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Honda Atlas And Indus Motor

ByShariq RameezNabeel Aftab

Faizan Ali

Ali Asghar Larik


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1) CURRENT RATIO

This ratio is more indicative of the short-term debt paying ability of anentity. The comparative data of both the companies is as under:

Significantly, Indus is better placed in terms of current ratio. Indus is twicebetter than Honda in term of current ratio, thus INDUS has a better abilityto payoff its short term debts as compare to Honda. Despite that. INDUS isstill lower than the market average which is 2.04 times. Overall others inthe market has a better ability to payoff it shortterm debt than Honda orIndus.

Conclusion: Indus appears to be more in line with the industry average of2.04 X. However, current ratio should be viewed in conjunction withinventory & receivables turnover ratios. Both turnover ratios are good.Therefore, there is no liquidity issue in receivables & inventory.

2009 2008

Honda 0.70 0.79

INDUS 1.69 2.56

Industry 2.04 2.60


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2) QUICK RATIO

This ratio is conservative than current ratio indetermining the short-term debt paying ability

of a company. Inventory is excluded on theassumption being slow moving, obsolete orpledged to creditors.

2009 2008

Honda 0.16 0.24

INDUS 0.99 1.16

Industry 0.93 0.97


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3) CASH RATIO

Cash Ratio is ratio seldom used by the analysts. It is unrealistic to have cashequivalents and marketable securities to cover the current liabilities. Thecomparative numbers are as under:

This ratio is useful when inventory & receivables are slow moving & indicatetowards immediate liquidity of the firm.

Conclusion: Overall, the cash ratios of Indus are better than Honda. For both

years, Indus is well above the industry average of 0.79. The main reasons are asunder:

All sales are on cash basis.

Cash & investments in marketable securities are used for borrowing from banksat cheap rates.

2009 2008

Honda 0.04 0.08

0.98 1.14

Industry 0.80 0.79


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5) ACCOUNT RECEIVIBLE TURNOVER

This ratio indicates the efficiency of an entity in managing its tradereceivables. Higher the ratio more efficient is the company. The ratios forboth the companies are as under:

The receivable turnover ratios of both Honda and Indus reflect a declining

trend for the years in comparison but Honda still above the industryaverage of 17.09 times. Sales increased for both the companies in 2009because of increase in demand for automobiles and better economicconditions as compare to 2008. This ratio indicates that how efficient anenterprise is in managing its receivables.

2009 2008

Honda 20.79 24.24

15.24 20.41

Industry 17.09 23.83


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6) AVERAGE COLLECTION PERIOD

This indicates the length of time that the average trade receivables have been outstanding at theend of the year

Comparison of both the companies is as under:

The above comparison depicts that there is an increasing trend in Days Sales in Receivables of bothHonda & Indus. However, the rate of increase in case of INDUS is more prominent and is above theindustry average of 22 days. Honda is still within the industry norm.

The quality of receivables of both the companies is good because all mostly sales are through cash

and pay-order. Conclusion: Overall receivables of both the companies are secured & are considered good.

Therefore, provisioning is seldom required. The data reveals that Honda is managing its receivablesmore efficiently than INDUS.

2009 2008

Honda 18 days 15 days

24 days 18 days

Industry 22 days 16 days


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7) INVENTORY TURNOVER

Inventory turnover indicates the efficiency of thecompany in managing its inventory.

The turnover figures of INDUS and Honda show an

increasing trend, but the figures of INDUS as comparedto Honda are well above the industry average of 6.31times which clearly reflects that INDUS is efficient inmanaging its inventory as compared to Honda.

2009 2008

Honda 4.57 8.31

10.57 13.67

Industry 6.31 9.01


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8)AVERAGE NO. OF DAYS IN STOCK

This ratio estimates the number of days required to sell the currentinventory.

Overall ratios of INDUS are better than Honda because INDUS has a largerdistribution network in the Country as compared to Honda.

The ratios computed substantiate that INDUS inventory management is

better than Honda. Conclusion:It takes on average 80 days for the inventory to be turned into

sales for Honda and 35 days for INDUS. It also shows that the marketingstrategies of INDUS are very effective. These ratios are likely to improvewith the increase in purchasing power of the automobiles buyers.

