UNIVERSITI TEKNOLOGI MARA

CAWANGAN MELAKA
KAMPUS BANDARAYA MELAKA
(FIN420-FINANCIAL MANAGEMENT)
INDIVIDUAL ASSIGNMENT:
FINANCIAL RATIO ANALYSIS
(Honda Motor Corporation &
Ford Motor Corporation)

PREPARED FOR:
MADAM SHAHREENA BINTI DAUD
NO. NAME UiTM ID CLASS
1 NUR SYAFIQAH BINTI AMRAN 2019659646 MIFH

SUBMISSON DATE:
26TH JUNE 2021
TABLE OF CONTENTS

No. Contents Page

no.

1.0 Introduction 1-3

Honda Motor Corporation
Ford Motor Corporation

2.0 Financial Ratio Analysis

Trend Analysis 4-9
Cross Sectional Analysis 10-12

3.0 Conclusion 13

4.0 Recommendation 14

5.0 References 15

6.0 Appendices 16-20

1.0 INTRODUCTION

HONDA MOTOR CORPORATION

Soichiro Honda founded Honda Motors in 1948. It is well-known in Japan as a premier

maker of motorbikes, automobiles, and power equipment. Honda's key goals are creativity,
innovation, and efficiency, which result in high-quality, low-cost, and environmentally responsible
goods. It has a large global network of production and manufacturing facilities. Honda has risen
above the competition and become one of Japan's Big Three automakers as a result of this (De
Wit & Meyer, 2004). Honda operates with the premise of recognizing each person's personality
and capability, according to the Honda website (2010). The company also thinks that everyone
who interacts with them, whether directly or indirectly through their products, should have a
positive experience. The company has strived to provide high-quality items at competitive rates
since its inception in 1948.

Furthermore, the company's operations are aimed on environmental and safety protection.
Honda manufactures, develops, and promotes a wide range of products ranging from engines to
sport vehicles as one of the world's leading automotive and motorbike manufacturers (Honda
website, 2010).

FORD MOTOR CORPORATION

Ford Manufacturing Company is the world's third-largest automaker (Billstein, Fings,

Kugler, and Levis, 2004, p.1), with Ford, DaimlerChrysler, and General Motors making up the
major three US automakers. Furthermore, its operations are primarily in America and Europe,
with headquarters in Dearborn, Michigan, and it employs almost 300,000 people (Cornell, et al,
2005).

Furthermore, the company is involved in both automotive and financial services, including
Ford, Land Rover, Mazda, Mercury, Volvo, and Aston Martin as prominent automotive car brands.
Ford's automotive business primarily comprises the production, design, development, sale, and
servicing of automobiles, trucks, and service parts. Aside from manufacturing and selling
automobiles and trucks, the company also provides after-sales items and services to its
customers.

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 The goal of this project is to undertake a comparative examination of the financial health
of two companies. I chose two firms in the manufacturing industry, Ford Motor Corporation and
Honda Motor Corporation, to examine and assess their financial statements and income
statements by computing performance indicators such as liquidity, leverage, activity, and
profitability during a three-year period. These financial analysis methods are critical for
determining an organization's strengths and limitations.

1. Liquidity Ratios

- Liquidity ratios show how well a corporation can pay its debts and other obligations. It may
experience financial difficulties if it does not have enough short-term assets to pay short-term
obligations or does not create enough cash flow to cover costs.

Current ratio - for example, the current ratio is current assets divided by current liabilities, and it
indicates how well a company can satisfy its obligations over the next 12 months.

Quick ratio – the quick ratio, also known as the acid-test ratio, compares a company's cash,
marketable securities, and receivables to its liabilities, providing a more accurate picture of its
ability to meet current obligations.

2. Activity Ratios

- Activity ratios show how efficient a company's activities are. To put it another way, you can
evaluate how effectively the company utilizes its resources, such as available assets, to generate
sales.

Inventory turnover - is calculated by dividing the total cost of goods sold for the year by the
average inventory. This ratio can reveal how effectively a company manages its inventory in
relation to sales.

The average collection period (ACP) - is the average time it takes for a corporation to collect
money after a credit sale. The financial ratio provides an average number of days necessary to
turn receivables into cash, which indicates the firm's liquidity.

