Company Financial Analysis Project: Honda Automobile

Author: Iloka Benneth Chiemelie
Published: 20th August 2015

Executive Summary

Investment is part of the modern day business process, and this is based on the understanding that it creates the right wing for people to have interest in their money and acquire more wealth. However, investment has for long been proven to be associated with a number or risks and it becomes very important to understand the risks associated in a company and how it can influence the potential for sustainable return before making the decision to plunge into the company for investment.

On that account, this paper is designed to understand the investment risk of Honda Motors, but considering how their recent recall of 18,000 cars as a result of brake related failure will influence performance and also advice on whether the company can be considered to be a sustainable investment option.

History and Background

·         Company Name
Honda Motor Co., Ltd.

·         Head Office
2-1-1, Minami-Aoyama, Minato-ku, Tokyo 107-8556, Japan
Tel: +81-(0)3-3423-1111

·         Established
September 24, 1948

·         President, CEO & Representative Director
Takanobu Ito

·         Capital
¥86 billion (as of March 31, 2013)

·         Chief Products
Motorcycles, automobiles, power products

Source as adapted from Honda (2013a)

Honda is a Japanese automobile giant that has made history in numerous areas of automobile innovation and shifting its production from the basic concept of motorcycles to automobiles, power products and airplanes. Such a business shift is a clear illustration of continued success that the company has enjoyed over the years with respect to innovation and creativity and the outcome of such is an increased financial performance that puts them amongst the list of top players in the global automobile industry.

Recent Events: Honda recall 18,000 cars (Honda, 2013a)

Why is it an issue/how is it an issue?

This is an issue because it directly influences the image of the company, with a direct influence on profitability as recalling the cars will mean that they will have to refund the customers when such demands arises and it reduces the chances of the customers to make choice for Honda in the future.

Strategies used by the companies to solve this problem

Following the discovery made by the company that a number of its cars - affected vehicles include model-year 2006-2007 Honda S2000 and model-year 2006 Acura RSX – have some brake related issues, further investigation was conducted in order to understand the cause of the issue and the finding from the company is that the issue is as a result of manufacturing error.

As such, Honda proceeded immediately to recall the cars that were affected by contacting the customer in order to notify them of the issue at hand and request that they take precautionary measure to minimize risk by returning their cars. In any case, it was noted that this is not the first time the company is recalling car for mechanically related issues and as such it points in line with earlier statement that such approach will damage the image of the company and will also have a direct influence on their profitability as the company will be viewed by the customers to be unreliable.

Was the strategy successful?

With the focus from discussions above highlighting that the recalling of cars for mechanical related issued in the company will have negative influence on profitability, it is important to understand that the strategy adopted by the company is very successful and this is based on the fact that the affected cars were effectively recalled and as such limiting the potential risk that lack of such might pose to the lives of the customers

Justify the strategy

While the fact that the company has recalled too much cars in recent years have been linked to lose of consumers’ confidence in the brand, it is also important to understand that such an approach is justifiable. The first of such is based on the understand that it communicates the value of the brand positively to the customers in the sense that it lets customers to understand that Honda is a trustworthy brand. This is because by recalling the affected cars, consumers will be able to increase their confidence in the brand in the sense that it will positively influence their taught of the company being affectionately dedicated towards meeting their safety and security needs with respective to transportation.

Additionally, it communicates value in the sense that it lets the customers to understand that Honda is not just about buying the cars but also about conducting further researches on sold cars in order to identify issues with such cars and made necessary amendments with the notion to resolve those issues. Still on that account, it lets the customers understand that the brand value their business ethics by not scarifying the lives of customers for their own financial gains. .

Information about the industry

In accordance with the OECD report (2012), the automobile industry is one of the business sectors that were heavily hit by the recent recession. This is can be noticed from the sharp demand for cars across the globe, which accentuated the difficulties experienced with excess production capacity that has already befallen the industry prior to the crises and it also deepened the economic downturn in majority of the car-producing nations that where affected in this case. In the case of Honda, there is no denying the fact that the recession had a very significant influence on USA and Japan, with the former being the source of the recession and the latter being one of the most affected countries as a result of close economic ties with USA and integration of the Japanese economy to the economies of the world (OECD, 2012). Even with the need for companies to shift from value based pricing to a more economic pricing as a way of combating the negative influence of the recession in the automobile industry, one thing that customers don’t generally negotiate on is the safety of the automobile because of its direct influence on their own personal life (OECD, 2012).

