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Financial Analysis & Control Systems

Question One Question: You are required to examine in detail the latest available Annual Report and
Accounts of your Company/Group of Companies an in depth analysis of the business & its financial performance. You are required to include the web address of the company that you have selected for your PMA. Failure to do so may result in a delay in marking. The assessment examines three specific factors; (i) Content (ii) Interpretation and (iii) Presentation Specific attention should be addressed to i. ii. iii. The Directors Report The Statement of accounting policies The Financial reports The Cash Flow The Balance sheet The Profit & Loss account The Cash Flow statement The Supporting schedules and Notes to the Accounts Your submission should include: a. A detailed review of the 12 months trading covered by the report b. An examination of the trend analysis covered by the last 5 years key statistics

iv.

For answering first question I have considered Indias no.1 two wheeler company named Hero Honda Limited. It is a listed company & its shares are traded in both major Indian stock exchanges i.e NSE (National stock exchange) & BSE (Bombay stock exchange). So In this PMA detail business review of this company will be done as per the question. The chairman & whole time director of this company is Mr. Brijmohan Lall Munjal. First of all introduction of this company will be given: Web Site Address of this company is www.herohonda.com Manpreet Singh Page 1

Financial Analysis & Control Systems

(1)

Introduction of Hero Honda Limited

Hero Honda Motors Ltd. is the world's largest manufacturer of two wheelers, based in India. The company is a joint venture between India's Hero Group and Honda Motor Company, Japan that began in 1984. In 2001, the company achieved the coveted position of being the largest two-wheeler manufacturing company in India and the World No.1 two-wheeler company in terms of unit volume sales in a calendar year by a single company. Hero Honda has retained that coveted position till date. Today, every second motorcycle sold in the country is a Hero Honda bike. Every 30 seconds, someone in India buys Hero Honda's top-selling motorcycle Splendor. Vision To provide world class affordable & durable personal transport for masses. The Hero Honda story began with a simple vision the vision of a mobile and an empowered India, powered by Hero Honda. This vision was driven by Hero Hondas commitment to customer, quality and excellence, and while doing so, maintaining the highest standards of ethics and societal responsibilities. Hero Honda believes that the fastest way to turn that dream into a reality is by remaining focused on that vision. Mission Hero Hondas mission is to strive for synergy between technology, systems and human resources, to produce products and services that meet the quality, performance and price aspirations of its customers. At the same time maintain the highest standards of ethics and social responsibilities. Strategy Hero Hondas key strategy has been driven by innovation in every sphere of activity building a robust product portfolio across categories, exploring new markets, aggressively expanding the network and continuing to invest in brand building activities.

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Financial Analysis & Control Systems

Manufacturing Hero Honda bikes are manufactured across three globally benchmarked manufacturing facilities. Two of these are based at Gurgaon and Dharuhera which are located in the state of Haryana in northern India. The third and the latest manufacturing plant is based at Haridwar, in the hill state of Uttrakhand. Technology In the 1980s Hero Honda pioneered the introduction of fuel-efficient, environment friendly fourstroke motorcycles in the country. Today, Hero Honda continues to be technology pioneer. It became the first company to launch the Fuel Injection (FI) technology in Indian motorcycles, with the launch of the Glamour FI in June 2006. Products Hero Honda's product range includes variety of motorcycles that have set the industry standards across all the market segments. The company also started manufacturing scooter in 2006. Hero Honda offers large no. of products and caters to wide variety of requirements across all the segments. Distribution The company's growth in the two wheeler market in India is the result of an intrinsic ability to increase reach in new geographies and growth markets. Hero Honda's extensive sales and service network now spans close to 4500 customer touch points. These comprise a mix of authorized dealerships, Service & Spare Parts outlets, and dealer-appointed outlets across the country. Brand The company has been continuously investing in brand building utilizing not only the new product launch and new campaign launch opportunities but also through innovative marketing initiatives revolving around cricket, entertainment and ground- level activation. Hero Honda has been actively promoting various sports such as hockey, cricket and golf. Hero Honda was the title sponsor of the Hero Honda FIH Hockey World Cup that was played in Delhi during Feb-March 2010. Hero Honda also partners the Commonwealth Games Delhi 2010. Manpreet Singh Page 3

Financial Analysis & Control Systems

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Directors Report (2009-2010)


(Rupees in Crores) For the year ended March 31,2010 March 31,2009 13,543.09 12,565.21 1,930.44 (31.68) 180.66 1,781.46

