1. EPGDIM 12-14
Management Accounting Project
Financial Ratio Analysis of
Honda Motor Company
Submitted By:
Hitesh Bharti (Roll No. 24)

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. 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. Liquidity Ratios
2

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. 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. Profitability Ratios
5

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. 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. 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. 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. Turnover Efficiency
Ratios
10

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. 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. 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. 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. Leverage Ratios
15

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. 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. Cash Flow Ratios
18

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. 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. 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. References
www.honda.com
www.morningstar.com
22