From the above description, it can be seen that the issue of brake failure in Honda products which increase the chances of crash and customers death have a high negative influence on the performance of the company because customers will become more sensitive to the brand and adopt a measure cutting approach to reduce the negative influence associated with such products. On that account, a decline in demand and financial performance of the company can easily be visualized.

Financial Health

Source as adapted from: Honda (2013)

A close look at the company’s financial statement above shows that it experienced profit in 2011 as opposed to 2010, but there was a decline the following year (2012). Considering the fact that the recall occurred in 2011, it can be argued that the decline could be as a result of the recall as there was no financial crisis at the world as of this time, but the recall could have planted a high level of negative image about the brand in the consumers mind. Something that is very significant from the above analysis is that while the 2011 financial performance was much better than 2010, the expenditure in 2011 (326,620 million Japanese Yen) was much less than that in 2010 (348,981 million Japanese Yen). Even as the financial performance declined tremendously in 2012 as opposed to what was obtained in 2012, it can be seen that the expenditure in 2012 (424,419 million Japanese Yen) is much higher than the expenditure in 2011.

The implication from the above analysis is an increase in the ratio of expenses from 2011 to 2011, but a decrease in the ratio of return between the same years. When compared with the previous year of 2010 as opposed to 2011, it can easily be argued that the company spent so much in the process of service recovery for its recalled products and as such it affected their overall financial performance.

Other analysis includes an increase in assets but a decline in equity for both the company and the shareholders between 2011 to 2012. Trying to finding the factors that influenced the increase in assets can be a little bit difficult, but it can be linked to a subsequent increase in the investment on research and development, which could easily be argued as a strategy adopted by the company to study more about the issue it faced and how to combat it presently and avoid it in the future.

From the above analysis, conclusion can be drawn to be that the company is well positioned financially to remain competitive in the market and this is based on the understanding that it has continue to increase investment in R&D and there is an experienced increase in assets – which can be a direct reflection of increase in productivity. While equity decreased, it can be linked to the huge investment on research and development and service recovery following its recall program and as such it can be argued that it is not a course for alarm. Basically, the investment returns have been very significant considering the ration of expenditure to revenue, which means that Honda still serve as a right investment option in the automobile industry.

Stock Valuation and Risk

Source as adapted from: Yahoo Finance (2013)

Stock valuation is very important for investors because it help in highlighting the benefits from an investment by presenting an overview of the business risk associated with such investment. A mare look at the red figure above will see that the stock value is negative at the moment and it could easily signal the wrong impression about the company. In any case, there is a need to evaluate the performance of a company over a long period of time in order to arrive at the right judgement as to whether the company is a good investment or not.

From the above figure, it is clear that Honda is a worthy investment and this judgement is made from the expected dividend returns of (2.20%), which is a positive figure and high value where investments are huge. Additionally, the profit to expenditure ratio is also significant at 14.7. On an individual case, the company is a clear profitable long-term investment, but there is a need to compare their potential with that of other companies in the industry.

Stock	Latest Price	1-day % Chg	5-day % Chg	1 year % chg	EPS	Recommendation	Market Cap	Yield
Toyota	124.49	-2.40	-4.50	63.61	7.24	Strong Buy	197,156.06M	1.953
Honda Motor	38.08	-1.70	-2.26	17.53	2.16	n/a	68,631.58M	2.165
Ford Motor	17.02	0.35	1.55	89.11	1.42	Buy	66,756.70M	2.35
Paccar Inc.	56.10	-0.05	-2.65	37.50	2.88	Hold	19,839.20M	1.426
Tata Motors Ltd.	24.74	-2.02	-0.28	24.07	3.07	Buy	15,702.73M	--
Borg Warner	92.53	-0.76	1.49	37.45	4.99	Buy	10,740.88M	--
TRW Automotive Holdings	70.12	0.59	1.14	103.13	6.02	Strong Buy	8,366.72M	--
LKQ Corporation	26.18	0.15	1.32	46.18	0.90	Buy	7,811.59M	--
Autoliv Inc.	80.73	-0.21	-1.70	43.98	5.41	Hold	7,718.60M	2.477
Lear Corp.	67.80	2.79	2.70	86.73	5.41	Buy	6,488.46M	1.003
WABCO Holdings	78.68	-1.47	-2.29	38.13	4.42	Buy	4,941.89M	--

