Recommendation to buy or sell stocks of Hyundai Motors
Recommendation to buy or sell stocks of Hyundai Motors
Introduction
The importance of financial ratios in analyzing a company’s monetary success cannot be overstated. Investors and other external consumers of financial data may frequently need to assess a company’s profitability and financial health. This analysis considers the company’s success, identifies any flaws, compares current and previous productivity, and compares performance levels to industry standards. Financially stable businesses are desired because they effectively secure their capacity to deliver revenue for investors while retaining or increasing value.
Analysis of Financial Ratios
Ordinary Share Capital
Ordinary share capital is a financial ratio that reflects a corporation’s equity; hence its issuance is documented on the balance sheet as part of the equity reserves. Common stock and equity shares are other names for ordinary shares (Backer & Gosman, 1980). This ratio can be understood as the amount of cash an organization acquires from other sources by issuing common shares. A high amount of ordinary share capital demonstrates a high level of trust placed in the organization by members of both the public and private sectors.
From the data collected, Hyundai’s Ordinary Share Capital is KRW1488.99B, Toyota’s Ordinary Share Capital is JPY397.05B and Mitsubishi’s Ordinary Share Capital is JPY284.38B. In a nutshell, Hyundai has the highest ordinary share capital compared to Toyota and Mitsubishi in the third fiscal quarter of 2021. Therefore, from an investor’s perspective, it is viable to conclude that people have more trust in Hyundai’s prospects than in Toyota and Mitsubishi’s. Consequently, it is better to buy Hyundai’s shares among the three, going by analysing this ratio.
Current Ratio
One of the quite often used liquidity indicators is the current ratio. The current balance defines the current asset-to-current-liability ratio. The ratio shows whether a company or an organization is in a position to settle its current liabilities using its existing assets (Backer & Gosman, 1980). A current ratio of one shows that an organization’s current liabilities can be covered by its current assets. In contrast, a current balance of less than one shows that a company’s current liabilities are too high to be settled by the company’s existing assets. Investors and regulators consider a current ratio of one and above as a signal for the organization’s insolvency.
In the third quarter fiscal of 2021, Hyundai’s Current ratio was 1.472, Toyota’s Current ratio was 1.07, and Mitsubishi’s Current ratio was 1.1. It is evident from this data that Hyundai limited had the highest current ratio, signalling that among the three motor companies, Hyundai is most likely to stay solvent for a more extended period than Toyota and Mitsubishi. Therefore, from an investor’s point of view, it would be a better decision to buy shares of Hyundai than shares of Toyota or Mitsubishi.
Quick Ratio
Often referred to as the Acid test ratio, the Quick Ratio is a financial ratio used to determine the financial liquidity of a company or an organization. It aids in predicting the actual status of the organization in terms of liquidity. The Quick ratio will tell the corporation whether or not they will be able to meet their existing obligations if they ignore their sales income. A 1:1 quick ratio indicates that assets are adequate to cover obligations (Alqam et al., 2021). This ratio suggests that even if sales revenue is not considered, the firm should have a good amount of cash at hand to settle all of its current debts.
A quick delve into financial ratios’ data of Hyundai, Toyota and Mitsubishi for the third quarter fiscal of 2021 reveals that Hyundai’s Quick Ratio was 1.22, Toyota’s Quick Ratio was 0.92, Mitsubishi’s Quick Ratio was 1.03. Toyota’s quick ratio of 0.92 is less than 1:1, indicating that the company is not in a position to settle its current debt using its cash at hand. This ratio signifies a looming state of solvency for the company. Comparing Mitsubishi and Hyundai, one quickly notices that Hyundai has a higher quick ratio. Therefore, as an investor basing his decision on the value of the quick ratio, it would be appropriate to invest in Hyundai by purchasing its shares.
Operating Margin
After subtracting direct expenses and maintenance costs and before taxes and other indirect charges such as interest, the operational margin or operating profit margin quantifies how much of a company’s income is left over. The operating margin is a metric used to assess the efficiency of a company’s pricing strategy (Gallery et al., 2011). Operating margin enables investors, regulators and the public to know the amount of cash an organization is earning as a profit for every dollar of sales before incorporating taxes and interests.
