Financial Statement Analysis

June 10, 2018 | Author: Olaish Khalil | Category: Documents


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Description

Financial Statement Analysis

Financial analysis of automotive industry: evidence from « General Motors » and «Honda Motor, LTD»

Prepared by: Abderrahmen Rejeb

Supervised by: Mr.

Jonathan Lange

Financial Statement Analysis Course

Fall semester 2015

Academic Year: 2015-2016

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Acknowledgements Firstly, we would like to express our gratitude to Mr. Jonathan Lange who provided us with clear guidelines of this report and his help to provide us with the financial statements upon them we based our financial analysis. We greatly appreciate the exemplary support and commitment given to us and we would not surely complete this stock pitch without his consistent advice.

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Abstract

The stock pitch applies the evaluation of performance of automotive companies in the world. It means evaluate how well the company operates. The main aim of this research paper is achieved through financial analysis of two automotive companies (General Motors Corporation and Honda Motor, Ltd. The main data collection are the annual financial reports on “General Motors” and “ Honda Motor” in 2014 to 2015.Different financial ratio are evaluated such liquidity ratios, asset management ratios, profitability ratios, market value ratios, debt management ratios and finally we measure the best performance between two companies. The mathematical calculation was established for ratio analysis between the two companies during 2014.This period was the most important factor for performance evaluation. The graphical analysis and comparisons are applied between two companies for measurement of all types of financial ratio analysis. Liquidity ratio is conveying the ability to repay short-term creditors. It determines the performance of short term creditor of both automotive companies under the three categories such as current ratio, quick ratio and cash ratio. Asset management ratio is the measurement of how effectively a company uses and controls its assets. We also base our analysis on measuring account receivable turnover, average collection period, inventory turnover, account payable turnover, account payable turnover in days, fixed asset turnover, total asset turnover. In addition, Profitability ratio evaluates how well a company is performing and how many profits were earned relative to sales, total assets for both companies. We didn’t overlook the valuation of market value that urges the stockholder to analyze their future market value of the stock. Overall, this analysis tends to provide a clear measurement of the best performance to make the right investment decisions.

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Table of content:

Review of literature I. The automobile industry in the World and in the USA: ........................................................................... Erreur ! Signet non défini. 1. An overview of automobile industry in the World: .............................................................................Erreur ! Signet non défini. 2. The automotive industry in the USA: ......................................................................................................................................... 2 II. The five forces Porter model in automotive industry: ............................................................................. Erreur ! Signet non défini. III. The value chain for the automotive Industry: ......................................................................................... Erreur ! Signet non défini. Evidence from "General Motors" and "Honda Motor” A. General Motors Corporation...................................................................................................................................................................6 1) Historical background............................................................................................................................................................................6 2) Financial statements...............................................................................................................................................................................7 3) The strategies of General Motors.........................................................................................................................................................10 4) The value creation and the competitive position of GM......................................................................................................................10 B. Honda Motor ..............................................................................................................................................................................................11 1) Historical background..........................................................................................................................................................................11 2) Financial statements…………………………………………………………… ……………………………………....................12 3) The strategies of Honda Motor............................................................................................................................................................15 4) The value creation and the competitive position of Honda Motor…………………........ …………………….................................15 Identification of key accounts Model of performance evaluation of both automobile companies I. Liquidity ratio: .................................................................................................................................................................... ……..19 1. Current ratio : ................................................................................................................................... Erreur ! Signet non défini. 2. Quick ratio or acid test ratio: ............................................................................................................ Erreur ! Signet non défini. 3. Cash ratio: ................................................................................................................................................................................ 20 II. Asset management ratios: ............................................................................................................................................................ 20 1. Accounts receivable turnover: .................................................................................................................................................. 20 2. Average collection period: ....................................................................................................................................................... 21 3. Inventory turnover ratio: .......................................................................................................................................................... 22 4. Accounts Payable turnover: ...................................................................................................................................................... 22 5. Accounts Payable turnover in days: ......................................................................................................................................... 23 6. Fixed asset turnover ratio: ........................................................................................................................................................ 23 7. Total asset turnover ratio: ......................................................................................................................................................... 24 III. Profitability Ratio: ....................................................................................................................................................................... 24 1. Net Profit Margin: .................................................................................................................................................................... 24 2. Gross Profit Margin ratio: ........................................................................................................................................................ 25 3. Return on asset ratio: ................................................................................................................................................................ 25 4. Return on Equity: ..................................................................................................................................................................... 25 5. Operating profit margin ratio:................................................................................................................................................... 26 IV. Debt management ratios:............................................................................................................................................................. 27 1. Debt ratio: ................................................................................................................................................................................ 28 2. Time interest earned ratio: ........................................................................................................................................................ 28 Projection of financial statements of both automobile companies The companies' valuation I. The dividend discount model................................................................................................................................................................39 1) Definition.............................................................................................................................................................................................39 2) Stock valuation based on DDM...........................................................................................................................................................39 II. Discounted Cash flows......................................................................................................................................... ...............................42 1) Definition.............................................................................................................................................................................................42 2) Company valuation on DCM…………………………………………………………………………….…………………….…….42 III. Market-based approach Valuation...................................................................................................................................................46 1) Book value per share ratio...................................................................................................................................................................46 2) Earnings per share ratio …………………………………………...…………………………………....………………....................47 3) Market/Book ratio………………………………………………………………………………….………………………...............48 Conclusion Summary............................................................................................................................................................................................................49 References..........................................................................................................................................................................................................50

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Review of Literature:

F

inancial statement analyses of companies are usually described as the process of defining how well companies use their assets, equity and liability and manage their revenues and expenses. It is very important to companies to go through this analysis

to make useful decisions related to investments, stocks acquisitions... The good interpretation of financial statements and the financial ratio analysis are one of the best tools of performance evaluation of any company to make judgment of how well cement companies are efficient in their operations and management.

We begin with the industry analysis of car companies in the world. We picked out two different companies operating in the same industry in the United States.

I. The automotive industry in the World and in the USA:

1. An overview of automobile industry in the World:

Automobile industry is an industry that produces cars and other gasoline-powered vehicles, such buses, trucks and motorcycles. The automobile industry is one of the most important industries in the world, affecting not only the economy of the world but the cultures of the world. The automobile has enabled people to travel and transport goods farther and faster, and has opened wider market areas for business and commerce. For instance global sales of passenger cars are forecast to hit 73.9 million vehicles in 2015. This statistic shows the leading countries for the production of passenger cars in 2014. In that year, the United States produced around 4.25 million such vehicles. As a result of easier and faster transportation, the United States and the world economies in general have become dependent on the mobility that automobiles, trucks and buses provide.

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Figure1: Passenger car production in selected countries in 2014, by country (in million units)

2. The automotive industry in the USA: The automotive industry of the US is sometimes referred as a mature industry which continues to experience dynamic and swift change- a change that sweeps beyond national borders. To operate successfully, US auto manufacturers manage large and complex supply chains, situating in many geographical regions and hunt chances and grab opportunities in diverse markets.

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Along with China, the United States has been considered as one of the largest automobile markets worldwide both in terms of production and sales as in its first fifteen years the US automobile industry was characterized by a great deal of entry and the number of firms exceeded 200. The US auto industry's sales volume has recorded an important increase of 5 % and it has accounted for 1.5 million units in July 2015.

