Honda Financial Report 2008 Analysis With Ratio Analysis

TABLE OF CONTENTS

I. COMPANY OVERVIEW

Company Profile 3

Industry and Products 3

Geographical distribution 3

Listed Stock Exchanges 4

Financial Stance 4

News summary 4

II. A FINANCIAL ANALYSIS

Sales Analysis 5

Dividend Analysis 6

Profitability Analysis 7

Inventory Analysis 8

Financial Position 8

II. B RATIO ANALYSIS

a. Current Ratio 8

b. Acid Test Ratio 9

c. Inventory Turnover Ratio 10

d. Fixed Asset Turnover Ratio 11

e. Total Asset Turnover Ratio 12

f. Net Profit Turnover Ratio 13

III. LAST TWO YEARS FINANCIALS

AND STATISTICS ANALYSIS 14

IV. BIBLIOGRAPHY 16

1

HONDA MOTOR COMPANY FINANCIAL REPORT ANALYSIS 2008

I. COMPANY PROFILE

Honda Motor Company, Limited is a multinational corporation, engine manufacturer and engineering

corporation headquartered in Tokyo, Japan. Founded on September 24, 1948 by founder & then CEO

Soichiro Honda. The Company has grown to become the world’s largest motorcycle manufacturer and

one of the leading automakers. With a global network of 501subsidiaries and affiliates.

INDUSTRY AND PRODUCTS

The company manufactures automobiles and motorcycles, trucks, scooters, robots, jets and jet engines,

ATV, water craft, electrical generators, marine engines, lawn and garden equipment, and aeronautical

and other mobile technologies. Honda's lines of luxury cars are branded Acura in North America and

China. The Group's major trademarks includes Honda, Acura, Accord, Civic, Fit, Odyssey, CR-V, Pilot,

Mobilio, Element, Step WGN, MDX, Stream, Life, ACTY, Vamos, That’s, CUB, Wave and Gold

Wing.

Honda is the 5th largest automobile manufacturer in the world as well as the largest engine-maker in

the world, producing more than 14 million internal combustion engines each year. As of August 2008

Honda surpassed Chrysler as 4th largest automobile manufacturer in United States. Currently, Honda is

the second largest manufacturer in Japan behind Toyota and ahead of Nissan.

GEOGRAPHICAL DISTRIBUTION

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Honda is headquartered in Tokyo, Japan. American Honda Motor Co. is based in Torrance, California.

Honda Canada Inc. is headquartered in the Scarborough district of Toronto, Ontario, and is building new

corporate headquarters in Markham, Ontario, scheduled to relocate in 2008. Hero Honda, a joint venture

between India's Hero Group and Honda, is the largest manufacturer of two wheelers in the world. Honda

of Canada Manufacturing is based in Alliston, Ontario. Honda has also created joint ventures around the

world, such as Honda Siel Cars India Ltd, Hero Honda Motorcycles India Ltd, Guangzhou Honda and

Dongfeng Honda Automobile Company in China and Honda Atlas Cars Pakistan

LISTED STOCK EXCHANGES

Honda is headquartered in Tokyo, Japan. Their shares trade on the Tokyo Stock Exchange and the

New York Stock Exchange, as well as exchanges in Osaka, Nagoya, Sapporo, Kyoto, Fukuoka, London,

Paris and Switzerland.

FINANCIAL STANCE

Market cap US$ 58.74 Billion (2008)

Revenue US$ 119.801 Billion (2008)

Operating income US$ 9.513 Billion (2008)

Net income US$ 5.989 Billion (2008)

Total assets US$ 125.916 Billion (2008)

Total equity US$ 45.356 Billion (2008)

Employees 167,231 (Sep 2008)

Fiscal year ends March

WORLD’S FIRSTS BY HONDA

Although a relatively small manufacturer compared to the other Japanese automakers, Honda is the

largest engine maker in the world. Honda has a number of firsts in many categories, including the first

engine to meet the 1970 US Clean Air Act (1975 CVCC), the first luxury Japanese car (1985 Legend)

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and motorcycle (2006 Gold Wing bikes) equipped with an airbag, as well as the first mid-size pickup

truck with independent rear suspension (2006 Ridgeline)

Honda has also pioneered new technology in its HA-420 HondaJet that allows new levels of reduced

drag, increased aerodynamics and fuel efficiency thus reducing operating costs.

