Professional Documents
Culture Documents
CYCLE LTD.
A PROJECT REPORT
Submitted by:
RITESH GARG
7048221587
June-July 2008
ACKNOWLEDGEMENT
Behind this successful undertaking is the blessing and guidance of many. This
1
gratitude and deep respect that have experienced during my learning process at Hero
Cycles. This endeavor would not have been successful without the help and
encouragement from a lot of people with whom I had good fortunate of interacting
during course of journey. I am indebted to Mr. Bharat Goyal (Sr V.P.Finance cum
Company Secretary) for the knowledge and experience that I gained from him during
course of training which I can easily look at as my most rewarding phase the course of
my study. Without his immaculate and intellectual guidance , sustained efforts and
friendly approach, it would have been difficult to achieve the result in a short span of
period.
Not leaving behind the contribution of all other staff members at Finance
Department for sharing with us the wealth of their experience and knowledge.
PREFACE
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I took summer training in well-managed organization and was fortunate to get a
good exposure. In this project report an attempt has been made to cover different
aspects of my training.
RITESH GARG
ABSTRACT
weaknesses of the firm by establishing strategic relationship between the items the
balance sheet, profit and loss account and other operative data. Myers’- “Financial
statement analysis is largely a study of relationship among the various financial factors
in a business is disclosed by a single set of statements, and a study of the trend of these
factors as shown in a series of statement.” The Hero Group has done business
differently right from the inception and that is what has helped us to achieve break-
through in whatever product category we have ventured. The Group’s low key, but
focused, style of management has earned the plaudits amidst investors, employees,
3
vendors and dealers, as also worldwide recognition.
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5
TABLES OF CONTENTS
1. 1 Introduction 9
1.1 Introduction 10
1.2 Organization of hero cycle ltd 11-12
1.3 , 1.4 Hero group &hero group co’s 13-15
1.5 Driving force : chairman 16-17
1.6 Milestones 18-23
1.7 Hero: the super brand 24-25
1.8 Global gearing :exports 26-27
1.9 Vision & mission 28
1.10 Quality: the driving force 29
1.11 Building relationship 30-31
1.12,1.13,1.14 R & D.,innovations, promotions 32-35
1.15 Social responsibility 36
1.16 , 1.17 Major products, competitors 37-38
1.18 Ownership of management 39
2. 2. Achievements 40-42
3. 3. LITERATURE REVIEW 43-45
4. 4. Financial Analysis 46-48
5. 5. Objectives 49-50
6. 6. Research Methodology 51-53
7. 7 Analysis & Interpretation 54
7.1 Comparative statements 55-59
7.2 Common size statement 60-62
7.3 Cash flow statement 63-64
7.4 Fund flow statement 65-68
7.5 Ratio analysis 69-93
8. 8. Findings 94-95
9. 9. Suggestions 96-97
10. 10. Limitations 98-99
11. 11. References 100-101
12. 12. annexure 102-112
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List of Tables
List of Figures
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S.No. Figure No. Figure Page No.
1 1.1 Current Ratio 75
2 1.2 Quick ratio 77
3 1.3 Absolute quick ratio 78
4 2.1 Working capital turnover ratio 80
5 2.2 Inventory turnover ratio 81
6 2.3 Inventory conversion period 82
7 2.4 Debtor turnover ratio 83
8 2.5 Average collection period 84
9 2.6 Creditor turnover ratio 85
10 2.7 Average payment period 85
11 3.1 Debt equity ratio 87
12 3.2 Equity ratio 88
13 3.3 Solvency ratio 89
14 3.4 Fixed asset to net worth ratio 90
15 4.1 Gross profit ratio 91
16 4.2 Net profit ratio 92
17 4.3 Return on investment 93
CHAPTER 1
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9
INTRODUCTION
Bicycle was seen in India in the year 1890. Import of cycles, however, started in 1905
and continued for more than 50 years. The Government in July 1953 announced
complete ban on imports, but cycle kept on simmering in the country till 1961. In 1890,
selling price of an imported bicycle was around Rs. 45/-; in 1917, during the First World
War the price jumped to Rs. 500/- but dropped considerably, month by month and came
down to Rs. 35/- or so (U.K. makes) and Rs. 15/- or so (Japanese models).
It would be interesting to mention that in 1919, five persons in Punjab imported
cycles and used them on The Mall, Simla. These included one Bishop, Two military
men and two contractors including S. Pala Singh Bhogal (Grand Father of Mr. M.S.
Bhogal of Ludhiana). Under special permission of the Governor, they were allowed to
use cycles on ‘The Mall’ only for one hour in a day. They imported B.S.A. Cross bar
Cycle from U.K. and it used to be a kind of Mela at that particular hour on the Mall in
Simla, the scene watched by hundreds of people everyday. Later, a firm was formed
under the name of Singh & Co. with shops on Railway Road, Jalandhar and Bazaar
Vakillan, Hoshiarpur, which imported bicycles in the year 1930 onwards.
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The Beginning
We look over our shoulders, we see the past. We use it to make a better
present and a beautiful tomorrow, as tomorrow isn’t just another day, it’s
another chance for us to better ourselves and to excel.
