financial ratio analysis for honda motor company

EPGDIM 12-14Management Accounting Project

Submitted By:Hitesh Bharti (Roll No. 24)

Financial Ratio Analysis of Honda Motor Company

Company Profile

Liquidity Ratios

Profitability Ratios

Turnover Efficiency Ratios

Leverage Ratios

Cash Flow Ratios

References

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Table of Contents

Key Competitors Products

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Honda Motor Co., Ltd. (Honda) develops, produces and manufactures a variety of motor products, ranging from small general-purpose engines and scooters to specialty sports cars. The Company’s business segments are the motorcycle business, automobile business, financial services business, and power product and other businesses. Honda conducts its operations in Japan and worldwide, including North America, Europe and Asia. On 22 March 2011, the Company completed the selling of its entire stake in Hero Honda Motors Limited.

Company Profile

Business Segments

Liquidity Ratios

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Current Ratio Current Ratio = Current Assets/ Current Liabilities

It measures whether or not a company has enough cash or liquid assets to pay its current liability over the next fiscal year.

The accepted benchmark is to have current assets at least as twice as current liabilities (i.e. 2:1).

Over the past five years, the current ratio for Honda has been lesser than the accepted benchmark, as well as the industry average.

However, the company maintained a decent ratio to meet its short term liabilities.

2007 2008 2009 2010 2011

Honda 1.23 1.12 1.09 1.35 1.31

Industry 1.4425 1.046 1.474 1.498 1.466

1.05

1.15

1.25

1.35

1.45

1.55

3Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen

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Liquid Ratio Liquid Ratio = Quick Assets/ Current Liabilities

Liquid ratio is also termed as "Liquidity Ratio", "Acid Test Ratio" or "Quick Ratio". The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due.

A standard of 1:1 absolute liquidity ratio is considered an acceptable norm.

Over the past five years, the liquid ratio for Honda has been less than the accepted standard and industry average.

Also, Honda’s liquid ratio is less than 1.0 in the last five years. Therefore, it indicates that the company did not have the ability to repay all its debts by using its most liquid assets

2007 2008 2009 2010 2011

Honda 0.8 0.730000000000001

0.640000000000001

0.91 0.9

Industry 1.18 0.784 1.16 1.216 1.182

0.65

0.75

0.85

0.95

1.05

1.15

1.25

Quick Assets = Current Assets – Inventory -

Prepayments


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Profitability Ratios

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Net MarginNet Margin= Net Profit/ Revenue

Net profit ratio is a ratio of net profits after taxes to the net sales of a firm.

The percentage shown by net profit margin does not have any specific benchmark, as the net profit margin of a small business and big steel plant cannot be same and therefore a standard benchmark cannot be set.

Over the past five years, net margin for Honda has been consistent except 2009.

However, still the company has earned a good profit to cover non-production costs, as compared to other peers.

2007 2008 2009 2010 2011

Honda 5.34 5 1.37 3.13 5.98

Industry 3.6025 -3.018 20.51 3.632 7.536

-2.50

2.50

7.50

12.50

17.50

22.50

Net Profit= Revenue – COGS – Operating Expenses – Interest &

Taxes


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Return on Assets Return on Assets = Net Income / Average Total Assets

The return on assets formula looks at the ability of a company to utilize its assets to gain a net profit.

Indicates the profit generated by the total assets employed. A higher ratio reflects a more effective employment of company assets.

Over the past five years, the Return on Assets for Honda has been consistent, as compared to the unstable industry figures.

2007 2008 2009 2010 2011

Honda 5.24 4.86 1.12 2.29 4.6

Industry 3.5325 -4.046 18.586 2.148 5.978

-2.50

2.50

7.50

12.50

17.50


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Return on Equity Return on Equity = Net Income / Shareholder's Equity

Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet.

The normal benchmark for ROE figure is 12% and above. Companies that could generate ROE of 15% or more are considered as very good investment.

