Financial Analysis Of Hero Cycles

FINANCIAL ANALYSIS OF HERO CYCLE LTD.

A PROJECT

REPORT Submitted by: RITESH GARG 7048221587

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 1

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 breakthrough in whatever product category we have ventured. The Group’s low key, but focused, style of management has earned the plaudits amidst investors, employees, 3

vendors and dealers, as also worldwide recognition.

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5

TABLES OF CONTENTS S.No. 1.

Chapter No. 1

Topic Introduction 1.1 Introduction 1.2 Organization of hero cycle ltd

1.3 , 1.4

Page No. 9 10 11-12

Hero group &hero group co’s

13-15

1.5 1.6 1.7

Driving force : chairman Milestones Hero: the super brand

16-17 18-23 24-25

1.8

Global gearing :exports

1.9

Vision & mission

1.10 1.11 1.12,1.13,1.14 1.15 1.16 , 1.17 1.18

26-27 28

Quality: the driving force Building relationship R & D.,innovations, promotions Social responsibility

29 30-31 32-35 36

Major products, competitors

37-38 39 40-42

2.

2.

Ownership of management Achievements

3. 4.

3. 4.

LITERATURE REVIEW Financial Analysis

43-45 46-48

5.

5.

Objectives

49-50

6.

6.

Research Methodology

51-53

7.

7

Analysis & Interpretation Comparative statements Common size statement Cash flow statement Fund flow statement Ratio analysis

54 55-59 60-62 63-64 65-68 69-93

7.1 7.2 7.3 7.4 7.5 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

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List of Tables S.No. 1 2 3 4 5 6 7 8 9 10

Table No. 1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.5 2.6 2.7

Table

11

3.1

Debt equity ratio

87

12 13 14

3.2 3.3 3.4

Equity ratio Solvency ratio Fixed asset to net worth ratio

88 89 90

15

4.1

Gross profit ratio

91

16

4.2

Net profit ratio

92

17

4.3

Return on investment

93

Current Ratio Quick ratio Absolute quick ratio Working capital turnover ratio Inventory turnover ratio Inventory conversion period Debtor turnover ratio Average collection period Creditor turnover ratio Average payment period

List of Figures

7

Page No. 74 76 77 79 80 81 82 83 84 85

S.No. 1 2 3 4 5 6 7 8 9 10

Figure No. 1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.5 2.6 2.7

Figure Current Ratio Quick ratio Absolute quick ratio Working capital turnover ratio Inventory turnover ratio Inventory conversion period Debtor turnover ratio Average collection period Creditor turnover ratio Average payment period

Page No. 75 77 78 80 81 82 83 84 85 85

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3.1

Debt equity ratio

87

12 13 14

3.2 3.3 3.4

Equity ratio Solvency ratio Fixed asset to net worth ratio

88 89 90

15

4.1

Gross profit ratio

91

16

4.2

Net profit ratio

92

17

4.3

Return on investment

93

CHAPTER 1

8

9

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 inhouse 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 20032004.

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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

LOG

O

Highway Cycle Industries

Sunbeam Auto Limited LOGO Munjal Auto Industries Limited

Munjal Showa Limited

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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

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 15

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) 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. 16

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 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. 17

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 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. 18

-

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 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. 19

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.

1996 Hero Winner, a large wheeled scooter with a choice of 50 cc & 75 cc engines was launched by Hero Motors Ltd. 1998

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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 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%. 21

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.

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 23

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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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

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

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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 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 26

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.” 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.

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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

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 28

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 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 DEVELOPMENT OF 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.

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(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 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

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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

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

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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 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

33

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.

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.

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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: • • • • •

AVON OPERA TI ATLAS OTHERS (NEELAM,KW,BS)

IN E-BIKE MARKET: 35

• • • • •

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 ASHISH KUMAR MUNJAL

(M.D. DOMESTIC MKTG.)

(M.D. UNIT TO SAHIBABAD)

SH. SUNIL KANT MUNJAL

(M.D. C.R.DIVISION)

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)

36

CHAPTER 2

The Achievements

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 37

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.  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.

