Financial reporting & analysis

Final project
Company : atlas honda

Submitted to:
Miss sehrish
Submitted by:
Anum fatima (03)
Maheen amin (24)
Class:
bba-7

DEPARTMENT OF MANAGEMENT SCIENCES

Lahore college for women university, lahore.
 TABLE OF CONTENT
NO. CONTENTS
1 Pakistan automobile industry
2 Atlas Honda introduction
3 Industry analysis (Atlas Honda)
4 Strategic analysis
5 HONDA’s
6 Financial statement analysis
7 Balance sheet horizontal & vertical analysis
8 P & L statement horizontal & vertical analysis
9 Ratio analysis
10 Evaluation & Inferences
Recommendations
11 Conclusion
 1. AUTOMATIVE INDUSTRY PAKISTAN
INTRODUCTION
The automobile sector plays pivotal role in the development of a country in terms of revenue
generation, foreign exchange, employment creation, and technology transfer. The share of Auto
Sector to GDP is around $ 3.6 Billion. The automobile sector of Pakistan was deregulated in the
early 90s after which major foreign automakers, through Joint ventures with local partners, made
investments in Pakistan
DEFUNCT COMPANIES
 Adam Motor Company
 Nexus Automotive (General Motors - Chevrolet/Daewoo)
The automotive sector has deep forward and backward linkages: backward linkages in the form
of reliance on a number of vendors for the supply of various components. It has forward linkages
in the form of dealership networks and agents for the provision of after sales services. According
to the Automotive Industry Development Programme (AIDP)1 the auto industry economic and
job multiplier in the Pakistani context is Rs1:3 and 1:8 respectively
AUTOMOTIVE DEVELOPMENT POLICY (2016-2021)
The new AUTOMOTIVE DEVELOPMENT POLICY (2016-2021) has been approved by the
ECC in its meeting held on March 18, 2016.
MAIN OBJECTIVES OF ADP-2016-21
 Facilitate higher volume, more investment, enhanced completion and better quality with
latest technology
 Creating a balance between Industrial Growth and Tariffs to ensure sustainability of all
stakeholders
 Ensuring consumer welfare
 Providing Policy Consistency and Predictability for investors and mid-term review to
cater for emerging developments
POLICY DIRECTIONS
Lower the entry threshold for New Investment (Two categories namely Greenfield Investment i-
e. the installation of new and independent automotive assembly and manufacturing facilities by
an investor for the production of vehicles of a make not already being assembled / manufactured
in Pakistan and Brownfield Investment i-e. revival of an existing assembly and / or
manufacturing facilities, that is non-operational or closed on or before July 1, 2013 and the make
is not in production in Pakistan since that date and that the revival is undertaken either
independently by original owners or new investors or under joint venture agreement with foreign
principal or by foreign principal independently through purchase of plant).
 Create enabling tariff structure o Rationalizing Automobile Import Policy
 Provide regulatory and enforcement mechanism for Quality, Safety and Environmental
Standards
 Establishment of Pakistan Automotive Institute
 Ensure Consumer welfare through provision of quality, safety, choice and value for
money
 Truck Financing by Commercial Banks and Incentivized Fleet Operations
NEW INVESTMENT POLICY
A new manufacturer under Automotive Development Policy (2016-2021), establishing maiden
assembly facility will invariably need separate treatment and greater incentives in the early years
to enable it to introduce its brand, develop a market niche and share, create a distribution and
after-sales service networks, and develop a part-manufacturer base.
 Investment Categories ADP (2016-21) envisages two categories of New Investment with
different incentives:
A. Category-A
Greenfield Investment is defined as the installation of new and independent automotive assembly
and manufacturing facilities by an investor for the production of vehicles of a make not already
being assembled / manufactured in Pakistan. [Note: “Make” is defined as any vehicle of
whatever variant produced by the same manufacturer]
B. Category-B
Brownfield Investment is defined as revival of an existing assembly and/or manufacturing
facilities, that is non-operational or closed on or before July 01, 2013 and the make is not in
production in Pakistan since that date and that the revival is undertaken either independently by
original owners or new investors or under joint venture agreement with foreign principal or by
foreign principal independently through purchase of plant. b. Investment Incentives
 Category-A
Investor shall be entitled to the following incentives:
 Duty-free import of plant and machinery for setting up the assembly and/or
manufacturing facility on a one-time basis
 Import of 100 vehicle of the same variant in CBU form at 50 percent of the prevailing
duty for test marketing after ground breaking of the project
  Concessional rate of custom duty @ 10 percent on non- localised parts and @ 25 percent
on localised parts for a period of five years for the manufacturing of Cars and LCVs
 Import of all parts (both localised and non-localised) at prevailing customs duty
applicable to non-localised parts for manufacturing of trucks, buses and prime-movers for
a period of three years
 The existing policy for Motorcycle industry as approved by the government and notified
by FBR vide SRO 939(I)/2013 and SRO 940(I)/2013 shall continue.
 Category-B
Investor shall be entitled to:
 Import of non-localised parts at 10 percent rate of customs duty and localised parts at 25
percent duty for a period of three years for the manufacturing of Cars and LCVs
 Import of all parts (both localised and non-localised) at prevailing customs duty
applicable to non-localised parts for manufacturing of trucks, buses and prime-movers for
a period of three years
Eligibility Criteria
The Board of Investment shall be the single point of contact for the investor with the
government. Any new investor shall be required to submit a detailed business plan and relevant
documents for manufacturing of vehicles to the Board of Investment. The Board of Investment
shall have the Business Plan assessed by the Engineering Development Board, which shall verify
the investor’s in-house assembly/manufacturing facilities for the manufacture of road worthy
vehicles. The Engineering Development Board shall determine eligibility of the applicant under
the defined criteria to be declared as Category A or Category B Investor. The Ministry of
Industries and Production, on recommendation of the Engineering Development Board, shall
approve a new investor under the relevant category. The Auto Industry Development Committee
(AIDC) and Engineering Development Board shall review results of the new investor policy
once every two years and shall recommend modifications, if any.
Documents Required
Following documents are required by a new investor to submit BOI alongwith an application:-
 Registration with SECP
 Registration with FBR
 Detailed Business Plan on EDB format alongwith documentary evidences, wherever
applicable, of the following:
 Land and Building
 Plant and Machinery
  IPO receipt of brand name and logo
 Verified / authenticated copies of Contract Agreement (Technical Transfer / Assistance)
from the following organizations:
 Foreign Office in the country of Foreign principal
 Chamber of Commerce & Industries in the country of Foreign principal
 Pakistan Embassy in the country of Foreign principal
 Federation of Pakistan Chamber of Commerce & Industry (FPCCI), Pakistan

Rapid growth (2010–present)

In 2010 the sales rebounded and began increasing again. The auto industry predicted a growing
demand in Pakistan and invested over ₨20 billion (US$140 million) during this decade.
Motorcycle production hit a record level in 2016–17, with 2.5 million units made. In 2015, the
Auto Policy 2016-21 was introduced, to help lure new automakers, which has traditionally been
dominated by Honda, Toyota and Suzuki. The auto industry remains the second-largest payer of
indirect taxes after the petroleum industry in Pakistan. At present, there are 10 cars for every
1,000 people in Pakistan. This is one of the lowest ratios among emerging economies, which
itself speaks of high potential of growth. Rising per capita income with changing demographic
distribution and an anticipated influx of 30 to 40 million young people in the economically active
workforce in the next decade will provide a stimulus to the industry to expand and grow. Toyota
started local assembly of its sedan Corolla. Similarly, United Motors started first Pakistani
locally made car Ghandhara Nissan started production of Isuzu d-max in Pakistan.

