ratio analysis on hero honda

1. Current ratio: - current ratio may be defined as the relationship between the current asset and current liabilities. This ratio is also known as working capital ratio, and is used to measure the liquidity and is most widely used to make the analysis of short term financial position of the liquidity of the firm.This ratio is calculated by dividing the total of current asset by total of current liabilities.

Current assets Current ratio = Current liabilities

(in crores)Serial no

computation results

1. 1013.49/2052.82 0.49:1

Interpretation: - A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligation in time as and when they become due.As per the prescribed standard given by the financial experts the ratio of current asset to current liabilities should be 2:1, but in this case the ratio stands as 0.49:1, which gives an indication that the liquidity position of the firm is not good, and is in a vulnerable position to meet it’s short term obligation, following a very aggressive working capital policy.

2. Liquid ratio:- The term liquid ratio is a more rigorous test of liquidity than the current ratio. The term liquidity refers to the ability of a firm to pay it’s short-term obligations and when they become due. These ratios are also termed as quick ratio or acid-test ratioLiquid ratio may be defined as the relation-ship between liquid assets (current asset –stock) and current liabilities on the notion that inventory should be excluded from the current asset because they cannot be converted into cash immediately without sufficient loss in value.

Liquid asset Liquid asset = Current liabilities


computation results

1. 696.39/2052.82 0.34:1

Interpretation:- a high liquid ratio indicates that the firm is liquid and has the ability to meet current liabilities in time.As per the prescribed standard given by the financial experts the ratio of current asset to current liabilities should be 1:1, but in this case the ratio stands as 0.34:1, which gives an indication that the liquidity position is very poor as inventories are absolutely non-liquid and reveals that the liquidity position of the firm has deteriorated.

3. Stock turn-over ratio:-stock or inventory turn-over ratio is normally calculated as net sales divided by average inventory, which indicates that the inventory has been efficiently utilized by the firm or not. The purpose is to see weather only the required minimum funds have been locked up in the inventory. Stock/inventory turn-over ratio indicates 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 it’s inventory.

Cost of goods soldStock turn-over ratio = Average Inventory


computation results

1. 9783.80/321.96 30.38

Interpretation: - stock turn-over ration measures the velocity of conversion of stock into sales. a high turn-over gives the indicates efficient management of stock ,because more frequently the stocks are sold, the lesser amount of money is required to finance the stock.There is no prescribed standard given by the financial expert, but in this case the stocks are turned 30.38 times in a year, which is very high and may endanger the firm and may result in stock-out and thus may interrupt smooth flow of the production process.

4. Debtor’s turn-over ratio:- debtors turn-over ratio indicates the velocity of debt-collection of the firm. in simple words, it indicates the number of times average debtors are turned over during a year.

Net credit sales Debtor’s turn-over ratio = Average debtors

(Where total sales has been assumed as credit sales and average debtors is equal to opening debtor + closing debtor /2)


computation results

1. 12319.12/223.69 55.07

Interpretation: - the higher debtor turn-over ratio indicates the maximum number of times the debtors are turned during that year, which in-turns gives the impression of efficient management of debtor’s.There is no prescribed standards given by the financial experts but the turn-over is high, gives an indication that the cash is realized from the debtor’s at regular intervals with minimum collection period.

5. Average collection period: - the average collection period represents number of days for which a firm has to wait before receivable are converted to cash.

Trade debtors *360Average collection period = Net sales

(assuming that sales are made through-out the year, and the year consists of 360 days)


computation results

1. (149.94/12319.12)*360 4.38 days

Interpretation:- the average collection period ratio represents the average number of days for which a firm has to wait before it’s receivable are converted into cash.There is no ‘thumb-rule’ or prescribed standards in interpreting this ratio, but as the computation reveals very high recovery of receivable into cash removing the burden of having excess employment of capital in business.

6. Creditors turn-over ratio:- in the business firm , the creditors is naturally interested in finding –out how much time the firm is likely to take in repaying it’s trade creditors.If the information about credit purchases is not available, the figure of total purchase may be taken as numerator and average trade creditors.

Net credit annual purchasesCreditors turn-over ratio = Average trade creditors

(Where total purchases has been assumed as credit purchases and average creditors is equal to opening creditor + closing creditor /2)


computation results

1. 9793.50/729.55 13.42 times

Interpretation: - the average payment period ratio represents the average number of days taken by the firm to pay its creditors. Generally, lower the better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm.As per the situation the average collection payment period of the company is very good revealing a sound credit-worthiness of the firm.

