HONDA

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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 HA420 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 Honda Industry Average Index 2009 1.37 % 4.93 % 2008 5% 8.37 % 2007 5.3 % 8.53 %

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 Honda Industry Average Index 2009 1.16 % 3.91 % 2008 4.76 % 7.23 % 2007 4.92 % 7.15 %

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: Year Honda Industry Average Index Return on equity = Net incomeStockholders'equity 2009 3.41 % 11.20 % 2008 13.20 % 19.90 % 2007 13.21 % 18.28 % For HONDA Company:

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 HONDA AVERAGE 2009 11,72 11,52 2008 11,75 10,84 2007 10,5 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 HONDA AVERAGE 2009 31 32 2008 31 34 2007 35 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 HONDA AVERAGE 2009 8,084 10,05 2008 10,01 10,49 2007 9,37 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 HONDA AVERAGE 2009 2,914 3,8 2008 3,864 4,28 2007 4,591 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 HONDA

2009 0,847

2008 0,951

2007 0,921

AVERAGE INDUSTRY

0,79

0,86

0,84

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 shortterm 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 Honda Motor Co., Ltd. Industry Average 65% -Mar 31, 2008 62.8% -Mar 31, 2007 61.7% --

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 Honda Motor Co., Ltd. Industry Average 12.57 8.68 Mar 31, 2008 62.05 19.7 Mar 31, 2007 70.41 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.

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