financial analysis of hero cycles
TRANSCRIPT
FINANCIAL ANALYSIS OF HEROCYCLE LTD.
A PROJECT REPORT
Submitted by:
RITESH GARG7048221587
In partial fulfillment of requirement for the degree of
MASTER OF BUSINESS ADMINISTRATION(SUMMER TRAINING)
GUJRANWALA GURU NANAK INSTITUTE OF MANAGEMENT & TECHNOLOGY, LUDHIANA
(PUNJAB TECHNICAL UNIVERSITY, JALANDHAR)
June-July 2008
ACKNOWLEDGEMENT
Behind this successful undertaking is the blessing and guidance of many. This
formal piece of acknowledgement may not be sufficient to express my feelings of
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Debt Equity Ratio
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gratitude and deep respect that have experienced during my learning process at Hero
Cycles. This endeavor would not have been successful without the help and
encouragement from a lot of people with whom I had good fortunate of interacting
during course of journey. I am indebted to Mr. Bharat Goyal (Sr V.P.Finance cum
Company Secretary) for the knowledge and experience that I gained from him during
course of training which I can easily look at as my most rewarding phase the course of
my study. Without his immaculate and intellectual guidance , sustained efforts and
friendly approach, it would have been difficult to achieve the result in a short span of
period.
Not leaving behind the contribution of all other staff members at Finance
Department for sharing with us the wealth of their experience and knowledge.
PREFACE
MBA is stepping stone to management career. In order to achieve practical, positive
and concrete results, the classroom learning need to be effectively fed to the realities of
the situation existing outside the classroom. This is practical true for management.
To develop healthy managerial and administrative skills in the potential
managers it is necessary that theoretical knowledge must be supplemented with
exposure of real environment. Actually it is very vital for the management and it is in
the practical training that the measuring of management is itself realized.
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I took summer training in well-managed organization and was fortunate to get a
good exposure. In this project report an attempt has been made to cover different
aspects of my training.
RITESH GARG
ABSTRACT
The term “Financial Analysis” also known as analysis and interpretation of
financial statements refers to the process of determining financial strength and
weaknesses of the firm by establishing strategic relationship between the items the
balance sheet, profit and loss account and other operative data. Myers’- “Financial
statement analysis is largely a study of relationship among the various financial factors
in a business is disclosed by a single set of statements, and a study of the trend of these
factors as shown in a series of statement.” The Hero Group has done business
differently right from the inception and that is what has helped us to achieve break-
through in whatever product category we have ventured. The Group’s low key, but
focused, style of management has earned the plaudits amidst investors, employees,
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vendors and dealers, as also worldwide recognition.
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TABLES OF CONTENTS
S.No. Chapter No. Topic Page No.
1. 1 Introduction 91.1 Introduction 101.2 Organization of hero cycle ltd 11-12
1.3 , 1.4 Hero group &hero group co’s 13-15
1.5 Driving force : chairman 16-171.6 Milestones 18-231.7 Hero: the super brand 24-25
1.8 Global gearing :exports 26-27
1.9 Vision & mission 28
1.10 Quality: the driving force 29
1.11 Building relationship 30-31
1.12,1.13,1.14 R & D.,innovations, promotions 32-35
1.15 Social responsibility 36
1.16 , 1.17 Major products, competitors 37-38
1.18 Ownership of management 39
2. 2. Achievements 40-42
3. 3. LITERATURE REVIEW 43-454. 4. Financial Analysis 46-48
5. 5. Objectives 49-50
6. 6. Research Methodology 51-53
7. 7 Analysis & Interpretation 547.1 Comparative statements 55-597.2 Common size statement 60-627.3 Cash flow statement 63-647.4 Fund flow statement 65-687.5 Ratio analysis 69-93
8. 8. Findings 94-95
9. 9. Suggestions 96-97
10. 10. Limitations 98-99
11. 11. References 100-101
12. 12. annexure 102-112
S.No. Table No. Table Page No.
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1 1.1 Current Ratio 74
2 1.2 Quick ratio 76
3 1.3 Absolute quick ratio 77
4 2.1 Working capital turnover ratio 79
5 2.2 Inventory turnover ratio 80
6 2.3 Inventory conversion period 81
7 2.4 Debtor turnover ratio 82
8 2.5 Average collection period 83
9 2.6 Creditor turnover ratio 84
10 2.7 Average payment period 85
11 3.1 Debt equity ratio 87
12 3.2 Equity ratio 88
13 3.3 Solvency ratio 89
14 3.4 Fixed asset to net worth ratio 90
15 4.1 Gross profit ratio 91
16 4.2 Net profit ratio 92
17 4.3 Return on investment 93
List of Tables
List of Figures
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S.No. Figure No. Figure Page No.
1 1.1 Current Ratio 75
2 1.2 Quick ratio 77
3 1.3 Absolute quick ratio 78
4 2.1 Working capital turnover ratio 80
5 2.2 Inventory turnover ratio 81
6 2.3 Inventory conversion period 82
7 2.4 Debtor turnover ratio 83
8 2.5 Average collection period 84
9 2.6 Creditor turnover ratio 85
10 2.7 Average payment period 85
11 3.1 Debt equity ratio 87
12 3.2 Equity ratio 88
13 3.3 Solvency ratio 89
14 3.4 Fixed asset to net worth ratio 90
15 4.1 Gross profit ratio 91
16 4.2 Net profit ratio 92
17 4.3 Return on investment 93
CHAPTER 1
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INTRODUCTION
Bicycle was seen in India in the year 1890. Import of cycles, however, started in 1905
and continued for more than 50 years. The Government in July 1953 announced
complete ban on imports, but cycle kept on simmering in the country till 1961. In 1890,
selling price of an imported bicycle was around Rs. 45/-; in 1917, during the First
World War the price jumped to Rs. 500/- but dropped considerably, month by month
and came down to Rs. 35/- or so (U.K. makes) and Rs. 15/- or so (Japanese models).
It would be interesting to mention that in 1919, five persons in Punjab imported
cycles and used them on The Mall, Simla. These included one Bishop, Two military
men and two contractors including S. Pala Singh Bhogal (Grand Father of Mr. M.S.
Bhogal of Ludhiana). Under special permission of the Governor, they were allowed to
use cycles on ‘The Mall’ only for one hour in a day. They imported B.S.A. Cross bar
Cycle from U.K. and it used to be a kind of Mela at that particular hour on the Mall in
Simla, the scene watched by hundreds of people everyday. Later, a firm was formed
under the name of Singh & Co. with shops on Railway Road, Jalandhar and Bazaar
Vakillan, Hoshiarpur, which imported bicycles in the year 1930 onwards.
THE ORGANISATION HERO CYCLES LTD
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The Beginning
We look over our shoulders, we see the past. We use it to make a better
present and a beautiful tomorrow, as tomorrow isn’t just another day, it’s
another chance for us to better ourselves and to excel.
Hero Cycles is a product of this philosophy. The philosophy that instills
commitment, team work and foresight. Hero’s colossal journey started
before independence. The four Munjal brothers, hailing from a small
town called Kamalia, now in Pakistan, are the men who are behind the
mission. Brotherhood apart, what knit the men together was the wealth
of will, integrity, ambition & determination. In the year 1944, they
decided to start a business of bicycle spare parts in Amritsar. Its is
modest beginning and the next 3 years saw the business grow
rapidly.But the dark clouds of partition eclipsed their plans of the future.
With renewed vigour and optimism, the operational base was shifted to
Ludhiana. By 1956, the brothers had began manufacturing key
components of bicycles and as a logical way forward, began to assemble
the entire cycle at their manufacturing plant in Ludhiana. In the early
days, the plant had a capacity for 25 cycles per day. Over the next few
years, the Bicycle Unit started growing in stature and size, attracting skilled engineers,
technocrats, administrators and entrepreneurs. From a modest beginning of mere 639
bicycles in the year 1956, Hero Cycles products over 18500 cycles a day today, the highest
in global reckoning. With the 48% share of the Indian market, this volume has catapulted
Hero in the ‘Guinness Books of World Records’ in 1986 and edge over global players is
being maintained since then.
A tiny acorn has now become a mighty Oak. From cycle to two - wheelers was a natural
step, and the Hero Group came into being. The Hero Group, today, is a vast conglomerate
of companies, either in the form of collaborations, joint ventures or fully owned
subsidiaries, with more than Rs. 10000 Crore turnover annually. Hero Group, besides being
the world’s largest manufacturers of bicycles, motorcycles and chains to this date, has
diversified into newer segments like Information Technology, IT Enabled Services and
Financial Services.
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THE HERO GROUP
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The Hero Group has done business differently right from the inception and that is what
has helped us to achieve break-through in whatever product category we have ventured.
The Group’s low key, but focused, style of management has earned the plaudits amidst
investors, employees, vendors and dealers, as also worldwide recognition.