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3. Leverage Ratios

- Leverage ratios, often known as solvency ratios, show a company's ability to pay down long-
term debt. These statistics look at how much a firm relies on debt to run its business and how
likely it is to repay its debts.

Debt ratio - a debt ratio is a financial ratio that determines how much debt a company has. It
refers to the percentage of a company's assets that are financed through debt.

Times interest earned ratio - is a metric that assesses a company's capacity to service its debt.
It is a symptom that a corporation is having financial difficulties.

4. Profitability Ratios

- Profitability ratios are a group of financial indicators that are used to evaluate a company's ability
to create earnings over time in relation to its revenue, operational costs, balance sheet assets, or
shareholders' equity, utilizing data from a certain point in time. Efficiency ratios, which assess how
successfully a corporation uses its assets internally to generate income, can be contrasted to
profitability ratios (as opposed to after-cost profits).

Operating profit margin (OPM) - is calculated by dividing the operating profit by total sales. It
reflects a company's operating earnings before taxes and interest payments.

Return on equity (ROE) - The ability of a corporation to produce a return on its equity investments
is measured by this ratio, which is important for shareholders. Without additional equity
investments, ROE (net income divided by shareholders' equity) may rise.

The impact of a firm's total operating outcomes when liquidity, activity, and leverage
management are combined. With this, we can determine which company has the best
performance and financial position over a three-year period.

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 2.0 FINANCIAL RATIO ANALYSIS

TREND ANALYSIS FOR HONDA

HONDA 2018 2019 2020

1. Liquidity ratio
Current Ratio (CR) CR = 62,327.59 CR = 66,125.65 CR = 67,169.29
= Total CA 50,616.89 53,830.12 53,268.81
Total CL = 1.23x = 1.23x = 1.26x

Quick Ratio (QR) QR QR QR

= Total CA – Inventory =62,327.59 -13,711.09 = 66,125.65 -14,281.08 = 67,169.29-14,357.23
Prepaid Expenses 50,616.89 53.830.12 53,268.81
Total CL = 0.960x = 0.963x = 1x

INTERPRET

Current ratio
Overall, the current ratio remains the same from 2018 to 2019, at 1.23x, while it rises to 1.26x in 2020. A
greater current ratio is obviously beneficial to the company. This demonstrates that this business has
adequate cash and the ability to pay its short-term loans.

Quick Ratio
The quick ratio for this company on 2018 is 0.960x and increase to 0.963x in 2019 and increase to 1x on
2020. The company's ability to pay short-term loans has improved as a result of this tendency. The greater
a company's liquidity and financial health, the higher the ratio result.

2. Activity ratio
Inventory Turnover = 108,005.2 = 113,228.5 = 109,035.3
= COGS 13,711.09 14,281.08 14,357.23
Inventory = 7.877x = 7.929x = 7.594x

ACP = (Receivable/sales) =(23770.46/ =(24,703.90/ =(23,112.86/

x 360 138,250.3) x 360 142,997.5) x 360 137,365.3) x 360
= 61.9 days = 62.19 days = 60.57 days

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INTERPRET

Inventory Turnover
The inventory turnover of the company increased from 7.877 times in 2018 to 7.929 times in 2019. However,
by 2020, their capacity to sell their product have decreased to 7.5945 times. As a result, the company will
incur greater storage costs and inventory obsolescence.

Average Collection Period (ACP)

The data revealed that ACP for this company is inconsistent, increasing from 61.9 days in 2018 to 62.19
days in 2019 and decreasing to 60.57 days in 2020. It shows that in 2020, the more efficient the collection
procedure is, the shorter the business's cash cycle is, which has a beneficial impact on its profitability.

3. Leverage ratio
Debt ratio = TL = 100,035.6 = 106,680 = 112,014.1
TA 174,142.5 183,772.1 188,245.5
= 57% = 58% = 60%

TIER = EBIT = 7,502.023 = 6,537.328 = 5,829.453

Interest 2,532.735 2,277.045 1,437.785
= 2.96x = 2.87x = 4.05x

INTERPRET

Debt ratio
The trend for debt ratio from 2018 (57%) to 2020 (60%) is increasing. The higher the debt ratio, the more
leveraged a company is, and the larger the financial risk. This company is employing debt financing at a rate
that is lower than the industry average, and they will have difficulty paying their interest payments.

