This paper is devoted to the analysis of financial performance of Nissan Motor Co., Ltd. over the past year. It provides a short overview of the company’s background and the current state of the automotive industry followed by the description of Nissan’s strategy and goals for the future. The main part of the paper incorporates a detailed analysis of Nissan’s liquidity position, operating efficiency, capital structure adequacy and profitability performance. The analysis is concluded with some recommendations for the management of Nissan and the trend analysis of its performance with projections for the future.

## Background of the Company

Nissan Motor Co., Ltd. was established in 1933 in the Japanese city Yokohama. Today, the corporation’s manufacturing facilities are present in 20 countries around the world and employ over 152,000 people. The company is involved in manufacturing automotive products as well as in sales and related business activities. Sales of Nissan’s products are conducted in more than 160 countries and have constituted about 5.4 million cars in 2015. The company’s manufacturing business is concentrated in Japan and China, while the sales are conducted in North America. The corporation produces two main product lines: Nissan and Infiniti. It also manufactures spare parts and offers automotive services. It actively participates in the international cooperation with other automotive manufacturers. In particular, the corporation is a part of Renault-Nissan Alliance and has close relationships with Daimler AG.

Sales of the company are highly dependent on the raw materials’ prices – especially metal – as well as on the oil and gas prices. The modern development of electric cars and biofuel innovations have a significant impact on the corporation providing pressure to adopt new technologies and design new models. Besides, the automotive industry is subject to ecological regulations and the overall economic situation in the countries where the sales are conducted.

The strategy of the corporation is based on the notion “the power comes from inside”. It largely forms the vision of the corporation to enrich the population buying Nissan cars and influences the mission to provide “unique and innovative automotive products”. The future of the corporation is expected to remain positive with strong growth projections and further cooperation with Renault.

Overall, the current state of economy represents a range of challenges for the automotive industry and Nissan in particular. First of all, the fluctuations in the oil and gas prices significantly impact nearly all world economies. Along with record sales in 2015 in the USA market, automakers have experienced declines in the emerging markets’ demand (PricewaterhouseCoopers [PWC], 2016). Additionally, new technologies and ecological pressure require automakers to adopt costly transformations in the production process. Thus, while emerging markets allow making sustainable growth projections for classic cars, mature markets require more intelligent and autonomous vehicles. Respectively, Nissan and other companies in the automotive industry need to resort to significant capital, research, and development investments in order to remain competitive and demanded in their major markets.

## Liquidity Analysis

The analysis of the short-term liquidity provides the understanding of the company’s ability to repay its short-term financial obligations. It is evaluated using such ratios as the current ratio, acid test, quick ratio, and working capital to total assets. The analysis of each ratio for Nissan in the past two years follows.

The current ratio is the relationship between total current assets and short-term liabilities (Epstein, 2014). It constituted 1.61 for Nissan in 2014 (calculated as 10,317,345 / 6,417,495; hereinafter – in millions of yen) and 1.59 in 2015 (calculated as 10,747,573 / 6,764,187). It can be noted that the corporation has an adequate current ratio with current assets covering more than 1.5 times its short-term liabilities. Besides, the ratio slightly declined in 2015 compared to 2014.

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Acid test provides an insight in the structure of total current assets of a company. It is determined as the ratio of monetary current assets (including cash, marketable securities, and accounts receivable less allowance for doubtful debts) to the short-term liabilities (Epstein, 2014). Nissan had the value of acid test equal to 1.24 in 2014 (calculated as (761,074 + 888,814 + 6,312,874 + 41,651 – 75 124) / 6,417,495) and equal to 1.24 in 2015 (calculated as (918,771 + 837,704 + 6,653,237 + 73,384 – 86,858) / 6,764,187). Thus, Nissan is maintaining a stable acid test ratio that is higher than one and indicates a strong liquidity position of the corporation.

Cash ratio is the ratio of cash and cash equivalents only to the total short-term liabilities (Epstein, 2014). Nissan had a value of 0.12 in 2014 (calculated as 761,074 / 6,417,495) and of 0.14 in 2015 (calculated as 918,771 / 6,764,187). The ratio slightly improved in 2015 due to lower cash balance on hand and in banks. Still, the company is able to immediately pay out over 10% of its current liabilities.

