Liquidity analysis

The Nissan Global is the premium retailer of the used and new vehicles from Nissan. Their well-trained technicians and the dedicated staffs from sales always try to make the shopping experiences of the customers easy, fun and advantageous in financial way. Their aim is to make the people use their website, so that they can serve them with exceptional network of employees and assist them choosing the ideal SUV, truck or car as per their preference. They are serving the automotive requirements of people from all over the world from the year 1933. Associated with various premium brands, their target is to provide the best service and sales experience related to the automotive to the people around the globe. Their services involves car repairing for Nissan car, auto parts for original Nissan and providing auto financing assistance to the people  for purchasing their dream cars (Nissan Motor Co, 2017).

On the other hand, the Toyota Global is serving the automotive requirement of the people all over the world from ever since its establishment in 1937. Associated with the selected premium brands, Toyota Global’s aim is to keep on bringing a commitment and focus for providing automotive service and sales to the people around the world. It has always provided the society with prosperity through the production of automobiles and operating their business focusing on the sales and production of sales. Since their establishment, they are using the Guiding Principles for producing consistent vehicles that can be contributed to sustainable development of the society through employment of high quality and innovative.

They consider the needs of every individual customer with great concern. Moreover, they understand the fact that the customers have great expectations from their company as they always meet the challenges and exceed the standards each time, which enables them to achieve the commitment towards excellence. Moreover, their experienced and trained sales staffs are keen to share their enthusiasm and knowledge with the customers. They also encourage the customers to go through the online inventory, investigating the financial options and for scheduling the test drive (Toyota Motor Corporation Global Website, 2017).

It can be seen from the ratios that, the liquidity position of Nissan global is better as compared to Toyota global.  The current ratio of Toyota global is more or less around 1 over both the year that is 2015 and 2016.  On the other hand, the current ratio of Nissan global is more than 1.5 for both 2015 and 2016. Moreover, the quick ratio of Nissan global for 2015 as well as 2016 is far better as compared with Toyota global (Saunders & Cornett, 2014). The quick ratio for Toyota global over 2015 and 2016 both are moving around 0.85 and that of Nissan global is moving around 1.24 for 2015 as well as 2016. This reveals that the liquidity position of Nissan global is better as compared to Toyota global and they are in better position to pay off their short-term obligations out of the available short-term assets.

Profitability analysis

It can be seen from the profitability ratios that the net profit ratio of Toyota global is quite better as compared to Nissan global. As it is very clear from the table that the net profit margin of Toyota global is 8% in 2015 and 9% in 2016, whereas the net profit of Nissan global 5% only both in 2015 and 2016. That means Nissan Global is not so efficient in turning their sales into net profit and must take appropriate steps for minimize their expenses, so that their profit margin can be enhanced. On the contrary, the return on asset of Nissan Global is comparatively better as compared to the Toyota global. Where the return on asset ratio of Toyota global is 5% in 2015 and 2016 both, the same is 9% for Nissan global for both 2015 and 2016.

It reveals that Nissan global is more efficient in getting return on their assets. it also reveals that the management of Nissan global is employing their asset in effective way to earn profit. Lastly, the return on equity position of Toyota global is far better as compared to Nissan global. The return on equity is a profitability measure that analyse that how many dollars towards profit are earned with regard to each dollar of the shareholders equity. It is identified from the above table that the return on equity of Nissan global is only 9% in 2015 and further decreased to 8% during 2016. Whereas, the same rate is 13% and 14% respectively over 2015 and 2016 for Toyota global; it reveals that Nissan Global is less efficient in generating income eon each dollar of shareholder’s equity (Saravanan, 2014).

Capital structure ratio of Nissan Global = Long-term debt / (long-term debt + common stock)                                                            = 84%

The capital structure of any organization states how the firm finances their overall growth and operations through utilising the sources of funds. Debts are raised through issuing bonds or long-term loan borrowed from bank or long-term noted payable. On the contrary, equity is segregated as retained earnings, preferred stock or common stock. As the debt part of the capital structure for Nissan global is quite high, that is 84% as compared to the industry average of 60%. Therefore, their request for loan shall be declined as the further loan will create extra burden on the financial position of the company. Thus, the company is suggested to lower their debt component first through paying off the debt out of their surplus fund and after achieving the industry average of 60% only the company shall think of new borrowing (DeAngelo & Stulz, 2014).

