Honda’s leverage ratios
In the auto industry, it’s important for investors to pay attention to a company’s leverage position and related ratios. High debt levels increase the risk profile of a company because debt is a contractual obligation a company must fulfill regardless of market conditions.
In this part, we’ll take a look at Honda Motor Company’s (HMC) key leverage ratios.
We can define net debt as total debt minus cash and cash equivalents. Net-debt-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] is an important leverage ratio used to analyze a company’s financial health. At the close of the most recent reported quarter ended March 31, 2016, Honda’s net debt-to-EBITDA ratio was ~4.0x.
This is worse than its direct US peers (IYK) General Motors’s (GM) -0.47x and Ford’s (F) -0.76x, as well as its Japanese peer Toyota’s (TM) 2.9x. GM and Ford both have negative net debt, which means these companies have more cash and cash equivalents than total debt. The net-debt-to-EBITDA ratio of Italian-American automaker Fiat Chrysler (FCAU) is 0.85x.
Interest coverage ratio
Due to the highly capital-intensive nature of the automotive business, companies tend to utilize debt extensively. Therefore, it’s not always bad to have high leverage. What matters most is a company’s ability to repay its debt and related interest with ease. A company’s ability to meet its interest obligations can be understood by looking at its interest coverage ratio.
At the end of the most recent reported quarter, Honda’s interest coverage ratio was ~27.7x. This is far better than the GM’s interest coverage ratio of 15.6x and Ford’s ratio of 14.1x. Toyota, the world’s largest automaker, still has a better interest coverage ratio as it is an efficient manufacturer with higher margins and lower financial risk than its closest market peers.
In the next part of this series, we’ll discuss where Honda stands in the electric vehicle segment.