ACF619 - Final Project - VU - Financial Analysis - Best Project

Final Project
Financial Statements Analysis
of
Honda Atlas Cars Pakistan Limited
and
Indus Motor Company Limited
A REPORT SUBMITTED TO THE DEPARTMENT OF MANAGEMENT SCIENCES,

VIRTUAL UNIVERSITY OF PAKISTAN IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF BS ACCOUNTING & FINANCE
Submitted By:
BC040200401
Hammad Hassan
Department of Management Sciences,
Virtual University of Pakistan

Financial Statements Analysis of:
Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Letter of Undertaking
I Hammad Hassan Student VU ID BC040200401 hereby confirms that the Project I have
provided is solely my own effort. I did not copy my report partially or completely from any other
student or from any other source either against payment or free and I did not provide any
plagiarized material in any section of my report. I further confirm that the documents (Job
Confirmation Letter, etc.) that I have provided are genuine (i.e. not forge/fake) and have been
issued by the authorized person in the organization. If I am found guilty of misstating,
misleading or concealing the facts about my activities (either academic or non-academic but
relevant to this course) at any stage, the university is authorized to take disciplinary action
against me according to university policies and regulations. I hereby also confirm that I have
carefully read and understood all the guidelines, rules and regulations provided by the course
instructor on VULMS. I assure that I will follow the instructions regarding presentation & viva
voce and will appear on the scheduled date for presentation & viva voce which will be intimated
to me at my VU-email ID by the Course Instructor. In case of any negligence, I shall be held
responsible.
Name: Hammad Hassan
Date: January 31, 2011
Project submitted by:
Hammad Hassan BC040200401 [2] Virtual University of Pakistan


Acknowledgement
In the name of Allah, the most beneficent and merciful who gave me strength and knowledge
to complete this project.
I am thankful to my parents, siblings and friends who helped me during my educational and
professional career.
In the end, I am thankful to my tutors in Virtual University of Pakistan who helped me gaining
right education in the right way. I am also thankful to Virtual University of Pakistan for
providing world class education to me with immense effectiveness and efficiency to help me in
pursuing a good career.


Executive Summary
In order to partial fulfillment of the requirements for the degree of BS Accounting & Finance,
this project Financial Statements Analysis of Honda Atlas Cars Pakistan Limited and Indus
Motor Company Limited is carried out.
The objective of the project is twofold i.e. to conduct a comprehensive financial statements
analysis of these two major automobile companies in Pakistan to evaluate the past, current, and
future conditions and performance of the organizations as well as to fulfill partial requirement to
complete the degree BS Accounting & Finance.
The project is also significant in terms of answering some important question related to
companies performances. Moreover, it is also significant because of the fact that automobile
sector is one of the fastest growing sectors in Pakistan. It contributes towards the nations
economy in the form of Technology Transfer, Employment, Investment and much more.
In the first section, it highlights background, objective and significance of this project. It also
highlights present condition of auto industry in Pakistan and worldwide along with listing key
players playing there part in Pakistan auto industry. In ends with some important information of
these two companies.
In the second section, an attempt has been made to conduct a comprehensive financial statement
analysis of these two companies which consists of accounting ratio analysis (liquidity ratios,
leverage ratios, profitability ratios, activity ratios, market ratio and cash flow ratios) along with
interpretation and analysis of each ratio calculated. It also presents vertical and horizontal
analysis.
In the third section, it highlights some important findings and recommends appropriate
measurements.


Table of Contents
CHAPTER 1) INTRODUCTION........................................................................................................................... 7
1.1 Background............................................................................................................................................ 7
1.2 Objectives.............................................................................................................................................. 8
1.3 Significance............................................................................................................................................ 8
1.4 Industry Analysis.................................................................................................................................... 9

1.4.1 Global Automobile Industry..........................................................................................................................9
1.4.2 Automobile Sector in Pakistan......................................................................................................................9
1.4.3 The Key Players............................................................................................................................................10
1.4.4 Honda Atlas Cars (Pakistan) Limited............................................................................................................11
1.4.5 Indus Motor Company Limited....................................................................................................................11
CHAPTER 2) DATA PROCESSING & ANALYSIS............................................................................12
2.1 Financial Analysis........................................................................................................................................ 12

2.1.1 Liquidity Ratios............................................................................................................................................12
2.1.2 Leverage Ratios............................................................................................................................................19
2.1.3 Profitability Ratios.......................................................................................................................................28
2.1.4 Activity Ratios..............................................................................................................................................37
2.1.5 Market Ratios..............................................................................................................................................47
2.1.6 Cash Flow Ratios..........................................................................................................................................55
2.2 Vertical Analysis.................................................................................................................................... 64

2.2.1 Balance Sheet..............................................................................................................................................64
2.2.2 Profit & Loss Statement...............................................................................................................................66
2.3 Horizontal Analysis............................................................................................................................... 67

2.3.1 Balance Sheet..............................................................................................................................................67
2.3.2 Profit & Loss Statement...............................................................................................................................69
CHAPTER 3) CONCLUSION, RECOMMENDATIONS & LIMITATIONS.....................................70
3.1 Conclusion............................................................................................................................................ 70
3.2 Recommendations................................................................................................................................ 72


3.3 Limitations............................................................................................................................................ 72
APPENDIX/APPENDIXES................................................................................................................. 74
Financial Statements......................................................................................................................................... 74
Honda Atlas Cars (Pakistan) Limited.........................................................................................................................74
Indus Motor Company Limited.................................................................................................................................78
References............................................................................................................................................ 81

Chapter 1) Introduction
In this project an attempt is made to prepare in detail a comprehensive financial analysis of
Honda Atlas Cars (Pakistan) Limited and Indus Motor Company Limited. The project discusses
the situation of automobile industry in Pakistan along with detailed financial analysis and review
of descriptive information for these two companies. In the end, recommendations are also given
to appropriate findings of the both companies.
1.1 Background
Financial Statements Analysis is a technique employed by intrigued parties including investors,

creditors, and management to appraise prior times, present and forecasted ailments and
efficiency of the firm. Ratio analysis is by far the most typical type of financial analysis. It
furnishes comparable measures of the firm's conditions and gratification. Horizontal analysis and
vertical analysis are, in addition well-liked methods. Horizontal analysis is commonly
employed to assess the popularity within the accounts through the years, while vertical analysis,
also known as a common-size analysis discloses the internal framework of the firm. It suggests
the present connection between sales and every income statement account. It exhibits the mix of
assets that produce income and the mix of the reasons for capital, whether by current or long-
term debt or by equity funding.
Automobile sector is one of the fastest growing sectors in Pakistan. It contributes towards the
nations economy in the form of Technology Transfer, Employment, Investment and much more.
Automobile sector contributed over Rs.23 billion to the national exchequer in the year 2003-04.
In past, students of different universities and colleges conducted such comparison for different
industries (mainly banking, textile and telecommunication industries) to see inside the
organizations. In this project, author is trying to compare following two automobile sector
organizations for the years 2008 to 2010 to peep into the results which are:


Honda Atlas Cars Pakistan Limited; and,
Indus Motor Company Limited.
1.2 Objectives
The objective of the project is to conduct a comprehensive financial statements analysis of two
major automobile companies in Pakistan to evaluate the past, current, and future conditions and
performance of the organizations as well to fulfil partial requirement to complete the degree BS
Accounting & Finance.
1.3 Significance
Financial analysis techniques such as ratio analysis and vertical and horizontal analysis can
provide significant insight into a companys operations, risk characteristics, and valuation
beyond what is readily apparent by examining raw. This project is helpful in answering the
following four key questions:
What aspects of performance are critical for these companies to successfully compete in
the industry?
How well did the companiesperformance meet these critical aspects?
What are the key causes of this performance, and how would this performance affect the
companies in the future?
What is the likely impact of trends in the company, industry, and economy on the future
cash flows?
1.4 Industry Analysis
1.4.1 Global Automobile Industry