Gross Sales Net Sales and other Income Profit before Interest and Depreciation Less: Interest (net) Depreciation Profit before tax (PBT) Less: Provision for taxation - Current - Deferred Fringe Benefit Profit after tax (PAT) Add: Balance of profit brought forward Balance available for appropriation Appropriations Dividend - Interim (Silver Jubilee Special Dividend)

16,780.62 16,098.79 3,002.58 (20.62) 191.47 2,831.73

591.58 8.32 2,231.83

475.65 19.06 4.99 1,281.76

2,707.28 4,939.11

2,021.77 3,303.53

1,597.50

--

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Financial Analysis & Control Systems

- Proposed Final Dividend Tax on Dividend Transfer to General Reserve Balance carried to Balance Sheet Dividend (%) 5500 1000 Basic and Diluted Earnings Per Share (EPS)(Rs.) 111.77

599.06 371.00 225.00 2,146.55

399.38 67.87 129.00 2,707.28

64.19

1. During the year under review (2009-2010), Company, the worlds largest two-wheeler manufacturer for the past nine years in a row recorded its highest-ever annual revenue, operating income and earnings per share. The Company reported a consolidated turnover (Net sales and other income) of Rs. 16,098.79 crores, a growth of 28.12 percent over the consolidated turnover recorded in the previous financial year, i.e. Rs. 12,565.21 crores. 2. Company achieved the significant landmark of recording total cumulative sales of 30 million two wheelers. 3. Nine new models were launched by your Company across various segments. 4. Declared and paid an Interim Silver Jubilee Special Dividend of 4,000% i.e. Rs. 80 per Equity share of the face value of Rs. 2 each 5. A final Dividend of 1,500% i.e. Rs. 30 per Equity share of the face value of Rs. 2 per share is recommended. 6. Reaffirming the financial strength of the Company. A sum of 225 crores has been transferred to the General Reserve of the Company for the financial year 2009-2010. 7. Company recorded EBIDTA margin of 17.4% as compare to 14.13 % in the last financial year. 8. EPS has improved from 64 Rs to 112 Rs. 9. Pat has increased from 1232 crores last year to 2232 crores in 2009-10. Improvement is about 81% which is very good. 4.1 Board of directors As on March 31, 2010, the Companys board of Directors comprised of sixteen Directors. Four Directors, including the chairman are executive. Four Directors are non-executive & eight directors

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Financial Analysis & Control Systems

are Non-Executive & independent. Fifty percent of the board consists of Independent directors there fore the composition of the board is in consonance with Clause 49 of the Listing agreement. During the period under review, Mr. Arun Nath Maira resigned from the Directorship of the Company w.e.f. July 23, 2009. Mr. Ravi Nath and Dr. Anand C. Burman were appointed as Additional Directors in the category of Non- Executive and Independent Directors with effect from October 14, 2009 and January 13, 2010 respectively.

4.2

Directors Responsibility

Directors make the following statement in terms of Section 217(2AA) of the Companies Act, 1956: 1. That in the preparation of the annual accounts for the year ended March 31, 2010, the applicable accounting standards have been followed; 2. That appropriate accounting policies have been selected and applied consistently and judgments and estimates that are reasonable and prudent have been made so as to give a true and fair view of the state of affairs as at March 31,2010 and of the Profit of the Company for the financial year ended March 31,2010. 3. That proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; 4. That the annual accounts for the financial year ended March 31, 2010 have been prepared on a going concern basis.

4.3

Corporate Governance Hero Honda philosophy of Corporate Governance stems from a belief that the Companys

business strategy & plan should be consistent with the welfare of all its stakeholders, including shareholders. Good Corporate Governance practices enable a Company to attract financial & human capital. In turn, these resources are leveraged to maximize long term share holder value, while preserving the interest of multiple stakeholders, including the society at large.

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Financial Analysis & Control Systems

Hero Honda believes that essence of Corporate governance lies in the phrase Your Company. Hero Honda believes that this company belongs to the shareholders & Chairman and Directors are fiduciaries & trustees of shareholders. Corporate Governance of Hero Honda rests upon the four pillars of 1) Transparency 2) Full Disclosure 3) Independent Monitoring 4) Fairness to All Hero Honda has always strived to promote Good Governance practices, which ensure that: A competent management team is at the helm of affairs The Board is strong with an optimum combination of Executive & Non-executive (including independent) directors, who present the interest of all stakeholders. The Board is effective in monitoring & controlling the Companys affair The Management & Employees have a stable environment.

