FINANCIAL STATEMENT ANALYSIS AND PERFORMANCE MEASURMENT

ASSIGNMENT
HERO MOTO CORP FINANCIAL ANALYSIS

SUBMITTED BY
G.UMESH CHANDU
REG.NO:13010121169
SEC: A
ROLL.NO:25

1.How would corporate reports of a corporate aid investors and bankers in
decision-making processes? Explain?
A. Financial reporting provide information that is useful to present and potential
investors and creditors and other users in making rational investment, credit and
similar decision. The information should be comprehensible to those who have a
reasonable understanding of business and economic activities and are willing to study
the information with reasonable diligence. External users of financial information
encompass a wide range of interests but can be classified into three general groups:
1. Credit and equity investors
2. Government, regulatory bodies, and tax authorities
3. The general public and special interest groups, labor unions, and consumer groups
Each of these user groups has a particular objective in financial statement
analysis; the primary users are equity investors and creditors. However, the
information supplied to investors and creditors is likely to be generally useful to
other user groups as well. Hence, financial accounting standards are geared to the
purposes and perceptions of investors and creditors.
The underlying objective of financial analysis is the comparative
measurement of risk and return to make investment or credit decisions. These
decisions require estimates of the future, be it a month, a year, or a decade.
General-purpose financial statements, which describe the past, provide one basis
for projecting future earnings and cash flows. Many of the techniques used in this
analytical process are broadly applicable to all types of decision, but there are also
specialized techniques concerned with specific investment interest or, in other
words, risks and returns specific to one class of investors or securities.
The equity investor is primarily interested in the long-term earning power
of the company, its ability to grow, and, ultimately, its ability to pay dividends and
increase in value. Since the equity investor bears the residual risk in an enterprise,
the largest and most volatile risk, the required analysis is the most comprehensive
of any user and encompasses techniques employed by all other external users.
Creditors need somewhat different analytical approaches. Short-terms
creditors, such as bank and trade creditors, place more emphasis on the
immediate liquidity of the business because they seek an early payback of their
investment. Long-term investors in bonds, such as insurance companies and
pension funds, are primarily concerned with the long-term asset position and
earning power of the company. They seek assurance of the payment of interest
and the capability of retiring or refunding the obligation at maturity. Credit risks
are usually smaller than equity risks and may be more quantifiable.
1. Briefly explain as to how MD&A section of the annual report of a
corporate is useful to the analysts?
A. Companies with publicly traded securities have been required since 1968 to
provide a discussion of earnings in the MD&A section. In 1980, the SEC expanded the
requirements to a comprehensive, broad-based discussion and analysis of the
financial statement to encourage more meaning disclosure.
The MD&A will discuss:

Results of operations, including discussion of trends in sales and categories
of expense
Capital resources and liquidity, including discussion of cash flow trends
Outlook based on known trends
Prospective information and required discussion of significant effects of
currently known trends, events, and uncertainties; for example, decline in
market share or impact of inventory obsolescence. Firms may voluntarily
disclose forward-looking data that anticipate trends or events.
Liquidity and capital resources: Firms are expected to use cash flow
statements to analyze liquidity; provide a balanced discussion of operating,
financing, and investing cash flows; and discuss transactions or events with
material current or expected long-term liquidity implication
Extensive disclosure in interim financial statements in keeping with the
obligation to periodically update MD&D disclosures.