The automotive industry is considered as an economic heavyweight due to which it has acquired
the status of a key sector of the economy for every major country in the world. The annual global


turn over of auto industry during the year 2005 remained $2.8 trillion while the size of trade has
grown to a massive level of $ 1,016 billion, which represents 9% of the world merchandise trade.
In 2006, over 69 million motor vehicles including cars, vans, trucks, buses and coaches were
produced worldwide. In 2006 Japan (11.484 million units), US (11.264 million units), China
(7.189 million units), Germany (5.820 million units) and South Korea (3.840 million units) were
the top five motor vehicle producing countries in the world.
Auto industry employed directly over 5% of the worlds total manufacturing labor force and
contributed over $ 634 billion in tax revenues of twenty countries only. The auto industry is one
of the largest investor in Research and Development, which help to increase the technology level
in other industries as well.
At present, the condition of automobile industry is not satisfactory worldwide and it is one of the
part of global financial downturn. It was weakened by 2003-2008 energy crisis and increase in
the cost of fuel.i Double-digit digit percentage declines in sales were seen in big automobile
organizations around the globe, including Toyota and Honda.
1.4.2 Automobile Sector in Pakistan

The economy of Pakistan is the 27th largest economy in the world in terms of purchasing power,
and the 45th largest in absolute dollar terms. Pakistan has a semi-industrialized economy, which
mainly encompasses textiles, chemicals, food processing, agriculture and other industries.
Growth poles of Pakistan's economy are situated along the Indus River, diversified economies of
Karachi and Punjab's urban centres; coexist with lesser developed areas in other parts of the
country. The economy has suffered in the past from decades of internal political disputes, a fast
growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with
neighbouring India.
Automobile sector is one of the fastest growing sectors in Pakistan. It contributes towards the
nations economy in the form of Technology Transfer, Employment, Investment and much more.
Automobile sector contributed over Rs.23 billion to the national exchequer in the year 2003-04.


As the industry's growing, so are the Automobile companies. Every manufacturer is in the
process of increasing production capacity to meet customer demands. Through out the 90's the
annual automobile production remained constant around 45,000 but due to consistent policies
and positive macro economic conditions the industry boomed to over 120,000 units/annum in
just 4 years.
1.4.3 The Key Players

The key players in Pakistans automobile industry are:
Key Player Plant Capacity
Pak Suzuki Motor Company Limited 68,000
Indus Motor Company Limited 50,000
Honda Atlas Cars (Pakistan) Limited 30,000
Dewan Farooque Motors Limited 15,000
Ghandhara Nissan Limited 6,000
In this project, author is trying to compare following two automobile sector organizations for the
years 2008 to 2010 to peep into the results which are:
Honda Atlas Cars (Pakistan) Limited; and,
Indus Motor Company Limited.
1.4.4 Honda Atlas Cars (Pakistan) Limited

Honda Atlas Cars (Pakistan) Limited; incorporated in November 1992, is a joint venture (in 1993)
between Honda Motor Company Limited Japan, and the Atlas Group of Companies, Pakistan. The
company is listed on Karachi, Lahore and Islamabad Stock Exchanges .
1.4.5 Indus Motor Company Limited


Indus Motor Company Limited; incorporated in May 1993, is also a joint venture among House
of Habib, Toyota Motor Corporation Japan (TMC), and Toyota Tsusho Corporation Japan (TTC)
for assembling, progressive manufacturing and marketing of Toyota vehicles in Pakistan since
July 01, 1990. IMC is engaged in sole distributorship of Toyota and Daihatsu Motor Company
Ltd vehicles in Pakistan through its dealership network.

Chapter 2) Data Processing & Analysis

The nature of this study is quantitative and descriptive. The mathematical tools like graphs,
charts, and diagram are also used for the deep and comprehensive analysis of the data. MS Excel
2003 will be used primarily for processing of data.
2.1 Financial Analysis

Financial analysis consists of:
Liquidity Ratios;
Leverage Ratios;
Profitability Ratios;
Activity Ratios;
Market Ratios; and,
Cash Flow Ratios.
In addition, horizontal and vertical analysis (index and common-size analysis respectively) is
also carried out.
2.1.1 Liquidity Ratios

Liquidity ratios depict organizations ability to meet their short-term obligations. For these two
companies, the author has calculated following liquidity ratios:
Current Ratio
Acid-test (Quick) Ratio
Cash Ratio
Working capital
Net working capital ratio
Sales to working capital


2.1.1.1 Current Ratio
Definition: Shows an organizations ability to cover its current liabilities with its current
assets.
Formula: Current Assets / Current Liabilities
Analysis:
Indus Motor Company Limited had very high current ratio in 2008 but gradually decreased in
subsequent years. It shows its ability to payoff its current liabilities efficiently. The decrease in
current ratio for Indus Motor Company Limited is because of the fact that its trade, other
payables and provisions along with taxation has increased.
Honda Atlas Cars (Pakistan) Limited has a constant decrease in its stock-in-trade hence resulting
in constant decrease in current ratio. Moreover, it has also a constant increase in Advances from
customers and dealers. Low current ratio suggests that it is having tough time in payoff its short-
term obligations. Although, major portion in trade payables are from its parent company, hence it
can get some relaxation in making payments, but from investors point of view, it is causing
burden on its parent company.
2.1.1.2 Acid-test (Quick) Ratio

Definition: Shows an organizations ability to cover its current liabilities with most liquid
current assets i.e. without selling its inventory.


Formula: (Current Assets Stocks-in-Trade Stores and spares) / Current Liabilities
Analysis:
Relative increase in Advances from customers and dealers, decrease in Trade debts, and increase
in Cash & bank balances of IMC is resulting in decrease in Acid-test (Quick) Ratio but still
capable enough to meet short-term obligations without selling its stocks-in-trade.
On the other hand, Honda Atlas Cars (Pakistan) Limited has extremely low quick ratio. Though it
is also a fact that most of its current assets consist of stock-in-trade - other assets like receivables
and cash are very low (it has trade debts equal to zero) still Acid-test (Quick) Ratio like 0.19 in
2010 in myriad low.

2.1.1.3 Cash Ratio

Definition: Shows an organizations ability to payoff its current liabilities with most liquid
current assets i.e. with cash.
Formula: Cash and bank balances / Current Liabilities
Analysis:
Cash & bank balances of both companies increased over the period but a reason for low cash
ratio for Honda Atlas Cars (Pakistan) Limited is that it obtained a short-term financing in year
2008 and its trade and other payables are increasing almost double every year.
Since 2007, Indus Motor Company Limited has an increase of 184.43% in its cash and bank
balances while its short-term obligations (including advances from customers) have increased to
191.94%. Honda Atlas Cars (Pakistan) Limited has increase in its cash and bank balances in the
same period for only 37.32% while its current obligations increased to 144.70% in the same
period.

2.1.1.4 Working capital

Definition: Shows an organizations financial health.
Formula: Current Assets - Current Liabilities
Analysis:
Indus Motor Company Limited has an increasing positive working capital in contrast to Honda
Atlas Cars (Pakistan) Limited which means Honda Cars (Pakistan) is striving hard to meet its
short-term obligations. It heavily relies on low inventory turnover to meet its short-term
obligations as has trade-debts equal to zero.
On the other hand, not only Indus Motor Company Limited has positive working capital, but it is
also efficient in managing its receivables. Trade-debts, loans & advances and other receivables
are below 10% to total assets in year 2010.

