FINANCIAL ANALYSIS OF HERO CYCLE LTD.

A PROJECT REPORT Submitted by: RITESH GARG 7048221587 In partial fulfillment of requirement for the degree of MASTER OF BUSINESS ADMINISTRATION (SUMMER TRAINING) GUJRANWALA GURU NANAK INSTITUTE OF MANAGEMENT & TECHNOLOGY, LUDHIANA (PUNJAB TECHNICAL UNIVERSITY, JALANDHAR) June-July 2008 ACKNOWLEDGEMENT Behind this successful undertaking is the blessing and guidance of many. This formal piece of acknowledgement may not be sufficient to express my feelings of 1 gratitude and deep respect that have experienced during my learning process at H ero 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 durin g course of training which I can easily look at as my most rewarding phase the cou rse of my study. Without his immaculate and intellectual guidance , sustained efforts a nd friendly approach, it would have been difficult to achieve the result in a short span of period. Not leaving behind the contribution of all other staff members at Finance Department for sharing with us the wealth of their experience and knowledge. PREFACE MBA is stepping stone to management career. In order to achieve practical, posit ive and concrete results, the classroom learning need to be effectively fed to the r ealities of the situation existing outside the classroom. This is practical true for managem ent. To develop healthy managerial and administrative skills in the potential managers it is necessary that theoretical knowledge must be supplemented with exposure of real environment. Actually it is very vital for the management and i t is in the practical training that the measuring of management is itself realized. 2 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 differen t aspects of my training. RITESH GARG ABSTRACT The term “Financial Analysis” also known as analysis and interpretation of financial statements refers to the process of determining financial strength and weaknesses of the firm by establishing strategic relationship between the items the balance sheet, profit and loss account and other operative data. Myers’- “Financial statement analysis is largely a study of relationship among the various financia l factors in a business is disclosed by a single set of statements, and a study of the tre

nd 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 b reakthrough 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. 4 5 TABLES OF CONTENTS S.No. Chapter No. Topic Page No. 1. 1 Introduction 9 1.1 Introduction 10 1.2 Organization of hero cycle ltd 11-12 1.3 , 1.4 Hero group &hero group 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 6 List of Tables List of Figures S.No. Table No. Table Page No. 1 1.1 Current Ratio 74 2 1.2 Quick ratio 76 3 1.3 Absolute quick ratio 77 4 2.1 Working capital turnover ratio 79 5 2.2 Inventory turnover ratio 80 6 2.3 Inventory conversion period 81 7 2.4 Debtor turnover ratio 82 8 2.5 Average collection period 83 9 2.6 Creditor turnover ratio 84 10 2.7 Average payment period 85 11 3.1 Debt equity ratio 87 12 3.2 Equity ratio 88

13 3.3 Solvency ratio 89 14 3.4 Fixed asset to net worth ratio 90 15 4.1 Gross profit ratio 91 16 4.2 Net profit ratio 92 17 4.3 Return on investment 93 7 CHAPTER 1 S.No. Figure No. Figure Page No. 1 1.1 Current Ratio 75 2 1.2 Quick ratio 77 3 1.3 Absolute quick ratio 78 4 2.1 Working capital turnover ratio 80 5 2.2 Inventory turnover ratio 81 6 2.3 Inventory conversion period 82 7 2.4 Debtor turnover ratio 83 8 2.5 Average collection period 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 8 9 INTRODUCTION Bicycle was seen in India in the year 1890. Import of cycles, however, started i n 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. I n 1890, selling price of an imported bicycle was around Rs. 45/-; in 1917, during the Fi rst World War the price jumped to Rs. 500/- but dropped considerably, month by month and c ame 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 forme d under the name of Singh & Co. with shops on Railway Road, Jalandhar and Bazaar Vakillan, Hoshiarpur, which imported bicycles in the year 1930 onwards. THE ORGANISATION HERO CYCLES LTD 10 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

With the 48% share of the Indian market. the operational base was shifted to Ludhiana. In the early days. and the Hero Group came into being. what knit the men together was the wealth of will. with more than Rs. the just-in-time inventory principle has been working si nce the beginning of production in the limit in the unit and is functional even till dat e. 10000 Crore turnover annually. they decided to start a business of bicycle spare parts in Amritsar. A tiny acorn has now become a mighty Oak. In the year 1944. technocrats. Hero Group. By 1956. began to assemble the entire cycle at their manufacturing plant in Ludhiana. the Bicycle Unit started growing in stature and size. Over the next few years.wheelers was a nat ural step. motorcycles and chains to this date . IT Enabled Services and Financial Services.mission. Brotherhood apart. either in the form of collaborations. administrators and entrepreneurs. attracting skilled engineers. joint ventures or fully owne d subsidiaries. Its is modest beginning and the next 3 years saw the business grow rapidly. integrity. ambition & determination. In Hero cycles Limited. The Hero Group. is a vast congl omerate of companies. vendors and dealers. Hero Cycles products over 18500 cycles a day today. but focused. besi des being the world’s largest manufacturers of bicycles. employees. Every assembly line worker operates two machines simultaneously to save time and impro ve productivity. style of management has earned the plaudits amid st investors. has diversified into newer segments like Information Technology. this volume has ca tapulted Hero in the ‘Guinness Books of World Records’ in 1986 and edge over global players i s being maintained since then. With renewed vigour and optimism. today. From cycle to two . 11 THE HERO GROUP 12 The Hero Group has done business differently right from the inception and that i s what has helped us to achieve break-through in whatever product category we have vent ured. The vendors bring in the raw material and by the end of the day the finished product . From a modest beginning of mere 6 39 bicycles in the year 1956. The Group’s low key. as also worldwide recognition. The fact that most of the machines are either developed or fabrica ted inhouse has resulted in low inventory levels. The growth of the Group through the years has been influenced by the number of f actor: The Hero Group through the Hero Cycles Division was the first to introduce the c oncept of just-in-time inventory. the plant had a capacity for 25 cycles per day.But the dark clouds of partition eclipsed their plans of the future. the brothers had began manufacturing key components of bicycles and as a logical way forward. The Group boasts of superb operational efficiencies. t he highest in global reckoning.

8 billion during the fiscal year 2 0032004. which churns out not only over 17. Hero is the first company to have mastered the art of the just-in-time inventory princip le . 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 was amongst the first Indian industrialists to effectively implement backward integration and he is acknowledged as the trend setter in the area. Dr Brijmohan Lall is a role model for Indian Industry in corporate governance and ethical and value-driven management practices. HERO GROUP COMPANIES Hero Group ranks amongst the Top 10 Indian Business Houses comprising 18 companies. with an estimated turnover of US$1.Brijmohan Lall Munjal. Dr. Dr.   .19 billion Hero Group was born in 1923. This is the Japanese style of production and in India . in what is now Pakistan.000 cycles per day but is also diversified into various domains.Lall has enriched the Hero Group with his vision of sound business governance and value driven management practices. 13 Munjal Showa Limited Hero Cycles Limited Hero Honda Motors Limited Hero Cold Rolling Division Hero Motors Limited Hero Exports LO GO Majestic Auto Limited Rockman Cycle Industries LOG O Highway Cycle Industries LOG O Sunbeam Auto Limited LOGO Munjal Auto Industries Limited 14 Munjal Castings Munjal Auto Components Hero Global Design Hero Corporate Services Limited Hero ITES Hero Mind mine Hero Soft Munjal e-systems Easy Bill Limited The Driving Force: Chairman Dr. After partition. patriarch of the US$ 3. Undoubtedly. His foresight has made the Hero Group a leader in its business.Lall is a first generation business entrepreneur of the 1950s . Dr Lall led a small time manufacturer of 60 cycles a day to become a manufacturing giant. His principle-based leadership has led the Group companies to receive the best industrial governance and safety awards and acquire stringent value certifications.is rolled out of the factory.

