FINANCIAL ANALYSIS OF HERO

CYCLE LTD.
A PROJECT REPORT
Submitted by:
RITESH GARG
7048221587
In partial fulfillment of requirement for the degree of
MASTER OF BUSINESS ADMINISTRATION
(SUMMER TRAINING)
GUJRANALA GURU NANA! INSTITUTE OF MANAGEMENT "
TECHNOLOGY# LUDHIANA
(PUNJAB TECHNICAL UNI$ERSITY# JALANDHAR)
J%&'(J%)* 2008
AC!NOLEDGEMENT
Behind this successful undertaking is the blessing and guidance of many. This
formal piece of acknowledgement may not be sufficient to express my feelings of
1
gratitude and deep respect that have experienced during my learning process at Hero
Cycles. This endeavor would not have been successful without the help and
encouragement from a lot of people with whom I had good fortunate of interacting
during course of ourney. I am indebted to !r. Bharat "oyal #$r %.&.'inance cum
Company $ecretary( for the knowledge and experience that I gained from him during
course of training which I can easily look at as my most rewarding phase the course of
my study. )ithout his immaculate and intellectual guidance * sustained efforts and
friendly approach* it would have been difficult to achieve the result in a short span of
period.
+ot leaving behind the contribution of all other staff members at 'inance
,epartment for sharing with us the wealth of their experience and knowledge.
PREFACE
!B- is stepping stone to management career. In order to achieve practical* positive
and concrete results* the classroom learning need to be effectively fed to the realities of
the situation existing outside the classroom. This is practical true for management.
To develop healthy managerial and administrative skills in the potential
managers it is necessary that theoretical knowledge must be supplemented with
exposure of real environment. -ctually it is very vital for the management and it is in
the practical training that the measuring of management is itself reali.ed.
/
I took summer training in well0managed organi.ation and was fortunate to get a
good exposure. In this proect report an attempt has been made to cover
different aspects of my training.
RITESH GARG
ABSTRACT
The term 1Financial Analysis2 also known as analysis and interpretation of
financial statements refers to the process of determining financial strength and
weaknesses of the firm by establishing strategic relationship between the items the
balance sheet* profit and loss account and other operative data. M*'+,-0 1'inancial
statement analysis is largely a study of relationship among the various financial factors
in a business is disclosed by a single set of statements* and a study of the trend of
these factors as shown in a series of statement.2 The Hero "roup has done business
differently right from the inception and that is what has helped us to achieve break0
through in whatever product category we have ventured. The "roup3s low key* but
focused* style of management has earned the plaudits amidst investors* employees*
4
vendors and dealers* as also worldwide recognition.
5
6
TABLES OF CONTENTS
S.N
..
C/012'+
N.. T.134
1. 1 I&2+.5%423.&
1.1 Introduction
1./ 7rgani.ation of hero cycle ltd
1.4 * 1.5 Hero group 8hero group co3s
1.6 ,riving force 9 chairman
1.: !ilestones
1.; Hero9 the super brand
1.< "lobal gearing 9exports
1.= %ision 8 mission
1.1> ?uality9 the driving force
1.11 Building relationship
1.1/*1.14*1.15 @ 8 ,.*innovations* promotions
1.16 $ocial responsibility
1.1: * 1.1; !aor products* competitors
1.1< 7wnership of management
2. 2. A4/3'6'7'&2,
8. 8. LITERATURE RE$IE
4. 4. F3&0&430) A&0)*,3,
5. 5. O9:'4236',
;. ;. R','0+4/ M'2/.5.).<*
7. 7 A&0)*,3, " I&2'+1+'2023.&
;.1 Comparative statements
;./ Common si.e statement
;.4 Cash flow statement
;.5 'und flow statement
;.6 @atio analysis
8. 8. F3&53&<,
=. =. S%<<',23.&,
10. 10. L3732023.&,
11. 11. R'>'+'&4',
12. 12. 0&&'?%+'
:
L3,2 .> T09)',
S.N.. T09)' N.. T09)' P0<' N..
1 1.1 Current @atio ;5
/ 1./ ?uick ratio ;:
4 1.4 -bsolute Auick ratio ;;
5 /.1 )orking capital turnover ratio ;=
6 /./ Inventory turnover ratio <>
: /.4 Inventory conversion period <1
; /.5 ,ebtor turnover ratio </
< /.6 -verage collection period <4
= /.: Creditor turnover ratio <5
1> /.; -verage payment period <6
11 4.1 ,ebt eAuity ratio <;
1/ 4./ BAuity ratio <<
14 4.4 $olvency ratio <=
15 4.5 'ixed asset to net worth ratio =>
16 5.1 "ross profit ratio =1
1: 5./ +et profit ratio =/
1; 5.4 @eturn on investment =4
L3,2 .> F3<%+',
;
S.N
.. F3<%+' N.. F3<%+' P0<' N..
1 1.1 Current @atio ;6
/ 1./ ?uick ratio ;;
4 1.4 -bsolute Auick ratio ;<
5 /.1 )orking capital turnover ratio <>
6 /./ Inventory turnover ratio <1
: /.4 Inventory conversion period </
; /.5 ,ebtor turnover ratio <4
< /.6 -verage collection period <5
= /.: Creditor turnover ratio <6
1> /.; -verage payment period <6
11 4.1 ,ebt eAuity ratio <;
1/ 4./ BAuity ratio <<
14 4.4 $olvency ratio <=
15 4.5 'ixed asset to net worth ratio =>
16 5.1 "ross profit ratio =1
1: 5./ +et profit ratio =/
1; 5.4 @eturn on investment =4
CHAPTER 1
<
=
INTRODUCTION
Bicycle was seen in India in the year 1<=>. Import of cycles* however* started in 1=>6
and continued for more than 6> years. The "overnment in Culy 1=64 announced
complete ban on imports* but cycle kept on simmering in the country till 1=:1. In 1<=>*
selling price of an imported bicycle was around @s. 56D0E in 1=1;* during the 'irst )orld
)ar the price umped to @s. 6>>D0 but dropped considerably* month by month and
came down to @s. 46D0 or so #F.G. makes( and @s. 16D0 or so #Capanese models(.