The Securities & Exchange Board of India (SEBI) has specified certain mandatory Corporate Governance practices, which are incorporated in clause 49 of the Listing Agreement of Stock Exchanges. Hero Honda committed to benchmarking itself with best standard of Corporate governance, not only in form but also in spirit. The Ministry of Corporate Affairs has issued Corporate Governance Voluntary Guidelines 2009 ("Guidelines") for voluntary adoption of the same by the Companies, which are in addition to the mandatory requirements of Clause 49 of the Listing Agreement.

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Accounting Policies

i) Accounting Convention

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Financial Analysis & Control Systems

The financial statements are prepared under the historical cost convention, in accordance with applicable accounting standards and relevant presentational requirements of the Companies Act, 1956. ii) Use of estimates The preparation of financial statements requires the management of the Company to make estimates and assumptions that affect the reported balance of assets and liabilities, revenues and expenses and disclosures relating to the contingent liabilities. The management believes that the estimates used in preparation of the financial statements are prudent and reasonable. Future results could differ from these estimates. Any revision to accounting estimates is recognized prospectively in the current and future periods. iii) Fixed /Intangible assets and depreciation / amortisation Fixed assets are stated at cost less accumulated depreciation. Cost of acquisition is inclusive of freight, duties, taxes and other incidental expenses. Depreciation is charged on a pro-rata basis at the straight line method rates prescribed in schedule XIV to the Companies Act, 1956. Assets covered under employee benefit schemes are amortized over a period of five years. Assets costing upto Rs. 5000 each are fully depreciated in the year of purchase. Intangible assets, comprising of expenditure on model fee etc, incurred are amortised on a straight line method over a period of five years. Leasehold land has been amortised over the period of lease. iv) Investments Current investments are stated at lower of cost and fair value computed Category wise. Long term investments are stated at cost less provision for permanent diminution, if any. v) Inventories Stores and spares and loose tools are stated at cost or under. Raw materials and components, finished goods and work in progress are valued at cost or net realisable value, whichever is lower.

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Financial Analysis & Control Systems

The basis of determining cost for various categories of inventories is as follows:Stores and spares, loose tools, raw materials and components Weighted average cost Materials in transit - Actual cost Work in progress and finished goods - Material cost plus appropriate share of labour, manufacturing overheads and excise duty vi) Employee benefits a) Defined contribution plan Provident fund, Superannuation fund and Employee State Insurance Corporation (ESIC) are the defined contribution schemes offered by the Company. The contributions to these schemes are charged to the profit and loss account of the year in which contribution to such schemes becomes due. b) Defined benefit plan and Long term Employee benefits Gratuity liability and long term employee benefits are provided on the basis of an actuarial valuation made at the end of each financial year as per projected unit credit method. Actuarial gains or loss arising from such valuation are charged to revenue in the year in which they arise. vii) Foreign currency transactions Exchange differences are dealt with as follows:Transactions in foreign currency are recorded at the exchange rate prevailing at the time of the transaction. All loss or gain on translation is charged to revenue in the year in which it is incurred. Monetary assets and liabilities denominated in foreign currency are restated at the rate prevailing at the year end and resultant gain or loss is recognised. In respect of forward contracts, the forward premium or discount is recognised as income or expense over the life of contract in the profit and loss account and the exchange difference between the exchange rate prevailing at the year end and the date of the inception of the forward exchange contract is recognised as income or expense in the profit and loss account. viii) Sales Manpreet Singh Page 9

Financial Analysis & Control Systems

Sale of goods is recognised at the point of dispatch of finished goods to the customers. Gross sales are inclusive of applicable excise duty and freight but are exclusive of sales tax. Services income is recognized when the services are rendered. Scrap is accounted for on sale basis. ix) Warranty claims Warranty costs are provided on accrual basis on the total sales of two wheelers during the year, which are based on past experience of claims. x) Research and development expenses Research and development expenditure of a revenue nature is expensed put under the respective heads of account in the year in which it is incurred. xi) Taxation The provision for taxation is ascertained on the basis of assessable profits computed in accordance with the provisions of the Income-tax Act, 1961. Deferred tax is recognised, subject to the consideration of prudence, on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. xii) Provisions and contingent liabilities Provisions involving substantial degree of estimation in measurement are recognized when there is a present obligation as a result of past events and it is probable that there will be an out flow of resources. Contingent liabilities are not recognized but are disclosed in the notes. xiii) Derivatives Foreign currency derivatives are used to hedge risk associated with foreign currency transactions. All open positions as at the close of the year are valued by marking them to the market and provision is made for losses, if any. Manpreet Singh Page 10