Ernst and Young has recognized him as the "Entrepreneur of the year 2001. established which is today the largest manufacture r of bicycle chains & hubs in the world." The PHD Chamber of Commerce and Industry presented him with the Distinguished Entrepreneurship Award in 1997. in recognition of his outstanding exemplary entrepreneurship. (NSIC award . he is the actively involved in many national associations such as CII. 1963 Bicycle exports take off from India – a faray into the international market. Dr. It is today the largest manufacturer of single speed & multi-speed freewheels in the country." All India Management Association conferred him with the Lifetime Achievement award for "Managment"(2003) Banaras Hindu University.Business India.Apart from the promotion of the Indian industry. is established. enterprises and perseverance coupled with vision and meticulous planning: 1956 Hero Cycles Ltd. Japan to manufacture Motorcycles. He was adjudged Businessman of the Year in 1994 by a leading business magazine . It is now the world’s largest producer of two-wheelers. He is Honorary Fellow of the Indian Institute of Industrial Engineering. established to manufacture shock absorbers and struts and is . In 1995. a premier institution has conferred on him the honor of Sir Jehangir Ghandy Medal for Industrial Peace in 2000. 17 1961 Rockman Cycle Industries Ltd. the Business Baron recognized him as the "Most Admired CEO. ASSOCHAM and PHD and is a member of the Regional Board of the Reserve Bank of India. degree of " Doctors of letters" Honoris Causa in October 2004 The Government Of India honoured him with the prestigious " Padma Bhushan"in March 2005 for his contribution to Trade and Industry MILESTONES Hero’s success saga contains the element of courage. SIAM. Varanasi one of the most prestigious Universities of India conferred him with a Doctrate. 1981 Munjal Casting established. 1975 Hero Cycles Limited became the largest manufacturer of bicycles in India. 16 Xavier Labour Relations Institute (XLRI). great. 1985 .Munjal Showa Ltd.Lall received the National Award for outstanding contribution to the Development of Indian Small Scale Industry. 1971 Highway Cycles was set up.Lall has received various accolades and awards for his immense contribution to the Indian industry.presented by the President of India) In 1999. 1978 Majestic Auto Limited was formed and Hero Majestic Moped was introduced. Dr. determination. 1984 Hero Honda Motors Limited established in joint venture with Honda Motors.

1986 Hero Cycles Limited entered the Guinness Books of World Records as the Largest bicycle manufacturer in the world.1 among all motorcycles in India. 1993 Hero Exports was established as International Trading Division for group & non-g roup products. a division of Majestic Auto Limited set up on collaboration with St eyr Diamler Puch of Austria. 1987 Gujarat Cycles Limited. 1987 Hero Motors. 1998 20 Hero Briggs & Stratton Auto (P) Ltd.Hero Corporate Services Ltd. 1992 Munjal Showa Ltd. . 2000 . 1987 Sunbeam Auto Limited. became No. 1991 Hero Cycles introduced Kid – the first branded bike in children’s segment. a large wheeled scooter with a choice of 50 cc & 75 cc engines was launched by Hero Motors Ltd. Ltd. 19 1991 Hero Honda received National Productivity Council Award and also the Economic Times – Harvard Business School Association Award against 200 contenders. It has the largest die casting plant in India. 1988 Hero Puch was introduced by Hero Motors Ltd. earlier a unit of Highway Cycle Ind. the first citibike in India.. which. 1995 .100cc Hero Honda Motorcycle was launched. 1998 Munjal Auto Components established to manufacture gear shaft & gear blanks for motorcycles. was established to manufacture and export state-of-the-art bicycles and light products in its full automated plant at Wagodia. 1990 Hero Cold Rolling Division established which is one of the most modern steel col d rolling plants in India. 1989 Ranger bicycles (a generic name for Mountain Bikes today) was introduced by Hero Cycles Limited. was established. received national safety award. 18 . established as an ancillary to Hero Honda.. was set up to produce 4-stroke two wheeler engines in various cubic capacities. which was a revolutionary machine to set new records of petrol. now known as Munjal Auto Centre Ltd. later on in 1988. 1992 Hero Cycles introduces Impact.today one of the topmost shock absorber manufacturers companies in this country.The first exerbike from Hero Group was introduced with the name– Allegro. 1996 Hero Winner.

launches 100 cc “pleasure”. a Super brand offers consumers significant emotional and physical advantages over its competitors. It has become one with us. The soap we use has a familiar smell. to manufacture high-end bicycles.T. we want a familiar flavour of tea. and I. USA USD 5 BILLION-market cap and fortune 500 companies. Enabled Se rvices through its services segment Hero Corporate Services Limited. 2005 Hero ITES strengthens its relationship with ACS. we stop and look at it suspiciously. a part of Matsushi ta Group. we reach out for familiars. 21 2004 Hero Retail Insurance Business established.. A Super brand cannot be substitu ted. we go to familiar sections and shop familiar brands. 2002 Easy Bills Limited established to offer utility bill collection and retail servi ces. 2003 Hero Honda continues to be the world’s largest manufacturer of two-wheelers with t he market of more than 48%. brush with a familiar toothbrush. 2001 Hero Honda emerges as the market leader in motorcycles with the sales of over a million motorcycles and a market share of 47%. Hero Corporate diversified into I. In the morning. 2007 Hero group has made 13 models of e-bikes. we . 2006 Hero Honda enters the scooters segment. 2003 Super Starter Series Launched by Hero Cycles Limited. 22 HERO: THE SUPER BRAND By Definition. which consciously or subconsciously consumers w ant. using a familiar taste of toothpaste.. When a brand e mbeds itself into our lives and we are willing to go to next shop. Often. Fastener World established. It was commemorated by sales of over 15 million motorcycles & over 100 million bicycles .The first fully automated bicycles by the name ‘POWERBIKE’ was introduced by Hero Cycles Limited. U.S. another time.A. Japan. And so through the day. 2006 Hero group celebrates GOLDEN JUBILLEE YEAR since inception. 2003 Tie-up with Live Bridge Inc. Haly & Bombardier Rotax GmbH of Germany. recognize and are willing to pay a premium for. to look for it. 2002 Hero Cycles Limited ties up with National Bicycle Industries. It is part of our life. Aprilia Scooters. we postpone the decision to try a new for another day. The shaving cream and the shaving razor are familiar and so is the tang of the aftershave. Super Smart Series introduced by Hero Cycles Limited. When a new one appears in the racks. In a departmental store.T. 2006 Hero Honda crosses a unit sales threshold of 3 MILLION motorcycles.

Globally. Sunil k Alagh.the way a true Hero always does. Many have followed the ‘Standard rules’ of becoming a Super brand: great product energy to exploit the market. This is     . the Indian market place has been witnes s to the emergence of a wide variety of Super brands. exceptionally powerful brands. More than 3200 dealers. dealers and customers. Super Brands are actually the big ideas. Mike Khanna. However. have directly or indirectly. leadership is all about capturing the hearts & minds of the people. in 25 countries of the world. GLOBAL GEARING: EXPORTS 24 As early as in the 1960s very few Indian bicycle manufacturers were interested in exports. the super brands go beyond mer e functional promises as they trigger deeply embedded emotional chords. Ambitions.6 crore satisfied customers. a select few. endeavored tirelessly to make Hero Cycle s a phenomenal success and are the true guardians of this brand. the Hero Group s foray into the overseas markets in 1963 pione ered Indian exports in the bicycle segment. Mr. It was a move prompted essentially by the need to remain attuned to the global marketplace. Dilip Sehgal. edge in business technology. While initial exports were restricted to Africa and the Middle East. rele vance to consumer needs of wants. Nabankur Gupta. Considered as “Oscars of Branding”. What makes a Super brand? Own the years. and amongs t that coveted group features Hero Cycles. Tara Sinha and Mr. belief. It is a leap from branding to brand leade rship. employees. today more than 50 percent of the exports from Hero Cycles Limited meet the demands of sophisticated markets in Europe and America. Mr. Mrs. Some of the Indian brands have made it into this unique hall of fame. Piyush Pandey. Anchored in omnipotent consumer insights. its communication and its dealings with suppliers. whi ch 23 provoke us to explore the realms of our dreams and inspire us to live satisfying life styles. the Super Brands i n India were bought by the finest marketing guru of all times Late Shunu Sen and t he unbiased rating agency ‘Super Brands India’ is now headed by advertising in India – Mr. Mr. Mr. We are searching for a Super brand. Yogi C Deveshwar. 4800 employees and more than 9. Each of these values is reflected in the company’s products. superb distribution and superbly chain and consistent quality. Mr. KMS Ahluwalia. besides others. are recognized as Super B rands. empathy and a strong culture of sensitivity are at the heart of Hero Cycles brand. Be it company’s environment friendly manufacturing processes or the brand initiatives fo r the lower income customers. Raghav Bahl.are longer looking for a brand. Mr. Hero Cycles has been one of the most progressive and dynamic brands for the deca des now.

