ASSIGNMENT ON

Ratio analysis of Honda Motors Co., Ltd

Submitted to Madam Sumavia Munir

Submitted By Huzaifa Sarfaraz
Roll No. BSF1602121 (A)
Semester BBA (Hons.) 6th
Session: 2016-2020
Subject Financial Management

UNIVERSITY OF EDUCATION, LAHORE

(MULTAN CAMPUS)
COMPANY PROFILE:
Honda Motor Company, Ltd. (HMC) Japanese  Honda Giken Kōgyō KK,
leading Japanese manufacturer of motorcycles and a major producer of
automobiles for the world market. Headquarters are in Tokyo.

While Honda is a world leader in producing

motorcycles, the bulk of the company’s annual sales
comes from automobiles, which the company
began manufacturing in 1963. Among its lightweight,
fuel-efficient passenger cars have been the popular
Civic and Accord models. The company’s other
major product areas include farm machinery and
small engines. Honda is a major Japanese exporter to
the United States and to other parts of the world.

Vision Statement:
Seek Solutions for a harmouous environment; shift the social paradigm.

Mission Statement:
To seek technology that helps realize true peace and the happiness to
earth.
 Honda Motors Co., Ltd
Balance Sheet:
As on March 31, 2015 2016 & 2017
Balance Sheet:
Period Ending: 3/31/2017 3/31/2016 3/31/2015

Current Assets

Cash and Cash $18,900,000 $15,636,000 $12,272,000

Equivalents

Short-Term $0 $0 $0
Investments

Net Receivables $23,719,000 $24,492,000 $24,345,000

Inventory $12,242,000 $11,685,000 $12,494,000

Other Current $3,970,000 $3,720,000 $3,389,000

Assets

Total Current $58,830,000 $55,533,000 $52,501,000

Assets

Long-Term Assets

Long-Term $32,916,000 $32,698,000 $35,019,000

Investments

Fixed Assets $65,557,000 $60,658,000 $54,408,000

Goodwill $0 $0 $0

Intangible Assets $6,984,000 $7,340,000 $6,333,000

Other Assets $4,757,000 $4,352,000 $4,233,000

Deferred Asset $1,090,000 $1,609,000 $1,151,000

Charges

Total Assets $170,135,000 $162,190,000 $153,645,000

Current Liabilities

Accounts Payable $14,776,000 $13,866,000 $13,248,000

Short-Term Debt / $0 $0 $0
Current Portion of
Long-Term Debt
Period Ending: 3/31/2017 3/31/2016 3/31/2015

Other Current $33,943,000 $34,804,000 $30,955,000

Liabilities

Total Current $48,720,000 $48,671,000 $44,203,000

Liabilities

Long-Term Debt $0 $0 $0

Other Liabilities $45,402,000 $43,929,000 $41,672,000

Deferred Liability $8,081,000 $7,027,000 $6,207,000

Charges

Misc. Stocks $0 $0 $0

Minority Interest $2,462,000 $2,405,000 $2,286,000

Total Liabilities $104,665,000 $102,031,000 $94,369,000

Stock Holders Equity

Common Stocks $772,000 $766,000 $718,000

Capital Surplus $1,536,000 $1,522,000 $1,427,000

Retained Earnings $60,243,000 $55,112,000 $50,728,000

Treasury Stock ($235,000) ($233,000) ($218,000)

Other Equity $3,154,000 $2,990,000 $6,621,000

Total Equity $65,470,000 $60,158,000 $59,276,000

Total Liabilities & $170,135,000 $162,189,000 $153,645,000

Equity
 Honda Motors Co., Ltd
Income Statement
For the year Ended March 31, 2015 2016 & 2017
Income Statement
Period Ending: 3/31/2017 3/31/2016 3/31/2015