2. ATLAS HONDA INTRODUCTION

Atlas Honda Limited is a public listed company which was incorporated on October 16, 1962. It
is a joint collaboration between Honda Motor Company Limited Japan, the largest and most
reputed motorcycle brand in the world, and Atlas Group, one of Pakistan’s most renowned
business conglomerates. The Company is principally engaged in progressive manufacturing and
marketing of motorcycles and spare parts. Atlas Honda Limited is the largest motorcycle
manufacturer in Pakistan with the strongest brand value and highest customer loyalty. The
Company is considered a pioneer of motorcycle industry in the country and has been leading two
wheeler market successfully for over 50 years. The Company currently has a production capacity
of over 1.35 million units per annum and continues to maintain its status as market leader both in
terms of volume and quality. It also exports its motorcycles and spare parts to Bangladesh and
Afghanistan. With highest quality products, state of the art manufacturing facilities, largest
dealership network & impeccable after sales service, Atlas Honda Limited is today considered a
benchmark for two wheeler manufacturing. It has been proudly and successfully fulfilling its role
as the flag bearer of motorcycle industry in Pakistan. As one of the largest tax payers in the
private sector and being one of the best employers in the country, Atlas Honda Limited stands as
a beacon of light for the corporate, social and intellectual sectors of Pakistan.

3. Industry analysis (atlas Honda)

 Porter’s five forces
 Porter’s value chain
 Valuable Activities

1. PORTER’S FIVE FORCES

Porter’s five forces is a framework developed by Michael E. Porter that we use to analyse the
industry regarding the internal and external environment, competitors, and also better understand
the industry context in which the firm operates.
The aim of the five forces is to modify the strategy or just some rules in the firm favour in
This framework is used to identify whether a product, service, business will be profitable, and
also know the suppliers; power of buyers, substitutes, new entrants and competitors that will face
the firm in order to stay attractive.
Porter’s five forces on Honda Motors:
Rivalry: competition in the automobile industries is very high, because there are many firms in
this industry which offer many choices for the customers, so each firm try to do its best to make
more profit than others, and make its products the more sellable in the market.
Toyota, Ford, General Motors are the main competitors of Honda, so it should keep on
innovating, improving, researching, and developing to stay effective in this sector.
“The degree of rivalry in the automotive industry is further heightened by high fixed cost
associated with manufacturing cars and trucks and the low switching cost for consumers when
buying different marks and models”
Threats of substitutes: there is not a huge threat of substitute in the automobile industry that
offers utility, independence and no wasting time, even if there is a large number of
transportation. There are bicycles, subways, buses, trains and airplanes that could make our life
easier, but that can be less convenience than automobiles. The price of fuel have a large effect on
the consumer’s decision to buy vehicles, also the maintenance and the insurance of the car, but
the automobile still has an important use in our personal and daily life.
Barriers to entry: it is not easy for an entrant to enter into the automobile industry easily,
because of the brand loyalty of the consumers. It is substantial for established companies to have
barriers to entry to protect themselves, because some companies are entering into foreign
markets by buying an existing company or either merging with it and then realising a huge profit.
With local knowledge and expertise, companies have the potential to compete in the market in
which they operate against the domestic firms.
“Honda took the risk of entering into a long and complex relationship during the 80s with a
European company universally considered to be one of the least capable automobile
manufacturers in the west “British Leyland”.
Buyers bargaining power: consumers have many choices and brands, but the factors that affect
more the consumer to buy a certain brand from another are: the appearance, quality, price,
design. Consumers want always something new and nice looking with the latest technologies.
The car had to be efficient, by saving fuel, protecting the environment, and running fast.
Since there are lot of competitors, people have more choices to select the less costly, and better
in quality, for being loyal to a certain brand, that’s why Honda tries to make its cars unique.
“Honda has a history of delivering high quality and fuel efficient vehicles, so the consumers are
seeking the best product for a good price. Honda has being a leader in producing fuel efficient
and low emissions vehicles”
“Honda’s achievements on the technology front are well recognized, ranging from its cutting
edge low pollution and low fuel consumption engine technologies. The CVCC engine attempts to
reduce emission of the pollution and with less fuel used, while VTEC engines was fuel economy
with more power”
Suppliers bargaining power: there are many suppliers in the automobile industry, and “many
suppliers rely on one or two automakers to buy a majority of their products. If an automaker
decides to switch the supplier, it could be devastating to the previous supplier business. As a
result, suppliers are extremely susceptible to the demands and requirements of the automobile
manufacturer and hold very little power.”
Honda relies on some main suppliers for the items and raw materials that uses in the manufacture
of its products.
“Honda has only a handful of components makers that might be considered to belong to its
supplier’s family.”

2. PORTER’S VALUE CHAIN

“The value chain is a framework developed by Porter to describe the development of competitive
advantage and the value of the business. It is a chain of activities for a firm.”
Let’s now analyse Porter’s value chain on Honda Motors:
Primary activities:
Inbound logistics: Honda purchases the raw materials from a number of components and tries to
gain advantages in quality and cost as much as possible. Both manual and automated assembly
tasks to handle the components together to come up with the final product, and it also adopts an
innovative strategy for the planning production called small batch production systems, in order to
reduce costs and having a product variety.
Operations: Honda has developed a small batch production system, in which same vehicles are
sent down the assembly line in batches, and then workers execute the same task for each batch,
then components are delivered to the assembly line in batches which exactly match the vehicle
they will be fitted into. There is also the facelift that Honda applies to its cars; the components
are then replaced by others more developed to come up with a new product. Honda designs
models which are related to geographical dimension depend of different market segments.
Outbound logistics:
Marketing and sales: Honda expanded several products and models that customers could choose
among them, and also it adopts a good production system that is related to its marketing and
sales.
Honda’s strategy emphasizes the high technology build into all its products and it offers features
like advanced engines as standards rather than optional extras, thus simplifying product variety
within each model type, so that every customers could benefit from it whatever the model of the
car.
The alignment of output levels with customer demand tends to focus on sales strategy, so the
production levels of particular models can be varied up or down as a function of demand.
Services: Honda is aiming to improve their relational with the consumers, by being responsive to
the service support throughout maintenance and repair, and adopting a high level of transparency
with their customers.
Support activities:
Procurement: for a number of components, Honda arranges to purchase the raw materials gaining
advantages in price and quality. It has also the possibility of purchasing raw materials from
component maker’s located very long distance away to allow cheap labour sources in other
regions, or purchasing them few square kilometres which is advantageous for just in time
logistics.
Technology development: Honda has technologically innovative products, developing new low
pollution power sources for its vehicles such as CVCC and VTEC in order to have a good market
positions, and also it gives to its models a cosmetic facelift every four years in order to gain
competitive advantages.
HRM: Honda praises the achievements of individuals, makes merit the key to promotion, and
awards responsibility to younger employees across elder ones.
Firm infrastructure: Honda had become well known in the business for the collective decision
making process utilized by its top executives. Honda adopts too much dichotomies in their
strategies management taking advantages from all. They also have a good research and
development department aiming to improve the quality of the products and entering new
technologies to gain sustainable advantages.
The primary activities and the support ones are related to each other, one activity can affect the
cost of another activity. Thus, the primary activity is related to the creation of the product by
handling raw materials together and selling it, and the support activity is related to the
competitive advantages that you gain from buying the components at a low cost and with a high
quality and to the technology used in the product. So those linkages between the two activities
added value to the firm, and can be a source for a sustainable competitive advantages.
Reconciling dichotomies:
This approach of reconciling dichotomies is used in a wide range of activities of Honda, and it
represents the innovation strategy that seeks to adopt different ways and opposite polarities.
Dichotomy means two contradictory polarities that do not fit together, and reconciling in this
context, refers to an approach in which those two poles are somehow made compatible with each
other. Honda’s strategic thinking rejects the trade off, or to choose one strategy, however, Honda
has mixed too many dichotomies to incorporate the best of both worlds, and this contributes to
the success of its strategy.
After Honda had selected its market and customers segments, it is time to decide how it wants to
position itself within this segment.