Financial Analysis & Control Systems

(4)

Financial Reports or Statements are formal record of the financial activities of a

business. Financial report or statement is often referred to as an account, although the term financial statement is also used, particularly by accountants. For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include three basic financial statements i.e Balance Sheet, Income Statement (Profit & Loss Account) & Cash Flow Statement. Now one by one these financial reports of Hero Honda will be discussed. First of all Balance sheet will be discussed

( 4.1) BALANCE SHEET HERO HONDA MOTOR LIMITED as at March 31 , 2010


(Ruppes in Crores) Schedule No. SOURCE OF FUNDS SHAREHOLDERS FUND Share capital Reserve & surplus LOAN FUND Unsecured DEFFERED TAX LIABILITIES TOTAL APPLICATION OF FUNDS FIXED ASSETS Gross Block Less : depreciation Net Block Capital work in Progress As at March 31,2010 As at March 31,2009

1 2 3

39.94 3425.08 3465.02 66.03 66.03 166.63 3691.68

39.94 3760.81 3800.75 78.49 78.49 153.08 4032.32

4 2750.98 1092.2 1658.78 48.14 1706.92 2516.27 942.56 1573.71 120.54 1694.25

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Financial Analysis & Control Systems

INVESTMENT DEFFERED TAX ASSETS CURRENT ASSETS, LOAN & ADVANCES Inventories Sundry debtors Cash & Bank balances Other Current Assets Loan & Advances Less : CURRENT LIABILITIES & PROVISIONS Current Liabilities Provisions Net Current assets TOTAL Notes to the accounts

5 8 6

3925.71 7.88 436.4 108.39 1907.21 24.82 405.76 2882.58

3368.75 8.65 326.83 149.94 219.57 5.89 311.26 1013.49

7 3805.06 1026.35 4831.41 (1948.83) 3691.68 12 1525.85 526.97 2052.82 (1039.33) 4032.32

Total Assets: Fixed Assets: Investment: Current Assets: 1706.92 3925.71 2882.58

Total Liabilities: Current Liabilities: Loans: 4831.41 66.03 254.94

Deferred Tax Asset : 7.88 -----------------------------------------------Total Assets: 8523.09 (Values in Rs. Crores)

Deferred tax liability: Total Liabilities: 5058.07

--------------------------------------------

Basic Balance Sheet equation is: Assets = Liabilities + Shareholders equity` 8523.09=5058.07 + 3465.02 8523.09=8523.09 Interpretation of Balance Sheet 1. Loan Fund has decreased from 78.49 crores to 66.03 crores . There is a decrease of 15.9% in loan funds as compare to previous year. It is a good sign that companys loan are getting reduced, but on the same time it also reflects that company is not taking the low interest loan fund to enhance its profits further more. As per schedule 3 this loan fund is basically Sale Tax deferment from the state Government of Haryana. Manpreet Singh Page 12

Financial Analysis & Control Systems

2. Companys fixed asset (gross block) has increased from 2516.27 crores to 2750.98 crores. There is an increase of 9.32% in fixed assets as compare to last year. 3. Cash & bank balances of the company have been increased heavily as compare to last year. Cash & bank balances in the last year were 219.57 crores . In 2009-2020 this figure has been increased to 1907.21 crores. There is an increase of 1687.64 crores . This is very good sign. As per schedule 6 , this increase is basically due to increase in dividend current account from 206.12 crores to 1844.60 crores. 4. Current ration of company as compare to last year has been increased from 0.5% to 0.59%. There is an improvement of 0.09%. Though it is not very good ration it should be around 2%. It shows that companys liquidity position is not very sound. 5. There is a decrease of 8.83% in the value of companys share holder funds. 6. Debtors have decreased from 149.94 to 108.39. It is a good sign showing inward cash flow has improved. As per schedule 6, debtors mainly decreased because of decrease in the uncured debt from 138.88 crores to 102.85 crores. 7. Net Current assets have decreased from -1039.33 to -1948.83. It shows that company is following very aggressive working capital policy. 8. Current liabilities have also increased from 2052.82 to 4831.41. But current asset has also been increased from 1010.49 to 2882.58. Overall current ration has improved. As per schedule 7, liabilities have mainly increased due to interim dividend declared by the company which is 1597.50 crores. Previous year it was zero. In addition to this provision for tax on dividend has also increased from 67.87 crores to 341 crores.