Hero Cycles is a product of this philosophy. The philosophy that instills
commitment, team work and foresight. Hero’s colossal journey started
before independence. The four Munjal brothers, hailing from a small
town called Kamalia, now in Pakistan, are the men who are behind the
mission. Brotherhood apart, what knit the men together was the wealth
of will, integrity, ambition & determination. In the year 1944, they
decided to start a business of bicycle spare parts in Amritsar. Its is
modest beginning and the next 3 years saw the business grow rapidly.But
the dark clouds of partition eclipsed their plans of the future. With
renewed vigour and optimism, the operational base was shifted to
Ludhiana. By 1956, the brothers had began manufacturing key
components of bicycles and as a logical way forward, began to assemble
the entire cycle at their manufacturing plant in Ludhiana. In the early
days, the plant had a capacity for 25 cycles per day. Over the next few
years, the Bicycle Unit started growing in stature and size, attracting skilled engineers,
technocrats, administrators and entrepreneurs. From a modest beginning of mere 639
bicycles in the year 1956, Hero Cycles products over 18500 cycles a day today, the highest
in global reckoning. With the 48% share of the Indian market, this volume has catapulted
Hero in the ‘Guinness Books of World Records’ in 1986 and edge over global players is
being maintained since then.
A tiny acorn has now become a mighty Oak. From cycle to two - wheelers was a natural
step, and the Hero Group came into being. The Hero Group, today, is a vast conglomerate
of companies, either in the form of collaborations, joint ventures or fully owned
subsidiaries, with more than Rs. 10000 Crore turnover annually. Hero Group, besides being
the world’s largest manufacturers of bicycles, motorcycles and chains to this date, has
diversified into newer segments like Information Technology, IT Enabled Services and
Financial Services.
11
THE HERO GROUP
12
The Hero Group has done business differently right from the inception and that is what
has helped us to achieve break-through in whatever product category we have ventured.
The Group’s low key, but focused, style of management has earned the plaudits amidst
investors, employees, vendors and dealers, as also worldwide recognition.
The growth of the Group through the years has been influenced by the number of factor:
The Hero Group through the Hero Cycles Division was the first to introduce the concept
of just-in-time inventory. The Group boasts of superb operational efficiencies. Every
assembly line worker operates two machines simultaneously to save time and improve
productivity. The fact that most of the machines are either developed or fabricated in-
house has resulted in low inventory levels.
In Hero cycles Limited, the just-in-time inventory principle has been working since the
beginning of production in the limit in the unit and is functional even till date. The
vendors bring in the raw material and by the end of the day the finished product is
rolled out of the factory. This is the Japanese style of production and in India; Hero is
the first company to have mastered the art of the just-in-time inventory principle
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Hero Cycles Limited
Hero Exports
LO GO
14
Munjal Castings
Hero ITES
Hero Soft
Munjal e-systems
Dr.Brijmohan Lall Munjal, patriarch of the US$ 3.19 billion Hero Group
was born in 1923, in what is now Pakistan. After
partition, the Munjal brothers started a small
business of manufacturing bicycle components in
Ludhiana in North India in the face of the bottlenecks
15
of industrial infrastructure and investments. Dr Lall led a small time
manufacturer of 60 cycles a day to become a manufacturing giant,
which churns out not only over 17,000 cycles per day but is also
diversified into various domains. Undoubtedly, Dr.Lall is a first
generation business entrepreneur of the 1950s'.
Dr.Lall has enriched the Hero Group with his vision of sound business
governance and value driven management practices. His foresight
has made the Hero Group a leader in its business. Dr Brijmohan Lall
is a role model for Indian Industry in corporate governance and
ethical and value-driven management practices. His principle-based
leadership has led the Group companies to receive the best industrial
governance and safety awards and acquire stringent value
certifications.
Dr.Lall has received various accolades and awards for his immense
contribution to the Indian industry. He was adjudged Businessman
of the Year in 1994 by a leading business magazine - Business
India.
The PHD Chamber of Commerce and Industry presented him with the
Distinguished Entrepreneurship Award in 1997, in recognition of
his outstanding exemplary entrepreneurship.
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Xavier Labour Relations Institute (XLRI), a premier institution has
conferred on him the honor of Sir Jehangir Ghandy Medal for
Industrial Peace in 2000.
MILESTONES
1956
Hero Cycles Ltd. is established.
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1961
Rockman Cycle Industries Ltd. established which is today the largest manufacturer of
bicycle chains & hubs in the world.
1963
Bicycle exports take off from India – a faray into the international market.
1971
Highway Cycles was set up. It is today the largest manufacturer of single speed &
multi-speed freewheels in the country.
1975
Hero Cycles Limited became the largest manufacturer of bicycles in India.
1978
Majestic Auto Limited was formed and Hero Majestic Moped was introduced.
1981
Munjal Casting established.
1984
Hero Honda Motors Limited established in joint venture with Honda Motors, Japan to
manufacture Motorcycles. It is now the world’s largest producer of two-wheelers.
1985
- Munjal Showa Ltd. established to manufacture shock absorbers and struts and is
today one of the topmost shock absorber manufacturers companies in this country.
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- 100cc Hero Honda Motorcycle was launched, which, later on in 1988,
became No.1 among all motorcycles in India.
1986
Hero Cycles Limited entered the Guinness Books of World Records as the Largest
bicycle manufacturer in the world.