3. VALUABLE ACTIVITIES
The VSA indicator stands for Vehicle Stability Assist, which is a standard system on most newer
Honda models. The Honda Vehicle Stability Assist System with Traction Control helps sense
and correct oversteering and understeering to improve cornering capabilities. Likewise, it helps
minimize wheel spin in slippery driving conditions. In all, the VSA System on your Honda gives
you a little more confidence behind the wheel by improving traction and vehicle stability.
But what does it mean when that VSA warning light illuminates?
If the system activates, likely in slippery driving conditions, you'll see the VSA warning light
blink. This is normal, as it indicates the system is working. When you see the light come on, it
might be time to lay off the accelerator to regain traction.
If the VSA warning light comes on and stays on while you are driving, there may be an issue
with the system. First, find a safe place to pull over to the side of the road and turn off the engine
for a short amount of time. Restart the vehicle and see if the VSA indicator once again remains
illuminated. If it does, there may be a problem with the system and you should make an
appointment with your Honda dealer to have it looked at.
You can continue to drive with the VSA warning light on, as you will have normal braking and
cornering abilities, just without the stability enhancements the VSA System provides.

4. Strategy analysis
This analysis covers company’s business decisions and its success at establishing competitive
advantage. Also company’s expected strategy responses on its future success and growth.
  STRATEGIES AND FUTURE
 COMPETITIVE ADVANTAGES
STRATEGIES
Purpose of every strategy along with its successful implication is given down below:
1. Enterprise Strategy
The Mission Statement of Honda is try to maintain a global point of view, with the dedication to
supply the highest quality products at a reasonable price for worldwide customer satisfaction.
Moreover, taking new challenges with the pursuit of Initiative, Technology and Quality, Honda
is pursuing their 2010 Vision: Striving to be a company society wants to exist through creating
new value, globalization, and commitment for the future.
2. Corporate Strategy
Honda’s portfolio includes three businesses: Automobiles business, Motorcycles business, Power
business. Even though stepping into Automobile industry rather late at 1963, Honda quickly
leads the industry with characteristics like superior fuel economy, optimum safety, and driving
pleasure. Honda’s sales and production in this industry prove successful steadily not just in U.S.
but also in many regions worldwide.
Meanwhile, motorcycle business is the first business of Honda, from 1963 with the event of the
first oversea plant in Belgium, Honda has devoted in one basic rule: build products close to the
customer. Honda has operated successfully in 28 motorcycle plant in 21 countries, as well as
Honda R&D operations in the U.S., Italy, China, Germany, Thailand, and India. In 2005, the
150-millionth Honda motorcycle created, its business goal is to make Honda cycles more popular
than ever.
The first Power Product engine started in 1953, and now has expanded – includes tillers, portable
generators, outboard engines, lawn mowers, power carrier. Cumulative production of power
products has exceeded 70 million units (May, 2006). Power Products are produced at 11 plants in
9 countries worldwide, sold in 156 countries, and used by around 5.5 million people annually.
Honda is now expanding into robot industry with ASIMO, reaching the sky through Hondajet,
providing financial services worldwide to enhance sales increasing. They all create a very
promising and potential Honda in the future.
3. Business Strategy
R&D is sharpening the business advantage of Honda, together with the fierce competition
between Honda and competitors, and they all define the Business Strategy of Honda. One of the
proudest things about Honda is its R&D system. With the systematic way of resembling, focus
on durability, reliability and basic performance to establish a creative and innovative technical
foundation.
With the wisely approach to the future, the Honda products do care about the economical,
environmental, and social issues – This leads to a increase steady in American and Europe
recently meanwhile the whole industry is going down by some external factors such as U.S.D.
depreciation, Oil price raising, political recession. Honda is keeping involving in the research
and development that benefit people in the future through leading-edge technology and
commitment to innovation that opens up new possibilities in mobility.
With “The Joy of Selling” The dealership of Honda is also one of its strengths. Through creating
products and services that provide the core values that make Honda unique, the Honda’s
associates around the world keep creating such inspiring experience for its customer. Honda put
heartfelt endeavors into services, responding to changing values and increasingly complicated
needs of customer worldwide. Its services focus on improving customer relations, with friendly
and attentive sales, responsive service support, thorough maintenance and repairs. “Life with a
Honda” Honda began unifying its multiple dealership channels into a single Honda sales
channel, seeking to strengthen the Honda brand, enhance customer satisfaction, and help ensure
lifetime customer loyalty.
The manufacturing and distributing system of Honda are also sources for the succession of
Honda. With the global network, Honda’s global strategies somehow include the globalization
characteristic. Honda has established independent local operation around the world and pushed
local autonomy and proactive efforts to localize the needs regional with mutual understanding.
The competition between Honda and others speed up year by year. This is somehow carry the
win/lose characteristic.
The world Automobile market is being taken by Asian Brands. In the U.S. market, the foremost
threat to U.S. car makers is the emergence of Toyota, Honda, and Nissan that are threatening
directly to the wealth being of these Big Boys here, General Motors – the world’s current largest
car manufacturer, Ford – the pioneer of automobile industry, and some others big boys of
Detroit. The raise of Honda and Toyota hit General Motor the most because they came so strong
many years ago.
Honda’s greatest competitor of all time worldwide is Toyota Motor, but the competition around
the world involve Hyundai, Volkswagen, Nissan, General Motor, Ford, Kia, Mazda. The rivalry
against these top car manufacturers in the world has created a work ethic that is unmatched in the
American auto scene. With their constant improvement on their cars, the healthy competition –
that mostly in Japan – leads the way for the production of vehicles that gets more and more miles
per gallon.
4. Operational Strategy
Honda operates in the worldwide market – with 134 production facilities in 28 countries and at
31 R&D facilities in 15 countries, about 167000 Honda employees and associates serve 23
million customers worldwide annually. Honda’s global operations are divided into 6
administrative regions responsible for operating. Hiring and engaging the people and
philanthropic initiatives locally in the communities that Honda operates. Honda is pushing the
independence of their local management and sales operations, at the same time with integrating
and forward-looking plan for each region. They operate under the conduct guidelines that help
member companies and associates in evaluating and managing risks, complying with laws and
regulations, keeping a high level of transparency in operational level, that’s all to maximize the
worldwide customer satisfaction.
5. The Individual Strategy
The individual strategy of Honda is reflected through the Honda’s philosophy – The Three Joy
 The Joy of buying:- the Honda’s associates must try their best to exceed the customers’
expectation.
 The joy of selling:- which concern not only about the relationship between the dealers
and their customers, but they also feel the pride of having a positive relationship with
their customers.
 The joy of producing:- comes from manufacturing, research and development. by
producing quality products that satisfy customers worldwide, the Honda’s employees can
experience pride in exceeding the expectation of their customers.
That all bring the strategies of Honda from their enterprise level, through corporation, business,
operational level, to individual strategy level, that spread the Honda’s strategic spirit throughout
the company.
FUTURE
The future of a company or the strategies to be made to keep an company alive in future can be
framed by keeping in mind the environment and the challenges that are expected to arise in near
future. So we will analysis the future policies of the company by taking Potter’s 5 force model
for environment and challenges that may arise in future
COMPETITIVE ADVANTAGE
Honda Motor produces, sells, and services the all Honda products. There are several factors that
can contribute to a firm’s ability to be competitive in its industry. Building blocks of a
competitive advantage include “efficiency, quality, innovation, and responsiveness to
customers”. A firm with a competitive advantage may experience higher profits than the average
profit in the industry while competing for the same customers.
In the case of Honda, this is true. Honda has many distinctive competencies based on its
 Resource
 Capabilities
Above mentioned competencies allow it to have a competitive advantage in the auto
manufacturing industry.
AREAS:
Three areas that give Honda a competitive advantage in the auto industry include
a) Honda’s engineering and design,
b) Research and development
c) Brand equity
In order to determine whether Honda’s competitive advantage in these three areas is sustainable,
we analyze and apply each one to the VRIO framework.