constant ly innovate products and processes. 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. to meet international quality standards. Its products are s upplied to the International Markets of developed countries like United Kingdom. amongst other developed markets. The unit is designed to match international standards and is an Export Oriented Unit (EOU). and develop teams that keep the momentum going to take the group to excellence in everything we do. The Group s exports have gone beyond cycles and their components. Mexico. Turkey and Holland. it became the largest exported moped from India. Argentina. United States and the United Kingdom. Munjal Showa Limited is one of the largest suppliers of shock absorbers to major auto giants in Japan. In 1993 Hero Exports was established as the International Trading Division for G roup and non-Group products. UK and Australia and has offices in UK & U SA to manage client relationships. The success of the Hero Majestic moped did not remain confined to Indian shores. systems and human resources to provide products and services that me et the 26 quality. France etc. at the Hero Group are continuously striving for synergy between technology. The Group has been continuously upgrading technology and has set up special unit s like Gujarat Cycles Limited (now Munjal Auto Industries Limited). performance. Germany . and price aspirations of the customers. NsurePlus) HERO MANAGMENT SERVICE LIMITED(HERO ITES ) MUNJAL SHOWA LIMITED 25 primarily because of appropriate product development and excellent quality that Hero offers. we maintain the highest standards of ethics and societal responsibilities. The Government of India recognizes Hero Exports as a Trading House. Hero Puch is perhaps the first Indian two-wheeler to be homologated abroad (in S pain) and has assembly plants in Mauritius and Egypt. Today Hero Puch mini-motorcycles can also be seen in Paraguay.” The Mission Statement   . Group Company.HERO CYCLES HERO HONDA MOTORS HERO MOTORS HERO CORPORATE SERVICE LIMITED (Hero Mindmine. Munjal Auto Industries Limited has state-of-the -art equipments imported from Europe and Taiwan. Finding enthusiast ic buyers across the world. The company exports services to many Fortune 1000 corporations in the USA. VISION AND MISSION The Vision “We. While doing so. Munjal eSystems.

And finally.A-frame. systems and human resources. As a company with a heart. Mr. Brijmohan Lall Munjal. th at only perfect product passes through his hands. Dayanand Munjal and late Mr. We are co mmitted to move ahead resolutely on this path. every Hero cycle goes through a series of rigorous quality checks before it leaves the fact ory. the soci ety and the nation. Om Prakash Munjal. Though growing incomes. No wonder. to produce products and services that meet the quality.” This mission is what drives us to new heights in excellence and helps us forge a unique and mutually beneficial relationship with all our stakeholders. Satya nand Munjal. environmental compliance endorsement from the Ministry of Environment. Chairman & MD – THE HERO GROUP. shown to us by visionaries like Mr. we maintain the highest standards of ethics and societal responsibilities. with every worker ensuring at each stage manufacturing. the late Mr. Hero is in proud possession of ISO-9001. it’s always believed that there is much more to life than just business. Swan shaped frame. The conformance to quality a t Hero begins on shop floor. By introducing the l oan facilities under ‘Hero Cycle Loan Yojana’ through Corporation Bank and Oriental Bank of Commerce. technically superb machines or world class quality. . D-frame. speedometers & indicators among other Building Relationships At Hero. changing life styles and availability of cheap customer finance has changed the market scenario enormously. Y-frame . through excellence. quality is a tradition. Hero’s production department too believe s in following the zero-defect approach and continuous upgradation of its manufacturi ng systems. it has certain commitments towards its employees. Commitment to its employees is just as important as commitment to the society.“ It’s our mission to strive for synergy between technology. The marketing and operations teams are also constantly creating new and effective strategies using modern management techniques. A technology tie-up with National Bi cycle Industries of Japan led to the launch of the ‘World 1’ series of cycles. besides introduction of new frame designing and features like. be it in the form of well trained labour . Hero Cycles has enabled low income customers to purchase cycles on 28 easy terms. performance a nd price aspirations of our customers. Hero believes that cycles can still be the driving force of the rural economy. Raman Kant Munjal. A ll efforts are taken to make sure that employees are provided the best working cond itions as work culture at Hero revolves around the philosophy-if there’s one way to work. ISO-9002 & BVQI certifications and also ISO 14001. Quality: The Driving Force At Hero Cycles. Mr. While doing so. 27 Constant quality upgradation ensures that the company stays in the global mainst ream and maintains its edge.

Adaptation and Innovation (i) The company is upgrading technology absorption and innovation to enhance its range of product both in domestic and export. DTB. but also those w ho are directly or indirectly exposed to it. However. Benefits derived as a result of the above R & D activities: -This brought the concept of high quality low cost/fancy bicycles. Future plan of action: . Like a true Super Brand.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. vendors and dealers. Fusion. Hero’s perception of customer relationship management (CRM) does not end with merely meeting their expectations and aspirations or by ensuri ng complete customer delight by overnight turnaround of customer complaints. Hero h as been able to attract the respect and awe of not only its users. It goes without say ing that people at Hero are its largest investment and easily the largest asset. wizard. plays a pivotal role in launch of innovative product models on continuous basis. The up graduation of technology through in-house research will assist the compan y in design development to capture the vast untapped market potential. Wonder Years and Brat series to the benefit of masses or high-end technology products like Street Racer. The company believes in delivering value to t he customers even before they feel the need. crusader. 2.it’s with the heart. Yiking Hero and Miss India Series (for the ladies) which completes the total product range. which is recognized by DSIR Govt. .g. Twinkle (Brat) and Tech Team. growth opportunity and respect are the unspoken. Ltd. Job security. This has helped Hero Cycles develop immense brand loyalty and customer satisfaction. 30 (ii) While in Indian market it is directed towards introducing products at lower cost e. Miss India. workers. Some of new designs developed through in house research and registered under Design Act with Controller General of Patents Design and Trade Marks are Anaconda. or the workers sharing their skills with other family members and passing on finest training to each other. Osaka. of India. At Hero Cycles. it has entered into a technical assistance agreement with national Bicycle Industrial Co. yet understood components of every man’s package who chooses to work within the fold of Hero family. there is a strong affinity towards building the relationships with employees. Kashiwara City. Our in-house Research & Development Centre. Japan in 2002 for upgrading its technology. Specific areas in which R&D carried out by the company: -Increasing competiti on in the market place has brought into sharp focus importance of differentiation. 29 RESEARCH AND DEVELOPMENT OF HERO CYCLES 1. Technology Absorption. Moreover India has a very small share of Global Market. (iii) The company has not imported any technology in the last 5 years. It is quite common to find two generations of the same family worki ng together in the company. but it goes several steps beyond that horizon. 3. At customer front too. Our product models excel in meeting expectations from extremely demanding customers of today’s modern era.

