Honda Financial Ratios Analysis
Would you place a personal deposit of one million dollars or more in the publicly traded stock of this company? Honda is considered to be one of the best auto makers in the world; its customer base continues to grow throughout the years. Honda also has profit margins constantly higher than its closest competitor Toyota Motors. Honda is making an effort to satisfy the necessities of its customers and the dominant market conditions by updating its models and ramping up supply.
Renovating the production system, building new plants for increasing production, such as the one in Brazil; and adopting innovative techniques for upgrading might help Honda to improve capacity and sales during fiscal 2014. Honda expects revenues and net income to increase 22. 5% and 58%, respectively, in fiscal 2014. The company’s strengths can be seen in several areas, such as its growth in earnings per share, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures.
Honda Financial Ratios Analysis Essay Example
Earnings per share trended upward after a decrease from Q1 to Q2 posting annual earnings of $202. 68 per share. Honda’s cash flow in the first half of fiscal 2014 improved to ? 671. 5 billion from ? 323. 3 billion in the first half of fiscal 2013. Honda expects higher revenues, favorable model mix, effective cost reduction measures, favorable currency effect and favorable impact of raw material cost fluctuations to contribute to the increase in profits during the year. For all of the abovementioned reasons, I would confidently place a million dollars in stocks from Honda. If the company keeps making money the way it has been, we could be looking at a very good investment opportunity.
Would you invest $500,000 in the debt (bonds) of this company? According to Moody’s Corporate ratings the bonds issued by Honda Finance Co. , Ltd. were assigned a rate of A1, this rating is supported by an excellent brand and strong position in its core automotive markets, its strong position in the motorcycle business, its cost management capability and its strong balance sheet. The steady position reflects the significant enhancement in Honda’s operating performance in the past year and it is expected that this improvement will be sustained.
Based on Moody’s analysis, Honda keeps a conservative financial policy and its balance sheet is strong. Adjusted debt/capitalization should stay sound and below 25%, while adjusted RCF/debt is expected to improve from around 46% to around 50% over the coming 2-3 years. The “Well Kept Agreement” between Honda and AHFC (American Honda Financial Corporation) has improved the credit quality of the notes. Under this agreement, Honda needs to possess a minimum of 80% of AHFC’s equity, either directly or indirectly.
Meanwhile, AHFC should have a positive tangible net assets balance along with sufficient liquidity. Moody’s believes that AHFC plays an important role in Honda’s U. S. auto business as it provides auto loans and leases for Honda’s cars in the U. S. In addition, Honda’s financial health remained stable during the year earning satisfactory profits and generating a return on investments. Therefore, I’d definitely invest $500,000 in the debt bonds of this company. Would you grant a one million dollar line of credit for overnight or term federal funds to this company?
Honda’s liquidity results indicate that the automaker is well positioned to meet maturing short-term liability obligations and unexpected cash needs. Even though, Honda’s current ratio deteriorated from 2012 to 2013, its current ratio is only a little bit higher than the industry average, 1. 30 compared to 1. 27 respectively. On the other hand, a quick ratio of 1 or greater is generally considered acceptable and Honda’s quick ratio is exactly equals to 1. 00. We also have to take into consideration that Honda Motors does not have to pay all its short term obligations at once, so the company can manage to pay its short term liabilities.
Therefore, if it was in my hands to approve a one million dollar line of credit to Honda, I would gladly grant it. Appendix A: Extended Liquidity Ratios Calculations ? Appendix B: Extended Asset Ratios Calculations ? Appendix C: Extended Profitability Ratios Calculations ? Appendix D: Extended Debt Ratios Calculations ? Appendix E: Extended Market Ratios Calculations ? Appendix F: Toyota Financial Ratios Toyota Motor Company Liquidity RatiosAnnual Current Ratio1. 07 Quick Ratio0. 93 Net Working Capital Ratio0. 02 Current Liabilities to Inventory Ratio7. 53
Cash Ratio0. 13 Operating Ratio15. 70 Asset RatioAnnual Inventory Turnover Ratio12. 53 Fixed Assets Turnover Ratio1. 15 Asset to Equity Ratio1. 64 Debt RatiosAnnual Total Debt Ratio0. 64 Interest Coverage Ratio62. 12 Debt/Equity Ratio1. 78 Appendix G: Toyota Financial Ratios Analysis Liquidity Honda’s liquidity results indicate that the automaker is well positioned to meet maturing short-term liability obligations and unexpected cash needs. Liquidity continued to trend upward between Q2 and Q4 after beginning the fiscal year in a downward trend between Q1 and Q2.
This trend is a result of a decrease in both current assets and current liabilities from Q1 to Q2. Quarterly financial reports suggest Honda settled debt with available cash on hand. The current ratio of 1. 30 has remained fairly constant during the past year and above foreign competitor Toyota. Honda’s liquidity exceeds Toyota’s in all analytic categories with the exception of the current liabilities to inventory ratio. This metric of 3. 37 to 7. 53 indicates that Honda holds less debt to inventory than Toyota, respectively.