It would be interesting to mention that in 1=1=* five persons in &unab imported
cycles and used them on The !all* $imla. These included one Bishop* Two military
men and two contractors including $. &ala $ingh Bhogal #"rand 'ather of !r. !.$.
Bhogal of Hudhiana(. Fnder special permission of the "overnor* they were allowed to
use cycles on IThe !all3 only for one hour in a day. They imported B.$.-. Cross bar
Cycle from F.G. and it used to be a kind of !ela at that particular hour on the !all in
$imla* the scene watched by hundreds of people everyday. Hater* a firm was formed
under the name of $ingh 8 Co. with shops on @ailway @oad* Calandhar and Ba.aar
%akillan* Hoshiarpur* which imported bicycles in the year 1=4> onwards.
THE ORGANISATION HERO CYCLES LTD
1>
The Beginning
)e look over our shoulders* we see the past. )e use it to make a
better present and a beautiful tomorrow* as tomorrow isn3t ust another
day* it3s another chance for us to better ourselves and to excel.
Hero Cycles is a product of this philosophy. The philosophy that instills
commitment* team work and foresight. Hero3s colossal ourney started
before independence. The four !unal brothers* hailing from a small town
called Gamalia* now in &akistan* are the men who are behind the mission.
Brotherhood apart* what knit the men together was the wealth of will*
integrity* ambition 8 determination. In the year 1=55* they decided to start a
business of bicycle spare parts in -mritsar. Its is modest beginning and the
next 4 years saw the business grow rapidly.But the dark clouds of partition
eclipsed their plans of the future. )ith renewed vigour and optimism* the
operational base was shifted to Hudhiana. By 1=6:* the brothers had began
manufacturing key components of bicycles and as a logical way forward*
began to assemble the entire cycle at their manufacturing plant in
Hudhiana. In the early days* the plant had a capacity for /6 cycles per day.
7ver the next few
years* the Bicycle Fnit started growing in stature and si.e* attracting skilled
engineers* technocrats* administrators and entrepreneurs. 'rom a modest beginning
of mere :4= bicycles in the year 1=6:* Hero Cycles products over 1<6>> cycles a day
today* the highest in global reckoning. )ith the 5<J share of the Indian market* this
volume has catapulted Hero in the I"uinness Books of )orld @ecords3 in 1=<: and
edge over global players is being maintained since then.
- tiny acorn has now become a mighty 7ak. 'rom cycle to two 0 wheelers was a
natural step* and the Hero "roup came into being. The Hero "roup* today* is a
vast conglomerate of companies* either in the form of collaborations* oint ventures
or fully owned subsidiaries* with more than @s. 1>>>> Crore turnover annually.
Hero "roup* besides being the world3s largest manufacturers of bicycles*
motorcycles and chains to this date* has diversified into newer segments like
Information Technology* IT Bnabled $ervices and 'inancial $ervices.
11
THE HERO GROUP
1
/
The Hero "roup has done business differently right from the inception and that is what has
helped us to achieve break0through in whatever product category we have ventured. The
"roup3s low key* but focused* style of management has earned the plaudits amidst
investors* employees* vendors and dealers* as also worldwide recognition.
The growth of the "roup through the years has been influenced by the number of factor9
The Hero "roup through the Hero Cycles ,ivision was the first to introduce the
concept of ust0in0time inventory. The "roup boasts of superb operational
efficiencies. Bvery assembly line worker operates two machines simultaneously
to save time and improve productivity. The fact that most of the machines are
either developed or fabricated in0house has resulted in low inventory levels.
In Hero cycles Himited* the ust0in0time inventory principle has been working since the
beginning of production in the limit in the unit and is functional even till date. The
vendors bring in the raw material and by the end of the day the finished product is
rolled out of the factory. This is the Capanese style of production and in IndiaE Hero is
the first company to have mastered the art of the ust0in0time inventory principle
.
HERO GROUP COMPANIES
Hero "roup ranks amongst the Top 1> Indian Business Houses comprising 1<
companies* with an estimated turnover of F$K1.< billion during the fiscal year
/>>40/>>5.
14
Hero Cycles Himited
Hero Honda !otors Himited
Hero Cold @olling ,ivision
Hero !otors Himited
Hero Bxports
H7 "7
!aestic -uto Himited
@ockman Cycle Industries
H7" 7
Highway Cycle Industries
H7" 7
$unbeam -uto Himited
H7"7
!unal -uto Industries Himited
!unal $howa Himited
1
5
!unal Castings
!unal -uto Components
Hero "lobal ,esign
Hero Corporate $ervices Himited
Hero ITB$
Hero !ind mine
Hero $oft
!unal e0systems
Basy Bill Himited
T/' D+363&< F.+4'@ C/03+70&
Dr.Brijmohan Lall Munjal, patriarch of the US$ 3.19 billion Hero Group
a! born in 19"3, in hat i! no #a$i!tan. %fter
partition, the Munjal brother! !tarte& a !mall
bu!ine!! of manufacturin' bic(cle component! in
Lu&hiana in )orth *n&ia in the face of the bottlenec$!
