RATIO ANALYSIS OF HERO HONDA MOTORS PVT.

LTD

HISTORY

Hero Honda Motors Limited, based in Delhi, India is a joint venture between the Hero Group of India and Honda of Japan. It has been referred to as the world's biggest manufacturer of 2-wheeled motorized vehicles since 2001, when it produced 1.3 million motorbikes in a single year. During the fiscal year 2008-09, the company has sold 3.28 million bikes and the net profit of the company stood at Rs. 1281.7 Crore, up 32% from the previous fiscal year.

Herois the brand nameused by the Munjal brothers fortheir flagship company Hero Cycles Ltd. A joint venture between the Hero Group and Honda Motor Company was established in 1984 as the Hero Honda company, India.

Hero Honda has three manufacturing facilities based at Dharuhera and Gurgaon in Haryana and at Haridwar in Uttarakhand. These plants together are capable of churning out 3.9 million bikes per year. Hero Honda's has a large sales and service network with over 3,000 dealerships and service points across India. The 2006 Forbes 200 Most Respected companies list has Hero Honda Motors ranked at 108.

The Group Chairman, Mr. Brij Mohan Lall Munjal has actively looked at diversification. A considerable level of vertical integration in its manufacturing activities has been present in the Group's growth and led to the establishment of the

Hero Cycles Cold Rolling Division, Munjal and Sunbeam Castings, Munjal Auto Components and Munjal Showa Limited amongst other component-manufacturing units.

Expansion into the automotive segment started with the setting up of Majestic Auto Limited, where the first moped designed entirely in India, Hero Majestic, went into commercial production in 1978. The Hero Group also plans to expand into other segments like exports, financial services, information technology, insurance and telecommunication.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

INTRODUCTION

The study of the company name Hero Honda is done in order to do the Ratio Analysis of the company. The company growth has been much higher by every year. The ratio analysis actually helps us in finding the actual growth of the company for every year of the company. The study actually gave us the broader aspect of the company and analysing the different ratios of the company. The ratios are done for the past five financial years till March 2009.

Once the company analysis is done, then the analysis is done for the industry for the financial year March 2009. The ratios are evenly analysed for the same industry as well. On the basis of ratio analysis, the interpretation can be done in respect of different segments of the ratio analysis.

The study continues for the comparison of the company and industry for the financial year March 2009. This comparison actually helps in doing the analysis and knowing the growth of the Company in respect to the industry. The different segment of ratio analysis has broadly given a lot of knowledge regarding the financial condition of the company and industry.

Thus, the study conducted has generated a lot of knowledge for the company and industry as well. The ratio analysis of the company and industry gives a broader analysis for the same.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

RATIO ANALYSIS AND INTERPRETATION OF THE COMPANY

The data collected for the company helped us in generating the following ratios which are as under: -

1. Profitability ratio 2. Liquidity ratio 3. Leverage ratio 4. Turnover ratio

PROFITABILITY RATIO: 1. NET PROFIT RATIO =

Profit after tax /total sales *100 Years Total sales (Rs. In Profit after tax (Rs. In Net profit ratio Crore) Crore) 2005 8792.46 810.47 9.22 2006 10254.06 971.34 9.47 2007 11731.75 857.89 7.31 2008 12518.83 967.88 7.73 2009 14106.04 1281.76 9.09

INTERPRETATION: The ratio shows that the profit increased from 9.22% in 2005 to 9.47% in 2006.This ratio provides some indication of the cushion available to the company in the event of an increase in cost or a drop in sale prices in the phase of recession or of greater competition. Similarly in 2008, the total sale and profit after tax increased substantially but net profit ratio increased marginally. In 2009, total sale, profit after tax and net profit ratio increased substantially. It indicates that the net profit ratio is totally dependent on profit after tax and profit after tax may not increase in the same ratio as the sale increases.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