Most investors prefer investing in companies with a bigger operating margin since a bigger margin shows that a company is making good profits from every dollar of sale. Therefore, when assessing Hyundai’s Operating Margin of 2.31%, Toyota’s Operating Margin of 10.03% and Mitsubishi’s Operating Margin of 5.1%, an investor should opt to buy shares of Toyota as this will guarantee good profits in return. In case a has shares in Hyundai, he should sell them and invest the proceeds in Toyota.
Market Capitalization
Market capitalization is defined as the market value of all the outstanding shares of an organization. It is also known as market cap, and it determines the worth of a company. This financial ratio is essential to investors since it enables them to compare different firms based on their worth and viability in the open financial markets (Gallery et al., 2011). Market cap is the product of a company’s current share price and its total outstanding shares. This financial ratio also indicates the amount investors are ready to invest in an organization’s outstanding shares.
Looking into financial ratios’ data of the third quarter fiscal of 2021, one quickly notices that Hyundai’s Market Capitalization of 48789.68B is higher than that of Toyota, which is 32629.97B Mitsubishi’s JPY457.52B. Therefore, by market capitalization as the determinant of investment decision, one should invest in Hyundai by purchasing its shares. Its market cap shows that it has more worth in the financial market than Toyota and Mitsubishi.
Equity Capital
Equity capital is the amount of money that investors invest in an organization in exchange for shares. In addition to loan financing, most companies often regard equity capital as their primary source of capital. In the third quarter fiscal of 2021, Hyundai’s Equity Capital was KRW74711.05B, Toyota’s Equity Capital was JPY24610.42B and Mitsubishi’s Equity Capital wasJPY517.66B. This clearly shows that Hyundai’s equity capital is higher than that of Toyota and Mitsubishi, indicating that Hyundai has a stable primary source of capital. Therefore, it would be best to invest in Hyundai by buying its shares based on this financial ratio.
Debt Ratio
The debt ratio is a financial metric that is used to assess the solvency status of a company. The ratio somewhat assesses a company’s capacity to cover its total liabilities using its total assets. It shows the number of a company’s assets that it will have to liquidate to settle its liabilities. The debt ratio also determines the financial leverage of a company (Alqam et al., 2021). This ratio is essential to both investors and creditors since it determines the overall debt burden of a company. In the third quarter fiscal of 2021, Hyundai had a Debt ratio of 1.38, Toyota had a Debt ratio1.074, and Mitsubishi had a Debt ratio of 1.51. This data shows that Hyundai had a lesser debt burden than Mitsubishi and a higher debt burden than Toyota.
Recommendation and Conclusion
According to the financial ratios analysed above, Hyundai has a better financial standing than Toyota and Mitsubishi. Hyundai’s Market Capitalization of 48789.68B shows that the company has a greater market worth than its competitors, Mitsubishi and Toyota. Besides looking into Hyundai’s Operating Margin of 2.31%, which sets it below Toyota’s Operating Margin of 10.03% and Mitsubishi’s Operating Margin of 5.1%, Hyundai is performing excellently regarding all other financial ratios. Therefore, an investor should disregard the use of operating margin as the only determinant of investment choice and consider other financial ratios as well. In conclusion, Hyundai has performed better in the third quarter fiscal of 2021 than Toyota and Mitsubishi, and therefore, an investor should invest in Hyundai by purchasing its shares.
References
Alqam, M. A., Ali, H. Y., & Hamshari, Y. M. (2021). The Relative Importance of Financial Ratios in Making Investment and Credit Decisions in Jordan. International Journal of Financial Research, 12(2), 284. https://doi.org/10.5430/ijfr.v12n2p284
Backer, M., & Gosman, M. L. (1980). The Use of Financial Ratios in Credit Downgrade Decisions. Financial Management, 9(1), 53. https://doi.org/10.2307/3665313
Gallery, N., Gallery, G., Brown, K., Furneaux, C., & Palm, C. (2011). FINANCIAL LITERACY AND PENSION INVESTMENT DECISIONS. Financial Accountability & Management, 27(3), 286–307. https://doi.org/10.1111/j.1468-0408.2011.00526.x