Honda Case

Recommendations for Investors and Lenders

Would you place a personal deposit of one million dollars or more in the publicly traded stock of this company?

Honda is considered to be one of the best auto makers in the world; its customer base continues to grow throughout the years. Honda also has profit margins constantly higher than its closest competitor Toyota Motors.

Honda is making an effort to satisfy the necessities of its customers and the dominant market conditions by updating its models and ramping up supply. Renovating the production system, building new plants for increasing production, such as the one in Brazil; and adopting innovative techniques for upgrading might help Honda to improve capacity and sales during fiscal 2014. Honda expects revenues and net income to increase 22.5% and 58%, respectively, in fiscal 2014.

The company's strengths can be seen in several areas, such as its growth in earnings per share, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. Earnings per share trended upward after a decrease from Q1 to Q2 posting annual earnings of $202.68 per share. Honda's cash flow in the first half of fiscal 2014 improved to ¥671.5 billion from ¥323.3 billion in the first half of fiscal 2013. Honda expects higher revenues, favorable model mix, effective cost reduction measures, favorable currency effect and favorable impact of raw material cost fluctuations to contribute to the increase in profits during the year.

For all of the abovementioned reasons, I would confidently place a million dollars in stocks from Honda. If the company keeps making money the way it has been, we could be looking at a very good investment opportunity.

Would you invest $500,000 in the debt (bonds) of this company?

According to Moody's Corporate ratings the bonds issued by Honda Finance Co., Ltd. were assigned a rate of A1, this rating is supported by an excellent brand and strong position in its core automotive markets, its strong position in the motorcycle business, its cost management capability and its strong balance sheet. The steady position reflects the significant enhancement in Honda's operating performance in the past year and it is expected that this improvement will be sustained.

Based on Moody's analysis, Honda keeps a conservative financial policy and its balance sheet is strong. Adjusted debt/capitalization should stay sound and below 25%, while adjusted RCF/debt is expected to improve from around 46% to around 50% over the coming 2-3 years.

The "Well Kept Agreement" between Honda and AHFC (American Honda Financial Corporation) has improved the credit quality of the notes. Under this agreement, Honda needs to possess a minimum of 80% of AHFC's equity, either directly or indirectly. Meanwhile, AHFC should have a positive tangible net assets balance along with sufficient liquidity. Moody's believes that AHFC plays an important role in Honda's U.S. auto business as it provides auto loans and leases for Honda's cars in the U.S.

In addition, Honda's financial health remained stable during the year earning satisfactory profits and generating a return on investments. Therefore, I'd definitely invest $500,000 in the debt bonds of this company.

Would you grant a one million dollar line of credit for overnight or term federal funds to this company?

Honda's liquidity results indicate that the automaker is well positioned to meet maturing short-term liability obligations and unexpected cash needs. Even though, Honda's current ratio deteriorated from 2012 to 2013, its current ratio is only a little bit higher than the industry average, 1.30 compared to 1.27 respectively. On the other hand, a quick ratio of 1 or greater is generally considered acceptable and Honda's quick ratio is exactly equals to 1.00. We also have to take into consideration that Honda Motors does not have to pay all its short term obligations at once, so the company can manage to pay its short term liabilities. Therefore, if it was in my hands to approve a one million dollar line of credit to Honda, I would gladly grant it.

Appendix A: Extended Liquidity Ratios Calculations

Appendix B: Extended Asset Ratios Calculations

Appendix C: Extended Profitability Ratios Calculations

Appendix D: Extended Debt Ratios Calculations

Appendix E: Extended Market Ratios Calculations

Appendix F: Toyota Financial Ratios

Toyota Motor Company

Liquidity Ratios Annual

Current Ratio 1.07

Quick Ratio 0.93

Net Working Capital Ratio 0.02

Current Liabilities to Inventory Ratio 7.53

Cash Ratio 0.13

Operating Ratio 15.70

Asset Ratio Annual

Inventory Turnover Ratio 12.53

Fixed Assets Turnover Ratio 1.15

Asset to Equity Ratio 1.64

Debt Ratios Annual

Total Debt Ratio 0.64

Interest Coverage Ratio 62.12

Debt/Equity Ratio 1.78

Appendix G: Toyota Financial Ratios Analysis

Liquidity

Honda's liquidity results indicate that the automaker is well positioned to meet maturing short-term liability obligations and unexpected cash needs. Liquidity continued to trend upward between Q2 and Q4 after beginning the fiscal year in a downward trend between Q1 and Q2. This trend is a result of a decrease