Capital structure analysis

Over the last two years that is during 2015 and 2016, Nissan global has borrowed both short-term as well as long-term debt. During 2015, the company’s short-term borrowings balance amounted to 32,46,038 million yen and amounted to 33,17,113 million yen during 2016. Further, the company’s long-term debt amounted to 27,55,896 million yen during 2015 and 32,82,947 million yen during 2016. It shows that the company raised further 71,075 million yen during 2016 through short-term borrowing and 5,27,051 million yen through long-term borrowing. Therefore, it is identified that the company instead of paying-off the previous loan, further borrowed through short-term as well as long-term borrowings.

Apart from the above mentioned factors, it is further identified that the sales of the company reduced by 678,259 million yen over the years from 2015 to 2016. Further, the gross profit margin of the company fell to 6.15 in 2016 from 6.6% in 2015. It is further noticed that the company raised big amount through issue of bonds that amounted to 13,82,272 million yen during 2016. The lease obligation of the company also went up by 5,255 million yen during 2016. It is evaluated from all the fact that the company is not efficient in paying off their liabilities and even borrowed further amount during 2016 in form of bonds and short-term as well as ling-term borrowings. To improve their profitability position, they must try to pay-off their obligations out of the available surplus funds instead of further borrowing. 

The primary objective of bond valuation is that the value of the bond is equal to present value of the bonds expected cash flows from future. The process of valuation mainly includes the following three steps:

• Project the expected future cash flows
• Verify the suitable rate of interest or the rate that shall be used to discount the cash flows
• Calculating the present value of expected future cash flows that is obtained from the step one through utilising the rate of interest or the determined rate of interest from step two.

The minimum rate of interest that the investor accepts is the yield from a risk-free bond. From the maturity aspect, the investor can use the date for the final maturity. However, as all the cash flows are unique with regard to interest rate, timing, maturity period, it will be appropriate to use the period of maturity that will be matched for the individual cash flows.

Prices of the bonds fluctuate due to the changes in the economic environment and market segments but in different considerations and in different way. Factors that contribute to the changes are fluctuation in rate of interest, policies of economic motivation that have great impact on both the stocks and bonds, each in opposite manner. When the stocks are in rising trend, the investors normally moves out of the bonds and gather to the stock market that is booming. However, when the market are corrected as predicted, or when the severe economic issues arise, then the investors move to the safe bonds as in any free-market, the prices of bonds are get affected by the demand and supply.

Source of finance status

Nissan Global

Let the maturity of bond = 5 years,

Face value = $100

Coupon rate = 8%

Rating from agency = A+

Yield to maturity (YTM) = 4

Value of the bond =  C/(1+r)^{1 +} C/(1+r)² + C/(1+r)³ + C/(1+r)⁴  + F/(1+r)⁵

Where, C = coupon rate, r = YTM rate and F= face value

Bond value =   8/(1+0.035)^{1 +} 8/(1+0.035)² + 8/(1+0.035)³ + 8/(1+0.035)⁴  + 108/(1+0.035)⁵

Bond value = 7.73 + 7.47 +7.22 + 6.97 + 90.93

Bond value of Nissan global = $ 120.32

Toyota Global

The maturity period of bond = 5 years, therefore, the period is 5*2 = 10 as the coupon rate is paid semi annually

Face value = $100

Coupon rate = 8% semi-annually that is 8/2 = 4%

Rating from agency = B+

Yield to maturity (YTM) = 3.50

Value of the bond = C/(1+r)^{1 +} C/(1+r)² + C/(1+r)³ + C/(1+r)⁴  + F/(1+r)⁵ + C/(1+r)^{6 +} C/(1+r)⁷ + C/(1+r)⁸ + C/(1+r)⁹  + F/(1+r)¹⁰

Where, C = coupon rate, r = YTM rate and F= face value

Bond value =   4/(1+0.040)^{1 +} 4/(1+0.040)² + 4/(1+0.040)³ + 4/(1+0.040)⁴  + 104/(1+0.040)⁵ + 4/(1+0.040)^{6 +} 4/(1+0.040)⁷ + 4/(1+0.040)⁸ + 4/(1+0.040)⁹  + 104/(1+0.040)¹⁰