Promotions 32 Until 1986. Taking upon ‘Novelty’ itself as a compet itor. students.e. adventure seekers. has been always striving for perfection and innovation in every aspect of their dealings. steel and nickel your company has i ncreased its production by 5. so much so that ‘innovation’ has become a buzz word in Hero premises.R. Rolling out nineteen new models in just one year. Racer Bikes. Hero Cycles begun to feel the need for creating lasting impress ion on the customer’s mind.e. The launch of innovative products and their use as image b uilders happened simultaneously. Hero Cycles was able to launch several new concepts and models in bicycl es like the Mountain Bikes. the Hero Cycles. It needed to communicate to customers the vast portfolio of products that it had. Hero Cycles has been able to use changes and new trends to its advantage by identifying emerging need gaps an d expanding its product portfolio to appeal to different kinds of customers.47% vis a vis previous year by introducing new era light all oy bicycles and powered cycles as well as bikes with a sincere focus on students. Hero’s most advanced & modern R & D department continuously creates innovative products having functional attributes & aesthetics. narrow and thinner strips with short delivery period and fast customization. particularl y in the recreational segment. city customers and fitness con scious. itself speaks volume for Hero’s emphasis on innovations & designs. Your directors are pleased to inform you that despite th e volatility in the prices of main inputs i. the company had no need for mass communication. Though the Stand Alone manufacturer are putting up a stiff competition . INNOVATIONS 31 Born out of Passion The ore goes into fire only to shed off its impurities. meeting the aspirational needs of its proud customers around the glo be. In the mid 1980s Hero was perceived to be the manufacturer of the basic black bicycles. As a result.Outlook During the year 2006-07 the economy has shown further improvements and the GDP has also increased. Similar is the man whose virtues shine when he is tried by the fire of life. Your company comes under mid segment with a capacity to produce up to 800mm wide strips. Dirt Terrain Bikes & D-frame bikes besides crea ting a variety of cycles for different user segments and sub-segments – including women a nd children.Division will do well by putting emphasis on special grades. The pursuit to innovate is endless at Hero. The company required an image change. narrow (400mm) and wide (1650mm). the communication strategy has been to buil . labourers. Since 1986. The industry is furt her classified into Stand Alone manufacturer and Integrated manufacturer. Industry producing the rolling steel strips can be broadly classified into two categories i. But as competition started growing. In it s endeavour to keep a step-ahead of times. your directors are hopeful that company’s C.

Company has long portfolio of differen t range of cycles. Manufactures cycles. The brand has also used celebraties . The latest is India’s new bowling sensation. WORKS) SH. maintains parks and public facilities. Charged with their mission nationalistic fervor. the company has fulfilled its social obligation.D.including film stars Sanjay Dutt. Irfan Pathan who has also been a real life Hero cycle user. free wheels . Hrithik Roshan and Ameesha Patel.hubs & chains and cold rolled strips as a main product. Company has 132models in the list . covers all the three section-gent s. It also manufactures cycles parts for its own requirements. OM PARKASH MUNJAL (CO-CHAIRMAN CUM M. rims . ladies and kids. gave the Hero brand a new meaning. Impact was the preferred choi ce among city riders and Jet was projected as the lightest running roadster while H awk was the racer’s edge. MKTG. such as providing medical facilities for the under privileg ed.) .BS) IN E-BIKE MARKET: 35 · CHINA HITECH · AVON · OPERA · ULTRA · TVS OWNERSHIP OF MANAGEMENT BOARD OF DIRECTORS SH. After fulf illing the requirements of company .KW. the Hero Group has always been actively involved in Social and Medicare activities.d each product separately and create a unique positioning for them. Rani Mukherjee. Hero also runs sch ools and colleges. MAJOR PRODUCTS The Hero Cycles Ltd. & ADMN. Each of these launches and their promotion. In this way th e Ranger was positioned as the bike for outdoor fun. SATYANAND MUNJAL (CO-CHAIRMAN CUM M. 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.it can export its remaining quantity. SOCIAL RESPONSIBILTIES 33 In this way.D. Heart Research Foundation and Mobile Medical Vans. BRIJMOHAN LAL MUNJAL (CHAIRMAN) SH. Hospitals.

Boston Consulting Group has ranked Hero Group as one of the top ten Business Houses on Economic value. 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.R. SURESH CHANDRA MUNJAL (M. Japan is over 20 years old.2 million bicycles in FY 2004. Hero Group is discussed as a case study at London Business School.K. ZAHIR (DIRECTOR) DR. SINGH (DIRECTOR) 36 CHAPTER 2 The Achievements The Group and its management have acquired a number of accolades and achievements over the years: Hero Group Management style has been acclaimed internationally by World Bank and BBC.D. PANKAJ MUNJAL (M. UK. Japan is over 18 years old. Asia’s leading companies award (2003) by Far Eastern Economic Review.A. D. Brijmohan Lall Munjal received the coveted “ Ernst & Young Entrepreneur of the Year” award for 2001.D.) SH. earnings and other v alue relevant information. Hero Cycles Limited is a Guinness Book Record holder since 1986 as the world’s largest manufacture of bicycles.) ASHISH KUMAR MUNJAL (M. Mr. RAI (M. WORKS) DR. --Hero Group’s Partnership with Showa Manufacturing Corporation. The Hero Group is recognized as a long-term partner and an ideal employer: --Hero Group’s Partnership with Honda Motors. Hero Cycles was ranked 3rd amongst top Indian Companies Review 2000 .D. UK and INSEAD. Ohlson(1995) depicted in his w ork that the value of a firm can be expressed as a linear function of book value. NEW HERO AUTO RIM DIV. C. has done a case stud y on the Group as model of entrepreneurship. World Bank has acclaimed Hero Cycles as a role model in vendor development 37 based on a worldwide study. Group Chairman. Hero Cycles is the World’s Largest manufacture of Bicycles with annual sales volume of over 4. INTN’L MARKETING) SH.DIVISION) SH. with annual sales volume of 5. Empirical research on the value relevance has its roots in the theoretical framework on equity valuation models. The London Business School.D. S.SH. DOMESTIC MKTG. Financial statement lending is rarely used for small business lending as it looks at the audited financial statement of companies tha t have an . UK. in India.D.D. SUNIL KANT MUNJAL (M. VIJAY KUMAR MUNJAL (M. M.8 million cycles. Engineering Exports Promotion Council has awarded Hero Cycles with the Best Exporter Award for the last 28 years in succession. France. UNIT TO SAHIBABAD) SH.R.

Another indication of relationship lend ing as reported by Cavalluzzo. 2007 CFA Institute [12] Kallunki. [15] Mingyi Hung. In other words. Rosplock. Journal of Accounting Research [14] Liu.30 No. (1998). Doron Nissim.3. Dec.63 No02. “Is Cash Flow King in Valuations” (2007) Financial Analysts Journal Vol. Available at SSRN.An International Analysis” Journal of Accounting and Economics. The median distance between the firm and the lender was just three miles. pg. information other than data from financial statements. and Thomas (March 2002) “Equity Valuations using Multiples” Journal of Accounting Research 40(1). In contrast.access to public credit market. 2005). Baruch and Paul Zarowin. Vol. "Stock Market Response to IFRS/IAS Cash Flows" 40 (August 11. Third. and Wolken (2001) is that 84 percent of the loans received by small businesses came from lending institutions located in the same city. 57. the information is collected vi a continuous communication between the lender and the small business. collateral and other public resources is collected. Nissim. 100(Iss. Vol. and local community. Allen Berger (1999) defines three conditions that should be met for relationship based finance to occur. banks rely on the subj ective information about a borrower that they received out of the lasting relationships rather than on financial condition of the borrowers. Cavalluzzo. Business Cred it. Juha-Pekka and Paakki. 1999. Eija. 3). [13] Lev. 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 weaknesse s of the firm by establishing strategic relationship between the items the balance sheet. profit . First.. "The Boundaries of Financial Reporting and H ow to Extend Them". and Jacob Thomas. relationship lending. the information is confidential and can be used only for making further lending decisions References Jing Liu.200 0. Second. the customers of the sm all business. “Accounting Standards and Value Relevance of Financial Statements. is based on “so ft” information about the potential borrower. Risk and the financial analyst of the year 2000.