38

CHAPTER 3

39

Literature review         Ball and Brown (1968) were the first to highlight the relationship between stock prices  and information disclosed in the financial statements. Empirical research on the value relevance has its  roots in the theoretical framework on equity valuation models. Ohlson(1995) depicted in his work  that the value of a firm can be expressed as a linear function of book value, earnings and other value  relevant information. 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 relationship­based  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 [12] Kallunki, Juha-Pekka and Paakki, Eija, "Stock Market Response to IFRS/IAS Cash Flows" 40

(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

41

42

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: 43

The analysis and interpretation of financial statement is used to determine the 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

44

45

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.

46

CHAPTER 6

47

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.

48

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.

49

CHAPTER 7

CHAPTER 7.1

50

51

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 52

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.

53

HERO CYCLE LTD. I) COMPARATIVE STATEMENT A) Comparative Balance Sheet Particulars 2006 2007 Increase/Decrease Assets

%age

Fixed Assets Investments Deferred Tax Assets (Net) Current Assets - Inventories - Sundry Debtors - Cash & Bank Balance Loan and advances

1968881237 2851504001 4892714

1893341411 3843437861 19845655

- 75539826 +991933860 +14952941

-3.84 +34.79 +305.62

766521142 1860512457 69481654 337661837

805661034 2228592486 22134657 457780835

+39139892 +368080029 - 47346997 +120118998

+5.11 +19.78 -68.14 +35.57

Total Assets Liabilities

7859455042

9270793939

+1411338897

+17.95

Shareholder Fund Loan Funds Current Liabilities - Liabilities - Provisions

4427446105 1567876432

5364231022 1732223697

+936784917 +164347265

+21.16 +10.48

1640425867 223706638

1978589143 19575007

+338163276 -27956561

+20.61 -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%.

54

HERO CYCLE LTD B) Comparative Income Statement Particulars 2006

2007

Net Sales Less : Cost of Goods Sold (Material consumed, manufacturing expenses & personal expenses) Gross Profit

11369337410 9756380835

13308705116 11733069767

Increase/ Decrease (Rs). +1939367706 +1976688932

%age

1612956575

1575635349

-37321226

-2.31

Less : Operating expenses (Administrative expenses, financial expenses, selling expenses & depreciation)

1147615431

1139418653

-8196778

-1.76

Operating profit/loss Add: Other income Less:non operating exp. Net profit Before Tax

465341144 1077448184 906615865 636173463

313168939 898158858 123047757 121132797

-29124448 -179289326 -783568108 +575154334

-6.25 -16.64 -86.43 +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

+17.06 +20.26

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

55

II) COMMON SIZE STATEMENT A) Common Size Balance Sheet Particulars

2006 Amount (Rs.) 1968881237 2851504001 4892714

%age

2007 Amount (Rs.)

%age

25.05 36.28 0.06

1893341411 3843437861 19845655

20.42 41.46 0.22

Assets Fixed Assets Investments Deferred Tax Assets (Net)

56

Current Assets - Inventories - Sundry Debtors - Cash & Bank Balance Loan and advances

766521142 1860512457 69481654 337661837

9.76 23.67 0.88 4.30

805661034 2228592486 22134657 457780835

8.69 24.04 0.24 4.93

Total Assets Liabilities

7859455042

100.00

9270793939

100.00

Shareholder Fund Loan Funds Current Liabilities - Liabilities - Provisions

4427446105 1567876432

56.33 19.95

5364231022 1732223697

57.86 18.69

1640425867 223706638

20.87 2.85

1978589143 19575007

21.34 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 Net Sales Less : Cost of Goods Sold (Material consumed, manufacturing expenses & personal expenses) Gross Profit Less : Operating expenses (Administrative expenses, financial expenses, selling expenses & depreciation) Operating profit/loss Add: Other income Less:non operating exp. Net profit Before Tax Less : Tax provision for wealth tax, taxation, fringe