2.1.1.5 Net working capital ratio

Definition: Shows an organizations financial health in terms of total assets contribution.
Formula: (Current Assets - Current Liabilities) / Total Assets
Analysis:
As discussed in working capital ratio (page 16) Indus Motor Company Limited is more efficient
in managing its short-term assets than Honda Atlas Cars (Pakistan) Limited. Thats why, it has
positive net working capital ratio and Honda Atlas Cars (Pakistan) Limited has negative net
working capital ratio.
Indus Motor Company (Pakistan) Limited has enough funds to spend on other profit related
activities.

2.1.1.6 Sales to working capital

Definition: Used to measure sales generation in terms with its inventory funded.
Formula: Sales / Working Capital
Analysis:
Sales to working capital ratio is also known as working capital turnover ratio. As working
capital (page 16) is used to measure how much funds are needed to purchase inventory, working
capital turnover is used to measure sales generation over the period from this inventory.
Indus Motor Company Limited has higher working capital turnover ratio in contrast with Honda
Atlas Cars (Pakistan) Limited which means it is generating a lot of sales compared to money it
has funded in its stocks-in-trade.

2.1.2 Leverage Ratios

Leverage ratios are used to measure the tendency of debt in the organization. Following ratios
are calculated for Honda Atlas Cars (Pakistan) Limited and Indus Motors Company Limited in
this project:
Times Interest Earned
Debt Ratio
Debt to Equity (Leverage or Gearing) Ratio
Total Capitalization Ratio
Fixed Asset Ratio
Equity Ratio
Fixed Asset Ratio / Equity Ratio
Long term Assets versus Long term Liabilities
The main factors to look into leverage ratios areii:
Debt
Equity
Assets; and,
Interest expenses.


2.1.2.1 Times Interest Earned
Definition: Used to show to what extent funds are available to meet interest expense.
Formula: Profit from operations / Interest
Analysis:
Times interest earned is also referred to as fixed-charged coverage or interest coverage ratio. The
reason for high times interest earned ratio of Indus Motor Companies Limited is that it doesnt
have obtained any financing. It is only paying interest & mark-up to advances from customers.
Honda Atlas Cars (Pakistan) Limited has obtained a short-term financing in year 2008 with a
long term finance, and incurred operating loss in 2009 and 2010, causing negative times interest
earned ratio.

2.1.2.2 Debt Ratio

Definition: Shows tendency or dependency on debt.
Formula: (Total Assets Shareholders Equity) / Total Assets
Analysis:
High debt ratio means higher dependency on debt. In this case, both companies have debt ratio
less than 1 which is favourable (both companies have more assets than debt). Honda Atlas Cars
(Pakistan) Limited has high debt ratio than Indus Motor Company Limited which means it
depends on debt more than Indus Motor Company Limited.
It is true as it has also obtained some sort of financing in previous three years while Indus Motors
Company Limited has not obtained any financing. Further more, large portion of advances from
customers can affect this ratio; still Honda Atlas Cars (Pakistan) Limited will need some external
financing to meet its cash demands.

2.1.2.3 Debt to Equity Ratio

Definition: Shows tendency or dependency on debt.
Formula: Total Debt (Total Liabilities) / Total Shareholders Equity
Analysis:
Debt to equity ratio is also known as leverage or gearing ratio. A higher debt to equity ratio
means company is depending more on debt for its growth.
In this case, the increase in debt to equity ratio for both companies is due to increase in advances
from customers. Low current, quick and cash ratio and higher debt and debt to equity ratios of
Honda Atlas Cars (Pakistan) Limited shows it is more aggressive in pursuing its growth with
financing.
Upper limit for debt to equity ratio ideally considered is 2:1 - Honda Atlas Cars (Pakistan)
Limited is well above this measurement in year 2010.

2.1.2.4 Total Capitalization Ratio

Definition: Measures influence of long term financing compared to its available capital.
Formula: Long Term Debt / (Long Term Debt + Shareholders Equity)
Analysis:
Total capitalization ratio is also referred to as capital structure ratio. Companies generating
higher portion of their capital via long-term financing are considered more risky.
The total capitalization ratio for Honda Atlas Cars (Pakistan) Limited is increasing year after
year though it is still below 50%.
Total capitalization ratio of Indus Motor Company Limited is zero because it has not obtained
any long-term financing.

2.1.2.5 Fixed Asset Ratio

Definition: Shows Companys ability to generate sales from fixed assets.
Formula: Net Sales / Fixed Assets
Analysis:
Fixed asset ratio is also known as fixed-asset turnover ratio. Higher fixed asset ratio is
favourable because it shows company is generating more sales by using its fixed assets.
Higher fixed asset ratio of Indus Motor Company Limited shows it is more efficient in utilizing
its fixed asset for generating more revenue than Honda Atlas Cars (Pakistan) Limited.
But fixed asset turnover ratio play more important role in those manufacturing industries where
major purchases are made for property, plant and equipment to help increase output iii. Hence, for
both companies, this ratio is not much important.

2.1.2.6 Equity Ratio

Definition: Shows proportion of shareholders equity and total assets.
Formula: Shareholders Equity / Total Assets
Analysis:
Decrease in equity ratio of Honda Atlas Cars (Pakistan) Limited is because it has suffered loss in
years 2009 and 2010.
Indus Motor Company Limited has equity ratio decreased from 69% to 46% between period
2008 to 2009 is because of relative low increase in its reserves then prior periods.

2.1.2.7 Fixed Asset Ratio / Equity Ratio

Definition: Used to measure companys financial stability in terms of fixed assets
Formula: Fixed Asset Ratio / Equity Ratio
Analysis:
Fixed asset / equity ratio measures financial stability of a company. Higher the fixed asset ratio /
equity ratio means higher the financial stability.
In case of Indus Motor Company Limited, it is increasing steadily and in year 2010 which is
bringing more financial stability.
The decrease in years 2009 and 2010 for Honda Atlas Cars (Pakistan) Limited is because it
incurred loss and its value of shareholders equity is decreased.

2.1.2.8 Long-term Assets versus Long-term Liabilities

Definition: Used to show to what extent long term assets are available to long term liabilities.
Formula: Long term Assets / Long Term Liabilities
Analysis:
Indus Motors Limited 10 times more long term assets while Honda Cars (Pakistan) has 4 times.
But for Indus Motor Company Limited, the portion of long term liabilities is only deferred
taxation. Hence, if we ignore this, its financial position will be strengthened further.
Honda Atlas Cars (Pakistan) Limited has long term financing so its long-term assets versus long
term liabilities ratio is not good than Indus Motor Company Limited.

2.1.3 Profitability Ratios

The profitability ratios give you opportunity to see an organizations ability to generate earnings
as compared with its all expenses. The following are key profitability ratios:
Net Profit Margin (NPM)
Operating Income Margin (OIM)
Gross Profit Margin (GPM)
Return on Investment (ROI)
Return on Total Equity (ROE)
Return on Total Capital (ROTC)
DuPont Return on Assets (DuRA)
Return on Total Assets (RTA)
Profitability ratios are important to calculate in order to measure results with competitors.
Profitability ratios also give a good insight to adjust prices of the products and to
control expenses. Moreover, profitability ratios also indicate firms overall performance.
Profitability ratios in this project can be divided into two parts:iv
Profitability ratios in relation to sales; and,
Profitability ratios in relation to investment.
Net profit margin, operating income margin and gross profit margin are popular profitability
ratios in relation to sales while return on investment, return on total equity, return on
total capital, DuPont return on assets and simply return on assets are some ratios to be
calculated for profitability ratios in relation to investment.

