EPGDIM 12-14
Management Accounting Project

Financial Ratio Analysis of
Honda Motor Company

Submitted By:
Hitesh Bharti (...
Table of Contents
Company Profile

1

Liquidity Ratios

2

Profitability Ratios

5

Turnover Efficiency Ratios

10

Levera...
Company Profile
Honda Motor Co., Ltd. (Honda) develops, produces and manufactures a
variety of motor products, ranging fro...
Liquidity Ratios

2
Current Ratio

Current Ratio = Current
Assets/ Current Liabilities

1.6

Times

1.5
1.4
1.3
1.2
1.1
1
2007

2008

It measu...
Liquid Ratio

Quick Assets = Current
Assets – Inventory Prepayments

Liquid Ratio = Quick
Assets/ Current Liabilities

1.3...
Profitability Ratios

5
Net Margin

Net Margin= Net
Profit/ Revenue

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

Percentag...
Return on Assets

Return on Assets = Net Income /
Average Total Assets

Percentage

20
15
10

5
0
2007

2008

2009

2010

...
Return on Equity

Return on Equity = Net Income /
Shareholder's Equity

80

Percentage

70
60
50
40
30
20
10

0
2007

2008...
Operating Margin

Operating Margin = Operating
Income/ Revenue

Percentage

10
8
6
4
2

0
2007
-2

2008

2009

2010

2011
...
Turnover Efficiency
Ratios

10
Receivables Turnover

Receivables Turnover = Net Credit
Sales/ Average Accounts Receivable

13

Times

12

11

10

9
2007
...
Inventory Turnover

Inventory Turnover = Cost of
Goods Sold/ Average Inventory

12
11

Times

10

9
8
7
6

5
2007

2008

I...
Fixed Assets Turnover

Fixed Assets Turnover =
Revenues/ Average Fixed
Assets

6

Times

5

4

3

2
2007

2008

The fixed ...
Asset Turnover

Asset Turnover = Revenues/
Average Total Assets

1

Times

0.95
0.9

0.85
0.8
0.75
0.7
2007

2008

It is a...
Leverage Ratios

15
Debt-Equity

Debt Equity = Total Liabilities/
Shareholders' Equity

7
6

Times

5
4
3
2
1

0
2007
-1

2008

2009

2010

20...
Financial Leverage

Financial Leverage = Total Assets/
Total Equity

16
14

Times

12
10

8
6
4
2

0
2007

2008

2009

The...
Cash Flow Ratios

18
Capital Expenditure to Sales

CAPEX to Sales : Cash
Expenditure / Sales

Percentage

13
12
11
10
9
8
7
6
5
4
2007

2008

C...
Free Cash Flow to Sales

Free Cash Flow to Sales =
Free Cash Flow / Sales

Percentage

15
12

9
6
3

0
2007

2008

2009

2...
Free Cash Flow to Net Income

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

Percentage

5
4
3
2
1
0
2007

20...
References
www.honda.com
www.morningstar.com

22
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Financial ratio analysis for honda motor company

  1. 1. EPGDIM 12-14 Management Accounting Project Financial Ratio Analysis of Honda Motor Company Submitted By: Hitesh Bharti (Roll No. 24)
  2. 2. Table of Contents Company Profile 1 Liquidity Ratios 2 Profitability Ratios 5 Turnover Efficiency Ratios 10 Leverage Ratios 15 Cash Flow Ratios 18 References 22
  3. 3. Company Profile 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. Business Segments Key Competitors Products 1
  4. 4. Liquidity Ratios 2
  5. 5. Current Ratio Current Ratio = Current Assets/ Current Liabilities 1.6 Times 1.5 1.4 1.3 1.2 1.1 1 2007 2008 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). 2009 2010 2011 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 3
  6. 6. Liquid Ratio Quick Assets = Current Assets – Inventory Prepayments Liquid Ratio = Quick Assets/ Current Liabilities 1.3 1.2 Times 1.1 1 0.9 0.8 0.7 0.6 2007 2008 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. 2009 2010 2011 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 Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 4
  7. 7. Profitability Ratios 5
  8. 8. Net Margin Net Margin= Net Profit/ Revenue Net Profit= Revenue – COGS – Operating Expenses – Interest & Taxes Percentage 25 20 15 10 5 0 2007 2008 2009 2010 2011 -5 Net profit ratio is a ratio of net profits after taxes to the net sales of a firm. Over the past five years, net margin for Honda has been consistent except 2009. 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. However, still the company has earned a good profit to cover non-production costs, as compared to other peers. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 6
  9. 9. Return on Assets Return on Assets = Net Income / Average Total Assets Percentage 20 15 10 5 0 2007 2008 2009 2010 2011 -5 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 7
  10. 10. Return on Equity Return on Equity = Net Income / Shareholder's Equity 80 Percentage 70 60 50 40 30 20 10 0 2007 2008 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. 2009 2010 2011 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 8
  11. 11. Operating Margin Operating Margin = Operating Income/ Revenue Percentage 10 8 6 4 2 0 2007 -2 2008 2009 2010 2011 -4 -6 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 9
  12. 12. Turnover Efficiency Ratios 10
  13. 13. Receivables Turnover Receivables Turnover = Net Credit Sales/ Average Accounts Receivable 13 Times 12 11 10 9 2007 2008 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. 2009 2010 2011 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. It measures the efficiency of a business in collecting its credit sales. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 11
  14. 14. Inventory Turnover Inventory Turnover = Cost of Goods Sold/ Average Inventory 12 11 Times 10 9 8 7 6 5 2007 2008 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 2009 2010 2011 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 12
  15. 15. Fixed Assets Turnover Fixed Assets Turnover = Revenues/ Average Fixed Assets 6 Times 5 4 3 2 2007 2008 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. 2009 2010 2011 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 13
  16. 16. Asset Turnover Asset Turnover = Revenues/ Average Total Assets 1 Times 0.95 0.9 0.85 0.8 0.75 0.7 2007 2008 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. 2009 2010 2011 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 14
  17. 17. Leverage Ratios 15
  18. 18. Debt-Equity Debt Equity = Total Liabilities/ Shareholders' Equity 7 6 Times 5 4 3 2 1 0 2007 -1 2008 2009 2010 2011 Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders' equity. Over the past five years, the debt equity ratio for Honda has been less, which is favorable and indicates less risk. 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. 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 16
  19. 19. Financial Leverage Financial Leverage = Total Assets/ Total Equity 16 14 Times 12 10 8 6 4 2 0 2007 2008 2009 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. 2010 2011 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 17
  20. 20. Cash Flow Ratios 18
  21. 21. Capital Expenditure to Sales CAPEX to Sales : Cash Expenditure / Sales Percentage 13 12 11 10 9 8 7 6 5 4 2007 2008 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. 2009 2010 2011 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 19
  22. 22. Free Cash Flow to Sales Free Cash Flow to Sales = Free Cash Flow / Sales Percentage 15 12 9 6 3 0 2007 2008 2009 2010 2011 -3 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 20
  23. 23. Free Cash Flow to Net Income Free Cash Flow to Net Income = Free Cash Flow / Net Income Percentage 5 4 3 2 1 0 2007 2008 2009 2010 2011 -1 -2 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. Note: Industry average includes Honda, Toyota, General Motors, Ford and Volkswagen 21
  24. 24. References www.honda.com www.morningstar.com 22
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