5.HONdA’S
HONDA’S ENGINEERING AND DESIGN
Honda Engineering develops manufacturing processes, systems and equipment used to build all
Honda products. Honda’s superior design capability has enabled it to build high-quality reliable
products and has also added value to the Honda brand. Honda’s efficient manufacturing
processes have also kept production costs low relative to other automakers in the industry
(Snipes 2008). In terms of value, Honda excels at using its engineering expertise and design
skills to build reliable cars that simply work. This ability is quite valuable to the company and its
industry. Although valuable, Honda’s engineering and design is not rare, because there are other
car manufactures with excellent engineering and design capabilities. For car manufacturers who
are not already competitive with Honda in its engineering and design ability, it would be very
difficult to bridge the gap to competitiveness by imitating Honda’s success. Therefore, Honda’s
engineering and design is inimitable. The final question to ask is whether Honda is organized,
ready and able to take advantage of opportunities via its engineering and design. Honda’s
organization is unique in its management structure in that it differs from most public U.S
corporations. A board consisting of 21 directors runs the company, which allows for faster
decision-making and execution in new product design (Whiston 2010). All of the company’s
business units are aligned to take advantage of design breakthroughs, which leads to a conclusion
that its engineering and design are a source of sustainable competitive advantage.
RESEARCH AND DEVELOPMENT
Honda’s focus on research and development is highly valuable and places it at the forefront of
technology. This allows the company to incorporate technological breakthroughs and
advancements into its wide line of vehicles. Honda also has a very high level of investment in
research and development, which is not common in the auto industry. Honda’s level of
commitment to research and development is also very rare compared to its industry peers. Honda
possesses a strong first mover advantage over many competitors in this area because of the
advanced nature of its research. Competitors not actively pursuing their own research find it very
difficult to catch up to Honda, therefore the company’s R&D is considered inimitable.
Organizationally, Honda keeps the R&D group separate from other divisions within the company
giving its teams freedom to develop new technologies for the company across the board.
Honda’s unique structure and its level of commitment to advanced quality research make its
research and development a sustainable source of competitive advantage in its industry.
HONDA’S BRAND EQUITY
Honda’s brand equity is an extremely valuable source of its competitive advantage since
consumers are willing to pay a premium for Honda’s vehicles because of the power of its brand
and its association with quality and value. As a result, it has led Honda to have best-in-class
repeat purchase rates. Honda has repeatedly been placed among the world’s top 20 most valuable
brands according to a research conducted by Business Week Magazine (Ferret 2006). The Honda
brand ranked 19th on the international list of one hundred most valuable brands in 2005, having
a brand value of $15.8 billion. Honda has very strong brand loyalty as evidenced by the strong
repurchase rate for Honda automobiles relative to the industry norms. 65% of Honda customers
purchase another Honda automobile compared to only 48% for the industry (Ferret 2006. While
it is highly valuable, Honda’s brand equity is not rare. Toyota also has strong brand equity in the
same industry, but recent recalls may have deteriorated its value. Because Honda’s brand equity
has been built over a long period of time, it would be very difficult for competitors to imitate.
Honda’s reputation for reliable cars was not earned over night, making it highly inimitable.
Honda takes advantages of the benefits given by its strong brand by using it as the flagship brand
for the company. By supporting its brand value with superior engineering, design, and research
and development, Honda is able to rely on its brand equity as a source of sustained competitive
advantage.
 6.FINANCIAL STATEMENT ANALYSIS

The analysis of financial statement is a process of evaluating the relationship between

component parts of financial statement to obtain a better understanding of firm financial position.
Analysis is a process of critically examining the accounting information given in financial
statements. For the purpose of analysis, individual items are studied; their inter-relationship with
other related figures is established. Thus, analysis of financial statement refer to treatment
of information contain in financial statement in a way so as to afford a full diagnosis of the
profitability and financial position of the firm concern.

OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS

Financial statement is helpful in assessing the financial position and profitability of the concern.
Keeping in the view of accounting ratio the accountant should calculate the ratio in appropriate
form as early as possible for presentation for management of managerial decisions.

Following are the main objectives of analysis of financial statements:

1. To evaluate the business in terms of profit in present and future.

2. To evaluate the efficiency of various parts or department of the business.

3. To evaluate the short term and long term solvency of business for distributing profit to the
trade creditors and debenture holders.

4. To evaluate the chances of growth of business in the future by preparing budgets and
forecasting.

5. To evaluate the operational efficiency of one firm with another firm by study the comparative
statements.

6. To evaluate the financial and economic stability of the business.

7. To evaluate the actual meaning and consequence of financial data.

8. To evaluate the long-term liquidity of the fund of the business.

USERS OF FINANCIAL STATEMENTS:

There are different users of financial statement analysis. These can be classified into internal and
external users. Internal users refer to the management of the company who analyzes financial
statements in order to make decisions related to the operations of the company. On the other
hand, external users do not necessarily belong to the company but still hold some sort of
financial interest. These include owners, investors, creditors, government, employees, customers,
and the general public.
 FINANCIAL STATEMENTS OF ATLAS HONDA
ATLAS HONDA
PROFIT AND LOSS STATEMENTS
FOR THE YEAR ENDED 2014-2019
participants 2019 2018 2017 2016 2015 2014

Sales 82,412,548 77,478,845 64,534,021 55,022,415 45,772,177 44,478,713

Cost of sale (75,856,677) (69,188,101) (57,754,987) (49,376,506) (41,098,571) (40,253,929)

Gross profit 6,555,871 8,290,744 6,799,034 5,645,909 4,673,606 4,224,784

Sales & (1,924,062) (1,852,057) (1,630,773) (1,456,152) (1,314,231) (1,293,938)

marketing
expense
Administrative (640,209) (634,594) (602,343) (499,915) (432,622) (430,054)
expense
Other Income 1,097,636 877,098 916,333 637,074 543,924 420,651

Other (436,793) (445,037) (404,740) (310,682) (245,132) (223,989)

operating
expense
Share of profit 15,698 50,607 61,084 43,475 26,283 _
of an
associated
company – net
of tax
Profit from 4,641,141 6,287,571 5,118,595 4,059,709 3,251,828 2,697,454
operation
Finance cost (25,818) (22,725) (25,853) (15,280) (8,190) (8,036)

Profit before 4,615,323 6,264,846 5,092,742 4,044,429 3,243,638 2,689,418

taxation
Taxation (1,406,664) (1,601,211) (1,340,263) (1,042,630) (892,747) (687.858)