2.1.3.1 Net Profit Margin (NPM)

Definition: Measures how much a company generates net profits in terms of sales.
Formula: Net Profit / Net Sales *100
Analysis:
Net profit margin (NPM), commonly known as Profit Margin (PM) indicates whether a business
is able to control all its costs or not. Indus Motor Company Limited has positive NPM which
shows it is able to control its costs.
On contrast, Honda Atlas Cars (Pakistan) Limited has negative NPM (loss) which shows it was
having tough time in controlling its cost. The net profit margin ratio is negative for Honda Atlas
Cars (Pakistan) Limited is also because of the fact that its demand decreased in market. In 2010,
it was unable to sell enough inventories to cover even its direct costs.
2.1.3.2 Operating Income Margin (OIM)

Definition: Measures how much a company generates operating profits in terms of sales.


Formula: Operating Income / Net Sales * 100
Analysis:
Indus Motor Company Limited has OIM 8.73% which is a good improvement as compared with
last years mere 5.47%.
Honda Atlas Cars (Pakistan) Limited has negative OIM which means it is unable to control costs.
This is not true. Its financial statements show that it has been able to control costs (in fact
decreased it) but it is unable to market its enough products to meet its obligations.
On the other hand, as Indus Motor Company Limited is on the move, it has been efficient in
controlling costs and also selling more products in market.

2.1.3.3 Gross Profit Margin (GPM)

Definition: Measures how much a company generates gross profits in terms of sales.
Formula: Gross Profit / Net Sales * 100
Analysis:
Indus Motor Company Limited has higher 7.84%. Honda Atlas Cars (Pakistan) Limited has
direct loss of 1.51%.
Honda Atlas Cars (Pakistan) Limited is having a difficult time in market its products to meet its
expenses. In year 2010, it even couldnt market enough products to meet its direct costs and
hence resulting in negative gross profit.

2.1.3.4 Return on Investment (ROI)

Definition: Provides a standard return on investor's equity.
Formula: Net Profits before Tax / Shareholder's Equity * 100
Analysis:
Indus Motor Company Limited has high return on invest ratio because it has controlled its costs
and generated more sales. Its operating profit is 8.73% in year 2010 which is highest in three
years.
On the other hand, Honda Atlas Cars (Pakistan) Limited has negative ROI because it is incurring
loss in previous two years (2009 & 2010).

2.1.3.5 Return on Total Equity (ROE)

Definition: Measures the return accruing to shareholders i.e. amount of net income returned
as a percentage of shareholders equity.
Formula: Net Profit / Average Total Shareholder's Equity
Analysis:
Return on Total Equity is known as also known as return on net worth. Return of equity for year
2010 has increased more than 200% for Indus Motor Company Limited. Some companies make
return on equity (ROE) high due to its misuse of financing. As Indus Motor Company Limited
doesnt have any long term or short term financing, so it is increasing because of its real
earnings.
It is negative for Honda Atlas Cars (Pakistan) Limited because it has incurred loss in both years
2009 and 2010.

2.1.3.6 Return on Total Capital (ROTC)

Definition: Measures the total return the company generates from all sources of financing.
Formula: (Net Profit + Interest Expense) / Average Total Shareholder's Equity
Analysis:
ROTC for Indus Motor Company Limited has increased from 0.26 to 0.31 from years 2008-2010
which mean it is generating more cash or sales from all source of financing. Major portion of
interest expense of Indus Motor Company Limited contains interest and mark up expense of
advances from customers.
Honda Atlas Cars (Pakistan) Limited has difficult time over the past two years and because it has
incurred loss, its ROTC is negative.

2.1.3.7 DuPont Return on Assets (DuRA)

Definition: A system of analysis has been developed that focuses the attention on all three
critical elements of the financial condition of a company: the operating
management, management of assets and the capital structure. This analysis
technique is called the "DuPont Formula".v
Formula: Net Income / Sales * Sales / Total Assets
Analysis:
Because of incurring loss and poor return on assets and return on equity, Honda Atlas Cars
(Pakistan) Limited has poor DuPont ratio in contrast to Indus Motor Company Limited.

2.1.3.8 Return on Total Assets (RTA)

Definition: Evaluates how efficiently financial management employs the average dollar
invested in the firm's assets.
Formula: Profit before Tax / Total Assets
Analysis:
Indus Motor Company Limited has higher return on total assets because it is generating profits
unlikely Honda Atlas Cars (Pakistan) Limited which has incurred loss in previous two years.

2.1.4 Activity Ratios

Activity ratios provide an opportunity to see how efficient an organization is in using its assets
such as receivables and inventory (how often and in when a company receives back cash from
receivables and how often and when a company generates cash from its assets). Activity ratios
are also known as efficiency or turnover ratios.
In this project, following activity ratios are calculated:
Accounts Receivable Turnover Ratio
Avg. No. of Days Receivables Outstanding (Avg. Collection Period)
Inventory Turnover Ratio
Avg. No of Days In Stock (Avg. Age of Inventory)
Payable Turnover
Avg. No. of Days Payables Outstanding (Avg. Age of Payables)
Capital Structure Ratio
Operating Cycle
Cash Conversion Cycle
Activity ratios are considered very important especially for manufacturing companies. A
company wants to turn their inventories into sales as soon as possible because it will allow it to
generate more cash.
Activity ratios helps firm to determine accurate budgets or set standards to make payments to its
creditors and receive payments from its trade-debts. Moreover, investors use activity ratios a lot
in fundamental analysis. Some activity ratios are closely related to liquidity ratios.
Usually, activity ratios are calculated both in times and days.

2.1.4.1 Accounts Receivable Turnover Ratio

Definition: Number of times accounts receivables are collected.
Formula: Annual Credit Sales / Average Trade Debts (Accounts receivables)
Analysis:
Accounts receivable ratio determines how often a company collects cash during a year. It also
determines how successful a company is in its collections. A higher accounts receivables
turnover ratio shows usually quick collection of credit sales.
Indus Motor Company Limited is maintaining accounts receivable turnover ratio is between
41.46 and 35.88 which show it has somehow a lax receivable policy though as RTO ratio has
decreased in last two years.
Accounts receivables turnover ratio for Honda Atlas Cars (Pakistan) Limited is zero because it
does not have any trade debts.

2.1.4.2 Avg. No. of Days Receivables Outstanding (Avg. Collection Period)

Definition: Measures number of days receivables are outstanding i.e. how much days
company takes to collect cash after sales has been made.
Formula: 365 days / receivables turnover ratio
Analysis:
Collection period determines how many days a company takes to turn its receivables into cash. A
high collection period means its receivables are slow in paying back.
Indus Motor Company Limited takes around 10 (2010) days to collect cash which is not too
high. However in 2008, it was maintaining collection period around 9 days. Rise in collection
period is also because of the fact that Indus Motor Company Limited has increased its share in
market and hence demand has increased with a bit more relaxation. A high collection period
shows a high cost in extending credit to customers.
Honda Atlas Cars (Pakistan) Limited has zero days because it doesnt have trade debts.
2.1.4.3 Inventory Turnover Ratio

Definition: Evaluates how efficiently companys inventory is being utilized.


Formula: Cost of Goods Sold / Average Stock-in-trade
Analysis:
Inventory turnover ratio is very important for a company. Investors are keen to measure number
of days an inventory is sold during the year. A high inventory turnover ratio suggests better
utilization of inventory and also popularity of product.
Indus Motor Company Limited has high inventory turnover ratio as compared with Honda Atlas
Cars (Pakistan) Limited which means Indus Motor Company Limited is selling more units than
Honda Atlas Cars (Pakistan) Limited and hence products are also selling well in market.
It is true as Indus Motor Company Limited has higher share in market and its products are
popular than Honda Atlas Cars (Pakistan) Limited.