4.2 PROFIT & LOSS ACCOUNT HERO HONDA MOTOR LIMITED


for the year ended March 31 , 2010
(Rupees in Crores) Year Ended 31,2009 13543.09 1223.97 12319.12 246.09 12565.21

Schedule No. INCOME Gross sales Less: Excise duty Net sales Other Income EXPEDITURE

Year Ended 31,2010 16780.62 1022.44 15758.18 340.61 16098.79

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Manufacturing & other expenses Depreciation Interest (net) Profit for the year before tax Provision for taxation current deferred fringe benefit Profit after tax Balance of profit brought forward Balance available for appropriation APPRORIATIONS Dividend Interim proposed Tax on dividend Transfer to general reserve Balance carried to balance sheet Basis and diluted earning per share face value Rs.2/-each(in rupes) Notes to the accouts

10 4 11

13096.21 191.47 -20.62 13267.06 2831.73 591.58 8.32 _ 2231.83 2707.28 4939.11

10634.77 180.66 -31.68 10783.75 1781.46 475.65 19.06 4.99 1281.76 2021.77 3303.53

1597.5 599.06 371 225 2146.55 4939.11 111.77 12

_ 399.38 67.87 129 2707.28 3303.53 64.19

Interpretation of Profit & Loss Account 1. There is a substantial upward movement in the operations during the year since total income has increased by a margin of 28.12 %. Total income increased from 12565.21 crores to 16098.79 crores. It shows very high growth of the company. 2. Profit for the year before tax has increased from 1781.46 crores to 2831.73 crores. In percentage the gross profit has increased by 60 %, it is a very good sign showing that company is really performing well. 3. PAT has increased 74 % as compare to last year. 4. Profit balance which is brought forward (Retained earning) has increased by 33.9%. Value has increased from 1281.76 crores to 2231.83 crores. 5. Earning per share has increased by 74.12% from Rs 64.19 to Rs 111.77 Manpreet Singh Page 14

Financial Analysis & Control Systems

4.3

CASH FLOW STATEMENT HERO HONDA MOTOR LIMITED

for The Year Ended March 31,2010


(Rupees in Crores) Year Ended 31,2010 A CASH FLOW FROM OPERATING ACTIVITIES Net profit before tax Adjustment for Add : Depreciation Loss on Fixed assets sold/discarded Exchange difference Loss of sale of non-trade current investment Provision of diminution in value in investment Current non trade investment Long trade non trade investment Interest-other & financial charges Provision for doubtful debts/written back Less : Interest on long term non-trade investment Interest received on loans, deposits etc Profit on sale of fixed assets Dividend income On current investment - Non-trade On long-term investments - Trade Profit on sale of non-trade current investments Year Ended 31,2009

2831.73 191.47 6.18 2.04 11.8 2.27 0.38 2.1 2.16 218.4 35.13 22.72 0.23 4.12 2.72 208.11 273.03 2777.1 629.82 1.05 630.87 36.71 109.57 146.28 3261.69 575.05 2686.64

1781.46 180.66 3.57 -0.64 38.89 0.2 12.49 2.53 -0.75 236.95 22.04 34.21 0.19 12.77 2.72 184.32 256.25 1762.16 119.95 0.89 112.84 4.6 9.74 14.34 1860.66 501.63 1359.03

Operating profit before working capital changes Adjustment for: Add: Increase in trade payable Increase in security deposits from dealers Less: Increase in trade & other receivables Increase in inventories

Cash generated from operations Less : Direct tax paid Net cash from operating activities B. Cash flow from investing activities Sale of fixed assets Sale of Invest-

1.48 22771.48

1.54 18042.65

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Financial Analysis & Control Systems

ments Inter corporate deposits received back Interest received on long term non-trade investments Interest received on loans, deposits etc. Dividend income On current investment - Non-trade On long-term investment- Trade Less: Purchase of fixed assets Inter corporate deposits paid Purchase of investments

100 16.2 22.72 4.12 2.72 22918.72 211.57 100 23134.78 23446.35 -527.63 2.1 1996.88 97.87 12.46 2109.31 2109.31 49.7 13.45

545.5 21.84 34.21 12.77 2.72 18661.23 315.08 495.5 18711.84 19522.42 -861.19 2.53 379.41 64.48 53.51 -499.93 -499.93 2.09 15.19

C.

Net Cash (used) in investing activities CASH FLOW FROM FINANCING ACTIVITIES Interest paid - other & financial charges Dividend deposited in dividend current accounts Tax on dividend Repayment of long term borrowings Net cash (used) in financing activities

D.