As of Mon Jul 29, 2013 11:51 AM GMT+0800

Source as adapted from: the glove and mail (2013)

Base on the notion provided earlier, it can be seen that understanding how the company weights up against other competitors is very significant because it would help to determine whether it is a worthy investment as compared with their competitors. The finding from the above figure is not encouraging as the company has the lowest return when compared with other companies in the same industry with special reference to the US market. In any case, it still maintained a positive return for the year, further stamping an approval mark on earlier statement that Honda is a worthy long-term investment

Source as adapted from: the glove and mail (2013)

Further analysis of the company’s stock valuation and risk shows a tremendous increase in value for a period of 5 years, which is a clear illustration of the company’s potential for continued long-term performance and a support for earlier statement that it is a worthy investment. The fall in 2008 is arguably as a result of the economic recession that besieged the world during that period of time.

Debt Policy

Honda Motor Co. Ltd., debt and solvency ratios
	Mar 31, 2013	Mar 31, 2012	Mar 31, 2011	Mar 31, 2010	Mar 31, 2009	Mar 31, 2008
Debt to equity	0.97	0.93	0.92	0.95	1.15	0.97
Debt to capital	0.49	0.48	0.48	0.49	0.54	0.49
Interest coverage	48.02	35.48	91.90	35.22	12.57	62.05
Source: Based on data from Honda Motor Co. Ltd. Annual Reports

It is clear from the above table that the company’s debt to equity ratio as well as debt to capital ratio has decorated from 2010 to 2012, but all these values saw an increase in 2012 and it can be argued to be as a result of the economic problem that faced the company following the recall made in 2012. On that note, the company debt policy can be argued to be such that is designed to reduce debt accumulation in order to increase overall profitability and reduce risk. Risk averse is included in the argument because the bearable interest per debt increases significantly from 91.90 in 2010 to 36.48 in 2012.

Summary

Overall, the above analysis has been successful in detailing the financial performance of Honda Motors as influences by its internal and external forces. Focus was on understanding how the recall of cars as a result of brake related issues influenced the performance of the company, and it was very clear that such influence was negative. This is because the economic performance of the company significantly reduces as a result of subsequent reduction in demand and huge investment made for service recovery and research and development in order to solve the issues that behalf the company.

Additionally, the investment risks of the company’s business was also studied with special focus on understanding factors that will ensure profitability and those that might pose high hindrance to sustainable investment returns. In any case, it was clear from the analysis that the company has been successful in establishing long-term investment returns as a result of their continued involvement in research that have geared them towards the development of new, sophisticate and innovative products and services that enhances the satisfaction of customers.

Besides, the company is a well-established brand with presence in numerous countries. On that account, it is recommended in this paper that Honda still remain a high investment portfolio with proven track record of sustainable returns and as such investors are advices to consider the company as one of their choices in investment decision within the automobile industry.

References

Honda (2013a), “2012 Annual Financial Report.” Available at: http://world.honda.com/investors/library/annual_report/2012/honda2012ar-all-e.pdf Accessed on: 30/07/2013].

Honda (2013b), “GL1800 Brake Recall.” Available at: http://www.honda.com/newsandviews/article.aspx?id=6426-en  [Accessed on: 30/07/2013].

OECD (2012), “The automobile Industry.” Available at: http://www.oecd.org/eco/outlook/44089863.pdf Accessed on: 30/07/2013].

The Globe and Mail (2013), “Honda Motor: HMC NYSE Consumer Products.” Available at: http://www.theglobeandmail.com/globe-investor/markets/stocks/chart/?q=HMC-N [Accessed on: 30/07/2013].

Yahoo Finance (2013), “Honda Motor Co., Ltd. (HMC) –NYSE.” Available at: http://finance.yahoo.com/q?s=HMC [Accessed on: 30/07/2013].