Over the past five years, the current ratio for Honda has been consistently good except 2009 and 2010. Therefore, Honda has been efficient in generating income on new investment.

The higher industry average in 2011 is due to an increase in Ford’s figures.

2007 2008 2009 2010 2011

Honda 13.76 13.27 3.21 6.44 12.17

Industry 10.3625 9.0125 0.815 9.762 71.172

5.00

15.00

25.00

35.00

45.00

55.00

65.00

75.00


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Operating Margin Operating Margin = Operating Income/ Revenue

Operating margin ratio or return on sales ratio is the ratio of operating income of a business to its revenue. Thus a higher value of operating margin ratio is favourable which indicates that more proportion of revenue is converted to operating income. An increase in operating.

Over the past five years, Honda has been more efficient in controlling its overall costs and has a higher operating margin ratio, as compared to the industry average.

2007 2008 2009 2010 2011

Honda 7.7 7.9 1.9 4.2 6.4

Industry 6.84 1.006 -4.216 3.904 4.96

-5.00

-3.00

-1.00

1.00

3.00

5.00

7.00

9.00


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Turnover Efficiency Ratios

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Receivables TurnoverReceivables Turnover = Net Credit Sales/ Average Accounts Receivable

Accounts receivable turnover is the ratio of net credit sales to average accounts receivable. It is an activity or efficiency ratio and it measures average number of times a business collects its receivables during a period usually a year.

It measures the efficiency of a business in collecting its credit sales.

Over the past five years, the receivables turnover for Honda has consistently been in line with the industry average and the company improved its process of cash collection on credit sales.

2007 2008 2009 2010 2011

Honda 10.99 11.54 10.69 9.87 10.7

Industry 9.81 12.656 11.008 11.934 11.662

9.50

10.50

11.50

12.50


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Inventory Turnover Inventory Turnover = Cost of Goods Sold/ Average Inventory

Inventory turnover is the ratio of cost of goods sold to average inventory.

It is an activity / efficiency ratio and it measures how many times per period, a business sells and replaces its inventory again

Over the past five years, Honda has been inefficient in controlling inventory levels, as compared to the industry peers.

This may be an indication of overstocking which may pose risk of obsolescence and increased inventory holding costs for Honda.

2007 2008 2009 2010 2011

Honda 7.09 7.16 6.08 5.89 7.08

Industry 9.625 10.03 9.388 10.636 10.838

5.50

6.50

7.50

8.50

9.50

10.50

11.50


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Fixed Assets TurnoverFixed Assets Turnover = Revenues/ Average Fixed

Assets

The fixed asset turnover ratio is the ratio of net sales to net fixed assets.

A high ratio indicates that a company is doing an effective job of generating sales with a relatively small amount of fixed assets. Conversely, if the ratio is declining over time, the company has either overinvested in fixed assets or it needs to issue new products to revive its sales.

Over the past five years, the fixed assets turnover ratio for Honda showed a declining trend, and has not performed well after 2008.

On the other hand, the industry average remains consistent.

2007 2008 2009 2010 2011

Honda 5.7 4.61 3.06 2.51 2.67

Industry 4.34499999999999

4.138 3.642 4.556 4.842

2.50

3.50

4.50

5.50


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Asset Turnover Asset Turnover = Revenues/ Average Total Assets

It is an efficiency ratio which tells how successfully the company is using its assets to generate revenue.

If a company can generate more sales with fewer assets, it has a higher turnover ratio which shows it is a good company because it is using its assets efficiently.

Over the past five years, the asset turnover for Honda has declined every year. This shows that the company is not using its assets optimally.

When compared to the industry average, Honda remains consistent and almost near to the industry figures.

2007 2008 2009 2010 2011

Honda 0.98 0.970000000000001

0.820000000000001

0.730000000000001

0.770000000000001

Indus-try

0.7875 0.948000000000001

0.718000000000001

0.750000000000001

0.79

0.73

0.78

0.83

0.88

0.93

0.98


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Leverage Ratios

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Debt-Equity Debt Equity = Total Liabilities/ Shareholders' Equity

Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders' equity.