2. RETURN ON ASSET RATIO =

Profit after tax / average total asset

Years Profit after Current Fixed Average total Return on tax (Rs. In asset (Rs. In asset (Rs. asset (Rs. In asset ratio Crore) Crore) In Crore) Crore) 2005 810.47 554.53 715.33 634.93 1.28 2006 971.34 821.24 993.56 907.4 1.07 2007 857.89 913.27 1355.45 1134.36 0.76 2008 967.88 936.78 1564.75 1250.765 0.77 2009 1281.76 1013.49 1694.25 1353.87 0.95

INTERPRETATION: -

This is a measure of profitability from a given level of investment .It is an excellent indicator of overall performance of a company. The return on asset of the company was 1.28 in 2005.over

the years it declined to 1.07 in 2006, 0.76 in 2007.with a slight improvement it raised to 0.77 in 2008 and 0.95 in 2009.there is a significant decline in the overall profitability of the company. Though average total assets increased every year but the return on asset ratio decreased because current and fixed assets did not increased as the profit after tax increased. Especially only in the year 2007, profit after tax decreased, and current fixed and including average assets increased but the return on asset ratio has decreased.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

3. OPERATING RATIO =

Operating cost / total sales * 100

Operating Cost =

Total sales - operating profit

Years Total sales (Rs. In Operating Operating Operating crore) profit (Rs. In cost (Rs. In ratio crore) crore) 2005 8792.46 1308.56 7483.9 85.12 2006 10254.06 1529.78 8724.28 85.08 2007 11731.75 1387.49 10344.26 88.17 2008 12518.83 1573.76 10945.07 87.43 2009 14106.04 1964.64 12141.4 86.07

INTERPRETATION: -

Operating ratio indicates the ratio of operational cost to sales. Operating cost consist of cost of goods sold and other operating ratio. The operating ratio is 85.12% in 2005 and 85.08% in 2006.the operating ratio in 2007 was 88.17%, with a decline to 87.43% in 2008 and 86.07% in 2009.the higher ratio indicates lower efficiency because a major part of sales is eaten up by the operating cost. This ratio implies that the company is incurring higher degree of operational expense, selling and distribution expenses, which needs to be brought down. The increase in operating profit has affected to reduce the operating ratio.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD 4. GROSS

PROFIT RATIO =

Gross profit / sales * 100

Cost of goods sold = Average inventory + purchases

Gross profit = Sales - cost of goods sold

Average Purchases(Rs. Cost of goods Gross Gross profit Years inventory (Rs. In crore) sold (Rs. In profit ratio In crore) crore) (Rs. In crore) 2005 204.26 258.05 462.31 8330.15 94.74 2006 226.55 342.93 569.48 9684.58 94.45 2007 275.58 58.56 334.14 11397.61 97.15 2008 317.1 0 317.1 12201.73 97.47 2009 326.83 0 326.83 13779.21 97.68

INTERPRETATION: -

The gross profit ratio reveals the profit earning capacity of the business with reference to its sales. The gross profit ratio was 94.74% in 2005 with a slight decline in 2006.thereafter the gross profit ratio increased to 97.15% in 2007, 97.47% in 2008 and 97.68% in 2009.this increase in ratio shows reduction in cost of production or direct expenses or sale at reasonably good prices. It can be analysed that when the cost of good sold is higher than the average inventory, the gross profit ratio is lower, though gross profit increases. In case of average inventory is equivalent to the cost of good sold then the gross profit ratio increases, resultant in to increase in gross profit ratio.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

LIQUIDITY RATIO

1. CURRENT RATIO =

Current assets / current liabilities

Year Current assets (Rs. In Current liabilities (Rs. Current Ratio Crore) In Crore) 2005 554.52 1500.47 0.37 2006 792.49 1562.8 0.51 2007 863.27 1479.16 0.58 2008 886.78 1824.74 0.49 2009 1013.49 2052.82 0.49

INTERPRETATION: -

Current ratio is dependent on current liabilities. It can be

observed that the current liability has increased every year in a remarkable percentage where as current assets increased marginally. Due to increase in the percentage of current liability in comparison increase in current asset, the current ratio decreases.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD 2. QUICK RATIO/ ACID TEST RATIO =

