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CHAPTER-3 DATA ANALYSIS PART-1 CAPITAL

STRUCTURE

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CHAPTER – 3 DATA ANALYSIS PART - 1: CAPITAL STRUC TURE

3.1 CONCEPT OF CAPITAL STRUCTURE: ............................................. 90

3.2 CAPITAL STRUCTURE ANALYSIS: ................................................... 91

3.2.1 FINANCIAL TOOLS: ............................................................................ 91

3.2.1.1 TREND ANALYSIS ....................................................................... 91

3.2.1.1.1 TREND ANALYSIS OF COMPONENTS OF CAPITAL

STRUCTURE ................................................................................................ 92

3.2.1.1.2 Trend Analysis of Reserves: ...................................................... 94

3.2.1.1.3 Trend Analysis of Net Worth: ..................................................... 95

3.2.1.1.4 Trend Analysis of Total Debt: ..................................................... 97

3.2.1.2 RATIO ANALYSIS ......................................................................... 98

3.2.1.2.1 INTRODUCTION AND MEANING: ............................................ 98

3.2.1.2.2 NATURE OF RATIO .................................................................. 98

3.2.1.2.3 STANDARDS OF COMPARISION ............................................ 99

3.2.1.2.4 IMPORTANCE OF RATIO ANALYSIS ....................................... 99

3.2.1.2.5 PRECAUTIONS TO BE TAKEN WHILE USING RATIO: ......... 100

3.2.1.2.6 UTILITY OF RATIO ANALYSIS ............................................... 101

3.2.1.2.7 CLASSIFICATION OF RATIOS ............................................... 101

3.2.2 STATISTICAL TOOLS: ...................................................................... 102

3.2.2.1 ARITHMETIC MEAN ................................................................... 102

3.2.2.2 STANDARD DEVIATION ............................................................ 102

3.2.2.3 CO-EFFICIENT OF VARIATION ................................................. 102

3.3 CAPITAL STRUCTURE RATIOS ...................................................... 102

3.3.1 DEBT-EQUITY RATIO ....................................................................... 104

3.3.2 TOTAL DEBT EQUITY RATIO .......................................................... 107

3.3.3 DEBT-TOTAL FUNDS RATIO ........................................................... 110

3.3.4 CAPITAL GEARING RATIO .............................................................. 113

3.3.5 PROPRIETARY RATIO ..................................................................... 114

3.3.6 INTEREST COVERAGE RATIO ........................................................ 117

3.3.7 LONG TERM FUNDS TO FIXED ASSETS RATIO ............................ 120

3.3.8 NET WORTH TO NET FIXED ASSETS RATIO ................................ 123

3.3.9 NET FIXED ASSETS TO CURRENT ASSETS RATIO ..................... 125

3.3.10 RESERVES TO CAPITAL RATIO ............................................... 128

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3.3.11 NET CURRENT ASSETS TO NET WORTH ............................... 130

3.4 CONCLUSION: .................................................................................. 133

� References.

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3 DATA ANALYSIS PART - 1: CAPITAL STRUCTURE 3.1 CONCEPT OF CAPITAL STRUCTURE: The capital structure is used to represent the proportionate relationship between the various long- term-forms of financing, such as debentures, long term debt, Preference capital and equity capital, reserve and surplus. The term capital structure is frequently used to indicate the long- term sources of funds employed in a business enterprise. In other words, it can be said that it represents permanent financing of the concern. This is usually measured by subtracting current liabilities from total assets. Thus, capital structure, general reserve, preference share and long –term debts.1 According to John and Mayor “financial structure” of a business as consisting three elements assets, liabilities and capital.2 The financial structure provides an insight into the various types of sources tapped to finance the total assets employed in a business enterprise that part of financial which represents long-term sources is known as “capital structure.”This term refers to make up of long –term funds as represented by the equity share capital, preference share capital and long-term debt. To circumscribe the real area of the term “Capital Structure.” it may be necessary to distinguish it from term “assets structure,” the assets structure refers to make-up of total assets as represented by fixed assets and current assets, 3 since the balance sheet is a detailed form of fundamental or structure equation. It sets forth the financial structure of an enterprise. It states the nature and amount of each of the various assets of the liabilities and of the property interest of the owner. Stating the nature of the assets, liabilities and capital is not difficult as their amount. The financial structure can be made initially from the point of view of the time for which funds are needed. An enterprise needs funds for financing shot-term and long–term requirements. However, view is not consistent regarding the duration of each type of finance. The financial structure line is often arbitrary, hazy, and vague. 4 Financial structure includes, therefore, both the sources of finance, i.e., long-term and short-term. From the angle of time there may be short-term capital. The short-term sources will be employed by an enterprise when the size of the funds is such as to generate sufficient cash flow to retire debt within short payment period of a year. They are invested in the current assets as a matter of policy as the current assets are automatically converted into cash during outline business operations.5 Probably, Gesternberg has used the term “capital structure” and “financial structure” interchangeably. According to him “financial structure also refers to make up of permanent capital of the Firm”.6 Capital structure means the financial plan of a company in which the various sources of capital are mixed up in such a proportion that they provide a distinct set-up most suitable to the requirements of that particular company. The task of framing capital structure involves determination of the right proportion in which different securities should be blended. Each corporate security has its own merits and demerits. It may be remarked that too much induction on any type of security in the capital structure of a company may prove unprofitable or risky subsequently, for example if the promoters decide to carry on business mainly with the help of

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equity capital without adequate debt capita, the company may forgo the advantage of “ trading on equity” and thus may not fulfill the objectives of the maximum return to owners, on the other hand if a company with fluctuating income has a high capital leverage and it will undertake a greater risk. Such a capital structure will no doubt maximize the return to owners, but in lean years it would make the position of the company very critical, because the net income might not be enough to meet even the fixed change obligations on preference shares or debentures. Undoubtedly, there should be a uniform capital structure, which suits the requirements of all companies. In other words, the capital structure has to be tailored in such a way so as to suit the needs of a particular company. Thus a model capital structure is possible only for such a Group of Companies, which has similar characteristics. 3.2 CAPITAL STRUCTURE ANALYSIS: Capital structure of the borrower has strong implications. For the analysis of capital structure, various financial & statistical tools have been used here. Structural ratios are based on the allocation of debt and equity in the pattern of firm’s assets.

3.2.1 FINANCIAL TOOLS: 3.2.1.1 TREND ANALYSIS The direction of changes over a period of time is very important in financial analysis. Trend analysis or time series analysis indicates the direction of change. Trends should be studied in relation to fixed expansion or secular trend in the growth of the business and the general price level. The ratio analysis gives a reasonable good picture but it is incomplete in one important respect-It ignores the time dimension. The ratios are snapshots of the picture at one point in time but there may be trends in motion that are in the process of rapidly eroding a relatively good present position.”7 Trend analysis is tool of analysis the financial statement in more simplified form over a period of years, “Trend analysis is horizontal analysis of financial statements often called as ‘pyramid method’ of ratio analysis-a guide to yearly changes.”8

To get a true trend of growth, the figures should be adjusted by a suitable index of general prices. Another method is to tabulate and plot the physical volume of sales expressed in suitable units of measure. If the general price level is not considered while analyzing trend the results may be misleading. They may show unduly optimistic results in periods of prosperity and pessimistic in recession. Generally, index number is used for trend analysis. This method is known as trend percentage method. Trend percentages are immensely helpful in making a comparative study of the financial statements for several years. The method of calculating trend percentages involves the calculation of

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percentage relationship that each item bears to the same item in the base year. Any year may be taken as base year. It is usually the earliest year. Any intervening year may also be taken as base year. Each item of base Year is taken as 100 and percentage changes in each items of other years in relation to the base year is to be calculated. This method is a useful analytical device for the management since by substituting percentages for large amounts; the brevity and readability are achieved. However, percentages are not calculated for all the items in the financial statements but are calculated only for major items since the purpose is to highlight important changes. In the wards “one of the most useful forms of horizontal analysis is trend analysis. It is especially helpful in revealing proportionate change over time in selected financial data.”9

For analysis of capital structure of selected automobile (two- wheeler) companies, the trend analyses of components of capital structure as well as of some ratios have been undertaken. By this exercise the effect of trend of components of capital structure on various other items can be analyzed. Also the trend with year-to-year basis variations and percentage change thereof has been put to analysis.

3.2.1.1.1 TREND ANALYSIS OF COMPONENTS OF CAPITAL STRUCTURE

(1) Trend Analysis of Share Capital:

Table no. 3.1

Trend Analysis of Share Capital of the selected Aut omobile Two Wheeler companies in India

YEAR HERO HONDAMOTORS LTD BAJAJ AUTO LTD

Sh .Cap (in Rs. cr.)

Simple Trend (%)

Year To Year Trend (%)

Sh. Cap (in Rs. cr.)

Simple Trend (%)

Year To Year Trend (%)

2005-06 39.94 100 100 101.18 100 100 2006-07 39.94 100 100 101.18 100 100 2007-08 39.94 100 100 144.68 143 143 2008-09 39.94 100 100 144.68 143 100 2009-10 39.94 100 100 144.68 143 100

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Graph no.3.1 Simple trend of the Share Capital of selected Autom obile Two

Wheeler companies in India

Graph no.3.2 Year To Year trend of Share Capital of the selected Automobile Two

Wheeler companies in India

From the table and graph it can be seen that share capital of Hero Honda Motors Ltd is remained Fixed i.e. from the year 2005 to 2010 the share capital of Hero Honda Motors Ltd has neither increased nor decreased. But share capital of Bajaj Auto Ltd has increased from 100% in the year 2005 -06, 06-07, 07-08, 08-09 to 143% in the year 2009-10 as per simple rate trend. The increase in share capital is due to capitalization of earnings i.e. by issuing bonus shares. Company had issued bonus shares in the year 2007-08.

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3.2.1.1.2 Trend Analysis of Reserves:

Table no. 3.2 Trend Analysis of Reserves of the selected Automobi le Two Wheeler

companies in India

YEAR HERO HONDAMOTORS LTD BAJAJ AUTO LTD Reserves (in Rs. 100 cr.)

