Honda has been the world's largest motorcycle manufacturer since
1959, as well as the world's largest manufacturer of internal
combustion engines measured by volume, producing more than 14
million internal combustion engines each year. Honda surpassed
Nissan in 2001 to become the second-largest Japanese automobile
manufacturer. As of August 2008, Honda surpassed Chrysler as the
fourth largest automobile manufacturer in the United States. Honda
is the sixth largest automobile manufacturer in the world.
Honda was the first Japanese automobile manufacturer to release a
dedicated luxury brand, Acura, in 1986. Aside from their core
automobile and motorcycle businesses, Honda also manufactures
garden equipment, marine engines, personal watercraft and power
generators, amongst others. Since 1986, Honda has been involved
with artificial intelligence/robotics research and released their ASIMO
robot in 2000. They have also ventured into aerospace with the
establishment of GE Honda Aero Engines in 2004 and the Honda HA-
420 HondaJet, scheduled to be released in 2011. Honda spends
about 5% of its revenues into R&D.
Asset management ratios are the key to analyzing how effectively
and efficiency your small business is managing its assets to produce
sales. Asset management ratios are also called turnover ratios or
efficiency ratios. If you have too much invested in your company's
assets, your operating capital will be too high. If you don't have
enough invested in assets, you will lose sales and that will hurt your
profitability, free cash flow, and stock price.
FINANCIAL STATEMENT ANALYSIS -
PROFITABILITY RATIOS
Profitability Ratios show how successful a company is in terms
of generating returns or profits on the Investment that it has made
in the business. If a business is liquid and efficient it should also be
Profitable.
1) Profit Margin : The Profit Margin of a company determines its
ability to withstand competition and adverse conditions like rising
costs, falling prices or declining sales in the future. This ratio
measures the percentage of profits earned per dollar of sales and
thus is a measure of efficiency of the company.
The Formula
Profit Margin=Net income Revenue
For HONDA Company:
Year 2009 2008 2007
Honda 1.37 % 5% 5.3 %
Industry Average 4.93 % 8.37 % 8.53 %
Index
The Explanation: If profit margin of the Honda Company is 1.37%,
it means this company gained 0.137 cent of profit over one cent
from sales. There is a decrease in profit margin, from 5.3% in 2007
to 5% in 2008, and then 1.37% in 2009. Review the Industry Ratios
for this ratio to compare; we can see Honda Company shows a lower
profit margin than industry average, it means Honda Company
control the cost less efficient than the industry average.
2) Return on Assets: The Return on Assets of a company
determines its ability to utilize the Assets employed in the company
efficiently and effectively to earn a good return. The ratio measures
the percentage of profits earned per dollar of Asset and thus is a
measure of efficiency of the company in generating profits on its
Assets.
The formula:
Return on Assets = Net incomeTotal asets
For HONDA Company:
Year 2009 2008 2007
Honda 1.16 % 4.76 % 4.92 %
Industry Average 3.91 % 7.23 % 7.15 %
Index
The Explanation:
Review the Industry Ratios for this ratio to compare and see they
are below to the others in the same industry. As we can see, there is
a decrease in ROA, from 4.92% in 2007 to 4.76% in 2008, and then
1.16% in 2009. In each level of management, the efficiency is not as
good as companies in same industry.
3) Return on Equity: Return on Equity measure the number of
dollars of profits that Company can earn per each dollar of
shareholders' equity. Generally a return of 10% would be desirable
to provide dividends to owners and have funds for future growth of
the company
The formula: Return on equity = Net incomeStockholders'equity
For HONDA Company:
Year 2009 2008 2007
Honda 3.41 % 13.20 % 13.21 %
Industry Average 11.20 % 19.90 % 18.28 %
Index
The Explanation:
Review the Industry Ratios for this ratio to compare and see they
are below industry average index. As we can see, there is a
decrease in ROE, from 13.21% in 2007 to 13.20% in 2008, and then
3.41% in 2009. Return on equity represents for the success of the
business. So, the higher ROE is better for businesses.