1987
Hero Motors, a division of Majestic Auto Limited set up on collaboration with Steyr
Diamler Puch of Austria.
1987
Gujarat Cycles Limited, now known as Munjal Auto Centre Ltd. was established to
manufacture and export state-of-the-art bicycles and light products in its full automated
plant at Wagodia.
1987
Sunbeam Auto Limited, earlier a unit of Highway Cycle Ind. Ltd., established as an
ancillary to Hero Honda. It has the largest die casting plant in India.
1988
Hero Puch was introduced by Hero Motors Ltd., which was a revolutionary machine to
set new records of petrol.
1989
Ranger bicycles (a generic name for Mountain Bikes today) was introduced by Hero
Cycles Limited.
1990
Hero Cold Rolling Division established which is one of the most modern steel cold
rolling plants in India.
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1991
Hero Honda received National Productivity Council Award and also the Economic
Times – Harvard Business School Association Award against 200 contenders.
1991
Hero Cycles introduced Kid – the first branded bike in children’s segment.
1992
Hero Cycles introduces Impact, the first citibike in India.
1992
Munjal Showa Ltd. received national safety award.
1993
Hero Exports was established as International Trading Division for group & non-group
products.
1995
- Hero Corporate Services Ltd. was established.
- The first exerbike from Hero Group was introduced with the name–
Allegro.
1996
Hero Winner, a large wheeled scooter with a choice of 50 cc & 75 cc engines was
launched by Hero Motors Ltd.
1998
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Hero Briggs & Stratton Auto (P) Ltd. was set up to produce 4-stroke two wheeler
engines in various cubic capacities.
1998
Munjal Auto Components established to manufacture gear shaft & gear blanks for
motorcycles.
2000
The first fully automated bicycles by the name ‘POWERBIKE’ was introduced
by Hero Cycles Limited. Hero Corporate diversified into I.T. and I.T. Enabled Services
through its services segment Hero Corporate Services Limited.
2001
Hero Honda emerges as the market leader in motorcycles with the sales of over a
million motorcycles and a market share of 47%.
2002
Hero Cycles Limited ties up with National Bicycle Industries, a part of Matsushita
Group, Japan, to manufacture high-end bicycles.
Fastener World established.
2002
Easy Bills Limited established to offer utility bill collection and retail services.
2003
Tie-up with Live Bridge Inc., U.S.A., Aprilia Scooters, Haly & Bombardier Rotax
GmbH of Germany.
2003
Super Starter Series Launched by Hero Cycles Limited.
2003
Hero Honda continues to be the world’s largest manufacturer of two-wheelers with the
market of more than 48%.
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2004
Hero Retail Insurance Business established.
Super Smart Series introduced by Hero Cycles Limited.
2005
Hero ITES strengthens its relationship with ACS, USA USD 5 BILLION-market cap
and fortune 500 companies.
2006
Hero Honda crosses a unit sales threshold of 3 MILLION motorcycles.
2006
Hero Honda enters the scooters segment, launches 100 cc “pleasure”.
2006
Hero group celebrates GOLDEN JUBILLEE YEAR since inception. It was
commemorated by sales of over 15 million motorcycles & over 100 million bicycles.
2007
Hero group has made 13 models of e-bikes.
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HERO: THE SUPER BRAND
What makes a Super brand? Own the years; the Indian market place has been witness to
the emergence of a wide variety of Super brands. Many have followed the ‘Standard
rules’ of becoming a Super brand: great product energy to exploit the market, relevance
to consumer needs of wants, edge in business technology, superb distribution and
superbly chain and consistent quality. It is a leap from branding to brand leadership.
Globally, a select few, exceptionally powerful brands, are recognized as Super Brands.
Some of the Indian brands have made it into this unique hall of fame, and amongst that
coveted group features Hero Cycles. Super Brands are actually the big ideas, which
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provoke us to explore the realms of our dreams and inspire us to live satisfying life
styles. Anchored in omnipotent consumer insights, the super brands go beyond mere
functional promises as they trigger deeply embedded emotional chords.
Hero Cycles has been one of the most progressive and dynamic brands for the decades
now. More than 3200 dealers, 4800 employees and more than 9.6 crore satisfied
customers, have directly or indirectly, endeavored tirelessly to make Hero Cycles a
phenomenal success and are the true guardians of this brand.
Ambitions, belief, empathy and a strong culture of sensitivity are at the heart of Hero
Cycles brand. Each of these values is reflected in the company’s products, its
communication and its dealings with suppliers, employees, dealers and customers. Be it
company’s environment friendly manufacturing processes or the brand initiatives for the
lower income customers, leadership is all about capturing the hearts & minds of the
people- the way a true Hero always does.
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HERO CYCLES
HERO MOTORS
HERO CORPORATE SERVICE LIMITED
(Hero Mindmine, Munjal eSystems,
NsurePlus)
HERO MANAGMENT SERVICE
LIMITED(HERO ITES)
MUNJAL SHOWA LIMITED
As early as in the 1960s' very few Indian bicycle manufacturers were interested in
exports. However, the Hero Group's foray into the overseas markets in 1963 pioneered
Indian exports in the bicycle segment. It was a move prompted essentially by the need
to remain attuned to the global marketplace.