2006 Amount (Rs.) 11369337410 9756380835

%age 100.00 85.81

2007 Amount (Rs.) 13308705116 11733069767

%age 100.00 88.16

1612956575 1147615431

14.19 10.09

1575635349 1139418653

11.84 8.56

1147615431 1077448184 906615865 636173463 -28757839

4.09 9.48 7.97 5.60 -2.53

1139418653 898158858 123047757 121132797 185742059

3.28 6.75 0.92 9.10 1.40

57

benefit tax & deferred tax 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

58

HERO CYCLES LTD. Cash Flow Statement Particulars

2006

2007 12113.28 2996.85

Increase/ Decrease +5751.55 -5385.98

Profit Before Tax Net Cash Flow Operating Activity

6361.73 8382.83

Net Cash used in Investing Activity

90.41 -64.25

-4988.22

-3143.35

-1844.87

-36.98

Net Cash used in Financing Activity

-3471.47

-326.97

-3144.50

-90.58

Net Inc/Dec in Cash & Equivalent Cash and Equivalent at the Begin of the Year

-76.86

-473.47

+396.61

+516.02

771.68

694.82

-76.86

-9.96

694.82

221.35

-473.47

-68.14

Cash and Equivalent at the End of the Year

CHAPTER 7.4

59

%age

FUND FLOW ANALYSIS Definition of Fund A question arises as to the definition of “FUND”. It means: •

Funds may mean change in cash only; 60

•

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.

61

Statement of Changes in Working Capital Particulars

2006

Current Assets - Inventories - Sundry Debtors - Cash & Bank Balance

2007

Effect on Working Capital Increase Decrease

766521142 1860512457 69481654 (A) 2696515253

805661034 2228592486 22134657 3056388177

39139892 368080029 -

47346997

1640425867 223706638 (B) 1864132505 Working capital (A-B) 832382748 Net increase in working 4966209 capital Total 882048957

1978589143 195750077 2174339220 882048957 -

27956561

338163276 -

-

49666209

882048957

435176482

435176482

Current Liabilities - Liabilities - Provisions

Note : Provision should be taken as current liability FUND FLOW STATEMENT Sources Raising of Loans Funds from operation

Amount (Rs.) 164347265 1135177199

Applications Net Increase in Working Capital Purchase of Investment Purchase of Fixed Assets Loan of Advances given

1299524464

Amount (Rs.) 49666209 991933860 137805397 120118998 1299524464

WORKING NOTES Adjusted Profit and Loss Account Particulars To Dep. on fixed Assets To Balance c/d

Amount (Rs.)

Particulars

Amount (Rs.)

213345223

By Balance b/d

4029233305

4966018222

By Deferred Tax By Fund from Operation

14952941 1135177199

62

(Bal. Figure) 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

63

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. 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.

64

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 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. 65

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 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 66

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 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. 67

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)

(i)

Current ratio

(ii)

Quick ratio

(iii)

Absolute quick ratio

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. TABLE 1.1 (Current Ratio)

Year Current assets Current liabilities Current Ratio

2006 2696515253 1640425867 1.64

68

2007 3056388177 1978589143 1.54

Current assets

Current liabilities

Amount (Rs.)

3500000000 3000000000 2500000000 2000000000 1500000000 1000000000 500000000 0 2006

2007 Years

FIGURE 1.1 Current Ratio 2 1.5 1 0.5 0 2006

2007 Years

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 Liquid assets Current liabilities Liquid Ratio

2006 1929994111 1640425867 1.18

2007 2250727143 1978589143 1.14

TABLE 1.2(Liquid Ratio)

Liquid assets

Current liabilities

Amount (Rs.)

2500000000 2000000000 1500000000 1000000000 500000000 0 2006

2007 Years

70

Liquid Ratio 1.5

1

0.5

0 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 Absolute Liquid assets Current liabilities Absolute Liquid Ratio

2006 69481654 1640425867 0.04 TABLE 1.3(Absolute Liquid Ratio)

71

2007 22134657 1978589143 0.01

Absolute Liquid assets

Current liabilities

2500000000 2000000000 1500000000 1000000000 500000000 0 2006

2007

FIGURE 1.3 Absolute Liquid Ratio 0.06 0.05 0.04 0.03 0.02 0.01 0 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

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 Net sales Average working capital Working Capital Turnover Ratio

2006 11369337410 1170612956.5 9.71

TABLE 2.1 (Working Capital Turnover Ratio)

73

2007 13308705116 1066944210 12.47

Working Capital Turnover Ratio 15

Times

10

5

0 2006

2007 Years 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 Net sales Average inventory at cost Inventory Turnover Ratio

