financial analysis of atlas honda ltd
TRANSCRIPT
Financial Analysis of Atlas Honda Ltd
Atlas Honda Limited
INTRODUCTION OF THE FIRM
Atlas Honda limited is a joint venture between the ATLAS GROUP and
HONDA MOTOR COMPANY, JAPAN. The merger of PUNJDARYA
LIMITED SHEIKHOOPURA successor to ATLAS EPAK LIMITED, DHAKA,
created the company. Since take over by the government of Bangladesh and
ATLAS AUTOS LIMITED in 1991.The atlas group established both these
motorcycle-manufacturing concerns. ATLAS HONDA LIMITED manufacturer
and market Honda motorcycles have collaborating with HONDA MOTOR
COMPANY. The company also manufactures shock absorbers under a technical
assistance agreement with SHOWA of JAPAN, world leaders in shock absorber
company Honda motor cycles are by far the best selling motorcycle in the country
with an unmatched reputation for high quality, reliability and after sales services.
Departments
I have visited following departments of ATLAS HONDA LTD, Karachi.
Human resource
Finance
Maintenance
Vender procurement
Production
Information technology
Marketing
FINANACE
Atlas Honda has a well-established finance department. It is totally computerized .it has its own system which is prepared by IT department. Finance department has further following sections.
Finance
General ledger
Costing
Taxation
Sales
Payables
Payroll
FINANCE
This section deals with the
Banking matters
Fund management
Import accounting.
COSTING
It is an important section of finance department, which deals with all costing matters including all material, labor, and overhead costs.
TAXATION
It deals with all tax and custom duty related affairs.
PAYABLES
This section deals with the following activities.
Vender payables
Utility payables
Insurance payables
Tax payables
Club payments
Other payable
PAYROLLS
This section controls the salary system of the organization. All the system is computerized. First of all the attendance of all employees is recorded and at the end of the month salary of all employees are paid after all deductions*
* Tax deductions, absenteeism deductions and all other deductions
GENERAL LEDGER
Finally all the transactions are recorded in general ledgers. General ledger for each account is maintained separately. There is a computerized system, which then produce different statements.
Ratio analysis
Ratio analysis involves the methods of calculating and interpreting financial ratios
to assess the firm’s performance and status. The basic input ratio analysis, the
firm’s income statement and balance sheet for the periods to be examined.
Groups of financial ratios Liquidity ratios Activity ratios
Debt analysis ratios
Profitability ratios
Marketability ratio
Ratio analysis
Liquidity ratios:
Net working capital
Current ratio
Quick(acid—test) ratio
Cash ratio
Net working capitals
Ratios Formula 2001 2002
Net working Capital (Rs.000) CA - CL = 327,842 347,904
Atlas Honda ltd. NWC shows +ve balance. It means that company having ability to
meet its short-term obligations when they come due. Also this balance has
improved from previous year, which shows that company is more efficient in
selling its inventory as compare to previous year. It’s also quit useful for internal
control.
Current ratio
Ratios Formula 2001 2002
Current Ratio CA / CL = 1.478 1.37
Current ratio has decreased from previous year, which indicate that the firm’s
current asset has decreased which depressed the liquidity position of the firm. This
depletion in current asset is mainly due to account receivables and inventory. But
with company point of view this is not acceptable because for lager manufacturing
concerns companies they must have more than 2.oo current ratio, why? Because
company’s current asset is not able to cover the current liability. If the current ratio
is less than the standard ratio than its mean firm having less NWC and if we have
greater CR than its mean we have positive NWC.
Quick Ratio
Ratios Formula 2001 2002
Quick Ratio CA – inventory / CL 0.6965% 0.8764%
Quick ratio is improved from previous year also reduce the level of stock in trade.
Actually inventory is not more liquid asset, so in case of insolvency, firm will not
be able to sell its inventory as per requirement. Also Honda sold more inventory
this year. Some time it might be difficult to recover its short-term obligations as
they come due, also same time we have to sacrifice on profitability. There is two
reason of it 1) current asset is less profitable than fixed asset. 2) Current liabilities
are less expensive financing source than that long-term fund. In the light of finance
this ratio should be 1.00 or greater than it but Honda’s ratios is less than but it is
acceptable. Why? Because larger manufacturing concerns affords it because they
already sets the impressive collecting policies.
Cash Ratio
Ratios Formula 2001 2002
Cash Ratio Cash + Marketable Securities /CL 23.22% 43.97%
Cash ratio is increased this year than previous also Honda increased its investment
on fixed assets. But on the other hand Honda sold its inventory more than previous
year but on credit.