The growth of the Group through the years has been influenced by the number of factor:
The Hero Group through the Hero Cycles Division was the first to introduce the concept
of just-in-time inventory. The Group boasts of superb operational efficiencies. Every
assembly line worker operates two machines simultaneously to save time and improve
productivity. The fact that most of the machines are either developed or fabricated in-
house has resulted in low inventory levels.
In Hero cycles Limited, the just-in-time inventory principle has been working since the
beginning of production in the limit in the unit and is functional even till date. The
vendors bring in the raw material and by the end of the day the finished product is
rolled out of the factory. This is the Japanese style of production and in India; Hero is
the first company to have mastered the art of the just-in-time inventory principle
.
HERO GROUP COMPANIES
Hero Group ranks amongst the Top 10 Indian Business Houses comprising 18 companies, with an estimated turnover of US$1.8 billion during the fiscal year 2003-2004.
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Munjal Showa Limited
Munjal Castings
Munjal Auto Components
Hero Global Design
Hero Corporate Services Limited
Hero ITES
Hero Mind mine
Hero Soft
Munjal e-systems
Easy Bill Limited
Hero Cycles Limited
Hero Honda Motors Limited
Hero Cold Rolling Division
Hero Motors Limited
Hero Exports
LO GO
Majestic Auto Limited
Rockman Cycle Industries
LOG O
Highway Cycle Industries
LOG O
Sunbeam Auto Limited
LOGO
Munjal Auto Industries Limited
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The Driving Force: Chairman
Dr.Brijmohan Lall Munjal, patriarch of the US$ 3.19 billion Hero Group was born in 1923, in what is now Pakistan. After partition, the Munjal brothers started a small business of manufacturing bicycle
components in Ludhiana in North India in the face of the bottlenecks of industrial infrastructure and investments. Dr Lall led a small time manufacturer of 60 cycles a day to become a manufacturing giant, which churns out not only over 17,000 cycles per day but is also diversified into various domains. Undoubtedly, Dr.Lall is a first generation business entrepreneur of the 1950s'.
Dr.Lall has enriched the Hero Group with his vision of sound business governance and value driven management practices. His foresight has made the Hero Group a leader in its business. Dr Brijmohan Lall is a role model for Indian Industry in corporate governance and ethical and value-driven management practices. His principle-based leadership has led the Group companies to receive the best industrial governance and safety awards and acquire stringent value certifications.
Dr.Lall was amongst the first Indian industrialists to
effectively implement backward integration and he
is acknowledged as the trend setter in the area.
Apart from the promotion of the Indian industry, he
is the actively involved in many national
associations such as CII, SIAM, ASSOCHAM and PHD
and is a member of the Regional Board of the
Reserve Bank of India. He is Honorary Fellow of the
Indian Institute of Industrial Engineering.
Dr.Lall has received various accolades and awards for his immense contribution to the Indian industry. He was adjudged Businessman of the Year in 1994 by a leading business magazine - Business India.
In 1995, Dr.Lall received the National Award for outstanding contribution to the Development of Indian Small Scale Industry. (NSIC award - presented by the President of India)
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In 1999, the Business Baron recognized him as the "Most Admired CEO."
The PHD Chamber of Commerce and Industry presented him with the Distinguished Entrepreneurship Award in 1997, in recognition of his outstanding exemplary entrepreneurship.
Xavier Labour Relations Institute (XLRI), a premier institution has conferred on him the honor of Sir Jehangir Ghandy Medal for Industrial Peace in 2000.
Ernst and Young has recognized him as the "Entrepreneur of the year 2001."
All India Management Association conferred him with the Lifetime Achievement award for "Managment"(2003)
Banaras Hindu University, Varanasi one of the most prestigious Universities of India conferred him with a Doctrate; degree of " Doctors of letters" Honoris Causa in October 2004
The Government Of India honoured him with the prestigious " Padma Bhushan"in March 2005 for his contribution to Trade and Industry
MILESTONES
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Hero’s success saga contains the element of courage, great; determination,
enterprises and perseverance coupled with vision and meticulous planning:
1956
Hero Cycles Ltd. is established.
1961
Rockman Cycle Industries Ltd. established which is today the largest manufacturer of
bicycle chains & hubs in the world.
1963
Bicycle exports take off from India – a faray into the international market.
1971
Highway Cycles was set up. It is today the largest manufacturer of single speed &
multi-speed freewheels in the country.
1975
Hero Cycles Limited became the largest manufacturer of bicycles in India.
1978
Majestic Auto Limited was formed and Hero Majestic Moped was introduced.
1981
Munjal Casting established.
1984
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Hero Honda Motors Limited established in joint venture with Honda Motors, Japan to
manufacture Motorcycles. It is now the world’s largest producer of two-wheelers.
1985
- Munjal Showa Ltd. established to manufacture shock absorbers and struts and is
today one of the topmost shock absorber manufacturers companies in this country.
- 100cc Hero Honda Motorcycle was launched, which, later on in 1988,
became No.1 among all motorcycles in India.
1986
Hero Cycles Limited entered the Guinness Books of World Records as the Largest
bicycle manufacturer in the world.
1987
Hero Motors, a division of Majestic Auto Limited set up on collaboration with Steyr
Diamler Puch of Austria.
1987
Gujarat Cycles Limited, now known as Munjal Auto Centre Ltd. was established to
manufacture and export state-of-the-art bicycles and light products in its full automated
plant at Wagodia.
1987
Sunbeam Auto Limited, earlier a unit of Highway Cycle Ind. Ltd., established as an
ancillary to Hero Honda. It has the largest die casting plant in India.
1988
Hero Puch was introduced by Hero Motors Ltd., which was a revolutionary machine to
set new records of petrol.
1989
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Ranger bicycles (a generic name for Mountain Bikes today) was introduced by Hero
Cycles Limited.
1990
Hero Cold Rolling Division established which is one of the most modern steel cold
rolling plants in India.
1991
Hero Honda received National Productivity Council Award and also the Economic
Times – Harvard Business School Association Award against 200 contenders.
1991
Hero Cycles introduced Kid – the first branded bike in children’s segment.
1992
Hero Cycles introduces Impact, the first citibike in India.
1992
Munjal Showa Ltd. received national safety award.
1993
Hero Exports was established as International Trading Division for group & non-group
products.
1995
- Hero Corporate Services Ltd. was established.
- The first exerbike from Hero Group was introduced with the name–
Allegro.
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1996
Hero Winner, a large wheeled scooter with a choice of 50 cc & 75 cc engines was
launched by Hero Motors Ltd.
1998
Hero Briggs & Stratton Auto (P) Ltd. was set up to produce 4-stroke two wheeler
engines in various cubic capacities.
1998
Munjal Auto Components established to manufacture gear shaft & gear blanks for
motorcycles.
2000
The first fully automated bicycles by the name ‘POWERBIKE’ was introduced
by Hero Cycles Limited. Hero Corporate diversified into I.T. and I.T. Enabled Services
through its services segment Hero Corporate Services Limited.
2001
Hero Honda emerges as the market leader in motorcycles with the sales of over a
million motorcycles and a market share of 47%.
2002
Hero Cycles Limited ties up with National Bicycle Industries, a part of Matsushita
Group, Japan, to manufacture high-end bicycles.
Fastener World established.
2002
Easy Bills Limited established to offer utility bill collection and retail services.
2003
Tie-up with Live Bridge Inc., U.S.A., Aprilia Scooters, Haly & Bombardier Rotax
GmbH of Germany.
2003
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Super Starter Series Launched by Hero Cycles Limited.
2003
Hero Honda continues to be the world’s largest manufacturer of two-wheelers with the
market of more than 48%.
2004
Hero Retail Insurance Business established.
Super Smart Series introduced by Hero Cycles Limited.
2005
Hero ITES strengthens its relationship with ACS, USA USD 5 BILLION-market cap
and fortune 500 companies.
2006
Hero Honda crosses a unit sales threshold of 3 MILLION motorcycles.
2006
Hero Honda enters the scooters segment, launches 100 cc “pleasure”.
2006
Hero group celebrates GOLDEN JUBILLEE YEAR since inception. It was
commemorated by sales of over 15 million motorcycles & over 100 million bicycles.
2007
Hero group has made 13 models of e-bikes.
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HERO: THE SUPER BRAND
By Definition, a Super brand offers consumers significant emotional and physical
advantages over its competitors, which consciously or subconsciously consumers want,
recognize and are willing to pay a premium for. A Super brand cannot be substituted. It
is part of our life. It has become one with us.
In the morning, we want a familiar flavour of tea, brush with a familiar
toothbrush, using a familiar taste of toothpaste. The soap we use has a familiar smell.
The shaving cream and the shaving razor are familiar and so is the tang of the
aftershave. And so through the day, we reach out for familiars.
In a departmental store, we go to familiar sections and shop familiar brands.
