CBEB 2102

FINANCIAL MANAGEMENT
GROUP ASSIGNMENT
HONEYWELL INTERNATIONAL INC.

AMIMAH BINTI ALI CEB 100002

NUR HASNIZA BT RAHIM CEB 100053
NUR SYIFAA BINTI NAJIB CEB 100055
SITI SHARAH BINTI MOHAMAD CEB 100076
Part A (2) : Industry and sector averages

VALUATION RATIOS

Company Industry Sector S&P 500

P/E Ratio (TTM) 16.54 18.54 15.91 20.64

P/E High - Last 5 Yrs. 30.29 57.13 63.71 100.82

P/E Low - Last 5 Yrs. 15.13 10.87 14.57 12.68

Beta 1.39 1.08 1.12 1.17

Price to Sales (TTM) 1.13 1.94 1.45 2.13

Price to Book (MRQ) 3.51 2.33 1.25 3.67

Price to Tangible Book -- 6.66 1.7 6.19

(MRQ)

Price to Cash Flow (TTM) 11.63 14.26 9.47 16.56

Price to Free Cash Flow 68.27 15.46 14.98 24.77

(TTM)

% Owned Institutions -- -- -- --

The Valuation Ratios Report helps Honeywell decide whether a stock is inexpensive or costly
relative to alternative investment opportunities. Honeywell's ratios are presented in
comparison to its Company, Industry, Sector, and the S&P 500.

Industry : The company universe is grouped into more than 100 distinctive industries.
These industries have been developed to contain those companies that operate along similar
lines of business.
Sector : Industries are grouped into 12 distinct sectors. These ectors represent
different segments of the US economy.

S&P 500 : The S&P 500 is used to represent the market as a whole.

Price to earnings (P/E) ratio of the single measure most widely used value of the
shares. This is because the key to the shareholders share of ownership interest in a
companys profits flow. P/E ratio is calculated by dividing current price by the amount of
diluted earnings per share from continuing operations before extraordinary items and
accounting changes during the last four quarters. P/E ratio give Trailing Twelve Month
(TTM). P/E is high and low for the last 5 years, including for the context.

Beta measures the stock price volatility than the overall stock market. Honeywell uses
the S&P 500 as a proxy for the market; we automatically define Beta as a 1.00. We show that
the higher the stock volatility and lower beta indicates greater stability. We can see the data
from Honeywell that I all exceed 1.00. Share with a Beta of 1.1, on average, rise or fall 17%
more than the market. So a 1.0% market move up or down should drive the measures 1.7% of
the stock.

Price to sales are generally used to evaluate the companies had no income and does
not pay dividends. For Honeywell, we can consider that the high multiples of sales and high
growth rate suggest optimistic expectations of future income on the part of investors. Also,
sales trends tend to be less than the earnings trend is uncertain, because the income can vary
widely from one year to come as temporary issues such as reserves or profits and losses on
disposals of assets. Therefore, a price to sales can be useful in situations where the P/E ratio
is distorted by unusual swings in income from Trailing twelve Month (TTM).

Price to book theoretical comparison of the company's stock value to the value of its
assets free and clear of debt. For some companies, which may, of course, is valid. But
today, HoneyWell need to take with a grain of salt. Important asset in the books of the
company at the price paid to acquire them, less accumulated depreciation /amortization
charge. The idea behind this cost is gradually reducing to zero the value of assets during the
period of use, the approach they are considered obsolete.
 But note: write-offs based on certain accounting formula that may or may not
resemble the real world progress toward absolescence. In addition, it is not clear that the book
value is effective in measuring the value of service-oriented companies that are less
dependent on factories bricks and traditional mortar and machinery. Price book ratio is given
for the recent quarter was (MRQ). Price to Tangible Book is similar Price to Book, except
that we have substracted the value of intangibles such as goodwill from book value.