Activity Ratios
Inventory Turnover
Ratios Formula 2001 2002
Inventory Turnover CGS / Inv. = 7.921 10.359
The inventory turnover ratio of the company improved from last year it
means that company is more efficient in selling its inventory in a year.
Average Age of Inventory
Ratios Formula 2001 2002
Avg. Age of Inventory 360 / Inv. Turnover = 45.4488 34.752
As, in year 2002, the company is able to sold its inventory, so this ratio has
decreased, which shows efficiency of firm in selling its inventory as compare to
previous year..
Average Collection Period
Ratios Formula 2001 2002
Avg. Collection Period A/C Receivable / Avg.Sale Per Day = 21.849 23.8549
It has increased from previous year, which is not good sign for them. In long
run these situations cause the company to write off its receivables. But still account
receivables are increases from previous year. Its mean we are giving the relaxation
to our customer which might be harmful in long run because we must receive our
receivables as soon as possible. In such type of case in long run if companies write
off their accounts than company will have to bear this extra cost and to compensate
this account from his own capital.
Average Sales per Day
Ratios Formula 2001 2002
Avg. Sales Per Day Net Sales / 360 13068.1 15344.30
Here Honda increased its sale, which shows the high sales revenue.
Operating Cycle
Ratios Formula 2001 2002
Operating Cycle Ratio Avg.Age of Inv. + Avg. Collection Period = 67.2978 58.6069
Here figures again showing the Honda’s efficiency to reduce its operating
cycle. Because short OC’s mean your current assets giving you return on time
and recovering the current liability when it come due.
Average Payment Period
Ratios Formula 2001 2002
Avg. Payment Period A/C Payable / Avg.Purchase Per Day = 127.0159 113.029
The reduction in average payment period is due to increase net purchases, which
improve company’s reputation in the market. It also increases their confidence in
supplier and lender’s eyes.
Average Purchase per Day
Ratios Formula 2001 2002
Avg. Purchase per Day Net Purchase / 360 407.158 491.883
Here we increase our daily requirement to meet our future need.
Account Receivable Turnover
Ratios Formula 2001 2002
Account Receivable Turnover 360 / Avg. Collection Period = 16.476 15.091
Its mean that Honda’s efficiency increases of recovering its receivable.
Account Payable Turnover
Ratios Formula 2001 2002Account Payable Turnover 360 / Avg. Payment Period = 2.834 3.185
Here figures shows that our paying capacity is slow due to the confidence of supplier or the credit term set by the supplier. But here we miss some discounts offered by supplier.
Cash Conversion Cycle
Ratios Formula 2001 2002
Cash Conversion Cycle Operating Cycle- Avg.Pmt Period= -59.7181 -54.4221
The negative CCC means that the avg. pmt period exceeds the operating
cycle. Some time large manufacturing firms will not have negative CCC unless
they extend their APP an unreasonable length of time. When any company having
a negative CCC, the firm should being able to use spontaneous financing to help
support aspect of business other than just the operating cycle.
Fixed Assets Turnover
Ratios Formula 2001 2002
Fixed Assets Turnover N Sales / NFA 10.4625 10.317
Firm’s fixed assets are increased as compare to previous year but the ratio has
decreased which means that in this year company has not utilized its fixed assets
efficiently to generate sale. This is not good for them because fixed assets are more
productive as compare to current assets.
Total Assets Turnover
Ratios Formula 2001 2002
Total Assets Turnover N Sales / TA = 3.163 3.015
Total assets turnover has reduced little bit, which means the company is not
utilizing its assets properly. More sales are due to current assets, which are not
more productive. Company has to change its fixed assets efficiency, to increase its
productivity.
Debt Ratio Analysis
Debt Ratio
Ratios Formula 2001 2002
Debt Ratio Total liabilities / Total Assets = 55% 56.74%
The ratio is increasing little bit from previous year. Its mean the investment or
other’s people money used more by Honda. Also higher the ratio, higher the
indebtedness and the more financial leverage company has.
Debt Equity Ratio
Ratios Formula 2001 2002
Debt Equity Ratio T Liabilities / Stockholders Equity = 1.99 1.311
As company’s liquidity portion decrease continuously so, debt equity ratio
has decreased. More over, liabilities are also short term, not more long term. It’s
also mean that how much owner has capital to meet with future obligations.