Working capital is determined as the difference between current assets and short-term liabilities. A positive figure is preferred. Nissan had working capital to total assets ratio equal to 0.23 in 2014 (calculated as (10,317,345 – 6,417,495) / 17,045,659) and to 0.23 in 2015 (calculated as (10,747,573 – 6,764,187) / 17,373,643). Consequently, this ratio also remains at the same level across different periods and is rather high compared to the competition. A significant volume of working capital is available for Nissan’s everyday operations.

All in all, the liquidity position of the corporation is very strong. This is a favorable sign for investors seeking stable investments bringing cash dividends. Additionally, strong short-term liquidity provides the corporation with assurance in its everyday operations and good relationships with suppliers receiving their payments in due time.

### Operating Efficiency

Operating efficiency of assets shows whether a company is using its available capital in the most effective way or not. Operating efficiency is determined using such ratios as inventory turnover, days inventory on hand, receivables turnover, days receivables outstanding, payables turnover, and days payables outstanding. They can be found using the end-of-period or average data for the period.

Inventory turnover ratio is the ratio of cost of sales to the company’s inventory balance. Nissan had inventory turnover ratio of 7.05 in 2014 (calculated as 9,241,341 / (853,962 + 90,811 + 365,224)) and 7.69 in 2015 (calculated as 9,796,998 / (857,818 + 86,313 + 330,435)). Thus, there were 51.77 days inventory on hand in 2014 and only 47.46 days inventory on hand in 2015 (determined as 365 days / inventory turnover). Since Nissan is operating in the automobile production industry, such inventory turnover ratio is very strong and indicates the high efficiency of the inventory policy applied by the company. It can be stated with high probability that the corporation is utilizing a just-in-time approach to its inventory management.

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Accounts receivable turnover shows the efficiency of the customer credit policy. Nissan has low receivables turnover ratios amounting to 1.58 in 2014 (calculated as 11,375,207 / (888,814 + 6,312,874)) and to 1.63 in 2015 (calculated as 12,189,519 / (837,704 + 6,653,237)). There were 231.01 days receivables outstanding in 2014 and 223.93 in 2015 (determined as 365 days / receivables turnover). The corporation has a very high proportion of credit sales and provides a considerable period of payment deferral for its customers. Although it might seem as an ineffective practice, it is normal for the sphere of sales of automotive products.

Payables turnover ratio is determined as the ratio of cost of sales to the trade notes and accounts payable. Nissan had payables turnover ratio equal to 5.95 in 2014 (calculated as 9,241,341 / 1,554,399) and 6.62 in 2015 (calculated as 9,796,998 / 1,479,689). Thus, there were 61.34 days payables outstanding in 2014 and 55.14 in 2015. One can note that the corporation needs to pay out its current obligations in much shorter time periods than the time needed to receive payments from its customers. This disproportion might potentially create a liquidity problem for the company in the long-run perspective.

### Capital Structure

The analysis of the capital structure gives insight in the company’s financing streams. Firms are believed to have a stronger capital position when they have a higher portion of equity financing. However, more debt financing is preferable for the tax purposes and the gains of the existing shareholders. Thus, a well-balanced capital structure is an important consideration in terms of solvency and shareholders’ benefits.

The adequacy of the capital structure is assessed using total debt to equity, long-term debt to total assets, and interest coverage ratios. Nissan had total debt to equity ratio of 2.25 in 2014 (calculated as 11,798,397 / 5,247,262) and 2.38 in 2015 (calculated as 12,232,898 / 5,140,745). Thus, it has a risky solvency position with liabilities being more than two times higher than own capital. Nevertheless, one should note that a significant portion of liabilities is represented by trade payables and short-term borrowings. The long-term debt of Nissan constituted only 0.32 of its total assets in 2014 (calculated as 5,380,902 / 17,045,659) and 0.31 in 2015 (calculated as 5,468,711 / 17,373,643). Thus, the proportion of long-term borrowing in the company’s financing structure can be considered acceptable.