Bond value = 3.85 + 3.70 + 3.56 + 3.42 + 3.29 + 3.16 + 3.04 + 2.92 + 2.81+ 70.23

Bond value of Toyota Global= $ 99.98

It is clearly seen from the above calculation that the values of bonds for both firms are not identical and there is wide gap in the prices of the firm value of Nissan Global bond is higher as compared to the value of Toyota Global bond. The price of Nissan global bond is $ 120.32, whereas, the price of Toyota Global bond is $ 99.98. The difference in the price of bond is amounted to ($ 120.32 – $ 99.98) = $ 20.34. Though the maturity period, coupon rate and face value of both the company’s bonds are identical, there is a difference in the coupon payment structure. While Nissan global are paying coupon annually, the Toyota global are paying coupon on semi-annual basis and that led to the difference in the value of the bond of two companies.  

Bond rating agencies are the organizations that evaluate the creditworthiness of the debt securities as well as their issuers. Three bond rating agencies ion United States are Fitch, Moody’s and Standard and Poor’s. Each of the agencies uses their unique rating system that is letter-based for conveying to investors quickly regarding whether the bond carries high or low default risk to analyse whether the issuer is financially viable. Bonds are been rated while they are issued and both issuers and the bonds are analyzed regularly to assess whether the change in rating has been aligned (Baghai,  Servaes & Tamayo, 2014). Highest rating paid by Standard and Poor’s is AAA and if the bond falls to the rating of BB+, then it will no more be considered as good for investment and the lowest rating that is, D specifies that the bond is of default nature.

Other significant changes

The highest possible ratings that can be assigned by the rating agency to a particular bond is AAA. Bond that is rated as AAA is considered to have outstanding level of creditworthiness as it has the capability to meet the financial commitment easily. The ratings agencies Fitch Ratings and Standard & Poor’s (S&P) use the AAA ratings to recognize bonds with the highest credit quality and Moody’s uses AAA as the top credit rating. High rating for credit reduces the borrowing cost of the issuer and the organizations can raise large amount of money with high rating. The low cost of borrowing assist to gain high competitive advantage as the company can take benefits from easy credit access (Opp,  Opp & Harris, 2013).

The amounts of debt that can be raised by an organization are dependent upon the credit rating of the target company as the default risk associated with the outstanding debt are dependent on the rating. Rating agencies like Moody’s or Standard and Poor’s consign their rating based on the following five key factors that determines the quality of credit of a company:

The existing conditions and the rating under the credit market evaluates the debt cost of an organization. to maintain the particular rating, the company must maintain their ration within a particular range under the rating class. For instance, if an organization targets for AA rting from Standard and Poor’s, it can raise the debt till the point where the EBIT interest coverage ratio that is (EBIT/Interest) is more than 9.5. Further, if the company wish to raise more amounts, its lower coverage ratio will lead to reduce the rating which in turn, will exposed to high credit risk.   Therefore, lower the rating, finance become costlier. Therefore, the companies try to maintain a target rating for their outstanding debt (Sinclair, 2014).

Reference

Baghai, R. P., Servaes, H., & Tamayo, A. (2014). Have rating agencies become more conservative? Implications for capital structure and debt pricing. The Journal of Finance, 69(5), 1961-2005.

DeAngelo, H., & Stulz, R. M. (2014). Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks.

Nissan Motor Co., L. (2017). Nissan Motor Corporation Global Website. Nissan-global.com. Retrieved 25 April 2017, from https://www.nissan-global.com/EN/index.html

Opp, C. C., Opp, M. M., & Harris, M. (2013). Rating agencies in the face of regulation. Journal of Financial Economics, 108(1), 46-61.

Saravanan, D. S. (2014). studied on” A Study on Liquidity Analysis of Selected Automobile Companies in India. Indian Journal of Applied Research, 4(2).

Saunders, A., & Cornett, M. M. (2014). Financial institutions management. McGraw-Hill Education,.

Sinclair, T. J. (2014). The new masters of capital: American bond rating agencies and the politics of creditworthiness. Cornell University Press.

Toyota Motor Corporation Global Website. (2017). Toyota Motor Corporation Global Website. Retrieved 25 April 2017.