18816035 Financial Analysis of Hero Cycles

8/2/2019 18816035 Financial Analysis of Hero Cycles

1/106

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


2/106

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.

2


3/106

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 Groups low key, but

focused, style of management has earned the plaudits amidst investors, employees,

3


4/106

vendors and dealers, as also worldwide recognition.

4


5/106

5


6/106

TABLES OF CONTENTS

S.No. Chapter No. Topic Page No.

1. 1 Introduction 9

1.1 Introduction 10

1.2 Organization of hero cycle ltd 11-12

1.3 , 1.4 Hero group &hero group cos 13-151.5 Driving force : chairman 16-17

1.6 Milestones 18-23

1.7 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 43-45

4. 4. Financial Analysis 46-48

5. 5. Objectives 49-50

6. 6. Research Methodology 51-53

7. 7 Analysis & Interpretation 54

7.1 Comparative statements 55-59

7.2 Common size statement 60-62

7.3 Cash flow statement 63-64

7.4 Fund flow statement 65-68

7.5 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

6


7/106

List of Tables

List of Figures

S.No. Table No. Table Page No.

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

7


8/106

CHAPTER 1

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 849 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 9217 4.3 Return on investment 93

8


9/106

9


10/106

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

10


11/106

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 isnt just another day, its

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. Heros 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 beingthe worlds largest manufacturers of bicycles, motorcycles and chains to this date, has

diversified into newer segments like Information Technology, IT Enabled Services and

Financial Services.

11


12/106

THE HERO GROUP

12


13/106

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 Groups 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.

13


14/106

Munjal Showa 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

14


15/106

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 HeroGroup was born in 1923, in what is now Pakistan.After partition, the Munjal brothers started a smallbusiness of manufacturing bicycle components inLudhiana in North India in the face of the bottlenecks

15


16/106

of industrial infrastructure and investments. Dr Lall led a small timemanufacturer of 60 cycles a day to become a manufacturing giant,which churns out not only over 17,000 cycles per day but is alsodiversified into various domains. Undoubtedly, Dr.Lall is a firstgeneration business entrepreneur of the 1950s'.

Dr.Lall has enriched the Hero Group with his vision of sound businessgovernance and value driven management practices. His foresight

has made the Hero Group a leader in its business. Dr Brijmohan Lallis a role model for Indian Industry in corporate governance andethical and value-driven management practices. His principle-basedleadership has led the Group companies to receive the best industrialgovernance and safety awards and acquire stringent valuecertifications.

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 immensecontribution to the Indian industry. He was adjudged Businessmanof the Year in 1994 by a leading business magazine - BusinessIndia.

In 1995, Dr.Lall received the National Award for outstandingcontribution to the Development of Indian Small ScaleIndustry. (NSIC award - presented by the President of India)

In 1999, the Business Baron recognized him as the "Most AdmiredCEO."

The PHD Chamber of Commerce and Industry presented him with theDistinguished Entrepreneurship Award in 1997, in recognition ofhis outstanding exemplary entrepreneurship.

16


17/106

Xavier Labour Relations Institute (XLRI), a premier institution hasconferred on him the honor ofSir Jehangir Ghandy Medal forIndustrial Peace in 2000.

Ernst and Young has recognized him as the "Entrepreneur of theyear 2001."

All India Management Association conferred him with the Lifetime

Achievement award for "Managment"(2003)

Banaras Hindu University, Varanasi one of the most prestigiousUniversities 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 andIndustry

MILESTONES

Heros 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


18/106

1961

Rockman Cycle Industries Ltd. established which is today the largest manufacturer of

bicycle chains & hubs in the world.

1963Bicycle 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 worlds 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


19/106

- 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


20/106

1991

Hero Honda received National Productivity Council Award and also the Economic

Times Harvard Business School Association Award against 200 contenders.

1991Hero Cycles introduced Kid the first branded bike in childrens 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

20


21/106

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 worlds largest manufacturer of two-wheelers with the

market of more than 48%.

21


22/106

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.

22


23/106

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


24/106

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 satisfiedcustomers, 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 companys products, its

communication and its dealings with suppliers, employees, dealers and customers. Be it

companys 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

24


25/106

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

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

25
http://www.herocycles.com/http://www.herohonda.com/http://www.heromotors.com/http://www.herocorp.com/http://www.heromindmine.com/http://www.munjal-esystems.com/http://www.nsureplus.com/http://www.heroites.com/http://www.heroites.com/http://www.heroites.com/http://www.heroites.com/http://www.munjalshowa.net/http://www.herocycles.com/http://www.herohonda.com/http://www.heromotors.com/http://www.herocorp.com/http://www.heromindmine.com/http://www.munjal-esystems.com/http://www.nsureplus.com/http://www.heroites.com/http://www.heroites.com/http://www.munjalshowa.net/


26/106

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 matchinternational 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

26


27/106

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.