1
6
of in&u!trial infra!tructure an& in+e!tment!. Dr Lall le& a !mall time
manufacturer of ,- c(cle! a &a( to become a manufacturin' 'iant,
hich churn! out not onl( o+er 1.,--- c(cle! per &a( but i! al!o
&i+er!ifie& into +ariou! &omain!. Un&oubte&l(, Dr.Lall i! a fir!t
'eneration bu!ine!! entrepreneur of the 19/-!0.
Dr.Lall ha! enriche& the Hero Group ith hi! +i!ion of !oun& bu!ine!!
'o+ernance an& +alue &ri+en mana'ement practice!. Hi! fore!i'ht
ha! ma&e the Hero Group a lea&er in it! bu!ine!!. Dr Brijmohan Lall
i! a role mo&el for *n&ian *n&u!tr( in corporate 'o+ernance an&
ethical an& +alue1&ri+en mana'ement practice!. Hi! principle1ba!e&
lea&er!hip ha! le& the Group companie! to recei+e the be!t in&u!trial
'o+ernance an& !afet( aar&! an& ac2uire !trin'ent +alue
certification!.
Dr.Lall a! amon'!t the fir!t *n&ian in&u!triali!t! to
effecti+el( implement bac$ar& inte'ration an& he i!
ac$nole&'e& a! the tren& !etter in the area. %part
from the promotion of the *n&ian in&u!tr(, he i! the
acti+el( in+ol+e& in man( national a!!ociation! !uch
a! 3**, S*%M, %SS43H%M an& #HD an& i! a member
of the 5e'ional Boar& of the 5e!er+e Ban$ of *n&ia.
He i! Honorar( 6ello of the
*n&ian *n!titute of *n&u!trial 7n'ineerin'.
Dr.Lall ha! recei+e& +ariou! accola&e! an& aar&! for hi! immen!e
contribution to the *n&ian in&u!tr(. He a! a&ju&'e& Businessman
of the Year in 1994 b( a lea&in' bu!ine!! ma'a8ine 1 Bu!ine!!
*n&ia.
*n 199/, Dr.Lall recei+e& the National Award for outstanding
contribution to the Development of Indian Small Scale
Industr! 9)S*3 aar& 1 pre!ente& b( the #re!i&ent of *n&ia:
*n 1999, the Bu!ine!! Baron reco'ni8e& him a! the ;"ost
Admired #$%!;
<he #HD 3hamber of 3ommerce an& *n&u!tr( pre!ente& him ith the
Distinguished $ntrepreneurship Award in 199&, in reco'nition
of hi! out!tan&in' e=emplar( entrepreneur!hip.
1:
>a+ier Labour 5elation! *n!titute 9>L5*:, a premier in!titution ha!
conferre& on him the honor of Sir 'ehangir (hand "edal for
Industrial )eace in *+++!
7rn!t an& ?oun' ha! reco'ni8e& him a! the ;$ntrepreneur of the
ear *++1!;
%ll *n&ia Mana'ement %!!ociation conferre& him ith the ,ifetime
Achievement award for ;"anagment;9*++-:
Banara! Hin&u Uni+er!it(, @arana!i one of the mo!t pre!ti'iou!
Uni+er!itie! of *n&ia conferre& him ith a DoctrateA &e'ree of ;
Doctors of letters; .onoris #ausa in 4ctober "--B
/he (overnment %f India honoure& him ith the pre!ti'iou! ;
)adma Bhushan;in March "--/ for hi! contribution to <ra&e an&
*n&u!tr(
MILESTONES
Hero3s success saga contains the element of courage* greatE determination*
enterprises and perseverance coupled with vision and meticulous planning9
1=5;
Hero Cycles Htd. is established.
1;
1=;1
@ockman Cycle Industries Htd. established which is today the largest
manufacturer of bicycle chains 8 hubs in the world.
1=;8
Bicycle exports take off from India L a faray into the international market.
1=71
Highway Cycles was set up. It is today the largest manufacturer of single speed
8 multi0speed freewheels in the country.
1=75
Hero Cycles Himited became the largest manufacturer of bicycles in India.
1=78
!aestic -uto Himited was formed and Hero !aestic !oped was introduced.
1=81
!unal Casting established.
1=84
Hero Honda !otors Himited established in oint venture with Honda !otors* Capan
to manufacture !otorcycles. It is now the world3s largest producer of two0wheelers.
1=85
0 !unal $howa Htd. established to manufacture shock absorbers and struts and is
today one of the topmost shock absorber manufacturers companies in this country.
1<
1>>cc Hero Honda !otorcycle was launched* which* later on in 1=<<* became
+o.1 among all motorcycles in India.
1=8;
Hero Cycles Himited entered the "uinness Books of )orld @ecords as the
Hargest bicycle manufacturer in the world.
1=87
Hero !otors* a division of !aestic -uto Himited set up on collaboration with
$teyr ,iamler &uch of -ustria.
1=87
"uarat Cycles Himited* now known as !unal -uto Centre Htd. was established
to manufacture and export state0of0the0art bicycles and light products in its full
automated plant at )agodia.
1=87
$unbeam -uto Himited* earlier a unit of Highway Cycle Ind. Htd.* established as
an ancillary to Hero Honda. It has the largest die casting plant in India.
1=88
Hero &uch was introduced by Hero !otors Htd.* which was a revolutionary
machine to set new records of petrol.
1=8=
@anger bicycles #a generic name for !ountain Bikes today( was introduced by
Hero Cycles Himited.
1==0
Hero Cold @olling ,ivision established which is one of the most modern steel
cold rolling plants in India.
