financial analysis of atlas honda ltd

Financial Analysis of Atlas Honda Ltd

Atlas Honda Limited

INTRODUCTION OF THE FIRM

Atlas Honda limited is a joint venture between the ATLAS GROUP and

HONDA MOTOR COMPANY, JAPAN. The merger of PUNJDARYA

LIMITED SHEIKHOOPURA successor to ATLAS EPAK LIMITED, DHAKA,

created the company. Since take over by the government of Bangladesh and

ATLAS AUTOS LIMITED in 1991.The atlas group established both these

motorcycle-manufacturing concerns. ATLAS HONDA LIMITED manufacturer

and market Honda motorcycles have collaborating with HONDA MOTOR

COMPANY. The company also manufactures shock absorbers under a technical

assistance agreement with SHOWA of JAPAN, world leaders in shock absorber

company Honda motor cycles are by far the best selling motorcycle in the country

with an unmatched reputation for high quality, reliability and after sales services.

Departments

I have visited following departments of ATLAS HONDA LTD, Karachi.

Human resource

Finance

Maintenance

Vender procurement

Production

Information technology

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Marketing

FINANACE

Atlas Honda has a well-established finance department. It is totally computerized .it has its own system which is prepared by IT department. Finance department has further following sections.

Finance

General ledger

Costing

Taxation

Sales

Payables

Payroll

FINANCE

This section deals with the

Banking matters

Fund management

Import accounting.

COSTING

It is an important section of finance department, which deals with all costing matters including all material, labor, and overhead costs.

TAXATION

It deals with all tax and custom duty related affairs.

PAYABLES

This section deals with the following activities.

Vender payables

Utility payables

Insurance payables

Tax payables

Club payments

Other payable

PAYROLLS

This section controls the salary system of the organization. All the system is computerized. First of all the attendance of all employees is recorded and at the end of the month salary of all employees are paid after all deductions*

* Tax deductions, absenteeism deductions and all other deductions

GENERAL LEDGER

Finally all the transactions are recorded in general ledgers. General ledger for each account is maintained separately. There is a computerized system, which then produce different statements.

Ratio analysis

Ratio analysis involves the methods of calculating and interpreting financial ratios

to assess the firm’s performance and status. The basic input ratio analysis, the

firm’s income statement and balance sheet for the periods to be examined.

Groups of financial ratios Liquidity ratios Activity ratios

Debt analysis ratios

Profitability ratios

Marketability ratio

Ratio analysis

Liquidity ratios:

Net working capital

Current ratio

Quick(acid—test) ratio

Cash ratio

Net working capitals

Ratios Formula 2001 2002

Net working Capital (Rs.000) CA - CL = 327,842 347,904

Atlas Honda ltd. NWC shows +ve balance. It means that company having ability to

meet its short-term obligations when they come due. Also this balance has

improved from previous year, which shows that company is more efficient in

selling its inventory as compare to previous year. It’s also quit useful for internal

control.

Current ratio


Current Ratio CA / CL = 1.478 1.37

Current ratio has decreased from previous year, which indicate that the firm’s

current asset has decreased which depressed the liquidity position of the firm. This

depletion in current asset is mainly due to account receivables and inventory. But

with company point of view this is not acceptable because for lager manufacturing

concerns companies they must have more than 2.oo current ratio, why? Because

company’s current asset is not able to cover the current liability. If the current ratio

is less than the standard ratio than its mean firm having less NWC and if we have

greater CR than its mean we have positive NWC.

Quick Ratio


Quick Ratio CA – inventory / CL 0.6965% 0.8764%

Quick ratio is improved from previous year also reduce the level of stock in trade.

Actually inventory is not more liquid asset, so in case of insolvency, firm will not

be able to sell its inventory as per requirement. Also Honda sold more inventory

this year. Some time it might be difficult to recover its short-term obligations as

they come due, also same time we have to sacrifice on profitability. There is two

reason of it 1) current asset is less profitable than fixed asset. 2) Current liabilities

are less expensive financing source than that long-term fund. In the light of finance

this ratio should be 1.00 or greater than it but Honda’s ratios is less than but it is

acceptable. Why? Because larger manufacturing concerns affords it because they

already sets the impressive collecting policies.