Increase/(decrease) in cash & cash equivalents(A+B+C) Cash & cash equivalents at the beginning of of the year Cash & cash equivalents at the end of the year Cash & bank balances Unrealised exchange loss/(gain)

62.61 0.54 63.15

13.45 -0.35 13.1

Notes to the accounts

12

Interpretation of Cash Flow Statement The performance of the Company with reference to the Cash Flow Statement for the year 2009-2010 given below: Net cash from operating activities is Rs. 2686.64 crores. Total 2686.64 crores net cash flow from operating activities in the end of 2009-10 is considered as the only income in-cash which has increased 97.6 % as compare to last year. Net cash used in investing activities (outflow of cash) is Rs. 527.63 Crores for year 200910. It has reduced by 333.56 crores. So out flow of cash for investing activities is reduced by 38.7% as compare to 2008-2009. Net cash used in financing activities (outflow) is increased to Rs. 2109.31 crores from Rs. 499.93 crores last year. It is mainly due to the dividend deposited in dividend current accounts. Manpreet Singh Page 16

Financial Analysis & Control Systems

Thus net increase in Cash & Cash Equivalents of Rs. 49.70 Crores. Total cash & cash equivalents for the next year is Rs 63.15 crores which was Rs 13.45 crores in the last year.

(5) Financial Ration Analysis


Financial ratios are very useful tool to measure the performance of a business & its financial condition or health. These ratios are calculated from one or more pieces of information from companys financial statements. These ratios indicates companys performance from different perspectives like liquidity , efficiency, investment & profitability etc. Now we will analyze & discuss important ratios one by one for Hero Honda business; Current Ratio : Current ratio may be defined as the relationship between the current asset and current liabilities. It is used to measure the liquidity and is most widely used to make the analysis of short term financial position of the liquidity of the firm. This ratio is calculated by dividing the total of current asset by total of current liabilities. 1. Current ratio = Current assets / Current liabilities Current ratio = 2882.58/4831.41 = 0.59 Low Current ration shows that companys liquidity condition is not very good. But it also indicates that company is using other businesss money to fund its own activities. Generally having more current assets that current liabilities is an indication of sound financial condition of an organization. This liquidity ratio has improved as compare to last year. Last year it was 0.49.
2. Quick Ratio or Acid Test Ratio = (Current Asset Inventories)/Current liabilities = 2882.58 436.40/4831.41 = 2446.18/4831.41 = 0.50

This ratio is more specific that current ration since inventory is not considered in the current asset because stock is not always easy to dispose of in hurry. Company quick ration is also on the lower side but it has improved as compare to last financial year. In last year this liquidity ratio was 0.33.

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Financial Analysis & Control Systems

3.

Stock Turn over ratio = Cost of goods sold/Average inventory = 157580.18 / [(436.40+326.83)/2] = 15758.18/381.65 = 41.2 times

Stock turn-over ration measures the velocity of conversion of stock into sales. A high turnover gives indication of efficient management of stock, because more frequently the stocks are sold, the lesser amount of money is required to finance the stock. There is no prescribed standard given by the financial expert, but in this case the stocks are turned 41.2 times in a year, which is very high and may endanger the firm and may result in stock-out and thus may interrupt smooth flow of the production process. 4. Average Collection Period = Trade Debtors x 365 / Net sales = 108.39x365 / 15758.18 = 2.51 days The average collection period ration represents the average number of days for which a firm has to wait before its receivables are converted into cash. 2.51 days reveal very high recovery of receivable into cash removing the burden of having excess employment of capital into the business. ` 5. Debtors turn-over ration = Net Credit sales/Average debtors = 15758.18 / [(108.39+149.94) / 2] = 15758.18/129.16 = 122 High debtor turn-over ratio indicates the maximum no. of times debtors are turned during the year, which in-turn gives the impression of efficient management of debtors. High turn-over also indicates that cash is realized from the debtors at regular interval with minimum collection period. 6. Working capital turn - over ratio = Net sales / Net working capital = 15758.18/(1948.83) = -8.08 Since the working capital is negative, the company is following very aggressive working capital policy and meets its operating through different reserves. There is minimum inventory; any type of miss happening may lead to interruption in the production process. Manpreet Singh Page 18

Financial Analysis & Control Systems

7.