A mar keting research involves the following major steps. To determine the efficiency with which the current assets are managed. FORMULATING RESEARCH PROBLEM The first step in research is formulating research problem. · To know the solvency position of firm. · To know the capability of payment of interest and dividend. To study and analyze the changes in working capital and fund flow position. Marketing is a form of Applied research which proceeds with a certain problem. · To know the efficiency of the management. and a study of the trend of these factors as shown in a series of statement. Tools of financial Analysis: 43 The analysis and interpretation of financial statement is used to determine the financial position and results of operations as well.and loss account and other operative data. To study and analyze the overall profitability of the firm. These varying needs may be:· To know the earning capacity or profitability of the firm. · To know the trend of the business. 5. To analyze the liquidity position of the firm. I t may be further named as “Decisional Research”. Acc. To relate the various items of profit and loss account with sales. B oth types of research are usually known as Applied Research. 6. which gives a concrete answer to a problem. specifies alternative solutions and the possible outcomes of each alternative. A financial analyst may use following methods:· Comparative statements · Ratio analysis · Fund Flow analysis · Common size statement CHAPTER 5 44 45 OBJECTIVES 1. 8. · To know the financial strength of the business. · To make comparative study with other firms. The Marketing Research methodology involves a number of interrelated activities. To study the and analyze the capital structure of the firm. 46 CHAPTER 6 47 RESEARCH METHODOLOGY Basically project study is usually based on a research. which overlap and do not rigidly follow a particular sequence. 2. A number of methods or dev ices are used to study the relationship between different statements.” Purpose of financial statement analysis: The purpose of financial statement analysis depends upon the need of person who is analyzing these statements.“Financial statement analysis is largely a study of relationship amo ng the various financial factors in a business is disclosed by a single set of stat ements. To Myers’. · To provide useful information to the management. It is the most . 3. To compare the assets and liabilities of the current year and previous year. 7. This research may be Problem Solving or Problem Oriented. To analyze the solvency position of the firm. 4.

In this report I have used the information gathered through secondary data which include mainly the Annual Reports of HERO CYCLES LIMITED. The comparative balance sheet has two columns for the data of original balance sheets. In this Project Report I have studied the concept of FINANCIAL ANALYSIS have carried the analysis of the same in HERO CYCLES LIMITED. The changes can be observed by compariso n of the balance sheet at the beginning and at the end of a period and changes can he lp in forming an opinion about the progress of an enterprise.1 50 51 COMPARATIVE STATEMENTS The comparative financial statements are statements of the financial position at different period. 2. common size balance sheet. fund flow statement and Ratios have been in the study. Not only the compar ison of the figure of two periods but also be relationship between balance sheet and income statement may show: i. DETERMINING THE SOURCE OF DATA The next step is to determine the source of data to be used. of time. Absolute data in term of percentages iv. 49 CHAPTER 7 CHAPTER 7.important stage in Applied Research as it rightly said “A problem well defined is half solved”. COMPARATIVE BALANCE SHEET The comparative balance sheet analysis is the study of the trend of the same items. From practical point of view. STATISTICAL TOOLS & TECHNIQUES The statistical techniques like comparative balance sheet. COMPARATIVE INCOME STATEMENT . Increase or decrease in terms of percentages 1. The marketing research may be based on primary or secondary data or on both. A third column is used to show increase in figures. groups of items and computed items in two or more balance sheets of the s ame business enterprise on different dates. generally. Absolute figures (rupee amounts) ii. 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 Rese arch Design is a sound one. The elements of financial position are shown in a comparative f orm so as to give an idea of financial position at two or more periods. These have been ve ry useful in doing the interpretation and analysis of the data collected through se condary sources. Changes in absolute figures (increase or decrease in absolute figures) iii. The fourth column ma y be added for giving percentages of increases or decreases. two financial statements (balance sheet and income statement) a re prepared in comparative form for financial analysis purpose.

Comparative Balance Sheet reveals that total Assets of Hero cycle increased during a year by 17. There has been increase in shareholder funds by 21. Third and fourth columns are used t o show increase or decrease in figures in absolute amounts and percentages respectively .62 Current Assets .52 The comparative income statement gives an idea of a business over a period of time. I) COMPARATIVE STATEMENT A) Comparative Balance Sheet Particulars 2006 2007 Increase/Decrease %age Assets Fixed Assets 1968881237 1893341411 . manufacturing expenses & personal expenses) 9756380835 11733069767 +1976688932 +20. selling expenses & depreciation) 1147615431 1139418653 -8196778 -1. First tw o columns give figures of various items for two years. It has also four columns.84 Investments 2851504001 3843437861 +991933860 +34.06 Less : Cost of Goods Sold (Material consumed.Sundry Debtors 1860512457 2228592486 +368080029 +19. %age Net Sales 11369337410 13308705116 +1939367706 +17.Cash & Bank Balance 69481654 22134657 .31 Less : Operating expenses (Administrative expenses.78 .57 Total Assets 7859455042 9270793939 +1411338897 +17. financial expenses.48 Current Liabilities .Provisions 223706638 19575007 -27956561 -14.79 Deferred Tax Assets (Net) 4892714 19845655 +14952941 +305.16%. 53 HERO CYCLE LTD. 2.76 Operating profit/loss 465341144 313168939 -29124448 -6.43 Net profit Before Tax 636173463 121132797 +575154334 +90.95%. 54 HERO CYCLE LTD B) Comparative Income Statement Particulars 2006 2007 Increase/ Decrease (Rs).16 Loan Funds 1567876432 1732223697 +164347265 +10.26 Gross Profit 1612956575 1575635349 -37321226 -2.64 Less:non operating exp.Inventories 766521142 805661034 +39139892 +5.95 Interpretation 1.61 .75539826 -3.14 Loan and advances 337661837 457780835 +120118998 +35. The changes in absolute data in money values and percentages can be determ ined to analyze the profitability of the business.47346997 -68.28 Total Liabilities 7859455042 9270793939 +1411338897 +17.Liabilities 1640425867 1978589143 +338163276 +20.95 Liabilities Shareholder Fund 4427446105 5364231022 +936784917 +21.25 Add: Other income 1077448184 898158858 -179289326 -16.11 .41 Less : Tax provision for . 906615865 123047757 -783568108 -86.

19 1575635349 11.00 Interpretation The investment in fixed assets.Liabilities 1640425867 20. taxation.00 9270793939 100.00 9270793939 100.Provisions 223706638 2.24 Loan and advances 337661837 4.28 Add: Other income 1077448184 9. II) COMMON SIZE STATEMENT B) Common Size Income Statement Particulars 2006 2007 Amount (Rs. manufacturing expenses & personal expenses) 9756380835 85.10 Less : Tax provision for wealth tax. The ratio of shareholders funds and the loan funds are do not change much.92 Net profit Before Tax 636173463 5.00 13308705116 100.93 Total Assets 7859455042 100.46 Deferred Tax Assets (Net) 4892714 0.67 2228592486 24.81 11733069767 88.2 55 II) COMMON SIZE STATEMENT A) Common Size Balance Sheet Particulars 2006 2007 Amount (Rs.69 . selling expenses & depreciation) 1147615431 10.Sundry Debtors 1860512457 23.) %age Amount (Rs.00 Liabilities Shareholder Fund 4427446105 56.76 805661034 8.wealth tax.34 .84 Less : Operating expenses (Administrative expenses.16 Gross Profit 1612956575 14.75 Less:non operating exp.87 1978589143 21.97 123047757 0. taxation.) %age Assets Fixed Assets 1968881237 25. But t he non operating expenses decreases by 86.42 Investments 2851504001 36. fringe -28757839 -2. financial expenses.43% so net profit increases.28 3843437861 41.09 1139418653 8.) %age Amount (Rs. current assets and investment are same in both t he years.22 56 Current Assets .88 Net profit After tax 664931302 1025585738 +360654436 +54.69 Current Liabilities .30 457780835 4.00 Less : Cost of Goods Sold (Material consumed. CHAPTER 7.53 185742059 1.86 Loan Funds 1567876432 19.88 22134657 0.31% because the rate of increase in sales is less than the rate of increase in cost of goods sold.48 898158858 6.85 19575007 2.56 Operating profit/loss 1147615431 4.Cash & Bank Balance 69481654 0.33 5364231022 57.Inventories 766521142 9.) %age Net Sales 11369337410 100.24 Interpretation There has been decrease in the gross profit by 2.05 1893341411 20. 906615865 7.95 1732223697 18.60 121132797 9.40 .04 . fringe benefit tax & deferred tax -28757839 185742059 +214499898 +745.06 19845655 0.11 Total Liabilities 7859455042 100.09 1139418653 3.

