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

§  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

Ø Banking matters

Ø Fund management

Ø 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

Ø  Liquidity ratios

Ø  Activity ratios

Ø  Debt analysis ratios

Ø  Profitability ratios

Ø  Marketability ratio

 

 

Ratio analysis

Liquidity ratios:

Ø  Net working capital

Ø  Current ratio

Ø  Quick(acid—test) ratio

Ø  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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
Avg. Sales Per Day	Net Sales / 360	13068.1	15344.30

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

 

 

Operating Cycle

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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	2002
Account 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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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

Ratios	Formula	2001	2002
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?

Answer

Being 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?

ANSwer

Yes, 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

Atlas Honda Limited

HORIZONTAL ANALYSIS OF PROFIT AND LOSS STATEMENT

ITMES	CHANGE	SOURCES	USES
CURRENT ASSETS Stores, Spares & Tools Stock In Trade Trade Debtors Advances & Other Receivables Cash & Bank Balance	+5,023   -73,777     +123,554    -43,052    +247,556	73,777     43,052	5,023   123,554     247,556
Deferred Cost	+1,463		1,463
Long Term Loans, Deposits & Other Receivables	-1,080	1,080
Investment	-571	571
Fixed 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		1,948
Long Term Loans	-20,092	20,092
Net Profit After Tax	+152,721	152,721
Dividend Paid	+29,181		29,181
TOTAL