1=
1==1
Hero Honda received +ational &roductivity Council -ward and also the Bconomic
Times L Harvard Business $chool -ssociation -ward against />> contenders.
1==1
Hero Cycles introduced Gid L the first branded bike in children3s segment.
1==2
Hero Cycles introduces Impact* the first citibike in India.
1==2
!unal $howa Htd. received national safety award.
1==8
Hero Bxports was established as International Trading ,ivision for group 8 non0
group products.
1==5
1- Hero Corporate $ervices Htd. was established.
2- The first exerbike from Hero "roup was introduced with the nameL
-llegro.
1==;
Hero )inner* a large wheeled scooter with a choice of 6> cc 8 ;6 cc engines
was launched by Hero !otors Htd.
1==8
/>
Hero Briggs 8 $tratton -uto #&( Htd. was set up to produce 50stroke two wheeler
engines in various cubic capacities.
1==8
!unal -uto Components established to manufacture gear shaft 8 gear blanks
for motorcycles.
2000
The first fully automated bicycles by the name I&7)B@BIGB3 was
introduced by Hero Cycles Himited. Hero Corporate diversified into I.T. and I.T.
Bnabled $ervices through its services segment Hero Corporate $ervices Himited.
2001
Hero Honda emerges as the market leader in motorcycles with the sales of over
a million motorcycles and a market share of 5;J.
2002
Hero Cycles Himited ties up with +ational Bicycle Industries* a part of
!atsushita "roup* Capan* to manufacture high0end bicycles.
'astener )orld established.
2002
Basy Bills Himited established to offer utility bill collection and retail services.
2008
Tie0up with Hive Bridge Inc.* F.$.-.* -prilia $cooters* Haly 8 Bombardier @otax
"mbH of "ermany.
2008
$uper $tarter $eries Haunched by Hero Cycles Himited.
2008
Hero Honda continues to be the world3s largest manufacturer of two0wheelers
with the market of more than 5<J.
/1
2004
Hero @etail Insurance Business established.
$uper $mart $eries introduced by Hero Cycles Himited.
2005
Hero ITB$ strengthens its relationship with -C$* F$- F$, 6 BIHHI7+0market
cap and fortune 6>> companies.
200;
Hero Honda crosses a unit sales threshold of 4 !IHHI7+ motorcycles.
200;
Hero Honda enters the scooters segment* launches 1>> cc 1pleasure2.
200;
Hero group celebrates "7H,B+ CFBIHHBB MB-@ since inception. It was
commemorated by sales of over 16 million motorcycles 8 over 1>> million bicycles.
2007
Hero group has made 14 models of e0bikes.
//
HERO@ THE SUPER BRAND
B* D'>3&323.&# a $uper brand offers consumers significant emotional and
physical advantages over its competitors* which consciously or subconsciously
consumers want* recogni.e and are willing to pay a premium for. - $uper brand
cannot be substituted. It is part of our life. It has become one with us.
In the morning* we want a familiar flavour of tea* brush with a familiar
toothbrush* using a familiar taste of toothpaste. The soap we use has a familiar
smell. The shaving cream and the shaving ra.or are familiar and so is the tang
of the aftershave. -nd so through the day* we reach out for familiars.
In a departmental store* we go to familiar sections and shop familiar brands.
)hen a new one appears in the racks* we stop and look at it suspiciously. 7ften*
we postpone the decision to try a new for another day* another time. )hen a brand
embeds itself into our lives and we are willing to go to next shop* to look for it* we
are longer looking for a brand. )e are searching for a $uper brand.
)hat makes a $uper brandN 7wn the yearsE the Indian market place has been witness to
the emergence of a wide variety of $uper brands. !any have followed the I$tandard rules3
of becoming a $uper brand9 great product energy to exploit the market* relevance to
consumer needs of wants* edge in business technology* superb distribution and superbly
chain and consistent Auality. It is a leap from branding to brand leadership.
Considered as 17scars of Branding2* in /6 countries of the world* the $uper
Brands in India were bought by the finest marketing guru of all times Hate
$hunu $en and the unbiased rating agency I$uper Brands India3 is now headed
by advertising in India L !r. ,ilip $ehgal* !r. G!$ -hluwalia* !r. !ike Ghanna*
!r. +abankur "upta* !r. &iyush &andey* !r. @aghav Bahl* !r. $unil k -lagh*
!rs. Tara $inha and !r. Mogi C ,eveshwar* besides others.
"lobally* a select few* exceptionally powerful brands* are recogni.ed as $uper
Brands. $ome of the Indian brands have made it into this uniAue hall of fame*
and amongst that coveted group features Hero Cycles. $uper Brands are
actually the big ideas* which /4
provoke us to explore the realms of our dreams and inspire us to live satisfying life
styles. -nchored in omnipotent consumer insights* the super brands go beyond
mere functional promises as they trigger deeply embedded emotional chords.
Hero Cycles has been one of the most progressive and dynamic brands for the
decades now. M.+' 2/0& 8200 5'0)'+,# 4800 '71).*'', 0&5 7.+' 2/0& =.;
4+.+' ,023,>3'5 4%,2.7'+,# have directly or indirectly* endeavored tirelessly to
make Hero Cycles a phenomenal success and are the true guardians of this brand.
-mbitions* belief* empathy and a strong culture of sensitivity are at the heart of
Hero Cycles brand. Bach of these values is reflected in the company3s products*
its communication and its dealings with suppliers* employees* dealers and
customers. Be it company3s environment friendly manufacturing processes or
the brand initiatives for the lower income customers* leadership is all about
capturing the hearts 8 minds of the people0 the way a true Hero always does.