When a new one appears in the racks, we stop and look at it suspiciously. Often, we
postpone the decision to try a new for another day, another time. When a brand embeds
itself into our lives and we are willing to go to next shop, to look for it, we are longer
looking for a brand. We are searching for a Super brand.
What makes a Super brand? Own the years; the Indian market place has been witness to
the emergence of a wide variety of Super brands. Many have followed the ‘Standard
rules’ of becoming a Super brand: great product energy to exploit the market, relevance
to consumer needs of wants, edge in business technology, superb distribution and
superbly chain and consistent quality. It is a leap from branding to brand leadership.
Considered as “Oscars of Branding”, in 25 countries of the world, the Super Brands in
India were bought by the finest marketing guru of all times Late Shunu Sen and the
unbiased rating agency ‘Super Brands India’ is now headed by advertising in India –
Mr. Dilip Sehgal, Mr. KMS Ahluwalia, Mr. Mike Khanna, Mr. Nabankur Gupta, Mr.
Piyush Pandey, Mr. Raghav Bahl, Mr. Sunil k Alagh, Mrs. Tara Sinha and Mr. Yogi C
Deveshwar, besides others.
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Globally, a select few, exceptionally powerful brands, are recognized as Super Brands.
Some of the Indian brands have made it into this unique hall of fame, and amongst that
coveted group features Hero Cycles. Super Brands are actually the big ideas, which
provoke us to explore the realms of our dreams and inspire us to live satisfying life
styles. Anchored in omnipotent consumer insights, the super brands go beyond mere
functional promises as they trigger deeply embedded emotional chords.
Hero Cycles has been one of the most progressive and dynamic brands for the decades
now. More than 3200 dealers, 4800 employees and more than 9.6 crore satisfied
customers, have directly or indirectly, endeavored tirelessly to make Hero Cycles a
phenomenal success and are the true guardians of this brand.
Ambitions, belief, empathy and a strong culture of sensitivity are at the heart of Hero
Cycles brand. Each of these values is reflected in the company’s products, its
communication and its dealings with suppliers, employees, dealers and customers. Be it
company’s environment friendly manufacturing processes or the brand initiatives for
the lower income customers, leadership is all about capturing the hearts & minds of the
people- the way a true Hero always does.
GLOBAL GEARING: EXPORTS
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As
early as in the 1960s' very few Indian bicycle manufacturers were interested in exports.
However, the Hero Group's foray into the overseas markets in 1963 pioneered Indian
exports in the bicycle segment. It was a move prompted essentially by the need to
remain attuned to the global marketplace.
While initial exports were restricted to Africa and the Middle East, today more than 50
percent of the exports from Hero Cycles
Limited meet the demands of sophisticated markets in Europe and America. This is
primarily because of appropriate product development and excellent quality that Hero
offers.
The Group has been continuously upgrading technology and has set up special units -
like Gujarat Cycles Limited (now Munjal Auto Industries Limited), to meet
HERO CYCLES
HERO HONDA MOTORS
HERO MOTORS
HERO CORPORATE SERVICE LIMITED (Hero Mindmine, Munjal eSystems, NsurePlus)HERO MANAGMENT SERVICE LIMITED(HERO ITES )
MUNJAL SHOWA LIMITED
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international quality standards. Munjal Auto Industries Limited has state-of-the-art
equipments imported from Europe and Taiwan. The unit is designed to match
international standards and is an Export Oriented Unit (EOU). Its products are supplied
to the International Markets of developed countries like United Kingdom, Germany,
France etc.
The Group's exports have gone beyond cycles and their components. The success of the
Hero Majestic moped did not remain confined to Indian shores. Finding enthusiastic
buyers across the world, it became the largest exported moped from India.
Hero Puch is perhaps the first Indian two-wheeler to be homologated abroad (in Spain)
and has assembly plants in Mauritius and Egypt. Today Hero Puch mini-motorcycles
can also be seen in Paraguay, Mexico, Argentina, Turkey and Holland.
Group Company, Munjal Showa Limited is one of the largest suppliers of shock
absorbers to major auto giants in Japan, United States and the United Kingdom,
amongst other developed markets.
In 1993 Hero Exports was established as the International Trading Division for Group
and non-Group products. The Government of India recognizes Hero Exports as a
Trading House.
And the latest diversification for the Group in the export market is in the area of
Software exports and providing Business Processing and Contact Center Services
through Hero Corporate Service limited. The company exports services to many
Fortune 1000 corporations in the USA, UK and Australia and has offices in UK & USA
to manage client relationships.
VISION AND MISSION
The Vision
“We, at the Hero Group are continuously striving for synergy between
technology, systems and human resources to provide products and services that meet
the quality, performance, and price aspirations of the customers. While doing so, we
maintain the highest standards of ethics and societal responsibilities, constantly
innovate products and processes, and develop teams that keep the momentum going to
take the group to excellence in everything we do.”
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The Mission Statement
“ It’s our mission to strive for synergy between technology, systems and human
resources, to produce products and services that meet the quality, performance and price
aspirations of our customers. While doing so, we maintain the highest standards of
ethics and societal responsibilities.”
This mission is what drives us to new heights in excellence and helps us forge a
unique and mutually beneficial relationship with all our stakeholders. We are committed
to move ahead resolutely on this path, shown to us by visionaries like Mr. Satyanand
Munjal, Mr. Om Prakash Munjal, the late Mr. Dayanand Munjal and late Mr. Raman
Kant Munjal. Mr. Brijmohan Lall Munjal, Chairman & MD – THE HERO GROUP.
Quality: The Driving Force
At Hero Cycles, quality is a tradition, be it in the form of well trained labour,
technically superb machines or world class quality. The conformance to quality at Hero
begins on shop floor, with every worker ensuring at each stage manufacturing, that only
perfect product passes through his hands. Hero’s production department too believes in
following the zero-defect approach and continuous upgradation of its manufacturing
systems. The marketing and operations teams are also constantly creating new and
effective strategies using modern management techniques. And finally, every Hero
cycle goes through a series of rigorous quality checks before it leaves the factory. No
wonder, Hero is in proud possession of ISO-9001, ISO-9002 & BVQI certifications and
also ISO 14001, environmental compliance endorsement from the Ministry of
Environment.
Constant quality upgradation ensures that the company stays in the global mainstream
and maintains its edge, through excellence. A technology tie-up with National Bicycle
Industries of Japan led to the launch of the ‘World 1’ series of cycles, besides
introduction of new frame designing and features like- A-frame, D-frame, Y-frame,
Swan shaped frame, speedometers & indicators among other
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Building Relationships
At Hero, it’s always believed that there is much more to life than just business. As a
company with a heart, it has certain commitments towards its employees, the society
and the nation. Though growing incomes, changing life styles and availability of cheap
customer finance has changed the market scenario enormously; Hero believes that
cycles can still be the driving force of the rural economy. By introducing the loan
facilities under ‘Hero Cycle Loan Yojana’ through Corporation Bank and Oriental Bank
of Commerce, Hero Cycles has enabled low income customers to purchase cycles on
easy terms.
Commitment to its employees is just as important as commitment to the society. All
efforts are taken to make sure that employees are provided the best working conditions
as work culture at Hero revolves around the philosophy-if there’s one way to work, it’s
with the heart. At Hero Cycles, there is a strong affinity towards building the
relationships with employees, workers, vendors and dealers. Job security, growth
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opportunity and respect are the unspoken, yet understood components of every man’s
package who chooses to work within the fold of
Hero family. It is quite common to find two generations of the same family working
together in the company, or the workers sharing their skills with other
family members and passing on finest training to each other. It goes without saying that
people at Hero are its largest investment and easily the largest asset.
At customer front too, Hero’s perception of customer relationship management (CRM)
does not end with merely meeting their expectations and aspirations or by ensuring
complete customer delight by overnight turnaround of customer complaints, but it goes
several steps beyond that horizon. The company believes in delivering value to the
customers even before they feel the need. This has helped Hero Cycles develop
immense brand loyalty and customer satisfaction. Like a true Super Brand, Hero has
been able to attract the respect and awe of not only its users, but also those who are
directly or indirectly exposed to it.
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RESEARCH AND DEVELOPMENTOF HERO CYCLES
1. Specific areas in which R&D carried out by the company: -Increasing competition
in the market place has brought into sharp focus importance of differentiation. Our
in-house Research & Development Centre, which is recognized by DSIR Govt. of
India, plays a pivotal role in launch of innovative product models on continuous
basis. Our product models excel in meeting expectations from extremely demanding
customers of today’s modern era.
2. Benefits derived as a result of the above R & D activities: -This brought the
concept of high quality low cost/fancy bicycles.
3. Future plan of action: - Though the domestic market for standard bicycles is
shrinking since last three years but the fancy segment has shown a significant
upsurge in the demand. Moreover India has a very small share of Global Market.
The up graduation of technology through in-house research will assist the company
in design development to capture the vast untapped market potential.