Price to cash flow ratio is the current price divided by Cash Flow per Share Traiing
Twelve Month (TTM). When measuring the performance of Honeywell, operating cash flow
is an alternative to net income which is calculated by deducting all expenses from revenue.

Free Cash Flow look at the company's operating cash actually generated in a given
year, and rejected significant non-cash expenses of operations, capital expenditure and
dividend payments. Therefore, Free Cash Flow is the purest measure of the companys ability
to generate cash. When analyzing stocks, we need to examine the Cash Flow and Free Cash
Flow. Cash flow is a less pure numbers, but it is less vulnerable to swings in the broad year
capital program on a periodic basis for building and wind down.

Percentage of Owned Institutions, the final line on the table, is an especially important
one to check. This item, which shows the percent of shares owned by institutions, helps
company gauge the level of demand for the stock on the part of this influential investor
group. Institutions are an important segment of the investment community because of their
expertise and size.
2) (1) Financial ratio analysis

(i) LIQUIDITY RATIO

Ratio analysis can be refers to methods of calculating and interpreting financial ratios
to analyze and monitor the firms performance. All companies using financial ratios to see
how success their firm and make decision on their own firm and also interest of stakeholders
and creditors. Financial ratios use information from income statement and balance sheet to
complete their analysis. In ratio analysis we can know what level of risk and return, its ability
to make interest and principal payments. Based on all the data Honeywell company
statements which are income statement, balance sheet and cash flow statement we can find all
the ratios.

As we know liquidity is ability of firms to pay off their debt depend on their assets.
Firms have to balance the need for safety that liquidity provides a low returns that liquid
assets generate for investors. There have two basic measures of liquidity are the current ratio
and quick ratio as known as acid-test ratio. Current ratio is measure the firms ability to meet
its short-term obligations. It is calculated by dividing current assets by its current liabilities.
On the year of 2007, the current ratio was 1.15 times. The result indicates that for every $1 of
current liabilities that Honeywell Co. has this present point in times, it has $1.15 worth of
current assets. On 2008, the current ratio was 1.08 times that indicates every $1 of current
liabilities; it has $1.08 worth of current assets. If we compare to the first two years, we can
see that the current ratio is decreased by $0.07. We know that a higher current ratio indicates
a greater degree of liquidity. That it is mean on 2007, this firm had greater liquidity than 2008
and the liquidity of cash, inventories and etc. might higher than 2008.

When we see on balance sheet of Honeywell Company that total current assets were
decreased by 0.43 billion and total current liabilities were increased by 0.35 billion. On 2009,
the current ratio was 1.25 times that indicates every $1 current liabilities, current assets was
worth $1.25. On 2010, the current ratio would be 1.28 times. It indicates that every $1 current
liability, it has $1.28 worth of current assets. We compared to year on 2009 and 2010, the
current ratio of 2010 were increased by $0.03 and it is mean that the degree of liquidity were
greater on 2010. Total current assets were increased from 2009 to 2010 by 1.07 billion and
total current liabilities also increased by 0.57 billion. This make that Honeywell Company
generally has well-established relationship with banks that can provide lines of credit and
other short-term loan that the firm has a need for liquidity.

The quick ratio or acid-test ratio is similar to the current ratio but it excludes inventory, this
ratio can be use when the company business is bad and need some cash expressly. So, the
factors make low liquidity of inventories are inventories cant be easily sold because they are
partially completed items and second one is because of inventory is always sold by credit, so
it also cant be a cash expressly. The quick ratio can be calculated by dividing the firms
current assets minus inventory by its current liabilities. Based on question 1, quick ratio
 already found when 2007 was 0.82, 2008 was 0.77, 2009 was 0.94 and 2010 was the same on
2009, 0.94. It indicate that for every $1 current liabilities, current assets was has worth $0.82
on 2007 and the same for other years. The quick ratio is provides the better measure of
overall liquidity only when the firms inventory cant be easily converted into cash.

