Assessing a Company’s Future Financial Health (i.e., Step 3: Investments in Asse

Question

Assessing a Company’s Future Financial Health (i.e., Step 3: Investments in Assets and Step 4: Economic Performance)to compose further assessment of the company/competitor pairing analysis as below:

Review the Management’s Discussion and Review (MDR), aka the Management’s Discussion and Analysis (MDA) section, which can be obtained from the SEC 10-K reports. Develop pro-forma financial statements for your company/competitor for the next 5 years. Pro-forma financial statements require us to make conservative assumptions about future growth; as such, your discussion must justify and support any assumptions you have made in developing the pro-formas.

Discuss current strategy (ies) used by the company/competitor and any relevant future investments required to support the business unit (s) strategy(ies) to achieve higher ROI and market position.

Perform a ratio analysis on the two pro-forma financial statements you’ve developed (company and competitor), and provide a discussion regarding future profitability and competitive performance as well as any significant changes you observe. To successfully complete this assignment, please show all ratio analysis calculations.

Honda Motor Co SEC Form 20-F Annual Report

http://quote.morningstar.com/stock-filing/Annual-Report/2015/3/31/t.aspx?t=:HMC&ft=20-F&d=2a82bdca80c1d4c99a6220081ce31a3f

Briggs and Stratton SEC Form 10-K Annual Report

http://quote.morningstar.com/stock-filing/Annual-Report/2015/6/28/t.aspx?t=:BGG&ft=10-K&d=ca0426dd22756e8420492852432a5f14

Explanation / Answer

Margins % of Sales 2006-03 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 TTM Revenue 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 COGS 70.75 70.94 71.18 74.11 74.77 72.70 74.48 74.36 73.98 77.51 77.65 Gross Margin 29.25 29.06 28.82 25.89 25.23 27.30 25.52 25.64 26.02 22.49 22.35 SG&A 16.72 16.40 15.98 18.37 15.59 15.47 16.07 14.45 14.33 12.91 13.48 R&D 5.15 4.98 4.90 5.63 5.40 5.46 6.54 5.67 5.35 4.55 4.34 Other -1.39 — — — — — — — — — — Operating Margin 8.77 7.68 7.94 1.89 4.24 6.38 2.91 5.52 6.34 5.03 4.53 Net Int Inc & Other -0.55 -0.53 -0.48 -0.28 -0.32 0.68 0.33 -0.57 -0.18 1.02 1.03 EBT Margin 8.22 7.15 7.46 1.62 3.92 7.06 3.24 4.95 6.16 6.05 5.55 Profitability 2006-03 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 2015-03 TTM Tax Rate % 38.95 35.79 43.25 67.91 43.69 32.80 52.73 36.61 34.66 30.41 27.83 Net Margin % 6.03 5.34 5.00 1.37 3.13 5.98 2.66 3.72 4.85 3.82 3.60 Asset Turnover (Average) 1.00 0.98 0.97 0.82 0.73 0.77 0.68 0.78 0.81 0.78 0.79 Return on Assets % 6.00 5.24 4.86 1.12 2.29 4.60 1.81 2.89 3.92 2.99 2.86 Financial Leverage (Average) 2.56 2.69 2.78 2.95 2.69 2.60 2.68 2.71 2.64 2.59 2.57 Return on Equity % 16.10 13.76 13.27 3.21 6.44 12.17 4.78 7.78 10.48 7.82 7.42 Return on Invested Capital % 8.66 7.24 6.60 1.41 3.09 6.15 2.27 3.88 5.21 3.92 3.68 Interest Coverage — — — 8.17 27.78 75.41 25.80 41.21 58.38 45.31 47.98 Over the past five years, the current ratio for Honda has been lesser than the accepted benchmark, as well as the industry average. However, the company maintained a decent ratio to meet its short term liabilities A standard of 1:1 absolute liquidity ratio is considered an acceptable norm. Over the past five years, the liquid ratio for Honda has been less than the accepted standard and industry average. Also, Honda’s liquid ratio is less than 1.0 in the last five years. Therefore, it indicates that the company did not have the ability to repay all its debts by using its most liquid assets Net margin for Honda has been consistent except 2009. The percentage shown by net profit margin does not have any specific benchmark, as the net profit margin of a small business and big steel plant cannot be same and therefore a standard benchmark cannot be set. However, still the company has earned a good profit to cover non-production costs, as compared to other peers The return on assets formula looks at the ability of a company to utilize its assets to gain a net profit. Indicates the profit generated by the total assets employed. A higher ratio reflects a more effective employment of company assets. Over the past five years, the Return on Assets for Honda has been consistent, as compared to the unstable industry figures

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