Technology Absorption, Adaptation and Innovation
(i) The company is upgrading technology absorption and innovation to enhance its
range of product both in domestic and export. Some of new designs developed
through in house research and registered under Design Act with Controller
General of Patents Design and Trade Marks are Anaconda, wizard, crusader,
DTB, Miss India, Twinkle (Brat) and Tech Team.
(ii) While in Indian market it is directed towards introducing products at lower cost
e.g. Wonder Years and Brat series to the benefit of masses or
high-end technology products like Street Racer, Fusion, Yiking Hero and Miss
India Series (for the ladies) which completes the total product range.
(iii) The company has not imported any technology in the last 5 years. However, it
has entered into a technical assistance agreement with national Bicycle
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Industrial Co. Ltd. Kashiwara City, Osaka, Japan in 2002 for upgrading its
technology.
Outlook
During the year 2006-07 the economy has shown further improvements and the
GDP has also increased. Your directors are pleased to inform you that despite the
volatility in the prices of main inputs i.e. steel and nickel your company has increased
its production by 5.47% vis a vis previous year by introducing new era light alloy
bicycles and powered cycles as well as bikes with a sincere focus on students.
Industry producing the rolling steel strips can be broadly classified into two
categories i.e. narrow (400mm) and wide (1650mm). Your company comes under mid
segment with a capacity to produce up to 800mm wide strips. The industry is further
classified into Stand Alone manufacturer and Integrated manufacturer. Though the
Stand Alone manufacturer are putting up a stiff competition , your directors are hopeful
that company’s C.R.Division will do well by putting emphasis on special grades,
narrow and thinner strips with short delivery period and fast customization.
INNOVATIONS
Born out of Passion
The ore goes into fire only to shed off its impurities. Similar is the man whose virtues
shine when he is tried by the fire of life. Taking upon ‘Novelty’ itself as a competitor,
the Hero Cycles, has been always striving for perfection and innovation in every aspect
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of their dealings. The pursuit to innovate is endless at Hero, so much so that
‘innovation’ has become a buzz word in Hero premises. Hero Cycles has been able to
use changes and new trends to its advantage by identifying emerging need gaps and
expanding its product portfolio to appeal to different kinds of customers. In its
endeavour to keep a step-ahead of times, Hero’s most advanced & modern R & D
department continuously creates innovative products having functional attributes &
aesthetics, meeting the aspirational needs of its proud customers around the globe. As a
result, Hero Cycles was able to launch several new concepts and models in bicycles like
the Mountain Bikes, Racer Bikes, Dirt Terrain Bikes & D-frame bikes besides creating
a variety of cycles for different user segments and sub-segments – including women and
children, students, adventure seekers, labourers, city customers and fitness conscious.
Rolling out nineteen new models in just one year, itself speaks volume for Hero’s
emphasis on innovations & designs.
Promotions
Until 1986, the company had no need for mass communication. But as competition
started growing, Hero Cycles begun to feel the need for creating lasting impression on
the customer’s mind. In the mid 1980s Hero was perceived to be the manufacturer of
the basic black bicycles. The company required an image change. It needed to
communicate to customers the vast portfolio of products that it had, particularly in the
recreational segment. The launch of innovative products and their use as image builders
happened simultaneously. Since 1986, the communication strategy has been to build
each product separately and create a unique positioning for them. In this way the
Ranger was positioned as the bike for outdoor fun, Impact was the preferred choice
31
among city riders and Jet was projected as the lightest running roadster while Hawk was
the racer’s edge. Each of these launches and their promotion, gave the Hero brand a
new meaning. The brand has also used celebraties - including film stars Sanjay Dutt,
Rani Mukherjee, Hrithik Roshan and Ameesha Patel. The latest is India’s new bowling
sensation, Irfan Pathan who has also been a real life Hero cycle user.
SOCIAL RESPONSIBILTIES
In this way, the company has fulfilled its social obligation. Charged with their mission
nationalistic fervor, the Hero Group has always been actively involved in Social and
Medicare activities, such as providing medical facilities for the under privileged,
Hospitals, Heart Research Foundation and Mobile Medical Vans. Hero also runs
schools and colleges, maintains parks and public facilities.
32
MAJOR PRODUCTS
The Hero Cycles Ltd. Manufactures cycles, rims , free wheels ,hubs & chains
and cold rolled strips as a main product. Company has long portfolio of different range
of cycles. Company has 132models in the list , covers all the three section-gents, ladies
and kids. It also manufactures cycles parts for its own requirements. After fulfilling the
requirements of company ,it can export its remaining quantity.
The main products are:-
i) Cycles
ii) Rims
iii) Free wheels
iv) Hubs and Chains
v) Cold Rolled strips
vi) E-Bikes
COMPETITORS
IN CYCLE MARKET:
33
AVON OPERA TI ATLAS OTHERS (NEELAM,KW,BS)
IN E-BIKE MARKET:
CHINA HITECH AVON OPERA ULTRA TVS
OWNERSHIP OF MANAGEMENT
BOARD OF DIRECTORS
SH. BRIJMOHAN LAL MUNJAL (CHAIRMAN)
SH. SATYANAND MUNJAL (CO-CHAIRMAN CUM M.D. WORKS)
SH. OM PARKASH MUNJAL (CO-CHAIRMAN CUM M.D. MKTG. & ADMN.)
SH. VIJAY KUMAR MUNJAL (M.D. INTN’L MARKETING)
SH. SURESH CHANDRA MUNJAL (M.D. DOMESTIC MKTG.)
ASHISH KUMAR MUNJAL (M.D. UNIT TO SAHIBABAD)
SH. SUNIL KANT MUNJAL (M.D. C.R.DIVISION)
34
SH. PANKAJ MUNJAL (M.D. NEW HERO AUTO RIM DIV.)
SH. S.K. RAI (M.D. WORKS)
DR. M.A. ZAHIR (DIRECTOR)
DR. D.R. SINGH (DIRECTOR)
CHAPTER 2
The Achievements
35
The Group and its management have acquired a number of accolades and achievements
over the years:
Hero Group Management style has been acclaimed internationally by World Bank and
BBC, UK. Hero Group is discussed as a case study at London Business School, UK and
INSEAD, France. World Bank has acclaimed Hero Cycles as a role model in vendor
development based on a worldwide study. The London Business School, UK, has done
a case study on the Group as model of entrepreneurship.
Boston Consulting Group has ranked Hero Group as one of the
top ten Business Houses on Economic value, in India.
The Hero Group is recognized as a long-term partner and an ideal
employer:
--Hero Group’s Partnership with Honda Motors, Japan is over 20 years old.
--Hero Group’s Partnership with Showa Manufacturing Corporation, Japan is
over 18 years old.
Group Chairman, Mr. Brijmohan Lall Munjal received the coveted “ Ernst &
Young Entrepreneur of the Year” award for 2001.
Hero Cycles was ranked 3rd amongst top Indian Companies Review 2000
.
Asia’s leading companies award (2003) by Far Eastern Economic Review.
Hero Cycles is the World’s Largest manufacture of Bicycles with annual sales
volume of over 4.8 million cycles.
36
Hero Cycles Limited is a Guinness Book Record holder since 1986 as the
world’s largest manufacture of bicycles, with annual sales volume of 5.2 million
bicycles in FY 2004.
Engineering Exports Promotion Council has awarded Hero Cycles with the Best
Exporter Award for the last 28 years in succession.
CHAPTER 3
37
Literature review
Ball and Brown (1968) were the first to highlight the relationship between stock prices and informationdisclosed in the financial statements. Empirical research on the value relevance has its roots in thetheoretical framework on equity valuation models. Ohlson(1995) depicted in his work that the value ofa firm can be expressed as a linear function of book value, earnings and other value relevantinformation.Financial statement lending is rarely used for small business lending as it looks at the audited financial statement of companies that have an access to public credit market. In contrast, relationship lending, is based on “soft” information about the potential borrower. In other words, banks rely on the subjective information about a borrower that they received out of the lasting relationships rather than on financial condition of the borrowers. Another indication of relationship lending as reported by Cavalluzzo, Cavalluzzo, and Wolken (2001) is that 84 percent of the loans received by small businesses came from lending institutions located in the same city. The median distance between the firm and the lender was just three miles. Allen Berger (1999) defines three conditions that should be met for relationship-based finance to occur. First, information other than data from financial statements, collateral and other public resources is collected. Second, the information is collected via continuous communication between the lender and the small business, the customers of the small business, and local community. Third, the information is confidential and can be used only for making further lending decisions
References
Jing Liu, Doron Nissim, and Jacob Thomas; “Is Cash Flow King in Valuations” (2007)
Financial Analysts Journal Vol.63 No02, 2007 CFA Institute
38
[12]
Kallunki, Juha-Pekka and Paakki, Eija, "Stock Market Response to IFRS/IAS Cash
Flows"
(August 11, 2005). Available at SSRN.