61 +516.41 Net Cash Flow Operating Activity 8382. all inclusive.97% to 0.81% of sales which increase to 88.28 +5751. CHAPTER 7.84% but the company is successful in controlling non operating expenses i.98 Net Cash used in Financing Activity -3471. The funds flow statement analyses only the causes of changes in the firm’s working capital position.47 +396.96 Cash and Equivalent at the End of the Year 694. 60 · Funds may mean change in working capital (the difference between current assets and current liabilities) only.47 -68. 7. statement of changes in financial positi .73 12113.22 -3143.85 -5385.02 Cash and Equivalent at the Begin of the Year 771.25 Net Cash used in Investing Activity -4988.97 -3144.19% to 11. arising from changes in working capital items and from financing and investing activities of the enterprise. Cash Flow Statement Particulars 2006 2007 Increase/ Decrease %age Profit Before Tax 6361.57 benefit tax & deferred tax Net profit After tax 664931302 5.47 -326.87 -36. a firm may prepare a comprehensive.14 CHAPTER 7. The statement of changes in financial position is an extension of the funds flow statement or the cash flow statement.35 -1844.16% in year 2007 resulting the decrease in gross profit from 14.98 -64.50 -90.82 -76.58 Net Inc/Dec in Cash & Equivalent -76.86 -473.85 1025585738 7.68 694. whi ch may involve only non-current items. Therefore.71 Interpretation In 2006 the cost of goods sold is 85.86 -9. The cash flow statement is prepared to analyze changes in the flow of cash only.92% so net profit increases in 2007.e. to get better insights. These statements fail to consider the changes in the firm’s tot al financial resources.55 90. A more comprehensive definition of funds may be given as follows: · Funds may mean change in financial resources.83 2996.35 -473. They do not reveal some significant items that do not affec t the firm’s cash or working capital position. It means: · Funds may mean change in cash only.4 59 FUND FLOW ANALYSIS Definition of Fund A question arises as to the definition of “FUND”. but considerably influence the financing position and asset mix of the firm.3 58 HERO CYCLES LTD.82 221.

47346997 (A) 2696515253 3056388177 Current Liabilities . figure) 137805397 By Balance c/d 1893341411 2106686634 2106686634 Interpretation : As seen from the above analysis that there is increase in worki .Provisions 223706638 195750077 27956561 (B) 1864132505 2174339220 Working capital (A-B) 832382748 882048957 ..Inventories 766521142 805661034 39139892 .Net increase in working capital 4966209 .) Particulars Amount (Rs.Cash & Bank Balance 69481654 22134657 .) To Balance b/d 1968881237 By Adjusted P & L A/c (Dep.49666209 Total 882048957 882048957 435176482 435176482 Note : Provision should be taken as current liability FUND FLOW STATEMENT Sources Amount (Rs.Liabilities 1640425867 1978589143 . Figure) 5179363445 5179363445 FIXED ASSETS Particulars Amount (Rs.) To Dep. and · Changes in the firm’s total financial resources.) Applications Amount (Rs.Sundry Debtors 1860512457 2228592486 368080029 .) Particulars Amount (Rs. · Changes in the firm’s cash position. on fixed Assets 213345223 By Balance b/d 4029233305 To Balance c/d 4966018222 By Deferred Tax 14952941 By Fund from Operation 1135177199 62 (Bal. 61 Statement of Changes in Working Capital Particulars 2006 2007 Effect on Working Capital Increase Decrease Current Assets .338163276 .) Raising of Loans 164347265 Net Increase in Working Capital 49666209 Funds from operation 1135177199 Purchase of Investment 991933860 Purchase of Fixed Assets 137805397 Loan of Advances given 120118998 1299524464 1299524464 WORKING NOTES Adjusted Profit and Loss Account Particulars Amount (Rs.) 213345223 To purchase on Fixed Assets (Bal.on incorporating changes in the firm’s cash and working capital positions involving: · Changes in the firm’s working capital position.

b. ratio analysis is not an end itself. 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 bel ongs.48% and it is being utilized in financing the fixed assets & investments. fraction or percentage. · Calculation of the appropriate ratios from the above data. However. unless several appropriate ratios are analyze d and interpreted. A financial ratio is the relationship between two accounting figures expressed mathematically. of the amount a. The following are four steps involved in the ratio analysis : · Selection of relevant data from financial statement depending upon objective of analysis. but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same keeping in mind the object ive of analysis. According to Kohl er. It is on ly a means of better understanding of financial strength and weakness of a firm. Ratios provide clues to the financial strength. a:b (a is to b). to another. It is with help of ratios that the financial statements can be analyzed more clearly and decisions made from such analysis. expressed as the ration o f a to b.ng capital which. According to Accountant’s Handbook by Wixon. integer. Calculatio n of ratios does not serve any purpose. Kell and Bedford. There are different parties interested in the ratio analysis for knowing the financial . soundness position or weakness of an enterprise. a ratio is the relation. decimal. indicate that company is having sufficient current assets to pay back the current liabilities in time. A ratio can also be expressed as percentage by simply multiplyin g the ratio by 100. CHAPTER 7. or as a simple fraction. 64 MEANING AND CONCEPT OF RATIO ANALYSIS Ratio analysis is a technique of analysis and interpretation of financial statements. One can draw conclusions about the exact financial po sition of a concern with the help of ratios. It is us ed as a device to analyze and interpret the financial health of enterprise. Interpretation of the Ratios Ratio analysis is one of the most powerful tools of financial analysis. There is increase in amount of loans by 10. There are a number of ratios which can be calculated from the infor mation given in the financial statements. a ratio “is an expression of quantitative relationship between two numbers”.5 63 MEANING OF RATIO A ratio is a simple arithmetical expression of the relationship of one number to another. The use of ratios is not confined to financial managers only . · Comparison of the calculated ratios with the ratio of same firm in the past. It is the process of establishing and interpreting various ratios fo r helping in making certain decisions.

The purpose or object for which rations are required to be studied should always be kept in mind for studying various ratios. 65 Guidelines or precautions for use of ratio: 1. The supplier of goods on credit. before reaching final conclusions. Selection of ratios: Another precaution in ratios analysis is the proper sele ction of appropriate ratios. 6. Objective or purpose of analysis: The type of ratios to be calculated will de pend upon the purpose for which these are required. The various liquidity ratios are: current ratio. Only these ratios should be selected which can throw proper light on t he matter to be discussed. which measure the short term solvency or financial position of the firm and are calculated to comment upon the short term paying capacity of concern or firm’s ability to meet its current obligations. example debt equity ratio and interest coverage ratio. 3. Liquidity ratios: These are the ratios.position of a firm for different purposes. 2. Accuracy of financial statements: The ratios are calculated from the data available in financial statements. may be industry standards. situation in the concern. The ratios should match the purpose for which these are required. Use of standards: The ratios will give on indications of financial position o nly when discussed with reference to certain standard. general economic environment etc. He should study any other relevan t information. Functional classification or classification according to tests 66 In view of financial management or according to tests satisfied. Caliber of the analyst: The ratios are the only tools of analysis and their interpretation will depend upon the caliber and competence of the analyst. one can measure the performance of the firm is improving or deteriorating. Ratios provide only a base: The ratios are only guidelines for the analyst he should not base his decision entirely on them. Leverage rat ion . These statements should also be properly audited by competent auditors. shareholders and management all make use of ratio analy sis as a tool in evaluating the financial position and performance of a firm for granting credit. These standard may be rule of thumb as in case of current ratio {2:1}and acid test ratio{1:1}. banks. various ratios have been classified as below: 1. Different objects may require the study of different ratios. Rat ios have wide applications and are of immense use today. financial institutions. investors. Thus. Before calculating ratios one should see whet her proper concepts and conventions have been used for preparing financial statement s or not. providing loans or making investments in the firm. liquid ratio and a bsolute ratio. The precautions will establish the reliability of data given in financial statem ents. He should be familiar with various financial statements and the significance of changes etc. 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. 4. With the use of ratio analysi s. 2. 5. may budgeted or projected ratios etc.