Simple Trend (%)

Year To Year Trend (%)

Reserves (in Rs. 100 cr.)

Simple Trend (%)

Year To Year Trend (%)

2005-06 19.69 100 100 46.69 100 100 2006-07 24.30 123 123 54.33 116 116 2007-08 29.46 150 121 14.43 31 27 2008-09 37.60 191 128 17.25 37 120 2009-10 34.25 174 91 27.84 60 161

Graph no.3.3 Simple trend of the Reserves of selected Automobile Two

Wheeler companies in India

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Graph no.3.4 Year To Year trend of Reserves of the selected Auto mobile Two Wheeler

companies in India

The Reserves shows increasing trend (both Simple and Year To Year rate) up-to the year 2008-09 in Hero Honda Motors Ltd. It has increased from 100% in 2005-06 to 191% and 128% in 2008-09 respectively. The main reasons for increase in reserves are ‘transfer of profits to reserves’ as well as increase in the outstanding balance of the P & L A/C. It shows growth of the company. But in the year 2009-10 both the trends (simple & year-to-year basis) of Hero Honda Motors Ltd shows declining trend. The reason for decline is ‘the company had celebrated their 25th (silver jubilee) anniversary and had paid 5,500 % equity dividend by using the profits of the year and reserves’. In Bajaj Auto Ltd. reserves shows increasing trend in all the years except 2007-08, because a huge amount of reserves was used for issuing bonus -shares. The increasing trend shows that Bajaj Auto is following liberal dividend policy. 3.2.1.1.3 Trend Analysis of Net Worth:

Table no. 3.3 Trend Analysis of Net Worth of the selected Automob ile Two Wheeler

companies in India YEAR HERO HONDAMOTORS LTD BAJAJ AUTO LTD

Net Worth (in Rs. 100 cr.)

Simple Trend (%)

Year To Year Trend (%)

Net Worth (in Rs. 100 cr.)

Simple Trend (%)

Year To Year Trend (%)

2005-06 20.09 100 100 47.71 100 100 2006-07 24.70 123 123 55.34 116 116 2007-08 29.86 149 121 15.87 33 29 2008-09 38.00 189 127 18.69 39 118 2009-10 34.65 172 91 29.28 61 157

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Graph no.3.5 Simple trend of the Net Worth of selected Automobil e Two

Wheeler companies in India

Graph no.3.6 Year To Year Trend of Net Worth of the selected Aut omobile Two

Wheeler companies in India

The simple and cumulative trend of Net Worth is increasing in Hero Honda Motors Ltd. up to the year 2008-09.It has increased from 100% in the year 2005-06 to 189% and 127% respectively. But in the year 2009-10 both the trends of Net Worth has decreased to 172% and 91% respectively. The increase in the Net Worth is accompanied by reduction in debt and financial leverage. This is favourable only if the rate of return on investment is less than the interest rates. Otherwise company should take benefit of financial leverage. Similarly, in Bajaj Auto Ltd., the Simple and Year To Year trends of Net Worth are increasing. The effect of increased Net Worth on profitability should also be analyzed.

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3.2.1.1.4 Trend Analysis of Total Debt:

Table no. 3.4

Trend Analysis of Share Total Debt of the selected Automobile Two Wheeler companies in India

YEAR HERO HONDAMOTORS LTD BAJAJ AUTO LTD

Total Debt (in Rs. cr.)

Simple Trend (%)

Year To Year Trend (%)

Total Debt (in Rs. cr.)

Simple Trend (%)

Year To Year Trend (%)

2005-06 185.78 100 100 1467.15 100 100 2006-07 165.17 89 89 1625.43 111 111 2007-08 132.00 71 80 1334.34 91 82 2008-09 78.49 42 59 1570.00 107 118 2009-10 66.03 36 84 1338.58 91 85

Graph no.3.7

Simple trend of the Total Debt of selected Automobi le Two Wheeler companies in India

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Graph no.3.8 Year To Year trend of Total Debt of the selected Au tomobile Two

Wheeler companies in India

The trend of total debt is continuously decreasing in Hero Honda Motors Ltd, but the trend of total debt is highly fluctuating in Bajaj Auto Ltd. The decreasing trend of debt Shows Company has retired all its major long-term debt such as debentures, institutional loan and bank loan.

3.2.1.2 RATIO ANALYSIS

3.2.1.2.1 INTRODUCTION AND MEANING: To get proper insight about financial strength and weaknesses of the firm proper analysis of financial statement is necessary. The future plans of the firm should be laid down in view of the firm’s financial strengths and weaknesses. “Ratio Analysis” is one of the prevalent and the most popular technique to measure the profitability of the business firm; it is used primarily to gain an insight into financial and operating aspects of a business firm Ratio analysis is the process of determining and presenting in arithmetical terms the relationship between figures and group of figures drawn from financial statements. A ratio may be defined as “the indicated quotient of two mathematical expression” and as the relationship between two or more things”. The tern accounting ratio, is used to describe significant relationship which exist between figures shown in financial statements profit & loss account and balance sheet.10

3.2.1.2.2 NATURE OF RATIO The absolute accounting figures reported in financial statements do not provide a meaningful understanding of the performance and financial position

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of the firm. An accounting figure conveys meaning when it is related to some other relevant information. Ratios may be defined as the mathematical expression of the relationship between two accounting figures. But these figures must be related to each other. i.e. these figures must have a mutual cause and effect relationship to produce a meaningful ratio. It indicates a quantitative relationship which the analyst may use to make a qualitative judgment about the various aspects of the financial position and performance of a concern. It may be expressed as: (i) Percentage (ii) Rate or (iii) Pure ratio 3.2.1.2.3 STANDARDS OF COMPARISION A single ratio in itself does not indicate favourable or unfavorable financial condition. It should be compared with some standard. Standards of comparison may consist of: 1. Time series Analysis / Past Ratios Past ratios are the ratios calculated from past financial statements of the same firm. By comparing current year’s ratios with past ratio the improvement or deterioration in firm’s performance over the period can be studied. It is also known as time series analysis. 2. Cross-sectional Analysis/ Competitor’s Ratios Competitor’s ratios are ratios of some selected firms, especially the most progressive competitor, at the same point in time by comparing firm’s ratios with competitor’s ratios the firm’s financial position in respect to competitors can be known. 3. Industry Analysis/ industry Ratios Industry ratios are the ratios of the industry to which the firm belongs. By comparing firm’s ratios with industry average ratios the `firm’s position Vis- a- Vis other firms in the industry can be understood. 4. Performa Analysis / Projected Ratios Projected ratios are the ratios developed by using the projected financial statements of the firm. The comparison of current or past ratios with future ratios indicates the firm’s relative strength and weaknesses in the past and in the future 3.2.1.2.4 IMPORTANCE OF RATIO ANALYSIS The ratio analysis is the most powerful tool of the financial analysis· Ratio analysis simplifies the financial statements and helps various interested parties in the business such as long term creditors, short term creditors, share holders. Management etc. in analyzing financial condition of the concern. 1. Security Analysis This major focus in security analysis is on long-term profitability, the efficiency with which the firm utilizes its assets and the financial risk to which the firm is

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exposed. For this purpose profitability ratios, activity, ratios and leverage ratios can be used. 2. Intra -firm Analysis Ratio analysis makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency in the past and likely performance in the future. 3. Competitive Analysis For meaningful interpretation, the ratios of a firm can be compared with the ratios of similar firms in the industry which highlights the factors associated with successful and unsuccessful firms. Ratios also reveal strong and weak firms and undercapitalized and over capitalized firms. This comparison will reveal whether the firm` is performing better or worse compared to its competitors. 4. Credit Analysis While taking credit from financial institutions ratios are very useful. Profitability ratios, liquidity ratios and leverage ratios indicate firm’s capacity to repay the loan amount and interest which is very useful in assessing the creditworthiness of the firm. Though ratio analysis is extremely useful there are certain problems in using ratios. 3.2.1.2.5 PRECAUTIONS TO BE TAKEN WHILE USING RATIO : 1. Standard for Comparison Ratios have meaning only if they are compared with some standards. Usually it is recommended that ratios should be compared with industry average, but industry average data is not easily available in India. Even while comparing ratios with the past ratios forecast may not be correct since several factors like market conditions, management policies etc. may affect the future operations. · 2. Price Level Changes Financial analysis based on accounting ratios will give misleading results if the effects of changes in price level are not taken into account. The accounting data, presented in financial statements is assumed to remain constant. Infect, prices change over years which affect accounting earnings. Therefore, financial statements should be adjusted as per price level changes. For this current purchasing power and current cost accounting are quite helpful. 3. Historical Data The ratios indicate what has happened in the past because it is calculated on the oasis of historical financial statements. Analysts are more interested in future and these ratios may not necessarily reflect the firm`s financial position and performance in future.

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4. Ratios Alone Are Not Adequate Ratios are only indicators, they cannot be considered final regarding financial position of the business. Other things also have to be seen. A high current ratio not necessarily mean sound liquidity position if most of current assets comprise outdated stocks. 5. Window Dressing Window dressing means manipulation of accounts in a way so as to conceal vital facts and present financial statements in a way to show better position than what it actually is. In this case ratios cannot indicate true situation. The quality of ratios depends on accuracy of accounts, 3.2.1.2.6 UTILITY OF RATIO ANALYSIS The various groups of people having different interests are interested in analyzing the financial information. They use ratio analysis to determine a particular financial characteristic of the firm in which they are interested. 1. Investors The investors can determine the magnitude and direction of the movements in firm’s earnings through profitability ratios and investors can decide whether to hold, sell or purchase the shares. 2. Short Term Creditors The short - term creditors like bankers and suppliers of material can determine the firm’s ability to meet its current obligations with the help of liquidity ratios. 3. Long Term Creditors The long term creditors like debenture holders and financial institutions can determine firm’s long - term financial strength and survival with the help of capital structure ratios. 4. Management The management can determine the operating efficiency with which the firm is utilizing its various assets in generating sales revenues with the help of activity ratios. The management can use ratios for forecasting purposes also. 3.2.1.2.7 CLASSIFICATION OF RATIOS Ratios can be classified into different categories depending upon the basis of classification. Traditional Classification : The traditional classification has been on the basis of the financial statements to which a ratio belongs. (i) Profit and Loss Account Ratio: Ratios calculated on the basis of the

items of profit and loss account only. (ii) Balance Sheet Ratios: Ratios calculated on the basis of the figures of

balance sheet only.

