FINANCIAL MANAGEMENT

(MBA234)

CIA 3: ASSIGNMENT ON CAPITAL STRUCTURE AND

DIVIDEND POLICY

MEMBERS:
KHUSHI SHOKEEN (23221062)
PRIYANSHU CHHABARIYA (23221072)
SHWETA VERMA (23221082)

Christ University School of Business and Management

Masters of Business Administration

DR. NIRAKAR NATH PANDEY
 Insights from Ratio Trends:
 Debt-to-equity ratio: This ratio measures the extent to which a company is financed
by debt compared to equity. A lower ratio is generally considered better, as it indicates
that the company is less reliant on debt and has a stronger financial position.
Increasing over the past five years, from 1.36 in 2019 to 1.44 in 2023. This suggests
that the company is taking on more debt to finance its operations. This could be due to
increased investment in growth initiatives, acquisitions, or a decline in profitability.
 Debt ratio: This ratio represents the proportion of a company's total assets that are
financed by debt. A lower debt ratio is also generally considered better, as it indicates
that the company has less debt relative to its assets. Hero Moto Corp's debt ratio is 1,
which means that all of its assets are financed by debt. However, this is likely due to
the fact that the company has very little long-term debt (as shown by the long-term
debt capitalization ratio) and a high proportion of current liabilities, which are
typically settled within a year.
 Equity ratio: This ratio shows the percentage of a company's assets that are financed
by equity. A higher equity ratio is generally considered better, as it indicates that the
company has a stronger financial position and is less reliant on debt. Decreasing
slightly over the past five years, from 0.73 in 2019 to 0.70 in 2023. This suggests that
the proportion of the company owned by shareholders is shrinking. This could be due
to the company issuing new shares to raise capital or repurchasing its own shares.
 Long-term debt capitalization ratio: This ratio measures the proportion of a company's
long-term debt to its total capital. A lower ratio is generally considered better, as it
indicates that the company is less reliant on long-term debt, which can be more
expensive than other forms of financing. Hero Moto Corp's long-term debt
capitalization ratio is 0.06, which is very low and suggests that the company has very
little long-term debt. Decreasing steadily over the past five years, from 0.061 in 2019
to 0.056 in 2023. This is a positive trend, indicating that the company is relying less
on expensive long-term debt to finance its operations.
 Total debt capitalization ratio: This ratio measures the proportion of a company's total
debt (including both long-term and short-term debt) to its total capital. A lower ratio is
generally considered better, as it indicates that the company is less reliant on debt
overall. Fluctuating slightly over the past five years, but remaining around 0.59 which
is relatively low and suggests that the company has a moderate level of debt. This
suggests that the company maintains a moderate level of overall debt.
 Overall, the capital structure ratios for Hero Moto Corp indicate that the company is
in a strong financial position. The company has a low debt to equity ratio, a high
equity ratio, and a low long-term debt capitalization ratio. These ratios suggest that
the company is well-financed and has a good ability to meet its financial obligations.
Suggestions for Hero MotoCorp:
 Monitor and control debt growth: While the current debt levels are manageable, the
rising debt-to-equity ratio warrants close attention. The company should consider
strategies to control debt growth, such as optimizing working capital, exploring
alternative financing options, or focusing on internal cash generation.
 Evaluate the reasons behind the constant debt ratio: Investigate the factors
contributing to the unchanging debt ratio despite the increasing debt-to-equity
ratio. Understanding the underlying reasons can help the company make informed
financial decisions.
 Maintain a balanced capital structure: The company should strive for a capital
structure that balances the benefits of debt and equity financing. This can involve
optimizing the debt-to-equity ratio and ensuring a healthy mix of long-term and short-
term debt.
 Continue reducing reliance on long-term debt: The decreasing long-term debt
capitalization ratio is a positive trend that should be encouraged. The company can
explore further avenues to decrease reliance on expensive long-term debt, potentially
lowering financing costs.
 Transparently communicate debt strategy: Investors and stakeholders value clear
communication about a company's debt strategy. Hero MotoCorp should openly
discuss its plans for managing debt and its long-term financial goals.
 Evaluate debt management strategies to control debt growth and maintain a healthy
capital structure. The company should consider a number of options to control its debt
growth, such as issuing new equity, reducing its dividend payout, or selling off assets.
 Consider exploring long-term debt options for potential cost benefits if necessary. If
the company does need to take on more debt, it should consider long-term debt
options, as they are typically cheaper than short-term debt.
FINANCIAL HIGHLIGHTS
During FY 2022-23, Hero MotoCorp clocked sales of 53.29 lakh units over 49.44 lakh units
in the previous FY. Revenue from operations was 33,805.65 crore as compared to 29,245.47
crore in FY 2021-22, registering an increase of 15.59%. Profit before tax (PBT) in FY 2022-
23 was 3,874.56 crore as compared to 3,250.13 crore in FY 2021-22, reflecting an increase of
19.21%.
Profit after tax (PAT) was 2,910.58 crore as against 2,473.02 crore in FY 2021-22, an increase
of 17.69% from the previous year. Earnings before Interest, Depreciation and Taxes
(EBIDTA) stood at 11.79% in FY 2022-23, as compared to 11.52% in FY 2021-22.
CHANGES IN CAPITAL STRUCTURE During the year under review, 27,777 equity shares
of ` 2/- each were allotted on exercise of Employee stock options and Restricted Stock Units
by the employees of the Company.