In Takanezawa, Japan, on June 16, 2008, Honda Motors produced the first assembly-line FCX Clarity.

More efficient than a hybrid vehicle, the FCX Clarity combines hydrogen and oxygen from ordinary air

to make electricity. The vehicle does not emit any pollutants and its only byproducts are heat and water.

The FCX Clarity also has an advantage over hybrids in that it does not require a rechargeable battery

and the use of electricity.

HONDA ROBOTICS

ASIMO is the part of Honda's Research & Development robotics program. It is the eleventh in a line

of successive builds starting in 1986 with Honda E0 moving through the ensuing Honda E series and the

Honda P series. Weighing 54 kilograms and standing 130 centimeters tall, ASIMO resembles a small

astronaut wearing a backpack, and can walk on two feet in a manner resembling human locomotion, at

up to 6 km/h. It is the world's only humanoid robot able to ascend and descend stairs independently.

COMPETITOR ANALYSIS

Honda Motor Co., Ltd. operates in the Motor vehicles and car bodies sector. This analysis compares

Honda Motor Co., Ltd. with another company in this sector in Japan: Mitsubishi Motors Corporation

(2008 sales of 2.68 trillion Japanese Yen [US$25.32 billion] of which 99% was Automobile).

II A. FINANCIAL ANALYSIS

SALES ANALYSIS

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Honda Motor Co., Ltd. reported sales of ¥12.00 trillion (US$113.31 billion) for the fiscal year ending

March of 2008. This represents an increase of 8.3% versus 2007, when the company's sales were ¥11.09

trillion. Sales at Honda Motor Co., Ltd. have increased during each of the previous five years. Honda

Motor Co., Ltd. also saw significant increases in sales in Motorcycle Business (up 13.7% to ¥1.56

trillion).

Sales Comparisons (Fiscal Year ending 2008)

Company

Sales

(trlns)

Sales

Growth

Sales/

Emp (US$) Largest Region

Honda Motor Co., Ltd. 12.003 8.3% 633,140 North America (50.8%)

Recent Sales at Honda Motor Co., Ltd.

8 89 10 11 12

2003 2004 2005 2006 2007 2008

(Figures in Trillions of Japanese Yen)

Just over half of the company's 2008 sales were in North America: in 2008, this region's sales were

¥6.09 trillion, which is equivalent to 50.8% of total sales. In 2008, sales in Rest of the World were up at

a rate that was much higher than the company as a whole. Honda Motor Co., Ltd. also experienced

significant increases in sales in Europe (up 22.3% to ¥1.50 trillion) and Asia (up 27.6% to ¥1.31

trillion).

DIVIDEND ANALYSIS

During the 12 months ending 30/6/2008, Honda Motor Co., Ltd. paid dividends totaling ¥88.00 per

share. Since the stock is currently trading at ¥3,340.00, this implies a dividend yield of 2.6%. Honda

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Motor Co., Ltd. has increased its dividend during each of the past 5 fiscal years, in 2003, the dividends

were ¥16.00 per share. During the same 12 month period ended 6/30/2008, the Company reported

earnings of ¥338.02 per share. Thus, the company paid 26.0% of its profits as dividends.

PROFITIBILITY ANALYSIS

On the ¥12.00 trillion in sales reported by the company in 2008, the cost of goods sold totaled ¥8.02

trillion, or 66.9% of sales i.e., the gross profit was 33.1% of sales which is better than in comparison as

achieved in 2007, when cost of goods sold totaled 67.6% of sales. This profit margin is lower than the

level the company achieved in 2007, when the profit margin was 5.3% of sales. The company's return

on equity in 2008 was 13.4%. This was a decline in performance from the 14.4% return that the

company achieved in 2007.

Profitability Comparison

Company Year

Gross

Profit

Margin

EBITDA

Margin

Earns

bef.

extra

Honda Motor Co., Ltd. 2008 33.1% 12.3% 5.0%

Honda Motor Co., Ltd. 2007 32.4% 11.0% 5.3%

Honda Motor Co., Ltd. reports profits by product line. During 2008, the itemized operating profits at

all divisions were ¥953.11 billion, which is equal to 7.9% of total sales. Of all the product lines,

Financial Services had the highest operating profits in 2008, with operating profits equal to 22.1% of

sales. Power Products and Other Businesses had the lowest operating profit margin in 2008, with the

operating profit equal to only 5.3% of sales. However, in 2007, Automobile Business had the lowest

profit margin.