Ratio Year Evaluation

Liquidity 2007 2008 2009 2010 Industry Cross-sectional Time-series

average 2010 2010 2007-2010

Current 1.15 1.08 1.25 1.28 1.3 ok ok

ratio

Quick acid 0.82 0.77 0.94 0.94 0.81 ok good

test ratio

(ii) PROFITABILITY RATIO

As we all know that profit is an important thing for all profit firms. Firms can make
profit based on their own ways like selling the products, services, or others. Firms can get
from statements such as gross profit, profit before taxes, and net profit after taxes. Measures
of profitability are enable analysts to evaluate the firms profits be given level of sales, a
certain level of assets, and the owners investment. Profitability is an important thing on
market place. So the market place such as owners, creditors and management pay close
attention to profit of firms. Look at the format of statement, we know firms can get their
gross profit first before get the net profit that is sales minus cost of goods sold.

Gross profit can be refers as profit that firms got before minus all the expenses. Gross
profit margin can be taken to measure how much revenue will be made on percentage by
firms. It can be found by gross profit dividing sales. We can look at Honeywell Company
which is for the year of 2007, the total percentage was 29.60%. It indicates the positive gross
profit margin, $0.2960 of gross profit for every $1 of revenue made by Honeywell Company.
Compare to the next year of 2008, the percentage of gross profit margin was 30.11%. It also
indicates that $0.3011 of gross profit for every $1 of revenue made by this company. We can
see that the gross profit margin was increased from 2007 to 2008. It is mean that every $1 of
revenue was increased where is can be proved by total gross profit and sales were increased
amount of 0.77billions and 1.97billions. We can conclude that for these two years Honeywell
Company had good performance on gross profit which is their sales was more than their
costs. For the last two years, we can see that on 2009 this firm got 30.60% and 0n 2010 it was
29.61%. The gross profit margin was decreased by 0.99%.
 Operating profit margin can be refers as profit after minus all expenses and dividing
by sales on that year. Operating profit margin is most important thing on market place which
is the creditors, invertors and management will look at this margin first. This is because of
operating profit same like net income for the firms. For Honeywell Company, operating
profits for the last four years would be 14.74%, 14,88%, 15.59% and 14.14%. On the year
2007, for every $1 of revenue earned by firms, enough to cover up total operating expenses
by $0.1474. Management has been able to manage the force that influences the amount of
operating income that the firm earned. We focus on last two years where is the operating
profit margin was decreased dramatically by 1.14%. This is because even the sales were
increased by 2.46billions but the operating profits were decreased by 0.10billions.

The percentage of decreasing the profit margin was proved that this company might
be had a lot of expenses on production for the year of 2010 compared to the year of 2009. Net
profit can be calculated by minus all the expenses included depreciation of assets, stationery
expenses, and other expenses. It is means that the net profit is takes overall items. For the first
two years, the net profit margin was increased by 0.58% and for the last two years net profit
margin was decreased by 0.91%. For the year of 2010, 6.05% is interpreted for every $1 of
revenue that Honeywell Company earned, it earned $0.605 a net profit.

Ratio Year Evaluation

Profitability 2007 2008 2009 2010 Industry Cross- Time-series

average sectional 2007-2010
2010 2010

Operating profit 14.74 14.88 15.59 14.14 11.70 ok ok

margin

Net profit 7.05 7.63 6.96 6.05 8.18 Ok Ok

margin

ROE 26.46 38.80 24.32 18.93 16.51 Good Good

ROA 7.22 7.86 5.97 5.34 5.91 Good Good

(iii) ACTIVITY RATIO

Activity ratios measure the speed with which various accounts are converted into
sales or cash. Activity ratio also measure how efficiently a firm operate with inventory
management, collection and others. In activity ratio, we also measure the activities that most
important on company accounts such as account receivable, account payable and etc. For
cash, it takes on cash inflow and cash outflow. Inventory turnover is measures the activity, or
liquidity, of a firms inventory. Inventory turnover can be calculated by cost of goods sold
dividing with inventory. So, from this measure we can know how many times the firm will
turnover their inventory.