Cash Ratio


Cash Ratio Cash + Marketable Securities /CL 23.22% 43.97%

Cash ratio is increased this year than previous also Honda increased its investment

on fixed assets. But on the other hand Honda sold its inventory more than previous

year but on credit.

Activity Ratios

Inventory Turnover


Inventory Turnover CGS / Inv. = 7.921 10.359

The inventory turnover ratio of the company improved from last year it

means that company is more efficient in selling its inventory in a year.

Average Age of Inventory


Avg. Age of Inventory 360 / Inv. Turnover = 45.4488 34.752

As, in year 2002, the company is able to sold its inventory, so this ratio has

decreased, which shows efficiency of firm in selling its inventory as compare to

previous year..

Average Collection Period


Avg. Collection Period A/C Receivable / Avg.Sale Per Day = 21.849 23.8549

It has increased from previous year, which is not good sign for them. In long

run these situations cause the company to write off its receivables. But still account

receivables are increases from previous year. Its mean we are giving the relaxation

to our customer which might be harmful in long run because we must receive our

receivables as soon as possible. In such type of case in long run if companies write

off their accounts than company will have to bear this extra cost and to compensate

this account from his own capital.

Average Sales per Day


Avg. Sales Per Day Net Sales / 360 13068.1 15344.30

Here Honda increased its sale, which shows the high sales revenue.

Operating Cycle


Operating Cycle Ratio Avg.Age of Inv. + Avg. Collection Period = 67.2978 58.6069

Here figures again showing the Honda’s efficiency to reduce its operating

cycle. Because short OC’s mean your current assets giving you return on time

and recovering the current liability when it come due.

Average Payment Period


Avg. Payment Period A/C Payable / Avg.Purchase Per Day = 127.0159 113.029

The reduction in average payment period is due to increase net purchases, which

improve company’s reputation in the market. It also increases their confidence in

supplier and lender’s eyes.

Average Purchase per Day


Avg. Purchase per Day Net Purchase / 360 407.158 491.883

Here we increase our daily requirement to meet our future need.

Account Receivable Turnover


Account Receivable Turnover 360 / Avg. Collection Period = 16.476 15.091

Its mean that Honda’s efficiency increases of recovering its receivable.

Account Payable Turnover

Ratios Formula 2001 2002Account Payable Turnover 360 / Avg. Payment Period = 2.834 3.185

Here figures shows that our paying capacity is slow due to the confidence of supplier or the credit term set by the supplier. But here we miss some discounts offered by supplier.

Cash Conversion Cycle


Cash Conversion Cycle Operating Cycle- Avg.Pmt Period= -59.7181 -54.4221

The negative CCC means that the avg. pmt period exceeds the operating

cycle. Some time large manufacturing firms will not have negative CCC unless

they extend their APP an unreasonable length of time. When any company having

a negative CCC, the firm should being able to use spontaneous financing to help

support aspect of business other than just the operating cycle.

Fixed Assets Turnover


Fixed Assets Turnover N Sales / NFA 10.4625 10.317

Firm’s fixed assets are increased as compare to previous year but the ratio has

decreased which means that in this year company has not utilized its fixed assets

efficiently to generate sale. This is not good for them because fixed assets are more

productive as compare to current assets.

Total Assets Turnover


Total Assets Turnover N Sales / TA = 3.163 3.015

Total assets turnover has reduced little bit, which means the company is not

utilizing its assets properly. More sales are due to current assets, which are not

more productive. Company has to change its fixed assets efficiency, to increase its

productivity.

Debt Ratio Analysis

Debt Ratio


Debt Ratio Total liabilities / Total Assets = 55% 56.74%

The ratio is increasing little bit from previous year. Its mean the investment or

other’s people money used more by Honda. Also higher the ratio, higher the

indebtedness and the more financial leverage company has.

Debt Equity Ratio


Debt Equity Ratio T Liabilities / Stockholders Equity = 1.99 1.311

As company’s liquidity portion decrease continuously so, debt equity ratio

has decreased. More over, liabilities are also short term, not more long term. It’s

also mean that how much owner has capital to meet with future obligations.