2.1.4.4 Avg. No of Days in Stock (Avg. Age of Inventory)

Definition: Evaluates number of days inventory is held.
Formula: 365 / Inventory turnover ratio
Analysis:
It also called average age of inventory or simply age of inventory. It evaluates number of days
inventory (stock-in-trade) in held. Higher the inventory period mean company will have to bear
holding costs associated with the inventory. Moreover, it also indicates companys inability to
sell its products which is risky for investors point of view.
For investors point of view, company carrying higher average age of inventory is risky as they
feel company is unable to market its product adequately or product itself is not fulfilling
customers demand or product is not popular in the market.
Indus Motor Company Limited has average age of inventory around 33 days in year 2010 while
Honda Atlas Cars (Pakistan) Limited holds stock-in-trade for around 75 days which is more than
twice than Indus Motor Company Limited.


2.1.4.5 Payable Turnover
Definition: Measures numbers of time accounts payable (creditors) are paid throughout the
year.
Formula: Annual Purchases / Average Creditors
Analysis:
Payable turnover ratio is a good measure to compare with competitors how often they are able to
make payments in a period. High payable turnover ratio results in making more prompt payment
to creditors.
Falling payable turnover ratio indicates Honda Atlas Cars (Pakistan) Limited is getting more
relaxation from its parent company for making payment.
On the other hand because of the fact, Indus Motor Company Limited has better inventory
turnover ratio and receivable ratio, it is paying off creditors not only in time but each year, it is
making payment earlier.
In 2010, both companies are making payments to creditors almost equally.


2.1.4.6 Avg. No. of Days Payables Outstanding (Avg. Age of Payables)
Definition: Measures numbers of days a company takes to pay its accounts payable
(creditors).
Formula: 365 / Payable turnover ratio
Analysis:
Average age of payable outstanding ratio shows how many days a company usually takes to pay
its creditors. Both payable turnover ratio and average age of payables are very important for
obtaining finances. Financial institutions like low average age of payables and higher payable
turnover ratio.
In this case, both companies have almost equal average of payables in 2010 which shows they
are making payments to their parent companies promptly. Because of present situation in global
auto industry, parent companies are not giving much relaxation to their subsidiaries or joint
venture companies. Moreover, over the couple of year, Pak. Rupees has been up side down in the
market, hence, there is also chance that management of both companies would have decided to
make prompt payments to their parent companies to avoid financial loss (as both companies pay
in Japanese Yen).

2.1.4.7 Capital Structure Ratio

Definition: Measures influence of long term financing compared to its available capital.
Formula: Long Term Debt / (Long Term Debt + Shareholders Equity)
Analysis:
Generally, companies generating higher portion of their capital via long-term financing are
considered more risky. It shows reliance on external financing for growth.
The total capitalization ratio for Honda Atlas Cars (Pakistan) Limited is increasing year after
year though it is still below 50% (generally capital structure ratio more than 65% is considered
too risky and investors hesitate to invest).
Capital structure ratio of Indus Motor Company Limited is zero because it has not obtained any
long-term financing. It shows Indus Motor Company Limited is more efficient in managing its
profitability and it does not require any external financing to meet its current demand.

2.1.4.8 Operating Cycle

Definition: The number of days from cash to stock-in-trade to trade debts to cash.
Formula: Avg. Age of Inventory + Avg. Collection Period
Analysis:
Operating cycle is a good measure to know how long cash is tied up in stock-in-trade and trade
debts. A long operating cycle means that less cash is available to meet short term obligations.
In this case, both companies had almost same operating cycle in year 2009 but in 2010, Indus
Motor Company Limited has operating cycle of around 43 days and Honda Atlas Cars (Pakistan)
Limited takes almost 75 days.
No doubt, Honda Atlas Cars (Pakistan) Limited products are having difficult time in competing
with Indus Motor Company Limited products.

2.1.4.9 Cash Conversion Cycle

Definition: The length of time from the actual outlay of cash for purchases until the collection
of trade debts resulting from the sales.
Formula: Avg. Collection Period + Avg. No. of Days in Stock - Avg. Age of Payables
Analysis:
Cash conversion cycle measures how quick a company is in converting its products into cash
through sales.
In 2008, Indus Motor Company Limited had a strong cash converting cycle (only around 27
days) - though after being touched to 41 days in 2009, still it has impressive figure of 34 days.
This is because it has strong market share and demand for its products.
On the other hand, Honda Atlas Cars (Pakistan) Limited takes 66 days (almost twice as Indus
Motor Company Limited) to complete its cash cycle. Cash conversion cycle of 66 days for
Honda Atlas Cars (Pakistan) Limited is higher especially when it has zero trade debts.

2.1.5 Market Ratios

Market ratios let investors know for owning an organizations stocks and also costs associated
with that stock.
In order to compare Indus Motor Company Limited and Honda Atlas Cars (Pakistan) Limited,
following key market ratios are used in this project:
Dividend per share
Earning per Share
Price/Earning Ratio
Retained Earnings Growth Rate
Dividend Payout
Dividend Yield
Book Value per Share
Market ratios are also investment ratios. Market ratios help investor to see different things
happening with company stocks like how much dividend a company is paying; what is its
earnings per share over the period; and, also what is its market share (market capitalization) etc.
Some market ratios are critical for investors e.g. price / earning ratio which reflects investors
assessment of those future earnings as they help them to determine which stocks they should buy
and which should be left along.
Healthy market ratios can help in attracting more investors.

2.1.5.1 Dividend per share

Definition: Total dividends paid over the year (excluding special dividends) in terms of
ordinary shares outstanding.
Formula: Sum of dividends over a period (D) - Special, one time dividends (SD)/Shares
outstanding for the period
Analysis:
Higher dividend per share shows more sustainability in grow.
Dividend per share for Indus Motor Company Limited has increased from 11.96 to 14.94 in
2007-2010 which indicates that management believes that it can sustain growth.
Honda Atlas Cars (Pakistan) Limited has low dividend per share because it is having difficult
time in marketing its products and generating profits.

2.1.5.2 Earning per Share

Definition: Used to measure companys profitability in terms on number of shares
outstanding i.e. shows portion of a company's profit allocated to each outstanding
share.
Formula: Net Profit / Number of Outstanding Shares
Analysis:
Indus Motor Company Limited reported 5.73% profit after taxation (net profit) in year 2010 (the
highest since 2008) which showed a significant increase in its earnings per share.
On the other hand, Honda Atlas Cars (Pakistan) Limited reported a loss of 5.38% in year 2010 so
it has negative earnings per share.
However, it is also noteworthy that Indus Motor Company Limited is generating higher EPS
because of higher value of capital.

2.1.5.3 Price/Earning Ratio

Definition: The length of time from the actual outlay of cash for purchases until the collection
of trade debts resulting from the sales.
Formula: Market Price per Share / Earning Per Share
Analysis:
Decrease in Honda Atlas Cars (Pakistan) Limiteds shows it has less confidence in maintaining
growth and same is the case with Indus Motor Company Limited but Indus Motor Company
Limited has positive Price / Earnings Ratio.
Decrease in P/E ratio of Indus Motor Company Limited is because of the famous stock market
crash in 2008 where it share price from Rs. 305.5 in 2007 suddenly dropped to Rs. 107.7 in 2009
though it regained momentum in 2010 and closed on Rs. 262.4. While the sharp decrease in
Honda Atlas Cars (Pakistan) Limited P/E ratio is because not only it also suffered from stock
market fluctuations but also it suffered loss in both years (2009 and 2010); hence resulting is
negative EPS (page 49).