While initial exports were restricted to Africa and the Middle East, today more than 50
percent of the exports from Hero Cycles
Limited meet the demands of sophisticated markets in Europe and America. This is
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primarily because of appropriate product development and excellent quality that Hero
offers.
The Group has been continuously upgrading technology and has set up special units -
like Gujarat Cycles Limited (now Munjal Auto Industries Limited), to meet
international quality standards. Munjal Auto Industries Limited has state-of-the-art
equipments imported from Europe and Taiwan. The unit is designed to match
international standards and is an Export Oriented Unit (EOU). Its products are supplied
to the International Markets of developed countries like United Kingdom, Germany,
France etc.
The Group's exports have gone beyond cycles and their components. The success of the
Hero Majestic moped did not remain confined to Indian shores. Finding enthusiastic
buyers across the world, it became the largest exported moped from India.
Hero Puch is perhaps the first Indian two-wheeler to be homologated abroad (in Spain)
and has assembly plants in Mauritius and Egypt. Today Hero Puch mini-motorcycles
can also be seen in Paraguay, Mexico, Argentina, Turkey and Holland.
Group Company, Munjal Showa Limited is one of the largest suppliers of shock
absorbers to major auto giants in Japan, United States and the United Kingdom,
amongst other developed markets.
In 1993 Hero Exports was established as the International Trading Division for Group
and non-Group products. The Government of India recognizes Hero Exports as a
Trading House.
And the latest diversification for the Group in the export market is in the area of
Software exports and providing Business Processing and Contact Center Services
through Hero Corporate Service limited. The company exports services to many
Fortune 1000 corporations in the USA, UK and Australia and has offices in UK & USA
to manage client relationships.
The Vision
“We, at the Hero Group are continuously striving for synergy between
technology, systems and human resources to provide products and services that meet the
26
quality, performance, and price aspirations of the customers. While doing so, we
maintain the highest standards of ethics and societal responsibilities, constantly
innovate products and processes, and develop teams that keep the momentum going to
take the group to excellence in everything we do.”
27
Constant quality upgradation ensures that the company stays in the global mainstream
and maintains its edge, through excellence. A technology tie-up with National Bicycle
Industries of Japan led to the launch of the ‘World 1’ series of cycles, besides
introduction of new frame designing and features like- A-frame, D-frame, Y-frame,
Swan shaped frame, speedometers & indicators among other
Building Relationships
At Hero, it’s always believed that there is much more to life than just business. As a
company with a heart, it has certain commitments towards its employees, the society
and the nation. Though growing incomes, changing life styles and availability of cheap
customer finance has changed the market scenario enormously; Hero believes that
cycles can still be the driving force of the rural economy. By introducing the loan
facilities under ‘Hero Cycle Loan Yojana’ through Corporation Bank and Oriental Bank
of Commerce, Hero Cycles has enabled low income customers to purchase cycles on
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easy terms.
Hero family. It is quite common to find two generations of the same family working
together in the company, or the workers sharing their skills with other
family members and passing on finest training to each other. It goes without saying that
people at Hero are its largest investment and easily the largest asset.
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RESEARCH AND DEVELOPMENT
OF HERO CYCLES
1. Specific areas in which R&D carried out by the company: -Increasing competition
in the market place has brought into sharp focus importance of differentiation. Our
in-house Research & Development Centre, which is recognized by DSIR Govt. of
India, plays a pivotal role in launch of innovative product models on continuous
basis. Our product models excel in meeting expectations from extremely demanding
customers of today’s modern era.
2. Benefits derived as a result of the above R & D activities: -This brought the
concept of high quality low cost/fancy bicycles.
3. Future plan of action: - Though the domestic market for standard bicycles is
shrinking since last three years but the fancy segment has shown a significant
upsurge in the demand. Moreover India has a very small share of Global Market.
The up graduation of technology through in-house research will assist the company
in design development to capture the vast untapped market potential.
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(ii) While in Indian market it is directed towards introducing products at lower cost
e.g. Wonder Years and Brat series to the benefit of masses or
high-end technology products like Street Racer, Fusion, Yiking Hero and Miss
India Series (for the ladies) which completes the total product range.
(iii) The company has not imported any technology in the last 5 years. However, it
has entered into a technical assistance agreement with national Bicycle
Industrial Co. Ltd. Kashiwara City, Osaka, Japan in 2002 for upgrading its
technology.
Outlook
During the year 2006-07 the economy has shown further improvements and the
GDP has also increased. Your directors are pleased to inform you that despite the
volatility in the prices of main inputs i.e. steel and nickel your company has increased
its production by 5.47% vis a vis previous year by introducing new era light alloy
bicycles and powered cycles as well as bikes with a sincere focus on students.
Industry producing the rolling steel strips can be broadly classified into two
categories i.e. narrow (400mm) and wide (1650mm). Your company comes under mid
segment with a capacity to produce up to 800mm wide strips. The industry is further
classified into Stand Alone manufacturer and Integrated manufacturer. Though the
Stand Alone manufacturer are putting up a stiff competition , your directors are hopeful
that company’s C.R.Division will do well by putting emphasis on special grades,
narrow and thinner strips with short delivery period and fast customization.