Figure2: The different car companies and their market shares

II. The five forces Porter model in automotive industry: Porter suggests that five forces influence the level of competition and the profitability of firms in an industry. Three of the forces- rivalry among existing firms, potential entry and substitutes- represent horizontal competition among current or potential future firms in the industry and closely related products and services. The other two forces- buyer power and supplier power depict vertical competition in the value chain, from the suppliers through the existing rivals to the buyers. We illustrate the 5 forces in the cement industry:

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The Supplier Power: Low The power of supplier is low because the automobile supply business is fragmented into many supplier firms. It is easily for a manufacturing car company to switch suppliers as they are extremely dependent on the demands and the specifications of the automobile manufacturer and thus they hold fewer power and lower control. There is a little integration in the value chain. The threat of new entrant: Low Usually, the threat of new entrant is low. This is due to the high costs of automotive start-ups, maintaining and expanding new firms within an industry that is highly qualified with the significant entry barriers and the entrenched firms. These barriers weaken the introduction of new firms on the market. The untapped market is usually discouraging for new businesses

The existing rivalry: High The industry is highly competitive and most firms generate low returns because of the cost of competition is relatively high. There is often a fierce competition among firms in terms of many factors including the stream of innovations and marketing. The market has taken an oligopolistic structure which helps to minimize the tendency toward a price the price-based competition. Otherwise, there is a competition over the extensive rebates and warranties that help to lure customers but they put pressure on the profits generated from vehicles sales.

The threat of substitute: Low The threat of substitute is moderate because in most cases, it is quietly easy for customers to shift from automotive to other substitutes. The substitutes include public transportation, bicycles and other modes of transportation. The price of gasoline may constitute a deterrent for customers' decisions to buy vehicles. Thus, it depends all on customer preferences, affordability and convenience...

The buyer power: low While buyers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars. There is an often low switching cost and customers can easily change from one automaker to another at no important extra cost. Thus the bargaining power of automakers is unchallenged. Figure3: Porter’s Five Forces in the automotive industry

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III. The value chain for the automobile Industry: Value chain is the integration of all resources starting with purchase of raw materials until the delivery of finished goods. It integrates information, materials, labor, facilities, logistics, etc.

Purchase of Raw material

From suppliers

Manufactures The most important sub-

Outsourcing some other components

component

as Appliances

Figure 4: the value chain for the automobile Industry

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Assembles the component and produces

cars

Sell cars

Evidence from “General Motors” and “Honda Motor”:

A. General Motors corporation: 1) Historical background :

General Motors Corporation (GM), one of the world’s largest manufacturers of automobiles and trucks. GM sells about 24 percent of all cars and trucks in the United States and about 15 percent of all cars and trucks in the world. Based in Detroit, Michigan, GM is the largest corporation in the United States based on overall sales. As of 2014, the corporation has had approximately 216,000 employees around the globe and manufactures cars and trucks in 35 countries (“General Motors: About GM,” 2014). Today, the GM automotive brands include Vauxhall, Daewoo, Buick, Cadillac, Chevrolet, GMC, Holden, Opel, and Wuling. GM is divided into five business segments: GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South America (GMSA), and GM Financial

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2) Financial statements:

Figure 5: the consolidated balance sheet GM

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Figure 6: The consolidated income statement of GM

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Figure 7: the consolidated statement of cash flows

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3) The strategies of General Motors: The automobile industry is becoming very competitive and firms exert themselves to meet consumer expectations. General Motors is dedicated to provide high quality and fairly-priced products to its customers. By doing so, customers obtain superior values and benefits, and the shareholders receive in return a high ROI (Return on investment). -The main strategies of General Motors are essentially: - The product differentiation strategy: The firm is attempting to create products that generate a high profit margin. In fact General Motors offers a comprehensive and panoply of vehicle from electric and mini cars to heavy- duty, full size trucks, monocots and convertibles. Currently produces cars, SUVs, pickups and trucks, which it sells and services them through diverse brands: Chevrolet, Buick, GMC, Cadillac, Baojun, Holden, Iuszu, Jiefang, Opel,Vauxhall and Wuling. GM aims through product differentiation to improve its operating margins and its expected EBIT in the next five years. GM also revamps its strategy toward; - A manufacturing cost reduction: since 2005, GM has been implementing a manufacturing and product strategy that allows the company to be more responsive to changes in consumer preferences and in the marketplace ("General Motors Corporation: Restructuring Plan for LongTerm Viability", 2008). -Focused Electrification Strategy: GM is committed to focus on producing vehicles with fuel efficiency and sustainability strategy. The company focuses on its vehicles electrification efforts on the three main technologies such as the light electrification, the extended range electric vehicles as the Chevrolet Volt, Spark EV…

4) The value creation and the competitive position of GM: GM has been involved in a process of value creation and this is through: The high research and development cost of Producing Electric Vehicles: Electric vehicles are becoming increasingly popular due to their fuel efficiency and the environmental features. To be highly innovative, the company has spent large sums for research and development, Research and development expenditures, which are expensed as incurred in Automotive cost of sales, were $7.4 billion, $7.2 billion and $7.4 billion in the years ended December, 31 2014, 2013 and 2012". The company hired experts to establish creative and innovative department to be able to keep up with the world changes, to develop electric that can compete in the market. Alternative fuel Vehicles: The current tendency of GM is to produce vehicles with alternative fuels that reduce the consumption of liquid petroleum in the transportation sector. This is done through the development of Flex Fuel, a vehicle that is reduced-fuel consumption designed. Hydrogen Fuel Cell Technology: In order to be complied with the environmental standards, GM aims to produce cars that reduce the petroleum consumption and greenhouse gas emissions. It is committed to develop hydrogen fuel cell technology such as Chevolet Equinox fuel cell electric vehicle demonstration programs. The company aims through those programs to identify consumer preferences and the infrastructure needed to understand the implication of technology in production. In addition to that the company ensures about the safety standards of its products, the vehicular noise control...

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B. “Honda Motor, Corporation.Ltd”:

1)

Historical background:

Honda Motor is a major manufacturer of automobiles and the largest manufacturer of motorcycles in the world. The company also produces power equipment such as snow blowers, outboard motors and portable generators. Honda is based in Tokyo, Japan. The founder of Honda, Soichiro Honda, was a mechanical engineer with a passion for automobile racing and motorbikes. The company soon began a thorough reorganization, cutting costs and shifting a large portion of its production facilities to North America. In 2000 Honda made a hybrid vehicle, the insight, available for sale in North America. The insight operates much as a conventional car does but runs on a combination gasolineelectric motor. The hybrid motor dramatically cuts toxic emissions.