2.1.5.4 Retained Earnings Growth Rate

Definition: Measures a companys position to generate or sustain internal funds.
Formula: (Net Income - Dividends) / Shareholders' Equity
Analysis:
Low retained earnings growth rate depicts it has inability to generate internal funds.
Honda Atlas Cars (Pakistan) Limited has constant decrease in retained earnings growth rate
because its direct costs are increasing and it has also suffered loss in both 2009 and 2010.
On contrast, Indus Motor Company Limited has an increase in its REGR which shows it has
sufficient enough internal funds to meet its working capital.

2.1.5.5 Dividend Payout

Definition: Shows portion of earnings (in percentage) paid in dividends.
Formula: Dividend per Share / Earning Per Share
Analysis:
Higher dividend payout ratio means higher dividends for shareholders.
Higher dividend ratio of Indus Motor Company Limited shows it is paying handsome portion of
earnings in dividends.
Reason for low dividend payout ratio for Honda Atlas Cars (Pakistan) Limited is it is incurring
losses and is paying very low dividends.

2.1.5.6 Dividend Yield

Definition: The yield a company pays out to its shareholders in terms of dividends.
Formula: Dividends per Share / Market Price per Share
Analysis:
Dividend yield is a way to measure how much cash flow you are getting for each dollar invested
in an equity position - in other words, how much "bang for your buck" you are getting from
dividends.vi Higher dividend yield ratio encourages investors to invest more in the companys
stocks. Investors calculate this ratio to assess return on their investments in terms of dividends.
Indus Motor Company Limited has higher dividend yield than Honda Atlas Cars (Pakistan)
Limited which means investors would like to invest more in Indus Motors Company Limited
than Honda Atlas Cars (Pakistan) Limited as investors can secure high cash flow by investing in
stocks paying relatively high, stable dividend yields.

2.1.5.7 Book Value per Share

Definition: The amount company may still get after liquidation.
Formula: (Stockholders Equity - Preferred Stock)/ Average Outstanding Shares
Analysis:
Indus Motor Company Limited is retaining higher value per share than Honda Atlas Cars
(Pakistan) Limited which means it will have still a lot more finance available if they both go
liquidated this point. The good thing is that, despite reporting loss in year 2009 and 2010, Honda
Atlas Cars (Pakistan) Limited has still positive book value per share but very low as compared
with Indus Motor Company Limited.

2.1.6 Cash Flow Ratios

Following cash flow ratios are used for the comparison between Honda Atlas Cars (Pakistan)
Limited and Indus Motors Company Limited:
Cash Flow from Operations to Net Income
Cash Flow from Investing to Operating and Financing
Cash Flow for Investing vs. Financing
Cash Flow from Sales to Total Sales
Net Cash (Cash Flow)
Operations Cash Flow to Current Liabilities (Cash flow from operations ratio)
Operations Cash Flow Plus Interest to Interest
Cash Dividend Coverage

2.1.6.1 Cash Flow from Operations to Net Income

Definition: Indicates the extent to which net income generates cash in a business.
Formula: Cash Flow from Operations / Net Profit
Analysis:
Decline in cash flow from operations to net income shows a company has cash flow problems. In
this case, both companies are maintaining positive cash flow from operations to net income.
The negative cash flow from operations to net income of Honda Atlas Cars (Pakistan) Limited is
because it generated a negative cash flow from operations.

2.1.6.2 Cash Flow from Investing to Operating and Financing

Definition: This ratio compares the funds needed for investment to the funds obtained from
financing and operations.
Formula: Cash Flows from Investing / (Cash Flows from Operations + Cash Flows from
Financing)
Analysis:
Negative cash flow from investing to operating and financing for Indus Motor Company Limited
is because of redemption of investment in listed mutual fund units in 2010. Honda Atlas Cars
Pakistan Limited also has not made any considerable investment. The sharp rise in 2009 for
Honda Atlas Cars (Pakistan) Limited is because of considerable investment in its fixed
expenditure.
2.1.6.3 Cash Flow for Investing vs. Financing

Definition: Measures funds needed for investment obtained from investing and financing
activities of the company.
Formula: (Net Cash Flows - Current Portion of Long-term Debt) / (Net Cash Flows from
Operating and Financing Activities)

Analysis:
The variation in Indus Motor Company Limited in years 2008-2009 is because in 2008, it had
negative Net cash generated from operating activities. In 2009, it has positive cash generated
from operations and also its net cash used in investing activities and net cash generated in
financing activities is decreasing. On the other hand, cash flow for investing versus financing
ratio for Honda Atlas Cars (Pakistan) Limited is decreasing slowly.
2.1.6.4 Cash Flow from Sales to Total Sales

Definition: Measures the degree to which sales generate cash retained by the business.
Formula: (Cash Flow from Operations - Dividends) / Net sales

Analysis:
Positive cash flow from sales to total sales ratio in 2010 shows that both companies are somehow
retaining its cash generated from net sales.
2.1.6.5 Net Cash (Cash Flow)

Definition: Calculated net amount of cash generated.
Formula: Net Profit + Depreciation + Amortization


Analysis:
Net cash flow is also known as cash flow. Indus Motor Company Limited has more net cash flow
than Honda Atlas Cars (Pakistan) Limited.
2.1.6.6 Operations Cash Flow to Current Liabilities (Cash flow from

operations ratio)
Definition: Measures utilization of cash.
Formula: Cash Flow from Operations / Current Liabilities
Analysis:
Operations cash flow to current liabilities or cash flow from operations ratio measure the
adequacy of a company in managing its working capital. An increase in this ratio indicates cash
should be invested. In this case, both companies are maintaining a similar operation cash flow to
current liabilities.
2.1.6.7 Operations Cash Flow plus Interest to Interest

Definition: Measures the availability of cash to meet interest charges.
Formula: (Cash Flow from Operations + Interest) / Interest

Analysis:
In 2010, both companies have enough cash generated from operations to meet is interest
expense.
2.1.6.8 Cash Dividend Coverage

Definition: Measures the company's ability to meet dividends from operating cash flow.
Formula: Cash Flow from Operations / Dividends


Analysis:
As Honda Atlas Cars (Pakistan) Limited is paying very low dividends so it has enough cash
generated from operations to meet it dividends. On the other hand, despite paying high
dividends, still is has enough cash flow from operations to pay off its dividends.

2.2 Vertical Analysis

Vertical analysis, also known as common-size analysis (shown below) is an analysis of
percentage financial statements where all balance sheet items are divided by total assets and all
income statement items are divided by net sales.
2.2.1 Balance Sheet
2.2.1.1 Honda Atlas Cars (Pakistan) Limited

Percentage
ASSETS 2007 2008 2009 2010
Non Current Assets
Fixed assets 49.16 56.69 52.21 49.61
Intangible assets 0.79 0.95 1.97 1.41
Capital work in progress 2.31 1.18 0.19 0.24
Deferred taxation 3.02 4.96 5.75 8.96
Long-term loans & advances 0.34 0.43 0.32 0.38
Long-term deposits 0.05 0.06 0.04 0.05
55.68 64.27 60.47 60.64
Current assets
Stores and spares 0.61 1.22 1.03 1.35
Stock-in-trade 32.57 23.66 29.71 25.99
Loans and advances 8.50 7.45 8.58 11.09
Cash & bank balances 2.65 3.40 0.21 0.92
44.32 35.73 39.53 39.36
TOTAL ASSETS 100.00 100.00 100.00 100.00
EQUITY
Issued, subscribed and paid-up capital 8.60 20.95 14.36 15.94
Reserves 23.97 25.33 18.12 15.64
Accumulated loss -3.18 1.10 -4.04 -9.53
29.39 47.38 28.44 22.05
LIABILITIES
Non current liabilities
Long-term finance secured 23.58 7.33 15.09 14.88
23.58 7.33 15.09 14.88
Current liabilities
Current portion of long term finances 7.02 0.00 0.00 1.86
Trade, other payables and provisions 28.83 28.45 22.64 48.20
Advances from customers and dealers 10.71 16.37 11.43 12.60
Accrued mark-up 0.48 0.47 0.75 0.42
Short-term running finance 0.00 0.00 21.64 0.00
47.03 45.29 56.47 63.07