4) Receivables turnover:
Accounts receivable turnover allows a company to measure whether
or not the company is effectively collecting payments on its
accounts receivable, or its sales on credit.here is the formulate o
this ratio
Receivables turnover = Sales on creditAccount Receivables
YEAR 2009 2008 2007
HONDA 11,72 11,75 10,5
AVERAGE 11,52 10,84 9,84
The Explanation
On the screen we can see there is dramatically increase from 2007
to 2008,and stay the same from 2008 to 2009.it’s mean honda
collects its receivable from lower to faster
Incomparation to industry average in 2009 ,the honda company
collects its receivable faster than does industry.this is shown by the
receivable turnover of 11,72 times versus 11,52 times.this show that
honda has a high receivable turnover,thecustomers are paying their
bills on time.,also mean that higher cash basis sales or efficient
collections.you know that the Most companies do not charge interest
on accounts receivable unless the account becomes past due. An
extension of credit is then essentially an interest free loan to
customers, and not collecting payments on time creates inefficiency
and opportunity costs for the company.
5) Average collection period:
Measures the number of days it takes a company to collect its credit
accounts from its customers.Here is the formulate of this ratio
Average collection period = Account receivableAverage daily credit sales
YEAR 2009 2008 2007
HONDA 31 31 35
AVERAGE 32 34 37
The Explanation
Look at the screen we can see there is the significant decrease from
2007 to 2008.and to stay the saame ratio from 2008 to 2009. this
meant average collection period have been shortened, which was
1day faster than industry average in 2009.
In comparation to industry average there’s a slightly lower.this data
tell us accounts receivables of honda company are as liquid or being
converted to cash as quickly.in orher world the honda company gets
its money more quickly from customer.
6) The inventory turnover ratio:
This measures the efficiency of the business in managing and selling
its inventory. It also helps the business owner determine how they
can increase their sales through inventory control. Here is the
calculation for the inventory turnover ratio:
The inventory turnover ratio= Net salesInventory
YEAR 2009 2008 2007
HONDA 8,084 10,01 9,37
AVERAGE 10,05 10,49 9,47
The Explanation
Look at the screen we can see there a slightly increase in 2007 to
2008.and the slightly decreasing in 2008 to 2009.
The inventory ratio is high that means the time for depleting the
existing inventory is short. company Honda has 107,555 million in
sales in 2009 for the previous year. Its inventory for the same year
is 13,364 million. So, its inventory turnover ratio is 8,048 which is
significantly hig and means that the company will need 1/8 years to
deplete the existing inventory.
In comparasion this ratio to industry averrage in 2009,we can see
It’s lower than industry average.this means if the value inventory
ratio is low it indicates that the management team doesn’t manage
efficiently.
7) Fixed asset turnover: The fixed asset turnover ratio measures
the company's effectiveness in generating sales from its
investments in plant, property, and equipment
Fixed asset turnover = Net SalesPlant and Equipment
YEAR 2009 2008 2007
HONDA 2,914 3,864 4,591
AVERAGE 3,8 4,28 4,21
The Explanation
On the screen we can see the asset turnover ratio decrease
gradually from 2007 to 2009.and look at in 2009 this ratio is lower
than average industry. If the fixed asset turnover ratio is low as
compared to the industry or past years of data for the firm, it means
that sales are low or the investment in plant and equipment is too
much. This may not be a serious problem if the company has just
made an investment in fixed asset to modernize.
8) Total asset turnover:
The total asset turnover ratio measures the ability of a company to
use its assets to generate sales. The total asset turnover ratio
considers all assets including fixed assets, like plant and equipment,
as well as inventory and accounts receivable.
