CC BY
54
-m
SCIENCE TIME
EVALUATION OF INVESTMENT ATTRACTIVENESS OF SUZUKI MOTOR CORPORATION USING INTERNAL INDICATORS
Gaysina Alfiya Irgizovna, Plekhanov Russian University of Economics, Moscow
E-mail: gaisinaalfiya@gmciil. com
Abstract. This paper is about evaluation of Suzuki Motor Corporation investment attractiveness using such internal indicators as WACC, CAPM, EVA, payback period, indicators of financial liquidity, mobility and free cash flow. For their calculation, there were used Corporation's Financial Statements - Balance Shit, Statement of Cash Flows.
Key words: evaluation of investment attractiveness, Suzuki Motor Corporation, investment analysis, WACC, payback period, indicators of financial liquidity, mobility, free cash flow, EVA, CAPM.
Nowadays companies are not able to generate the huge amount of money they need for stable existence and successful development. In that case, modern companies have to involve more capital from other sources: loans from a bank, investments from other companies or single investors. And because of different factors some companies are more attractive for investors than other. That is why it is very essential for potential investors, shareholders, competitors and other interested in the company, this shows the relevance of chosen topic.
Company's investment attractiveness can be affected both external and internal factors. For instance, the external factors include political and economic situation in the country and the region, perfection of legislative and judicial powers, the level of development of the industry and infrastructure and others. Unlike external factors, the internal factors directly depend on the economic performance of the company.
In this paper there will be studied evaluation of company's investment attractiveness using only internal factors. The subject of the investigation is investment attractiveness of Suzuki Motor Corporation.
The main purpose of this work is to study the method and indicators for evaluation of investment attractiveness of company.
Different techniques can be used in evaluation of the investment attractiveness.
SCIENCE TIME
One of these techniques is the rapid assessment of investment attractiveness based on the use of indicators such as payback period, indicators of financial liquidity, mobility, free cash flow, WACC.
The most fundamental way to test company is to analyze its financial statements such as Balance sheet, income statement, statement of retain earning, shareholders' equity and statement of cash flows.
Free cash flow
This indicator shows the amount of the free cash flow available in company. For its calculation, capital expenditures (investments in non-current assets) are been deducted from net income:
Net cash provided by operating activities — Capital expenditures
To calculate it there were used Suzuki corp. financial statement - Statement of Cash Flows from 2007 to 2014 years.
As the research showed, amount of free cash flow is fluctuated during eight year period. It was 29 000 mln ¥ in 2007, then in next two years it sharply plummeted to -167 960 mln ¥. The reason for this is the Global financial crisis, which began at 2008. Company used its free cash to cover current liabilities.
According to information received, in two years after free cash flow hit the low, it increased more than two times and reached the peak in 2010 - 197 246 mln. ¥. After that it began gradually decline, and in 2013 it almost reached the reached a value of free cash flow in 2007 (26 128 mln ¥). In the last year of studied period there was upward trend - the amount of free cash flow increased from 26 128 to 118 176 mln ¥.
For a company such dynamics of free cash flows means that the amount of free cash and cash equivalents in the presence is reduced, so smaller amount of debt could be covered without selling out fixed assets.
Financial liquidity
This indicator shows how many of current debt can be covered by current assets and cash. It also indicates company's ability to deal with current liabilities and some unexpected financial situations in short-time period.
Current assets
Current assets debt coverage
Average current liabilities
Cash and balances at central banks
Current cash debt coverage
Average current liabilities
SCIENCE TIME
According to investigation, during studied period, both indicators have been changing in similar way and there was upward trend from 2007 to 2011 with small reduction in next three years. Received data shows which part of current liabilities Suzuki corp. can cover with its current assets and cash. It means that, during whole studied period from 2007 to 2014, Suzuki Motor Corporation is able to cover all its current debts using only its current assets. The best year was 2011 when company's current assets were 1.7 times bigger than its current liabilities. After 2011 current debt coverage declined on 1% for current assets debt coverage and on 28 % for current cash debt coverage indicator.
Financial flexibility
This indicator shows relation between cash provided by Suzuki's operating activities and its total liabilities.
Net cash provided by operating activities
Cash debt coverage —---
Average total liabilities
The cash debt coverage throughout the period was positive with dramatic increase in 2010. The numbers rose ten times compared to previous year from 2% in 2009 to 25% in 2010. It means that in 2010 year 25% of the debt can be covered by cash provided from operating activities. During the remaining months Cash debt coverage indicator gradually declined and in 2014 it was equal 23.4%.
WACC (weighted average cost of capital) shows the relative level of the total costs of providing each funding source and represents the weighted average cost of capital.
Where,
E- the whole own capital of company; D - company's borrowings; y - expected revenue from equity; i - cost of capital.
CAPM (Capital Asset Pricing Model) describes the relationship between risk and expected return. This model shows the expected compensation (in risk and time equivalent) that investor wants to get from investment project.