TOTAL EQUITY AND LIABILITIES 100.00 100.00 100.00 100.00


2.2.1.2 Indus Motor Company Limited
Percentage
ASSETS 2007 2008 2009 2010
Non Current Assets

Fixed assets 13.37 29.34 19.02 12.25
13.59 29.70 19.19 12.33
Current assets
Stock-in-trade 18.26 19.19 19.77 19.16
Trade debts 4.25 9.69 8.40 5.94
Short-term prepayments 0.30 0.17 0.08 0.07
Accrued return on bank deposits 0.85 0.25 0.25 0.21
Other receivables 3.87 0.54 0.33 0.72
Investments - at fair value through profit or
loss 0.00 0.39 0.00 0.00
Taxation net 0.31 1.52 0.00 0.00
86.41 70.30 80.81 87.67
TOTAL ASSETS 100.00 100.00 100.00 100.00
EQUITY
Reserves 46.33 62.92 45.98 43.49
Accumulated loss 0.00 0.00 0.00 0.00
51.35 68.64 49.78 46.38
LIABILITIES

1.34 3.87 2.44 1.20
Current liabilities
Liabilities against assets subject to finance
lease 0.02 0.00 0.00 0.00
Taxation net 0.00 0.00 0.07 0.89
47.31 27.49 47.79 52.42


2.2.2 Profit & Loss Statement

Percentage
2007 2008 2009 2010
Net sales 100.00 100.00 100.00 100.00
Cost of sales 98.99 95.74 98.75 101.51
Gross profit 1.01 4.26 1.25 -1.51
Distribution expenses 1.26 1.42 1.34 0.79

Administrative expenses 0.86 0.95 0.99 0.86
Other operating expenses 0.38 0.03 2.20 0.37
Other operating income 0.46 0.16 0.46 0.17
Profit from operations -1.03 2.02 -2.82 -3.36
Financial cost 1.79 1.59 1.57 2.87
Profit before taxation -2.82 0.43 -4.40 -6.23
Taxation -1.27 -0.08 1.56 -0.86
Profit after taxation -1.55 0.51 -5.96 -5.38

Percentage
2007 2008 2009 2010
Net sales 100.00 100.00 100.00 100.00
Cost of sales 88.63 90.71 93.86 92.16
Gross profit 11.37 9.29 6.14 7.84
Distribution expenses 1.31 1.18 1.24 0.78
Administrative expenses 0.68 0.72 0.93 0.63
Other operating expenses 0.89 0.74 0.41 0.69
Other operating income 2.45 1.90 1.92 3.00
Profit from operations 10.94 8.56 5.47 8.73
Financial cost 0.11 0.01 0.07 0.01
Profit before taxation 10.83 8.55 5.40 8.72
Taxation 3.80 3.02 1.75 2.99
Profit after taxation 7.03 5.53 3.66 5.73

2.3 Horizontal Analysis

Horizontal analysis is also termed as index analysis (as shown below). It is an analysis of
percentage financial statements where all balance sheet or income statement figures for a base
year equal 100 (percentage) and subsequent financial statement items are expressed as
percentage of their values in the base year.
2.3.1 Balance Sheet

Percentage
ASSETS 2007 2008 2009 2010
Non Current Assets
Fixed assets 100.00 94.65 127.13 108.89
Intangible assets 100.00 98.08 297.15 191.17
Capital work in progress 100.00 42.09 10.02 11.37
100.00 94.75 130.03 117.53
Current assets
Stock-in-trade 100.00 59.62 109.21 86.11
100.00 66.16 106.75 95.81
TOTAL ASSETS 100.00 82.08 119.71 107.90
EQUITY
Reserves 100.00 86.74 90.48 70.39
Accumulated loss 100.00 -28.25 151.95 323.02
100.00 132.33 115.86 80.95
LIABILITIES
Long-term finance secured 100.00 25.53 76.60 68.09
Deferred taxation
100.00 25.53 76.60 68.09
Current liabilities
Current portion of long term finances 100.00 0.00 0.00 28.57
Accrued mark-up 100.00 80.83 189.39 94.38
100.00 79.03 143.73 144.70



ASSETS 2007 2008 2009 2010
Non Current Assets
Fixed assets 100.00 192.65 187.91 158.77
100.00 191.80 186.48 157.21
Current assets
Stock-in-trade 100.00 92.23 142.97 181.76
Trade debts 100.00 200.23 260.89 242.36
Short-term prepayments 100.00 48.71 35.51 39.51
Accrued return on bank deposits 100.00 26.40 38.41 43.17
Other receivables 100.00 12.28 11.21 32.40
Taxation net 100.00 431.85 0.00 0.00
100.00 71.40 123.49 175.76
TOTAL ASSETS 100.00 87.76 132.05 173.24
EQUITY
Reserves 100.00 119.18 131.04 162.60
Accumulated loss
100.00 117.31 128.01 156.49
LIABILITIES
Long-term finance secured
100.00 253.22 239.69 155.03
Current liabilities
Current portion of long term finances
Accrued mark-up 100.00 14.69 94.13 132.03
100.00 51.00 133.38 191.94
2.3.2 Profit & Loss Statement

Percentage
2007 2008 2009 2010
Net sales 100 86.28 82.96 92.96


Cost of sales 100 83.45 82.77 95.33
Gross profit 100 362.89 102.07 -138.53
Distribution expenses 100 97.57 88.46 58.13

Administrative expenses 100 94.49 94.89 92.43
Other operating expenses 100 7.71 482.10 90.88
Other operating income 100 30.40 83.56 33.98
Profit from operations 100 -168.75 226.79 302.49
Financial cost 100 76.48 72.92 148.98

Profit before taxation 100 -13.21 129.20 205.12
Taxation 100 5.25 -101.54 62.54

Profit after taxation 100 -28.35 318.57 322.14

Percentage
2007 2008 2009 2010
Net sales 100 106 97 154
Cost of sales 100 109 103 160
Gross profit 100 87 52 106
Distribution expenses 100 96 92 92

Administrative expenses 100 112 133 144
Other operating expenses 100 88 45 119
Other operating income 100 82 76 188
Profit from operations 100 83 48 123
Financial cost 100 6 60 8
Profit before taxation 100 84 48 124
Taxation 100 84 45 121
Profit after taxation 100 83 50 125

Chapter 3) Conclusion, Recommendations & Limitations

3.1 Conclusion
The liquidity position of Indus Motor Company Limited is favourable. Its current and quick
ratios are above 1 with positive working capital and impressive working turnover.
On the other hand, though, the liquidity position of Honda Atlas Cars (Pakistan) Limited
apparently looks too poor but somehow, it may not be so true. In its current liabilities one main
portion is its trade payables, as it purchases its raw material from parent company Honda Japan
so it can get a lot of relaxation in making payment to its parent company. Moreover, it has to pay
its payables in Japanese Yen so change in currency rate can affect the figure of payables so a risk
is also involved.
Honda Atlas Cars (Pakistan) Limited has trade-debts to zero. Its current liabilities are increasing
and it heavily relies on sales to meet its short-term obligations and working capital turnover ratio
shows, it is not efficient in converting its funded amount in stock-in-trade to sales.
The leverage position of Indus Motor Company Limited is better than Honda Atlas Cars
(Pakistan) Limited. Low current, quick and cash ratios and higher debt and debt to equity ratios
of Honda Cars (Pakistan) Limited shows it is more aggressive in pursuing its growth with
financing (external debt).
The overall profitability of Honda Atlas Cars (Pakistan) Limited is also not favourable as
compared with Indus Motor Company Limited.
In 2010, Honda Atlas Cars (Pakistan) Limited was unable to sell enough inventories to cover
even its direct costs.
Asset turnover ratio shows Honda Atlas Cars (Pakistan) Limited has much higher capacity than
production. This is because, over the years, it has been unable to sell its products and its share in
market is also on decline.
Low inventory turnover ratio of Honda Atlas Cars (Pakistan) Limited shows its products are not
selling well in market as compared with Indus Motor Company Limited. The industry analysis
also shows Honda Atlas Cars (Pakistan) Limited has fewer market share than Indus Motor
Company Limited.