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(iii) Composite Ratios: Ratios based on figures of profit and loss account as well as balance sheet.

Modern Classification Modern classification is in view of the requirements of various users of the ratios. The ratios can be classified in following four groups: (i) Capital structure Ratios. (ii) Profitability Ratios (iii) Liquidity Ratios. (iv) Activity Ratios. NOTE: In present study we have not used Published R atios, but we have calculated Ratios From the Published Annual Reports . 3.2.2 STATISTICAL TOOLS: 3.2.2.1 ARITHMETIC MEAN It is called as the average of difference of the values of items from some average of the series. According to Gulerian “the most commonly used average is the arithmetic mean, briefly referred to as the mean”11 the mean has been found by adding all the variables and dividing it by the total number of years taken. 3.2.2.2 STANDARD DEVIATION Standard deviation may be defined as “positive square root of the variance. While the variance of a sample is the average square deviation of values from the mean.” 12 3.2.2.3 CO-EFFICIENT OF VARIATION Co-efficient of variation has been defined as the percentage of the standard deviation to the mean. It should be noted that higher the variability the greater would be the co-efficient of variation. Therefore, it may be pointed out that for the stability of results, Co-efficient of variation must be low. Coefficient of variation (C.V.) may be calculated with the help of standard deviation and mean.13 STANDARD DEVIATION CO-EFFICIENT OF VARIATION X 100 ARITHMETIC MEAN

3.3 CAPITAL STRUCTURE RATIOS To judge the long-term financial position of the firm, financial leverage or Capital structure ratios are calculated. These ratios indicate mix of funds provided by owners and lenders. These ratios show the long-term financial solvency and measure the enterprise’s ability to pay the interest regularly and

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to repay the principal amount on maturity. Usually, the following ratios are calculated to judge the long-term financial solvency of the concern:

(1) Debt -Equity Ratio = Long term debts

Shareholder's funds

(2) Total Debt Ratio = Total debts (short term + long term)

Share holder's funds

(3) Debt To Total Funds Ratio = Long term debt

Capital employed

(4) Capital Gearing Ratio = Fixed intrest bearing securities

Ordinary capital

(5) Proprietary Ratio = Share holder's fund

Total tangible assets

(6) Debt Service Coverage Ratio =

Earnings before depreciation, interest& tax

lnterest

(7) Long Term Funds to Fixed Assets Ratio = Long term funds

Fixed assets

(8) Net Worth to Net Fixed Assets Ratio = Net worth

Net fixed assets

(9) Net Current Assets to Net worth Ratio = Net current assets

Net worth

(10) Net Fixed Assets to Current Assets Ratio Net fixed assets

Current assets=

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(11) Reserves to Capital Ratio = Total assets

Share capital

3.3.1 DEBT-EQUITY RATIO This ratio shows the proportion of long-term external equities and internal equities. This ratio is determined to ascertain the soundness of the financial policies of the company. It establishes a relationship between long-term debts and shareholder’s funds. This ratio determines the relative stake of outsiders and shareholders in the com signifies that in case of liquidation whether company`s total holder’s funds are sufficient to repay total debts of the company or not. The objective of computing this ratio is to measure the relative proportion of debt and equity in financing the assets of a firm. The ratio is computed by dividing the long-term debts by the shareholder`s funds.

Debt -Equity Ratio = Long term debts

Shareholder's funds

Here, long term debts means long-term loans whether secured or unsecured which may include debenture, bonds, loan from financial institution etc. And share holder’s funds means equity share capital plus preference share capital plus reserves and surplus minus fictitious assets. Generally, in normal condition of trading 1:1 ratio is preferred. But in time of boom higher borrowing is consider while in the period of recession, it is safer to have debt at a lower level in comparison to equity holder’s fund. Low Debt-Equity Ratio It indicates the margin of safety to long term creditors. A low Debt Equity Ratio implies the use of more equity than debt which means a larger safety margin for creditors since owner’s equity is treated as a margin of safety by creditors and vices versa. From the firm’s point of view it indicates that debt servicing is less burdensome as well as there will be less pressure and interference of creditors in management- Moreover. The firm has an additional capacity to raise additional debt but at the same time no benefit of trading on equity would be available when the firm earns a higher Rate of Return on Investment than the interest rate on borrowed funds. High Debt-Equity Ratio A high Debt-Equity Ratio is riskier for creditors because the owners are putting up relatively less money of their own and this is a danger signal for the creditors. if the project fails financially, the creditors will lose heavily. From the firm’s point of view if Debt-Equity Ratio is high then debt servicing is burdensome in adverse conditions as well as pressure and interference of creditors in management is also high thirdly the company may find difficulty in raising additional debt. However, If the firm is able to earn on the borrowed

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funds a higher Rate of Return on Investment than the rate of interest on loans, the firm can take advantage of Trading on Equity. Even though, one should keep in mind that the Debt- Equity Ratio be applied mechanically, without regard to the circumstance of each case, such as type and size of business, the nature of industry and the degree of risk involved. OBSERVATIONS:

YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 185.78 ÷ 2009.33 0.09 1467.13 ÷ 4770.73 0.31 2006-07 165.17 ÷ 2470.06 0.07 1602.97 ÷ 5534.32 0.29 2007-08 132 ÷ 2986.24 0.04 1327.39 ÷ 1587.59 0.84 2008-09 78.49 ÷ 3800.75 0.02 1570 ÷ 1686.39 0.93 2009-10 66.03 ÷ 3465.02 0.02 1325.60 ÷ 2928.34 0.45 AVERAGE = 0.048 : 1 AVERAGE = 0 .56 : 1

Table No.:- 3.5 Debt-equity ratio of selected Automobile Two Wheele r companies in

India from 2005-06to 2009-10(Times) COMPANY 2005 2006 2007 2008 2009 Mean S.D. C.V. Min. Max.

HHML 0.09 0.07 0.04 0.02 0.02 0.048 0.02786 58.03 0.02 0.09

BAL 0.31 0.29 0.84 0.93 0.45 0.564 0.26934 47.76 0.29 0.93

Mean 0.2 0.18 0.44 0.475 0.235 0.306 0.12544 40.99 0.155 0.51

S.D. 0.11 0.11 0.4 0.455 0.215 0.258 0.14466 56.07 0.135 0.42

C.V. 55 61.11 90.91 95.79 91.49 84.31 115.33 136.78 87.1 82.35 Sources: computed from annual reports of the sample companies. The above Table no. 3.5 shows Debt-Equity Ratio. The ratio of HHML shows the declining trend during the study period. The ratio ranged between 0.09 times in 2005-06 to 0.02 times in 2009-10 with an average of 0.048 times. HHML is using less debt compared to shareholders’ funds. The average Debt-Equity ratio 0.048:1 shows extremely low which tells us that the company does not want to take benefit of trading on equity. The standard deviation is 0.02786 and coefficient of variation is 58.03%.HHML has large coefficient of variation in compared to BAL, which reveals that it has more dispersion or it is said to be less stable from the variability point of view. In the BAL the ratio indicates fluctuating trend during the span of research period with an average of 0.56 times. The ratio fluctuated from a lowest 0.29 times in 2006-07 to highest 0.83 times in 2007-08. The standard deviation is 0.26852 and coefficient of variation is 48.44%. Bajaj auto Ltd. has taken the benefit of trading on equity but not at the maximum level. The ratio is lower than average in early years but after it increased up to the year 2008-09. The ratio was at a high stage i.e. 0.93:1 in the year 2008-09.

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Graph no.3.9 Debt-equity Ratio of the Selected Automobile Two Wh eeler Companies

The ratio indicates the proportion of owners’ stake in the business and the extent to which the firm depends upon outsiders for its existence. The ratio provides a margin of safety to the creditors. It informs the owners the extent to which they can gain benefits or retains control with a limited investment. In normal condition of trading, ratio of 1:1 is preferred. In other words, the investors may take debt-equity ratio as quite satisfactory if shareholders funds are equal to borrowed funds. However, a lower ratio say 2/3rd borrowed funds and 1/3rd owned funds, may also not be considered as unsatisfactory if the business needs heavy investments in fixed assets and has an assured return on its-investment. For e.g. in case of public utility concern. The Hero Honda Motors Ltd’s average debt equity ratio remained at 0.05:1. It shows that in comparison to equity capital of Re.1, the company has maintained Re.0.05 as long term debt. So the company is using lower debt compared to shareholders funds. The ratio is higher than average in early years but after it declined year by year. The ratio was at a high stage i.e. 0.09:1 in the year 2005-06 but in the year 2008-09 & 2009-10, it declined to 0.02:l that is a decline of 7%. The average Debt-Equity ratio 0.048:1 appears to be extremely low this may lead us to remark that the company does not want to take benefit of trading on equity. Perhaps it may be the intention of the management not to accept the burden of charges and repayment of long term loans. Despite the increase in the ownership fund the effective control has remained with the management and perhaps the loss of benefits on trading on equity are compensated by not having to dilute the controls of affairs of the company. While in Bajaj Auto Ltd, the average ratio 0.56: 1 shows that in comparison to equity capital of Re.1, the company has maintained Re.0.56 as long term

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debt. Bajaj auto Ltd. has used trading on equity but not at the maximum level. The ratio is lower than average in early years but after it increased up to the year 2008-09. The ratio was at a high stage i.e. 0.93:1 in the year 2008-09 but in the year 2009-10, it declined to 0.45: l that is a decline of 48%. Debt- Equity Ratio (T-Test) � Null Hypothesis: There is no significant difference in Debt-Equity Ratio of

selected automobile two wheeler companies under study. � Alternative hypothesis : There is significant difference in Debt-Equity

Ratio of selected automobile two wheeler companies under study.