The Mission Statement Its 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. Heros 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.

27


28/106

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, its 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


29/106

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 theres one way to work, its

with the heart. At Hero Cycles, there is a strong affinity towards building therelationships with employees, workers, vendors and dealers. Job security, growth

opportunity and respect are the unspoken, yet understood components of every mans

package who chooses to work within the fold of

Hero family. It is quite common to find two generations of the same family workingtogether 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, Heros 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.

29


30/106

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 todays 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.

30


31/106

(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 companys C.R.Division will do well by putting emphasis on special grades,

narrow and thinner strips with short delivery period and fast customization.

INNOVATIONS

31


32/106

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 andexpanding its product portfolio to appeal to different kinds of customers. In its

endeavour to keep a step-ahead of times, Heros 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 Heros

emphasis on innovations & designs.

Promotions

32


33/106

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 customers 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 therecreational 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 racers 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 Indias new bowling

sensation, Irfan Pathan who has also been a real life Hero cycle user.

SOCIAL RESPONSIBILTIES

33


34/106

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.

34


35/106

The main products are:-

i) Cycles

ii) Rims

iii) Free wheels

iv) Hubs and Chainsv) Cold Rolled strips

vi) E-Bikes

COMPETITORS

IN CYCLE MARKET:

AVON

OPERA

TI ATLAS

OTHERS (NEELAM,KW,BS)

IN E-BIKE MARKET:

35


36/106

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. INTNL 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)

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


37/106

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


38/106

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 Groups Partnership with Honda Motors, Japan is over 20 years old.

--Hero Groups 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

.

Asias leading companies award (2003) by Far Eastern Economic Review.

Hero Cycles is the Worlds 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

worlds 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


39/106

CHAPTER 3

39


40/106


41/106

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


42/106

42


43/106

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, profitand 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


44/106

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


45/106

45


46/106

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


47/106

CHAPTER 6

47


48/106

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


49/106


50/106

CHAPTER 7

CHAPTER 7.1

50


51/106

51


52/106

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 soas 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


53/106

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


54/106

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%.

54


55/106

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, sellingexpenses & depreciation)

1147615431 1139418653 -8196778 -1.76

Operating profit/loss 465341144 313168939 -29124448 -6.25

Add: Other income 1077448184 898158858 -179289326 -16.64Less:non operating exp. 906615865 123047757 -783568108 -86.43

Net profit Before Tax 636173463 121132797 +575154334 +90.41

Less : Taxprovision forwealth tax, taxation, fringebenefit 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

55


56/106

II) COMMON SIZE STATEMENT

A) Common Size Balance Sheet

Particulars 2006 2007

Amount (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

56


57/106

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

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, sellingexpenses & 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 : Taxprovision forwealth tax, taxation, fringe

-28757839 -2.53 185742059 1.40

57


58/106

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


59/106

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

59


60/106

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


61/106

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 firms

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 firms total

financial resources. They do not reveal some significant items that do not affect the

firms 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 firms cash and working capital positions involving:

Changes in the firms working capital position,

Changes in the firms cash position, and

Changes in the firms total financial resources.

61


62/106

Statement of Changes in Working Capital

Particulars 2006 2007 Effect on Working

Capital

Increase Decrease

Current 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 workingcapital

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 1201189981299524464 1299524464

WORKING NOTES

Adjusted Profit and Loss Account

Particulars Amount

(Rs.)

Particulars Amount

(Rs.)

To Dep. on fixedAssets

213345223 By Balance b/d 4029233305

To Balance c/d 4966018222 By Deferred Tax 14952941

By Fund from Operation 1135177199

62


63/106

(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 FixedAssets (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


64/106


65/106

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 andinterpreted. 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, financialinstitutions, 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


66/106

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 infinancial 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.

66


67/106

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 firms 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

67


68/106


69/106

FIGURE 1.1

Current Ratio

0

0.5

1

1.5

2

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

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

3500000000

2006 2007

Years

A m o u nt

(R s.

)

Current assets Current liabilities

69


70/106

(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)

0

500000000

1000000000

1500000000

2000000000

2500000000

2006 2007

Years

A m o u nt

(R s.

