Honda: A Global Automotive Powerhouse Since 1948 - Essay Sample

Introduction

Honda Motor Company Ltd. is a multinational firm that was founded in September 1948 by Soichiro Honda and Takeo Fujisawa in Hamamatsu, Shizuoka Prefecture, Japan ("Honda Global | Company Overview", 2019). It focuses on the production and sale of motorcycles, automobiles, and power products. It is currently headquartered in Minato Tokyo, Japan but has a network of subsidiaries and approximately 435 affiliate companies across the world ("Honda Global | Company Overview", 2019). In 1948, the bicycle was the standard mode of transport. In this case, the founders started by developed the very first auxiliary engine for these bicycles which saw Honda gain popularity in the market. Over the years to date. Honda has exhibited an exceptional level of innovation by integrating technology to enhance the performance of their products. It is mirrored in its mission, which focuses on providing the highest quality of products and services to its customer worldwide at the lowest prices possible.

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Toyota Motor Company is also a Japanese multinational firm that was founded by Kiichiro Toyoda on 28th august 1937 in Japan. It focuses on the production and sale of automobiles, and it is headquartered in Toyota, Aichi, Japan (Toyota Motor Corporation, 2019). Toyota Company began its operations by designing and producing A1 cars and G1 trucks. Through the years, the company has focused on streamlining their production to enhance the efficiency of their automobiles. In its mission, Toyota Company aims at attracting customers by providing high-quality products and services as well as the most satisfying ownership experience. Also, Toyota is recognized as one of the leading automobile company across the world (Toyota Motor Corporation, 2019). In 2012, it created history by becoming the first company to produce over 10 million hybrid cars in a year.

Comparative Ratio Analysis

Quick Ratio

The quick ratio is a liquidity ratio that measures the ability of a firm to meet the short term obligations using the most liquid assets (Goel, 2015). Over the five years between 2013 and 2017, Honda's quick ratio was decreasing but shown an increase in 2018. This can be attributed to the zero cash generated between 2014 and 2018. On the other hand, the Toyota Company has shown a consistent rise in the quick ratio over the six years. This can be as a result of the constant increase in its cash, short term investments, and the current liabilities over the six years. While both companies show a different trend performance over the period, Toyota Motor Company maintains a higher and consistent quick ratio, which means that it holds a better liquidity position than the Honda Company.

Cash Ratio

The cash ratio also helps in assessing the liquidity position of a company since it measures the ability of the firm to meet the short term obligations using its cash and cash equivalents (Leach, 2010). In 2014, Honda's cash ratio decreased to zero and then remained constant at zero for the period up to 2018. The reason could be as a result of the zero cash flows generated between 2014 and 2018. On the other hand, Toyota's cash ratio was constant between 2013 and 2014, increased in 2015, decreased in 2016 and 2017, and later increased in 2018. While Honda held a higher cash ratio than Toyota in 2013, Toyota has shown a remarkable performance over the next five years while Honda maintained a zero cash ratio.

Debt-to-Equity Ratio

The debt to equity ratio measures the proportion of both debts and shareholders' equity that a company uses to finance its assets (Gibson, 2009). In 2014, Honda's debt to equity ratio decreased, it then increased in 2015, and then reduced consistently from 206 to 2018. On the other hand, Toyota's debt to equity ratio decreased steadily between 2013 and 2018. Although the two companies maintained a similar trend performance, Toyota maintained a higher debt to equity ratio than Toyota in all the six years, Toyota showed a remarkable performance over the next five years while Honda maintained a zero cash ratio. A higher debt to equity ratio means that the company is financing a significant proportion of its assets using debt, which is risky.

Days' in Receivables

The days' in receivables ratio measures the number of days that the accounts receivable take to pay their dues (Raiyani, 2015). Honda showed a consistent decrease in the number of days where the numbers ranged between 60 and 80 days. However, Toyota's values were fluctuating for the six years period where it increased in 2014, decreased in 2015, increased in 2016, decreased in 2017, and finally increased again in 2018. The frequent changes were as a result of the constant changes in the firm policies that govern the trade agreement and payment policies between the firm and the customers. Nevertheless, while both companies showed a somewhat similar trend performance, Toyota Company maintained a higher ratio ranging from 100-115 days. This means that Toyota's debtors take longer to repay their dues as compared to the accounts receivables at Honda.