Time Interest Earned

The time interest earned ratio for this company decreased from 2018 (2.96x) to 2019 (2.87x). However, by
2020, the ratio increase to 4.05x. Because earnings are much bigger than annual interest obligations, a
company with a higher ratio can meet its interest obligations.

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4. Profitability ratio
OPM = EBIT = 7,502.023 = 6,537.328 = 5,829.453
Net sales 138,250.3 142,997.5 137,365.3
= 5.4% = 4.57% = 4.24%

ROE= net profit after tax = 9,534.033 = 5,492.844 = 4,192.863

stockholder’s equity 74,106.85 77,092.11 76,231.41
= 12.9% = 7.13% = 5.5%

INTERPRET

Operating Profit Margin (OPM)

The trend for OPM is decreased from 5.4 percent in 2018 to 4.24 percent in 2020. A lower ratio indicates
that the company is inefficient in obtaining raw resources and transforming them into final goods. The
company's profitability decreases when the operational profit margin decreases.

Return on Equity (ROE)

Overall, the trend for ROE is declining, decreasing from 12.9 percent in 2018, 7.13 percent in 2019, and
5.5 percent in 2020. Lower ROE shows that management is not doing a good job of developing the
company's business while also diminishing the value of the shareholders' wealth.

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 TREND ANALYSIS FOR FORD

FORD 2018 2019 2020

1. Liquidity ratio
Current Ratio (CR) CR = 114,649 CR = 114,047 CR = 116,744
= Total CA 95,569 98,132 97,192
Total CL = 1.2x = 1.16x = 1.20x

Quick Ratio (QR) QR QR QR

= Total CA – Inventory = 114,649 – 11,220 = 114,047 – 10,786 = 116,744 – 10,808
Prepaid Expenses 95,569 98,132 97,192
Total CL = 1.08x = 1.05x = 1.09x

INTERPRET

Current ratio
The investigation revealed the inconsistency of this company's current ratio, which decreased from 1.2x to
1.16x in 2018 and then increased to 1.20x in 2020. A greater current ratio is obviously beneficial to the
company. This demonstrates that this business has adequate cash and the ability to pay its short-term loans.

Quick Ratio
The quick ratio for this company on 2018 is 1.08x and decrease to 1.05x in 2019 and increase back to 1.09x
on 2020. The company's ability to pay short-term loans has improved as a result of this tendency. The greater
a company's liquidity and financial health, the higher the ratio result.

2. Activity ratio
Inventory Turnover = 136,269 = 134,693 = 112,752
= COGS 11,220 10,786 10,808
Inventory = 12.15x = 12.49x = 10.43x

ACP = (Receivable/sales) =(11,195/160.338) x =(9,237/ 155,900) x 360 =(9,993/ 127,144) x 360

x 360 360 = 21.33 days = 28.29 days
= 25.14 days

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INTERPRET

Inventory Turnover
The inventory turnover of the company increased from 12.15 times in 2018 to 12.49 times in 2019. However,
by 2020, their capacity to sell their product have decreased to 10.43 times. As a result, the corporation will
incur greater storage costs and inventory obsolescence.

Average Collection Period (ACP)

The data revealed that ACP for this company is inconsistent, decreasing from 25.14 days in 2018 to 21.33
days in 2019 and increasing to 28.29 days in 2020. It shows that the greater it is, the longer the business's
cash cycle is, which has a negative influence on profitability. This demonstrates that this company is unable
to collect debts from customers.

3. Leverage ratio

Debt ratio = TL = 220,574 = 225,307 = 236,450

TA 256,540 258,537 267,261
= 86% = 87% = 88%

TIER = EBIT = 3203 = 574 = (-4,408)

Interest 1142 (-1,214) (3292)
= 2.804x = -0.4728x = -1.339x

INTERPRET

Debt ratio
The trend for debt ratio from 2018 (86%) to 2020 (88%) is increasing. As a result, the larger a company's
debt ratio is, the more leveraged it is, signaling greater financial risk. This company is employing debt
financing at a rate that is lower than the industry average, and they will have difficulty paying their interest
payments.