2. How is depreciation accounting policy used to window dress the financial
information of a corporate? Explain with example?
A. Depreciation terms used for the systematic allocation of the capitalized cost of
an asset to income over its useful life. Depreciation, the most frequently used of these
terms, its represents the allocation of the cost of tangible fixed assets.
There are several method of allocating depreciation. Those most commonly
employed are:
1. Straightline method
2. Written down value method
Suppose take an example of Asset which it cost is 1000 and its life
span is 5 years and assume its sales are 500 for every
Straightline method:-
In straight line method the value of asset will depreciate by 200 in every year up
to 5 years so that value of asset is as follows:
1
st year
: - 1000, 2nd
year
: - 800, 3
rd
year: -600, 4
th
year: - 400, 5
th
year: - 200
Implications:-
3rd year Fixed asset turnover ratio= Sales/Fixed Assets = 500/600 = 0.8333
Written down value method:
In written down value method asset will depreciate with a fixed percentage every
year, here in this case asset value depreciate every by 20%
Implication:-
3
rd
Fixed asset turnover ratio: - 500/640 = 0.78125
This just one example that Window dress the financial information through
depreciation accounting policies, there are so many different implication involved in it, where
w.r.t Straight method it is showing FATR as .833, where through written down value it is
showing as 0.78125, So through straight line method asset value is 600, whereas through
written value method it is 640 ,that means total asset value in Balance sheet will be more if
go for written down value, it is low through straight line ,depreciation accounting policies
differ the financial information of the company.
4. Explain as how statement of shareholders equity of a corporate is useful to
the existing and prospective investors?
A. Companies generally report components of shareholders equity in order of
preference upon liquidation.
This report gives the information about the total shareholders capital through
stock purchase, about the retained earnings, amount of dividends paid for the stock, and
other comprehensive amount details.
This shows how the company is performing (how equity is growing whether good
are bad).By calculating the growth of the equity through the years we can assess the
companys performance, but the increase in the equity should be quality earnings i.e.;
through the performance of the company but not through issuing of the additional shares or
other financing activities.
This will give information to the existing shareholders about the company
growing and the guide for the investors to know about the company and to arrive at the
investment decision.
This statement reports he amount and changes in equity from capital transactions with
owners and may include the following components:
Preferred shares
Common shares
Additional paid-in capital
Retained earnings
Employee stock ownership plan etc.
5. What are managerial uses for comparative statements?
Companies prepare financial statements of the company at the end of each
accounting year. They are:
1 .Balance sheet
2. Income statement
3. Statement of comprehensive income
4. Statement of cash flows and
5 .Statement of stockholders equity
The management and other financial analysts use these financial statements to
analyze the companys performance over the period. There are different tools available to
analyze these financial results by
1 .Ratios
2. Comparative statements
Comparative statements provide several advantages regarding the analysis of information
about the financial statements.
The company study of financial statements is the comparison of financial statement of
business with the previous year financial statements. It enables the identification of weak
points and applying corrective measures through analyzing balance statement and income
statement.
The comparative income statement provides the results of the operations of
the business. It gives an idea about the progress of the business over a period of time.
The Comparative balance sheet shows the different assets and liability of the
firm of different dates to make comparison of balances from one date to other.
Cash flow statements also give the information about the cash inflows and
outflows occurred from various activities over the years.
By these statements analysis we can know about the profitability, efficiency and financial
soundness of the company over the years.
By the comparative statements we can also calculate the percentage change in each item of
the financial reports and calculate the YOY growth for the years. By this it will give a vivid
picture about the companys performance.
The other way of analyzing is drawing the trend analysis based on the ratios by this we can
draw the trend line which gives the performance chart of the company over the years and
sometimes it is possible to predict the behavior of the company. These are also useful to
compare the other companys performance also.
6. What would the impact of off balance sheet items that would
impact future financial position of corporate?
A. Operating leases have been widely used over the years, although the accounting rules have
been tightened to lessen the use. For example, a company can rent or lease a piece of
equipment and then buy the equipment at the end of the lease period for a minimal amount
of money, or it can buy the equipment outright. In both cases, a company will eventually own
the equipment or building.
The difference is in how a company accounts for the purchase. In an operating
lease the company records only the rental expense for the equipment rather than the full
cost of buying it outright. When a company buys it outright, it records the asset (the
equipment) and the liability (the purchase price). So by using the operating lease, the
company is recording only rental expense, which is significantly lower than booking the entire
purchase price, resulting in a cleaner balance sheet.
Partnerships are another common off balance sheet financing item, and this is
the way Enron hid its liabilities. When a company engages in a partnership, even if the
company has a controlling interest, it does not have to show the partnerships liabilities on its
balance sheet, again resulting in a cleaner balance sheet.
This is very attractive to all companies, but especially to those that are already
highly levered. For a company that has high debt to equity, increasing its debt may be
problematic for several reasons. This can often create liquidity for a company. For example, if
a company uses an operating lease, capital is not tied up in buying the equipment since only
rental expense is paid out. Exchange rate is also an off balance sheet item.
7. Compute, Analysis & interpret the performance of the firm for the
fiscals 2012 & 2013 in term of following:
Liquidity Ratio: The importance of adequate liquidity in the sense of the ability of a
firm to meet current/short-term obligations when they become due for payment can hardly
be overstressed. In fact, liquidity is a prerequisite for the survival of a firm. The short-term
creditors of a firm are interested in the short-term solvency or liquidity of a firm, so that to
find the liquidity of a firm they are main four ratios which illustrate about liquidity of a firm,
they are
1. Current ratio
2. Quick ratio
3. Cash ratio
4. Cash flow from operation
1. Current ratio: - The current ratio of a firm measures its short-term solvency, that is,
its ability to meet short-term obligation. As a measure of short-term/current financial
liquidity, it indicates the rupees of current assets available for each rupee of current
liability/obligation payable. The higher the current ratio, the larger is the amount of rupee
available per rupee of current liability, the more is the firms ability to meet current
obligation and greater is the safety of funds of short-term creditors
Current Ratio results for Hero Moto Corp:-
Current Ratios for Hero Moto Corp are 1.2174, 1.1127 and 0.959 in the years of
2013, 2012, 2011 respectively, by above following observations it will state that liquidity
position of a company was improved by year on year, i.e. current asset are more than current
liability which means that it has more assets in hands than of liabilities, So we can say that its
good Implication of company as it improved in maintaining the current ratio
Disadvantages involved in Current Ratio: -
If we go deeper into the analysis of current ratio it not significant enough to tell the
liquidity of firm because current assets include Inventory, Sometimes Inventories may or may
not generate the revenue, even though we are considering as a current asset, i.e. if inventory
we are having is outdated it is not possible to generate the revenue from the outdated
inventory, so current ratio is not appropriate to calculate the liquidity position, to overcome
this ratios are useful