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2) Financial statements:

Figure 8: The consolidated balance sheet of GM

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Figure 9: The consolidated income statement of Honda Motor

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Figure 10: The consolidated statement of cash flows of Honda Motor

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3) The strategies of Honda Motor:

Honda Motor adopts different strategies that enable the company to create products and models with strong competitiveness on a global base. - The product differentiation strategy: Meanwhile as Honda was becoming the world's leading motorcycle manufacturer, in 1967 it diversified and began to produce panoply of cars and trucks. In fact, the company started to manufacture portable generators, power tillers and pumps. - The cost effective production strategy: Honda purchases raw materials and parts from numerous external suppliers and relies on certain suppliers for some of the raw materials. -The medium and long-term management strategy: Honda aims to achieve global growth by encouraging and strengthening innovation and creativity and creating quality products that please the customers and be beyond their expectations. 4) The value creation and the competitive position of Honda Motor: Honda Motor creates value for customers through: -The research and development: Honda makes efforts to create the most effective safety and environmental technologies. Honda continues to be innovative in advanced technology and products. The company aims to create and introduce in the market new value-added products that respond the customers’ expectations. -Production efficiency: Honda will establish and improve the efficient and flexible production system. The company also is ready to supply high quality products and provide a business continuity plan to respond to various risks including the natural disasters. -Sales efficiency: The Company will remain proactive to the efforts of expanding the product lines through the innovative use of IT and upgrading the sales and service structure. -Product quality: To respond to the increasing customer demand, Honda improves the quality control by integrating and coordinating the development, the purchase, and the production and sales/services departments. -Safety of technologies: Honda aims to develop and ensure a safe technology that enhances accident prediction and prevention. -The environment: Honda makes efforts to create better, cleaner and more fuel-efficient engine technologies and to further improve recyclables throughout its product line.

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Identification of key accounts The automobile industry relies extensively on capital. The property, plant and equipment is an important part of the automobile sector which we are considering here the robots, the machines and the technology used to serve the business or the organizational function. For instance, the amount of capitalized software included in Property, net was $817 million and $630 million in the years ended December 31, 2014 and 2013. The property, plant and equipment account of Honda has been accounted for 2438107, 2821542 and 3189511 million Yen respectively in 2013, 2014 and 2015. The inventory accounts are very important as they are fragmented into different functions from raw materials to the finished products. - The revenue recognition: Both companies follow correct revenue recognition policy which consists essentially of measuring the sales revenues at the fair value of the consideration received or receivable. Both companies recognize revenue from sale of products when there is significant transfer of risks and rewards of ownership to the customer. Thus, the companies recognize revenue at the point of sale, meaning when the products are delivered to customers and dealers. Provisions, discounts and other types of incentives are taken into consideration in the revenue recognition process. These incentives are estimated and recognized at the time the product is sold to the dealer and are deducted from sales revenue in the consolidated statements of income. The companies accounts for some special accounts as follows: - The property, plant and equipment: Property, plant and equipment is measured based on the cost model and carried at its cost less accumulated depreciation and impairment losses. Property, plant and equipment is initially measured at its cost. Subsequent expenditures on an item of property, plant and equipment acquired, are recognized in the carrying amount of the item, only when it is probable that the expenditure will generate a future economic benefit. -Intangible assets: they are measured based on the cost model and carried at their cost less accumulated amortization and impairment losses. However, there is matter in accounting the research and development costs as both companies follow different accounting standards. - The research and development: The accounting for research and development costs is different between the two companies. For instance, Honda follows IFRS. It capitalized research and development costs if there is a technical and commercial feasibility of completing the development, Honda has intention, ability and sufficient resources to use the outcome of the development, it is probable that the outcome will generate a future economic benefit, and the cost can be measured reliably. Any costs that do not meet the condition aforementioned it is expensed as incurred. However, GM expensed all the research and development costs as the company follows the US GAAP and as GM with high R&D expenditures, U.S. GAAP requirement to expense is troublesome – because a major asset never appears on the balance sheet and which can open the room for earnings manipulations. -Inventories: Both companies account similarly inventories. This account includes raw materials needed in production of cars and constitutes the finished vehicles to be sold to dealers and customers.

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Model of performance evaluation of both automobile companies:

Model of performance evaluation of automotive companies Liquidity ratios

Selection of financial report

Asset management ratios

Identification of balance sheet, income statement and cash flow statement Profitability ratios

Ratios analysis Debt management ratios

Mathematical calculations

Graphical analysis of both companies Comparisons among both companies

Declaration of the best performance Figure 11: Methodology used in performance analysis

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Formula of ratios analysis: We have referred in this section to the different formulas studied in the course of Principals of finance related to the different kinds of ratio. We collect some formula from the book of intermediate accounting by Kieso, Weygandt, Warfield, first edition. The ratios are presented as follows:

Liquidity ratios Current Ratio: Current Ratio = Current assets /Current liabilities --------------------- (1) Quick Ratio: Quick Ratio= (Current Assets-Inventories)/Current Liabilities ----------------------- (2) Cash Ratio: Cash Ratio = Cash / Current Liabilities ---------------------- (3)

Asset management ratios Accounts receivable turnover: Accounts receivable turnover = Sales /Average Accounts receivable --------------------- (4) Average collection period: Average collection period = 360 days / Accounts receivable turnover ------------------- (5) Inventory Turnover Ratio: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory ------------------- (6) Accounts Payable turnover: Accounts Payable turnover = Purchases / Average Accounts Payable -------------------- (7) Accounts Payable turnover in days: Accounts Payable turnover in days = 360 / Accounts Payable turnover ---------------- (8) Fixed asset turnover: Fixed asset turnover = Sales / Average Net fixed asset ----------------- (9) Total asset turnover : Total asset turnover = Sales / Average Total asset ----------------- (10)

Profitability Ratio Net Profit margin: Net Profit margin = Net profit after tax/sales ----------------------- (11) Gross Profit margin ratio: Gross Profit margin ratio= Gross profit/sales ----------------------- (12) Return on Total Assets: Return on Total Assets = (Net income+ (1-T) Interest expenses+ Minority interests) / Average total assets ----------------------- (13) Return on common stock equity: Return on common stock equity = (Net income – Preferred dividends) / Average Common stockholders’ equity------- (14) Operating Profit Margin: Operating Profit Margin = Operating profits / Sales ---------------- (15)

Debt coverage ratio Debt Ratio: Debt Ratio =Total liabilities / Total assets ---------------- (16) Time interest earned: Time interest earned = EBIT / Interest charged --------------- (17)

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Results and analysis In this part we present the result from our data analysis. This part is separate into four categories. At first, we briefly examined the performance of liquidity position of both automotive companies. Second, we present the asset management condition of those companies .Third, we demonstrate the performance of profitability of the two companies, Forth we discussion the debt management position.

I. Liquidity ratio: Liquidity ratios refer to the ability of a company to use its assets that are most readily converted into cash to cover its short term debts. They show the relationship of a firm’s current assets to its current liabilities and thus its ability to meet maturing debts. The Liquidity ratios we are interested in our calculations are: 1) Current ratio 2) Quick ratio or acid test 3) Cash Ratio 1. Current ratio : The current ratio is calculated by dividing current assets by current liabilities. Current asset includes inventory, trade debtors, advances, deposits and repayment, investment in marketable securities in short term loan, cash and cash equivalents, and current liabilities are comprised short term banks loan, long term loans-current portion, trade creditors liabilities....

Current ratio= (Current assets)/ (Current Liabilities) Year 2014

General Motors 83.670/65.701=1.27

Honda 5.549.158/4.751.800= 1.16

Table 1: The current ratios of the 2 companies in 2014 Analysis: In this table, we can view in 2014 the current ratio was 1.27 times in General Motors company. That is to say current assets are capable of covering 1.27 of current liabilities. On the other hand, Honda Company had a 1.16 current ratio which means that the company’s current assets are capable of covering 1.16 times its current liabilities. So we understand that both companies are good at covering their current liabilities by their current assets.  The current ratio of the automobile industry is 1.724; therefore, both companies cannot meet the average ratio.