2009 2008


35 days 27 days



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9) PAYABLE TURNOVER RATIO

INDUS credit rating is much more improved as

compare to Honda as Indus avail credit for

much longer days from its suppliers as

compare to its competitors. The more creditsuppliers gave to its clients shows higher

rating of clients.

2009 2008

Honda 3.52 3.72

5.41 6.68

Industry 5.74 6.03


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10) AVERAGE NO. OF DAYS PAYABLE

OUTSTANDING

Honda took much longer to pay off it

suppliers as compare to Indus. Indus payoff

period is almost the same as compare to the

industry made it a benchmark company forthe whole automobile industry.

2009 2008


67 days 55 days



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11) CASH CONVERSION CYCLE

Automobile industry normally has a negative cash cyclebecause most of the automobile companies took theirpayments upfront. Last years, this ratio was much higherbecause automobile companies have started taking longerperiod advance payments. INDUS has much better

conversion ratios as compare to Honda, Indus converted itsinvestment into sales at a higher rate as compare to Honda.Negative cash conversion cycle gives more flexibility to thecompanies and its very attractive for the investors.

2009 2008

Honda (6.31) (39.21)

(8.92) (10.09)

Industry 2.34 (3.71)


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12) GROSS PROFIT MARGIN

This ratio shows the efficiency with which the resourceshave been utilized to make finished goods and create saleskeeping costs at a minimum.

The Gross profit for both the companies shows adecreasing trend because of the appreciation of JPYPKRrate as well as the overall inflation which has decrease thepurchasing power of automobiles buyers. The ratios showthat the gross profit margin for INDUS is better thanHONDA.

2009 2008

Honda 1.25% 4.26%

6.13% 9.29%

Industry 3.18% 5.01%


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13) OPERATING PROFIT MARGIN

INDUS is better off in paying its fixed cost such asinterest on debt etc as compare to Honda. Operatingmargin is leftover after paying for variable costs ofproduction such as wages, raw materials, etc. A healthyoperating margin is considered as a positive indicatorfor investment point of view. Indus has a much betterability to pay off its fixed cost relative to itscompetitors.

2009 2008

Honda (2.82)% 2.02%

5.47% 8.50%



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14) PRE TAX MARGIN

INDUS has a much better profitability as

compare to Honda.

2009 2008

Honda (4.40)% 0.43%

5.40% 8.55%



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15) NET PROFIT MARGIN

Net profit margin for Indus shows decreasing trend butstill the numbers are positive as compare to Hondawhose net profitability in 2009 is in negative. OverallIndus profitability is better than its competitors withrespect to the overall sales.

Conclusion: Profitability margins of both thecompanies are volatile but INDUS is still much betterplaced.

2009 2008

Honda (2.84)% 0.51%

3.60% 5.50%



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RETURN ON INVESTMENT RATIOS

16) RETURN ON ASSETS

INDUS is effectively managing its assets to

generate earnings relative to Honda and the

whole Automobile Industry.

2009 2008

Honda (0.05) 0.04

0.12 0.24

Industry 0.04 0.10


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17) RETURN ON COMMON EQUITY

INDUS gives a much better return to its

stakeholders as compare to Honda.

2009 2008

Honda (0.28) 0.07

1.76 2.91

Industry 0.60 1.25


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18) RETURN ON TOTAL EQUITY

This ratio shows the firms efficiency in utilizing thepermanently invested capital (equity) in generatingsales. The higher the efficiency in investing equity for along time period in fixed assets, the higher the capacityto produce, leading to higher revenue and lower costs.

It is an indirect channel for increasing net profit. Itshould ideally be used for expansion and long-termpurposes. The return to shareholders of INDUS ishigher than Honda.

2009 2008

Honda (0.13) 0.03

0.14 0.26

Industry 0.01 0.11


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EEFICIENCY RATIOS

19) TOTAL ASSET TURNOVER

Comparative figures are as under:

Indus average assets are converted almost

80% more than Honda. The more averageassets conversion into sales, the better it is.