T-Test:

Normality Test: Passed (P = 0.389) Equal Variance Test: Failed (P < 0.050) Group Name N Missing Mean Std Dev SEM DER of HHML 5 0 0.0480 0.0311 0.0139 DER of BAL 5 0 0.564 0.301 0.135 Difference -0.516 t = -3.811 with 8 degrees of freedom. (P = 0.005) 95 percent confidence interval for difference of means: -0.828 to -0.204 The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistical ly significant difference between the input groups (P = 0.005). Power of performed test with alpha = 0.050: 0.906 In short, t: calculated value is -3.811 and p-value = 0.005< 0.389 Hence, the test is significant. Therefore H0 is rejected and H1 is accepted. (The Debt Equity ratios of the two sample companies do differ significant.)

3.3.2 TOTAL DEBT EQUITY RATIO Another method of computing Debt Equity Ratio is to take all types of debts long term and short term in place of long term debts only. The argument in favour of this view is that like long term debts, short term are also received from outside creditors and they add to the financial risks Similarly, interest is to be paid on short term debts as m case of long-term debts besides the pressure from short term creditors is much more on the management. So total debt equity ratio is computed as

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Total Debt Ratio = Total debts (short term + long term)

Share holder's funds

OBSERVATIONS:

YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 185.78 ÷ 2009.33 0.09 1467.15 ÷ 4770.73 0.31 2006-07 165.17 ÷ 2470.06 0.07 1625.43 ÷ 5534.32 0.29 2007-08 132 ÷ 2986.24 0.04 1334.34 ÷ 1587.59 0.84 2008-09 78.49 ÷ 3800.75 0.02 1570 ÷ 1686.39 0.93 2009-10 66.03 ÷ 3465.02 0.02 1338.58 ÷ 2928.34 0.46 AVERAGE = 0.05 : 1 AVERAGE = 0.57 : 1

Table No.:- 3.6 Total Debt-equity ratio of selected Automobile Two Wheeler companies

in India

COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min. Max

HHML 0.09 0.07 0.04 0.02 0.02 0.048 0.02786 58.03 0.02 0.09

BAL 0.31 0.29 0.84 0.93 0.46 0.566 0.26852 47.44 0. 29 0.93

Mean 0.2 0.18 0.44 0.475 0.24 0.307 0.12488 40.68 0.18 0.475

S.D. 0.11 0.11 0.4 0.455 0.22 0.259 0.14437 55.74 0.11 0.455

C.V. 55 61.11 90.91 95.79 91.67 84.36 115.61 137.03 118.53 86.50

Sources: computed from annual reports of the sample companies. The above table no 3.6 shows Total Debt-Equity Ratio. The ratio of HHML shows the decreasing trend during the study period. The ratio ranged between 0.09 times in 2005-06 to 0.02 times in 2009-10 with an average of 0.05 times. The company could not take benefit of trading on equity due to less outsiders’ fund. The standard deviation is 0.02786 and coefficient of variation is 58.03%. The average ratio of HHML is too lower in comparison with BAL. The lower ratio reveals that HHML has not invested short term debt in fixed assets, which is considered as good decision in capital budgeting. The co. is advised to increase the net worth to invest in fixed assets. In the BAL the ratio indicates fluctuating trend during the span of research period with an average of 0.56 times. The ratio fluctuated from a lowest 0.29 times in 2006-07 to highest 0.83 times in 2007-08. The standard deviation is 0.26852 and coefficient of variation is 48.44%. The total debt equity ratio of the company is satisfactory.

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Graph no. 3.10 Total Debt Equity Ratio of Selected of Automobile Two Wheeler

Companies

This ratio indicates that whether the owner`s funds are sufficient to meet long-term as well as short term debt of the company or not. If this ratio is compared with Long-term Debt-Equity Ratio it shows the increase or decrease in short-term loan. For Hero Honda Motors Ltd the average ratio is 0.05:1 which is equal to average long—term debt equity ratio which means for every Re.1 of equity the company has Rs.0.05 borrowed funds. And in Bajaj Auto Ltd the average ratio is 0.57:1 which is equal to average long—term debt equity ratio which means for every Re.1 of equity the company has Rs.0.57 borrowed funds. In most of the years the ratio is equal to long-term debt equity. It means the company is not relying much on short-term debt. So there is less pressure on management. Total Debt- Equity Ratio (T-Test)

� Null Hypothesis: There is no significant difference in Total Debt-Equity Ratio of selected automobile two wheeler companies under study.

� Alternative hypothesis : There is significant difference in Total Debt-Equity Ratio of selected automobile two wheeler companies under study.

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T-Test:

Normality Test: Passed (P = 0.389) Equal Variance Test: Failed (P < 0.050) Group Name N Missing Mean Std Dev SEM TDER of HHML 5 0 0.0480 0.0311 0.0139 TDER of BAL 5 0 0.564 0.301 0.135 Difference -0.516 t = -3.811 with 8 degrees of freedom. (P = 0.005) 95 percent confidence interval for difference of means: -0.828 to -0.204 The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistical ly significant difference between the input groups (P = 0.005). Power of performed test with alpha = 0.050: 0.906 In short, t: calculated value is -3.811 and p-value = 0.005< 0.389 Hence, the test is significant. Therefore H0 is rejected and H1 is accepted. (The Total Debt Equity ratios of the two sample companies do differ significant.) 3.3.3 DEBT-TOTAL FUNDS RATIO This ratio is a variation of the Debt- Equity Ratio and gives the similar indications as the debt-equity ratio. In this ratio, the outside long term liabilities are related to the total capitalization of the firm and not merely to the shareholder`s funds. This ratio is computed by dividing the long-term debt by the capital employed. In the form of a formula, this ratio may be expressed as under.

Debt To Total Funds Ratio = Long term debt

Capital employed

Where, the Capital Employed comprises the long term debt and the shareholders funds. The firm may be interested in knowing the proportion of interest bearing debt in the capital structure. It may therefore compute debt ratio by dividing long term debt by capital employed on net assets Because of the equality of the capital employed and net assets. Debt ratio can also be defined as long term debt divided by net assets.

Debt-total fund ratio = Long term debt

Net assets

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Capital employed equals net assets which consist of Net Fixed Assets (NFA) and Net Current Assets (NCA). Net current assets are current assets minus current liabilities excluding interest bearing short term debt for working capital. These relationships can be expressed as under:

NFA + CA = NW + TD + CL NFA + CA - CL = NW + TD NFA + NCA = NW + TD NA = CE

Where, NFA = Net fixed assets NCA = Net current assets CA = Current assets CL = Current liabilities NW = Net worth TD = Total debt

NA = Net assets CE = Capital employed OBSERVATIONS: YEAR HERO HONDA MOTORS LTD BAJAJ AUT O LTD 2005-06 185.78 ÷ 2195.11 0.08 1467.13 ÷ 6237.88 0.24 2006-07 165.17 ÷ 2635.23 0.06 1602.97 ÷ 7159.75 0.22 2007-08 132 ÷ 3118.24 0.04 1327.39 ÷ 2921.93 0.45 2008-09 78.49 ÷ 3879.24 0.02 1570 ÷ 3256.39 0.48 2009-10 66.03 ÷ 3531.05 0.02 1325.60 ÷ 4266.92 0.31 AVERAGE = 0.04 AVERAGE = 0.34

Table No.:- 3.7 Debt-total funds ratio of selected Automobile Two W heeler companies in

India from 2005-06to 2009-10(Times)

COMPANY 2005-

06 2006-

07 2007-

08 2008-

09 2009-

10 Mean S.D. C.V. Min Max

HHML 0.08 0.06 0.04 0.02 0.02 0.044 0.02332 53.01% 0.02 0.08

BAL 0.24 0.22 0.45 0.48 0.31 0.34 0.10677 31.40% 0.22 0.48

Mean 0.16 0.14 0.245 0.25 0.165 0.192 0.04611 24.01% 0.14 0.25

S.D. 0.08 0.08 0.205 0.23 0.145 0.148 0.06202 41.90% 0.08 0.23

C.V. 50.00% 57.14% 83.67% 92.00% 87.88% 0.139284 0.62605 449.48% 0.5 0.92

Sources: computed from annual reports of the sample companies. The above table no.3.7 shows Debt to Total funds Ratio. The ratio of HHML shows the decreasing trend during the study period, with an average ratio of 0.044. The ratio was 0.08 times in the year 2005-06 which was gradually decreased to 0.02 in the year 2008-09 and 2009-10. In the year 2005-06 the ratio was double than average and from the year 2008-09 the ratio is half than average. It is because in later years the owners’ fund has been increased due to increase in reserves. Thus we can say from this ratio that the owners are able to pay long term debts. In the BAL, the Debt to Total funds Ratio indicates fluctuating trend during the study period, with an average ratio of 0.34. The ratio was 0.22 times in the year 2006-07 which was increased to 0.48 times in the year 2008-09 and again it decreased to 0.31 times in the 2009-10. The standard deviation is 0.10677 and coefficient of variation is 31.40% which is quite lower to the’ C.V.

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of HHML i.e. 53.01%. Debt-Total Fund Ratio indicates that the company has not use trading on equity at its maximum level .If the company has used the Trading on Equity at its maximum, the Profit after Tax and earning per share both should have-been gone up.

Graph no.3.11 Debt to Total funds Ratio of Selected Automobile T wo Wheeler

Companies

This ratio indicates the proportion of long-term debt to total funds employed which includes owner`s funds as well as borrowed funds. The Hero Honda Motors Ltd’s average Debt-Total Funds Ratio remained at 0.04: l during the period under study which shows that in comparison with total capital employed of Re.1 the company have maintained a proportion of Re.0.04 for long term debt. Before the year 2005-06 the ratio was double than average and after from the year 2008-09 the ratio is half than average. The main reason for this is an increase in shareholder‘s funds in later years. The main reason for increase in shareholder’s funds is increase in reserves because of increase in general reserve and profit transferred to reserves. So, from this ratio it can be interpreted that if any project fails, the risk of creditors is very low because the owner`s themselves have put forward more amount in total funds employed. The shareholders funds are sufficient to pay long-term debts. The average ratio of 0.04: l means that the lenders have financed 4% of Hero Honda Motors Ltd’s net assets (capital employed). It obviously implies that owner`s have provided the remaining finance. While in Bajaj Auto ltd, the average Debt-Total Funds Ratio remained at 0.34: l during the period under study which shows that in comparison with total capital employed of Re.1 the company have maintained a proportion of Re.0.34 for long term debt. Debt-Total Fund Ratio indicates that the company has not use maximum benefit of the trading on equity and the average

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Operating Profit Margins is 14.01 % against the average prevailing rate of interest of 11 % (Average effective rate of interest may be 7.5 %). If the company has used the Trading on Equity at its maximum, the Profit after Tax should have-been increased and so the EPS. Debt to Total Fund Ratio (T-Test)

� Null Hypothesis: There is no significant difference in Debt to Total Fund Ratio of selected automobile two wheeler companies under study.