Interest coverage ratio is earnings before interest and taxes (for Nissan’s financial statements: income before income taxes plus interest expense) divided by interest expenses. Nissan had a very high interest coverage amounting to 24.57 in 2014 (calculated as (687,421 + 29,167) / 29,167) and 30.55 in 2015 (calculated as (732,934 + 24,806) / 24,806). Consequently, the company does not have any potential problems with paying out its interest rates related to long-term debt obligations. This finding supports the adequacy of the chosen capital structure.

## Profitability Analysis

Profitability ratios are of great concern for the company’s management as they usually determine the volume of bonus payments. They also concern shareholders as they affect capital gains and the amount of dividends declared. They comprise gross and net profit margins, return on total assets, total asset turnover, return on total equity, and earnings per share ratios. The detailed analysis of these ratios for Nissan is presented further.

The gross margin of Nissan constituted 18.76% in 2014 (calculated as 2,133,866 / 11,375,207) and 19.53% in 2015 (calculated as 2,392,521 / 12,189,519). These numbers are rather low providing a small buffer remaining for operating expenses of the corporation. Still, it does not differ much from the automotive industry average. The net profit margin of Nissan was 4.31% in 2014 (calculated as 490,097 / 12,189,519) and 4.53% in 2015 (calculated as 552,793 / 12,189,519). Low profitability is a logical outcome of the low risk of the company’s operations and a stable performance of its balance sheet.

Return on total assets (ROA) of Nissan amounted to only 2.88% in 2014 (calculated as 490,097 / 17,045,659) and 3.1 % in 2015 (calculated as 552,793 / 17,373,643). Still, with the low net profitability of the assets, the company continuously generates profits and demonstrates a growing tendency in both absolute terms and ratio values. Besides, the assets of the corporation generate enormous amounts of sales. Thus, total assets turnover was equal to 0.67 in 2014 (calculated as 11,375,207 / 17,045,659) and 0.70 in 2015 (calculated as 12,189,519 / 17,373,643). Therefore, annually, the corporation generated about 70 cents on each dollar of its total assets even though the automotive industry is considered highly asset intensive. Additionally, return on total equity (ROE) of Nissan is not very high but still acceptable for the industry. It constituted 9.34% in 2014 (calculated as 490,097 / 5,247,262) and 10.75% in 2015 (calculated as 552,793 / 5,140,745).

Earnings per share is one of the main indicators allowing shareholders to assess their potential gains and dividends from their investments in the company (Warren et al., 2014). This is the ratio of the firm’s net income for the year to the weighted average number of shares outstanding during the year (Epstein, 2014). Nissan reported basic earnings per share in the amount of 109.15 yen in 2014 and 125.00 yen in 2015 (Nissan, 2016a). A notable increase in the earnings per share value is a positive sign indicating that the corporation provides growing gains to its existing investors.

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### Conclusions and Trend Analysis

To conclude, Nissan Motor Co., Ltd. demonstrates outstanding financial performance and attractiveness for investors, customers, and creditors. It has a decent liquidity position supported by large cash and receivables amounts on the balance sheet with a growing trend over the past few years, which is expected to increase further in future. Additionally, the company is effectively maintaining its inventory with a short period of days inventory on hand resulting in low storage costs and high turnover of annual sales. Still, the corporation should revise its customer credit policy as it has much longer days receivables outstanding than days payables outstanding which might worsen future its liquidity position.

Solvency and profitability of Nissan are stable and can be projected to remain at the same level in the future. The company has growing sales and net income along with increasing total assets volume and the remaining proportion of long-term financing. Although the corporation is utilizing a rather large portion of financial leverage, it has also strong interest coverage ratio and, thus, there is no need to decrease external financing volume. One can recommend improving profitability outlook of Nissan by targeting its gross profit margin. This goal can be achieved through the application of high markups on the manufactured product lines or revising the cost of sales by searching for cheaper raw materials and the labor force in the developing economies.