Total Revenue $125,632,000 $129,909,000 $111,137,000

Cost of Revenue $97,513,000 $100,827,000 $86,144,000

Gross Profit $28,119,000 $29,083,000 $24,993,000

Operating Expenses

Research and Development $6,205,000 $5,841,000 $5,055,000

Sales, General and Admin. $14,370,000 $18,763,000 $14,347,000

Non-Recurring Items $0 $0 $0

Other Operating Items $0 $0 $0

Operating Income $7,545,000 $4,479,000 $5,592,000

Add income/expense items $126,000 $215,000 $481,000

Earnings Before Interest and Tax $9,149,000 $5,815,000 $6,875,000

Interest Expense $112,000 $161,000 $152,000

Earnings Before Tax $9,037,000 $5,654,000 $6,723,000

Income Tax $2,940,000 $2,038,000 $2,044,000

Minority Interest $0 $0 $0

Equity Earnings/Loss Unconsolidated Subsidiary $1,479,000 $1,121,000 $801,000

Net Income-Cont. Operations $7,576,000 $4,737,000 $5,480,000

Net Income $6,097,000 $3,615,000 $4,679,000

Net Income Applicable to Common Shareholders $6,097,000 $3,615,000 $4,679,000

 Ratio Analysis
1) Liquidity Ratio:
A liquidity ratio is a financial ratio that indicates whether a company’s current assets will be
sufficient to meet the company’s obligations when they became due.
a) Current Ratio: The current ratio is the liquidity ratio that measures a company’s ability to
pay short-term obligations or those due within one year.
Formula: = Current Asset/ Current Liabilities
Years 2015 2016 2017
Current Assets $52,501,000 $55,533,000 $58,830,000
Current liabilities $44,203,000 $48,671,000 $48,720,000
Current Ratio 1.10 1.14 1.21

Interpretation:
In 2015, the firm’s ability to cover its current liabilities with its current assets was
1.10. In 2016, the ratio goes up to 1.14 as compared to 2015 and also In 2017 the current ratio of
the firm’s goes up to 1.21 as compared to 2012 & 2016, which means that the company has the
ability to pay its liabilities, as the definition says that higher the ratio, greater the ability of the
firm to pay its bills. This tells that Honda Motors is improving their liquidity and efficiency,
because their current ratio is improving.
b) Quick Ratio/Acid Test Ratio: The company should have the ability to pay its liabilities
through its most liquid assets.
Formula: = Current Asset – Inventory/ Current Liability
Years 2015 2016 2017
Current Assets $52,501,000 $55,533,000 $58,830,000
Inventory $12,494,000 $11,685,000 $12,242,000
Current liabilities $44,203,000 $48,671,000 $48,720,000
Quick Ratio 0.91 0.93 0.96

Interpretation:
A quick ratio of 1 is good. The table shows that in 2015, the firm has the ratio
0.91 cents. Then we observe the slight improvement in 2016 & 2017. So we can figure out from
the ratio that Honda Motors still cannot pay its debts without its inventory. This lead us to
believe that Honda Motors is a somewhat risky business, even through it is the largest in the
automobiles industry. So in 2015 & 2016 company are not pay his quick liabilities & 2017 may
be company pay his liabilities.

2) Profitability Ratio:
A profitably ratio is a measure of profitability, which is a way to measure a company’s
performance. Profitability is simply the capacity to make profit.
a) Gross Profit Margin: Gross Profit Margins tells about the profitability of your goods and
services. It tells you how much it cost you to produce the product.
Formula: = Gross Profit/ Sales * 100
= Sales – CGS/ Sales * 100
Years 2015 2016 2017
Sales $111,137,000 $129,909,,000 $125,632,000
Cost of Goods Sold $86,144,,000 $100,827,000 $97,513,000
Gross profit $34,993,000 $29,083,000 $28,119,000
Gross profit Margin 23% 22% 21%

Interpretation:
In 2015 Gross Profit Margin is 23% & In 2016 is 22% & In 2017 which is 21%.
Its means remaining portion are CGS which is 77% ,78% & 79%, which is not better as the
definition say, higher the Gross Profit Margins ratio, the company shows higher performance but
in case Gross profit margin are less & CGS are more, which means it is not Favorable for the
company.
b) Operating Profit Margin: Operating Profit Margin is the cost of producing the product or
services that are unrelated to the direct production of the product or services, such as
administrative expenses
Formula: = EBIT/ Sales * 100 or = Operating Profit/ Sales * 100
= Gross Profit – Operating Expenses/ Sales *100
Years 2015 2016 2017
Operating profit $6,875,000 $5,815,000 $9,149,000
Sales $111,137,000 $129,909,000 $12,563,2000
Operating Profit Margin 6% 4% 7%

Interpretation:
In 2015 company has 94% of cost of goods sold and operating expenses it means
is not good for the company because he has large amount of operating expenses that he pay in
coming years but now company has minimum amount of profit there is same situation in 2016
company not complete their target and in 2017 company has 7% amount of profit and company
situation are same just like a previous year ,but increases 1% that is better for Honda Motors.
Operating profit margin for Honda Motors decreased in 2016, but remains quite stable after that.
The lower margin reflects that the Honda Motors is less efficient in cost management.
c) Net Profit Margin: NFM is the percentage of revenue remaining after all operation expenses,
interest, taxes and preferred stock dividends(but not for common stock dividends) have been
deducted from a company’s total revenue.
Formula: = Earnings Available for Common Stockholder/ Sales *100
Years 2015 2016 2017
EACS $4,679,000 $3,615,000 $6097,000
Sales $111,137,000 $129,909,000 $125,632,000
Net Profit Margin 4% 3% 5%