Debt / Equity ratio (Gearing): This Debt / equity or Leverage Ratio indicates the
extent to which the business is reliant on debt financing (creditor money versus owner's equity):

= Debt/Equity capital = 66.03/3465.02 = 0.019 It shows the company is debt free or has very low debt against equity capital. It indicates that company is not utilizing low cost outside funds to magnify their earnings. Moreover the company is not utilizing any leverage benefits which in-turn reduces profitability. But on the other hand company is mainly relying on shareholders fund & shareholders fund is quite safe & is not risky at all because company is almost debt free. 8. Gross profit ratio = (Gross profit / Net sales) x 100 = (2831.73 / 15758.18) x 100 = 17.9% Gross profit has increased from 14.45 % last financial year to 17.9% this year. This is a positive sign of companys growth. 9. Net profit ratio = (Net Profit/Net sales) x100 = (2231.83/15758.18 )x 100 = 14.1% Net profit ratio has also increased as compare to last year. In last year it was 10.4 %. 10. ROCE or return on capital employed ratio ROCE = ( Earning before tax/Total capital employed ) x100 = (2831.73 / 3691.68) x 100 =76.7% ROCE ratio is very good for the 2009-10 financial year. It is best in the last five years. It is a very good sign for the organization as well as for investors or share holders that company is really give high return on their money. Manpreet Singh Page 19

Financial Analysis & Control Systems

11.

Return on Shareholders fund Return on Share holders fund = (Net profit/ Avg.Shareholders fund) x 100 = (2231.83/ 3632.88) x 100 = 61.43% Shareholders of company got a huge benefit this year, because there is a huge increase in returns. Last year the return was 37.77%. This year the return is best in last five years. It indicates the good performance of the company & shows that company is really utlilising share holders fund effectively.

12.

Earning per share(Rs) = Net Profit after tax/ no. of equity shares = 22318300000/199687500 =111.76 Rupees

Earning per share has increased from Rs. 64.2 last year to Rs. 111.7 this year. High increase in EPS shows companys good performance. Ultimately for share holders profit per share is the most important thing. Earning per share is the highest in last five years. This is really good news for share holders.

(6)

Last five year key Statistics Trend

Five Years Key Statastics Year Sales nos (nos) Growth in sales - % Year Total net income Growth in total income - % Year Profit before tax Profit after tax Reserve & Surplus Manpreet Singh 2005-06 14.5 2005-06 8870 17.4 2005-06 1412 971 1969 2006-07 11.2 2006-07 10090 13.7 2006-07 1246 858 2430 2007-8 3337142 .01 2007-8 10517 4.2 2007-8 1410 968 2946 2008-09 3722000 11.53 2008-09 12565 19.5 2008-09 1781 1282 3761 2009-10 4600130 23.59 2009-10 16099 28.1 2009-10 2832 2232 3425 Page 20 3000751 3336756

Financial Analysis & Control Systems

Total debt Net Fixed assets Earning per sahare (Rs) Dividend per share(Rs)

186 994 48.6 20

165 1355 43 17

132 1549 48.5 19

78 1694 64.2 20

66 1707 111.8 30

1. Sales Nos Trend

Year Sales nos (nos)

2005-06 3000751

2006-07 3336756

2007-08 3337142

2008-09 3722000

2009-10 4600130

Sales Nos Trend


5000000 4500000 4000000 3500000 3000000 Nos 2500000 2000000 1500000 1000000 500000 0 2005-06 2006-07 2007-8 Year 2008-09 2009-10 3000751 3336756 3337142 3722000 4600130

2. Net Income Trend

Years Net Income Manpreet Singh

2005-06 8870

2006-07 10090

2007-08 10517

2008-09 12565

2009-10 16099 Page 21

Financial Analysis & Control Systems

Net Income Trend 18000 16000 Net Income (Crores) 14000 12000 10000 8000 6000 4000 2000 0 2005-06 2006-07 2007-8 Year 2008-09 2009-10 12565 8870 10090 10517

16099

3. Profit Before Tax (PBT)Trend

Year Profit before tax

2005-06 1412

2006-07 1246

2007-08 1410

2008-09 1781

2009-10 2832

Profit Before Tax Trend PBT (In crores) 3000 2000 1000 0 2005-06 2006-07 2007-8 Year Manpreet Singh Page 22 2008-09 2009-10 1412 1246 1410 1781 2832