INNOVATIONS
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Born out of Passion
The ore goes into fire only to shed off its impurities. Similar is the man whose virtues
shine when he is tried by the fire of life. Taking upon ‘Novelty’ itself as a competitor,
the Hero Cycles, has been always striving for perfection and innovation in every aspect
Promotions
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Until 1986, the company had no need for mass communication. But as competition
started growing, Hero Cycles begun to feel the need for creating lasting impression on
the customer’s mind. In the mid 1980s Hero was perceived to be the manufacturer of
the basic black bicycles. The company required an image change. It needed to
communicate to customers the vast portfolio of products that it had, particularly in the
recreational segment. The launch of innovative products and their use as image builders
happened simultaneously. Since 1986, the communication strategy has been to build
each product separately and create a unique positioning for them. In this way the
Ranger was positioned as the bike for outdoor fun, Impact was the preferred choice
among city riders and Jet was projected as the lightest running roadster while Hawk was
the racer’s edge. Each of these launches and their promotion, gave the Hero brand a new
meaning. The brand has also used celebraties - including film stars Sanjay Dutt, Rani
Mukherjee, Hrithik Roshan and Ameesha Patel. The latest is India’s new bowling
sensation, Irfan Pathan who has also been a real life Hero cycle user.
SOCIAL RESPONSIBILTIES
33
In this way, the company has fulfilled its social obligation. Charged with their mission
nationalistic fervor, the Hero Group has always been actively involved in Social and
Medicare activities, such as providing medical facilities for the under privileged,
Hospitals, Heart Research Foundation and Mobile Medical Vans. Hero also runs schools
and colleges, maintains parks and public facilities.
MAJOR PRODUCTS
The Hero Cycles Ltd. Manufactures cycles, rims , free wheels ,hubs & chains
and cold rolled strips as a main product. Company has long portfolio of different range
of cycles. Company has 132models in the list , covers all the three section-gents, ladies
and kids. It also manufactures cycles parts for its own requirements. After fulfilling the
requirements of company ,it can export its remaining quantity.
34
The main products are:-
i) Cycles
ii) Rims
iii) Free wheels
iv) Hubs and Chains
v) Cold Rolled strips
vi) E-Bikes
COMPETITORS
IN CYCLE MARKET:
• AVON
• OPERA
• TI
• ATLAS
• OTHERS (NEELAM,KW,BS)
IN E-BIKE MARKET:
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• CHINA HITECH
• AVON
• OPERA
• ULTRA
• TVS
OWNERSHIP OF MANAGEMENT
BOARD OF DIRECTORS
36
CHAPTER 2
The Achievements
37
based on a worldwide study. The London Business School, UK, has done a case study
on the Group as model of entrepreneurship.
Boston Consulting Group has ranked Hero Group as one of the top ten Business
Houses on Economic value, in India.
--Hero Group’s Partnership with Honda Motors, Japan is over 20 years old.
--Hero Group’s Partnership with Showa Manufacturing Corporation, Japan is
over 18 years old.
Group Chairman, Mr. Brijmohan Lall Munjal received the coveted “ Ernst &
Young Entrepreneur of the Year” award for 2001.
Hero Cycles was ranked 3rd amongst top Indian Companies Review 2000
.
Asia’s leading companies award (2003) by Far Eastern Economic Review.
Hero Cycles is the World’s Largest manufacture of Bicycles with annual sales
volume of over 4.8 million cycles.
Hero Cycles Limited is a Guinness Book Record holder since 1986 as the
world’s largest manufacture of bicycles, with annual sales volume of 5.2 million
bicycles in FY 2004.
Engineering Exports Promotion Council has awarded Hero Cycles with the Best
Exporter Award for the last 28 years in succession.
38
CHAPTER 3
39
Literature review
Ball and Brown (1968) were the first to highlight the relationship between stock prices
and information
disclosed in the financial statements. Empirical research on the value relevance has its
roots in the
theoretical framework on equity valuation models. Ohlson(1995) depicted in his work
that the value of
a firm can be expressed as a linear function of book value, earnings and other value
relevant
information.
Financial statement lending is rarely used for small
business lending as it looks at the audited financial statement of companies that have
an
access to public credit market. In contrast, relationship lending, is based on “soft”
information about the potential borrower. In other words, banks rely on the subjective
information about a borrower that they received out of the lasting relationships rather
than
on financial condition of the borrowers. Another indication of relationship lending as
reported by Cavalluzzo, Cavalluzzo, and Wolken (2001) is that 84 percent of the loans
received by small businesses came from lending institutions located in the same city.
The
median distance between the firm and the lender was just three miles.
Allen Berger (1999) defines three conditions that should be met for relationshipbased
finance to occur. First, information other than data from financial statements, collateral
and other public resources is collected. Second, the information is collected via
continuous
communication between the lender and the small business, the customers of the small
business, and local community. Third, the information is confidential and can be used
only
for making further lending decisions
References
Jing Liu, Doron Nissim, and Jacob Thomas; “Is Cash Flow King in Valuations” (2007)
Financial Analysts Journal Vol.63 No02, 2007 CFA Institute
[12]
Kallunki, Juha-Pekka and Paakki, Eija, "Stock Market Response to IFRS/IAS Cash
Flows"
40
(August 11, 2005). Available at SSRN.
[13]
Lev, Baruch and Paul Zarowin, 1999, "The Boundaries of Financial Reporting and How
to
Extend Them", Journal of Accounting Research
[14]
Liu, Nissim, and Thomas (March 2002) “Equity Valuations using Multiples” Journal of
Accounting Research 40(1).