7. Working capital turn-over ratio: - working capital of concern is directly related to sales .working capital turn-over ratio indicates the velocity of the utilization of net-working capital. This ratio indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm.

Net salesWorking capital turn-over ratio = Net working capital


computation Results

1. 12319.12/(1039.43) (11.85)

Interpretation: - this ratio measures the velocity of utilization of working capital, and there is no prescribed standard given by financial experts, since the net working capital is negative, the company follows a very aggressive working capital policy and meets its operating through it’s different reserves. There is minimum inventory and any kind of miss-happenings my lead to interruption in the production process.

8. Debt-equity ratio: - It is also known as external-internal equity ratio, and is calculated to measure the relative claims of outsiders (i.e. share-holders), against the firm’s assets. This ratio indicates the relationship between the external equities or the outsiders fund and the internal equities or the shareholders fund.

Debt capitalDebt-equity ratio = Equity capital


computation Results

1. 78.49/3800.75 0.02:1

Interpretation: - the debt-equity ratio is calculated to measure the extent to which debt financing has been used in a business. This ratio indicates the proportionate claims of owners and the outsiders against the firm’s assets.As per the prescribed standards given by the financial experts the debt-equity ratio is 2:1,but the debt-equity mix in this case is very low, indicating the firms inability of utilizing low-cost outsider’s fund to magnify their earnings.Moreover, the firm is not getting and leverage benefit, which in-turns reduces profitability.

9. Fixed asset to net-worth:- the ratio establishes the relationship between fixed asset and shareholders fund.

Net fixed assetsFixed asset to net-worth = Shareholder’s fund


computation results

1. (1694.25/3800.75)*100 45%

Interpretation :- the ratio of fixed asset to net-worth indicates the extent to which shareholder’s fund are sunk into fixed asset.genarally the purchase of fixed asset should be financed by shareholders equity including reserves, surpluses and retained earnings.There is no prescribed standards for this ratio, but 65-70% is considered satisfactory as per the industry standards, whereas in this case it is just 45%,reflecting that the owner’s fund are more than total fixed and provided to finance as a part of working capital.

10. Current asset to equity fund: - this ratio is calculated by dividing the total of current asset by the amount of shareholder’s fund

Current assetCurrent asset to equity fund = Shareholder’s fund


computation results

1. (1013.49/3800.75)*100 27%

Interpretation: - the ratio indicates the extents to which proprietor’s fund are invested in current asset.There is no prescribed standard for this ratio. Since only 27% of the current assets is financed by the equity fund, giving the impression very low investment in working capital by the company.

11. Gross profit ratio:-gross profit ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. This ratio indicates the profit earned directly from manufacturing process, without any further indirect expenditure.

Gross profit *100Gross profit ratio = Net sales


Computation results

1. (1781.46/3800.75)*100 47%

Interpretation: - the gross profit indicates the extent to which selling prices of goods per unit may decline without resulting in losses on operation of the firm.There is no prescribed standard given by any financial expert ,but the rate 35-45% is normally considered satisfactory return, since the return is 47%,therefore we can conclude that the earning capacity of the firm is very good and the firm should try and maintain this rate.

12. Net-profit ratio: - net profit establishes a relationship between net profit and sales, and indicates the efficiency of the management in manufacturing, selling, administration and other activities of the firm.The two basic element of the ratio are net profit and sales.

Net profit after tax *100Net profit ratio = Net sales


Computation results

1. (1281.76/12319.12)*100 10.4%

Interpretation :- the net-profit are obtained after deducting income-tax and indicates the firms capacity to face adverse economic conditions such as price ,competition, low-demand ,etc .the higher the ratio, the better is the profitability.As per the prescribed standard by the experts the net-profit should range between 11-15%,so in this case the company earns favorable amount of net-profit, but there is a drastic decrease in the profitability because of the increase in the indirect expenditure of the company, so the company should try to minimize the cost.

13. Return on share holder investment/return on investment: - this ratio shows the relationship between net-profit and the proprietor’s fund, the two basic components of this ratio are net-profit and shareholder’s fund

Net profit after tax Return on investment = Shareholder’s fund


Computation results

1. (1281.76/3800.75)*100 33.75%

Interpretation: - this ratio is one of the most important ratios measuring the overall efficiency of a firm. As the primary objective of the business is to maximize its earnings, it also indicates the extent to which the primary objectives are achieved.There is no prescribed standards given by any expert, but in this case the firm has a considerable rate of return from the business, shows better results of the firm.