Time Interest Earned Ratio


Time interest earned ratio

EBIT / Interest = 3.557 13.849

This ratio is actually measures the firm’s ability to make the contractual

interest payments. In previous ratio is very low but this year it has increased with

good numbers. If the firm’s earning before interest and taxes were to shrink by

93% [(13.849-1)/13.849], the firm would still be ale o pay the 26,572 in the

interest owes. Thus, it has good opportunity for safety.

Profitability Ratio

Gross Profit Ratio


Gross Profit Margin Gross Profit / Net Sales = 9.744% 13.31%

Here the gross profit increase but not as much attractive which can

compensate the cost. But here in the case of larger manufacturing concern it will

increase gradually.

Net Profit Ratio


Net Profit Margin Net Profit (After Taxation) / Net Sales = 2.515% 4.926%

Here the increase in the ratio of profit margin but the Honda point of view it

is quit better. This ratio is actually measures the firm successes with respect of

earning sale.

Operating Profit Ratio


Operating Profit ratio Operating Profit / Net Sales 4.690% 7.478%

Here the increase in the operating profit ratio due to the increase is sale but the

CGS is also high but not as higher against the sale. If company is not able to

control its cost of goods sold it will damage its profitability position, which reduce

investor’s confidence. It is also pure form because we can see the result after

operational expenses.

Return on Assets or Investment


Return on Total Assets Net Profit / TA = 7.919% 14.767%

As firm’s total assets (investment) has increased but firm is not utilizing its fixed

assets efficiently so, the profit in year 2002 has reduced, which cause return on

investment to reduce from previous year. This decreasing trend may cause the

company to sell its assets.

Return on Equity


Return on Equity Net Profit / Stockholders' Equity = 18.277% 34.142%

The ROE, measures the returned against the investment of owner in the firm. The

return has increased in 2002 which is better off are the owner.

Marketability Ratios

Earning Per Share


Earning per Share (Rs.) EAFS / Common Stock Outstanding = 8.07 13.24

Its mean, the number of rupees earned on the behalf of each outstanding share

of common stock. This is also very watching able for prospector’s point of view,

also indicator of corporate success. And this increased in EPS indicates the good

response of the share in the stock market as well consumer market.

Price Earning Ratio


Price/Earning Ratio Market Price Per Share / EPS = 12.887 7.930

This decrease shows that investor is willing to pay for each rupee of the

firm’s earning. Also this decrease not looses the confidence of the investor for

future because the EPS is high as compare to last year.

Breakup Value


Breakup Value Stock holder's equity / outstanding shares 4.414 3.876

The reduction of this value enhances the confidence of the owner.

Question #1

Would you like to invest in this firm as a short term investor?

AnswerBeing as investor I would like to invest in short term. Why?

Firstly Honda has positive NWC and also increased from the last year. This show

the company having attractive CA, whose efficiency can bear the short term

obligations

Secondly the thing which increases my risk is the current ratio; because it is

relatively low than last year and it mean the company CA depressed the liquidity

position of firm.

Also for short term financing we have to critically review the balance sheet assets

in which inventory, Account receivables, some of the liabilities. With this

information I wish to invest in Atlas Honda, because Honda having positive NWC

which shows that the Honda has current asset which is able to bear the risk of

current liabilities.

Question # 2

Would you like to invest in this firm as a long-term investor?

ANSwer

With keeping the eye on the debt ratio of the Atlas Honda show the company

having just more assets than liabilities which is plus point for Honda. And this

thing will help me to invest in the long term.

Secondly the debt equity ratio is also decreased significantly and indicates that

firm is using more stockholders equity instead of debt in order to finance the

assets. So because this trend, I will like to invest as long term investor because

there is less chance that firm become defaulter.

Thirdly important argument, which enhanced my decision to invest as long-term

investor, is that the time interest earned ratio indicates the firm having ability to

meet its contractual obligation

Question # 3

Would you like to purchase or invest in the shares of the Atlas Honda?

ANSwerYes, I would like to invest in Atlas Honda. Because the EPS higher than last year.

This may indicate the worth of Atlas’s product in the market and in the mind of

consumer.