Interpretation:
According to the definition, higher he ratio, higher will be the firm’s ability to
pay its taxes. In 2016 the margin was very low but in 2015 & 2017, the increases to 1% which is
not enough. In 2016 company has lot of amount remaining CGS, operating income, interest and
taxes, its means company generate minimum amount of profit. Same in 2015 company has
minimum amount of profit so far 2017 company has earned more profit as compare to previous
year. Honda Motors is inefficient at converting its sales into actual profits.
d) Earnings Per Share: Earnings per share shows the company profit margin on a one share.
= Earnings Available for Common Stockholder/ No. of shares of Common Stock outstanding
Years 2015 2016 2017
EACS $4,679,000 $3,615,000 $6,097,000
NSCSO $1,409,337 $2,273,585 $1,917,296
EPS $3 $2 $3

Interpretation:
In 2015 company earn $3 against the one share. Similarly 2016 company earn $2
against one share and In 2017 company also earn $3. In 2015 & 2017 profit margin is increasing
as compare to year 2016. Company earn more in 2015 &2017 than 2016.
e) Return On Total Asset (ROA): ROA measure how effectively the company produces
income from its assets
Formula: = Earnings Available for Common Stockholder/ Total Assets * 100
 Years 2015 2016 2017
EACS $4,679,000 $3,615,000 $6,097,000
Total Assets $153.,645,000 $162,190,000 $170,135,000
ROA 3% 2% 4%

Interpretation:
The decreases in Return on assets indicates that the company is generating less
profit from all of its resources in the year 2016 as compared to 2015 &2017. The higher ratio is
better for the company i.e 2017. Therefore this, decreases in Honda Motor ratio is indicating that
the company is not much prospering. In 2015 company earn 3% against the asset its good but in
2016 company earn 1 % less then in 2017 earning against assets is increasing to 4% as compare
to previous year. So we say that company performance is better in 2017 than in other years.
f) Return on Common Stock Equity (ROE): ROE measure how much a company makes for
each dollar that investor put into it. ROE shows how much company generate profit.
Formula: Earnings Available for Common Stockholder/ Total Common Stock Equity * 100
Years 2015 2016 2017
EACS $4,679,000 $3,615,000 $6,097,000
TCSE $5,927,6000 $60,158,000 $65,,470,000
ROE 6% 8% 9%

Interpretation:
The ratio should be higher. Here starting from 2015, the ratio was 6% its means the
company earn 8 percent against the equity & the management is not efficient but in 2016 the
ratio goes up to 8% and then in 2017 the ratio increases to 9%, it is good as compare to
previous year, it means management is efficient for work. This increase in ROE is a good thing
for stockholders and indicates that Honda Motors is using the equity provided by stockholders
during this specific year effectively and using it to generate more equity for the owners.

3) Activity Ratio:
Activity Ratio is the category of financial ratios that measure a firm’s ability to convert different
accounts within its balance sheets into cash or sales.
a) Inventory Turnover: Its measure the numbers of times inventory is sold or used in a period
such as a year.
Formula: = Cost of Goods Sold/ Inventory

Years 2015 2016 2017

 CGS $86,144,000 $100,827,000 $97,513,000
Inventory $12,494,000 $11,685,000 $12,242,000
Inventory Turnover 9 7 8

Interpretation:
In 2015 inventory complete his cycle 9 time in a year it shows effort of the
company & its goods for the company if inventory complete his cycle many times in a year. In
2015, Honda has a ratio of 9 & In 2016, Honda has a ratio of 7 and then in 2017 the Honda has a
ratio of 8 times. The Honda Inventory Turnover ratios deteriorated from 2016 to 2017 which
means that its ability to sell inventory has relatively comes down.
b) Average Age of Inventory: Average age of inventory shows the time period of company how
long take to change inventory
Formula: = 365/ Inventory Turnover
Years 2015 2016 2017
Inventory Turnover 7 9 8
Avg. Age of Inventory 52 41 46

Interpretation:
In the year 2015 the turnover in days was 52, but the collection days decreases in
the year 2016 and then in 2017 the collection days increases to 46. The collection period of 2016
is 41 days which is best from others years. This shows that the collection is faster as compared to
the previous years.
c) Average Collection period: Average collection period shows how long company take to
receive their cash it good for the company. The ability of the firm collecting the receivable in
specific time.
Formula: = Account Receivable/ Average Sales per Day
or = Account Receivable/ Annual Sale/ 365
Years 2015 2016 2017
Account Receivable $24,345,000 $24,492,000 $23,719,000
Avg. Sales per day $304,485 $355,915 $344,197
Annual sales $111,137,000 $129,909,000 $12,632,,000
Avg. Collection period 80 68 69