[15]
Mingyi Hung, “Accounting Standards and Value Relevance of Financial Statements- An
International Analysis” Journal of Accounting and Economics, Vol.30 No.3, Dec.,2000.
Rosplock. (1998). Risk and the financial analyst of the year 2000. Business Credit, Vol.
100(Iss. 3), pg. 57.
CHAPTER 4
41
42
Meaning of financial analysis
The term “financial analysis” also known as analysis and interpretation of financial
statements refers to the process of determining financial strength and weaknesses of the
firm by establishing strategic relationship between the items the balance sheet, profit
and loss account and other operative data.
The purpose of financial statement analysis depends upon the need of person who is
analyzing these statements. These varying needs may be:-
• Comparative statements
• Ratio analysis
• Fund Flow analysis
• Common size statement
CHAPTER 5
44
45
OBJECTIVES
46
CHAPTER 6
47
RESEARCH METHODOLOGY
48
DATA REPRESENTATION
The result have presented with the help of pie-charts and bar diagrams which
clearly represents that the research conducted is a Formal Research and the Research
Design is a sound one.
49
CHAPTER 7
CHAPTER 7.1
50
51
COMPARATIVE STATEMENTS
The comparative financial statements are statements of the financial position at different
period; of time. The elements of financial position are shown in a comparative form so
as to give an idea of financial position at two or more periods. From practical point of
view, generally, two financial statements (balance sheet and income statement) are
prepared in comparative form for financial analysis purpose. Not only the comparison
of the figure of two periods but also be relationship between balance sheet and income
statement may show:
53
HERO CYCLE LTD.
I) COMPARATIVE STATEMENT
A) Comparative Balance Sheet
Particulars 2006 2007 Increase/Decrease %age
Assets
Interpretation
1. Comparative Balance Sheet reveals that total Assets of Hero cycle increased
during a year by 17.95%.
2. There has been increase in shareholder funds by 21.16%.
54
HERO CYCLE LTD
B) Comparative Income Statement
Particulars 2006 2007 Increase/ %age
Decrease
(Rs).
Net Sales 11369337410 13308705116 +1939367706 +17.06
Less : Cost of Goods Sold 9756380835 11733069767 +1976688932 +20.26
(Material consumed,
manufacturing expenses &
personal expenses)
Gross Profit 1612956575 1575635349 -37321226 -2.31
Interpretation
There has been decrease in the gross profit by 2.31% because the rate of
increase in sales is less than the rate of increase in cost of goods sold. But the non
operating expenses decreases by 86.43% so net profit increases.
CHAPTER 7.2
55
II) COMMON SIZE STATEMENT
A) Common Size Balance Sheet
56
Current Assets
- Inventories 766521142 9.76 805661034 8.69
- Sundry Debtors 1860512457 23.67 2228592486 24.04
- Cash & Bank Balance 69481654 0.88 22134657 0.24
Loan and advances 337661837 4.30 457780835 4.93
Interpretation
The investment in fixed assets, current assets and investment are same in both the years.
The ratio of shareholders funds and the loan funds are do not change much.
Interpretation
In 2006 the cost of goods sold is 85.81% of sales which increase to 88.16% in
year 2007 resulting the decrease in gross profit from 14.19% to 11.84% but the
company is successful in controlling non operating expenses i.e. 7.97% to 0.92% so net
profit increases in 2007.
CHAPTER 7.3
58
HERO CYCLES LTD.
Cash Flow Statement
CHAPTER 7.4
59
FUND FLOW ANALYSIS
Definition of Fund
A question arises as to the definition of “FUND”. It means:
• Funds may mean change in cash only;
60
• Funds may mean change in working capital (the difference between current
assets and current liabilities) only.
A more comprehensive definition of funds may be given as follows:
• Funds may mean change in financial resources, arising from changes in working
capital items and from financing and investing activities of the enterprise, which
may involve only non-current items.
The funds flow statement analyses only the causes of changes in the firm’s
working capital position. The cash flow statement is prepared to analyze changes in the
flow of cash only. These statements fail to consider the changes in the firm’s total
financial resources. They do not reveal some significant items that do not affect the
firm’s cash or working capital position, but considerably influence the financing
position and asset mix of the firm.
The statement of changes in financial position is an extension of the funds flow
statement or the cash flow statement. Therefore, to get better insights, a firm may
prepare a comprehensive, all inclusive, statement of changes in financial position
incorporating changes in the firm’s cash and working capital positions involving:
61
Statement of Changes in Working Capital
Particulars 2006 2007 Effect on Working
Capital
Increase Decrease
Current Assets
- Inventories 766521142 805661034 39139892 -
- Sundry Debtors 1860512457 2228592486 368080029 -
- Cash & Bank Balance 69481654 22134657 - 47346997
(A) 2696515253 3056388177
Current Liabilities
- Liabilities 1640425867 1978589143 - 338163276
- Provisions 223706638 195750077 27956561 -
(B) 1864132505 2174339220
Working capital (A-B) 832382748 882048957 - -
Net increase in working 4966209 - - 49666209
capital
Total 882048957 882048957 435176482 435176482
WORKING NOTES
FIXED ASSETS
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Balance b/d 1968881237 By Adjusted P & L A/c (Dep.) 213345223
2106686634 2106686634
Interpretation : As seen from the above analysis that there is increase in working
capital which, indicate that company is having sufficient current assets to pay back the
current liabilities in time. There is increase in amount of loans by 10.48% and it is being
utilized in financing the fixed assets & investments.