Profit after 3,208,659 4,663,635 3,752,479 3,001,799 2,350,891 2,001,560

taxation
 ATLAS HONDA

BALANCE SHEET

AS ON 30, JUNE 2014-2019

Particulars 2019 2018 2017 2016 2015 2014

Assets
Non current assets
Property plant and equipment 8,950,633 7,976,101 6,961,919 5,817,700 4,982,552 5,552,816
Intangible assets 168,924 44,905 37 5,379 12,774 4,781
L/T investments 323,497 324,899 292,342 245,508 216,283 -
L/T loans and advances 33,467 31,481 30,108 28,027 27,198 26,396
L/T deposits 13, 882 22,573 17,339 14,937 12,986 9,632
Total non-current assets 9,490,403 8,399,959 7,301,745 6,111,551 5,251,793 4,593,625
Current assets
Stores, spares and loose tools 725,754 650,160 539,104 489,415 421,339 400,424
Stock in trades 5,069,836 2,599,530 2,123,831 1,863,482 1,1660,529 2,042,602
Trade debts 1,116,000 861,224 623,331 608,420 704,597 520,321
Loans and advances 43,794 40,107 38,921 35,877 41,235 35,305
Trade deposits and prepayments 1,007,128 137,663 120,562 64,770 59,568 50,679
S/T investments 5,261,724 8,400,246 7,080,669 5,876,554 4,119,696 3,691,241
Accrued mark-up/ interest 37,614 15,557 21,470 16,842 10,857 11,130
Other receivables 573,080 15,528 6,627 4,910 3,674 4,666
Taxation net 1,149,424 725,750 732,706 542,121 99,185 -
Bank balances 7,480159 9,981,615 7,053,784 4,755,020 3,409,200 2,843,738
Total current assets 22,464,513 23,427,380 18,341,005 14,257,411 10,529,880 9,600,106
Non-current assets classified as held - - - - - 171,459
for sales
TOTAL ASSETS 31,954,916 31,827,339 25,642,750 20,368,962 15,781,673 14,365,190
Equity and liabilities
Equity
Shares capital 1,034,066 1,034,066 1,034,066 1,034,066 1,034,066 1,034,066
Reserves 14,331,698 14,966,654 12,223,467 9,968,057 8,204,479 6,879,247
Total equity 15,365,764 16,000,720 13,257,533 11,002,123 9,238,545 7,913,313
Non-current Liabilities
Retirement benefits 296,409 262,882 228,443 214,620 195,145 192,042
Deferred taxation 700,024 698,042 670,968 566,749 578,249 637,558
Total Non-current liabilities 996,433 960,924 899,411 781,369 773,394 829,600
Current liabilities
Trade and other payables 15,592,719 14,865,695 11,485,806 8,585,470 5,769,734 5,577,694
Taxation- Net - - - - - 44,583
Total current liabilities 15,592,719 14,865,695 11,485,806 8,585,470 5,769,734 5,622,277
Total liabilities 16,589,152 15,826,619 12,385,217 9,366,839 6,543,128 6,451,877
TOTAL EQUITY AND LIABILITIES 31,954,916 31,827,339 25,642,750 20,368,962 15,781,673 14,365,190
 METHODS OF FINANCIAL ANALYSIS
There are three main methods of analyzing financial statements: horizontal or trend analysis, and
vertical analysis. These are explained below along with the interpretation of each analysis:

1. HORIZONTAL ANALYSIS

Horizontal analysis (also known as trend analysis) is a

financial statement analysis technique that shows
changes in the amounts of corresponding financial
statement items over a period of time. It is a useful tool
to evaluate the trend situations.

Formula

H.A = Current Year - Previous Year/ Previous year

2. VERTICAL ANALYSIS
Vertical analysis is the propositional Analysis of a financial statement, each line item on a
financial statement is listed as a percentage of another item. Vertical analysis is also useful for
timeline analysis, to see relative changes in
accounts over time, such as on a comparative basis
over a five-year period.
In the given balance sheet and income statement of
Atlas Honda I’ve used six years data from 2014 to
2019.
Formula for balance sheet
V.A= (Each item of Balance Sheet / Total Assets) *
100
Formula for Income statement
V.A= (Each item of income statement /mark-up interest earned) *100
3. FINANCIAL RATIO ANALYSIS
Ratio analysis is the comparison of line items in the financial statements of a business. Ratio
analysis is used to evaluate a number of issues with an entity, such as its liquidity, efficiency of
operations, and profitability. This type of analysis is particularly useful to analysts outside of a
business, since their primary source of information about an organization is its financial
statements. Ratio analysis is less useful to corporate insiders, who have better access to more
detailed operational information about the organization.
 7.Balance sheet
HORIZONTAL ANALYSIS
YEARS 2019 VS 2018 VS 2017 VS 2016 VS 2015 VS
2018 2017 2016 2015 2014
Assets
Non current assets
Property plant and equipment 12% 15% 20% 17% -10%
Intangible assets 276% 121265% -99% -58% 167%
L/T investments 0% 11% 19% 14%
L/T loans and advances 6% 5% 7% 3% 3%
L/T deposits
Total non-current assets 13% 15% 19% 16% 14%
Current assets
Stores, spares and loose tools 12% 21% 10% 16% 5%
Stock in trades 95% 22% 14% -84% 471%
Trade debts 30% 38% 2% -14% 35%
Loans and advances 9% 3% 8% -13% 17%
Trade deposits and prepayments 632% 14% 86% 9% 18%
S/T investments -37% 19% 20% 43% 12%
Accrued mark-up/ interest 142% -28% 27% 55% -2%
Other receivables 3591% 134% 35% 34% -21%
Taxation net 58% -1% 35% 447%
Bank balances -25% 42% 48% 39% 20%
Total current assets -4% 28% 29% 35% 10%
Non-current assets classified as held for sales
TOTAL ASSETS 0% 24% 26% 29% 10%
Equity and liabilities
Equity
Shares capital 0% 0% 0% 0% 0%
Reserves -4% 22% 23% 21% 19%
Total equity -4% 21% 20% 19% 17%
Non-current Liabilities
Retirement benefits 13% 15% 6% 10% 2%
Deferred taxation 0% 4% 18% -2% -9%
Total Non-current liabilities 4% 7% 15% 1% -7%
Current liabilities
Trade and other payables 5% 29% 34% 49% 3%
Taxation- Net
Total current liabilities 5% 29% 34% 49% 3%
Total liabilities 5% 28% 32% 43% 1%
Total equity and liabilities 0% 24% 26% 29% 10%
 VERTICAL ANALYSIS
YEARS 2019 2018 2017 2016 2015 2014
Assets
Non current assets
Property plant and equipment 28% 25% 27% 29% 32% 39%
Intangible assets 1% 0% 0% 0% 0% 0%
L/T investments 1% 1% 1% 1% 1%
L/T loans and advances 0% 0% 0% 0% 0% 0%
L/T deposits 0% 0% 0% 0% 0%
Total non-current assets 30% 26% 28% 30% 33% 32%
Current assets
Stores, spares and loose tools 2% 2% 2% 2% 3% 3%
Stock in trades 16% 8% 8% 9% 74% 14%
Trade debts 3% 3% 2% 3% 4% 4%
Loans and advances 0% 0% 0% 0% 0% 0%
Trade deposits and prepayments 3% 0% 0% 0% 0% 0%
S/T investments 16% 26% 28% 29% 26% 26%
Accrued mark-up/ interest 0% 0% 0% 0% 0% 0%
Other receivables 2% 0% 0% 0% 0% 0%
Taxation net 4% 2% 3% 3% 1%
Bank balances 23% 31% 28% 23% 22% 20%
Total current assets 70% 74% 72% 70% 67% 67%
Non-current assets classified as held 1%
for sales
TOTAL ASSETS 100% 100% 100% 100% 100% 100%
Equity and liabilities
Equity
Shares capital 3% 3% 4% 5% 7% 7%
Reserves 45% 47% 48% 49% 52% 48%
Total equity 48% 50% 52% 54% 59% 55%
Non-current Liabilities
Retirement benefits 1% 1% 1% 1% 1% 1%
Deferred taxation 2% 2% 3% 3% 4% 4%
Total Non-current liabilities 3% 3% 4% 4% 5% 6%
Current liabilities
Trade and other payables 49% 47% 45% 42% 37% 39%
Taxation- Net 0%
Total current liabilities 49% 47% 45% 42% 37% 39%
Total liabilities 52% 50% 48% 46% 41% 45%
Total equity and liabilities 100% 100% 100% 100% 100% 100%
HORIZONTAL ANALYSIS:
Equity
Atlas Honda Limited’s share capital remained unchanged during the last six years at Rs. 1.034
Billion. The reserves of the company increased gradually over the period primarily due to profit
retention for financing the future growth. Resultantly the total shareholders’ equity stood at
Rs.15.4 Billion with an increase of 94% since 2014.
Non-Current Liabilities
Non-current liabilities, comprising of deferred taxation and retirement benefits increased by 20%
since 2014 primarily due to accumulation of leave absences
Current Liabilities
Current liabilities increased from Rs.5.6 Billion in 2014 to Rs.15.6 Billion in 2019 primarily due
to increase in customer advances and trade related payables, which are in line with the increase
in sales and production trends respectively.
Non-Current Assets
Property, plant & equipment, intangible assets and long term investments constitute the
Company’s non-current assets. Investment in capacity expansion plan besides routine capital
expenditure has resulted in net increase of Rs. 4.4 Billion since 2014 to Rs. 8.9 Billion in
property, plant and equipment. As a part of its strategy for diversification, Atlas Honda Limited
has acquired equity stakes of 29.23% in Atlas Hitec (Private) Limited in 2015 with an investment
of Rs. 0.2 Billion.
Current Assets
Current Assets mainly comprises of stores and spares, stock in trade, trade debts, other
receivables, short term investments and cash & bank balances. Stock levels surged from Rs.2.4
Billion in 2014 to Rs.5.8 Billion in 2019 due to higher production levels. Similarly trade debts
increased from Rs. 0.5 Billion in 2014 to Rs. 1.1 Billion in 2019 on account of higher sales
volume. Further the short term investments and cash balances increased from Rs. 6.5 Billion in
2014 to Rs. 12.7 Billion in 2019. Resultantly, the total current assets increased from Rs. 9.6
Billion in 2014 to Rs. 22.5 Billion in 2019.
VERTICAL ANALYSIS:
Trade & Other Payables
Trade and other payables increased by Rs. 0.7 Billion as compared to last year in line with the
increase in production levels.
Property, Plant & Equipment
Property, plant and equipment increased by Rs. 0.9 Billion as compared to last year mainly on
account of capacity expansion, dies and jigs for new models and BMR.
Stores & Stock in Trade
Stores and stock in trade increased by Rs. 2.6 Billion as compared to last year due to devaluation
of Rupee and increase in raw material prices. Further higher level of inventory is maintained in
accordance with the increased production requirement.
Trade Deposits & Prepayments
Trade deposits and prepayments increased by Rs. 0.9 Billion as compared to last year due to
State Bank’s imposition of the requirement to maintain 100% cash margin on letter of credit.
Other Receivables
Other receivables has increased by Rs. 0.6 Billion as compared to last year on account of
unadjusted sales tax receivable from the government.
 8.PROFIT AND LOSS STATEMENT
HORIZONTAL ANALYSIS
YEAR 2019 VS 2018 VS 2017 VS 2016 VS 2015 VS
2018 2017 2016 2015 2014
Sales 6% 20% 17% 20% 3%
Cost of sale 10% 20% 17% 20% 2%
Gross profit -21% 22% 20% 21% 11%
Sales & marketing expense 4% 14% 12% 11% 2%
Administrative expense 1% 5% 20% 16% 1%
Other Income 25% -4% 44% 17% 29%
Other operating expense -2% 10% 30% 27% 9%
Share of profit of an -69% -17% 41% 65%
associated company – net
of tax
Profit from operation -26% 23% 26% 25% 21%
Finance cost 14% -12% 69% 87% 2%
Profit before taxation -26% 23% 26% 25% 21%
Taxation -12% 19% 29% 17% 129687%
Profit after taxation -31% 24% 25% 28% 17%