g. The short-term obligations are met by realizing amounts from current. Some ratios are more important than others and the firm may classify them as primary and secondary ratios. The sufficiency or insufficiency of current as sets should be assessed by comparing them with short-term liabilities. thus return on c apital employed is named as primary ratio. e. the following ratios can be calculated: (i) Current ratio (ii) Quick ratio (iii) Absolute quick ratio (i) Current Ratio It is also known as Working capital ratio. the relationship of operating pro fit to sales or the relationship of sales to total assets of the firm. These ratios are also called turnover ratios because it indicates the speed with which assets are being turne d over in to sales example debtor turnover ratio. Moreover a very h igh degree of liquidity will tie funds in current assets. its goodwill in the market is likely to be affected beyond repair. For inter firm comparisons. Analysis Of Short-Term Financial Position The short-term obligation of a firm can be met only when there are sufficient liquid assets. . These should be convertible into cash f or paying obligations of short – term nature. Classification according to significance or importance The Ratios have also been classified according to their significance or importance.show the proportions of debt and equity in financing of the firm. I) LIQUIDITY RATIOS II) EFFICIENCY RATIOS III) SOLVENCY RATIOS IV)PROFITABILITY RATIOS I) LIQUIDITY RATIO It refers to the ability of a concern to meet its current obligation as and when these become due. To measure liquidity of a firm. The other ratios which support or explain th e primary ratio are called secondary ratio. 67 Therefore it is necessary to have a proper balance in regard to liquidity of the firm. floating or circulating assets. The British Institute of management has recomme nded the classification of ratios according to importance for inter firm comparisons. The primary ratio is one which is of prime importance to a concern. 3. Two types of ratio are calculated to measure short-term solvency of a firm. the liquidity position is satisfactory. the ratios may be classified as primary and secondary ratios. It is a measure of liquidity and used in making analysis of short term financial position. If a firm fails to meet such current obligations. If current ass ets can pay-off current liabilities. On the othe r hand. if current liabilities may not easily met out of current assets then the liquidity position will be bad. Activity ratios: Activity ratios are calculated to measure the efficiency wit h which the resources of a firm have been employed.

Current Ratio = Current Assets / Current Liabilities. TABLE 1.) Current assets Current liabilities (ii) Liquid Ratio Liquid Ratio is more rigors test of liquidity than the current ratio.14 TABLE 1. It is the ratio between quick ratio & current liabilities.18 1.) Liquid assets Current liabilities Liquid Ratio 0 . 2:1 69 0 500000000 1000000000 1500000000 2000000000 2500000000 3000000000 3500000000 2006 2007 Years Amount (Rs.1 (Current Ratio) Year 2006 2007 Current assets 2696515253 3056388177 Current liabilities 1640425867 1978589143 Current Ratio 1.64 1. Overall this ratio is satisfactory as it is nearest to the thumb rule i. Liquid Ratio = Liquid assets / Current Liabilities Liquid assets = Current Assets.e. Quick ratio refers to all current ass ets except Inventory & prepaid expenses.5 1 1.5 2 2006 2007 Years Interpretation : It is decreasing in the year 2007 because current liabilities a re increased this year as compare to 2006.54 68 FIGURE 1.1 Current Ratio 0 0.Prepaid Exp – Inventories Year 2006 2007 Liquid assets 1929994111 2250727143 Current liabilities 1640425867 1978589143 Liquid Ratio 1.2(Liquid Ratio) 70 0 500000000 1000000000 1500000000 2000000000 2500000000 2006 2007 Years Amount (Rs.

marketable securities or temporary investments.02 0. Working Capital Turnover Ratio .05 0. Working capital ratio 2.06 2006 2007 Years Interpretation : Viewing the trend of the cash ratio of both the years it can be said that this ratio is not satisfactory because cash and bank balance has been decreased very much in the year 2007 approx.e.01 TABLE 1.3(Absolute Liquid Ratio) 71 FIGURE 1.01 0.04 0. Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities Absolute Liquid Assets = Cash + Bank + Marketable Securities Year 2006 2007 Absolute Liquid assets 69481654 22134657 Current liabilities 1640425867 1978589143 Absolute Liquid Ratio 0. II) EFFICIENCY RATIOS OR ACTIVITY RATIOS 72 0 500000000 1000000000 1500000000 2000000000 2500000000 2006 2007 Absolute Liquid assets Current liabilities Activity ratio measures the efficiency and the effectiveness with which a firm c an manage its resources. 68%.5 2006 2007 Years FIGURE 1. Cash at bank. Inventory turnover ratio 3 Debtor turnover ratio 4.3 Absolute Liquid Ratio 0 0.5 1 1.0. Major ratio given as under : 1. Creditor turnover ratio 1. These are known as the Turnover ratios .5 : 1.03 0. (iii) Absolute Liquid Ratio Cash is the most liquid ratio asset.04 0. because they indi cate the speed with which assets are converted into cash.2 Interpretation: As seen from the analysis this ratio is almost same in both the years quite satisfactory with a thumb rule i. 1. Company’s current assets involv ed large amount of debtors in it. Absolute liquid assets include Cash in hand .

Working Capital Turnover Ratio = Net Sales /Average working capital Year 2006 2007 Net sales 11369337410 13308705116 Average working capital 1170612956. Inventory Turnover Ratio It indicates whether the inventory has been efficiently used or not.47 TABLE 2. of days in a year /Inventory Turnover Ratio Year 2006 2007 No.5 1066944210 Working Capital Turnover Ratio 9.1 Interpretation : Working capital turnover ratio is increasing as we can see from the above table becomes 12. of days in a year 365 365 Inventory Turnover Ratio 16. Inventory at Cost Year 2006 2007 Net sales 11369337410 13308705116 Average inventory at cost 708281512.71 in 2006 due to increase in sales 2.71 12. It indicates th e efficiency with which working capital is being used by the company. Inventory Conversion Period It is calculated to see the average time taken for clearing the stocks. 3.3(Inventory Conversion Period) 75 Inventory Turnover Ratio 0 5 10 15 20 2006 2007 Years .It indicates the velocity of utilization of net working capital.1 (Working Capital Turnover Ratio) 73 FIGURE 2.2 (Inventory Turnover Ratio) 74 Working Capital Turnover Ratio 0 5 10 15 2006 2007 Years Times FIGURE 2. Inventory Turnover Ratio : Net Sales / Avg.47 in 2007 from 9.2 Interpretation : As seen from the analysis there has been slight increase in the ratio.93 Inventory conversion period 23 (days) 22 (days) TABLE 2. Inventory conversion period = No. It indicate d the number of times the stock has been turned over during the period and evaluat es the efficiency with which a firm is able to manage its inventory.93 TABLE 2. Being a manufacturing concern company has to maintain large amount of inventorie s in different forms but on the other side sales are increasing so it is good sign fo r the company.5 786091088 Inventory Turnover Ratio 16.05 16.05 16.

Average Collection Period It represents the average number of days for which a firm has to wait before its receivables are converted into cash.3 Interretation: The company’s inventory conversion period is approximate 25 days which indicates there is no fear of obsolesce of material. Debtor Turnover Ratio This ratio indicates the velocity of debt collection generally higher the ratio means the more efficient management of debtors or more liquid are debtors and vi ce verse. 4.Times FIGURE 2.4(Debtor Turnover Ratio) 76 Inventory conversion period 0 5 10 15 20 25 2006 2007 Years Days FIGURE 2. of days in a year 365 365 Avg.51 TABLE 2.17 6. Collection period 6. Collection period = Number of days in a year / Debtor Turnover Ratio Year 2006 2007 No.5(Average Collection Period) 77 Debtor Turnover Ratio 0 2 4 6 8 10 2006 2007 Years Times Average Collection Period 0 10 20 30 40 50 60 2006 2007 Years .17 6. Debtor Turnover Ratio = Total sales / Average Trade Debtors Year 2006 2007 Total Sales 11369337410 13308705116 Average trade debtors 1844321481 2044552471.4 Interpretation: This ratio has been increased by 34% due to increase in sales bu t at the same time debtors are also increasing which is not feasible in long run. 5.5 Debtor Turnover Ratio 6.51 Average Collection Period 59 days 56 days TABLE 2. Aver.