2006 11369337410 708281512.5 16.05

TABLE 2.2 (Inventory Turnover Ratio)

74

2007 13308705116 786091088 16.93

Inventory Turnover Ratio 20 Times

15 10 5 0 2006

2007 Years 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 No. of days in a year 365 Inventory Turnover Ratio 16.05 Inventory conversion period 23 (days) TABLE 2.3(Inventory Conversion Period)

75

2007 365 16.93 22 (days)

Inventory conversion period 25

Days

20 15 10 5 0 2006

2007 Years 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 Total Sales Average trade debtors Debtor Turnover Ratio

2006 11369337410 1844321481 6.17 TABLE 2.4(Debtor Turnover Ratio)

76

2007 13308705116 2044552471.5 6.51

Debtor Turnover Ratio 10

Times

8 6 4 2 0 2006

2007 Years 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 No. of days in a year 365 Avg. Collection period 6.17 Average Collection Period 59 days TABLE 2.5(Average Collection Period)

77

2007 365 6.51 56 days

Average Collection Period 60 50 Days

40 30 20 10 0 2006

2007 Years

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 Annual purchases Average creditors Creditor Turnover Ratio

2006 8450144997 1219309612 6.93 TABLE 2.6(Creditor Turnover Ratio)

78

2007 10318618457 1499180490.5 6.88

Creditor Turnover Ratio 20

Times

15 10 5 0 2006

2007 Years

FIGURE 2.6 7.

Average Payment Period

Average Payment Period = No. of days in a year / Creditor Turnover Ratio Year 2006 No. of days in a year 365 Creditor Turnover Ratio 6.93 Average Payment Period 53 (days) TABLE 2.7 (Average Payment Period)

Average Payment Period 60

Days

50 40 30 20 10 0 2006

2007 Years

FIGURE 2.7

79

2007 365 6.88 53 (days)

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 Long term Debts Shareholders Funds Debt Equity Ratio

2006 1567876432 4427446105 35.41 TABLE 3.1(Debt Equity Ratio) 80

2007 1732223697 5364231022 32.29

Debt Equity Ratio

Percentage

40 30 20 10 0 2006

2007 Years 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 Shareholder’s Funds Total Assets Equity Ratio

2006 4427446105 7516900491 59 TABLE 3.2(Equity Ratio)

81

2007 5367231022 8793167449 61

Equity Ratio

Percentage

70 60 50 40 30 20 10 0 2006

2007 Years 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 2006

Solvency Ratio 41

2007

39 TABLE 3.3(Solvency Ratio)

82

Solvency Ratio

Percentage

50 40 30 20 10 0 2006

2007 Years 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

Percentage

Year 2006 Fixed Assets (after Dep.) Fixed Assets to Net Worth 1968881237 Ratio Shareholder funds 4427446105 Fixed Assets to Net Worth Ratio 44.47 50 TABLE 3.4(Fixed Assets to Net worth Ratio) 40 30

FIGURE 3.4

20 10 0 2006

83 Years

2007

2007 1893341411 5364231022 35.30

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 Gross Profit Sales Gross Profit Ratio

2006 1612956575 11369337410 14.19 TABLE 4.1(Gross Profit Ratio)

84

2007 1575635349 13308705116 11.84

Gross Profit Ratio

Percentage

20 15 10 5 0 2006

2007 Years 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

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 Net profit after tax Net sales Net Profit Ratio

2006 664931302 11369337410 5.84

2007 1025585738 13308705116 7.71

TABLE 4.2(Net Profit Ratio) Net Profit Ratio

Percentage

10 8 6 4 2 0 2006

2007 Years 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 nonoperating expenses decrease by 86.43% so net profit increases.

86

3.

Return on Investment

Return on Investment = Profit Before interest and taxes / Total investment *100 Year 2006 Profit Before interest and taxes 636173463 Total investment 28515040014 Return on Investment 22.31 TABLE 4.3(Return on Investment)

2007 1211327797 3843437861 31.52

Return on Investment 35 Percentage

30 25 20 15 10 5 0 2006

2007 Years FIGURE 4.3

Interpretation: The Company’s overall profitability is improving as return on investment increases from 22.31% to 31.52%.

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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.

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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.

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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 & nonmonetary 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.

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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.

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