2. Quick ratio or acid test ratio: It is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities.

Quick ratio = (C.Assets – Inventories) / C.Liabilities Year 2014

General Motors (83.670-13.642)/ 65701 = 1.066

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Honda (5.549.158-1.334.775)/ 4.751.800=0.886

Table 2: The quick ratios

Analysis: In 2014 , the quick ratio of general motors was 1.066 which means that the company is capable of liquidating its current assets and cover its current liabilities .On the other hand, Honda’s quick ratio is only 0.886 which means that the company couldn’t cover its entire current liabilities .  The automotive industry quick ratio is approximately 0.740.As a conclusion, we can say that both companies have good results regarding this ratio.

3. Cash ratio: It measures the ability of the firm to cover its current liabilities using its cash and cash equivalent. In general, this ratio is the most appropriate to realize clearly the liquidity of the company unlike the other ratios which embody the necessary time period to convert the accounts receivable and inventories into cash. Consequently, this ratio gives a better result.

Immediate ratio = Cash & Cash Eq. / C.Liabilities Year

General Motors 18.954/65.701=0.288

2014

Honda 1.193.584/4.751.800= 0.041

Table 3: The cash ratio of 2 companies Analysis: The table indicates that both companies failed in covering their liabilities with cash .both ratios are discouraging .That’s why, the two companies should increase their cash and cash equivalents by increasing their investments in order to cover their current liabilities.  The industry average ratio is about 0.081, Honda’s cash ratio is less than the industry ratio but on the other hand, General Motors has better cash to current liabilities ratio.

II. Asset management ratios: Asset management ratios are the most notable ratios of the financial ratios analysis. They measure how effectively a company uses and controls its assets. They are also called Turnover ratios or working activities ratios. Companies can easily measure their turnover ratios because those ratios are made up between assets and sales. - In the following section we will discuss seven types of asset management ratios: 1) Accounts receivable turnover 2) Average collection period 3) Inventory turnover 4) Accounts Payable turnover 5) Accounts Payable turnover in days 6) Fixed asset turnover 7) Total asset turnover

1. Accounts receivable turnover: 20

This ratio measures the number of time the company cleans up or totally collects its receivables each year (The higher the better). If any company has the difficulty to collect money so it has large account receivable and also indicates a low ratio. Instead of, if any company adopts aggressive collection money policy, it will have low receivable and also high ratio. This ratio measures the number of times cash is collected from customers during the period.

Receivables Turnover = Sales /Average Acc.Receivable Year

General Motors

2014

155.929/9.078=17.176

Honda 12.506.091/736.871= 16.971

Table 4: The receivables turnover of both companies 17,2 17,15 17,1 Honda

17,05 17

General Motors

16,95 16,9 16,85

Figure 14: The accounts receivable turnover

Analysis: From this ratio analysis, we observe that the accounts receivable turnover ratio for Honda is smaller than the ratio of general motors. This means that General Motors collects its cash more often than Honda.  The latest statistics demonstrate that the accounts receivable turnover ratio for the automobile industry is 12.59.according to our findings. Both companies are doing well in collecting their cash.

2. Average collection period: The average collection period is referred to the average number of day it needs the company to collect cash from customers. It gives a clear idea about the collection policy. It measures the average number of days customers take to pay their bills.

Average collection period = 360 days / Accounts receivable turnover Year 2014

General Motors

Honda

360/17.176=20.96days 360/16.971=21.21days

Table 5: the average collection period of the 2 companies

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21,25 21,2 21,15 21,1 Honda

21,05 21

General Motors

20,95 20,9 20,85 20,8

Figure15: the average collection period

Analysis: As a result, we observe that the average collection period of Honda is bigger ,which means that it takes more time for the company to collect cash from its customers (every 21.21 days).On the other hand, General Motors collects cash from its customers more frequently with a ratio of 20.96 days.  The industry’s collection period is approximately 53 days. Unfortunately, neither of our companies was able to achieve this ratio.

3. Inventory turnover ratio: The inventory turnover ratio measures the number of times on average the inventory was sold during the period (Kieso, Weygandt, Warfield, 2001). In other words, it measures the number of times inventories are sold and restocked each year.

Inv. Turnover ratio = cost of goods sold /Average Inventories Year

General Motors

Honda

2014

154.399/13.840=11.155

11.682.227/1.349.278= 8.658

Table 6: The inventory turnover ratio of the 2 companies 12 10 8 6

Honda

4

General motors

2 0 Inventory turnover ratio

Figure 16: The inventory turnover ratio of the 2 companies

Analysis: This ratio indicates that General Motors has a bigger inventory turnover ratio, which is in fact a good indication; it shows that General motors renew its total inventory about 11.155 times a year. On the other hand Honda renews its entire inventory only 8.658 times a year.  The automobile industry average inventory turnover ratio is 10.69.according to our analysis, General motors’ inventory turnover ratio was 11.155 but Honda’s ratio was only 8.658

4. Accounts Payable turnover: 22

The accounts payable turnover ratio is computed dividing purchases over average accounts payable. The accounts payable turnover indicates the speed at which a manufacturing or retailing firm pays for purchases of raw materials or inventories on account.

Accounts Payable turnover = Purchases / Average Accounts Payable Year

General Motors

Honda

2014

154.002/22.529=6.835

11.802.253/1.079.318= 10.934

Table 7: The accounts payable turnover of the 2 companies 12 10 8

Honda

6 General Motors

4 2 0

Figure 17: the accounts payable turnover ratios

Analysis: According to this Ratio, Honda can pay its purchases on account 10.934 times a year, but as we can see on the other hand, General motors reimburse its Payables less frequently than Honda (6.835 times a year). 5. Accounts Payable turnover in days: Accounts Payable turnover in days represents the number of days it took the company to pay its liabilities to their creditors.

Accounts Payable turnover in days = 360 days / Accounts Payable turnover Year

General Motors

Honda

2014

360/6.835=52.670

360/10.934=32.924

Table 8: The accounts payable turnover in days 60 50 40

Honda

30 general motors

20 10 0

Figure 18: The accounts payable turnover in days

Analysis: The ratio indicates that Honda is capable of reimbursing its payables more rapidly than General Motors. In fact it takes General Motors 52.670 days to reimburse its payable. But on the other hand, Honda needs only 32.924 days to repay its accounts payable.  The average payables turnover in days was estimated to 49.220 .Honda managed to surpass the average but General Motors isn’t.

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6. Fixed asset turnover ratio: It measures how effectively the firm uses its plant and equipment to generate sales. It determines the effectiveness in generating net sales revenue from investments in net property, plant, and equipment.