[13]
Lev, Baruch and Paul Zarowin, 1999, "The Boundaries of Financial Reporting and How
to
Extend Them", Journal of Accounting Research
[14]
Liu, Nissim, and Thomas (March 2002) “Equity Valuations using Multiples” Journal of
Accounting Research 40(1).
[15]
Mingyi Hung, “Accounting Standards and Value Relevance of Financial Statements-
An
International Analysis” Journal of Accounting and Economics, Vol.30 No.3, Dec.,2000.
Rosplock. (1998). Risk and the financial analyst of the year 2000. Business Credit, Vol.
100(Iss. 3), pg. 57.
CHAPTER 4
39
40
Meaning of financial analysis
The term “financial analysis” also known as analysis and interpretation of financial
statements refers to the process of determining financial strength and weaknesses of the
firm by establishing strategic relationship between the items the balance sheet, profit
and loss account and other operative data.
Acc. To Myers’- “Financial statement analysis is largely a study of relationship among
the various financial factors in a business is disclosed by a single set of statements, and
a study of the trend of these factors as shown in a series of statement.”
Purpose of financial statement analysis:
The purpose of financial statement analysis depends upon the need of person who is
analyzing these statements. These varying needs may be:-
To know the earning capacity or profitability of the firm.
To know the solvency position of firm.
To know the financial strength of the business.
To make comparative study with other firms.
To know the capability of payment of interest and dividend.
To know the trend of the business.
To know the efficiency of the management.
To provide useful information to the management.
Tools of financial Analysis:
The analysis and interpretation of financial statement is used to determine the
41
financial position and results of operations as well. A number of methods or devices are
used to study the relationship between different statements. A financial analyst may use
following methods:-
Comparative statements
Ratio analysis
Fund Flow analysis
Common size statement
CHAPTER 5
42
43
OBJECTIVES
1. To analyze the liquidity position of the firm.
2. To analyze the solvency position of the firm.
3. To study and analyze the overall profitability of the firm.
4. To study and analyze the changes in working capital and fund flow position.
5. To relate the various items of profit and loss account with sales.
6. To compare the assets and liabilities of the current year and previous year.
7. To study the and analyze the capital structure of the firm.
8. To determine the efficiency with which the current assets are managed.
44
CHAPTER 6
45
RESEARCH METHODOLOGY
Basically project study is usually based on a research, which gives a concrete
answer to a problem. This research may be Problem Solving or Problem Oriented. Both
types of research are usually known as Applied Research.
Marketing is a form of Applied research which proceeds with a certain problem,
specifies alternative solutions and the possible outcomes of each alternative. It may be
further named as “Decisional Research”.
The Marketing Research methodology involves a number of interrelated
activities, which overlap and do not rigidly follow a particular sequence. A marketing
research involves the following major steps.
FORMULATING RESEARCH PROBLEM
The first step in research is formulating research problem. It is the most
important stage in Applied Research as it rightly said “A problem well defined is half
solved”.
In this Project Report I have studied the concept of FINANCIAL ANALYSIS
have carried the analysis of the same in HERO CYCLES LIMITED.
STATISTICAL TOOLS & TECHNIQUES
The statistical techniques like comparative balance sheet, common size balance
sheet, fund flow statement and Ratios have been in the study. These have been very
useful in doing the interpretation and analysis of the data collected through secondary
sources.
46
DATA REPRESENTATION
The result have presented with the help of pie-charts and bar diagrams which
clearly represents that the research conducted is a Formal Research and the Research
Design is a sound one.
DETERMINING THE SOURCE OF DATA
The next step is to determine the source of data to be used. The marketing
research may be based on primary or secondary data or on both.
In this report I have used the information gathered through secondary data which
include mainly the Annual Reports of HERO CYCLES LIMITED.
47
CHAPTER 7
CHAPTER 7.1
48
49
COMPARATIVE STATEMENTS
The comparative financial statements are statements of the financial position at different
period; of time. The elements of financial position are shown in a comparative form so
as to give an idea of financial position at two or more periods. From practical point of
view, generally, two financial statements (balance sheet and income statement) are
prepared in comparative form for financial analysis purpose. Not only the comparison
of the figure of two periods but also be relationship between balance sheet and income
statement may show:
i. Absolute figures (rupee amounts)
ii. Changes in absolute figures (increase or decrease in absolute figures)
iii. Absolute data in term of percentages
iv. Increase or decrease in terms of percentages
1. COMPARATIVE BALANCE SHEET
The comparative balance sheet analysis is the study of the trend of the same
items, groups of items and computed items in two or more balance sheets of the same
business enterprise on different dates. The changes can be observed by comparison of
the balance sheet at the beginning and at the end of a period and changes can help in
forming an opinion about the progress of an enterprise.
The comparative balance sheet has two columns for the data of original balance
sheets. A third column is used to show increase in figures. The fourth column may be
added for giving percentages of increases or decreases.
2. COMPARATIVE INCOME STATEMENT
50
The comparative income statement gives an idea of a business over a period of
time. The changes in absolute data in money values and percentages can be determined
to analyze the profitability of the business. It has also four columns. First two columns
give figures of various items for two years. Third and fourth columns are used to show
increase or decrease in figures in absolute amounts and percentages respectively.
51
HERO CYCLE LTD.
I) COMPARATIVE STATEMENT
A) Comparative Balance Sheet
Particulars 2006 2007 Increase/Decrease %age
Assets
Fixed Assets 1968881237 1893341411 - 75539826 -3.84
Investments 2851504001 3843437861 +991933860 +34.79
Deferred Tax Assets (Net) 4892714 19845655 +14952941 +305.62
Current Assets
- Inventories 766521142 805661034 +39139892 +5.11
- Sundry Debtors 1860512457 2228592486 +368080029 +19.78
- Cash & Bank Balance 69481654 22134657 - 47346997 -68.14
Loan and advances 337661837 457780835 +120118998 +35.57
Total Assets 7859455042 9270793939 +1411338897 +17.95
Liabilities
Shareholder Fund 4427446105 5364231022 +936784917 +21.16
Loan Funds 1567876432 1732223697 +164347265 +10.48
Current Liabilities
- Liabilities 1640425867 1978589143 +338163276 +20.61
- Provisions 223706638 19575007 -27956561 -14.28
Total Liabilities 7859455042 9270793939 +1411338897 +17.95
Interpretation
1. Comparative Balance Sheet reveals that total Assets of Hero cycle increased
during a year by 17.95%.
2. There has been increase in shareholder funds by 21.16%.
52
HERO CYCLE LTD
B) Comparative Income Statement
Particulars 2006 2007 Increase/Decrease
(Rs).
%age
Net Sales 11369337410 13308705116 +1939367706 +17.06
Less : Cost of Goods Sold (Material consumed,
manufacturing expenses & personal expenses)
9756380835 11733069767 +1976688932 +20.26
Gross Profit 1612956575 1575635349 -37321226 -2.31
Less : Operating expenses (Administrative expenses, financial expenses, selling expenses & depreciation)
1147615431 1139418653 -8196778 -1.76
Operating profit/loss 465341144 313168939 -29124448 -6.25
Add: Other income 1077448184 898158858 -179289326 -16.64
Less:non operating exp. 906615865 123047757 -783568108 -86.43
Net profit Before Tax 636173463 121132797 +575154334 +90.41
Less : Tax provision for wealth tax, taxation, fringe benefit tax & deferred tax
-28757839 185742059 +214499898 +745.88
Net profit After tax 664931302 1025585738 +360654436 +54.24
Interpretation
There has been decrease in the gross profit by 2.31% because the rate of
increase in sales is less than the rate of increase in cost of goods sold. But the non
operating expenses decreases by 86.43% so net profit increases.
CHAPTER 7.2
53
II) COMMON SIZE STATEMENT
A) Common Size Balance Sheet
54
Particulars 2006 2007Amount (Rs.) %age Amount (Rs.) %age
Assets
Fixed Assets 1968881237 25.05 1893341411 20.42
Investments 2851504001 36.28 3843437861 41.46
Deferred Tax Assets (Net) 4892714 0.06 19845655 0.22
Current Assets
- Inventories 766521142 9.76 805661034 8.69
- Sundry Debtors 1860512457 23.67 2228592486 24.04
- Cash & Bank Balance 69481654 0.88 22134657 0.24
Loan and advances 337661837 4.30 457780835 4.93
Total Assets 7859455042 100.00 9270793939 100.00
Liabilities
Shareholder Fund 4427446105 56.33 5364231022 57.86
Loan Funds 1567876432 19.95 1732223697 18.69
Current Liabilities
- Liabilities 1640425867 20.87 1978589143 21.34
- Provisions 223706638 2.85 19575007 2.11
Total Liabilities 7859455042 100.00 9270793939 100.00
Interpretation
The investment in fixed assets, current assets and investment are same in both the years.
The ratio of shareholders funds and the loan funds are do not change much.