� Alternative hypothesis : There is significant difference in Debt to Total Fund Ratio of selected automobile two wheeler companies under study.

T-Test:

Normality Test: Passed (P = 0.661) Equal Variance Test: Failed (P < 0.050) Group Name N Missing Mean Std Dev SEM DTFR of HHML 5 0 0.0440 0.0261 0.0117 DTFR of BAL 5 0 0.340 0.119 0.0534 Difference -0.296 t = -5.417 with 8 degrees of freedom. (P = <0.001) 95 percent confidence interval for difference of means: -0.422 to -0.170 The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistical ly significant difference between the input groups (P = <0.001). Power of performed test with alpha = 0.050: 0.998 In short, t: calculated value is -5.417 and p-value = 0.001< 0.661 Hence, the test is significant. Therefore H0 is rejected and H1 is accepted. (The Debt to Total Fund ratios of the two sample companies do differ significant.) 3.3.4 CAPITAL GEARING RATIO This ratio expresses the proportion of fixed charge bearing capital or debt to ordinary capital. The higher the ratio, the greater the proportion of preference capital and debentures to ordinary capital and reserves the capital structure of the company is said to be highly geared. In such cases, the ordinary shares of the company will be speculative the reason is due to a small increase in profit, and the rate of return on ordinary capital will increase substantially. The higher the ratio more unstable will be the ordinary shares because major share of the earnings will be absorbed by interest and preference dividend and there will be greater fluctuations in the rate of equity dividend. Some

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authors suggest that while computing this ratio, the equity shareholders funds must be compared with preference capital and debentures, it means that reserves should be added to equity capital but general opinion is that it should be added only if the reserves are of substantial amount.

Capital Gearing Ratio = Fixed interest Bering securities

Ordinary capital

OBSERVATIONS: Both Companies do not have Preference share capital and Debentures, so observing capital Gearing Ratio is not worthwhile in case of both sample companies. 3.3.5 PROPRIETARY RATIO It is variant of Debt Equity Ratio. It establishes a relationship between the proprietor`s funds and total tangible assets. It may be expressed as:

Proprietary Ratio = Share holders Funds

Total Tangible Assets

This ratio focuses the attention on the general financial strength of the business enterprise. The ratio is of a particular importance to creditors who can find out the proportion of shareholder`s funds in the total assets employed in the business. The higher the ratio, the stronger the financial position of the company as it signifies that the proprietors have provided larger funds to purchase the assets. It is relatively little dangerous to creditors in the event of forced reorganization or winding up of the company. A low proprietary ratio indicates greater risk to the creditors since in the event of losses a part of their money may be lost besides loss to the proprietors of the business. This ratio cannot exceed 100%. If it is 100%, it means that the business does not use any outside funds. There are no outside liabilities. Purchases are made for cash only and the firm carries on the business entirely with owned funds and a very high ratio is therefore not desirable, it means that insufficient use is being made of outside funds. OBSERVATIONS: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 2009.33 ÷ 2195.11 0.92 4770.33 ÷ 6237.88 0.76 2006-07 2470.06 ÷ 2635.23 0.94 5534.32 ÷ 7159.75 0.77 2007-08 2986.24 ÷ 3118.24 0.96 1587.59 ÷ 2921.93 0.54 2008-09 3800.75 ÷ 3879.24 0.98 1686.39 ÷ 3256.39 0.52 2009-10 3465.02 ÷ 3531.05 0.98 2928.34 ÷ 4266.92 0.69 AVERAGE = 0.96 AVERAGE = 0.66

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Table No.:- 3.8 Proprietary Ratio of selected Automobile Two Wheeler companies in

India from 2005-06to 2009-10(Times)

COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max

HHML 0.92 0.94 0.96 0.98 0.98 0.956 0.02332 2.44 0.92 0.98

BAL 0.76 0.77 0.54 0.52 0.69 0.656 0.1067 16.26 0.52 0.77

Mean 0.84 0.855 0.75 0.75 0.835 0.806 0.0462 5.73 0.75 0.855

S.D. 0.08 0.085 0.21 0.23 0.145 0.15 0.06189 41.26 0.08 0.23

C.V. 9.52 9.94 28.00 30.67 17.37 0.585821 0.40462 69.07 0.095238 0.306667

Sources: computed from annual reports of the sample companies. The above table no.3.8 shows Proprietary Ratio. The ratio of HHML shows increasing trend during the span of research. It was 0.92 times in the year 2005-06 and gradually it was increased year by year and became stable with 0.98 times in the year 2008-09. The average ratio of HHML is 0.956 times, which is to be considered as most satisfactory as 96% of the assets are employed from proprietor’s funds. It is safe for creditors. It shows that proprietors have used borrowed fund and took the benefit of financial leverage along with providing larger funds to buy the assets. The standard deviation is 0.02332 and coefficient of variation is 2.44%, which reveals that it is more stable & of less dispersion as its c.v. is smaller than c.v .of BAL. In the BAL, the Proprietary Ratio indicates fluctuating trend during the study period, with an average ratio of 0.656. The ratio was higher at 0.77 times in the year 2006-07 which was decreased to 0.52 times in the year 2008-09 and again it is increased to 0.69 times in the 2009-10. The standard deviation is 0.1067 and coefficient of variation is 16.26% which is higher than the HHML. Thus the ratio is considered to be satisfactory in BAL.

Graph no.3.12 Proprietary Ratio of Selected Automobile Two Wheel er Companies

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There cannot be any standard proprietary ratio for all businesses, but it can be said that the proprietor’s funds should be enough to cover the fixed assets. Secondly, a reasonable proportion must be maintained between owned funds and borrowed funds, so that benefit of trading on equity can be obtained. This will increase the rate of equity dividend. Generally it is assumed that the ratio should be between 0.50 to 1 because if it is less than 0.50 it may be dangerous for creditors at the time of winding up and if it is 1 then it means that company does not use borrowed funds and if its rate of return on investments is higher than rate of interest then it loses, the benefit of trading on equity. In Hero Honda Motors Ltd, average proprietary ratio is 0.96:l which can be considered as most satisfactory as 96% of the assets are employed from proprietor’s funds. So it is less dangerous for creditors. It indicates that proprietors have provided larger funds to purchase the assets. And at the same time by using borrowed funds company takes benefit of trading on equity. This ratio is continuously increasing. In the year 2005-06 it is low i.e. 0.92:1 and in the year 2008-09 and 2009-10 it is high i.e. 0.98:1 as compared to the year 2005-06. In Bajaj Auto Ltd, average proprietary ratio is 0.66:l which can be considered as most satisfactory as 66% of the assets are employed from proprietor’s funds. This ratio is fluctuating in nature because in the year of 2006-07 it is very high i.e. 0.77:1 and in the year 2008-09 it is very low as compared to year 2006-07 i.e. 0.52:1. Proprietary Ratio (T-Test)

� Null Hypothesis: There is no any significant difference in Proprietary Ratio of selected automobile two wheeler companies under study.

� Alternative hypothesis : There is significant difference in Proprietary Ratio of selected automobile two wheeler companies under study. T-Test:

Normality Test: Passed (P = 0.531) Equal Variance Test: Failed (P < 0.050) Group Name N Missing Mean Std Dev SEM PR of HHML 5 0 0.956 0.0261 0.0117 PR of BAL 5 0 0.656 0.119 0.0533 Difference 0.300 t = 5.494 with 8 degrees of freedom. (P = <0.001) 95 percent confidence interval for difference of means: 0.174 to 0.426

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The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistical ly significant difference between the input groups (P = <0.001). Power of performed test with alpha = 0.050: 0.998 In short, t: calculated value is 5.494 and p-value = 0.001< 0.531 Hence, the test is significant. Therefore H0 is rejected and H1 is accepted. (The Proprietary ratios of the two sample companies do differ significant.) 3.3.6 INTEREST COVERAGE RATIO Debt ratios described above are static in nature. and fail to indicate the firm`s ability to meet interest (and other fixed charges) obligations. The interest Coverage Ratio is used to test the firm’s debt servicing capacity. In the words of Brigham, “The times interest earned ratio is determined by dividing earnings before interest and taxes (EBIT) by the interest charges.”14

When a creditor or bank lends money to the business, they always examine the repaying capacity of the borrower. Creditors will try to ascertain whether the borrower will be able to pay interest regularly and principal amount. The company makes payments of interest out of profit. Hence, the proportion of net profit as compared to the amount of interest payable is ascertained. The interest Coverage Ratio shows the number of times the interest charges are covered by funds that are ordinarily available for their payment. Since taxes are computed after interest. Interest coverage is calculated in relation to before tax earnings. Depreciation is a non-cash item. Therefore funds equal to depreciation are also available to pay interest charges. One can thus calculate the interest Coverage Ratio as earnings before depreciation, interest and taxes (EBDIT) divided by interest.

Interest coverage ratio = EBDIT

Interest

This ratio indicates the extent to which earnings may fall without causing any embarrassment to the firm regarding the payment of interest charges. A higher ratio is desirable, but too high ratio indicates that the firm is very conservative in using debt and that it is not using credit to the best advantage of the shareholders. A lower ratio indicates excessive use of debt or inefficient operations. The firm should make efforts to improve the operating efficiency or to retire debt to have a comfortable coverage ratio. The limitation of the Interest Coverage Ratio is that it does not consider repayment of loan. Therefore, a more inclusive ratio the Fixed Charges Coverage is calculated. This ratio is calculated by dividing EBDIT by interest plus principal repayment.