Total asset turnover = SalesTotal asets
YEAR 2009 2008 2007
HONDA 0,847 0,951 0,921
AVERAGE 0,79 0,86 0,84
INDUSTRY
The Explanation
Look at the total asser turnover on the screen there is no fluctuation
during three year..in comparision to industry average.there is a
slightly higher.this show the higher total asset turnover ratio is the
higher lever of sales that the firm gain over the total asset
Liquidity Ratios
Investors always look at liquidity ratios to determine the ability of a
business to pay off its short term obligations from cash or near cash
assets to evaluate the risk associated if invest in this company.
Failure to pay off short term obligation may resulted in financial
difficulty or bankruptcy in near future.
➢ Current ratio measures the company's ability to pay its short-
term liabilities from short-term assets.
The current ratio can give a sense of the efficiency of a company's
operating cycle or its ability to turn its product into cash. Companies
that have trouble getting paid on their receivables or have long
inventory turnover can run into liquidity problems because they are
unable to alleviate their obligations.
Current ratio = Current AssetsCurrent Liabilities
• < 1 unable to pay off.
• > 1 able to pay off
The Explanation
12,25%; 11,18%; 10,9% is the Current ratio of Honda from 2007 to
2009 in turn. We can see that the current ratio was over 1 the last
three years as the inventory was calculated in this case. The higher
CR is, the more Honda is able to pay off short-term obligations.
Generally, b/c of the different industry, Honda is customer good
industry with inventory is not easy to convert into cash so it
encourages us to evaluate the efficiency of its operating cycle by
Current Ratio.
➢ Quick ratio also known as Liquidity Ratio or Acid Test, it
measures the ability of a company to pay off its short-term
obligations from current assets, except inventories.
The reason of excluding inventories is due to it's low liquidity and
thus quick ratio provide better measurement of company ability to
paid off it current obligations compare to current ratio. Quick ratio
does not apply to companies with inventory is easily converted into
cash, use current ratio instead.
Quick ratio = Current Assets - inventory Current Liabilities
The ratio between 1< QR<2 is acceptable.
According to BS, QR of Honda from 2007 – 2009 in turn is 80%; 73%;
64% we realize that Honda was in dangerous zone, and it is very low
liquidity. Low liquidity means that Honda is unable to convert
products into cash to pay off the short-term obligations. In fact, low
liquidity does not give the sense of bankruptcy but it takes bad
effect on company’s operating cycle b/c of the high profit of delayed
payment.
Debt Utilization Ratios
Financial leverage ratios provide an indication of the long-term
solvency of the firm. Unlike liquidity ratios that are concerned with
short-term assets and liabilities, Debt Utilization Ratios( financial
leverage ratios) measure the extent to which the firm is using long
term debt.
The Debt to Total Assets Ratio shows the proportion of a
company's assets which are financed through debt.
Formula :
Debt/ Total Assets Ratio = Total LiabilitiesTotal Assets
Debt/ Total Assets Ratio of Honda Motor Co., Ltd. :
Mar 31, 2009 Mar 31, 2008 Mar 31, 2007
Honda Motor Co.,
65% 62.8% 61.7%
Ltd.
Industry Average -- -- --
Explanation: This is not a particularly exciting ratio, but a
useful one. From 2007 to 2009, Honda Motor Co., Ltd. 's debt/asset
ratio increase slowly but it is fairly low (< 1 ), meaning that its
assets are financed more through equity rather than debt.
The Times Interest Earned Ratio indicates how well the
firm's earnings can cover the interest payments on its debt.
This ratio also is known as the interest coverage and is
calculated as follows:
Time interest earned=Income before interest and tax (EBIT)Interest
Expense
Times interest earned ratio of Honda Motor Co., Ltd.
Mar 31, 2009 Mar 31, 2008 Mar 31, 2007
Honda Motor Co.,
12.57 62.05 70.41
Ltd.
Industry Average 8.68 19.7 20.31
Explaination : Through the table, We can find out this ratios
decrease annually. This ratios dramatically fell from 62.05 times to
12.57 times in 2009, it means that HONDA debt is not well managed
as they did; But compare to the debt management of other firms in
the industry, HONDA is better afford to pay operating expenses.