It is a leverage ratio and it measures the degree to which the assets of the business are financed by the debts and the shareholders' equity of a business.

Over the past five years, the debt equity ratio for Honda has been less, which is favorable and indicates less risk.

The industry average is high in every year when compared to Honda, which is unfavourable because it shows that the business relies more on external lenders, thus it is at higher risk, especially at higher interest rates.

2007 2008 2009 2010 2011

Honda 0.43 0.4 0.48 0.53 0.46

Industry 6.7 0.45 0.605000000000001

0.5925 1.564

-0.50

0.50

1.50

2.50

3.50

4.50

5.50

6.50


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Financial LeverageFinancial Leverage = Total Assets/ Total Equity

The financial leverage ratio is a measure of how much assets a company holds relative to its equity.

A high financial leverage ratio means that the company is using debt and other liabilities to finance its assets and, every thing else being equal, is more riskier than a company with lower leverage.

Over the past five years, the financial leverage for Honda has been very consistent as compared to the industry average.

The industry average is reasonably high in 2007 due to the inflated figures of Ford.

2007 2008 2009 2010 2011

Honda 2.69 2.78 2.95 2.69 2.6

Industry 14.905 3.43666666666666

4.3175 3.8375 5.396

1.00

3.00

5.00

7.00

9.00

11.00

13.00

15.00


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Cash Flow Ratios

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Capital Expenditure to Sales

CAPEX to Sales compares the capital expenditure with sales.

The ratio reflects the efficiency of an entity in employing its operational funds to maintain its assets.

Over the past five years, the capital expenditure to sales ratio for Honda has been consistent except in 2011, where it reported a significant high.

However, the figures remained in line with industry average, except the mentioned year.

2007 2008 2009 2010 2011

Honda 5.39 5.57 6.34 4.57 12.5

Industry 7.21 7.276 5.71499999999999

4.85599999999999

7.076

4.50

5.50

6.50

7.50

8.50

9.50

10.50

11.50

12.50

CAPEX to Sales : Cash Expenditure / Sales


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Free Cash Flow to SalesFree Cash Flow to Sales = Free Cash Flow / Sales

This ratio compares the free cash flows of a company to its sales revenue. It gives indications about the ability of a company to generate cash from its sales. The term free cash flow refers to GAAP operating cash flow less purchases of property as well as plant and equipment.Ideally there should be a parallel increase in cash flows with the increase in sales.

Over the past five years, the Free Cash Flow to Sales for Honda has been fluctuating every year, as compared to an unstable industry average.

2007 2008 2009 2010 2011

Honda 2.77 3.82 -2.51 13.43 -0.52

Industry 4.2825 -2.876 -2.4625 6.03 1.038

-1.50

1.50

4.50

7.50

10.50

13.50


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Free Cash Flow to Net Income

It measures the ability to generate cash without external financings, which actually helps gauging the resources available for strategic opportunities.

In addition, the management uses these measures in making operating decisions, allocating financial resources and for budget planning purposes.

Over the past five years, the Free Cash Flow to Net Income has been different in every year. However, the five year industry average of 0.9 looks better than the 0.7 of Honda.

2007 2008 2009 2010 2011

Honda 0.52 0.760000000000001

-1.84 4.29 -0.09

Industry -0.415 0.34 1.8 2.356 0.208 -1.50

-0.50

0.50

1.50

2.50

3.50

4.50

Free Cash Flow to Net Income = Free Cash Flow / Net Income


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References

www.honda.comwww.morningstar.com

financial ratio analysis for honda motor company

Education

net profit ratio

higher ratio

ratio of operating income

quick ratio

sales ratio

ratio of net profits

decent ratio

current ratiocurrent