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Exploring the Capital Structures for Four of the World's Leading Auto Companies

Overview

This chapter provides an overview of the effects of leverage, and describes the process that firms use to determine their optimal capital structure. The chapter also indicates that capital structures tend to vary across industries and across countries. If you are interested in exploring these differences in more detail, Thomson Analytics provides information about the capital structures of each of the companies it follows.

The discussion questions below demonstrate how we can use this information to evaluate the capital structures for four of the world's leading automobile companies: General Motors (GM), Ford (F), BMW (BMW), and Toyota (J:TYMO). As you gather information on these companies, be mindful of the currencies in which these companies' financial data are reported.

Discussion Questions

1. To get an overall picture of each company's capital structure it is helpful to see a chart that summarizes the company's capital structure over the past decade. To obtain this chart, choose a company to start with and select FINANCIALS. Next, select MORE > THOMSON REPORTS & CHARTS > CAPITAL STRUCTURE. This should generate a chart that plots the companies' long-term debt, common equity, and total current liabilities over the past decade. What, if any, are the major trends that emerge from looking at these charts? Do these companies tend to have relatively high or relatively low levels of debt? Do these companies have significant levels of current liabilities? Have their capital structures changed over time? (Note an alternative chart can be found by selecting FINANCIALS > FUNDAMENTAL RATIOS > WORLDSCOPE RATIOS > DEBT TO ASSETS & EQUITY RATIOS.)

2. To get more details about the companies' capital structures over the past five years, select FINANCIALS > FUNDAMENTAL RATIOS > THOMSON RATIOS. From here you can select ANNUAL RATIOS and/or 5 YEAR AVERAGE RATIOS REPORT. In each case, you can scroll down and look for "Leverage Ratios". Here you will find a variety of leverage ratios for the past five years. (Notice that these two pages offer different information. The ANNUAL RATIOS page offers year-end leverage ratios, while the 5 YEAR AVERAGES RATIOS REPORT offers the average ratio over the previous 5 years for each calendar date. In other words, the 5 YEAR AVERAGE RATIOS REPORT smoothes the changes in capital structure over the reporting period.) Do these ratios suggest that the company has significantly changed its capital structure over the past five years? If so, what factors could possibly explain this shift? (Financial statements might be useful to detect any shifts that may have led to the company's changing capital structure. You may also consult the company's annual report to see if there is any discussion and/or explanation for these changes. Both the historical financial statements and annual report information can be found via Thomson Analytics.)

3. Repeat this procedure for the other three auto companies. Do you find similar capital structures for each of the four companies? Do you find that the capital structures have moved in the same direction over the past five years, or have the different companies changed their capital structures in different ways over the past five years?

4. The financial ratios investigated thus far are based upon book values of debt and equity. Determine whether using the market value of equity (market capitalization found on the OVERVIEW page) makes a significant difference in the most recent year's "LT Debt Pct Common Equity" and "Total Debt Pct Total Assets". (Note: "LT Debt" is defined by Thomson Analytics as the Long Term Debt" listed on the balance sheet, while "Total Debt" is defined as "Long Term Debt" plus "ST Debt & Current Portion Due LT Debt".) Are there big differences between the capital structures measured on a book or market basis?

5. You can also use Thomson Analytics to search for companies with either very large or very small debt ratios. For example, if you want to find the top 50 companies with the highest debt ratio select: SEARCHING, ADVANCED SEARCHING, RATIOS, THOMSON DATABASE, THOMSON FUNDAMENTAL RATIOS, and LEVERAGE. From here, let's select "LT Debt Pct Total Cap 5 Yr. Avg." (This will focus in on the average capital structure over the past five years, which should give us perhaps a better indication of the company's long-run target capital structure.) All of this should take you to the "Search Expression Builder." From here, you go to "Rank" and select the top 50. You can easily change this to also select the bottom 50 (or perhaps the bottom 5% or 10%). Take a close look at the resulting firms. Do you see any observe any differences between the types of firms that have high debt levels and the types of firms that have low debt levels? Are these patterns similar to what you expect after reading the chapter (as a quick review, you may want to look at the average capital structures for different industries, which is summarized in the text). Note: The searches are cumulative, so that if you ask for the top 10% of the database, and follow that by asking for the bottom 5%, you will be shown the bottom 5% of the top 10%. In other words, you would only see a small subset of the firms you are asking for. Hence, when beginning a new search, clear all existing searches first.

6. From the submenu just above the list of firms, you may choose a number of options. "List" displays a list of the firms and allows you to access a firm report. "Profiles" provides key information about the firms, such as ticker, country, exchange, and industry code. "Financials" gives a couple of key financial figures (expressed in US dollars) from the firms' balance sheets and income statements. "Market Data" includes the firms' market capitalization, current price, P/E ratio, EPS, etc. "Report Writer" allows you to create customized company reports.

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