Quick assets (Current assets-Inventory) / current liabilities

Current Inventory Current Net Current assets Quick Ratio Year assets (Rs. (Rs. In Liabilities (Rs. (Rs. In Crore) In Crore) Crore) In Crore) 2005 554.52 204.26 1500.47 350.26 0.23 2006 792.49 226.55 1562.8 565.94 0.36 2007 863.27 275.58 1479.16 587.69 0.40 2008 886.78 317.1 1824.74 569.68 0.31 2009 1013.49 326.83 2052.82 686.66 0.33

INTERPRETATION:-

Quick ratio is affected by the current liabilities. Increase in current liabilities cause a reduction in quick ratio. In 2007 when current liabilities were minimum, quick ratio was maximum. Though net current asset was higher than the year 2005,2006 and

2008, but lower than 2009. hence, it can be interpreted that the quick ratio is totally related to the current liabilities.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD 3. ABSOLUTE CASH RATIO =

(Cash In hand + Marketable securities) / Current Liabilities

Cash Marketable Current Total Absolute Cash Year (Rs. In securities liabilities (Rs. In cash (Rs. ratio Crore) Crore) In Crore) 2005 17.6 0 1500.47 17.6 0.01 2006 158.72 0 1562.8 158.72 0.10 2007 35.78 0 1479.16 35.78 0.02 2008 131.09 0 1824.74 131.09 0.07 2009 219.57 0 2052.82 219.57 0.11

INTERPRETATION: -

Total cash is directly related to the current liability though the percentage increase or decrease of total cash in comparison to current liability is not same every year. The increase in total cash has directly affected the absolute cash ratio. During the year 2005,

the current liability was about 1500 Crore where as total cash was 17.6 and absolute cash ratio turned out to be 0.01. But during the year 2007, the current liabilities decreased marginally and total cash increased almost double. In other years the increase in current liabilities and total cash ratio are almost in the same ratio.

RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

LEVERAGE RATIO

1. FINANCIAL LEVERAGE =

Earning before interest and tax / earning before tax

years Earning before interest and tax (Rs. Earning before financial leverage In Crore) tax (Rs. In Crore) 2005 1308.56 1306.63 1.001 2006 1529.78 1526.86 1.004 2007 1387.49 1385.88 1.001 2008 1573.76 1571.76 1.001 2009 1969.65 1962.12 1.004

INTERPRETATION:

Financial leverage is the ratio between earning before tax and earning before interest and tax. Since in all the year, the difference between both are same, hence financial leverage ratio also remains

same except in the year 2006 and 2009 where difference between earning before interest and tax and earning before tax increased which resulted into the increase in the financial leverage.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

2. DEBT EQUITY RATIO =

Long term liability / shareholders fund

Years Long term liabilities Shareholders fund debt equity ratio (Rs. In Crore) (Rs. In Crore) 2005 201.76 1493.38 0.14 2006 185.78 2009.33 0.09 2007 165.17 2470.06 0.07 2008 132 2986.24 0.04 2009 78.49 3800.75 0.02

INTERPRETATION: -

Debt equity ratio indicates the relationship between long term debts

and equity. By this we come to know that at a point of time how much is the state of owners as comparedto those who have given long termloans. Higher the ratio high is the risk in extending the loan. From the above data we can see that the indebt ness of the company is decreasing this is good for the company as it can raise more loans with least amount of risk.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

3. INTEREST COVERAGE RATIO =

Earning before interest and tax / interest

Years Earning before Interest (Rs. In Crore) interest coverage ratio interest and tax (Rs. In Crore) 2005 1308.56 1.93 678.01 2006 1529.78 2.92 523.9 2007 1387.49 1.61 861.79 2008 1573.76 2 786.88 2009 1969.65 2.53 778.52

INTERPRETATION: -

Interest coverage ratio is also known as debt service ratio or

fixed charge coverage ratio. Interest coverage ratio deals with the ability of the enterprise to honour its interest payment out of its profits. If the ratio is low then risk is more for the payment of interest. From the above data we can see that the interest coverage ratio once decreases in 2006 and after that it increases in 2007 which is a good sign and after 2007 it is again decreasing.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

4.