VERTICAL ANALYSIS
YEAR 2019 2018 2017 2016 2015 2014
Sales 100% 100% 100% 100% 100% 100%
Cost of sale 92% 89% 89% 90% 90% 91%
Gross profit 8% 11% 11% 10% 10% 9%
Sales & marketing expense 2% 2% 3% 3% 3% 3%

Administrative expense 1% 1% 1% 1% 1% 1%
Other Income 1% 1% 1% 1% 1% 1%
Other operating expense 1% 1% 1% 1% 1% 1%
Share of profit of an 0% 0% 0% 0% 0% #VALUE!
associated company – net of
tax
Profit from operation 6% 8% 8% 7% 7% 6%
Finance cost 0% 0% 0% 0% 0% 0%
Profit before taxation 6% 8% 8% 7% 7% 6%
Taxation 2% 2% 2% 2% 2% 0%
Profit after taxation 4% 6% 6% 5% 5% 5%
HORIZONTAL ANALYSIS
Sales & Gross Profit
The Company remained focused towards delivering objective of sustainable growth through
value creation. The momentum of increasing sales continued over the period of six years on
account of positive market demand. It resulted in sales revenue of Rs. 82.4 Billion in 2019 with
an achievement of cumulative average growth rate of 13% over six years period. The cost of
sales was recorded at Rs. 75.8 Billion with a cumulative average growth rate of 14% since 2014,
on account of volume growth, devaluation, increase in raw material prices and other inflationary
Factors. Resultantly, Gross profit margin declined from 9.5% to 8.0%.
Selling General and Administrative Expenses
SG&A increased from Rs. 1.72 Billion in 2014 to 2.56 Billion in 2019 with a cumulative average
growth rate of 8% over six years period owing to higher volumes and rising inflationary prices.
However, as a percentage of sales they remained well under control and decreased from 3.9% to
3.1%.
Other Operating Income
Other operating income increased from Rs. 0.4 Billion in 2014 to Rs. 1.1 Billion in 2019 over the
period of six years with cumulative average growth rate of 21%. This is on account of
investment of surplus funds in TDRs, mutual funds and income from associate.
Other Operating Expenses
Other operating expenses increased from Rs. 0.2 Billion in 2014 to Rs. 0.5 Billion in 2019 over
the period of six years with cumulative average growth rate of 16 %. It mainly comprises of
provision for workers’ welfare funds and workers’ profit participation funds that were directly
related to profits.
Taxation
The variation in taxation charge remained in line with profitability of the Company. This effect
of gradual reduction in applicable corporate tax rates, however subdued by the levy of super tax.
VERTICAL ANALYSIS
Gross Profit
Although the revenue has increased from Rs. 77.5 Billion to Rs. 82.4 Billion as compared to last
year, the gross profit has decreased from Rs. 8.3 Billion to Rs. 6.6 Billion because of increase in
raw material prices, currency devaluation and inflationary factors.
Profit After Tax
Net profit after tax reduced from Rs. 4.6 Billion to Rs. 3.2 Billion as compared to last year
mainly because of increase in manufacturing and operating costs as explained above in addition
to higher tax charge.
 9.ATLAS RATIO ANALYSIS
1. Liquidity ratio
LIQUIDITY RATIO 2019 2018 2017 2016 2015 2014
current ratio 1.440705 1.575936 1.596841 1.660644 1.82502 1.707512
acid test ratio 0.518887 0.673544 0.616577 0.556379 0.593395 0.508608
collection period 2.667674 0.144434 0.156738 0.142319 0.114287 0.127849
days to sell inventory -24.0604 -13.5259 -13.2383 -13.5865 -102.14 -18.2675

Liquidity ratios show whether the company’s current assets will be able to pay its debts in time or not. It
is very important for lender and creditor wants to know the financial situation to decide whether to
grant loan or not. The current ratio of 1.40 times slightly declined over last year of 1.60 that means
company’s ability to pay short term obligation that are due within an year as horizontal analysis shows
increase in investments and cash balances. This decline is due to continued investments in capacity
expansion, new models and localization of critical parts. Acid test ratio was recorded at 0.5 times for
three years times and improved in 2017 and 2018. As compared to 2018, it declined by 0.1 times owing
to higher closing inventory because Atlas’s acid-test ratio is much lower than the current ratio, it means
that a company's current assets are highly dependent on inventory.

Atlas’s fluctuating collection period over these years that are increasing and decreasing with
inconsistency, now has been enhanced to 2.6 times in 2019 from 0.14 times last year 2018 that’s very
favorable for the company as less the collection period more you can reinvest. DSI indicates the average
time in days that a company takes to turn its inventory, including goods that are a work in progress, into
sales. This figure represents how many days a company’s current stock of inventory will last. A lower DSI
is preferred as it indicates a shorter duration to clear off the inventory, though the average DSI varies
from one industry to another. Atlas’s DSI is negative and this year it’s lowest of all previous years that
means Atlas needs a shorter duration to clear off the inventory. And it’s better because company’s
current assets are highly dependent of inventory that are causing low acid test ratio so, company should
increase it.