Fix. A turnover = Sales / Average fixed assets Year

General Motors

Honda 12.506.091/3.491.325= 3.58

155.929/39.786=3.919

2014

Table 9: the fixed asset turnover ratio

Analysis: According to this table, Honda and General Motors have approximately the same fixed asset turnover .we can notice that both Companies use efficiently their fixed assets. Honda gains 3.58 yens on every yen invested in fixed assets and General Motors gains 3.91 dollars for every dollar invested in fixed assets.  Compared to the average industry 4.56 (Ford)1, both companies have deteriorated ratios

7. Total asset turnover ratio: The total asset turnover ratio measures the ability of a company to use its assets to generate sales.(Kieso, Weygandt, Warfield ,2001).It considers all assets including property ,plant and equipment, capital working in process, investment –long term, inventories, trade debtors, advances, deposit and prepayment, investment in market securities, short term loan, cash and cash equivalents etc. In these criteria a high ratio means the company is achieving more profit.

Total asset turnover = Sales / Average Total asset Year

General Motors

Honda

2014

155.929/177.677=0.877

12.506.091/14.157.473= 0.883

Table 10: The total asset turnover

Analysis: Unfortunately, according to this ratio, both companies have negative results in the efficiency of their total assets use. In fact, for every dollar invested in total assets, General motors get only $0.87.On the other hand, Honda gets 0.833 yen for every yen invested in total assets.  As we can see in the text book (Wahlen, Baginsky, Bradshaw) the automobile industry total asset turnover is 1.235, unfortunately, both companies failed to meet this average.

III. Profitability Ratios: Profitability ratios designate a company's overall efficiency and performance. It measures the company how to use of its assets and control of its expenses to generate an acceptable rate of return. It also used to examine how well the company is operating or how well current performance compares to past records of both cement companies . There are five important profitability ratios that we are going to analyze:

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https://www.stock-analysis-on.net/NYSE/Company/General-Motors-Co/Ratios/Long-term-Investment-Activity

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1. Net Profit Margin 2. Gross Profit Margin 3. Return on Asset 4. Return on Equity 5. Operating profit margin

1. Net Profit Margin: The net profit margin is determined by dividing net profit after tax over net sales. The measurement reveals the amount of profit that a business can extract from its total sales. The higher net profit margin the better is for any automotive company.

Net Profit margin = (Net profit after tax/sales)*100 Year 2014

General Motors (4.018/155.929)*100=2.57%

Honda (665.911/12.506.091)*100= 5.32%

Table 11: the net profit margin ratio

Analysis: Honda has A bigger profit margin Than General motors (5.32%>2.57%).So as a conclusion, we can say that Honda is a more profitable company Than General Motors. 2  Compared to the industry average 2.49 , both companies are more profitable. 2. Gross Profit Margin ratio: A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

Gross profit margin ratio= (Gross profit/sales)*100 Year 2014

General Motors Honda (4.246/155.929)*100= (823.864/12.506.091)*100= 10.57% 14.58% Table 12: Gross profit margin ratio

Analysis:

Both Companies seem to have positive gross profit margins that indicate the profitability of the two companies in terms of gross profit. However, as we saw earlier in the profit margin ratio, Honda is still more profitable than General motors.  The industry shows a gross profit margin of 20.2%, which is by far higher than Honda and General Motors profit margins.

2

https://www.stock-analysis-on.net/NYSE/Company/General-Motors-Co/Ratios/Profitability

25

3. Return on asset ratio: The ROA measures a firm's success in using assets to generate earnings independent of the financing of those assets. ROA takes as given the particular set of environmental factors and strategic choices that a firm makes (such as products, operating decisions and financing policies) and focuses on how well a firm has used its assets to generate earnings in a particular period.

Return on Assets = (Net income+ (1-T)*Interest expenses+ Minority interests)/ Average total asset Honda’s tax rate=32% General Motors’ tax rate=5.3%

Year

General Motors

Honda

2014

0.023

0.059

Table 13: Return on asset ratios

Analysis: This ratio demonstrates that Honda is better at using its assets to generate earnings than General Motors.  The average ROA is estimated to 0.042 .General motors couldn’t realize this average contrarily to Honda.

4. Return on common equity: This ratio measures the rate of return on common stockholder’s investment. It reveals how much profit a company generates with the money shareholders have invested.

Return on common stock equity = (Net income-preferred stock dividends) / Average common stockholders’ equity

Year

General Motors

Honda

2014

10.37

11.22

Table 14: The return on common equity ratios

26

Titre du graphique 11,4 11,2 11 10,8 10,6 10,4 10,2 10 9,8 Honda

General Motors

Figure 19: The return on equity ratios

Analysis: As we can see that for the year 2014 General motors generates more ROE for its shareholders that means it has more efficient management is in utilizing its equity base and it gives better return to its investors and is doing better performances in employing its equity 5. Operating profit margin ratio: It measure the operating profits generated from sales operations.

Operating Profit Margin = Operating profits / Sales Year 2014

General Motors 1.530/155.929 =0.98

Honda 823.864/12.506.091=6.58

Table 15: The operating profit margin ratios for the 2 companies

Operating Profit Margin 8 6 4 2 0 Genral Motors

Honda

Figure 20: The operating profit margin ratio

Analysis: As we can see that Honda’s Operating margin ratio is higher which is preferred since it shows us that Honda is earning more per Dollar of sales comparing to General Motors which has a very low operating profit margin which shows that its fixed costs are too high for the production or sales volume.

27

 Compared to the industry average 2.53%3, GM is badly performing, Honda is more profitable.

IV. Debt management ratios: They measure the extent to which a firm is using debt financing, or financial leverage, and the degree of safety afforded to creditors. Analysts use two procedures to examine the firm’s debt: *They check the balance sheet to determine the extent to which borrowed funds have been used to finance assets, and *they review the income statement to see the extent to which fixed charges are covered by operating profits The Debt-coverage ratio we can satisfy on the three ratios, those are: 1. Debt ratio. 2. Time interest earned. 3. Book value per share. 1. Debt ratio: It measures the percentage of funds provided by creditors or how the firm is financed. (Total debt includes both current liabilities and long-term debt.)

Debt ratio = Total debt / Total assets Year

General Motors 75.952/177.677=0.42

2014

Honda 8.429.168/14.157.473= 0.59

Table 16: The debt ratios 0,6 0,5 0,4 Honda

0,3

General Motors

0,2 0,1 0

Figure 21: the debt ratios

Analysis: The ratio shows that General motors Finances 42% of its total assets with borrowings from its creditors. On the other hand, Honda finances 59% of its total assets with debt. Therefore, General Motors is by far better at financing its total assets.

3

https://www.stock-analysis-on.net/NYSE/Company/General-Motors-Co/Ratios/Profitability

28

2. Time interest earned ratio: The time interest earned ratio indicates the company’s ability to meet interest payment as they come due (Kieso, Weygandt, Warfield, 2001). It is measured by dividing their earnings before interest tax by the interest charged.

TIE = EBIT / Interest charges Year 2014

General Motors 4.246/403=10.53

Honda 933.903/12.803=72.94

Table 17: Time interest earned ratios 80 60 Honda

40

General Motors

20 0

Figure 22: Time interest earned ratios

Analysis: The higher this ratio is the better, the company can pay its interests from its earnings before income taxes.as we can see, and Honda has a far better ratio than General motors which means that Honda is better at covering its interest charges.  Compared to the average industry 2.8984, both companies are able to cover interests much more than the industry

4

FSA book _Wahlen, Baginski, Bradshaw page 1202

29

Common-size and percentage change analysis The common-size and percentage change are simple ways of creating greater comparability across firms and for the same firm through time. We use both analyses for General Motors in the analysis of profitability through the analysis of income statements of both companies and in the analysis of financial positions through the balance sheets. This section is divided into two parts:

I.