Financial Analysis & Control Systems

4. Profit After Tax (PAT) Trend Year Profit after tax 2005-06 971 2006-07 858 2007-8 968 2008-09 1282 2009-10 2232

PAT Trend

2500
PAT (in crores)

2000 1500 1000 500 0 2005-06 2007-08 2008-09

2232 1282

971

968

2009-10

Years

5. Debt Trend Year Total debt 2005-06 186 2006-07 165 2007-08 132 2008-09 78 2009-10 66

Total Debt Trend 200 Debt in crores 150 100 50 0 2005-06 2006-07 2007-08 Years 2008-09 2009-10 186

165 132 78 66

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Financial Analysis & Control Systems

6. Net Fixed Asset Trend Year Net Fixed assets 2005-06 994 2006-07 1355 2007-08 1549 2008-09 1694 2009-10 1707

Net Fixed asset Trend Fixed Asset (In crores) 2000 1500 1000 500 0 2005-06 2006-07 2007-08 Years 2008-09 2009-10 994 1355 1549 1694 1707

7. EPS Trend Year Earning per share (Rs) 2005-06 48.6 2006-07 43 2007-8 48.5 2008-09 64.2 2009-10 111.8

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Financial Analysis & Control Systems

EPS Trend
10 2 10 0 8 0 6 0 4 0 2 0 0 11 1 .8 6 .2 4

E S s) P (R

4 .6 8

4 3

4 .5 8

2 0 -0 05 6

2 0 -0 06 7

2 0 -8 07 Yea rs

2 0 -0 08 9

2 0 -1 09 0

Last five year trend analysis shows that Hero Honda business is really in a healthy condition. Sales nos have been increased from 3000751 (2005-06) to 4600130 in 2009-10. Income grown to approximately double from 8870 crores (2005-06) to 16099 crores(2009-10). Debt is decreased drastically year by year & If we we speak about Earning per share it has grown consistently from 48.6 Rs in 2005-06 to 112 Rs in 2009 -10. Trends of this business are really positive & moreover consistent.

(7) Hero Honda Comparison with Competitor


In two wheeler industry the main competitor of Hero Honda is Bajaj auto. But if we compare the main statistics (2009-2010) we will see the hero Honda is having much financial & market position.

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Financial Analysis & Control Systems

Market Price (Rupees) Bajaj Auto Hero Honda 1362 1441.4

Market Cap (Crores) 39411.79 28782.96

Sales Turnover (Crores) 11920 15860

Net Profit (Crores) 1700.11 2231.83

Total Asset (Crores) 4266.92 3531.05

Total Debt (crores) (Crores) 1338.58 66.03

Bajaj auto has more marker capitalization, but still if we will see the sales turnover is much less as compare Hero Honda. Net profit is also on the much lower side as compare to Hero Honda. Total assets of Bajaj auto are more in value but still profit of Bajaj auto is less than Hero Honda. It shows that hero Honda is effectively using its assets to gain profit as compare to its main competitor i.e Bajaj Auto. Hero Honda is a debt free company only 66 crores of short term debt is there, while Bajaj auto has a debt of 1139 crores which is very high as compare to Hero Honda. It indicated that Hero Honda company is more stable company & it financials are much better as compare to its main competitor. If we will from Investor point of view Hero Honda has given 1500% dividend on its face value beside the interim dividend while Bajaj auto has given 400% dividend on its face value. Face value of Hero Honda share is Rs 2 while Bajaj auto is Rs 10. In spite of lower face value of Hero Honda, market price of Hero Honda share is very high.

8. Summary of PMA or Conclusion After analyzing the different financial details in Directors Report, Financial statements (Balance sheet, Income statement, and Cash flow statement), Ration analysis & five years trend of Hero Honda Limited, it is crystal clear that financial health of the organization is very sound. Performance is improving year by year whether it is sales turnover, net profit, receivable money or earning per share. Company is debt free company & its total debt has decreased to 66 crores from 186 crores five years back. Net profit has increased from Rs 971 crores five years back to Rs 2232 crores. More over earning per share is is Rs 112 which was Rs 49 five year back. Company has given a dividend of 1500% beside giving interim dividend which was 4000%. These facts show that companys future is really bright. It has very consistent performance. After analyzing the whole business I am really satisfied with the financial performance based on the facts & figures. I myself would like to invest some money in this company to earn good profit. Manpreet Singh Page 26

Financial Analysis & Control Systems

References 1. Financial analysis& control systems module notes 2. Annual reports of Hero Honda Limited (www.herohonda.com) 3. Financial ratio tutorial by Richard Loth 4. Presentation of Financial statements Standard IAS 1, International accounting standard boards, 5. Analysis for financial management- By Robert Higgins 6. Financial Management R.P.Rustagei 7. Web site www.moneycontrol.com

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