93 6. Generally higher the ratio better it is or otherwise lowe r the creditor velocity.5 Creditor Turnover Ratio 6. Creditor Turnover Ratio = Annual Purchases / Average Creditors. less favorable are the results.6(Creditor Turnover Ratio) 78 FIGURE 2.7 (Average Payment Period) FIGURE 2.7 79 Creditor Turnover Ratio 0 5 10 15 20 2006 2007 Years Times Average Payment Period 0 10 20 30 40 50 60 2006 2007 Years Days Interpretation: The payment track record of the company is properly designed suc h that timely payment is made to the suppliers. III) SOLVENCY RATIOS The term ‘solvency’ refers to ability of a concern to meet its long-term obligations.5 Interpretation : Company’s average collection period is approximate 60 days or two months. of days in a year 365 365 Creditor Turnover Ratio 6. By analyzing the trend it can be s aid 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 polic y by the creditors.Days FIGURE 2.93 6. Creditor Turnover Ratio This ratio indicates the velocity with which the creditors are turned over in relation to purchases. of days in a year / Creditor Turnover Ratio Year 2006 2007 No.6 7. 6. The long-term indebtness of a firm includes debenture-holders. fina ncial . Year 2006 2007 Annual purchases 8450144997 10318618457 Average creditors 1219309612 1499180490. It means company’s is allowing sufficient time to debtors.88 Average Payment Period 53 (days) 53 (days) TABLE 2. Average Payment Period Average Payment Period = No. It should not b e very much increasing in the long run.88 TABLE 2.

  .2(Equity Ratio) 81 Debt Equity Ratio 0 10 20 30 40 2006 2007 Years Percentage FIGURE 3. whether in for m of debentures. Debt Equity Ratio = Long term Debts / Shareholders Funds*100 Year 2006 2007 Long term Debts 1567876432 1732223697 Shareholders Funds 4427446105 5364231022 Debt Equity Ratio 35.1 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. mortgage or bills.2 Interpretation : Company is relying more shareholder funds than on loan funds. The shareholders funds include equity + preference share capital included capital reserve.1(Debt Equity Ratio) 80 FIGURE 3.Long-term solvency ratio indicate a firm’s ability to meet the fixed interest and costs and repayment schedules associated with its long-term borrowi ngs.institutions providing medium and long-term loans and other creditors selling go ods on installments basis . T his is favourable point for the creditors as company’s equity ratio in 2006 is 59% and in 2007 is 61% . bonds.41 32. As such ratio has been improved and that amount is blocked in inventories. revenue reserve and reserves representing accumulated profits a nd surpluses. (2) Equity Ratio Establish the relationship between shareholders funds and total assets of the company. the components of this ratio are Equity Ratio = Shareholder’s Funds / Total Assets *100 Year 2006 2007 Shareholder’s Funds 4427446105 5367231022 Total Assets 7516900491 8793167449 Equity Ratio 59 61 TABLE 3.29 TABLE 3. Following solvency ratios have been used for this purpose:(1) Debt-equity ratio (2) Equity ratio (3) Solvency ratio (4) Fixed assets to net worth (1) Debt Equity Ratio It shows the relationship between external and internal equities & it is calcula ted to measure the claim of outsiders and owners against company’s assets The outsider s funds include all debts/ liabilities to outsiders.

reserves and surplus and retained earning The rat io can be calculated as follows: Fixed Assets to Net worth Ratio = Fixed Assets (after Dep.4(Fixed Assets to Net worth Ratio) FIGURE 3.e. share capital plus. Solvency Ratio This ratio indicates the relationship between total liabilities to outsiders & t otal assets of the company.) / Shareholder funds * 100 Year 2006 2007 Fixed Assets (after Dep.Equity ratio Year Solvency Ratio 2006 41 2007 39 TABLE 3. more satisfactory/stable in the long term solvency position of the firm. so it implies lo wer the ratio of total liabilities to total assets.30 TABLE 3.The ratio in 2006 is 41% and in 2007 is 39% . 4.3.3(Solvency Ratio) 82 Equity Ratio 0 10 20 30 40 50 60 70 2006 2007 Years Percentage FIGURE 3. Fixed Assets to Net Worth Ratio The ratio established the relationship between fixed assets and shareholders funds i.4 83 Solvency Ratio 0 10 20 30 40 50 2006 2007 Years Percentage Fixed Assets to Net Worth Ratio 0 10 20 30 40 50 2006 2007 Years . Solvency ratio = 100.) 1968881237 1893341411 Shareholder funds 4427446105 5364231022 Fixed Assets to Net Worth Ratio 44.47 35.3 Interpretation : .

1 Interpretation: There has been decrease in the Gross Profit by 2.2(Net Profit Ratio) FIGURE 4. 85 Gross Profit Ratio 0 5 10 15 20 2006 2007 Years Percentage 2.71 86 Net Profit Ratio 0 2 4 6 8 . This r atio is the overall measure of firms profitability and is calculated as: Net Profit Ratio = Net profit after tax / Net Sales *100 TABLE 4.P.19 11.84 7. Gross Profit Ratio Gross profit ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Gross Profit Ratio = Gross Profit / Sales * 100 Year 2006 2007 Gross Profit 1612956575 1575635349 Sales 11369337410 13308705116 Gross Profit Ratio 14.31% because th e rate of increase in sales is less than the rate of increase in cost of goods sold.1(Gross Profit Ratio) 84 FIGURE 4.30% in ye ars 2006 and 2007.47% and 35. Th e nonoperating expenses decrease by 86.Percentage Interpretation: the company’s fixed assets to net worth is 44.43% so net profit increases. Net Profit Ratio Net profit ratio established a relationship between net profit and sales.2 Interpretation : There has been decrease in the Gross Profit by 2. It implies that owners funds are more than total fixed assets and a part of the working capital is provided by the shareholders.84 TABLE 4.P. IV PROFITABILITY RATIOS The following ratios are known as general profitability ratio 1) G. Thus it is calculated by dividing the gross profit by sales. Year 2006 2007 Net profit after tax 664931302 1025585738 Net sales 11369337410 13308705116 Net Profit Ratio 5.31% because the rate of increase in sales is less than the rate of increase in cost of goods sold. Ratio 2) N. Ratio 3) Return on Investment 1.

Moreover. There is decrease in gross profit of the company due to increase in cost of g oods sold but there is increase in net profits due to decrease in non operating expen se.52 TABLE 4.14% 5. CHAPTER 8 87 Return on Investment 0 5 10 15 20 25 30 35 2006 2007 Years Percentage 88 FINDINGS 1. Where as cash decreases very mu ch by 68.31 31.61%. There is stability in equity share capital. Therefore there is blockage of funds.52%. 2. Large amounts of funds are blocked in debtors. Inventory control is not proper. Company should reduce its debtors so that the blocked amount is properly utilized. Company’s is utilizing long term loans to finance fixed assets and investments but it has started relying on own funds. 4. The Company is enjoying a good current position. the safety stock level is also not defined.3 Interpretation: The Company’s overall profitability is improving as return on investment increases from 22.3(Return on Investment) FIGURE 4. So the company should apply the proper Inventory Control System so that there is no wastage of funds. 3. Current liabilities are increasing by 20. Return on Investment Return on Investment = Profit Before interest and taxes / Total investment *100 Year 2006 2007 Profit Before interest and taxes 636173463 1211327797 Total investment 28515040014 3843437861 Return on Investment 22. It should take steps to furt her improve its position by repositioning the composition of current assets as large amount has been block in debtors and inventories.10 2006 2007 Years Percentage 3. 89 CHAPTER 9 90 SUGGESTIONS 1.31% to 31. Debtors are also increasing which is not good sign for the company in long ru n. 2. The Company has not defined the minimum and the maximum stock level scientifically. 3. 91 CHAPTER 10 92 LIMITATION .

which are as follows :1.herocycles. As financial statement are prepared on the basis of a going concern. It does not consider changes in price level. It is only a study of interim reports.com Book Author Management Accounting R. CHAPTER 12 95 96 97 98 99 100 101 102 103 104 105 106 .Financial analysis is a powerful mechanism of determining financial strength and weakness of a firm. The analyst has to make interpretation and draw his own conclusion.com www. 2. 4. 3. Financial analysis is based only upon monetary information & nonmonetary factors are ignored.Sharma Annual Reports of HERO CYCLES LIMITED at ending year 31ST MARCH 2006 AND 2007. 5. But the analysis is based on the information available in th e financial statements. Analysis is only a mean not an end in itself. Thus the financial analysis suffers from some serious inhe rent limitation of financial statements.K. it does not give exact position.google. 93 CHAPTER 11 94 REFERENCES Sites: www.

Sign up to vote on this title
UsefulNot useful