CHAPTER 7.5
63
MEANING OF RATIO
A ratio is a simple arithmetical expression of the relationship of one number to
another. According to Accountant’s Handbook by Wixon, Kell and Bedford, a ratio “is
an expression of quantitative relationship between two numbers”. According to Kohler, a
ratio is the relation, of the amount a, to another, b, expressed as the ration of a to b, a:b
(a is to b); or as a simple fraction, integer, decimal, fraction or percentage.
A financial ratio is the relationship between two accounting figures expressed
mathematically. A ratio can also be expressed as percentage by simply multiplying the
ratio by 100. Ratios provide clues to the financial strength, soundness position or
weakness of an enterprise. One can draw conclusions about the exact financial position
of a concern with the help of ratios.
64
MEANING AND CONCEPT OF RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial
statements. It is the process of establishing and interpreting various ratios for helping in
making certain decisions. However, ratio analysis is not an end itself. It is only a means
of better understanding of financial strength and weakness of a firm. Calculation of
ratios does not serve any purpose, unless several appropriate ratios are analyzed and
interpreted. There are a number of ratios which can be calculated from the information
given in the financial statements, but the analyst has to select the appropriate data and
calculate only a few appropriate ratios from the same keeping in mind the objective of
analysis. The following are four steps involved in the ratio analysis :
• Selection of relevant data from financial statement depending upon objective of
analysis.
• Calculation of the appropriate ratios from the above data.
• Comparison of the calculated ratios with the ratio of same firm in the past, or the
ratios developed from projected financial statements or the ratios of some
other firms or the comparisons with ratios of the industry to which the firm belongs.
65
Guidelines or precautions for use of ratio:
1. Accuracy of financial statements: The ratios are calculated from the data
available in financial statements. Before calculating ratios one should see whether
proper concepts and conventions have been used for preparing financial statements
or not. These statements should also be properly audited by competent auditors.
The precautions will establish the reliability of data given in financial statements.
the short term paying capacity of concern or firm’s ability to meet its current
obligations. The various liquidity ratios are: current ratio, liquid ratio and absolute
ratio.
2. Long term solvency and leverage ratios: Long term solvency ratios convey
firms ability to meet the interest cost and repayment schedule of its long term
obligations, example debt equity ratio and interest coverage ratio. Leverage ration
show the proportions of debt and equity in financing of the firm.
3. Activity ratios: Activity ratios are calculated to measure the efficiency with
which the resources of a firm have been employed. These ratios are also called
turnover ratios because it indicates the speed with which assets are being turned over in
to sales example debtor turnover ratio.
68
Current assets Current liabilities
3500000000
Amount (Rs.)
3000000000
2500000000
2000000000
1500000000
1000000000
500000000
0
2006 2007
Years
FIGURE 1.1
Current Ratio
1.5
0.5
0
2006 2007
Years
69
(ii) Liquid Ratio
Liquid Ratio is more rigors test of liquidity than the current ratio. It is the ratio
between quick ratio & current liabilities. Quick ratio refers to all current assets except
Inventory & prepaid expenses.
Liquid Ratio = Liquid assets / Current Liabilities
Liquid assets = Current Assets- Prepaid Exp – Inventories
2500000000
Amount (Rs.)
2000000000
1500000000
1000000000
500000000
0
2006 2007
Years
70
Liquid Ratio
1.5
0.5
0
2006 2007
Years
FIGURE 1.2
Interpretation: As seen from the analysis this ratio is almost same in both the years
quite satisfactory with a thumb rule i.e. 1.5 : 1. Company’s current assets involved large
amount of debtors in it.
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Absolute Liquid assets Current liabilities
2500000000
2000000000
1500000000
1000000000
500000000
0
2006 2007
FIGURE 1.3
0.06
0.05
0.04
0.03
0.02
0.01
0
2006 2007
Years
Interpretation : Viewing the trend of the cash ratio of both the years it can be said that
this ratio is not satisfactory because cash and bank balance has been decreased very
much in the year 2007 approx. 68%.
72
Activity ratio measures the efficiency and the effectiveness with which a firm can
manage its resources. These are known as the Turnover ratios , because they indicate the
speed with which assets are converted into cash.
73
Working Capital Turnover Ratio
15
10
Times
0
2006 2007
Years
FIGURE 2.1
Interpretation : Working capital turnover ratio is increasing as we can see from the
above table becomes 12.47 in 2007 from 9.71 in 2006 due to increase in sales
74
Inventory Turnover Ratio
20
15
Times
10
0
2006 2007
Years
FIGURE 2.2
Interpretation : As seen from the analysis there has been slight increase in the ratio.
Being a manufacturing concern company has to maintain large amount of inventories in
different forms but on the other side sales are increasing so it is good sign for the
company.
It is calculated to see the average time taken for clearing the stocks.