2. Solvency ratio
SOLVENCY RATIO
ratios 2019 2018 2017 2016 2015 2014
debt to equity ratio 1.079618 0.989119 0.934202 0.851367 0.708242 0.815319
total debt ratio 0.519142 0.497265 0.482991 0.459858 0.414603 0.449133
long term debt to equity ratio 0.064848 0.060055 0.067842 0.07102 0.083714 0.104836
fixed asset to equity 0.617633 0.524974 0.550762 0.555488 0.568465 0.580493
current liabilities to total 0.939935 0.939284 0.92738 0.916581 0.881801 0.871417
liabilities
 The debt to equity ratio shows the percentage of company financing that comes from creditors and
investors. Atlas’s constantly improving value of debt to equity ratio over years from 2014 to 2018
especially in 2019 it has gone above 1 which indicates that more creditors are financing is used than
investor financing. Creditors seem quite satisfied with the company’s performance. But analyzing equity
financing contribution improved to 48% showed vertical analysis and the debt ratio analysis shows that
Atlas total debt ratio is below 1 over years translates the fact that a greater portion of a company's
assets is also funded by equity as the company’s reserves are also increasing showed horizontal analysis.
A consistent long term debt to equity ratio of Atlas indicates a consistency in business risk since it may
be able to pay for the interest expense on the debt but its cash flows declined because of low
profitability this year but company should work on these factors to decrease this ratio. Atlas’s fixed
assets to stockholders' equity ratio was around 0.5 for 5 years now in 2019 it has become 0.6 still less
than 1 that means stockholders' equity is more than the fixed assets this year also the company has
lessened the usage of debts to finance a portion of fixed assets this year. The current to total Liabilities
ratio measures the percentage of total current liabilities to total liabilities and this ratio is close to 1 of
Atlas over the years from 2014 to 2019 and consistent in last two years shows current liabilities are
approximately equal total liabilities because horizontal analysis shows advances and trade related
payables increased the portion of current liabilities in 2019.

3. Return on investment
RETURN ON INVESTMENT 2019 2018 2017 2016 2015 2014

ROA 0.10122 0.147243 0.147345 0.148121 0.149482 0.139893

ROE 0.208819 0.291464 0.283045 0.272838 0.254466 0.252936

ROA gives an idea to how sufficient management is using its assets to generate earnings. The more the
Net Income as compare to the value of total assets; the more will be the ROA. Atlas has recovered its
ROA in 2015 and then able to maintain it until 2018 because their net income was high but it declines to
0.10% means Atlas is not getting the desired level of return and net income. And its decreasing because
of increased expenses. As we can see in income statement net income declined because gross profit and
profit from operations decreased. But the total assets are consistent in their growth that cause decline
in ROA because bank is not utilizing assets efficiently.

Return on equity revels how much profit a company earned in comparison to the shareholder equity
found in balance sheet. ROE was constantly improving at low rate from 2014 as it goes to 0.25% to
0.29%. In 2018 stock equity contribution has increased drastically, shows balance sheet vertical analysis,
as compare to net income didn’t improved with the same rate so the ROE increased at low rate. As
lower the net income, lower will be the ROE in 2019 both equity and net income has declined that cause
a downfall in ROE to 0.20%. And in 2019 both net income and equity is declined that also cause because
net profit is declining because of increased expenses.

Both showed improvement and decline in 2019 that means Atlas is not able to efficiently utilize the
assets and invested equity to generate return this year.

4. Profitability Ratios

profitability ratios 2019 2018 2017 2016 2015 2014

gross profit margin 0.07954 0.10700 0.10535 0.10261 0.10210 0.09498
9 7 6 1 6 4
operating profit margin 0.05631 0.08115 0.07931 0.07378 0.07104 0.06064
6 2 6 3 4 6
net profit margin 0.03893 0.06019 0.05814 0.05455 0.05136 0.045
4 2 7 6 1

Profitability means the ability of a company to earn a profit. Firm’s profitability is very
important both for stockholders and creditors because revenue in the form of dividends is being
derived from profits, as well as profits are one source of funds for covering debts. Profitability
ratio analysis is a good way to measure company’s performance.
A key indicator of firm’s profitability is gross profit margin, measuring the amount of its gross
profit per 1 sales rupee. Gross profit margin ratio shows the part of profit remains after deducting
cost of goods sold from sales. Gross profit margin is constantly on declining mode. Gross profit
reflects the effect of sale and CGS both. From horizontal analysis we can clearly observe that for
2019 sales has decline by 14% (20-6) and cost of goods sold has decline by 10% (20-10). As the
sales has fallen with greater percentage than CGS, gross profit margin reduced by 0.02746
(0.10700-0.07954). Vertical analysis also showing the growth of cost of goods sold in year 2019.
Cost of goods sold has increased by 3% (92-89).
Multiple factors can influence sales and CGS. Factors effecting sales may include cutting down
advertising budget, poor economic condition, lack of finished inventory or poor hiring etc. High
CGS is result of untrained employees, old plants and techniques, high raw material prices. This
amount includes the cost of the materials and labor directly used to create the good. It excludes
indirect expenses, such as distribution costs and sales force costs.
Operating profit margin shows the portion of net operating income from sales. The operating
profit margin is a measure of operating income of an enterprise, generated by 1 rupee of sales.
The numerator of this ratio is net sales excluding costs of goods sold and operating expenses
(selling and administrative). Basically, the numerator defines the operating income of the
company. Profit from operations is on declining mode. Different factors effects net operating
profit such as admin expense, sales and marketing expense etc. Horizontal analysis shows that
other operating expenses increased from Rs. 0.2 Billion in 2014 to Rs. 0.5 Billion in 2019 over
the period of six years. It mainly comprises of provision for workers’ welfare funds and workers’
profit participation funds that were directly related to profits. Operating profit margin was
improved in 2018 by 0.00184 (0.08115-0.07931). SG&A increased from Rs. 1.72 Billion in 2014
to 2.56 Billion in 2019. However, as a percentage of sales they remained well under control and
decreased from 3.9% to 3.1%. Other operating income increased from Rs. 0.4 Billion in
2014 to Rs. 1.1 Billion in 2019 over the period of six years. This is on account of investment of
surplus funds in TDRs, mutual funds and income from associate.
Being a key ratio of profitability and one of the most closely followed numbers in finance, net
profit margin (generally expressed as a percentage) measures net income generated by 1 rupee of
sales. Net profit margin shows the portion of net income from sales. The higher this ratio is, the
better company performs in terms of profitability. Net profit after tax reduced from Rs. 4.6
Billion to Rs. 3.2 Billion as compared to last year mainly because of increase in manufacturing
and operating costs. Another reason of decline is competitive forces within an industry (increase
trend of imported cars) and adverse economic conditions.

5. Activity ratio

ACTIVITY RATIOS 2019 2018 2017 2016 2015 2014

cash turnover 11.0174 7.76215 9.14885 11.5714 13.4260 15.6409
9 5 1 4 8 3
account recievable turnover 134.949 2492.48 2296.83 2529.53 3149.96 2815.82
3 4 7 1
inventory turnover 14.9624 26.6156 27.1938 26.4969 3.52459 19.7072
working capital turnover 11.9928 9.04948 9.41388 9.70080 9.61570 11.1816
7 6 9 9 6
PEE turnover 9.20745 9.71387 9.26957 9.45776 9.18649 8.01011
5 5 4 1 3 8
total asset turnover 2.57902 2.43434 2.51665 2.70128 2.90033 3.09628
6 9 8 7 7 4