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Fixed Charges Coverage Ratio = EBDIT

interest + loan repayement

The equation can be extended to include other fixed obligations such as preference dividends and lease rental. Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 1542.44 ÷ 15.58 99.0 1738.74 ÷ 0.34 5113.94 2006-07 1399.64 ÷ 13.76 101.71 1897.05 ÷ 5.43 355.25 2007-08 1584.07 ÷ 13.47 117.59 1255.48 ÷ 5.16 243.31 2008-09 1975.16 ÷ 13.04 151.47 1089.87 ÷ 21.01 51.87 2009-10 3034.34 ÷ 11.14 272.38 2542.71 ÷ 5.98 425.20 AVERAGE = 148.43 AVERAGE = 1237.91

Table No.:- 3.9 Interest Coverage Ratio of selected Automobile Two Wheeler companies

in India from 2005-06to 2009-10(Times)

COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max

HHML 99 101.71 117.59 151.47 272.38 148.43 64.7303 43.61 99 272.38

BAL 5113.94 355.25 243.31 51.87 425.2 1237.914 1942.12 156.89 51.87 5113.94

Mean 2606.47 228.48 180.45 101.67 348.79 693.172 960.001 138.49 101.67 2606.47

S.D. 2507.47 126.77 62.86 49.8 76.41 544.742 971.958 178.43 49.8 2507.47

C.V. 96.20 55.48 34.84 48.98 21.91 501.2579 500.743 99.90 0.219072 0.962018

Sources: computed from annual reports of the sample companies. The above table no.3.9 shows Interest coverage ratio. The ratio of HHML shows constant increasing trend during the period of study. It was 99 times in the year 2005-06, which was constantly increased every year and reached to 272.38 times in the year 2009-10.the standard deviation is 64.73 % and coefficient of variation is 43.61% which shows very much lower than to BAL. The average ratio is 148.43 of HHML. This ratio tells us that the company has not any difficulty in payment of interest. Interest coverage Ratio indicates that Hero Honda Motors Ltd has a strong position to pay interest. In the BAL, the Proprietary Ratio indicates declining trend up to the first four years but in the fifth year it again took the high jump. During the study period, the ratio was higher at 5113.94 times in the year 2005-06 which was decreased to 51.87 times in the year 2008-09 and again it is increased to 425.2 times in the 2009-10, with an average ratio of 1237.914 times.. The standard deviation is 1942.12 and coefficient of variation is 156.89% which is too high than the HHML. Thus the ratio Bajaj Auto Ltd shows wide variations over the period of 5 years. A higher ratio is desirable, but too high ratio indicates that the enterprise is very conservative in using debt, and it is not using credit to the best advantage of shareholders.

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Graph no.3.13 Interest Coverage Ratio of Selected Automobile Two Wheeler

Companies

The ratio shows continuous increasing trend in the case of Hero Honda Motors Ltd over the period of 5 years. The average ratio is 148.43 i.e. company’s earnings covers interest 148.43 times. The ratio is very high in the year 2009-10. Therefore, it can be interpreted that the company cannot have any difficulty in payment of interest. Interest coverage Ratio indicates that Hero Honda Motors Ltd has a strong position to pay interest whereas Bajaj Auto Ltd has interest burden below 1% to the profit before interest, depreciation and tax as the average ratio is 1237.91 i.e. company’s earnings covers interest 1237.91 times but this average is influenced by extreme figures of recent years. The ratio Bajaj Auto Ltd shows wide variations over the period of 5 years. According to Wright, “its basis as a measurement tool is that, as the times covered declines, the risk of failures increases.”15 A high ratio means the firm can easily meet the interest burden even if earnings before interest and tax suffer a considerable decline. A low ratio may result in financial embarrassment if earnings decline. Interest Coverage Ratio (T-Test)

� Null Hypothesis: There is no any significant difference in Interest Coverage Ratio of selected automobile two wheeler companies under study.

� Alternative hypothesis : There is significant difference in Interest Coverage Ratio of selected automobile two wheeler companies under study.

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T-Test:

Normality Test: Failed (P < 0.050) Equal Variance Test: Passed (P = 0.317) Group Name N Missing Mean Std Dev SEM ICR of HHML 5 0 148.430 72.371 32.365 ICR of BAL 5 0 1237.914 2171.354 971.059 Difference -1089.484 t = -1.121 with 8 degrees of freedom. (P = 0.295) 95 percent confidence interval for difference of means: -3329.994 to 1151.026 The difference in the mean values of the two groups is not great enough to reject the possibility that the difference is du e to random sampling variability. There is not a statistically significa nt difference between the input groups (P = 0.295). Power of performed test with alpha = 0.050: 0.071 The power of the performed test (0.071) is below the desired power of 0.800. Less than desired power indicates ‘the results are less likely to detect a difference when one actually exists’. Negative results should be interpreted cautiously. In short, t: calculated value is -1.121 and p-value = 0.295 > 0.050 Hence, the test is not significant. Therefore H0 is accepted. (The Interest Coverage ratios of the two sample companies do not differ significantly.) 3.3.7 LONG TERM FUNDS TO FIXED ASSETS RATIO Normally, the fixed assets of` business must be purchased out of fixed capital only, which includes share capital, reserves and long term liabilities. This ratio, therefore, shows the relationship between fixed capital and fixed assets. The ratio must be 1:1 or more i.e. the fixed capital must be more than fixed assets or must at least be equal to fixed asset. If fixed capital is less than fixed assets, it would mean that short term funds have been used in purchasing fixed assets. When these short term obligations mature, the business would be put to trouble and may be compelled to dispose of its fixed assets at a considerable loss to the business.

Long Term Funds To Fixed Assets Ratio = Long term fund

Fixed assets

Where long term funds = share capital + Reserves + Long term liabilities

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Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 2195.11 ÷ 949.37 2.31 6237.86 ÷ 1133 5.51 2006-07 2635.23 ÷ 1165.53 2.26 7137.29 ÷ 1273.60 5.60 2007-08 3118.24 ÷ 1156.26 2.69 2914.98 ÷ 1268.61 2.30 2008-09 3879.24 ÷ 1573.71 2.46 3439.69 ÷ 1542.29 2.23 2009-10 3531.05 ÷ 1658.78 2.31 4253.94 ÷ 1479.59 2.88 AVERAGE = 2.37 AVERAGE= 3.70

Table No.:- 3.10 Long term funds to fixed assets ratio of selected A utomobile Two

Wheeler companies in India from 2005-06to 2009-10(T imes)

COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max

HHML 2.31 2.26 2.69 2.46 2.31 2.406 0.15705 6.53 2.26 2.69

BAL 5.51 5.6 2.3 2.23 2.88 3.704 1.52835 41.26 2.23 5.6

Mean 3.91 3.93 2.495 2.345 2.595 3.055 0.71077 23.27 2.345 3.93

S.D. 1.6 1.67 0.195 0.115 0.285 0.649 0.71702 110.48 0.115 1.67

C.V 40.92 42.49 7.82 4.90 10.98 2.749715 2.54096 92.41 0.049041 0.424936

Sources: computed from annual reports of the sample companies. The above table no.3.10 shows Long Term Funds To Fixed Assets Ratio. The ratio of HHML shows fluctuating trend during the period of study. The average ratio is 2.406 times , standard deviation is 0.15705 and coefficient of variation is 6.53%, which shows less variability in compared to BAL. the ratio was 2.31 times in the year 2005-06 which was decreased to 2.26 times in the next year i.e. in 2006-07. After it again it was increased to 2.69 times in the year 2007-08 but afterwards it started decreasing slowly and ratio came down to 2.46 times and 2.31 times in the year 2008-09 & 2009-10 respectively. In the BAL also, the ratio shows fluctuations during the span of research. The ratio was high in the year 2006-07 i.e. 5.60 times, which came down to 2.30 times in the year 2007-08. But again after the year 2008-09 the ratio slightly went up to the 2.88 times. The standard deviation and coefficient of variation are 1.52835 and 41.26% respectively. The average ratio of BAL is 3.704 times. Both companies throughout the period of research do not fall below the standards of 1:1. It reveals that all fixed assets are purchased from long term funds.

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Graph no.3.14 Long Term Funds To Fixed Assets Ratio of Selected Automobile Two

Wheeler Companies

This ratio indicates the proportion of fixed assets purchased from long term funds. The average ratio remains at 2.37:1 and 3.70:1 for Hero Honda Motors Ltd and Bajaj Auto Ltd respectively. Throughout the period under study it does not fall below the standards of 1:1 which indicates that all fixed assets are purchased from long term funds. So the business will not be in a trouble when short term obligations mature, the fixed assets will not be sold for need of money and for payment of short term obligations. Long Term Fund to Fixed Assets Ratio (T-Test)

� Null Hypothesis: There is no any significant difference in Long Term Fund to Fixed Assets Ratio of selected automobile two wheeler companies under study.

� Alternative hypothesis : There is significant difference in Long Term Fund to Fixed Assets Ratio of selected automobile two wheeler companies under study.

T-TEST

Normality Test: Passed (P = 0.197) Equal Variance Test: Passed (P = 0.096) Group Name N Missing Mean Std De v SEM LTFTFAR of HHML 5 0 2.406 0.176 0.0785 LTFTFAR of BAL 5 0 3.704 1.709 0.764 Difference -1.298 t = -1.690 with 8 degrees of freedom. (P = 0.130) 95 percent confidence interval for difference of means: -3.069 to 0.473

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The difference in the mean values of the two groups is not great enough to reject the possibility that the difference is du e to random sampling variability. There is not a statistically significa nt difference between the input groups (P = 0.130). Power of performed test with alpha = 0.050: 0.216 The power of the performed test (0.216) is below the desired power of 0.800. Less than desired power indicates ‘the results are less likely to detect a difference when one actually exists’. Negative results should be interpreted cautiously. In short, t: calculated value is -1.690 and p-value = 0.130 > 0.197 Hence, the test is not significant. Therefore H0 is accepted. (The Long Term to Fixed Assets ratios of the two sample companies do not differ significantly.) 3.3.8 NET WORTH TO NET FIXED ASSETS RATIO This ratio shows that how much net worth utilizes for the purchase of net fixed assets. And so, how much borrowed fund utilizes for the same, can also is kwon from this ratio. The ratio can be calculated following.