Time Interest Earned

From 2018 (2.804x) to 2020, the ratio of time interest earned for this corporation has decreased (-1.339x).
When the times interest earned ratio is low, it suggests there are fewer earnings available to cover interest
payments. If these responsibilities are not met, a company may be forced to file for bankruptcy.

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4. Profitability ratio

OPM = EBIT = 3,203 = 574 = (-4,408)

Net sales 160,338 155,900 127,144
= 2% = 3.68% =-3.5%

ROE=net profit after tax = 3,677 = 47 = (-1,279)

stockholder’s equity 35,966 33,230 30,811
= 10.2% = 14.14% = -4.15%

INTERPRET

Operating Profit Margin (OPM)

The trend for OPM from 2018 (2%) to 2020 (3.68%) is increasing while decreasing in 2020 (-3.5%). In 2020,
a lower ratio demonstrates the company's inefficiency in purchasing raw materials and transforming them
into final goods. The company's profitability decreases when the operational profit margin decreases.

Return on Equity (ROE)

Overall, the ROE trend has risen from 10.2 percent in 2018 to 14.14 percent in 2019. However, by 2020, it
have dropped to -4.15 percent. Lower ROE in 2020 suggests that management is not doing a good job of
developing the company's business while also diminishing the value of the shareholders' wealth.

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 CROSS SECTIONAL ANALYSIS

Year 2020 (Recent year)

HONDA FORD
1. Liquidity ratio

Current Ratio (CR) CR = 67,169.29 CR = 116,744

= Total CA 53,268.81 97,192
Total CL = 1.26x = 1.20x

Quick Ratio (QR) QR QR

= Total CA – Inventory = 67,169.29 - 14,357.23 = 116,744 – 10,808
– Prepaid Expenses 53,268.81 97,192
Total CL = 1x = 1.09x

ANALYSIS

The current ratio demonstrates the company's capacity to meet its short-term obligations and displays
its short-term solvency. HONDA has a greater ability to payback against its liabilities than FORD, which
has a good ability to repay its short-term obligations as well.

The quick ratio demonstrates the company's capacity to satisfy short-term obligations without relying
on inventories or prepaid expenses. We can see that both HONDA and FORD will be able to meet their
short-term obligations and improve their performance in 2020, but it slightly better for FORD.

2. Activity ratio

Inventory Turnover = 109,035.3 = 112,752

= COGS 14,357.23 10,808
Inventory = 7.594x = 10.43x

ACP =(23,112.86/137,365.3) x 360 =(9,993/ 127,144) x 360

= (Receivable/sales) x = 60.57 days = 28.29 days
360

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ANALYSIS

Inventory turnover indicates how rapidly a company's inventory is sold. In 2020, we can see that
FORD has a better performance in selling their inventory, with a 10.43 times increase over HONDA's
7.594 times increase.

Average collection period tells us if the policy requires the collection of all debt within 30 days, the
firm is having difficulty collecting its debt. In 2020, we can see that FORD is performing well in terms
of debt collection.

3. Leverage ratio

Debt ratio = TL = 112,014.1 = 236,450

TA 188,245.5 267,261
= 60% = 88%

TIER = EBIT = 5,829.453 = (-4,408)

Interest 1,437.785 (3292)
= 4.05x = -1.339x

ANALYSIS

The debt ratio is a measure of how much of a company's assets are financed by debt. Both companies
demonstrate that they have low performance, which makes borrowing further capital expensive for
them.

Time interest earned measured the ability of the company to meet it fixed interest payments. HONDA
has a higher ratio, indicating that the company is able to cover its annual interest expense from
operating income.

4. Profitability ratio

OPM = EBIT = 5,829.453 = (-4,408)

Net sales 137,365.3 127,144

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 = 4.24% = -3.5%

ROE=net profit after tax = 4,192.863 = (-1,279)

stockholder’s equity 76,231.41 30,811
= 5.5% = -4.15%

ANALYSIS

HONDA has a greater OPM ratio than FORD. This demonstrates that HONDA has a high asset
productivity and that HONDA has a low cost structure, resulting in a large profit. HONDA makes more
money per dollar of sales with a large profit margin than a company with a small profit margin.