II) COMMON SIZE STATEMENT
B) Common Size Income Statement
Particulars 2006 2007
55
Amount (Rs.) %age Amount (Rs.) %age
Net Sales 11369337410 100.00 13308705116 100.00
Less : Cost of Goods Sold (Material consumed,
manufacturing expenses & personal expenses)
9756380835 85.81 11733069767 88.16
Gross Profit 1612956575 14.19 1575635349 11.84
Less : Operating expenses (Administrative expenses, financial expenses, selling expenses & depreciation)
1147615431 10.09 1139418653 8.56
Operating profit/loss 1147615431 4.09 1139418653 3.28
Add: Other income 1077448184 9.48 898158858 6.75
Less:non operating exp. 906615865 7.97 123047757 0.92
Net profit Before Tax 636173463 5.60 121132797 9.10
Less : Tax provision for wealth tax, taxation, fringe benefit tax & deferred tax
-28757839 -2.53 185742059 1.40
Net profit After tax 664931302 5.85 1025585738 7.71
Interpretation
In 2006 the cost of goods sold is 85.81% of sales which increase to 88.16% in
year 2007 resulting the decrease in gross profit from 14.19% to 11.84% but the
company is successful in controlling non operating expenses i.e. 7.97% to 0.92% so net
profit increases in 2007.
CHAPTER 7.3
56
57
HERO CYCLES LTD.
Cash Flow Statement
Particulars 2006 2007 Increase/ Decrease
%age
Profit Before Tax 6361.73 12113.28 +5751.55 90.41
Net Cash Flow Operating Activity 8382.83 2996.85 -5385.98 -64.25
Net Cash used in InvestingActivity
-4988.22 -3143.35 -1844.87 -36.98
Net Cash used in FinancingActivity
-3471.47 -326.97 -3144.50 -90.58
Net Inc/Dec in Cash & Equivalent
-76.86 -473.47 +396.61 +516.02
Cash and Equivalent at theBegin of the Year
771.68 694.82 -76.86 -9.96
Cash and Equivalent at theEnd of the Year
694.82 221.35 -473.47 -68.14
CHAPTER 7.4
58
FUND FLOW ANALYSIS
Definition of Fund
A question arises as to the definition of “FUND”. It means:
59
Funds may mean change in cash only;
Funds may mean change in working capital (the difference between current
assets and current liabilities) only.
A more comprehensive definition of funds may be given as follows:
Funds may mean change in financial resources, arising from changes in working
capital items and from financing and investing activities of the enterprise, which
may involve only non-current items.
The funds flow statement analyses only the causes of changes in the firm’s
working capital position. The cash flow statement is prepared to analyze changes in the
flow of cash only. These statements fail to consider the changes in the firm’s total
financial resources. They do not reveal some significant items that do not affect the
firm’s cash or working capital position, but considerably influence the financing
position and asset mix of the firm.
The statement of changes in financial position is an extension of the funds flow
statement or the cash flow statement. Therefore, to get better insights, a firm may
prepare a comprehensive, all inclusive, statement of changes in financial position
incorporating changes in the firm’s cash and working capital positions involving:
Changes in the firm’s working capital position,
Changes in the firm’s cash position, and
Changes in the firm’s total financial resources.
60
Statement of Changes in Working Capital
Particulars 2006 2007 Effect on Working Capital
Increase DecreaseCurrent Assets
- Inventories 766521142 805661034 39139892 -
- Sundry Debtors 1860512457 2228592486 368080029 -
- Cash & Bank Balance 69481654 22134657 - 47346997
(A) 2696515253 3056388177
Current Liabilities
- Liabilities 1640425867 1978589143 - 338163276
- Provisions 223706638 195750077 27956561 -
(B) 1864132505 2174339220
Working capital (A-B) 832382748 882048957 - -
Net increase in working capital
4966209 - - 49666209
Total 882048957 882048957 435176482 435176482
Note : Provision should be taken as current liability
FUND FLOW STATEMENT
Sources Amount (Rs.)
Applications Amount (Rs.)
Raising of Loans 164347265 Net Increase in Working Capital 49666209
Funds from operation 1135177199 Purchase of Investment 991933860
Purchase of Fixed Assets 137805397
Loan of Advances given 120118998
1299524464 1299524464
WORKING NOTES
61
Adjusted Profit and Loss Account
Particulars Amount (Rs.)
Particulars Amount (Rs.)
To Dep. on fixed Assets
213345223 By Balance b/d 4029233305
To Balance c/d 4966018222 By Deferred Tax 14952941
By Fund from Operation (Bal. Figure)
1135177199
5179363445 5179363445
FIXED ASSETS
Particulars Amount (Rs.)
Particulars Amount (Rs.)
To Balance b/d 1968881237 By Adjusted P & L A/c (Dep.)
213345223
To purchase on Fixed Assets (Bal. figure)
137805397 By Balance c/d 1893341411
2106686634 2106686634
Interpretation : As seen from the above analysis that there is increase in working
capital which, indicate that company is having sufficient current assets to pay back the
current liabilities in time. There is increase in amount of loans by 10.48% and it is being
utilized in financing the fixed assets & investments.
CHAPTER 7.5
62
MEANING OF RATIO
A ratio is a simple arithmetical expression of the relationship of one number to
another. According to Accountant’s Handbook by Wixon, Kell and Bedford, a ratio “is
an expression of quantitative relationship between two numbers”. According to Kohler,
a ratio is the relation, of the amount a, to another, b, expressed as the ration of a to b, a:b
(a is to b); or as a simple fraction, integer, decimal, fraction or percentage.
63
A financial ratio is the relationship between two accounting figures expressed
mathematically. A ratio can also be expressed as percentage by simply multiplying the
ratio by 100. Ratios provide clues to the financial strength, soundness position or
weakness of an enterprise. One can draw conclusions about the exact financial position
of a concern with the help of ratios.
MEANING AND CONCEPT OF RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial
statements. It is the process of establishing and interpreting various ratios for helping in
making certain decisions. However, ratio analysis is not an end itself. It is only a means
of better understanding of financial strength and weakness of a firm. Calculation of
ratios does not serve any purpose, unless several appropriate ratios are analyzed and
interpreted. There are a number of ratios which can be calculated from the information
given in the financial statements, but the analyst has to select the appropriate data and
calculate only a few appropriate ratios from the same keeping in mind the objective of
analysis. The following are four steps involved in the ratio analysis :
Selection of relevant data from financial statement depending upon objective of
analysis.
Calculation of the appropriate ratios from the above data.
Comparison of the calculated ratios with the ratio of same firm in the past, or the
ratios developed from projected financial statements or the ratios of some
other firms or the comparisons with ratios of the industry to which the firm belongs.
Interpretation of the Ratios
Ratio analysis is one of the most powerful tools of financial analysis. It is used as
a device to analyze and interpret the financial health of enterprise. It is with help of
ratios that the financial statements can be analyzed more clearly and decisions made
from such analysis. The use of ratios is not confined to financial managers only. There
are different parties interested in the ratio analysis for knowing the financial position of
a firm for different purposes. The supplier of goods on credit, banks, financial
64
institutions, investors, shareholders and management all make use of ratio analysis as a
tool in evaluating the financial position and performance of a firm for granting credit,
providing loans or making investments in the firm. With the use of ratio analysis, one
can measure the performance of the firm is improving or deteriorating. Thus, Ratios
have wide applications and are of immense use today.
Guidelines or precautions for use of ratio:
1. Accuracy of financial statements: The ratios are calculated from the data
available in financial statements. Before calculating ratios one should see
whether proper concepts and conventions have been used for preparing financial
statements or not. These statements should also be properly audited by
competent auditors. The precautions will establish the reliability of data given in
financial statements.
2. Objective or purpose of analysis: The type of ratios to be calculated will
depend upon the purpose for which these are required. The purpose or object for
which rations are required to be studied should always be kept in mind for
studying various ratios. Different objects may require the study of different
ratios.
3. Selection of ratios: Another precaution in ratios analysis is the proper selection
of appropriate ratios. The ratios should match the purpose for which these are
required. Only these ratios should be selected which can throw proper light on
the matter to be discussed.
4. Use of standards: The ratios will give on indications of financial position only
when discussed with reference to certain standard. These standard may be rule
of thumb as in case of current ratio {2:1}and acid test ratio{1:1}, may be
industry standards, may budgeted or projected ratios etc.
5. Caliber of the analyst: The ratios are the only tools of analysis and their
interpretation will depend upon the caliber and competence of the analyst. He
65
should be familiar with various financial statements and the significance of
changes etc.
6. Ratios provide only a base: The ratios are only guidelines for the analyst he
should not base his decision entirely on them. He should study any other
relevant information, situation in the concern, general economic environment etc.
before reaching final conclusions.
Functional classification or classification according to tests
In view of financial management or according to tests satisfied, various ratios
have been classified as below:
1. Liquidity ratios: These are the ratios, which measure the short term
solvency or financial position of the firm and are calculated to comment upon
the short term paying capacity of concern or firm’s ability to meet its current
obligations. The various liquidity ratios are: current ratio, liquid ratio and absolute
ratio.
