Toyota Company Valuation ✓ Solved
Toyota Company Valuation
Toyota Company is an organization which operates globally as discussed in the previous assignment. It deals with the manufacture and sales of vehicles and their spare parts. To evaluate an organization means going through some steps which a company uses to conduct an assessment of the economic value in a market. The process is mostly used by individuals who take part in the financial market, assisting them to determine the price to pay or take while transacting business. Determining the financial status of an organization assists investors to be in a position to decide whether they should invest in that organization.
The price-earnings ratio is one of the commonly used tools when selecting stocks (Ahmad et al., 2016). Decision making in an organization can be challenging, thus requiring appropriate analysis to avoid losses. Additionally, it is essential that each organization maintains up-to-date financial reports, which enable the organization to determine whether it is working in accordance with the goals and strategies set.
The price-earnings (PE) ratio is a crucial measure in modern business, especially when selecting the kind of stock to work with. The formula for calculating the price-earnings ratio is:
Price-earnings ratio = Current market worth per share / Current earnings worth in each share
The PE ratio provides stakeholders, management, and investors an idea of what price the current market is willing to pay for the company's earnings, explaining the product's market value. Research indicates that the recent price-earnings ratio for Toyota Company is 10.72 as of December 13, 2017 (Buchman et al., 2016). A high PE ratio indicates great future performance potential, encouraging investors to take an interest in the business, as evidenced by Toyota’s current situation.
Comparison with Other Organizations
A comparison with General Motors (GM) reveals that their current price-earnings ratio is 8.6 as of December 13, 2017, indicating a lower valuation than Toyota Company, and suggesting that Toyota is in a better position. Many investors would likely prefer investing in Toyota (Ahmad et al., 2016). GM has experienced a decline in sales, largely due to increased competition in the market, leading to a decrease in its ratio.
Determining Undervalued or Overvalued Status
To determine whether an organization is undervalued or overvalued, one must consider various factors, including the price-earnings ratio. Investors analyze this ratio to glean insights into the returns allocated to stakeholders. Over the last year, Toyota Company has maintained an average PE ratio of 10.02, indicating that it may be undervalued since the PE ratio has ranged around 10.35 (Buchman et al., 2016). This suggests that the stock, despite Toyota's leading market position, could be priced lower than expected.
Book Value of Shares in Toyota Company
The book value is calculated using the formula:
Book value = Total assets - Total liabilities
For 2017, Toyota's book value was calculated as follows:
Book value = $60,000 - $40,000 = $20,000
With outstanding shares numbered at four, the book value per share results in:
Book value per share = $20,000 / 4 = $5,000
This valuation suggests that the stock may be overvalued, as its market price exceeds this book value.
Analyst Opinions
Despite Toyota being a strong candidate for investment, analysts note several risks. The company's earnings have been consistently good, inspiring confidence among investors while acting as a benchmark for other firms in the industry to establish realistic PE targets. Continuous financial analysis is critical for the organization to understand its standing in the current economy (Ahmad et al., 2016). Many analysts recommend that the organization consider stock sales as a means of yielding more profit, especially given the risks associated with consumer trends constantly shifting.
Conclusion
In summary, Toyota Company demonstrates a favorable financial position with competitive metrics, such as a relatively high PE ratio compared to competitors like General Motors. While the book value suggests potential overvaluation, continuous monitoring and strategic adjustments to its offerings could lead to increased stability and attractiveness for investors. As such, informing potential stakeholders and maintaining transparency in financial reporting will be key to Toyota’s sustained success in a competitive market.
References
- Ahmad, B., & Anees, M. (2016). Investment Decisions Stock Buybacks Or Stock Prices? Journal of Business Strategies, 10(2), 51.
- Buchman, T. A., Harris, P., & Liu, M. (2016). GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.
- Jindal, S., Laveena, L., & Aggarwal, A. (2015). A comparative study of crisis management-Toyota v/s General motors. Scholedge International Journal of Management & Development, 2(6), 1-12.
- Shirley, M. W., & Patel, N. (2014). Estimating Beta: Interpreting Regression Statistics. Cost of Capital: Applications and Examples.