The common-size and percentage change analysis for General Motors:

Figure 23: The common-Size Percentage Change Income Statements for General Motors

Analysis: The 2014 common-size income statement scaled by revenues suggests that General Motors shows to some extent favorable gross profit of 1 % of net sales, relative to 7.8% for General Motors as Selling, general and administrative expenses. The operating profit has decreased in 2014 compared to 2013. The net income of the company has decreased during the three years; this is due to the increase of cost of goods sold and the selling, general and administrative expenses. Sales have recorded increase over the three years by 2.1% during the 2012-2013 and 0.3% during 2013-2014. The future prospect dictates that the company’s sales may increase with a potential increase of costs and general, selling and administrative expenses.

30

Figure 24: The common-Size Percentage Change of balance sheet for General Motors

31

II.

The common-size and percentage change analysis for Honda Motor:

Figure25: The common-Size Percentage Change Income Statements for Honda Motor

Analysis: The 2014 common-size income statement scaled by revenues suggests that Honda Motor shows to some extent favorable gross profit of 6.6% of net sales, relative to 11.9% for Honda Motors as selling, general and administrative expenses. The operating profit has decreased in 2015 compared to 2014. The net income of the company has decreased during the two years; this is due to the increase of cost of goods sold and the selling, general and administrative expenses. Sales have recorded increase over the two years by 6.6 years during the 2014-2015. The future prospect dictates that the company’s sales may increase with a potential increase of costs and general, selling and administrative expenses.

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Figure 26: The common-Size Percentage Change Balance Sheets for Honda Motor

33

Financial Statements Projections Financial Statement Projections is developing realistic expectations for the outcomes of future business activities based on a set of financial statement forecasts. Financial statement forecasts represent an integrated portrayal of a firm’s future operating, investing, and financing activities. These activities determine the firm’s future profitability, growth, financial position, cash flows, and risk. Financial statement forecasts are very important tools in a decision-making context. In our forecasting, we focused mainly on the growth of sales revenues for both companies and our assumptions are based on the sales rates as the principal business activity of companies is generating revenues from sales. Revenues level is a good indicator of a firm’s profitability and growth and when projecting the financial statements, generally all other entities follow up the sales rate of growth.

General Motors:  Income Statement: For General Motors, the percentage change in sales was 2.1% in 2013 and 0.3% in 2014. The management is expecting things to improve in 2015; they are relying on their customers’ loyalty and their future projects in the U.S and abroad especially in China. GM is anticipating an approximately 3% increase in global industry vehicle sales and a reduction in overall restructuring costs. Besides, according to Porter’s Five Forces model, the suppliers’ power is relatively low and thus the costs are not supposed to increase. Assumptions: Sales growth rate 2% COGS 88% of Sales SG&A 8% of Sales Other expenses 3% of Sales Interest expense Fixed at 400M $ Income taxes 30% tax rate The Sales percent change has decreased in 2014 compared to 2013, but we can refer to GM management and make an assumption of 2% growth rate for Sales. For the Operating Expenses, based on prior years, we can deduce them as a percentage of Sales Revenue. We assume a tax rate of 30% and Interest expense fixed at 400 M $.

34

Figure 27: The forecasted Income Statement for General Motors

 Balance Sheet:

The percent change recorded in 2014 for both Total Assets and Total Liabilities and Equity is 6.8% but seeing that Sales growth rate is relatively low (2% expected), we are going to make an assumption of 5% growth rate for Assets, Liabilities and Equity in the next five years.

Figure 28: The forecasted Balance Sheet for General Motors

35

Figure 29: The forecasted Balance Sheet for General Motors (Continued)

Honda:  Income Statement:

The Sales revenue percent change for Honda in 2015 is 6.6%. The management aims to achieve a significant growth in the future by applying a strategy of innovation and improving the quality of their products Assumptions: Sales growth rate 6.5% COGS 75% of Sales SG&A 13% of Sales Other expenses 5% of Sales Share of profit of investments Fixed at 100,000 M ¥ Total finance income and finance costs

Fixed at 40,000 M ¥

Income taxes

30% tax rate

36

Sales have grown at a relatively high rate in the prior period (6.6%) and nothing indicates economic or industry factors will change significantly, so we can project that the historical sales growth rate will persist in the future. For the Operating Expenses, as we did for GM, we can refer to the previous years to deduce them as a percentage of Sales Revenue. We assume a tax rate of 30%, share of profit of investments fixed at 100,000 M ¥ and total finance income and finance costs fixed at 40,000 M ¥.

Figure 30: The forecasted Income Statement for Honda

 Balance Sheet:

The percentage Changes recorded in 2014 and 2015 for Total Assets and Total Liabilities and Equity are approximately between 13% and 16%. With a forecasted Sales growth rate of 6.5%, we can make an assumption of 10% for Assets, Liabilities and Equity.

Figure 31: The forecasted Balance Sheet for Honda

37

Figure 32: The forecasted Balance Sheet for Honda (Continued)

Conclusion: The forecasted financial statements of the two companies show that Honda registered better growth rates than General Motors in prior periods and is expected to register better results in the next five years with an expected improvements of financial figures related to General Motors.

38

The companies’ valuation: The business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation of the company is based in our case upon the dividend valuation model, the discounted cash flow method and the market-based approaches. I. The dividend discount model : 1. Definition: The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. In other words, it is used to value stocks based on the net present value of the future dividends. The Gordon growth model can be used to value a firm that is in 'steady state' with dividends growing at a rate that can be sustained forever. The Gordon model growth model relates the value of a stock to its expected dividends in the next time period, the cost of equity and the expected growth rate in dividends The formula can be written as follow:

Where  Di = Dividend in year i  r = required rate of return for equity  TVn = the present value of the terminal value discount at n period  g = growth rate  V0 = Present Value of stock  D1 = Expected Dividends one year from now  r= required rate of return for equity investors  g = Growth rate in dividends forever

2- Stock valuation based on DDM: 

Honda versus General Motors

Honda:

Estimating r: Rate of return on LT Treasury Composite Rf =2.78%5

5

Data taken from www.stock-analysis-on.net

39

Expected rate of return on market portfolio (RM)= 14.91%1 Systematic risk (β) of Honda's common stock βHMC =0.801 Required rate of return on Honda’s commons stock :

rHMC = RF + βHMC [E(RM) – RF] = 2.78% + 0.80[14.91% - 2.78%] = 12.52%

Estimating g: Retention –

rate= =

=0.76

Profit margin = =

= 5.32 %

Asset turnover =

=

= 0.77

Financial leverage = =

=2.44

g = Retention rate × Profit margin × Asset turnover × Financial leverage =0.76*5.32%*0.77*2.44 =0.075 =7.5% Stock intrinsic value At 31/12/2014 dividends were 102.98 102.98JPY=0.8612 USD DV or Year Terminal value g Value 2014 D0 7,50% 0,8612 2015 D1 7,50% 0,9258 2016 D2 7,50% 0,9952 2017 D3 7,50% 1,0698 2018 D4 7,50% 1,1500 2019 D5 1,2363 2019 TV5 7,50% 26,4746

