Strong U.S. sales of Toyota SUVs like this Highlander -- and a huge exchange-rate advantage -- boosted Toyota's profits in the most recent quarter. Source: Toyota Motor Co.

Toyota Motor Co. (NYSE:TM) on Wednesday reported quarterly earnings that beat Wall Street estimates, and raised its fiscal-year profit forecast. Strong sales of profitable SUVs in North America and very favorable exchange rates helped it more than offset slumps in demand elsewhere in the world.

Toyota's net income for the quarter ended Dec. 31 was 600 billion yen ($5.1 billion), up from 525 billion yen in the year-ago period. Wall Street analysts surveyed by Bloomberg had expected a profit of 549.2 billion yen.

A boost in guidance as strong U.S. sales and a weak yen drive huge profits
CEO Akio Toyoda now says his company will earn a net income of 2.13 trillion yen, or $18.1 billion, for the fiscal year that ends on March 31. This is an improvement over the 2 trillion yen Toyota had previously forecast.

That improvement is coming on strong sales in North America, along with exchange-rate moves that greatly favor companies that earn dollars (or euros) but report results in yen. It's enough to make Toyota, despite its recent weakness in markets outside of North America, the most profitable automaker in the world by far. That $18.1 billion estimate is more than its two largest global rivals, Volkswagen and General Motors, made in 2014 -- combined.

Toyota now assumes exchange rates of 109 yen to the dollar and 139 yen to the euro, a change that accounts for 175 billion of its 200-billion-yen increase to its forecast full-year operating income. Much of the remainder is due to the boom in sales of more profitable SUVs in the U.S. But behind those sunny profit forecasts, Toyota's sales in much of the world have been sluggish.

A closer look under Toyota's hood: Profits up -- but sales (in most places) down
Toyota is the dominant automaker in its home country, with roughly half the market, but new-car sales in Japan have been slumping. That didn't hurt Toyota's bottom line in the most recent quarter: Its operating income in Japan rose to 424.8 billion yen ($3.6 billion) from 331.3 billion yen a year ago, despite selling about 42,000 fewer vehicles. Toyota attributed the profit gains to "cost-reduction efforts," as well as some exchange-rate gains. 

In North America, Toyota's income rose to 167.9 billion yen ($1.4 billion), up 45 billion from the year-ago quarter. That came on an increase in sales of about 48,000 vehicles -- and a 17% surge in Toyota-brand SUV sales in the U.S. during the quarter -- but it was only good enough to give Toyota a 6.3% operating profit margin. That's well behind the profit margins generated by companies like General Motors and Ford in North America, and it suggests that Toyota is using its exchange-rate windfall to keep prices low (and sales high) in its largest market.

In Europe, Toyota's profits nearly doubled, to 33.2 billion yen ($282 million), despite a small drop in sales, as "cost reductions" and favorable yen-euro exchange-rate shifts helped results. And in its Asia region, which excludes Japan, Toyota earned 107.6 billion yen ($916 million). That's roughly flat versus the year-ago period, despite a drop in overall sales. 

Long story short: Despite generating tremendous profits, Toyota's sales declined in every one of its global regions except North America. That's a cause for concern.

The upshot: Behind the huge profit numbers, some cause for concern
Three years ago, one U.S. dollar was worth 76 yen. Now, a dollar buys about 117 yen -- and that means that every dollar Toyota earns in the U.S. is worth more at home.

That huge boost to Toyota's yen-denominated bottom line has given the company some leeway to keep U.S. prices modest in order to gain market-share ground against Detroit and its Japanese rivals -- even as some rivals have cried foul. Its decision to boost its already-impressive full-year guidance shows that it expects that happy situation to continue.

But the extent to which Toyota's sales have slipped in regions outside of North America should raise some eyebrows. The company has struggled to gain traction in China, and growth elsewhere has been hard to come by. This will bear watching as 2015 unfolds.

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