The annual operating ratio of 17. 13 fluctuated during the year. Honda’s Operating and Financial Review of the 2013 Annual Report states the instability is a direct result of increased costs and expenses associated with unit sales in the Automobile business segment, negative foreign currency effects and increased product warranty expenses. The operating ratio is expected to continue an upward trend with increased net sales and continued cost reduction. Asset Utilization Honda’s asset utilization suggests the company is resourceful in generating revenue from assets held.
Honda’s quarterly average inventory turnover of 2.27 successfully contributed to the turnover of motorcycles, automobiles and power engines almost 9 times during the year. Q3 to Q4 reported a substantial increase of . 28 in inventory turnover as a result of increased automobile unit sales. The annual inventory turnover result is 3. 75 times lower than its competitor given that Toyota is the 3rd largest manufacturer and holds a larger percentage of the automobile market than Honda. In addition, these results illustrate Honda’s ability to manage inventory levels during cyclical economic downturns. Total assets ratio of . 72 suggests Honda generated $. 72 in sales for every dollar of assets.
Quarterly results ranged from . 19 to . 21. An asset to equity ratio of 2. 62 indicates Honda leveraged assets nearly 3 times per dollar of stockholders equity. Although assets decreased proportionately to a decrease in equity from Q1 to Q2, this metric remained constant during the fiscal year as a result of an overall increase in assets and equity of 18% and 14%, respectively. Profitability Honda’s financial health remained stable during the year earning satisfactory profits and generating a return on investments. Market price and dividend potential is greatly affected by the ability to generate profit.
Although net income decreased from Q1 to Q2, overall profitability remained relatively stable as reductions in average total assets, average owners’ equity, total sales and total assets decreased proportionately to net income fluctuations. As such, Honda’s profitability trended upward as a result of increased automobile unit sales. This is evidenced by a 24% increase in net sales and revenue contributing to an increase of 73. 6% in net income. Return on assets resulted in a 3% return in net income for every dollar of total assets. The return on equity is the ratio in which shareholders predicate management’s performance.
This ratio remained constant during the fiscal year with an annual result of . 08 leveraging stockholders’ investment. The profit margin of . 04 remained level with quarterly results as the fiscal year began with a decrease in total sales. Basic earnings power ratio remained constant throughout the year with an annual result of . 04, which are due to the negative impact of unrealized gains and losses on derivative instruments and foreign currency transactions losses. 5 Initial earnings per share decreased from Q1 to Q2 as a result of 37% decrease in net income with results continuing to decline throughout the year.
Debt Utilization Honda’s debt ratio indicates that over half of assets are financed through debt. This is evidenced by a total debt to assets ratio of . 62 which indicates that every dollar of assets is financed by debt. Honda’s competitor, Toyota, total debt to assets ratio of . 64 illustrates the auto industries reliance on debt to finance assets. The debt to equity ratio demonstrates that 1. 62 of every dollar of assets is financed through debt and stockholders equity. Although the debt ratio shows that over half of assets are financed by debt, Honda’s interest coverage ratio signifies the ability to pay interest on debt 40.
21 times with earnings before interest and taxes. Market Values Market value ratios illustrate Honda’s ability to return profits to stockholders. Earnings per share trended upward after a decrease from Q1 to Q2 posting annual earnings of $202. 68 per share. This indicates the return investors receive for each share of common stock held. Investor’s optimism in Honda’s future performance is represented by the price to earnings ratio which increased by 124% from Q1 to Q4 averaging out annual earnings of $17.54 per share.
The payout ratio of 35% suggests Honda’s willingness to pay stockholders for their return on investment. Comparative Financial Analysis of the Company Compared to the Industry Performance Honda’s current ratio deteriorated from 2012 to 2013. Honda Motor Co Ltd. (HMC) current ratio is 1. 30, a little bit higher than the industry average of 1. 27. This high current ratio could be due to the company has tied up a lot of money in non-productive assets such as excessive inventory.
Overall, the key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the future. The net profit margin for HMC is currently lower than what is desirable, coming in at 3. 70% compare to the industry average of 4. 30%. The company’s current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Automobiles industry and the overall market, return on equity of 8% is below that of both the industry average of 12% and the S&P 500.
The company has a P/E ratio of 17. 54 indicating a premium compared to an average of 11. 89 for the automotive industry. The debt-to-equity ratio is somewhat high at 1. 62 as compared to the industry average of 0. 74, implying that there has been a relative increment in the management of debt levels (HMC’s total debt increased from 2012 to 2013). Honda Motor Co. Ltd. ‘s inventories increased from 2012 to 2013, which is reflected on its debt to equity ratio of 1. 62 which is higher than the industry average of 0. 74.