Based on Honeywell Company, only from 2007 to 2008 was increased their inventory
turnover which is from 6.31times to 6.63times. For the rest of the years, Honeywell Company
had been decreasing their inventory turnover. For the year of 2007, the meaning of 6.31times
is can be interpreted as that on average, the inventory and sold by Honeywell Company need
to be replenished 6.31times a year. Average collection period is the average amount of time
needed to collect accounts receivable. Average collection period is useful in evaluating credit
and collection policies. We can be calculated by dividing the average daily sales into the
account receivable. On the year of 2007, the average collection period was 67.43 days. It
indicates that it take the firm 67.43 days to collect an account receivable.

The average is meaningful only in relation to the firms credit terms. Based on the
Honeywell result on average collection period, only the first was decreased by 6.32days. It is
the good result because of the fast they can collect the money, the fast they can get the cash
and income will be increase quickly. But for the next three years, Honeywell Company faced
on increasing the average collection period. For the first time, it increased by 13.24 days and
the second time was increased by 3.29days. It is mean Honeywell Company didnt get the
best result for average collection for the last three years. Increasing the average collection
period means that the company cant get as soon as possible the liquidity for their firm. It
cant be happen to any firm because this result will be influences the creditors also investors.

Average payment period is the average amount of time needed to pay accounts
payable. Account payable is used when we purchase any stuffs for business by credit. So, it
can be calculated by dividing the average daily purchase. We focus on the year of 2010, the
average collection period was 67.44days. It indicates the firm would be pay the payment on
67.44days a year. It is same for the first three years. It same like average receivable period
which is the fast we can pay, the good we get. For total asset turnover, it indicates the
efficiency with which the firm uses its asset to generate sales. . Companies with low profit
margins tend to have high assets turnover, those with high profit margins have low asset
turnover. Honeywell Company assets turnover seems to be relatively low, meaning that it
makes a high profit margin on its products.
Ratio year evaluation

Activity 2007 2008 2009 2010 Industry Cross- Time-series

average sectional 2007-2010
2010 2010

Inventory 6.31 6.63 6.21 5.93 11.70 ok ok

Turnover

Average 67.43 61.20 74.04 77.33 8.18 poor poor

Collection
Period days days days days

Average 59.36 53.88 61.80 67.44 16.51 poor poor

Payment Period
days days days days

Total Assets 1.02 1.03 0.86 0.88 5.91 Good Good

Turnover

(iv) LEVERAGE RATIO

A companys leverage ratio relates how much debt it has on its balance sheet, and it is
another measure of financial health. Generally, the more debt a company has, the riskier its
stock is, since debt holders have first claim to a companys asset. This is important because in
extreme cases, if a company become bankrupt, there may be nothing left over for its
stockholders after the company has satisfied its debt holders.

The debt ratio measures how much of the company is financed by its debt holder
compared to its owner. The higher the ratio, the greater the amount of peoples money being
used to generate profits. The debt ratio is calculated by dividing total liabilities with total
assets. The debt ratio for Honeywell International Inc. in 2007 is 73%, increase by 7% in
2008 (80%) but decrease by 5% in 2009 (75%) and decrease by 3% in 2010(72%).
 The value indicates that the company has financed more than half of its assets with
debt. The higher the ratio, the greater the firms degree of indebtedness and the more
financial leverage it has. The firms ability to pay certain fixed charges is measured using
coverage ratio or time interest earned ratio. We get it by dividing earnings before interest and
taxes or EBITDA with taxes. The higher interest coverage ratio are typically better and
interest coverage close to or less than one means the company has some serious difficulty in
paying their debts.