Quick Ratio: - The acid-test ratio is a rigorous measure of a firms ability to service short-
term liabilities. The useful of the lies in the fact that is widely accepted as the best available
test of the liquidity position of a firm
Quick Asset = Current Asset-Inventories (Stock)
Quick Ratio for Hero Moto Corp:-
In 2013: - 1.0647
2012: - 0.957146
2011: - 0.847019
Above figure shows that quick is better compared to 2012 and 2011, this firm has
better liquidity than past years, so it can easily meet the short obligations
Cash Ratio: - Cash ratio is similar to quick ratio, whereas in the quick ratio we also consider
the trade receivables where here cash ratio we will just take the cash and cash equivalents
Cash Asset: -Quick Asset- Trade receivable
Cash ratios for Hero Moto Corp: -0.9053, 0.8944, 0.825315 for years 2013, 2012, 2011
respectively, this means cash in hand for the firm has more in 2013, so liquidity of the firm
has increased.
Relation between Current, Quick, Cash ratio for Hero Moto Corp: -
For 2013:-
C.A = 1.2174
Q.A = 1.0647
This means Inventory portion in Current Asset is 0.1527 out of 1.2174 (C.A-Q.A), so
firm has less inventory in their hand out of total current asset, it is good implication for the
firm if firm have less inventory in current asset.
Years 2013 2012 2011
Current Ratio 1.2174 1.1127 0.959
Quick Ratio 1.0647 0.957146 0.8477019
Cash Ratio 0.9053 0.894426 0.825315
CFO Ratio 0.6003 0.67757 0.45456277

TURNOVER RATIOS:
Inventory Turnover Ratio:
Years 2013 2012 2011
Inventory Turnover 32.35009 34.474 35.3219
Days Receivable 11.28 10.5876 10.333

Table shows the Inventory turnover which gives as in how many times in an accounting year
the inventory is converted into sales. The no of days has been decreasing over the years,
which mean that the company is managing the inventory in an efficient manner, as well as
procuring inventory as required for the production of its finished products. So lesser the
Inventory Turnover is better for the company, because total revenue is dependent on
Inventory, So lesser the turnover better the total sales of firm, if we see the Inventory
turnover for Hero Moto Corp days for Inventory turnover has less in 2013 compared to 2012
and 2011, i.e. firm managing the inventory well 2013 compared to last 2 years