Net worth to fixed assets ratio = Net worth

Net fixed assets

Observations:

YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 2009.33 ÷ 949.37 2.12 4770.73 ÷ 1133.00 4.21 2006-07 2470.06 ÷ 1165.53 2.12 5534.32 ÷ 1273.60 4.34 2007-08 2986.24 ÷ 1156.26 2.58 1587.59 ÷ 1268.61 1.25 2008-09 3800.75 ÷ 1573.71 2.42 1869.69 ÷ 1542.29 1.21 2009-10 3465.02 ÷ 1658.78 2.09 2928.34 ÷ 1479.59 1.98 AVERAGE = 2.27 AVERAGE = 2.60

Table No.:- 3.11 Net worth to fixed assets ratio of selected Automob ile Two Wheeler

companies in India from 2005-06to 2009-10(Times)

COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max

HHML 2.12 2.12 2.58 2.42 2.09 2.266 0.19795 8.74 2.09 2.58

BAL 4.21 4.34 1.25 1.21 1.98 2.598 1.39705 53.77 1.21 4.34

Mean 3.165 3.23 1.915 1.815 2.035 2.432 0.62923 25.87 1.815 3.23

S.D. 1.045 1.11 0.665 0.605 0.055 0.166 0.65082 392.06 0.055 1.11

C.V. 33.02 34.37 34.73 33.33 2.70 2.350466 2.07793 88.40 0.027027 0.347258

Sources: computed from annual reports of the sample companies.

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The above table no.3.11 shows Net worth to fixed assets ratio. The ratio of HHML shows fluctuating trend during the period of study. In the first two year the ratio was stagnant to 2.12 times which went up to 2.58 times in the third year under the period of study. But after it, it started goes down and came to 2.09 times in the year 2009-10. This ratio shows that the net worth utilizes for the purchase of net fixed assets. The Net worth to fixed assets ratio of BAL also shows fluctuating trend during the period of study. The average ratio is 2.59 and standard deviation is 1.39705 with the coefficient of variation of 53.77%, which is too higher than C.V. of the HHML. The large C.V. shows less stability form the variation point of view.

Graph no.3.15 Net worth to Fixed Assets Ratio Selected Automobile Two Wheeler

Companies .

The average ratio of both the sample companies namely the Hero Honda Motors Ltd and Bajaj Auto Ltd is remained at 2.27:1 and 2.60: 1 respectively. The employment of net worth in the fixed assets is remained more than 100%. In Hero Honda Motors Ltd, during the year 2009-10 ratio remained at lower stage i.e. 2.09:1 while it remained at higher stage in the year 2007-08 i.e. 2.58:l, while in Bajaj Auto Ltd during the year 2008-09 ratio remained at lower stage i.e. 1.21:1 while it remained at higher stage in the year 2006-07 i.e. 4.34: l. Net worth to Fixed Assets Ratio (T-Test)

� Null Hypothesis: There is no any significant difference in Net worth to Fixed Assets Ratio of selected automobile two wheeler companies under study.

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� Alternative hypothesis : There is significant difference in Net worth to Fixed Assets Ratio of selected automobile two wheeler companies under study.

T-TEST

Normality Test: Passed (P = 0.281) Equal Variance Test: Passed (P = 0.067) Group Name N Missing Mean Std De v SEM NWTFAR of HHML 5 0 2.266 0.221 0.0990 NWTFAR of BAL 5 0 2.598 1.562 0.699 Difference -0.332 t = -0.471 with 8 degrees of freedom. (P = 0.650) 95 percent confidence interval for difference of means: -1.959 to 1.295 The difference in the mean values of the two groups is not great enough to reject the possibility that the difference is du e to random sampling variability. There is not a statistically significa nt difference between the input groups (P = 0.650). Power of performed test with alpha = 0.050: 0.050 The power of the performed test (0.050) is below the desired power of 0.800. Less than desired power indicates ‘the results are less likely to detect a difference when one actually exists’. Negative results should be interpreted cautiously. In short, t: calculated value is -0.471 and p-value = 0.650 > 0.281 Hence, the test is not significant. Therefore H0 is accepted. (The Net worth to Fixed Assets Ratio of the two sample companies do not differ significantly.) 3.3.9 NET FIXED ASSETS TO CURRENT ASSETS RATIO To employ the fixed assets gainfully in the business, current assets are required. Therefore, the ratio will differ from industry to industry and even from company to company. That is why the standard cannot be laid down. The ratio is expressed as:

Net Fixed Assets To Current Assets Ratio = Net fixed assets

Current assets

An increase in this ratio may mean the efficiency of working capital management that means fewer current assets are required for employing fixed assets in the concern’s operational activities. A decline in the ratio may mean that more and more current assets are required for effectively employing fixed assets in the business or the stock and debtors have unduly

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increased. Moreover, increase in current assets, if accompanied by increase in profit shows that business is expanding. Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 949.37 ÷ 822.56 1.15 1133.00 ÷ 2939.55 0.39 2006-07 1165.53 ÷ 914.65 1.27 1273.60 ÷ 3848.25 0.33 2007-08 1156.26 ÷ 942.00 1.23 1268.61 ÷ 1780.67 0.71 2008-09 1573.71 ÷ 1022.14 1.54 1542.29 ÷ 2401.45 0.64 2009-10 1658.78 ÷ 2890.46 0.57 1479.59 ÷ 3111.75 0.48 AVERAGE = 1.15 AVERAGE = 0.51

Table No.:- 3.12 Net fixed assets to current assets ratio of selecte d Automobile Two

Wheeler companies in India from 2005-06to 2009-10(T imes)

COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max

HHML 1.15 1.27 1.23 1.54 0.57 1.152 0.31915 27.70 0.57 1.54

BAL 0.39 0.33 0.71 0.64 0.48 0.51 0.14464 28.36 0.33 0.71

Mean 0.77 0.8 0.97 1.09 0.525 0.831 0.19221 23.13 0.525 1.09

S.D. 0.38 0.47 0.26 0.45 0.045 0.321 0.15635 48.71 0.045 0.47

C.V. 49.35 58.75 26.80 41.28 8.57 0.384591 0.17706 46.04 0.085714 0.5875

Sources: computed from annual reports of the sample companies. The above table no.3.12 shows Net Fixed Assets To Current Assets Ratio. The ratio of HHML shows fluctuating trend during the span of study. The ratio was lowest in the year 2009-10 i.e. 0.57 times as against the higher ratio of 1.54 times in its previous year i.e. 2008-09. The average ratio is 1.15 which is more than double to the average ratio of BAL. It means that Hero Honda Motors Ltd has invested Rs.1.15 in net fixed assets as compared to current assets of Re.l against which Bajaj Auto Ltd has invested only Re.0.51. The Net fixed Assets to Current Assets ratio of BAL also shows fluctuating trend during the period of study. The ratio was lowest in the year 2006-07 at 0.33 times and highest in the year 2007-08 at 0.71 times. In the last two years the ratio shows constant declining trend, 0.64 & 0.48 times in the year 2008-09 & 2009-10 respectively. The standard deviation is 1.44464, while the coefficient of variation of 28.36%.

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Graph no. 3.16 Net Fixed Assets To Current Assets Ratio of Select ed Automobile Two

Wheeler Companies

The ratio signifies the relationship between the current assets and net fixed assets. Both companies’ average net fixed assets to current assets ratio remained at 1.15:1 and 0.51: 1 respectively. It means that Hero Honda Motors Ltd has invested Rs.1.15 and Bajaj Auto Ltd has invested Re.0.51 in net fixed assets as compared to current assets of Re.l. The increase in current assets accompanied with increase in profit suggests expansion of business. Net Fixed Assets To Current Assets Ratio (T-Test)

� Null Hypothesis: There is no any significant difference in Net Fixed Assets To Current Assets Ratio of selected automobile two wheeler companies under study.

� Alternative Hypothesis : There is significant difference in Net Fixed Assets To Current Assets Ratio of selected automobile two wheeler companies under study.

T-TEST

Normality Test: Passed (P = 0.470) Equal Variance Test: Passed (P = 0.458) Group Name N Missing Mean Std Dev SEM NFATCAR of HHML 5 0 1.152 0.357 0.160 NFATCAR of BAL 5 0 0.510 0.162 0.0723 Difference 0.642 t = 3.664 with 8 degrees of freedom. (P = 0.006) 95 percent confidence interval for difference of means: 0.238 to 1.046

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The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistical ly significant difference between the input groups (P = 0.006). Power of performed test with alpha = 0.050: 0.880 In short, t: calculated value is 3.664 and p-value = 0.006 < 0.470 Hence, the test is significant. Therefore H0 is rejected and H1 is accepted. (The Net Fixed Assets To Current Assets Ratio of the two sample companies do differ significant.) 3.3.10 RESERVES TO CAPITAL RATIO The ratio of reserves created out of profit to share capital indicates the financial strength of the company. Higher the ratio, better it is, because it means that any future loss can be easily absorbed. The ratio is calculated as:

Reserve To Capital Ratio = Total reserve

Share capital

Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 1969.39 ÷ 39.94 49.31 4669.55 ÷ 101.18 46.15 2006-07 2430.12 ÷ 39.94 60.84 5433.14 ÷ 101.18 53.70 2007-08 2946.30 ÷ 39.94 73.77 1442.91 ÷ 144.68 09.97 2008-09 3760.81 ÷ 39.94 94.16 1725.01 ÷ 144.68 11.92 2009-10 3425.08 ÷ 39.94 85.76 2783.66 ÷ 144.68 19.24 AVERAGE = 72.77 AVERAGE = 28.20

Table No.:- 3.13

Reserves to Capital ratio of selected Automobile Tw o Wheeler companies in India from 2005-06to 2009-10(Times)

COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max

HHML 49.31 60.84 73.77 94.16 85.76 72.768 16.2479 22.33 49.31 94.16

BAL 46.15 53.7 9.97 11.92 19.24 28.196 18.1665 64.43 9.97 53.7

Mean 47.73 57.27 41.87 53.04 52.5 50.482 5.2618 10.42 41.87 57.27

S.D. 1.58 3.57 31.9 41.12 33.26 22.286 16.411 73.64 1.58 41.12

C.V. 3.31 6.23 76.19 77.53 63.35 20.37084 19.9204 97.79 0.033103 0.775264

Sources: computed from annual reports of the sample companies. The above table no.3.13 shows Reserves to Capital Ratio. The ratio of HHML shows increasing trend up to the fourth year under the period of study, but in the fifth year it shows declining as the company had declared and paid the Silver Jubilee Dividend from reserves (5500 %). From the year 2005-06 to 2008-09 there was a constant growth in the ratio, which shows reserves are created out of profits to share capital, and indicates the financial strength of the company.