GLOBAL GEARING@ EAPORTS
/5
.$0% #Y#,$S
.$0% .%NDA "%/%0S
.$0% "%/%0S
.$0% #%0)%0A/$ S$01I#$
,I"I/$D 2 .ero "indmine 3 "un4al
eSstems3 Nsure)lus 5
.$0% "ANA("$N/ S$01I#$
,I"I/$D2.$0% ITES5
"6N'A, S.%7A ,I"I/$D
-s early as in the 1=:>sO very few Indian bicycle manufacturers were interested in
exports. However* the Hero "roupOs foray into the overseas markets in 1=:4
pioneered Indian exports in the bicycle segment. It was a move prompted
essentially by the need to remain attuned to the global marketplace.
)hile initial exports were restricted to -frica and the !iddle Bast* today more
than 6> percent of the exports from Hero Cycles
Himited meet the demands of sophisticated markets in Burope and -merica. This is
/6
primarily because of appropriate product development and excellent Auality that
Hero offers.
The "roup has been continuously upgrading technology and has set up
special units 0 like "uarat Cycles Himited #now !unal -uto Industries Himited(*
to meet international Auality standards. !unal -uto Industries Himited has
state0of0the0art eAuipments imported from Burope and Taiwan. The unit is
designed to match international standards and is an Bxport 7riented Fnit
#B7F(. Its products are supplied to the International !arkets of developed
countries like Fnited Gingdom* "ermany* 'rance etc.
The "roupOs exports have gone beyond cycles and their components. The success of the
Hero !aestic moped did not remain confined to Indian shores. 'inding enthusiastic
buyers across the world* it became the largest exported moped from India.
Hero &uch is perhaps the first Indian two0wheeler to be homologated abroad #in
$pain( and has assembly plants in !auritius and Bgypt. Today Hero &uch mini0
motorcycles can also be seen in &araguay* !exico* -rgentina* Turkey and Holland.
"roup Company* !unal $howa Himited is one of the largest suppliers
of shock absorbers to maor auto giants in Capan* Fnited $tates and the
Fnited Gingdom* amongst other developed markets.
In 1==4 Hero Bxports was established as the International Trading ,ivision
for "roup and non0"roup products. The "overnment of India recogni.es
Hero Bxports as a Trading House.
-nd the latest diversification for the "roup in the export market is in the area of
$oftware exports and providing Business &rocessing and Contact Center
$ervices through Hero Corporate $ervice limited. The company exports
services to many 'ortune 1>>> corporations in the F$-* FG and -ustralia and
has offices in FG 8 F$- to manage client relationships.
$ISION AND MISSION
The Vision
1)e* at the Hero "roup are continuously striving for synergy between technology*
systems and human resources to provide products and services that meet the
/:
Auality* performance* and price aspirations of the customers. )hile doing so* we
maintain the highest standards of ethics and societal responsibilities* constantly
innovate products and processes* and develop teams that keep the momentum
going to take the group to excellence in everything we do.2
The Mission Statement
1 It3s our mission to strive for synergy between technology* systems and
human resources* to produce products and services that meet the Auality*
performance and price aspirations of our customers. )hile doing so* we
maintain the highest standards of ethics and societal responsibilities.2
This mission is what drives us to new heights in excellence and helps us forge a
uniAue and mutually beneficial relationship with all our stakeholders. )e are committed
to move ahead resolutely on this path* shown to us by visionaries like !r. $atyanand
!unal* !r. 7m &rakash !unal* the late !r. ,ayanand !unal and late !r. @aman
Gant !unal. !r. Brimohan Hall !unal* Chairman 8 !, L THB HB@7 "@7F&.
?uality9 The ,riving 'orce
-t Hero Cycles* Auality is a tradition* be it in the form of well trained labour*
technically superb machines or world class Auality. The conformance to Auality at
Hero begins on shop floor* with every worker ensuring at each stage
manufacturing* that only perfect product passes through his hands. Hero3s
production department too believes in following the .ero0defect approach and
continuous upgradation of its manufacturing systems. The marketing and
operations teams are also constantly creating new and effective strategies using
modern management techniAues. -nd finally* every Hero cycle goes through a
series of rigorous Auality checks before it leaves the factory. +o wonder* Hero is in
proud possession of I$70=>>1* I$70=>>/ 8 B%?I certifications and also I$7
15>>1* environmental compliance endorsement from the !inistry of Bnvironment.
/;
Constant Auality upgradation ensures that the company stays in the global
mainstream and maintains its edge* through excellence. - technology tie0up with
+ational Bicycle Industries of Capan led to the launch of the I)orld 13 series of
cycles* besides introduction of new frame designing and features like0 -0frame* ,0
frame* M0frame* $wan shaped frame* speedometers 8 indicators among other
Building @elationships
-t Hero* it3s always believed that there is much more to life than ust business. -s a
company with a heart* it has certain commitments towards its employees* the society
and the nation. Though growing incomes* changing life styles and availability of cheap
customer finance has changed the market scenario enormouslyE Hero believes that
cycles can still be the driving force of the rural economy. By introducing the loan
facilities under IHero Cycle Hoan Moana3 through Corporation Bank and 7riental Bank
of Commerce* Hero Cycles has enabled low income customers to purchase cycles on
/<
easy terms.
Commitment to its employees is ust as important as commitment to the society.