Debtors Turnover (Trade receivables):

Years 2013 2012 2011
Debtors Turnover 50.71558 58.52328 81.16968
Days 7.19699 6.2368 4.496757

As tabulated, the debtors turnover ratio shows in how many days the debtors pay off their
debts. The ratio is also decreasing over the years, which is a positive sign for the company as
management of debtors and credit period is done in an efficient manner.
Creditors Turnover:
Years 2013 2012 2011
Creditors turnover 11.3103 9.089 8.2295
Credit outstanding 32.271 40.15 44.35
As shown in table 4, the creditors turnover ratio shows in how many days the creditors ask
the company for their payment. As greater the number of days the better it is for the
company. However, it should not exceed more than a year for a manufacturing company. It
leads to accumulation of time liability which should be cleared as and when possible
Fixed Asset Turnover:
Years 2013 2012 2011
FATR 7.586205 6.1655 4.696562

This ratio gives a view of the revenue in terms of the fixed assets. It shows how many times of
its fixed asset (Operating Assets) does the company generate revenue. In 2013 has better
turnover, It shows that the company is utilizing its assets to the fullest. The reason can be a
increase in demand or less competition from its peers.

Total Asset Turnover:
Years 2013 2012 2011
TATR 2.46515 2.38389 1.808452

This ratio gives a view of the revenue in terms of the fixed assets. It shows how many times of
its total asset (Operating Assets) does the company generate revenue. In 2013 has better
turnover, It shows that the company is utilizing its assets to the fullest. The reason can be a
increase in demand or less competition from its peers.

Working Capital Turnover:
Years 2013 2012 2011
Working capital 26.20 48.1676 ---------

As shown in table working capital ratio given an account of how much times of the working
capital is the net sales. This shows the net investment in current assets and liabilities to
generate revenue. Since the working capital decreased in the year 2013, 2012 the ratio shows
a decrease to the working capital. Thus, low investments greater revenue.

Debt-Total Capital:
Years 2013 2012 2011
Debt-total 0.4807 0.566198 0.724409


The debt to total capital gives an account of how much debt constitutes to the total capital
employed. 0.4807 ratios show that 48% of the total capital is debt. It is good for a company to
maintain low debt to its total capital as the finance cost decreases which in turn raises profits
for share holders.

Debt-Equity:
Years 2013 2012 2011
Debt-Equity 0.9259 1.3052 2.62856

The debt equity ratio on an average is 1.61988 over the period of 3 years. This is not so
healthy for the company as debt leads to more financial leverage and fixed charges. In 2012 &
2013 the ratio decreased below one which is a positive sign for the company.
Times interest Earned:
Years 2013 2012 2011
Times Interest 213.2594 135.4934 128.086
This means firm has more earnings to repay back their Interest expenses, Times interest
more in 2013 than past two years ,it will be good for the firm because they can raise funds
easily by both shareholders and debt.
CFO to Debt:
Years 2013 2012 2011
CFO to DEBT 0.407 0.4214 0.29013
This shows how much cash flow from operations has been generated as compared to debt
taken by the company. As we see that Hero Moto Corp is not doing great in generating cash
from operations to meet its debt if at all it is required in an unforeseen situation
Gross Profit Margin:
Years 2013 2012 2011
Gross ratio 0.106913 0.122397 0.124752
The Gross profit gives the profit after deduction of all the direct expenses. Although the sales
have been almost same over the years the proportional increase in direct expenses is more
than increase in sales and therefore the profits slight decrease. Moreover the finance cost has
also been increasing as the debt increases.