Time Interest Earned Ratio
Ratios Formula 2001 2002
Time interest earned ratio
EBIT / Interest = 3.557 13.849
This ratio is actually measures the firm’s ability to make the contractual
interest payments. In previous ratio is very low but this year it has increased with
good numbers. If the firm’s earning before interest and taxes were to shrink by
93% [(13.849-1)/13.849], the firm would still be ale o pay the 26,572 in the
interest owes. Thus, it has good opportunity for safety.
Profitability Ratio
Gross Profit Ratio
Ratios Formula 2001 2002
Gross Profit Margin Gross Profit / Net Sales = 9.744% 13.31%
Here the gross profit increase but not as much attractive which can
compensate the cost. But here in the case of larger manufacturing concern it will
increase gradually.
Net Profit Ratio
Ratios Formula 2001 2002
Net Profit Margin Net Profit (After Taxation) / Net Sales = 2.515% 4.926%
Here the increase in the ratio of profit margin but the Honda point of view it
is quit better. This ratio is actually measures the firm successes with respect of
earning sale.
Operating Profit Ratio
Ratios Formula 2001 2002
Operating Profit ratio Operating Profit / Net Sales 4.690% 7.478%
Here the increase in the operating profit ratio due to the increase is sale but the
CGS is also high but not as higher against the sale. If company is not able to
control its cost of goods sold it will damage its profitability position, which reduce
investor’s confidence. It is also pure form because we can see the result after
operational expenses.
Return on Assets or Investment
Ratios Formula 2001 2002
Return on Total Assets Net Profit / TA = 7.919% 14.767%
As firm’s total assets (investment) has increased but firm is not utilizing its fixed
assets efficiently so, the profit in year 2002 has reduced, which cause return on
investment to reduce from previous year. This decreasing trend may cause the
company to sell its assets.
Return on Equity
Ratios Formula 2001 2002
Return on Equity Net Profit / Stockholders' Equity = 18.277% 34.142%
The ROE, measures the returned against the investment of owner in the firm. The
return has increased in 2002 which is better off are the owner.
Marketability Ratios
Earning Per Share
Ratios Formula 2001 2002
Earning per Share (Rs.) EAFS / Common Stock Outstanding = 8.07 13.24
Its mean, the number of rupees earned on the behalf of each outstanding share
of common stock. This is also very watching able for prospector’s point of view,
also indicator of corporate success. And this increased in EPS indicates the good
response of the share in the stock market as well consumer market.
Price Earning Ratio
Ratios Formula 2001 2002
Price/Earning Ratio Market Price Per Share / EPS = 12.887 7.930
This decrease shows that investor is willing to pay for each rupee of the
firm’s earning. Also this decrease not looses the confidence of the investor for
future because the EPS is high as compare to last year.
Breakup Value
Ratios Formula 2001 2002
Breakup Value Stock holder's equity / outstanding shares 4.414 3.876
The reduction of this value enhances the confidence of the owner.
Question #1
Would you like to invest in this firm as a short term investor?
AnswerBeing as investor I would like to invest in short term. Why?
Firstly Honda has positive NWC and also increased from the last year. This show
the company having attractive CA, whose efficiency can bear the short term
obligations
Secondly the thing which increases my risk is the current ratio; because it is
relatively low than last year and it mean the company CA depressed the liquidity
position of firm.
Also for short term financing we have to critically review the balance sheet assets
in which inventory, Account receivables, some of the liabilities. With this
information I wish to invest in Atlas Honda, because Honda having positive NWC
which shows that the Honda has current asset which is able to bear the risk of
current liabilities.
Question # 2
Would you like to invest in this firm as a long-term investor?
ANSwer
With keeping the eye on the debt ratio of the Atlas Honda show the company
having just more assets than liabilities which is plus point for Honda. And this
thing will help me to invest in the long term.
Secondly the debt equity ratio is also decreased significantly and indicates that
firm is using more stockholders equity instead of debt in order to finance the
assets. So because this trend, I will like to invest as long term investor because
there is less chance that firm become defaulter.
Thirdly important argument, which enhanced my decision to invest as long-term
investor, is that the time interest earned ratio indicates the firm having ability to
meet its contractual obligation
Question # 3
Would you like to purchase or invest in the shares of the Atlas Honda?
ANSwerYes, I would like to invest in Atlas Honda. Because the EPS higher than last year.
This may indicate the worth of Atlas’s product in the market and in the mind of
consumer.