)

Liquid assets Current liabilities

70


71/106

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. Companys 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


72/106

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

0

500000000

1000000000

1500000000

2000000000

2500000000

2006 2007

Absolute Liquid assets Current liabilities

72


73/106

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 13

Average working capital 1170612956.5 1066944210

Working Capital Turnover Ratio 9.71 12.47

TABLE 2.1 (Working Capital Turnover Ratio)

73


74/106

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 13

Average inventory at cost 708281512.5 786091088

Inventory Turnover Ratio 16.05 16.93

TABLE 2.2 (Inventory Turnover Ratio)

Working Capital Turnover Ratio

0

5

10

15

2006 2007

Years

Ti m es

74


75/106

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)

Inventory Turnover Ratio

0

5

10

15

20

2006 2007

Years

Ti

m es

75


76/106

FIGURE 2.3

Interretation: The companys 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)

Inventory conversion period

0

5

10

15

20

25

2006 2007

Years

D ay s

76


77/106

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


Avg. Collection period 6.17 6.51

Average Collection Period 59 days 56 days

TABLE 2.5(Average Collection Period)

Debtor Turnover Ratio

0

2

4

6

8

10

2006 2007

Years

Ti m es

77


78/106

Average Collection Period

0

10

20

30

40

50

60

2006 2007

Years

Days

FIGURE 2.5

Interpretation : Companys average collection period is approximate 60 days or two

months. It means companys 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


79/106

FIGURE 2.6

7. Average Payment Period

Average Payment Period = No. of days in a year / Creditor Turnover RatioYear 2006 2007


Creditor Turnover Ratio 6.93 6.88

Average Payment Period 53 (days) 53 (days)

TABLE 2.7 (Average Payment Period)

FIGURE 2.7

Creditor Turnover Ratio

0

5

10

15

20

2006 2007

Years

Ti

m es

Average Payment Period

0

10

20

30

40

50

60

2006 2007

Years

D ay

s

79


80/106

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 firms 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 companys 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

TABLE 3.1(Debt Equity Ratio)

80


81/106

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 = Shareholders Funds / Total Assets *100

Year 2006 2007

Shareholders Funds 4427446105 5367231022

Total Assets 7516900491 8793167449

Equity Ratio 59 61

TABLE 3.2(Equity Ratio)

Debt Equity Ratio

0

10

20

30

40

2006 2007

Years

P er

ce

nt

a g e

81


82/106

FIGURE 3.2

Interpretation : Companyis relying more shareholder funds than on loan funds. This

is favourable point for the creditors as companys 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 Ratio2006 41

2007 39

TABLE 3.3(Solvency Ratio)

Equity Ratio

0

10

20

3040

50

60

70

2006 2007

Years

P er

ce

nt

a g e

82


83/106

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

Solvency Ratio

0

10

20

30

40

50

2006 2007

Years

P er

ce

nt

a g e

83

Fixed Assets to Net WorthRatio

0

10

20

30

40

50

2006 2007

Years

P er

ce

nt

a g e


84/106

Interpretation: the companys 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

Gross Profit Ratio 14.19 11.84

TABLE 4.1(Gross Profit Ratio)

84


85/106

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.

Gross Profit Ratio

0

5

10

15

20

2006 2007

Years

P er

ce

nt

a g e

85


86/106

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

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.

Year 2006 2007

Net profit after tax 664931302 1025585738

Net sales 11369337410 13

Net Profit Ratio 5.84 7.71

Net Profit Ratio

0

2

4

6

8

10

2006 2007

Years

P er

ce

nt

a g e

86


87/106

3. Return on Investment

Return on Investment = Profit Before interest and taxes / Total investment *100

Year 2006 2007Profit 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 Companys overall profitability is improving as return on

investment increases from 22.31% to 31.52%.

CHAPTER 8

Return onInvestment

0

5

10

15

20

25

30

35

2006 2007

Years

P er

ce

nt

a g e

87


88/106

88


89/106


90/106

CHAPTER 9

90


91/106


92/106

CHAPTER 10

92


93/106

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 inherentlimitation 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


94/106

CHAPTER 11

94


95/106

REFERENCES

Sites: -

www.herocycles.com

www.google.com

Book Author

Management Accounting R.K.Sharma

Annual Reports of HERO CYCLES LIMITED at ending year 31 ST MARCH 2006 AND

2007.

CHAPTER 12

95
http://www.herocycles.com/http://www.herocycles.com/


96/106

96


97/106

97


98/106

98


99/106

99


100/106

100


101/106

101


102/106

102


103/106

103


104/106

104


105/106

105


106/106

Documents

18816035 Financial Analysis of Hero Cycles