Return on equity (ROE) gauges management's efficiency in managing stockholder funds and shows
us how much profit is made on each dollar invested by shareholders. HONDA has a better track record
than FORD in terms of earning a return on the money invested by shareholders.

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3.0 CONCLUSION

For the final analysis, all of the discussed financial statements are used to calculate the
financial ratio for each organization. Different ratios, such as the liquidity ratio, leverage ratio,
activity ratio, and profitability ratio, aid in establishing whether a company's overall performance
is excellent or bad for that year. These figures can also be used as a standard for other businesses
in the same field.

According to the above ratio analysis, HONDA appears to be in good financial shape, and
investors will be interested in investing in the company's financial sectors. The company has
consistently maintained a high level of margin, according to the data, which is affected by the
company's decision to do business outside of the country and its strong internet presence
(Fridson& Alvarez, 2002).

According to the statistics, HONDA has superior regional diversification and higher
solvency and profitability ratios than FORD. This shows that it is expanding, generating more
revenue, and assuring its long-term viability. Despite its increased engagement, FORD's short-
term survival in the industry trails that of HONDA.

In terms of analysis and overall description, we have already completed the financial
analysis report for the two businesses. Because we are in the process of becoming business
graduates, we will face certain difficulties with this report in our professional careers. As a result,
we must understand business management in order to consider running a company and many
other aspects of business. This report will aid us in dealing with any future issues that may
emerge.

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4.0 RECOMMENDATION

As a result, it is recommended that HONDA is a better investment because it has a bigger

equity, generates more earnings, and can resist longer during difficult times. However, its quick
ratio value is lower than FORD's. It can be increasing by repaying debts, obtaining a loan, selling
a fixed asset, or reinvesting gains (Business builder, n.d.).

Next, because FORD's profit appears to be consistent across the study's periods, and this
profit is earned with varying sales turnover, the company should calculate the expenses analysis
ratio, gross margin ratio, and net profit ratio for each period covered to gain a better understanding
of the company's performance and profitability. A corporation can examine expenses incurred in
comparison to sales achieved and gross margin obtained through this study, allowing for better
control of manufacturing costs and other expenses.

Furthermore, FORD should strengthen its ability to attract potential investors by

calculating its return on equity ratio and comparing it to the results of this ratio from companies in
the same industry to see if they can raise equity even with external resources such as possible
investors.

Last but not least, at the end of each accounting period, multiple discriminant analysis
should be computed to assess historical data in order to predict financial failure, not only for
HONDA and FORD as our case study, but also for other corporate entities to check their going
concern condition. The company's management should seek out ways to disclose the company's
financial statements to professional accountants in order to obtain advice and recommendations
from these experts in order to obtain fully disclosed financial statements on which financial
analysis and decision-making can be conducted.

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5.0 REFERENCES

UKEssays. (November 2018). Hondas primary goals are originality, innovation and
efficiency. Retrieved from https://www.ukessays.com/essays/business/hondas-
primary-goals-are-originality-innovation-and-efficiency-business-essay.php?vref=1

IvyPanda. (2020, May 26). Honda Motors and Ford Motors. Retrieved from
https://ivypanda.com/essays/honda-motors-and-ford-motors/

Will Kenton. (Mar 1, 2021). Financial Statement Analysis. Retrieved from

https://www.investopedia.com/terms/f/financial-statement-analysis.asp

https://www.gradeasy.com/assignment-help/finance/financial-report-hyatt/

https://www.academia.edu/33492128/Analysis_of_Financial_Statement_Formal_Assignment_R
eport

https://www.macrotrends.net/stocks/charts/HMC/honda/income-statement

https://www.macrotrends.net/stocks/charts/HMC/honda/balance-sheet

https://www.macrotrends.net/stocks/charts/F/ford-motor/financial-statements

https://www.macrotrends.net/stocks/charts/F/ford-motor/balance-sheet

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6.0 APPENDICES

Income Statement for HONDA

16
Balance Sheet for HONDA

17
Income Statement for FORD

18
Balance Sheet for FORD

19
20