PREFERENCE DIVIDEND COVERAGE RATIO =

Profit after tax / preference dividend

Years Profit after Preference dividend preference dividend coverage ratio tax (Rs. In (Rs. In Crore) Crore)

2005 810.47 3.66 221.44 2006 971.34 10.41 93.31 2007 857.89 11.96 71.73 2008 967.88 6.96 139.06 2009 1281.76 15.49 82.75

INTERPRETATION: -

Preference dividend coverage ratio deals with the ability of the

enterprise to honour its dividend payment out of its profits. If the ratio is low then risk is more for the payment of preference. From the above data we can see that the preference coverage ratio is been declining to a certain extent.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

ACTIVITY / TURNOVER RATIO

1. INVENTORY TURNOVER RATIO =

Sales / Average inventory

Year Sales (Rs. In Avg. Inventory (Rs. Inventory Turnover Ratio Crore) In Crore) 2005 8792.46 204.26 43.05 2006 10254.06 226.55 45.26 2007 11731.75 275.58 42.57 2008 12518.83 317.1 39.48 2009 14106.04 326.83 43.16

INTERPRETATION: -

Inventory stock turn-over ration measures the velocity of conversion of stock into sales. a high turn-over gives the indicates 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 out to be 42.71 times in a year on average, 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.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD 2. DEBTORS TURNOVER RATIO =

Sales / Average Accounts Receivable

Year Credit Sales Avg. acc. Receivables (Rs. Debtors Turnover Ratio (Rs. In crore) In crore) 2005 8792.46 330.2 26.63

2006 10254.06 404.28 25.36

2007 11731.75 547.75 21.42

2008 12518.83 435.09 28.77

2009 14106.04 455.93 30.94

INTERPRETATION: -

The higher debtor turn-over ratio indicates the maximum number of times the debtors are turned during that year, which in-turns gives the impression of efficient management of debtors

There is no prescribed standard given by the financial experts but if the debtors turnover is high, gives an indication that the cash is realized from the debtors at regular intervals with minimum collection period. In this case the debtors turnover ratio increases which indicates better management of receivables.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

3. STOCK HOLDING PERIOD =

365 / Inventory turnover ratio

Year Inventory Turnover Stock Holding Period(in days) Ratio 2005 43.05 8 2006 45.26 8 2007 42.57 9 2008 39.48 9 2009 43.16 8

INTERPRETATION: -

The time taken to convert inventory into cash is the operating cycle of a business. In this case the stock holding period is almost constant over the

five years,this indicatesthat companys receivables and inventories were held up for a short period of time, resulting in saving in interest, storage and other expenses.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

4. AVERAGE COLLECTION PERIOD =

365 / Debtors turnover ratio

Year Debtors Turnover Ratio Average Collection Period (in days)

2005 26.63 14 2006 25.36 14 2007 21.42 17 2008 28.77 13 2009 30.94 12

INTERPRETATION: -

The average collection period ratio represents the average number of days for which a firm has to wait before its receivable is converted into cash.

Thereis no thumb-rule or prescribedstandards in interpreting this ratio, but as the computation reveals very high recovery of receivable into cash removing the burden of having excess employment of capital in business. In this case the average collection period in the year 2009 is 12 days when compared to 2008 or 2007 indicating improvement in collection.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD 5. FIXED ASSETS TURNOVER RATIO =

Sales / Average net fixed assets

Year Sales (Rs. In Avg. net fixed assets Fixed Assets Turnover Ratio Crore) (Rs. In Crore) 2005 8792.46 715.33 12.29 2006 10254.06 993.56 10.32 2007 11731.75 1355.45 8.66 2008 12518.83 1564.75 8.00 2009 14106.04 1694.25 8.33