Return on Assets (ROA)

ROA is a profitability ratio that measures the level which the organization utilize the available assets to generate income (Birchall, 2014). Over the six-year, Honda's ROA was fluctuating where it decreed in 2014 and 2015, increased in 2016 and 2017, and finally decreased in 2018. These fluctuations were as a result of the subsequent variation in the net incomes and the total assets of the company between 2013 and 2018. On the other hand, Toyota recorded a consistent increase in ROA for six years, but there was a slight decrease in 2016 and 2018. This is because while the assets were increasing the net income was also rising except for 2016 and 2018 where it dropped. In this case, despite the inconsistent trend in both the companies' ROA, Toyota maintained a higher ratio averaging at 0.07 as compared to Honda, which stood at an average of 0.03.

Profit Margin (PM) Ratio

The profit margin ratio is a profitability ratio that measures the proportion of a company's profits generated by the sales (Kobyletskii, & Sakevych, 2015). Over the six years, Honda did not maintain a consistent trend performance whereby there was a decrease in 2014 and 2015, an increase in 2016 and 2017, and a decline in 2018. On the other hand, Toyota had a consistent increase in the profit margin ratio in 2014, 2015, and 2017 but a decrease in 2016 and 2018. Based on the annual performances, Toyota recorded a higher profit margin than Honda.

Return on Equity (ROE)

ROE is a profitability ratio that assesse the level of profits that the equity shareholders generate within a given company (Peterson, & Fabozzi, 2012). In the case scenario, Honda did not maintain a consistent trend performance since there was a decrease in 2014 and 2015, an increase in 2016 and 2017, and a reduction in 2018. On the other hand, Toyota had an increase in the profit margin ratio in 2014, 2015, and 2017 and a decrease in 2016 and 2018. Based on their performances, Toyota recorded a higher ROE than Honda.

Price Earnings (PE) Ratio

The price-earnings ratio measures the proportion of the market price per share (MPS) to the earnings per share (EPS) in a given company (Rist, & Pizzica, 2015). In the case scenario, Honda maintains an inconsistent trend performance in the PE ration since there was a decrease in 2014 and 2015, an increase in 2016 and 2017, and a decrease in 2018. Similarly, Toyota had an increase in the PE ratio in 2014, 2015, and 2017 and a decrease in 2016 and 2018. Consequently, the trend performance in both companies show that Toyota had a higher PE ratio than Honda

Price-to-Sales Ratio

The price to sales ratio is a valuation ratio that links the stock price of a given company to its total revenues (Wahlen, Baginski, & Bradshaw, 2011). Over the six years, Honda maintained a fluctuation trend performance there was a decrease in 2014 and 2015, an increase in 2016 and 2017, and a reduction in 2018. On the other hand, Toyota had a rise in the price to sales ratio in 2014, 2016, and 2017 and a reduction in 2015 and 2018. Based on their performances, Toyota recorded a higher ratio than Honda

Summary of the Companies' Performance

Based on the ratio analysis, it is evident that Toyota Motors maintains a better performance position than Honda Motors. This is because Toyota has a favorable liquidity position mirrored in the lower quick and cash ratios. Toyota also maintains a remarkable profitability position that higher than that of Honda Motors. This is mirrored in the ROA, ROE, and the PM ratio. Nevertheless, Toyota Motors has a high debt to equity ratio, which is considered as risky.

References

Birchall, A. (2014). Financial Analysis and Control: Financial Awareness for Students and Managers. Kent: Elsevier Science.

Gibson, C. H. (2009). Financial reporting & analysis: Using financial accounting information. Mason, OH: South-Western Cengage Learning.

Goel, S. (2015). Financial Ratios. New York: Business Expert Press.

Honda Global | Company Overview. (2019). Retrieved 11 August 2019, from https://global.honda/about/profile.html

Kobyletskii, P., & Sakevych, A. (2015). An Introduction to the Financial Statement Analysis. Munchen BookRix

Leach, R. (2010). Ratios made simple: A beginner's guide to the key financial ratios. Petersfield, Hampshire: Harriman House.

Peterson, P. P., & Fabozzi, F. J. (2012). Analysis of financial statements. (Analysis of Financial Statements.) Hoboken, NJ: Wiley.

Raiyani, J. R. (2015). Financial ratios & financial statement analysis. New Delhi: New Century Publications.

Rist, M., & Pizzica, A. J. (2015). Financial ratios for executives: How to assess company strength, fix problems, and make better decisions.

Berkeley, California: ApressToyota Motor Corporation. (2019). Overview | Profile | Company | Toyota Motor Corporat...