The time interest earned ratio for Honeywell International Inc. seems acceptable. Its
because the time interest ratio are more than one, then the firm can meet its total interest
expense on its debt. Higher value of times interest earned ratio is favourable because
Honeywell has a greater ability to repay its interest and debt. Analysis on Honeywell shows
that the ratio at 2007 is 5.82 , 5.59 in 2008, 6.11 in 2009 and 5.84 in 2010. So, Honeywells
income before interest and taxes is just enough to pay off its interest expense. It also
beneficial to company to create trend of values of time interest earned.

(v) MARKET RATIO

Market ratios evaluate the economic status of company in the wider marketplace.
Market value ratios include the price earning ratio book value per share and the market per
book ratio.This ratios give insight into how investors in the marketplace feel the firm is doing
in terms of risk and return. Market value ratios give management an idea of what the market
is willing to pay for the company earnings and what the firms investors think of the firm
performance and future prospects.

The price/earnings(P/E) shows the Honeywell relationship between the stock

priceand the company earnings. The P/E ratio is calculated by dividing the market price per
share of common stock with earnings per share (EPS). The higher the P/E ratio, the higher the
market is willing to pay for the companys earnings. Thats means the more the company are
willing to pay, thats show the company has good long term prospects over and above its
current position. For the Honeywell International Inc, the P/E ratio are calculated by using
basic and diluted value.
 For the P/E ratio of basic value are almost same with diluted value. For the year 2007,
the P/E ratio is 3.77, on 2008 is 2.58, on 2009 is 4.11 and on 2010 is 5.28. This shows that
the investors were paying $3.77 in 2008 , $2.58 in 2009, $4.11 in 2009 and $5.28 in 2010 for
each $1.00 of earnings. A P/E ratio that is too high, means that Honeywell carriers a lot of
risk. An investors use the price earnings ratio extensively in analysis investments.

For the market per book (M/B) ratio, is the way of measuring the relative value of a
Honeywell compared to its stock price or market value. To get the M/B ratio ,firstly we need
to calculated book value per share of common stock by dividing the common stock equity
with number of shares of common stock outstanding. We calculated this ratio by using basic
and diluted value for the both book value per share and market per book ratio. To get the M/B
ratio by dividing the market price per share of common stock with book value per share. So
,we get the ratio for the year 2007 was $12.06, $9.76 in year 2008, $11.75 in year 2009 and
$13.79 in year 2010. Thats means, the investor currently paying the values for each $1.00 of
book value of Honeywell International Incs stock. The M/B ratio of the fourth year are
lower. Honeywell International Inc s assets are undervalued because of the low of the M/B
ratio. Based on the M/B ratio, its suggest a companys prospects are good and earnings/value
should grow.

(2) Conclusion and recommendation

Part B (2)

The present value of all future cash flows that is dividends is equal to the value of a
share of common stock. Stockholder can earn a capital by selling stock higher than a price
paid. Dividend are relevant when it a valuation view-point. The dividend can be found in
term of anticipated growth. We have to consider three models that are zero growth, constant
growth, and variable growth. Based on question 2, market efficiency assumes that the quick
reactions of rational investors to new information.

Market efficiency can be known when the company has stock prices fluctuated, the
flow of new information is almost constant. To determine its value, buyers and sellers use
their assessment of an assets risk and return. They can digest new information quickly such as
through their purchase and sale activities. Based on the Honeywell Company, the market it
was efficiency. This is because of the required rate return is 15% and the current dividend
was $1.49 per share. So, firstly they can find the zero growth based on the information, it
could be $9.93 where on this growth, dividend is assumes constant and nongrowing dividend
stream. Constant-growth model can be refers as assumption that dividend will grow at a
constant rate, but the rate is less than the required return. We can see that the annual growth
rate of dividend was D 1.65, D 1.835, D 2.04, D4 2.26, and D5 2.51. The earnings and
dividend grow at the same rate. Assuming the dividend and rate was estimated, so the stock
value could be $41.25 per share.