2. Long term solvency and leverage ratios: Long term solvency ratios convey
firms ability to meet the interest cost and repayment schedule of its long term
obligations, example debt equity ratio and interest coverage ratio. Leverage ration
show the proportions of debt and equity in financing of the firm.
3. Activity ratios: Activity ratios are calculated to measure the efficiency with
which the resources of a firm have been employed. These ratios are also called
turnover ratios because it indicates the speed with which assets are being turned over in
to sales example debtor turnover ratio.
Classification according to significance or importance
The Ratios have also been classified according to their significance or
importance. Some ratios are more important than others and the firm may classify them
as primary and secondary ratios. The British Institute of management has recommended
the classification of ratios according to importance for inter firm comparisons. For inter
firm comparisons, the ratios may be classified as primary and secondary ratios. The
primary ratio is one which is of prime importance to a concern, thus return on capital
employed is named as primary ratio. The other ratios which support or explain the
66
primary ratio are called secondary ratio, e.g. the relationship of operating profit to sales
or the relationship of sales to total assets of the firm.
Analysis Of Short-Term Financial Position
The short-term obligation of a firm can be met only when there are sufficient
liquid assets. If a firm fails to meet such current obligations, its
goodwill in the market is likely to be affected beyond repair. Moreover a very high
degree of liquidity will tie funds in current assets.
Therefore it is necessary to have a proper balance in regard to liquidity of the firm. Two
types of ratio are calculated to measure short-term solvency of a firm.
I) LIQUIDITY RATIOS
II) EFFICIENCY RATIOS
III) SOLVENCY RATIOS
IV)PROFITABILITY RATIOS
I) LIQUIDITY RATIO
It refers to the ability of a concern to meet its current obligation as and when
these become due. The short-term obligations are met by realizing amounts from
current, floating or circulating assets. These should be convertible into cash for paying
obligations of short – term nature. The sufficiency or insufficiency of current assets
should be assessed by comparing them with short-term liabilities. If current assets can
pay-off current liabilities, the liquidity position is satisfactory. On the other hand, if
current liabilities may not easily met out of current assets then the liquidity position will
be bad.
To measure liquidity of a firm, the following ratios can be calculated:
(i) Current ratio
(ii) Quick ratio
(iii) Absolute quick ratio
(i) Current Ratio
It is also known as Working capital ratio. It is a measure of liquidity and used in making
analysis of short term financial position.
Current Ratio = Current Assets / Current Liabilities.
Year 2006 2007
Current assets 2696515253 3056388177
67
Current liabilities 1640425867 1978589143
Current Ratio 1.64 1.54
TABLE 1.1 (Current Ratio)
FIGURE 1.1
Current Ratio
0
0.5
1
1.5
2
2006 2007
Years
68
0
500000000
1000000000
1500000000
2000000000
2500000000
3000000000
3500000000
2006 2007
Years
Am
ou
nt
(Rs.
)
Current assets Current liabilities
Interpretation : It is decreasing in the year 2007 because current liabilities are
increased this year as compare to 2006. Overall this ratio is satisfactory as it is nearest
to the thumb rule i.e. 2:1
69
(ii) Liquid Ratio
Liquid Ratio is more rigors test of liquidity than the current ratio. It is the ratio
between quick ratio & current liabilities. Quick ratio refers to all current assets except
Inventory & prepaid expenses.
Liquid Ratio = Liquid assets / Current Liabilities
Liquid assets = Current Assets- Prepaid Exp – Inventories
Year 2006 2007
Liquid assets 1929994111 2250727143
Current liabilities 1640425867 1978589143
Liquid Ratio 1.18 1.14
TABLE 1.2(Liquid Ratio)
70
0
500000000
1000000000
1500000000
2000000000
2500000000
2006 2007
Years
Am
ou
nt
(Rs.
)
Liquid assets Current liabilities
Liquid Ratio
0
0.5
1
1.5
2006 2007
Years
FIGURE 1.2
Interpretation: As seen from the analysis this ratio is almost same in both the years
quite satisfactory with a thumb rule i.e. 1.5 : 1. Company’s current assets involved large
amount of debtors in it.
(iii) Absolute Liquid Ratio
Cash is the most liquid ratio asset. Absolute liquid assets include Cash in hand,
Cash at bank, marketable securities or temporary investments.
Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities
Absolute Liquid Assets = Cash + Bank + Marketable Securities
Year 2006 2007
Absolute Liquid assets 69481654 22134657
Current liabilities 1640425867 1978589143
Absolute Liquid Ratio 0.04 0.01
TABLE 1.3(Absolute Liquid Ratio)
71
FIGURE 1.3
Absolute Liquid Ratio
0
0.01
0.02
0.03
0.04
0.05
0.06
2006 2007
Years
Interpretation : Viewing the trend of the cash ratio of both the years it can be said that
this ratio is not satisfactory because cash and bank balance has been decreased very
much in the year 2007 approx. 68%.
II) EFFICIENCY RATIOS OR ACTIVITY RATIOS
72
0
500000000
1000000000
1500000000
2000000000
2500000000
2006 2007
Absolute Liquid assets Current liabilities
Activity ratio measures the efficiency and the effectiveness with which a firm can
manage its resources. These are known as the Turnover ratios , because they indicate
the speed with which assets are converted into cash.
Major ratio given as under :
1. Working capital ratio
2. Inventory turnover ratio
3 Debtor turnover ratio
4. Creditor turnover ratio
1. Working Capital Turnover Ratio
It indicates the velocity of utilization of net working capital. It indicates the
efficiency with which working capital is being used by the company.
Working Capital Turnover Ratio = Net Sales /Average working capital
Year 2006 2007
Net sales 11369337410 13308705116
Average working capital 1170612956.5 1066944210
Working Capital Turnover Ratio 9.71 12.47
TABLE 2.1 (Working Capital Turnover Ratio)
73
FIGURE 2.1
Interpretation : Working capital turnover ratio is increasing as we can see from the
above table becomes 12.47 in 2007 from 9.71 in 2006 due to increase in sales
2. Inventory Turnover Ratio
It indicates whether the inventory has been efficiently used or not. It indicated
the number of times the stock has been turned over during the period and evaluates the
efficiency with which a firm is able to manage its inventory.
Inventory Turnover Ratio : Net Sales / Avg. Inventory at Cost
Year 2006 2007
Net sales 11369337410 13308705116
Average inventory at cost 708281512.5 786091088
Inventory Turnover Ratio 16.05 16.93
TABLE 2.2 (Inventory Turnover Ratio)
74
Working Capital Turnover Ratio
0
5
10
15
2006 2007
Years
Tim
es
FIGURE 2.2
Interpretation : As seen from the analysis there has been slight increase in the ratio.
Being a manufacturing concern company has to maintain large amount of inventories in
different forms but on the other side sales are increasing so it is good sign for the
company.
3. Inventory Conversion Period
It is calculated to see the average time taken for clearing the stocks.
Inventory conversion period = No. of days in a year /Inventory Turnover Ratio
Year 2006 2007
No. of days in a year 365 365
Inventory Turnover Ratio 16.05 16.93
Inventory conversion period 23 (days) 22 (days)
TABLE 2.3(Inventory Conversion Period)
75
Inventory Turnover Ratio
0
5
10
15
20
2006 2007
Years
Tim
es
FIGURE 2.3
Interretation: The company’s inventory conversion period is approximate 25 days
which indicates there is no fear of obsolesce of material.
4. Debtor Turnover Ratio
This ratio indicates the velocity of debt collection generally higher the ratio
means the more efficient management of debtors or more liquid are debtors and vice
verse.
Debtor Turnover Ratio = Total sales / Average Trade Debtors
Year 2006 2007
Total Sales 11369337410 13308705116
Average trade debtors 1844321481 2044552471.5
Debtor Turnover Ratio 6.17 6.51
TABLE 2.4(Debtor Turnover Ratio)
76
Inventory conversion period
0
5
10
15
20
25
2006 2007
Years
Da
ys
FIGURE 2.4
Interpretation: This ratio has been increased by 34% due to increase in sales but at the
same time debtors are also increasing which is not feasible in long run.
5. Average Collection Period
It represents the average number of days for which a firm has to wait before its
receivables are converted into cash.
Aver. Collection period = Number of days in a year / Debtor Turnover Ratio
Year 2006 2007
No. of days in a year 365 365
Avg. Collection period 6.17 6.51
Average Collection Period 59 days 56 days
TABLE 2.5(Average Collection Period)
77
Debtor Turnover Ratio
0
2
4
6
8
10
2006 2007
Years
Tim
es
Average Collection Period
0
10
20
30
40
50
60
2006 2007
Years
Day
s
FIGURE 2.5
Interpretation : Company’s average collection period is approximate 60 days or two
months. It means company’s is allowing sufficient time to debtors. It should not be very
much increasing in the long run.