Atlas Honda Limited
VERTICAL ANALYSIS OF PROFIT AND LOSS STATEMENT
2001 %Age Change
2002 %age Change
SALES-NET 4,704,528 100% 5,523,951 100%COST OF GOODS SOLD 4,246,111 90.256 4,788,509 86.686GROSS PROFIT 458,417 9.744 735442 13.314OPERATING PROFITAdministrative Expense
Selling & Distribution Expense
111,053
126,725
2.360
2.694
150,923
171,448
2.732
3.104OPERATING PROFIT 220,639 4.690 413,071 7.478MISCELLENEOUS PROFIT 42,540
263,179
0.903
5.593
38,209
451,280
0.692
8.170OTHER CHARGES
Financial Expenses
Provision For Diminution in the Value Of Investment
Worker’s Profit Participation Fund
Worker’s Welfare Fund
44,525
1,733
10,848
3,183
0.945
0.037
0.231
0.068
26,572
571
21,210
8354
0.481
0.010
0.384
0.151
PROFIT BEFORE TAX 202,890 4.313 394,573 7.143TAXATION
Current Year
Prior Year
Deferred
83,500
(3,387)
5,000
1.775
0.072
0.105
160,000
(1,925)
(34,000)
2.895
(0.035)
(0.615)
PROFIT AFTER TAX
Unappropriated Profit Bought Forward
117,777
609
2.503
0.013
270,498
1,604
4.897
0.029
APPROPRIATION
Reserves for issue of bonus shares
Transfer to General Reserves
Proposed Dividend 60% (2001: 40%)
(Rs. 6 Per Share (2001: Rs. 4 Per Share))
58,391
-
58,391
1.241
-
1.241
-
148,000
122,621
-
2.678
2.220
UAPPROPRIATED PROFIT CARRIED FARWARD
1,604 0.034 1,481 0.027
Atlas Honda LimitedHORIZONTAL ANALYSIS OF PROFIT AND LOSS STATEMENT
2001 2002 %age Change
SALES-NET 4,704,528 5,523,951 17.418%COST OF GOODS SOLD 4,246,111 4,788,509 12.774%GROSS PROFIT 458,417 735442 60.431%OPERATING PROFITAdministrative Expense
Selling & Distribution Expense
111,053
126,725
150,923
171,448
35.902%
35.290%OPERATING PROFIT 220,639 413,071 87.216%MISCELLENEOUS PROFIT 42,540
263,179
38,209
451,280
-10.181%
71.473%OTHER CHARGES
Financial Expenses
Provision For Diminution in the Value Of Investment
Worker’s Profit Participation Fund
Worker’s Welfare Fund
44,525
1,733
10,848
3,183
26,572
571
21,210
8354
-40.321%
-67.051%
95.520%
162.456%
PROFIT BEFORE TAX 202,890 394,573 94.475%TAXATION
Current Year
83,500
(3,387)
160,000
(1,925)
Prior Year
Deferred
5,000 (34,000)
PROFIT AFTER TAX
Unappropriated Profit Bought Forward
117,777
609
270,498
1,604
129.970%
APPROPRIATION
Reserves for issue of bonus shares
Transfer to General Reserves
Proposed Dividend 60% (2001: 40%)
(Rs. 6 Per Share (2001: Rs. 4 Per Share))
58,391
-
58,391
-
148,000
122,621
109.2%
UAPPROPRIATED PROFIT CARRIED FARWARD
1,604 1,481 -7.669%
atlas honda limitedSTATEMENT OF SOURCES AND USES
ITMES CHANGE SOURCES USESCURRENT ASSETS
Stores, Spares & Tools
Stock In Trade
Trade Debtors
Advances & Other
+5,023
-73,777
+123,554
-43,052
+247,556
73,777
43,052
5,023
123,554
247,556
Receivables
Cash & Bank BalanceDeferred Cost +1,463 1,463Long Term Loans, Deposits & Other Receivables
-1,080 1,080
Investment -571 571Fixed Capital Expenditure
Operating Fixed Assets
Capital Work-in-Progress
+85,759
-437
437 85,759
CURRENT LIABILITIES
Short Term Finances
Current Maturity of LTL.
Creditors & Other Liabilities
Provision In Taxation
Dividend Payable
-
-16,456
+114,582
+76,500
+64,616
16,456 114,582
76,500
64,616
Deferred Liabilities +1948 1,948Long Term Loans -20,092 20,092Net Profit After Tax +152,721 152,721Dividend Paid +29,181 29,181TOTAL