Inventory conversion period = No. of days in a year /Inventory Turnover Ratio
75
Inventory conversion period
25
20
Days 15
10
0
2006 2007
Years
FIGURE 2.3
Interretation: The company’s inventory conversion period is approximate 25 days
which indicates there is no fear of obsolesce of material.
76
Debtor Turnover Ratio
10
Times
6
0
2006 2007
Years
FIGURE 2.4
Interpretation: This ratio has been increased by 34% due to increase in sales but at the
same time debtors are also increasing which is not feasible in long run.
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Average Collection Period
60
50
40
Days
30
20
10
0
2006 2007
Years
FIGURE 2.5
78
Creditor Turnover Ratio
20
15
Times
10
0
2006 2007
Years
FIGURE 2.6
7. Average Payment Period
Average Payment Period = No. of days in a year / Creditor Turnover Ratio
Year 2006 2007
No. of days in a year 365 365
Creditor Turnover Ratio 6.93 6.88
Average Payment Period 53 (days) 53 (days)
TABLE 2.7 (Average Payment Period)
60
50
40
Days
30
20
10
0
2006 2007
Years
FIGURE 2.7
79
Interpretation: The payment track record of the company is properly designed such
that timely payment is made to the suppliers. By analyzing the trend it can be said that
creditors are paid with in two months this shows as and when payment is received from
the debtors then it is being paid and more over company is enjoying credit policy by the
creditors.
80
Debt Equity Ratio
40
Percentage
30
20
10
0
2006 2007
Years
FIGURE 3.1
Interpretation : There has been a slight decrease in this ratio due to the fact that now
the company is relying more on own funds then on outsiders funds. As such ratio has
been improved and that amount is blocked in inventories.
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Equity Ratio
70
60
Percentage
50
40
30
20
10
0
2006 2007
Years
FIGURE 3.2
Interpretation : Company is relying more shareholder funds than on loan funds. This
is favourable point for the creditors as company’s equity ratio in 2006 is 59% and in
2007 is 61% .
3. Solvency Ratio
This ratio indicates the relationship between total liabilities to outsiders & total
assets of the company.
Solvency ratio = 100- Equity ratio
2007 39
TABLE 3.3(Solvency Ratio)
82
Solvency Ratio
50
Percentage
40
30
20
10
0
2006 2007
Years
FIGURE 3.3
Interpretation : .The ratio in 2006 is 41% and in 2007 is 39% , so it implies lower the
ratio of total liabilities to total assets, more satisfactory/stable in the long term solvency
position of the firm.
40
30
FIGURE 3.4
20
10
0
2006 83 2007
Years
Interpretation: the company’s fixed assets to net worth is 44.47% and 35.30% in years
2006 and 2007. It implies that owners funds are more than total fixed assets and a part
of the working capital is provided by the shareholders.
IV PROFITABILITY RATIOS
The following ratios are known as general profitability ratio
1) G.P. Ratio
2) N.P. Ratio
3) Return on Investment
Gross profit ratio measures the relationship of gross profit to net sales and is
usually represented as a percentage. Thus it is calculated by dividing the gross profit by
sales.
84
Gross Profit Ratio
20
Percentage
15
10
0
2006 2007
Years
FIGURE 4.1
Interpretation: There has been decrease in the Gross Profit by 2.31% because the rate
of increase in sales is less than the rate of increase in cost of goods sold.
85
2. Net Profit Ratio
Net profit ratio established a relationship between net profit and sales. This ratio
is the overall measure of firms profitability and is calculated as:
Net Profit Ratio = Net profit after tax / Net Sales *100
10
Percentage
0
2006 2007
Years
FIGURE 4.2
Interpretation : There has been decrease in the Gross Profit by 2.31% because the rate
of increase in sales is less than the rate of increase in cost of goods sold. The non-
operating expenses decrease by 86.43% so net profit increases.
86
3. Return on Investment
Return on Investment = Profit Before interest and taxes / Total investment *100
Return on Investment
35
30
Percentage
25
20
15
10
5
0
2006 2007
Years
FIGURE 4.3
CHAPTER 8
87
88
FINDINGS
1. Company’s is utilizing long term loans to finance fixed assets and investments
2. There is decrease in gross profit of the company due to increase in cost of goods
sold but there is increase in net profits due to decrease in non operating expense.
3. Debtors are also increasing which is not good sign for the company in long run.
4. Current liabilities are increasing by 20.61%. Where as cash decreases very much
by 68.14%
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CHAPTER 9
90
SUGGESTIONS
1. The Company is enjoying a good current position. It should take steps to further
improve its position by repositioning the composition of current assets as large
amount has been block in debtors and inventories.
2. Large amounts of funds are blocked in debtors. Company should reduce its
debtors so that the blocked amount is properly utilized.
3. Inventory control is not proper. The Company has not defined the minimum and
the maximum stock level scientifically. Therefore there is blockage of funds.
Moreover, the safety stock level is also not defined. So the company should
apply the proper Inventory Control System so that there is no wastage of funds.
91
CHAPTER 10
92
LIMITATION
5. Analysis is only a mean not an end in itself. The analyst has to make
interpretation and draw his own conclusion.
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CHAPTER 11
94
REFERENCES
Sites: -
www.herocycles.com
www.google.com
Book Author
Annual Reports of HERO CYCLES LIMITED at ending year 31ST MARCH 2006 AND
2007.
CHAPTER 12
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101
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