Conclusion: Overall asset turnover ratio ofIndus is better than Honda.

2009 2008

Honda 1.69 1.95

2.20 2.82

Industry 1.80 2.28


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20) FIXED ASSETS TURNOVER

INDUS ability to convert sales through fixed

assets investment is much better than Honda.

Indus comparison with the industry in terms

of Fixed assets turnover ratio is far better thanany other ratio, thus Indus is much better

placed.

2009 2008

Honda 2.72 3.27

9.40 13.34

Industry 5.73 8.14


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21) EQUITY TURNOVER

Honda conversion to sales in terms of equity is

much better than Indus. Honda converted to

sales more repeatedly than Indus with respect

to equity of both companies.

2009 2008

Honda 4.67 5.19

3.84 4.74

Industry 3.45 4.25


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FINANCIAL RISK RATIOS

22) DEBT TO TOTAL CAPITAL

Leverage is the use of fixed cost to magnify profit. Leverage Ratiosmeasure the extent to which firms finance their assets throughdebt and they indicate the financial leverage of the firm.

Honda debt ratios are high as compared to Indus. Honda ratiosindicate that more than 70% of assets are financed by the creditors.

Conclusion: The creditors of Indus are well protected as comparedto Honda.

2009 2008

Honda 0.72 0.53

0.50 0.31

Industry 0.47 0.34


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23) DEBT TO EQUITY

This ratio also determines the entity long-term debtpaying ability. Comparative figures are as under:

The ratio is another computation that determines theentitys long-term debt paying ability. This ratioindicates that the creditors of Honda are well protected

as compared to INDUS. Conclusion: Honda are well protected as compared to

INDUS.

2009 2008

Honda 0.53 0.15

0.05 0.06

Industry 0.27 0.14


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24) INTEREST COVERAGE RATIO

This ratio indicates the firms long-term debt paying ability.Comparison reveals that both the companies haveimpressive coverage of their interest obligations.

Conclusion: In case of Honda there is a major decline in

2009 even the earning turned red, However INDUS have anedge in both the years. Ratios indicate Indus has a betterlong term debt paying ability as compare to Honda, alsoIndus is well above the market.

2009 2008

Honda (1.79) 1.27

0.78 1.28

Industry (0.22) 0.92


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26) RETENTION RATE

Higher retention rate means more investments from thecompanies own profits but from the investor point of viewit would be considered as negative indicator. Those who hasinvested in the company need more returns from theirinvestment and most important return is dividend. Honda

retains all of its profit, thus indicates a negative sign to itsinvestor as compare to Indus which payout around 57% ofits profits in 2009. Indus is much better placed in terms ofretention and dividend payout policy.

2009 2008

Honda 100% 100%

43.25% 63.97%

Industry 75.75% 83.66%


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INDUS

CFO

Major improvement in terms of themanagement of operations for INDUS. Overall

company reliability on short terms debts

decreased to major extent. Effectivemanagement of operating activities was the

main reason for better profitability of INDUS

relative to its competitors.


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INDUS CFI

Overall investments have decreased in 2009,

mainly because of heavy investments in 2008.

Reasonable investments, all that is needed for

a company to grow at a stable rate.


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INDUS CFF

A very good sign for the investors as the

company is paying of its long term debt both

in 2008 and 2009. Thus shows the overall

strength of the company relative to its

competitors who has taken more finances to

cover up for the slow down in demand and

poor operations management.


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HONDA

CFO

Honda CFO appears to be in very bad shape astheir 2009 cash utilization on operating activitiesincreased more than 200% showing the overall

inefficient management from the operation side.Working capital is not managed properly whichshows that company heavily rely on short termdebts. Overall CFO indicates weak standing of the

company relative to Indus.


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Honda CFI

Capital investments is always considered a

good sign for the company and same is the

case with Honda which has invested major

amount in 2009 for investing activities. Fixed

cost would be higher this year, but prospects

of growth are visible with such high

investments.


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Honda CFF

Company has taken additional loan to finance

its investment. Additional loan is always

considered as negative indicator for the

company and may create a cautious approach

from the investor point of view.

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