-ll efforts are taken to make sure that employees are provided the best working
conditions as work culture at Hero revolves around the philosophy0if there3s one
way to work* it3s with the heart. -t Hero Cycles* there is a strong affinity towards
building the relationships with employees* workers* vendors and dealers. Cob
security* growth opportunity and respect are the unspoken* yet understood
components of every man3s package who chooses to work within the fold of
Hero family. It is Auite common to find two generations of the same family
working together in the company* or the workers sharing their skills with other
family members and passing on finest training to each other. It goes without saying
that people at Hero are its largest investment and easily the largest asset.
-t customer front too* Hero3s perception of customer relationship management
#C@!( does not end with merely meeting their expectations and aspirations or by
ensuring complete customer delight by overnight turnaround of customer
complaints* but it goes several steps beyond that hori.on. The company believes in
delivering value to the customers even before they feel the need. This has helped
Hero Cycles develop immense brand loyalty and customer satisfaction. Hike a true
$uper Brand* Hero has been able to attract the respect and awe of not only its
users* but also those who are directly or indirectly exposed to it.
/=
RESEARCH AND DE$ELOPMENT
OF HERO CYCLES
1. Specific areas in which R! carried out by the company@ (Increasing
competition in the market place has brought into sharp focus importance of
differentiation. 7ur in0house @esearch 8 ,evelopment Centre* which is
recogni.ed by ,$I@ "ovt. of India* plays a pivotal role in launch of innovative
product models on continuous basis. 7ur product models excel in meeting
expectations from extremely demanding customers of today3s modern era.
2. "enefits deri#ed as a result of the abo#e R ! acti#ities@ (This brought
the concept of high Auality low costDfancy bicycles.
3. Future plan of action@ ( Though the domestic market for standard bicycles is
shrinking since last three years but the fancy segment has shown a significant
upsurge in the demand. !oreover India has a very small share of "lobal !arket.
The up graduation of technology through in0house research will assist the company
in design development to capture the vast untapped market potential.
T'4/&.).<* A9,.+123.&# A5012023.& 0&5 I&&.6023.&
(1) The company is upgrading technology absorption and innovation to enhance its
range of product both in domestic and export. $ome of new designs developed
through in house research and registered under ,esign -ct with Controller
"eneral of &atents ,esign and Trade !arks are -naconda* wi.ard* crusader*
,TB* !iss India* Twinkle #Brat( and Tech Team.
4>
)hile in Indian market it is directed towards introducing products at lower cost
e.g. )onder Mears and Brat series to the benefit of masses or high0end
technology products like $treet @acer* 'usion* Miking Hero and !iss
India $eries #for the ladies( which completes the total product range.
(3) The company has not imported any technology in the last 6 years.
However* it has entered into a technical assistance agreement with
national Bicycle Industrial Co. Htd. Gashiwara City* 7saka* Capan in />>/
for upgrading its technology.
$utloo%
,uring the year />>:0>; the economy has shown further improvements and the
",& has also increased. Mour directors are pleased to inform you that despite the
volatility in the prices of main inputs i.e. steel and nickel your company has increased
its production by 6.5;J vis a vis previous year by introducing new era light alloy
bicycles and powered cycles as well as bikes with a sincere focus on students.
Industry producing the rolling steel strips can be broadly classified into two
categories i.e. narrow #5>>mm( and wide #1:6>mm(. Mour company comes under mid
segment with a capacity to produce up to <>>mm wide strips. The industry is further
classified into $tand -lone manufacturer and Integrated manufacturer. Though the
$tand -lone manufacturer are putting up a stiff competition * your directors are hopeful
that company3s C.@.,ivision will do well by putting emphasis on special grades* narrow
and thinner strips with short delivery period and fast customi.ation.
INNO$ATIONS
41
"orn out of &assion
The ore goes into fire only to shed off its impurities. $imilar is the man whose virtues
shine when he is tried by the fire of life. Taking upon I+ovelty3 itself as a competitor* the
Hero Cycles* has been always striving for perfection and innovation in every aspect
of their dealings. The pursuit to innovate is endless at Hero* so much so that
Iinnovation3 has become a bu.. word in Hero premises. Hero Cycles has been able
to use changes and new trends to its advantage by identifying emerging need gaps
and expanding its product portfolio to appeal to different kinds of customers. In its
endeavour to keep a step0ahead of times* Hero3s most advanced 8 modern @ 8 ,
department continuously creates innovative products having functional attributes 8
aesthetics* meeting the aspirational needs of its proud customers around the globe.
-s a result* Hero Cycles was able to launch several new concepts and models in
bicycles like the !ountain Bikes* @acer Bikes* ,irt Terrain Bikes 8 ,0frame bikes
besides creating a variety of cycles for different user segments and sub0segments
L including women and children* students* adventure seekers* labourers* city
customers and fitness conscious. @olling out nineteen new models in ust one year*
itself speaks volume for Hero3s emphasis on innovations 8 designs.
&romotions
4/
Fntil 1=<:* the company had no need for mass communication. But as competition
started growing* Hero Cycles begun to feel the need for creating lasting impression on
the customer3s mind. In the mid 1=<>s Hero was perceived to be the manufacturer of
the basic black bicycles. The company reAuired an image change. It needed to
communicate to customers the vast portfolio of products that it had* particularly in the
recreational segment. The launch of innovative products and their use as image
builders happened simultaneously. $ince 1=<:* the communication strategy has been
to build each product separately and create a uniAue positioning for them. In this way
the @anger was positioned as the bike for outdoor fun* Impact was the preferred choice
among city riders and Cet was proected as the lightest running roadster while Hawk
was the racer3s edge. Bach of these launches and their promotion* gave the Hero
brand a new meaning. The brand has also used celebraties 0 including film stars
$anay ,utt* @ani !ukheree* Hrithik @oshan and -meesha &atel. The latest is India3s
new bowling sensation* Irfan &athan who has also been a real life Hero cycle user.
