should be made to determine whether Hundaii could save on labor cost by producing the cars in Japan and then exporting them to the European Union member states in order to bail itself out of its financial woes.
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- Nissan Company UK, retrieved Oct 12, 2007 http://www.nissan.co.uk/home/inside-nissan/corporate/index.html?ln=/en_GB