INSIGHTS INTO RATIOS:

1. Time Interest Earned: This ratio shows the company's ability to cover interest
expenses with its operating income. The trend shows a consistent increase over the
past five days, indicating improved financial stability. This means that the company
has been generating enough operating income to comfortably cover its interest
expenses, which is a positive sign for its financial health.
2. Dividend Payout Ratio: This ratio measures the proportion of earnings paid out as
dividends. The trend shows a slight decrease, suggesting the company is retaining
more earnings for growth or other purposes. This indicates that the company is
prioritizing reinvestment in the business rather than distributing a large portion of its
earnings as dividends. By retaining more earnings, the company can allocate funds
towards expansion, research and development, or other strategic initiatives.
3. Retention Ratio: This ratio represents the proportion of earnings retained by the
company. The trend shows some fluctuations, indicating varying levels of
reinvestment in the business. The fluctuations in the retention ratio suggest that the
company's management is making decisions on whether to reinvest a larger or smaller
portion of its earnings back into the business. This flexibility allows the company to
adapt its reinvestment strategy based on market conditions or specific growth
opportunities.
4. Interest Expense to Revenue: This ratio indicates the company's interest expense
relative to its revenue. The trend shows a slight increase, which may indicate higher
borrowing costs or a change in the company's financing structure. The increase in the
interest expense to revenue ratio suggests that the company may be facing higher
interest rates or taking on additional debt to finance its operations or growth
initiatives. It is important for the company to closely monitor its borrowing costs and
evaluate the impact on its overall financial performance.
5. Return on Equity: This ratio measures the profitability of shareholders' investments.
The trend shows a relatively stable return on equity over the past five days, indicating
consistent performance. A stable return on equity indicates that the company is
effectively utilizing shareholders' investments to generate profits. This is a positive
signal for investors as it demonstrates the company's ability to generate returns on
their capital.
6. Dividend Coverage Ratio: This ratio indicates the company's ability to cover dividend
payments with its earnings. The trend shows minor fluctuations, suggesting a
relatively stable ability to meet dividend obligations. The minor fluctuations in the
dividend coverage ratio indicate that the company's earnings are generally sufficient
to cover its dividend payments. This is important for investors who rely on dividends
as a source of income, as it provides reassurance that the company has the financial
capacity to sustain its dividend payments.
7. Return on Assets: This ratio measures the company's profitability relative to its total
assets. The trend shows a slight increase, indicating improved asset utilization and
profitability. The increase in the return on assets ratio suggests that the company is
becoming more efficient in utilizing its assets to generate profits. This could be a
result of improved operational processes, cost management, or strategic investments
in assets that generate higher returns.
8. Interest Coverage Ratio: This ratio shows the company's ability to cover interest
expenses with its operating income. The trend is consistent with the Time Interest
Earned ratio, indicating a favourable ability to cover interest expenses. The consistent
trend in the interest coverage ratio aligns with the positive trend in the time interest
earned ratio. This indicates that the company has a favourable ability to cover its
interest expenses with its operating income, which is a crucial factor in maintaining
financial stability.
9. Gross Profit Ratio: This ratio measures the proportion of gross profit to revenue. The
trend shows minor fluctuations, suggesting a relatively stable gross profit margin. The
minor fluctuations in the gross profit ratio indicate that the company's gross profit
margin has remained relatively stable over the past five days. This suggests that the
company has been able to maintain a consistent level of profitability after accounting
for the cost of goods sold.
10. Net Profit Ratio: This ratio represents the proportion of net profit to revenue. The
trend shows minor fluctuations, indicating a relatively stable net profit margin. The
minor fluctuations in the net profit ratio suggest that the company's net profit margin
has remained relatively stable over the past five days. This indicates that the company
has been able to maintain a consistent level of profitability after accounting for all
expenses and taxes.
11. Operating Profit Ratio: This ratio measures the proportion of operating profit to
revenue. The trend shows minor fluctuations, indicating a relatively stable operating
profit margin. The minor fluctuations in the operating profit ratio suggest that the
company's operating profit margin has remained relatively stable over the past five
 days. This indicates that the company has been able to maintain a consistent level of
profitability from its core operations.
Based on these trends, it appears that the company is maintaining consistent profitability and
financial stability. However, there is room for improvement in certain areas such as the
dividend payout ratio and interest expense to revenue ratio. To further enhance performance,
the company could consider increasing its dividend retention ratio, reducing interest
expenses, and focusing on optimizing asset utilization. Additionally, conducting a detailed
analysis of expenses and revenue sources could provide insights for further improvement. By
closely monitoring these ratios and making strategic adjustments, the company can continue
to strengthen its financial position and drive sustainable growth.