SOCIAL RESPONSIBILTIES
44
In this way* the company has fulfilled its social obligation. Charged with their
mission nationalistic fervor* the Hero "roup has always been actively involved in
$ocial and !edicare activities* such as providing medical facilities for the under
privileged* Hospitals* Heart @esearch 'oundation and !obile !edical %ans. Hero
also runs schools and colleges* maintains parks and public facilities.
MAJOR PRODUCTS
The Hero Cycles Htd. !anufactures cycles* rims * free wheels *hubs 8 chains
and cold rolled strips as a main product. Company has long portfolio of different range
of cycles. Company has 14/models in the list * covers all the three section0gents*
ladies and kids. It also manufactures cycles parts for its own reAuirements. -fter
fulfilling the reAuirements of company *it can export its remaining Auantity.
45
The main products are90
1) Cycles
2) @ims
3) 'ree wheels
4) Hubs and Chains
5) Cold @olled strips
6) B0Bikes
COMPETITORS
I' ()(*+ MAR,+T:
1 -%7+
2 7&B@-
3 TI
4 -TH-$
5 7THB@$ #+BBH-!*G)*B$(
I' +-"I,+ MAR,+T:
46
CHI+- HITBCH
1 -%7+
2 7&B@-
3 FHT@-
4 T%$
ONERSHIP OF MANAGEMENT
BOARD OF DIRECTORS
$H. B@IC!7H-+ H-H !F+C-H (CHAIRMAN)
$H. $-TM-+-+, !F+C-H (CO(CHAIRMAN CUM M.D. OR!S)
$H. 7! &-@G-$H !F+C-H (CO(CHAIRMAN CUM M.D. M!TG. " ADMN.)
$H. %IC-M GF!-@ !F+C-H (M.D. INTN-L MAR!ETING)
$H. $F@B$H CH-+,@- !F+C-H (M.D. DOMESTIC M!TG.)
-$HI$H GF!-@ !F+C-H(M.D. UNIT TO SAHIBABAD)
$H. $F+IH G-+T !F+C-H (M.D. C.R.DI$ISION)
$H. &-+G-C !F+C-H (M.D. NE HERO AUTO RIM DI$.)
$H. $.G. @-I (M.D. OR!S)
,@. !.-. P-HI@ (DIRECTOR)
,@. ,.@. $I+"H (DIRECTOR)
4
:
CHAPTER 2
T/' A4/3'6'7'&2,
The "roup and its management have acAuired a number of
accolades and achievements over the years9
Hero "roup !anagement style has been acclaimed internationally by
)orld Bank and BBC* FG. Hero "roup is discussed as a case study
at Hondon Business $chool* FG and I+$B-,* 'rance. )orld Bank
has acclaimed Hero Cycles as a role model in vendor development
4;
based on a worldwide study. The Hondon Business $chool* FG* has done a
case study on the "roup as model of entrepreneurship.
Boston Consulting "roup has ranked Hero "roup as one of the top ten
Business Houses on Bconomic value* in India.
The Hero "roup is recogni.ed as a long0term partner and an ideal employer9
00Hero "roup3s &artnership with Honda !otors* Capan is over /> years old.
00Hero "roup3s &artnership with $howa !anufacturing Corporation*
Capan is over 1< years old.
"roup Chairman* !r. Brimohan Hall !unal received the coveted 1 Brnst
8 Moung Bntrepreneur of the Mear2 award for />>1.
Hero Cycles was ranked 4
rd
amongst top Indian Companies @eview />>>
.
-sia3s leading companies award #/>>4( by 'ar Bastern Bconomic @eview.
Hero Cycles is the )orld3s Hargest manufacture of Bicycles with annual
sales volume of over 5.< million cycles.
Hero Cycles Himited is a "uinness Book @ecord holder since 1=<: as
the world3s largest manufacture of bicycles* with annual sales volume of
6./ million bicycles in 'M />>5.
Bngineering Bxports &romotion Council has awarded Hero Cycles with
the Best Bxporter -ward for the last /< years in succession.
4<
CHAPTER 8
4
=
L32'+02%+' +'63'B
Ball and Brown #1=:<( were the first to highlight the relationship between stock
prices and information
disclosed in the financial statements. Bmpirical research on the value relevance
has its roots in the
theoretical framework on eAuity valuation models. 7hlson#1==6( depicted in his
work that the value of
a firm can be expressed as a linear function of book value* earnings and other
value relevant
information.
'inancial statement lending is rarely used for small
business lending as it looks at the audited financial statement of companies
that have an
access to public credit market. In contrast* relationship lending* is based on
1soft2 information about the potential borrower. In other words* banks rely on
the subective information about a borrower that they received out of the
lasting relationships rather than
on financial condition of the borrowers. -nother indication of relationship lending as
reported by Cavallu..o* Cavallu..o* and )olken #/>>1( is that <5 percent of the loans
received by small businesses came from lending institutions located in the same city.
The
median distance between the firm and the lender was ust three miles.
-llen Berger #1===( defines three conditions that should be met for
relationshipbased finance to occur. 'irst* information other than data from
financial statements* collateral and other public resources is collected. $econd*
the information is collected via continuous
communication between the lender and the small business* the customers of
the small business* and local community. Third* the information is confidential
and can be used only
for making further lending decisions
@eferences
Cing Hiu* ,oron +issim* and Cacob ThomasE 1Is Cash 'low Ging in %aluations2
#/>>;( 'inancial -nalysts Cournal %ol.:4 +o>/* />>; C'- Institute
Q1/R
Gallunki* Cuha0&ekka and &aakki* Bia* S$tock !arket @esponse to
I'@$DI-$ Cash 'lowsS
5>
#-ugust 11* />>6(. -vailable at $$@+. Q14R
Hev* Baruch and &aul Parowin* 1===* SThe Boundaries of 'inancial @eporting
and How to
Bxtend ThemS* Journal of Accounting Research
Q15R
Hiu* +issim* and Thomas #!arch />>/( 1BAuity %aluations using !ultiples2
Cournal of -ccounting @esearch 5>#1(.