14. Return on equity capital :- this ratio shows the relation ship between profits of the company and its equity capital, the ordinary shareholders are more interested in the profitability of a company and the performance of the company is judged on the basis of return on equity capital.

Net profit after tax – preference dividendReturn on equity capital = Equity share capital (paid-up)


Computation results

1. (1281.76-0/39.94) 32.09

Interpretation :- ,As there is no prescribed standard given by any expert and since the firm is dependent more on the equity capital for its operations so the organization return on its equity capital is considerably satisfactorily.

15. Operating ratio: - operating ratio establishes the relation between cost of goods sold and other operating expenses on the one hand and the sales on the other. In other words, it measures the cost of operation per rupee of sales.

(Cost of goods sold + operating expenses) * 100Operating ratio = Net sales

(where operating expenses includes selling & distribution and administrative expenses.)


Computation results

1. (10770.93/12319.12) *100 87%

Interpretation: - operating ratio indicates the percentage of net sales that is consumed by operating cost, a high operating ratio, is less favorable because it would have a small margin to cover interest, income-tax, dividends and reserves.Since there is no ‘thumb rule’, given by any expert, but the 75-85% may be considered to be good in case of manufacturing undertaking, and in this case the company maintains it business is good.

16. Earning per share: - earning per share is a small variation on return of equity capital and is calculated by dividing the net-profit after tax by the total number of equity shares.

Net profit after tax – preference dividenedEarning per share = Number of equity shares


Computation results

1. 12817600000/199687500 Rs.63.15

Interpretation: - this ratio is a good indicator of measuring the profitability of the firm and comparing it with previous years.The earning per share is very high comparing to the value of shares at par, giving the indication that company is providing adequate return to their shareholders.

17. Return on capital employed:-it establishes the relation ship between the profit after tax and the total capital employed in the business by the firm. it is a primary ratio and is most widely used to measure the overall profitability and efficiency of a business.The term capital employed refers to the total of investment made in the business by the firm including all tangible assets and excluding all intangible asset.

Profit after tax * 100Return on capital employed = Net capital employed

(net capital employed=fixed asset + investment + current asset )


Computation results

1. 1281.76/4390.89 0.29:1

Interpretation: - this ratio is particularly used in appraising the divisional and department performance of the firm and in determining the selling price so as to earn the desired percentage on return.As there is no prescribed standards by the financial experts, whereas in this case the return on capital is quite satisfactory as the company is earning fair return on there capital they are employing in the business.

18. Price earning ratio:- price earning ratio is the ratio between market price per share and earning per share. The ratio is calculated to make an estimate of appreciation in the value of shares of a company and is widely used by the investor to decide or not to buy shares in a particular company.

Market price per equity sharePrice earning ratio = Earning per share


Computation results

1. 1625.35/63.15 25.73

Interpretation: - the greater the price earning ratio of the company the greater is the position of the firm in the market in terms of market capitalization of the firm.Since, in this case the price-earning ratio of the firm is very good the market capitalization rate of the company is growing at a very fast rate.

Recommendation

1. Liquidity position: - these are the ratios which measures the short-term solvency or financial position of a firm. These ratios are calculated to comment upon the short-term paying capacity of a concern or the firm’s ability to meet its current obligations.The various liquidity ratios are current ratio & liquid ratio.These ratio shows that the short-term repaying capacity of the firm is very poor, hence the organization should employ more fund in working capital to have uninterrupted flow of production process and try to follow the moderate working capacity in order to have a balance between liquidity and profitability. Moreover this may also affect the solvency position of the firm if the keep on following policy.

2. Long-term solvency and leverage position:- long-term solvency position ratio conveys a firm ability to meet the interest cost and repayment schedule of it’s long term obligation.Since the company does not have adequate mixture of debt capital in their capital structure, so the company does not obtain any leverage benefit. moreover in order to finance the operational activity they are dependent on their equity capital, since the company does not bear the burden to repaying interest to its financial institutions, bears a good credit-worthiness and a sound financial background.

3. Activity benefit: - Activity ratios are calculated to measure the efficiency with which the resources of the firm have been employed. These ratios are called turn-over ratio, as per the position of the firm the firm earns high profit from production process, but the net profit gradually decreases.The turn-over of stock, debtor’s creditors are very healthy showing a high turn-over of sales and frequent conversion of credit sales into cash. Since the rate of conversion is very high the company gets a

very high return on their capital employed and thus the return on investment is increased.

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ratio analysis on hero honda