Activity ratios show Honda Atlas Cars (Pakistan) Limited is taking longer time to convert its
inventories into cash.
Honda holds stock-in-trade for around 75 days which is more than twice as compared with Indus
Motor Company Limited.
Falling payable turnover ratio indicates Honda Atlas Cars (Pakistan) Limited is getting more
relaxation from its parent company for making payment. On the other hand because of the fact,
Indus Motor Company Limited has better inventory turnover ratio and receivable ratio, it is
paying off creditors not only in time but each year, it is making payment earlier.
Moreover, all this results in higher operating cycle for Honda Atlas Cars (Pakistan) Limited.
Indus Motor Company Limited has low operating cycle.
Market ratios of Honda Atlas Cars (Pakistan) Limited are also not satisfactory. Indus Motor
Company Limited is offering high dividend per share, high dividend yield ratio and higher
earnings per share.
Dividend per share for Indus Motor Company Limited is increasing because management is
more optimistic for growth in future. Honda Atlas Cars (Pakistan) Limited has very low dividend
per share because it is having difficult time in generating cash and making profits.
Due to loss and stock market fluctuations, Honda Atlas Cars (Pakistan) Limited has a sharp
decrease in P/E ratio. Indus Motor Company Limited gained its momentum after stock market
crash and it has stabilized its market price per share which shows investors have strong
confidence in this company.
Honda Atlas Cars (Pakistan) Limited has low retained earnings growth rate which depicts it has
inability to generate internal funds as depicted by its financial statements, it has already opted for
short-term financing and Indus Motor Company Limited has no short-term or long-term
financing.
Indus Motor Company Limited has strong cash flow ratios. Its cash flow for investing versus
financing ratio is increasing because it has positive cash generated from operations and also its
net cash used in investing activities and net cash generated in financing activities is decreasing.
On the other hand, cash flow for investing versus financing ratio for Honda Atlas Cars (Pakistan)
Limited is decreasing slowly.


Positive cash flow from sales to total sales ratio in 2010 shows that both companies are somehow
retaining its cash generated from net sales. Cash flow of Indus Motor Company Limited was
efficiently managed and the surplus funds were invested in high yielding mutual funds.
Based on these ratios, it is evident that Indus Motor Company Limited can enjoy a sustained-
growth position while it can be a tough for Honda Atlas Cars (Pakistan) Limited. For both
companies, the biggest concern will be financial risk because foreign exchange reserves are
fluctuating, causing PKR to fluctuate. Inflation and rising interest rates can also play negative
role for Honda Atlas Cars (Pakistan) Limited as it will look for some external financing to meet
its obligations.
3.2 Recommendations
The following are few recommendations to improve its efficiency:
Honda Atlas Cars (Pakistan) Limited should use its stock-in-trade more efficiently in
order to improve its liquidity.
Honda Atlas Cars (Pakistan) Limited should increase its financing through equity (issuing
common shares).
Honda Atlas Cars (Pakistan) Limited and Indus Motor Company Limited should avoid
cash dividends better both companies should offer dividends in terms of stocks.
Stock-in-trade should be kept at optimum level.
Honda Atlas Cars (Pakistan) Limited needs an aggressive marketing strategy to compete
with its competitors and also to sell enough units to meets its expenses.
3.3 Limitations
This financial analysis was based on audited balance sheet, profit and loss statements and
cash flow statements for respective companies for the years 2008-2010
This analysis takes into account only historical information presented in those financial
statements and it does not take into current situation or financial position of the
companies.
This financial analysis presented in this project does not take into account significant off-
balance sheet items.


This financial analysis carried out in this project also does not adjust companies capital
structure or other similar items.
This financial analysis does not change the information fiscal year end (the year end
figures for Indus Motor Company Limited remain June 30 and for Honda Atlas Cars
(Pakistan) Limited remains March 30 for respective years.)

Appendix/Appendixes
Financial Statements
Honda Atlas Cars (Pakistan) Limited





Indus Motor Company Limited



References

i
Uncertainty in U.S. auto industry puts pressure on suppliers. International Herald Tribune. September
19, 2008. Retrieved 20 November 2008.
ii
http://www.investopedia.com/terms/l/leverageratio.asp
iii
http://www.investopedia.com/terms/f/fixed-asset-turnover.asp
Fundamentals of Financial Management (12th Edition) by James C. Horne, John M. Wachowicz Jr. &
iv
Saumitra N. Bhaduri
v
http://www.investopedia.com/exam-guide/cfa-level-1/financial-ratios/return-equity-dupont-system.asp
vi
http://www.investopedia.com/terms/d/dividendyield.asp

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Financial Statements Analysis

Honda Atlas Cars Pakistan Limited

Indus Motor Company Limited

A REPORT SUBMITTED TO THE DEPARTMENT OF MANAGEMENT SCIENCES,

Department of Management Sciences,

Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Name: Hammad Hassan

Date: January 31, 2011

Project submitted by:

Hammad Hassan BC040200401 [2] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Project submitted by:

Hammad Hassan BC040200401 [3] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Project submitted by:

Hammad Hassan BC040200401 [4] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

1.4 Industry Analysis.................................................................................................................................... 9

CHAPTER 2) DATA PROCESSING & ANALYSIS............................................................................12

2.1 Financial Analysis........................................................................................................................................ 12

2.2 Vertical Analysis.................................................................................................................................... 64

2.3 Horizontal Analysis............................................................................................................................... 67

CHAPTER 3) CONCLUSION, RECOMMENDATIONS & LIMITATIONS.....................................70

Project submitted by:

Hammad Hassan BC040200401 [5] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Project submitted by:

Hammad Hassan BC040200401 [6] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Financial Statements Analysis is a technique employed by intrigued parties including investors,

Project submitted by:

Hammad Hassan BC040200401 [7] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Indus Motor Company Limited.

1.4 Industry Analysis

1.4.1 Global Automobile Industry

Project submitted by:

Hammad Hassan BC040200401 [8] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

1.4.2 Automobile Sector in Pakistan

Project submitted by:

Hammad Hassan BC040200401 [9] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

1.4.3 The Key Players

Key Player Plant Capacity

Pak Suzuki Motor Company Limited 68,000

Indus Motor Company Limited 50,000

Honda Atlas Cars (Pakistan) Limited 30,000

Dewan Farooque Motors Limited 15,000

Ghandhara Nissan Limited 6,000

Honda Atlas Cars (Pakistan) Limited; and,

Indus Motor Company Limited.

1.4.4 Honda Atlas Cars (Pakistan) Limited

1.4.5 Indus Motor Company Limited

Project submitted by:

Hammad Hassan BC040200401 [10] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Project submitted by:

Hammad Hassan BC040200401 [11] Virtual University of Pakistan

Honda Atlas Cars (Pakistan) Limited Indus Motor Company Limited

Chapter 2) Data Processing & Analysis