Atlas Honda Limited

VERTICAL ANALYSIS OF PROFIT AND LOSS STATEMENT

2001 %Age Change

2002 %age Change

SALES-NET 4,704,528 100% 5,523,951 100%COST OF GOODS SOLD 4,246,111 90.256 4,788,509 86.686GROSS PROFIT 458,417 9.744 735442 13.314OPERATING PROFITAdministrative Expense

Selling & Distribution Expense

111,053

126,725

2.360

2.694

150,923

171,448

2.732

3.104OPERATING PROFIT 220,639 4.690 413,071 7.478MISCELLENEOUS PROFIT 42,540

263,179

0.903

5.593

38,209

451,280

0.692

8.170OTHER CHARGES

Financial Expenses

Provision For Diminution in the Value Of Investment

Worker’s Profit Participation Fund

Worker’s Welfare Fund

44,525

1,733

10,848

3,183

0.945

0.037

0.231

0.068

26,572

571

21,210

8354

0.481

0.010

0.384

0.151

PROFIT BEFORE TAX 202,890 4.313 394,573 7.143TAXATION

Current Year

Prior Year

Deferred

83,500

(3,387)

5,000

1.775

0.072

0.105

160,000

(1,925)

(34,000)

2.895

(0.035)

(0.615)

PROFIT AFTER TAX

Unappropriated Profit Bought Forward

117,777

609

2.503

0.013

270,498

1,604

4.897

0.029

APPROPRIATION

Reserves for issue of bonus shares

Transfer to General Reserves

Proposed Dividend 60% (2001: 40%)

(Rs. 6 Per Share (2001: Rs. 4 Per Share))

58,391

-

58,391

1.241

-

1.241

-

148,000

122,621

-

2.678

2.220

UAPPROPRIATED PROFIT CARRIED FARWARD

1,604 0.034 1,481 0.027

Atlas Honda LimitedHORIZONTAL ANALYSIS OF PROFIT AND LOSS STATEMENT

2001 2002 %age Change

SALES-NET 4,704,528 5,523,951 17.418%COST OF GOODS SOLD 4,246,111 4,788,509 12.774%GROSS PROFIT 458,417 735442 60.431%OPERATING PROFITAdministrative Expense

Selling & Distribution Expense

111,053

126,725

150,923

171,448

35.902%

35.290%OPERATING PROFIT 220,639 413,071 87.216%MISCELLENEOUS PROFIT 42,540

263,179

38,209

451,280

-10.181%

71.473%OTHER CHARGES

Financial Expenses

Provision For Diminution in the Value Of Investment

Worker’s Profit Participation Fund

Worker’s Welfare Fund

44,525

1,733

10,848

3,183

26,572

571

21,210

8354

-40.321%

-67.051%

95.520%

162.456%

PROFIT BEFORE TAX 202,890 394,573 94.475%TAXATION

Current Year

83,500

(3,387)

160,000

(1,925)

Prior Year

Deferred

5,000 (34,000)

PROFIT AFTER TAX

Unappropriated Profit Bought Forward

117,777

609

270,498

1,604

129.970%

APPROPRIATION

Reserves for issue of bonus shares

Transfer to General Reserves

Proposed Dividend 60% (2001: 40%)

(Rs. 6 Per Share (2001: Rs. 4 Per Share))

58,391

-

58,391

-

148,000

122,621

109.2%

UAPPROPRIATED PROFIT CARRIED FARWARD

1,604 1,481 -7.669%

atlas honda limitedSTATEMENT OF SOURCES AND USES

ITMES CHANGE SOURCES USESCURRENT ASSETS

Stores, Spares & Tools

Stock In Trade

Trade Debtors

Advances & Other

+5,023

-73,777

+123,554

-43,052

+247,556

73,777

43,052

5,023

123,554

247,556

Receivables

Cash & Bank BalanceDeferred Cost +1,463 1,463Long Term Loans, Deposits & Other Receivables

-1,080 1,080

Investment -571 571Fixed Capital Expenditure

Operating Fixed Assets

Capital Work-in-Progress

+85,759

-437

437 85,759

CURRENT LIABILITIES

Short Term Finances

Current Maturity of LTL.

Creditors & Other Liabilities

Provision In Taxation

Dividend Payable

-

-16,456

+114,582

+76,500

+64,616

16,456 114,582

76,500

64,616

Deferred Liabilities +1948 1,948Long Term Loans -20,092 20,092Net Profit After Tax +152,721 152,721Dividend Paid +29,181 29,181TOTAL

financial analysis of atlas honda ltd

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