INTERPRETATION: -

If the fixed asset turnover ratio is low as compared to the industry or past years of data for the firm, it means that sales are low or the investment in

plant and equipment is too much. This may not be a serious problem if the company has just made an investment in fixed asset to modernize; in this case fixed asset turnover ratio has decreased over the five years indicating that sales are low.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

6. TOTAL ASSETS TURNOVER RATIO =

Sales / Average total assets

Year Sales (Rs. In Avg. Total assets (Rs. Total Assets Turnover Ratio Crore) In Crore) 2005 8792.46 3297.14 2.67 2006 10254.06 3878.01 2.64 2007 11731.75 4243.97 2.76 2008 12518.83 5073.57 2.47 2009 14106.04 6085.14 2.32

INTERPRETATION: -

The lower the total asset turnover ratio, as compared to historical data for the firm and industry data, the more sluggish the firm's sales. This may

indicate a problem with one or more of the asset categories composing total assets - inventory, receivables, or fixed assets. In this case the Total Asset Turnover ratio is low through the five year, indicating sluggish change.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

7. CREDITORS TURNOVER RATIO =

Net purchases / Average Payables (creditors)

Year Net Purchases (Rs. Avg. Payables (Rs. Creditors Turnover ratio In Crore) In Crore) 2005 258.05 650.42 0.40 2006 342.93 638.46 0.54 2007 58.56 554.82 0.11 2008 0 756.07 0.00 2009 0 703.03 0.00

INTERPRETATION: -

The average payment period ratio represents the average

number of days taken by the firm to pay its creditors. Generally, lower the better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm.

As per the situation the average collection payment period of the company is very good revealing a sound credit-worthiness of thefirm.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

8. WORKING CAPITAL TURNOVER RATIO =

Sales / Average working capital

Year Net sales (Rs. In Current Current Working Working Crore) assets (Rs. In Liabilities Capital Capital Crore) (Rs. In (Rs. In Turnover Crore) Crore) Ratio 2005 8792.46 554.52 1500.47 -945.95 -9.29 2006 10254.06 792.49 1562.8 -770.31 -13.31 2007 11731.75 863.27 1479.16 -615.89 -19.05 2008 12518.83 886.78 1824.74 -937.96 -13.35 2009 14106.04 1013.49 2052.82 -1039.33 -13.57

INTERPRETATION: -

This ratio measures the velocity of utilization of working capital, and there is no prescribed standard given by financial experts, since the net working capital is negative, the company follows a very aggressive working capital policy and meets its operating through its different reserves. There is minimum inventory and any kind of miss-happenings my lead to interruption in the production process. In this case the company is aggressively using its working capital.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

CONCLUSION

The study conducted on the firm named HERO HONDA MOTORS LTD. actually gave a broader aspect in respect of their balance sheet, profit and loss accounts. The data collected and generated states the following facts: -

The profitability ratio has been increasing in respect to past five financial years respectively in every aspect. The various ratios under profitability mainly show the increase in the profit for the same.

The various ratios under liquidity ratio evenly show a drastic change. The change states that there had been a great increase in the liquidity of the firm since 2005 till 2009.

The leverage ratio where as show a decreasing effect in the past five years of the firm. The various ratios stated under leverage mainly inculcates a little downfall in the firms leverage which means the firm has been performing well through out.

The ratios stated under the activity turnover ratios, eventually shows a constant behaviour to certain extent. The turnovers are not much in the past five years, as a very minimum change is been seen in the past five financial

years.

Thus, on an average it can be stated that the company named HERO HONDA MOTORS PVT. LTD. is doing well in its business and from the past five financial years, the company has generated goodwill in the market.

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RATIO ANALYSIS OF HERO HONDA MOTORS PVT.LTD

REFERENCES

The data collected for HERO HONDA MOTORS PVT. LTD is through: -

PROWESS

www.wikipedia.org

www.google.com

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