T9 = rf + p * (7^ - Tf)
Where
Tf - risk free rate;
(3 - beta of the company:
r^ - expected market return.
In order to be profitable expected return, calculated by CAPM method, must be higher than cost of capital, calculated through WACC method.
Research shows that Suzuki's expected return during eight year period higher than waged cost of capital at the same period. The average expected return during the whole period is 5.05% compared to WACC = 4.26% at the same period.
The difference between these two indicators was more significant in the beginning of studied period - from 2007 to 2009 - and it was 1.15% in average. However, the situation changed rapidly after 2009, when the cost of capital rose sharply and the expected return became stable. Expected return reached low in 2012 -4.36%, but it still was higher than WACC = 4.15%. During next two years it have been stabilizing, but expected return is far lower than it was before crisis.
For Suzuki Motor it is very good sign that the amount of CAPM is always higher than WACC. It means, that the cost of capital is lower than expected return on that capital, that makes company, as investment project, profitable.
The amount of capital of Suzuki Motor Corporation flactuated during studied years, but in general, it has an upward trend: it grow on more than 100 000 mln ¥ -from 588 050 mln ¥ in 2007 to 694 620 mln ¥ in 2014. However, there was huge reduction from 2008 till 2011. The value of capital abruptly dropped 226 369 mln ¥, that is 2.6 times less than it was in previous period. Such significant reduction can be explained by Global Financial Crisis, which led to increasing of cost of capital, moreover, various risks, liabilities and other payment were also increased. Because of that company got rid from all non-essential capital assets. According to received data, Suzuki corporation regained the volume of capital after crisis was over, so in 2014 the volume of capital = 694 420 mln ¥.
Payback period (PP) is the period of investments' return. The quicker it happens the better project is.
All investments made by company will pay off during 6.2 years.
EVA ( Economic Value Added) shows the volume of economic profit created by firm. This indicator must always be higher than cost of capital, that means cost of capital is less than profit, earned by firm . Also EVA is a tool to measure the actual profitability of the enterprise, as well as manage them from a position of its owners.
SCIENCE TIME
At the beginning and the end of studied period the amount of EVA is quite alike: 62 000 mln ¥ in 2007 and 74 74 744 mln ¥ in 2014.
Between this two years there is huge gap during period from 2008 to 2013. After 2007 EVA sharply dropped from 62 000 to negative volume in 2010 = -2346 mln ¥ , which means that company could not generate enough profit from its operating activities to cover all capital costs. After crisis slowed down the amount of EVA started rising and it rocketed in 2014: EVA increased on almost 500% from 15 000 mln ¥ in previous year to 74 744 mln ¥ in 2014. For the company it means that after period of economic and financial stagnation Suzuki's profit after operating activities rose dramatically, which also shows that in more or less stable times the company is able to generate high profit from its core business. Also it can be added, that at the end of studied period invested capital is using more effectively than during 2008-2010 years.
To summarize, Suzuki motor corporation is a stable company with a wide international market of services and diversified capital and products. In non-crisis time it performs much better than during economic stagnation: at a quiet time many of the indicators of investment attractiveness are several times higher than their values in crisis.
The amount of expected return is always higher than average cost of capital: the cost of capital is lower than expected return on that capital, that makes company, as investment project, profitable.
Suzuki's Pay Back period is 6.2 years that means all investments, made from 2007 to 2014 will be paid off in 6.2 years with average payment of 218 634 mln ¥ per year.
According to this report's findings Suzuki Motor Corporation has enough liquidity to cover significant part of its current debt without selling its fixed assets. For example, in 2014 year 67% of current liabilities can be covered by cash and balances at central banks, 1.5 of current liabilities (more than company really has) can be covered by current assets (cash and balances at central banks, cash equivalents, recourses, etc), 23% of whole liabilities can be covered only by cash. In other words, Suzuki corporation is stable company and it generates adequate amount of profit from its core business and has enough other current assets to pay off all its current liabilities without selling fixed assets.
After stagnation, volume of economic profit created by firm is also increase dramatically, so company is able perform effectively and generate relatively high profit.
This report helped me understand how to read Company's Financial Statements and understand how to use it in investment analysis. Moreover, I have learned how to evaluate company's investment attractiveness and studied a lot about Suzuki Motor Corporation and other Japanese companies. In near future I am going to improve this paper by adding more indicators and deepen research in chosen topic.
SCIENCE TIME
Literature:
1. Thomas H. Beechy, Joan E.D. Intermediate accounting: 2nd edition. - Conrod,
2. Бясов К.Т. Основные аспекты разработки инвестиционной стратегии организации // Финансовый менеджмент. - 2008. №2 4
3. Annual Reports of Suzuki Motor Corporation from 2007 to 2014
4. Official web-site of Suzuki Motor Corporation [Electronic resource]. — URL: http://www.globalsuzuki.com/
2002.