Calculations 0,86 0,8612*(1+0,075) 0,9258*(1+0,075) 0,9952*(1+0,075) 1,0698*(1+0,075) 1,1500*(1+0,075) 1,2363/(12,52%-7,5%)

Intrinsic value of stock Market value Difference

Over -valuated

40

Present value at r= 12,52% 0,83 0,79 0,76 0,73 0,70 14,68 18,47 29,52 11,05

 General Motors: Estimating r: Assumptions: Rate of return on LT Treasury Composite Rf =2.78% Expected rate of return on market portfolio E(RM)= 14.91% Systematic risk (β) of General Motors’ common stock β = 1.706 Required rate of return on Honda’s commons stock: rHMC = RF + βHMC [E(RM) – RF] = 2.78% + 1.70[14.91% - 2.78%] = 23.34% Estimating g: Retention rate = (Net income attributable to stockholders – Cash dividends paid on common stock – Cash dividends paid on Series A Preferred Stock and charge related to redemption of Series A Preferred Stock) ÷ (Net income attributable to stockholders – Cash dividends paid on Series A Preferred Stock and charge related to redemption of Series A Preferred Stock) = (3,949 – 1,928 – 1,160) ÷ (3,949 – 1,160) = 0.31 Profit margin = 100 × (Net income attributable to stockholders – Cash dividends paid on Series A Preferred Stock and charge related to redemption of Series A Preferred Stock) ÷ Automotive sales and revenue = 100 × (3,949 – 1,160) ÷ 151,092 = 1.85% Asset turnover = Automotive sales and revenue ÷ Total assets = 151,092 ÷ 177,677 = 0.85 Financial leverage = Total assets ÷ Stockholders' equity = 177,677 ÷ 35,457 = 5.01

g = Retention rate × Profit margin × Asset turnover × Financial leverage = 1.00 × 3.38% × 0.95 × 4.13 = 13.34%

Stock intrinsic value:

6

Data taken from www.stock-analysis-on.net

41

Di or Terminal value D0 D1 D2 D3 D4 D5 TV5

Year 2014 2015 2016 2017 2018 2019 2019

g 13,34% 13,34% 13,34% 13,34% 13,34% 13,34% 13,34%

Value 1,20 1,36 1,54 1,75 1,98 2,24 22,40

calculations 1,2 1,2*(1+0,1334) 1,36*(1+0,1334) 1,54*(1+0,1334) 1,75*(1+0,1334) 1,98*(1+0,1334) 2,24/ (23,34%-13,34%)

Intrinsic value of stock Market value Difference

over valuated

Present value at r= 23,34% 1,10 1,01 0,93 0,86 0,79 7,85 12,54 33,5 20,96

 The final test of a model lies in how well it works at identifying undervalued and overvalued stocks. According to the dividend discount model, the two companies have over-valuated stocks, the general tendency of investors will probably to sell the stock or buy the stock that’s less over-valuated. II. Discounted Cash flows: 1. Definition

Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one. The formula for calculating DCF is usually given something like this:

Where:    

CFi = free cash flow in year i r = Weighted average cost of capital TCF = the terminal year cash flow g = growth rate

2- Company valuation based on DCM: 42

Honda versus General Motors



Honda:

Weighted Average Cost of Capital (WACC)

=

Weight of equity =

=0.4046

=

Weight of debt =

= 0.5953

Equity (fair value) = No. shares of common stock outstanding × Current share price = 1,802,294 ×4248.50y = 7 657 046.059 y Debt fair value = current liabilities + non-current liabilities = 2,622,436+3,224,512=5,846,948 My Weighted average interest rates according to note 15 = 1.14% Average effective tax rate 28.7% Required rate of return on equity=23.34 %( calculated above)

WAAC=We* Re + Wd *Rd*(1-Tc) =0.4046*23.34%+0.5953* (1.14 %*( 1-28.7%)) =9.92716%

FCFF Growth Rate (g) EITR =

=29.65 %

Interest expense, after tax = Interest expense × (1 – EITR) = 12803 × (1 –29.65 %) = 9006.9105 EBIT (1 – EITR) = Net income attributable to Honda Motor Co., Ltd. + Interest expense, after tax = 823,864+9006.9105= 832870,9 RR = ROIC =





– –



= 6.16%

g = RR × ROIC = 6.16× 79.06% =4.87 %

Free cash flow 2014= 449,108

43

= 0.7906

Year 2014 2015 2016 2017 2018 2019

FCFi or Terminal value FCF0 FCF1 FCF2 FCF3 FCF4 FCF5

g 4,87% 4,87% 4,87% 4,87% 4,87% 4,87%

2019

TV5

4,87%

Value 499 108,0 523 414,6 548 904,9 575 636,6 603 669,5 633 068,2 12 536 004,0

calculations 3100 499108*(1+0,0487) 523414,6*(1+0,0487) 548904,9*(1+0,0487) 575636*(1+0,0487) 603669,5*(1+0,0487)

Present value at r= 9,92% 476 177,73 454 300,97 433 429,25 413 516,02 394 518,07

633068,2/(9,92%-4,87%)

DCF fair value capital Difference

-

Over valuated

 General Motors: Weighted Average Cost of Capital (WACC)

Equity (fair value) = No. shares of common stock outstanding × Current share price = 1,556,176,910*33.31$= 51,836,252,872.10$=51,836M$ Debt fair value = 37,707M$ (Note 14)

Weight of equity =

= 0.5785

Weight of debt =

= 0.4208

Weighted average required return on debt = 5.35% Estimated (average) effective tax rate =

=32.69%

Required rate of return on equity=23.34%( calculated above) WAAC=We* Re + Wd *Rd*(1-Tc) =(0.5785*23.34%)+(0.4208*5.32%*(1-32.69%)) =15.01% FCFF Growth Rate (g) EITR =

=5.37%

Interest expense, after tax = Interest expense × (1 – EITR) = 403*(1-5.37%)=381 EBIT(1 – EITR) = Net income attributable to stockholders. + Interest expense, after tax = 3,949 +381 = 4,330

44

7 812 239,02 9 984 181,05 13 503 994,00 3 519 812,95



RR =



= 0.4667

– –

ROIC =

= 4.83%

g = RR × ROIC = 0.4667*4.83% =2.25% Free cash flow =Cash Flows from Operations-capital expenditure =10.1-7=3.100M$

Year 2014 2015 2016 2017 2018 2019 2019

FCFi or Terminal value FCF0 FCF1 FCF2 FCF3 FCF4 FCF5 TV5

g 2,25% 2,25% 2,25% 2,25% 2,25% 2,25% 2,25%

Value 3 100,0 3 177,5 3 256,9 3 338,3 3 422,3 3 507,9 35 079,0

calculations 3100 3100*(1+0,025) 3177,5*(1+0,025) 3256,9*(1+0,025) 3338,8*(1+0,025) 3422,3*(1+0,025) 3507,9/(15,01%-2,25%)

Present value at r= 15,01% 2 762,80 2 462,28 2 194,43 1 956,01 1 743,27 17 432,88

DCF

28551,68

fair value capital Difference

89543,00 -60991,32

over valuated

 In this section of valuation, the primary focus of managers is to maximize the firm’s intrinsic value. However, to maximize the value, managers need a tool for estimating the effects of the different strategies and alternatives in place. We developed and illustrated such a tool (the corporate valuation model), which consists of calculating the present value of all expected future cash flows discounted at the weighted average cost of capital. Both companies have created value for stockholders and potential investors as the fair value of the company exceeds its present value based upon the expected future free cash flows to be generated. However, the spread of this difference is highly large for General Motors which indicates that the company creates value for customer by $60991.32 M with the probability of experiencing growth and meeting the capital requirements. According to this type of valuation, investor may prefer investing in General Motors as it creates a high potential market value added which both reflects the efficiency and the effectiveness of managerial decisions.

