What are the income statements saying?
The chart below shows several financial ratios. Let’s first look at the column titled “operating margin.” This is earnings before interest and taxes, divided by sales. Essentially, it’s how much of each dollar of revenue the company keeps before paying interest and taxes. On this measure, Toyota (TM) does well compared to the other-mass focused manufacturers, with an operating margin of 8.9% versus Volkswagen (VOW) with a 6.5% operating margin and General Motors (GM) with a 2.7% operating profit margin. Toyota pioneered lean manufacturing and inventory turns and constant improvement. This history continues to benefit Toyota.
I included BMW Group (BMW) to provide color on the industry. Whereas Toyota makes approximately 9 million vehicles a year, BMW produces approximately 2 million a year. BMW’s premium product sells for higher prices and produces higher revenue and profit margins than the mass-focused manufacturers. Toyota’s and BMW’s profit margins are both 7.1%. Both companies have to spend research and development dollars to maintain their respective products qualities. It’s not a matter of “better” or “worse,” but a matter of “different” when we look at profitability.
In looking at the other columns in the table above, we see the different balance sheet strategies of the leading original equipment manufacturers. Debt-to-equity is a measure of how a company uses leverage in financing its operations. Toyota’s debt and equity are about equal, at 1.07x. This compares favorably against BMW and Volkswagen, which have 1.97x and 1.35x debt-to-equity, respectively. Ford and GM are both unusual stories. GM went through bankruptcy, shedding debt, and it’s now 0.84x debt-to-equity. Ford didn’t go through bankruptcy and has debt-to-equity of 4.29x.
Don’t forget the balance sheet
Leverage is another take on the health of a company’s balance sheet, and it’s shown in the far right column of the table above. Whereas the industry is 3x leveraged, Ford shows a negative number after net debt is adjusted for its large financial subsidiary. While leverage is just one of the criteria for ratings, Toyota is the only AA- rated automobile manufacturer, while BMW and Volkswagen are A- rated and Ford and GM are BBB- and BB+, respectively. You could gain exposure to the industry with the exchange-traded fund CARZ.
Returning our focus to Toyota, Toyota is an efficient manufacturer with higher profit margins and lower financial risk than its closest market peers. Let’s take a look at Toyota’s most recent reporting period to get a better idea of how it operates. Read on to the next part of this series to learn more.