Operating Profit Margin:
Years 2013 2012 2011
Gross ratio 0.106913 0.122397 0.124752
The operating profit gives the profit after deduction of all the direct expenses. Although the
sales have been almost same over the years the proportional increase in direct expenses is
more than increase in sales and therefore the profits slight decrease. Moreover the finance
cost has also been increasing as the debt increases
Margin before interest:
Years 2013 2012 2011
Gross ratio 0.106913 0.122397 0.124752
The Margin before interest gives the profit after deduction of all the direct expenses.
Although the sales have been almost same over the years the proportional increase in direct
expenses is more than increase in sales and therefore the profits slight decrease. Moreover
the finance cost has also been increasing as the debt increases
Pretax Margin:
Years 2013 2012 2011
Gross ratio 0.10641 0.121494 0.12392
The profit before tax margin is less than the operating profit margin because of the
impairment of assets and the divesture of Long term Investments added to operating profits.
Thus it decreases and thereby more funds are available to the shareholders funds. The better
the percent the better it is for the company.

Net Profit Margin:
Years 2013 2012 2011
Net profit Margin 0.089118 0.100858 0.099387
Although the net profit is above 8% on an average in the recent years it has gone down. This
is due to increased expenses as well as increased tax expenses
Return on Asset:
Years 2013 2012 2011
ROA 0.263556 0.291843 0.225606
Return on capital employed is given by EBIT/Total Asset. This ratio given in account of how
much the company is earning through the funds of the share holders and borrowed funds.
The greater it is the better and Hero Moto Corp is giving good returns on its capital employed

Return on Equity:
Years 2013 2012 2011
ROE 0.4937 0.815512 0.55638
The return on share holders fund shows the profitability for the shareholders investments in
the given year. The greater it is the more trust worthy the company is for the shareholders,
but 2013 ROE is less than 2012 its shows less return in 2013 than 2012.
Earnings per share:
Years 2013 2012 2011
EPS 106.07 119.09 100.53

8. Analysis & arrived at the implication of cash flow statements
from the viewpoint of shareholders & Debt holder for fiscal 2012,
2013
A. The cash flow statements help to provide answers to user to some of the important
question related to the company such as the following:
How many cash has been generated from normal business operating activities
What have been the other premier financing activities of the firm through which cash
has been raised? What happened to cash so obtained?
How much cash has been spent on investment activities, say, on purchase of new
plant and equipment?
These issues related to cash flow statements, Cash flow are separated into three categories
1. Operating activities
2. Investing activities
3. Financing activities
1. Operating activities: - (cash from operation or CFO) measures the amount of cash
generated or used by the firm as a result of its production and sales of goods and services.
Although deficit or negative cash flows operations are expected in some circumstances, for
most firms positive operating cash flows are essential for long-run survival.
2. Investing activities: -(CFI) reports amount of cash used to acquire asset such as plant and
equipment as well as investments and entire businesses. These outlays are necessary to
maintain a firms current operating capacity and to capacity for growth
3. Financing activities: - (CFF) contains the cash flow consequences of the firms capital
structure decisions, including proceeds from the issuance of equity, returns to shareholders in
the form of dividends and repurchase of equity.
Analysis of CASH FLOW Information:
Free Cash flows and valuation: An important but elusive concept often used in cash
flow analysis is Free Cash flow (FCF). This concept is widely used by analysts (shareholders &
Debtors), the basic element required to calculate FCF are available from the cash flow
statement. The larger the firms FCF the healthier it is, because it has more cash available for
growth, debt payment, and dividends. So that with respect to Shareholders and debtors Free
Cash flows are useful to interpret the Cash flow statements.
FREE CASH FLOWS (FCF) for HERO MOTO CORP: -

Years 2013 2012 2011
Cash flow operations 1890.43 2359.78 2254.16
Cash flow Investing -732.94 92.79 -1322.31
Cash flow Finance -1056.27 -2458.16 -955.23
Free Cash Flow1
(FCF1)
1157.49 2452.57 931.85
Free Cash flow2
(FCF2)
1282.79 1794.73 1890.04

Whereas FCF1 = CFO-CFI
FCF2 = CFO-Capital Expenditure
If the free cash flows are better than it is better for debtors and shareholders,
because this is the free cash that will be taken up by either debtor or shareholder
Where as if we see the Free Cash Flow 2013 has a less free cash flows compared to 2012, this
means a less cash available for shareholders and debtors compared to 2012 ,they are some
many reasons why the cash flows are less in 2013, it may be more on spending more to
sustain operating or for future growth.