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The Reserves to Capital Ratio of BAL shows fluctuating trend during the period of study. The ratio was 46.15 times in the year 2005-06 which went up in the next year i.e.in 2006-07 to 53.7 times. The ratio was lowest in the year 2007-08 i.e.9.97 times as company had issued bonus shares in the ratio 5:2 and the demerger took place on 20th February, 2008 with effect from 1st April, 2007 . The standard deviation is 18.1665 and coefficient of variation is 64.43%. C.V. of BAL is too high as compared to HHML which tells us less stability from the view point of variations.

Graph no.3.17 Reserves to Capital Ratio of Selected Automobile Tw o Wheeler

Companies

The ratio shows fluctuating during the period under study. The ratio shows reserves created out of profit to share capital, and indicates the financial strength of the company. Generally the ratio is expected higher where there is high degree of risk in the business or when it’s earning rise at an exponential rate. The Hero Honda Motors Ltd’s average reserve to capital ratio remained at 72.77: l. It indicates that the company has generated reserves of Rs.72.77 as compared to equity share capital of Re.l. While Bajaj Auto Ltd’s average reserve to capital ratio is 28.20:1, which shows poor ratio as against to Hero Honda Motors Ltd. The reason for lower ratio of Bajaj Auto Ltd in the year 2007-08 is that there was change in the amount of share capital compared to previous year. Reserves to Capital Ratio (T-Test)

� Null Hypothesis: There is no any significant difference in Reserves to Capital Ratio of selected automobile two wheeler companies under study.

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� Alternative Hypothesis : There is significant difference in Reserves to Capital Ratio of selected automobile two wheeler companies under study.

T-TEST Normality Test: Passed (P = 0.265) Equal Variance Test: Passed (P = 0.789) Group Name N Missing Mean Std Dev SE M RTCR of HHML 5 0 72.768 18.166 8.124 RTCR of BAL 5 0 28.196 20.311 9.083 Difference 44.572 t = 3.658 with 8 degrees of freedom. (P = 0.006) 95 percent confidence interval for difference of means: 16.471 to 72.673 The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistical ly significant difference between the input groups (P = 0.006). Power of performed test with alpha = 0.050: 0.879 In short, t: calculated value is 3.658 and p-value = 0.006 < 0.265 Hence, the test is significant. Therefore H0 is rejected and H1 is accepted. (The Reserves to Capital Ratio of the two sample companies do differ significant.) 3.3.11 NET CURRENT ASSETS TO NET WORTH Business earns the profits from the turnover of current assets with the support of fixed assets. From the earned profits, it has to pay the Income tax to the Government and then to serve the pre-decided or expected return to the investors. Growth of business requires larger capital investments, but the best option is ‘Reinvestment of the Profits’. The ratio between Fixed and Current assets may change from business to business. But it is certain that the contribution of Current assets to the Profits is greater to the Fixed assets. So it is important to know the relation (Ratio) between the two.

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Observations:

Net Fixed Assets To Current Assets Ratio Net fixed assets

Current assets=

YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 -860.34 ÷ 2009.33 -0.43 -795.42 ÷ 4770.73 -0.17 2006-07 -694.09 ÷ 2470.06 -0.28 -669.00 ÷ 5534.32 -0.12 2007-08 -1013.33 ÷ 2986.24 -0.34 -238.56 ÷ 1587.59 -0.15 2008-09 -1183.76 ÷ 3800.75 -0.31 -200.90 ÷ 1869.69 -0.12 2009-10 -2101.58 ÷ 3465.02 -0.61 -1355.03 ÷ 2928.34 -0.46 AVERAGE = -0.39 AVERAGE = -0.20

Table No.:- 3.14

Net Current Assets to Net worth Ratio of Selected A utomobile Two Wheeler companies in India from 2005-06to 2009-10(T imes)

COMPANY 2005-06 2006-07 2007-08 2008-

009 2009-10 Mean S.D. C.V. Min Max

HHML -0.43 -0.28 -0.34 -0.31 -0.61 -0.394 0.1191 -30.23 -0.61 -0.28

BAL -0.17 -0.12 -0.15 -0.12 -0.46 -0.204 0.1294 -63.43 -0.46 -0.12

Mean -0.3 -0.2 -0.245 -0.215 -0.535 -0.299 0.12286 -41.09 -0.535 -0.2

S.D. 0.13 0.08 0.095 0.095 0.075 0.095 0.01924 20.25 0.075 0.13

C.V. -43.33 -40.00 -38.78 -44.19 -14.02 0.349741 0.71915 205.62 -0.4418 -0.1401

Sources: computed from annual reports of the sample companies. The above table no. 3.14 shows Net Current Assets to Net worth Ratio. The ratio of HHML shows fluctuating trend . The ratio was -0.43 times in the year 2005-06 which was decreased to - 0.28 times in the year 2006-07. Again the ratio was increased to - 0.34 times in the year 2007-08 which was again declined to - 0.31 times in the year 2008-09. The average ratio is - 0.394. The standard deviation is 0.1191 and coefficient of variation is - 30.23% which reveals that company is more stable from the variation point of view as against to BAL. The Net Current Assets to Net worth Ratio of BAL also shows fluctuation during the span of research. The ratio was -0.17 times in the year 2005-06 which was decreased to 0.12 times in the year 2006-07. The ratio was -0.46 times which is the highest in the year 2009-10 during the period of study. The average ratio is -0.204, standard deviation and coefficient of variation are 0.1294 & - 63.43% respectively.

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Graph no. 3.18 Net Current Assets to Net Worth Ratio of Selected A utomobile Two

Wheeler Companies

In the Net Current Assets to Net worth Ratio, net worth should equal to fixed assets plus net working capital, except borrowed capital. In both the sample companies, they have huge reserves & surplus and their investments are more to the Net Worth. Second thing is that their net working capitals are in negative. Certainly, this indicates that the companies have invested owners’ capital and the negative net working capital into the investment except fixed assets. Net Current Assets to Net worth Ratio (T-Test)

� Null Hypothesis: There is no any significant difference in Net Current Assets to Net worth Ratio of selected automobile two wheeler companies under study.

� Alternative Hypothesis : There is significant difference in Net Current Assets to Net worth Ratio of selected automobile two wheeler companies under study.

T-TEST

Normality Test: Failed (P < 0.050) Equal Variance Test: Passed (P = 0.872) Group Name N Missing Mean Std Dev SEM NCATNWR of HHML 5 0 -0.394 0.133 0.0595 NCATNWR of BAL 5 0 -0.204 0.145 0.0647 Difference -0.190 t = -2.161 with 8 degrees of freedom. (P = 0.063) 95 percent confidence interval for difference of means: -0.393 to 0.0128

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The difference in the mean values of the two groups is not great enough to reject the possibility that the difference is du e to random sampling variability. There is not a statistically significa nt difference between the input groups (P = 0.063). Power of performed test with alpha = 0.050: 0.384 The power of the performed test (0.384) is below the desired power of 0.800. Less than desired power indicates ‘the results are less likely to detect a difference when one actually exists’. Negative results should be interpreted cautiously. In short, t: calculated value is -2.161 and p-value = 0.050 < 0.063 Hence, the test is significant. Therefore H0 is rejected and H1 is accepted. (The Net Current Assets to Net worth Ratio of the two sample companies do differ significant.) 3.4 CONCLUSION: Trend analysis only tells us about the growth made over a period. But it doesn’t give us fair view of the comparison of the two companies as the Bajaj Auto Ltd was split in to three companies in the year 2008. The demerger took place on 20th February, 2008 with effect from 1st April, 2007 and the company demerged in to: 1. Bajaj Auto Ltd ( Pure Auto business) 2. Bajaj Finserve Ltd (Two Insurance Companies + Bajaj Auto Finance + Wind Power Project) 3. Bajaj Holding & Investments Ltd (Existing Company - the businesses of above mentioned two new companies) (The company had used the General Reserve to write-off the diminishing value of Investments) The reserves were more than five times to the owners’ capital and investments also were more than five times to the fixed assets. So we may not compare certain ratios. As far as growth is concerned, it proves that the growth of BAL is rapid to the HHML. Capital structure ratios tell us that both the companies have used the reserves for the expansion, have invested the reserves in the ‘Investments’, so have not to issue borrowed capital. This shows that both the companies are profit making units, their inventory turn-over ratio is fast and their business is depended heavily on current assets to the fixed assets. By comparing the correlation of coefficient between HHML and BAL, we can say that BAL is better to HHML as it has positive correlation coefficient, which indicates that the rate of earning is quite high, this could be further increased

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by an increase in the proportion of debt in future by taking benefit of tax deductibility through leverage. During the period, the owners’ funds have-been increased with the help of ‘Retained Profits’ (neither by issuing equity share capital nor by Convertible Debentures), by which the effective control of the management remained at the same level. The companies have not created long term liabilities so have not used the trading on equity, so the capital structure have no impact either on the profitability or liquidity. On the whole, it may be concluded that capital structure trends of both the companies are satisfactory, but BAL is more effective in its performance that to the HHML.

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