6

INVENTORY ANALYSIS

As of March 2008, the value of the company's inventory totaled ¥1.20 trillion. Since the cost of goods

sold was ¥8.02 trillion for the year, the company had 55 days of inventory on hand. In terms of

inventory turnover, this is an improvement over March 2007, when the company's inventory was ¥1.18

trillion, equivalent to 58 days in inventory.

FINANCIAL POSITION

As of March 2008, the company's long term debt was ¥1.84 trillion and total liabilities (i.e., all money

owed) were ¥7.75 trillion. The long term debt to equity ratio of the company is 0.39. As of March 2008,

the accounts receivable for the company were ¥2.36 trillion, which is equivalent to 72 days of sales.

This is an improvement over the end of 2007, when Honda Motor Co., Ltd. had 82 days of sales in

accounts receivable.

Financial Positions Honda Motors Pvt., Ltd.

Company Year

LT Debt/

Equity

Days

AR

Days

Inv.

R&D/

Sales

Honda Motor Co., Ltd. 2008 0.39 72 55 4.9%

II B. RATIO ANALYSIS

a. CURRENT RATIO:

Current Ratio shows a firm’s ability to meet current liabilities with its current assets.

Computation:

Current Ratio = Current Assets/ Current Liabilities

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2007 (for Honda) 2007 (for Mitsubishi)

Current Ratio = 5192609/4287527 Current Ratio = 1059633/1110874

Current Ratio = 1.21 times. Current Ratio = 0.95 times


Current Ratio = 5231568/4678550 Current Ratio = 964133/1030913

Current Ratio = 1.11 times. Current Ratio = 0.93 times

Company Year

Current

Ratio

Honda Motor Co., Ltd. 2008 1.11

2007 1.21

Mitsubishi Motor Co., Ltd. 2008 0.93

2007 0.95

Analysis:

The current ratio is lower in 2008 as compared to 2007.There is an increase in all the current

assets except other receivables which decreased in 2008. The net current assets increased by ¥38959

million in 2008 and at the same time the net current liabilities increased by ¥391023 million in 2007.

b. ACID TEST RATIO:

Acid Test Ratio or Quick Ratio shows a firm’s ability to meet current liabilities with its most liquid

assets.

Computation:

Quick ratio = (Current Assets-Inventory)/Current Liabilities.


Quick ratio = (5192609-1183116)/4287527 Quick ratio = (1059633-351991)/1110874

8

Quick ratio = 0.93 times. Quick ratio = 0.63 times


Quick ratio = (5231568-1199260)/4678550 Quick ratio = (1059633-351991)/1030914

Quick ratio = 0.86 times Quick ratio = 0.64 times

Company Year

Quick

Ratio


2007 0.93


2007 0.63

Analysis:

We have seen that the company had a lower current ratio in 2008 and was unable to meet its short

term obligations as compared to 2007. Where as the quick ratio identifies the role played by the

inventories in this context. Therefore the ratio shows that in year 2008 it has decreased as compared to

2007 due to the fact that the investment in inventories is increased by ¥16144 million only and

current liabilities have increased by ¥391023 million.

ASSET MANAGEMENT RATIOS.

c. INVENTORY TURNOVER RATIO

Computation:

Inventory Turnover Ratio = Sales/Inventory


Inventory Turnover Ratio = 9819973/1183116 Inventory Turnover Ratio =2202869/351991

Inventory Turnover Ratio = 8.32 times Inventory Turnover Ratio = 6.25 times


9

Inventory Turnover Ratio = 11304485/1199260 Inventory Turnover Ratio =2682103/299644

Inventory Turnover Ratio = 9.42 times Inventory Turnover Ratio = 8.95 times

Company Year

Inventory Turnover Ratio


2007 8.32


2007 6.25

Analysis:

The inventory turnover ratio in the year 2007 was 8.32 which indicate that 8.32 times in a

year the inventory of the firm is converted into receivables or cash. However, in 2008, the inventory

turnover ratio slightly increased to 9.42. This was due to the fact that the company’s current assets have

increased by ¥38959 million and a slight increase of 1.3% in inventories.

d. FIXED ASSETS TURNOVER RATIO

This ratio measures the extent of turnover or volume of gross income generated by the fixed assets of

a company or in other words the efficiency in their utilization.