45

III.

Market-based approach Valuation:

The market-based approach valuation is the way to analyze and use information in the market value. To achieve this type of valuation, we have looked basically at the different market ratios. It is a set of ratios that relate the firm’s stock price to its earnings, Cash Flow, and book value per share, and thus give management an indication of what investors think of the company’s past performance and future prospects. In order to the stockholder to be able to analyze the likely future market value of the stock market, there are two ratios under this set. They are as follows: 1. Book value per share 2. Earnings per Share (EPS) ratio 3. Market/Book ratio 1. Book value per share ratio: Book value per share is the amount each share would worth. (Kieso,Weygandt, Warfield, 2001). Book value per share =

Year 2014

General Motors

Honda

7086000000/1802294=3931.655 36024/1605= 22.44 $ yen =32.83 US $ Table18: Book value per share of the two companies

Analysis: In this calculation analysis we see that the book value of each share is different. If any company increases the book value per share it indicates that it is in a healthy position. The book value per share has been for General Motors 22.44$ in 2014. In addition to that, Honda has recorded also an important book value per share compared to General Motors which was worth approximately 32.83 US$ . The difference of the book value per share has been very important between both companies. So we can mention that Honda Company is in a better position in stock market. 2. Earnings per Share (EPS) ratio :

It is gauged by dividing net income over total number of share outstanding .It is most important and useful tool to make decision including the deterrence from share prices, investments and so on … Earnings per share ratio=

Year 2014

General Motors

Honda

624703/1802294383=346.62 2804/1605=1.74$ yen=2.89$ Table19: Earnings per share of the two companies

46

Analysis: In this part of analysis, we observe that Honda Corporation was operating better than General Motors as its earnings per share is the higher. In other words, investors were benefiting of an additional 1.15$ on every share invested in this company compared to General Motors. Overall, the situation of Honda is in better situation than General Motors because potential investors may have a good impression on investing in it as it engages more earnings per share. 3. Market/Book ratio:

The Market/Book Ratio refers to the company market value per share over its book value per share. It indicates the management success in creating value for its stockholders. It is an indicator of how investors regard the company. It measures How much investors are willing to pay for 1$ of book value equity. Market/Book ratio= Year

General Motors

Honda

33.5/22.44=1.49 29.52/32.83=0.89 2014 Table20: Market/Book ratios of the two companies

Analysis: In this case, we observe that the market/book value ratio of General Motors is higher than the market/book value ratio of Honda in 2014. This means that investors are willing to pay for 22.44 $ share of General an additional amount of 1.49$. However, the same ratio has been accounted for 0.89 for Honda Corporation which means and investors are willing to pay for 32.83$ share an additional amount of 0.89$.  General Motors created more value for its stockholders.

Conclusion: Investors are recommended to invest in General Motors as the company creates more value of its stockholders. Although the company has a lower earnings per share compared to Honda, this could not deny the potential improvements that the company would make to improve this financial metric in the future by generally focusing on amplifying its sales and reducing its capital requirements.

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Conclusion: In this part, we will directly be connected to the purpose of this stock pitch. The analysis will be summarized in order to answer clearly to the research question which trips over the better decision to invest. This research is built upon different questions. First, we referred to the automobile industry in the world as a whole then we focused on the two most dominant countries in this industry which are Japan and USA. For this research, we targeted “General Motors” which is an American car manufacturer based in USA and “Honda Motor” which is located in Japan. We conducted our financial analyses based on diversified ratios and indicators that allowed us to compare between the two companies. We start by measuring the liquidity ratios and they indicate that "General Motors" is in better liquidity than “Honda Motor”. Both companies recorded a sufficient liquidity position but "General Motors" is more capable to cover up its current debt by referring to its current assets more than Honda Motors. Second, we analyze all ratios related to the efficient use and management of assets such as: account receivable turnover, average collection period, inventory turnover, accounts payable turnover, fixed assets turnover, total asset turnover .Generally "General Motors" company has recorded in summary better turnover ratios than “Honda Motor” and we ensure that it is the best in standard positions related to asset management measures. Third, we focus our analysis on profitability ratios and we find that "Honda Motor" company is more profitable than “General Motors” company in net profit margin, gross profit margin, return on assets (ROA), return on equity (ROE) and operating profit margin. Finally and after conducting a the valuations of the two companies based on the three model; the dividend discount model, the discounted cash flows model and the market-based approach, we come out to the conclusion that if investors are willing to invest, they have to direct their visions to "General Motors" considering the figures of the given year 2014 that reveals the different stakes to be taken by potential investors with the assumptions that will be undertaken by the corporation for the next years.

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Summary:

Liquidity ratios

General Motors Current ratio

Better

Quick ratio Cash ratio

Better Better

Honda Motor

Debt coverage ratio

Profitability ratios

Asset turnover ratios

Accounts receivable turnover Better Average collection period

Better

Inventory turnover ratio

Better

Accounts payable turnover Accounts payable turnover in days Fixed assets turnover Total asset turnover

Better Better Better Better

Net profit margin

Better

Gross profit margin

Better

Return on total assets

Better

Return on equity Operating profit margin

Better Better

Debt ratio

Better

TIE ratio

Better

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References - Weygandt, J. J, Kieso, D. E., & D, Warfield Terry (2001). “Intermediate Accounting: Return on assets ratio”. (10thed.). Bearcat Company, Vol-1.p.361. -Weygandt, J. J, Kieso, D. E., & D, Warfield Terry (2001). “Intermediate Accounting: Inventory turnover ratio”. (10thed.). Bearcat Company, Vol-1.p.470. -Weygandt, J. J, Kieso, D. E., & D, Warfield Terry (2001). “Intermediate Accounting: total asset turnover ratio”. (10thed.). Bearcat Company, Vol-1 p.572. -Weygandt, J. J, Kieso, D. E., & D, Warfield Terry (2001). “Intermediate Accounting: Return on asset ratio”. (10thed.). Bearcat Company, Vol-1 p.572. -Weygandt, J. J, Kieso, D. E., & D, Warfield Terry (2001). “Intermediate Accounting: Debt coverage ratio”. (10thed.). Bearcat Company, Vol-1 .p.734. -http://finance.yahoo.com/q/hp?s=GM&a=10&b=18&c=2010&d=11&e=31&f=2014&g=d -http://finance.yahoo.com/q/hp?s=HMC&a=02&b=17&c=1980&d=11&e=31&f=2014&g=d -http://www.statista.com/topics/1487/automotive-industry/ -http://www.statista.com/statistics/226032/light-vehicle-producing-countries/ -http://www.druid.dk/conferences/winter2002/gallery/klepper.pdf -http://www.investopedia.com/terms/g/gross_profit_margin.asp

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