Activity ratios are a category of financial ratios that measure a firm's ability to convert different
accounts within its balance sheets into cash or sales. Activity ratios measure the relative
efficiency of a firm based on its use of its assets, leverage, or other similar balance sheet items
and are important in determining whether a company's management is doing a good enough job
of generating revenues and cash from its resources.
The asset turnover ratio, also known as the total asset turnover ratio, measures the efficiency
with which a company uses its assets to produce sales. The asset turnover ratio formula is equal
to net sales divided by the total or average assets of a company. A company with a high asset
turnover ratio operates more efficiently compared to competitors with lower ratios. Asset
turnover ratio slightly declined from 2.7 times in 2018 to 2.6 times in 2019 on account of
expanding asset base. Deep-down Vertical analysis shows that current asset has declined by 4%
(74-70) from 2018 to 2019. Bank balances has sharply declined by 8% during last year. This is
due to capacity & BMR investments in property, plant and equipment and increase in working
capital needs.
Inventory turnover ratio, defined as how many times the entire inventory of a company has been
sold during an accounting period, is a major factor to success in any business that holds
inventory. It shows how well a company manages its inventory levels and how frequently a
company replenishes its inventory. In general, a higher inventory turnover is better because
inventories are the least liquid form of asset. The inventory turnover witnessed a downward trend
from 23.4 times in 2018 to16.8 times in 2019 mainly due to increase in stock in trade. The higher
stock in trade is on account of increased raw material prices, exchange devaluation and to meet
the future anticipated demand in the market. This resulted in inventory turnover of 22 days as
compared to 16 days of last year. A low inventory turnover ratio shows that a company may be
overstocking or deficiencies in the product line or marketing effort. It is a sign of ineffective
inventory management because inventory usually has a zero rate of return and high storage cost.
The accounts receivable turnover ratio, also known as the debtor’s turnover ratio, is an efficiency
ratio that measures how efficiently a company is collecting revenue. The accounts receivable
turnover ratio measures the number of times over a given period that a company collects its
average accounts receivable. This year, the Company has received impressive sales orders from
its institutional clients. Resultantly, more orders from institutional clients increased the average
value of debtors. Accordingly, the debtor turnover/ account receivable turnover increased to 4
days in 2019 as compared to 3 days in 2018. This translated into debtors turnover of 83.4 times
as compared to 104.4 times of last year. Horizontal analysis clearly providing trend picture of
receivable turnover. Sales has decline by 14% in last year but receivables has declined by only
8%. It means company’s credit policy is not good.
The working capital turnover ratio measures how well a company is utilizing its working capital
to support a given level of sales. Working capital is current assets minus current liabilities.
Recent year this ratio has increased by 2.94332 times (11.9928- 9.04948). A high turnover ratio
indicates that management is being extremely efficient in using a firm's short-term assets and
liabilities to support sales.
PPE ratio examine how many rupees of sales company gets for each rupee invested in property,
plant, and equipment (PPE). It's a measure of how efficient company are at generating revenue
from fixed assets such as buildings, vehicles, and machinery. In 2019 this ratio has declined by
0.51. The PPE t/o is low because of manufacturing problems, a bottleneck in the value chain that
held up production during the year and resulted in fewer than anticipated sales.

6. Market measures:
MARKET MEASURES 2019 2018 2017 2016 2015 2014
price-to-earning 12.19355 11.6408 15.41873 13.27586 14.75771 15.08247
earnings yield 0.082011 0.085905 0.064856 0.075325 0.067761 0.066302
dividend yield 0.05291 0.051429 0.033053 0.037662 0.035821 0.034176
dividend payout rate 0.645161 0.59867 0.509642 0.5 0.528634 0.515464

Market value ratios are used to evaluate the current share price of a publicly-held company's
stock. These ratios are employed by current and potential investors to determine whether a
company's shares are over-priced or underpriced.

The price earnings ratio is a ratio of valuing a company that measures its current shares price
relative to its per-share earnings. In 2019 earnings on behalf of each outstanding share is
increasing to 12.19 times from 11.64 times but the market price per share for the year 2019 is
declined to 378 as well as EPS to 31 they both declined that cause increase in P/E Ratio but the
internal analysis shows the investor’s confidence has decreased and are now willing to pay less
for each share. It’s because the debt financing has increased this year but current and acid test
ratio decreased as well. Because the horizontal analysis showed the current liabilities decreased
from 29% to 5% but remain positive but current assets decreased from 28% to -4%.

The earnings yield (which is the inverse of the P/E ratio) shows the percentage of how much a
company earned per share. This yield is used by many investment managers to determine
optimal asset allocations and is used by investors to determine which assets seem underpriced or
overpriced. During last 6 years 2014-2019 earning yield has increased by 0.01571 but during
2018-2019 it has dropped by 0.00329.

The dividend yield is a financial ratio that measures the amount of cash dividends distributed to
common shareholders relative to the market value per share. Investors use the dividend yield
formula to compute the cash flow they are getting from their investment in stocks. In other
words, investors want to know how much dividends they are getting for every dollar that the
stock is worth. During last year it has improved by 0.0015 time as compared to 2018. High
dividend yield increases customer confidence over investment and attracts new investors.

The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders
relative to the net income of the company. It is the percentage of earnings paid to shareholders in
dividends. During last year this ratio has increased by 4.65%.

10.EVALUTION AND INFRENCES

 SHORT-TERM LIQUIDITY
As the auto industry of Pakistan has fallen into a deep crisis, as car sales witnessed a decline of
around 50pc in July 2019, with expectations of a further decline in figures by the end of August.
The assessment of Atlas short-term liquidity is a mixed one. Both current and acid-test ratios are
declining due to continued investments in capacity expansion, new models, localization of
critical parts when the industry is in downfall and sharp decline on account receivable turnover
because of poor credit policy when account receivables are increasing. Yet Atlas’s cash position
compares favorably because of increase investment and cash balances, and inventory turnover
ratios are declining when it’s dependent on inventory to pay its current liabilities. Moreover,
Atlas its cash position is strong, allowing for cash to be used for non-operating activities like
acquisitions and retirement of debt. Atlas’s hold critical position in industry shows the market
share:

 CAPITAL STRUCTURE AND SOLVENCY

Atlas’s has transformed its capital structure in recent year to a less equity contributed and more
credit financing. This inference is drawn from above mentioned measures.
Total liabilities make up about 52% of total financing and equity is 48% of total equity and
liabilities. On the positive side, debt ratio is closer to 1 that shows increase in equity financing
and current assets are 70% of total assets. Still the Profitability ratios show week position but
still the company was able to have maintained consistency in market ratios. In 2019, sales
sharply declined from 20% to 6% presented in horizontal analysis as in industry it’s position is
also low with respect to sales:

 RETURN ON INVESTED CAPITAL

Atlas’s return on net operating assets increased in 2015 and then became consistent to 14 until
2019 in which it declined to 0.09. And ROE was increasing every year until 2019 in which it
slightly dropped to 0.20 from 0.29 in 2018 that means generation of return on equity decreased
while they introduced new products but diminishing economy didn’t supported it but still it’s
market ratios are favorable that has increased contribution of equity but not equal to the
proportion of debt in total financing. Total market condition is as follows that is affecting
company’s return on invested capital main reason is downfall in economy that the automobile
customers are becoming price sensitive:

 ASSET TURNOVER (UTILIZATION)

Atlas’s cash turnover is improved this year. While its turnover of account receivables fluctuates
from year to year until 2018 then sharply declined in 2019, Atlas’s inventory turnovers are
improving and exceed industry norms. They can improve their working capital more through
less receivables and inventories. Nevertheless, asset turnover is recovered in 2019 despite the
relatively PPE turnover and increased working capital turnover.
 OPERATING PERFORMANCE AND PROFITABILITY
Atlas’s gross profit margin that was continuously
improving from 2014 to 2018 has sharply diminished
in 2019 both horizontally (22% to -21%) and
vertically (11% to 8%). Yet its net profit margin is
also decreased this year like other profitability
ratios. This is due primarily to 3% increase is COGS
this year vertically as all other expenses remain same
like previous years. This shows the inability of
Atlas’s management in controlling these COGS.
As their market share is declined this year in the
industry they should not only focus on individual
but also industry as a whole while working on
market ratio. That has shown positive image of atlas
as a company but as in industry we can see the
critical position Atlas is falling in:
11.RECOMMENDATIONs
 12.Conclusion
After analyzing Alas as an individually than in an industry we come to conclude the following
points regarding Atlas’s financial performance:
 Low profitability it’s the result of poor management of COGS.
 More reliance on inventory causing decline in acid test ratio
 Increase credit financing
 Account receivable turnover shows company’s poor credit policy
 Equity financing contribution also increasing at 48% but ROA is very low
 Market ratios as individual are favorable but critical as in industry