Computation:

Fixed Assets Turnover Ratio = Sales/Fixed Assets


Fixed assets Turnover Ratio = 9819973/2078728 Fixed assets Turnover Ratio = 2202869/555994

Fixed assets Turnover Ratio = 4.72 times Fixed assets Turnover Ratio = 1.23 times


Fixed assets Turnover Ratio = 11304485/2201299 Fixed assets Turnover Ratio = 2682103/485278

Fixed assets Turnover Ratio = 5.13 times Fixed assets Turnover Ratio = 4.40 times

10

Company Year

Fixed Asset Turnover Ratio


2007 4.72


2007 1.23

Analysis:

According to the calculations above the productivity of fixed assets in year 2008 is better than it was

in previous years. In 2007, it was 4.72 times and now it has been slightly increased to 5.13 times. This

change was brought about by increase in total sales by 13.13%, where as the fixed assets increased only

by 5.57%.

e. TOTAL ASSETS TURNOVER RATIO

Computation:

Total Assets Turnover Ratio = Sales/Total Assets


Total Assets Turnover Ratio=9819973/120336500 Total Assets Turnover Ratio=2202869/1778693

Total Assets Turnover Ratio = 0.81 times Total Assets Turnover Ratio = 1.23 times


Total Assets Turnover Ratio=11304485/12615543 Total Assets Turnover Ratio=2682103/609408

Total Assets Turnover Ratio = 0.89 times Total Assets Turnover Ratio = 4.40 times

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Company Year

Total Assets Turnover Ratio


2007 0.81


2007 1.23

Analysis:

According to the calculations above the productivity of assets in year 2008 is good as it was in

previous years. In 2007, it was 0.81 times and now it has been increased to 0.89 times. This change was

brought about by increase of only 4.59% in the total assets, where as the total sales increased by

13.13%.

f. NET PROFIT TURNOVER RATIO

Computation:

Net Profit Turnover Ratio = Sales/Net Profit


Net Profit Turnover Ratio = 9819973/592322 Net Profit Turnover Ratio = 2202869/8745

Net Profit Turnover Ratio = 16.57 times Net Profit Turnover Ratio = 251.6 times


Net Profit Turnover Ratio = 11304485/600039 Net Profit Turnover Ratio = 2682103/34710

Net Profit Turnover Ratio = 18.83 times Net Profit Turnover Ratio = 77.27 times

Company Year

Net Profit Turnover Ratio

12


2007 16.57


2007 251.6

Analysis:

The net profit turnover ratio has increased by 2.26 times in 2008 as compared to the previous year.

This change was brought about by the increase in the total sales in 2008 by 13.13% as compared to

2007. There has also been an increase in the net profit in 2008 by an amount of ¥7717 million.

III. COMPARATIVE ANALYSIS OF CURRENT FISCAL YEAR WITH THE

PREVIOUS FISCAL YEAR.

Honda’s consolidated net sales and other operating revenues for the fiscal year ended March 31, 2008

grew ¥915.6 billion, or 8.3%, compared with fiscal 2007, to ¥12,002.8 billion. Factors behind this

increase were higher unit sales in the motorcycle business in Other Regions, higher unit sales in the

automobile business in all overseas regions, and higher unit sales of power products in Asia, as well as

the positive impact of foreign exchange rate changes.

Domestic net sales decreased by ¥95.4 billion, or 5.7%, to ¥1,585.7 billion, but overseas net sales were

up ¥1,011.1 billion, or 10.7%, to ¥10,417.0 billion as compared to FY 2007.

Net income rose ¥7.7 billion or 1.3% from the previous year, to ¥600.0 billion.

Consolidated cash and cash equivalents for the year ended March 31, 2008 increased by ¥105.3 billion

from March 31, 2007, to ¥1,050.9 billion. This can be primarily attributed to higher unit sales in

motorcycle business.

The provision for credit losses increased by ¥19.3 billion, which was at ¥25.5 billion on 2007 and rose

to ¥44.8 in 2008, primarily as a result of the weakening U.S. economy.

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IV. BIBLIOGRAPHY

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1) Honda Motor Co., Ltd. Annual Report 2007-2008

2) Mitsubishi Motor Co., Ltd Annual Report 2007-2008

3) www.honda.co.jp

4) Abrarish Gupta (2006), “Financial Accounting for Management”, Pearson Education, 3rd Edition,

PP.605-673.

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http://www.honda.co.jp/

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Honda Financial Report 2008 Analysis With Ratio Analysis

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