Interpretation:
 In the year 2015, the turnover in days was 80, but the collection days decreases
in the year 2016 and then in 2017 the collection days decreases to 68. The collection period of
2016 is 68 days which is best from others years. This shows year 2016 collect the cash faster as
compared to the previous years. Its good for the company because company collect cash in
minimum days.
d) Average Payment Period: It shows how long company take to pay his liabilities.
Formula: = Account Payable/ Average Purchase per day
= Account Payable/ Annual Purchases/ 365
Years 2015 2016 2017
Accounts payable $13,248,000 $13,866,000 $14,776,000
Average Purchase per day $133,262 $316,077 $305,678
Annual Purchases $48,640,000 $115,368,,000 $111,572,500
Average Payment Period 98 Days 90 Days 98 Days

Interpretation:
Honda average period for payment has reduce to 90 days in 2016 which was 98
days in 2015 & 2017. Its good if we pay our liability in minimum time. This reduction in average
payment period shows that how efficiently company is paying back their creditors and also
assuring that payments are being made in a prompt manner by cars to its creditors. This period
should remain low as much as possible. In 2016, company pay liabilities in 90 days this is best
year.
e) Total Asset Turnover (TAT): Total asset turnover shows the asset place in a year it also
shows the efficiency of the company its good for the company if asset place more times in a
year..
Formula: = Sales/ Total Asset
Years 2015 2016 2017
Sales $111,137,000 $129,909,000 $125,632,000
Total Assets $153,645,000 $162190,000 $170,,135,000
Total Assets Turnover 0.72 0.80 0.74

Interpretation:
The ratio is supposed to be high. Here we can see that the Honda Motors total
assets turnover ratio in 2016 was 0.80, which means that company generated more revenue per
dollar of investment. The ratio then comes slightly down in years 2015 & 2017. The table shows
that the year 2016 company efficiency are good than other year because its generated more
revenues.

4) Debt Ratio:
Indicates the amount the firm uses to generate profits from others money.
a)Debt Ratio: The ratio shows the company ability to cover its debts through its total assets.
Through debt Ratio we attract the investor.
Formula: = Total Liability/ Total Asset * 100
Years 2015 2016 2017
Total Liabilities $94,369,000 $102,031,000 $104,665,000
Total Assets $15,3645,000 $162,190,000 $170,135,000
Debt Ratio 61% 63% 62%

Interpretation:
Debt ratio for Honda Motors in 2015 was 61% & remaining 39 percent is equity
it is more good if company has low amount of debt, and then debt ratio goes up in 2016 & 2017.
The ratio has to be low. So we can interpret that in the year 2016, the risk of the firm is getting
higher as the ratio goes up. The remaining percent is the personal investment (equity). In 2015
company position is quiet good because company has minimum debt as compare to previous
years.
b) Time Interest Earned Ratio:
Formula: = EBIT/ Interest
Years 2015 2016 2017
EBIT $6,875,000 $5,815,000 $9,149,000
Interest $152,000 $161,000 v112,000
Times Interest Earned Ratio 45 Times 36 Times 82 Times

Interpretation:
In 2017 Honda Motors has a ratio of 82 which is very large increases from 2015
& 2016 when their ratio was 45 & 36. This means that they have a comfortable coverage of
interest, and that the coverage has increased to previous year. In 2015 our liability is 1.18% but
we earn 45 times more profit it mean company current situation is good and appreciable
company has done a good job but in 2016 company has earn 36 times more profit in 2017
company has going to 85% more profit than other and he has to pay than other times liability
that is very good situation.

5) Market Ratio:
a) Price/ Earning(P/E) Ratio:
Formula: = Market Price Per Share/ EPS
 Years 2015 2016 2017
Market Price Per Share 33 34 27
EPS $3 $2 $3
Price/Earnings Ratio 11 17 9

Interpretation:
Honda price earning ratio in year 2015 is 11 and in year 2016 is 17 and then in 2017
is 9. The P/E ratio in year 2015 is 11 and then increased to 17 and also then it decreases to 9
which suggested that the investors may be looking less favorable at the Honda in year 2015 &
2017. This ratio should be high, because higher the P/E ratio, the higher will be the investor
confidence in company.
b) Market/ Book (M/B) Ratio:
Formula:
= Market Price Per Share of Common Stock/ Book Value Per Share of Common Stock
Years 2015 2016 2017
Market Price Per Share of Common Stock 30 25 29
Book Value Per Share of Common Stock 37 32 39
Market/Book Ratio 0.80 0.78 0.74

Interpretation:
We can say that Honda Motor future prospects are being viewed less favorably
by investors. Because still, investor are not willing to pay more for stock than their accounting
book value as M/B ratio fluctuation s negligible in 2017 &2016 against 2015. This ratio should
be high.