6. Creditor Turnover Ratio
This ratio indicates the velocity with which the creditors are turned over in
relation to purchases. Generally higher the ratio better it is or otherwise lower the
creditor velocity, less favorable are the results.
Creditor Turnover Ratio = Annual Purchases / Average Creditors.
Year 2006 2007
Annual purchases 8450144997 10318618457
Average creditors 1219309612 1499180490.5
Creditor Turnover Ratio 6.93 6.88
TABLE 2.6(Creditor Turnover Ratio)
78
FIGURE 2.6
7. Average Payment Period
Average Payment Period = No. of days in a year / Creditor Turnover Ratio
Year 2006 2007
No. of days in a year 365 365
Creditor Turnover Ratio 6.93 6.88
Average Payment Period 53 (days) 53 (days)
TABLE 2.7 (Average Payment Period)
FIGURE 2.7
79
Creditor Turnover Ratio
0
5
10
15
20
2006 2007
Years
Tim
es
Average Payment Period
0
10
20
30
40
50
60
2006 2007
Years
Day
s
Interpretation: The payment track record of the company is properly designed such
that timely payment is made to the suppliers. By analyzing the trend it can be said that
creditors are paid with in two months this shows as and when payment is received from
the debtors then it is being paid and more over company is enjoying credit policy by the
creditors.
III) SOLVENCY RATIOS
The term ‘solvency’ refers to ability of a concern to meet its long-term
obligations. The long-term indebtness of a firm includes debenture-holders, financial
institutions providing medium and long-term loans and other creditors selling goods on
installments basis .Long-term solvency ratio indicate a firm’s ability to meet the fixed
interest and costs and repayment schedules associated with its long-term borrowings.
Following solvency ratios have been used for this purpose:-
(1) Debt-equity ratio
(2) Equity ratio
(3) Solvency ratio
(4) Fixed assets to net worth
(1) Debt Equity Ratio
It shows the relationship between external and internal equities & it is calculated
to measure the claim of outsiders and owners against company’s assets
The outsider's funds include all debts/ liabilities to outsiders, whether in form of
debentures, bonds, mortgage or bills.
The shareholders funds include equity + preference share capital included
capital reserve, revenue reserve and reserves representing accumulated profits and
surpluses.
Debt Equity Ratio = Long term Debts / Shareholders Funds*100
Year 2006 2007
Long term Debts 1567876432 1732223697
Shareholders Funds 4427446105 5364231022
Debt Equity Ratio 35.41 32.29
80
TABLE 3.1(Debt Equity Ratio)
FIGURE 3.1
Interpretation : There has been a slight decrease in this ratio due to the fact that now
the company is relying more on own funds then on outsiders funds. As such ratio has
been improved and that amount is blocked in inventories.
(2) Equity Ratio
Establish the relationship between shareholders funds and total assets of the
company, the components of this ratio are
Equity Ratio = Shareholder’s Funds / Total Assets *100
Year 2006 2007
Shareholder’s Funds 4427446105 5367231022
Total Assets 7516900491 8793167449
Equity Ratio 59 61
TABLE 3.2(Equity Ratio)
81
FIGURE 3.2
Interpretation : Company is relying more shareholder funds than on loan funds. This
is favourable point for the creditors as company’s equity ratio in 2006 is 59% and in
2007 is 61% .
3. Solvency Ratio
This ratio indicates the relationship between total liabilities to outsiders & total
assets of the company.
Solvency ratio = 100- Equity ratio
Year Solvency Ratio
2006 41
2007 39
TABLE 3.3(Solvency Ratio)
82
Equity Ratio
0
10
20
30
40
50
60
70
2006 2007
Years
Per
cen
tag
e
FIGURE 3.3
Interpretation : .The ratio in 2006 is 41% and in 2007 is 39% , so it implies lower the
ratio of total liabilities to total assets, more satisfactory/stable in the long term solvency
position of the firm.
4. Fixed Assets to Net Worth Ratio
The ratio established the relationship between fixed assets and shareholders
funds i.e. share capital plus, reserves and surplus and retained earning The ratio can be
calculated as follows: Fixed Assets to Net worth Ratio =
Fixed Assets (after Dep.) / Shareholder funds * 100
Year 2006 2007
Fixed Assets (after Dep.) 1968881237 1893341411
Shareholder funds 4427446105 5364231022
Fixed Assets to Net Worth Ratio 44.47 35.30
TABLE 3.4(Fixed Assets to Net worth Ratio)
FIGURE 3.4
83
Solvency Ratio
0
10
20
30
40
50
2006 2007
Years
Pe
rce
nta
ge
Fixed Assets to Net Worth Ratio
0
10
20
30
40
50
2006 2007
Years
Per
cen
tag
e
Interpretation: the company’s fixed assets to net worth is 44.47% and 35.30% in
years 2006 and 2007. It implies that owners funds are more than total fixed assets and a
part of the working capital is provided by the shareholders.
IV PROFITABILITY RATIOS
The following ratios are known as general profitability ratio
1) G.P. Ratio
2) N.P. Ratio
3) Return on Investment
1. Gross Profit Ratio
Gross profit ratio measures the relationship of gross profit to net sales and is
usually represented as a percentage. Thus it is calculated by dividing the gross profit by
sales.
Gross Profit Ratio = Gross Profit / Sales * 100
Year 2006 2007
Gross Profit 1612956575 1575635349
Sales 11369337410 13308705116
84
Gross Profit Ratio 14.19 11.84
TABLE 4.1(Gross Profit Ratio)
FIGURE 4.1
Interpretation: There has been decrease in the Gross Profit by 2.31% because the rate
of increase in sales is less than the rate of increase in cost of goods sold.
85
Gross Profit Ratio
0
5
10
15
20
2006 2007
Years
Per
cen
tag
e
2. Net Profit Ratio
Net profit ratio established a relationship between net profit and sales. This ratio
is the overall measure of firms profitability and is calculated as:
Net Profit Ratio = Net profit after tax / Net Sales *100
Year 2006 2007
Net profit after tax 664931302 1025585738
Net sales 11369337410 13308705116
Net Profit Ratio 5.84 7.71
TABLE 4.2(Net Profit Ratio)
FIGURE 4.2
Interpretation : There has been decrease in the Gross Profit by 2.31% because the rate
of increase in sales is less than the rate of increase in cost of goods sold. The non-
operating expenses decrease by 86.43% so net profit increases.
86
Net Profit Ratio
0
2
4
6
8
10
2006 2007
Years
Per
cen
tag
e
3. Return on Investment
Return on Investment = Profit Before interest and taxes / Total investment *100
Year 2006 2007
Profit Before interest and taxes 636173463 1211327797
Total investment 28515040014 3843437861
Return on Investment 22.31 31.52
TABLE 4.3(Return on Investment)
FIGURE 4.3
Interpretation: The Company’s overall profitability is improving as return on
investment increases from 22.31% to 31.52%.
87
Return on Investment
0
5
10
15
20
25
30
35
2006 2007
Years
Per
cen
tag
e
CHAPTER 8
88
FINDINGS
1. Company’s is utilizing long term loans to finance fixed assets and investments
but it has started relying on own funds.
2. There is decrease in gross profit of the company due to increase in cost of goods
sold but there is increase in net profits due to decrease in non operating expense.
3. Debtors are also increasing which is not good sign for the company in long run.
4. Current liabilities are increasing by 20.61%. Where as cash decreases very much
by 68.14%
5. There is stability in equity share capital.
89
CHAPTER 9
90
SUGGESTIONS
1. The Company is enjoying a good current position. It should take steps to further
improve its position by repositioning the composition of current assets as large
amount has been block in debtors and inventories.
2. Large amounts of funds are blocked in debtors. Company should reduce its
debtors so that the blocked amount is properly utilized.
3. Inventory control is not proper. The Company has not defined the minimum and
the maximum stock level scientifically. Therefore there is blockage of funds.
Moreover, the safety stock level is also not defined. So the company should
apply the proper Inventory Control System so that there is no wastage of funds.
91
CHAPTER 10
92
LIMITATION
Financial analysis is a powerful mechanism of determining financial strength and
weakness of a firm. But the analysis is based on the information available in the
financial statements. Thus the financial analysis suffers from some serious inherent
limitation of financial statements, which are as follows :-
1. It is only a study of interim reports.
2. Financial analysis is based only upon monetary information & non-
monetary factors are ignored.
3. It does not consider changes in price level.
4. As financial statement are prepared on the basis of a going concern; it does
not give exact position.
5. Analysis is only a mean not an end in itself. The analyst has to make
interpretation and draw his own conclusion.
93
CHAPTER 11
94
REFERENCES
Sites: -
www.herocycles.com
www.google.com
Book Author
Management Accounting R.K.Sharma
Annual Reports of HERO CYCLES LIMITED at ending year 31ST MARCH 2006 AND
2007.
CHAPTER 12
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