Q16R
!ingyi Hung* 1-ccounting $tandards and %alue @elevance of 'inancial
$tatements0 -n International -nalysis2 Cournal of -ccounting and Bconomics*
%ol.4> +o.4* ,ec.*/>>>. R.,1).4C. (1==8). @isk and the financial analyst of the
year />>>. Business Credit, Vol. 100#Iss. 4(* pg. 6;.
CHAPTER 4
51
5/
M'0&3&< .> >3&0&430) 0&0)*,3,
The term 1financial analysis2 also known as analysis and interpretation of
financial statements refers to the process of determining financial strength and
weaknesses of the firm by establishing strategic relationship between the items
the balance sheet* profit and loss account and other operative data.
A44. T. M*'+,-0 1'inancial statement analysis is largely a study of relationship among
the various financial factors in a business is disclosed by a single set of statements*
and a study of the trend of these factors as shown in a series of statement.2
P%+1.,' .> >3&0&430) ,202'7'&2 0&0)*,3,@
The purpose of financial statement analysis depends upon the need of person
who is analy.ing these statements. These varying needs may be90
1 To know the earning capacity or profitability of the firm.
2 To know the solvency position of firm.
3 To know the financial strength of the business.
4 To make comparative study with other firms.
5 To know the capability of payment of interest and dividend.
6 To know the trend of the business.
7 To know the efficiency of the management.
8 To provide useful information to the management.
T..), .> >3&0&430) A&0)*,3,@
54
The analysis and interpretation of financial statement is used to determine the
financial position and results of operations as well. - number of methods or
devices are used to study the relationship between different statements. -
financial analyst may use following methods90
1 Comparative statements
2 @atio analysis
3 'und 'low analysis
4 Common si.e statement
CHAPTER 5
55
56
OBJECTI$ES
1. To analy.e the liAuidity position of the firm.
2. To analy.e the solvency position of the firm.
3. To study and analy.e the overall profitability of the firm.
4. To study and analy.e the changes in working capital and fund flow position.
5. To relate the various items of profit and loss account with sales.
6. To compare the assets and liabilities of the current year and previous year.
7. To study the and analy.e the capital structure of the firm.
8. To determine the efficiency with which the current assets are managed.
5
:
CHAPTER ;
5
;
RESEARCH METHODOLOGY
Basically proect study is usually based on a research* which gives a
concrete answer to a problem. This research may be &roblem $olving or &roblem
7riented. Both types of research are usually known as -pplied @esearch.
!arketing is a form of -pplied research which proceeds with a certain
problem* specifies alternative solutions and the possible outcomes of each
alternative. It may be further named as 1,ecisional @esearch2.
The !arketing @esearch methodology involves a number of interrelated
activities* which overlap and do not rigidly follow a particular seAuence. -
marketing research involves the following maor steps.
FORMULATING RESEARCH PROBLEM
The first step in research is formulating research problem. It is the most
important stage in -pplied @esearch as it rightly said 1- problem well defined is
half solved2.
In this &roect @eport I have studied the concept of 'I+-+CI-H
-+-HM$I$ have carried the analysis of the same in HB@7 CMCHB$ HI!ITB,.
STATISTICAL TOOLS " TECHNIDUES
The statistical techniAues like comparative balance sheet* common si.e
balance sheet* fund flow statement and @atios have been in the study. These
have been very useful in doing the interpretation and analysis of the data
collected through secondary sources.
5<
DATA REPRESENTATION
The result have presented with the help of pie0charts and bar diagrams
which clearly represents that the research conducted is a 'ormal @esearch and
the @esearch ,esign is a sound one.
DETERMINING THE SOURCE OF DATA
The next step is to determine the source of data to be used. The
marketing research may be based on primary or secondary data or on both.
In this report I have used the information gathered through secondary
data which include mainly the -nnual @eports of HB@7 CMCHB$ HI!ITB,.
5=
CHAPTER 7
CHAPTER 7.1
6
>
61
COMPARATI$E STATEMENTS
The comparative financial statements are statements of the financial position at
different periodE of time. The elements of financial position are shown in a
comparative form so as to give an idea of financial position at two or more periods.
'rom practical point of view* generally* two financial statements #balance sheet and
income statement( are prepared in comparative form for financial analysis purpose.
+ot only the comparison of the figure of two periods but also be relationship
between balance sheet and income statement may show9
1. -bsolute figures #rupee amounts(
2. Changes in absolute figures #increase or decrease in absolute figures(
3. -bsolute data in term of percentages
4. Increase or decrease in terms of percentages
1. COMPARATI$E BALANCE SHEET
The comparative balance sheet analysis is the study of the trend of the same
items* groups of items and computed items in two or more balance sheets of the
same business enterprise on different dates. The changes can be observed by
comparison of the balance sheet at the beginning and at the end of a period and
changes can help in forming an opinion about the progress of an enterprise.
The comparative balance sheet has two columns for the data of original
balance sheets. - third column is used to show increase in figures. The fourth
column may be added for giving percentages of increases or decreases.
2. COMPARATI$E INCOME STATEMENT
6/
The comparative income statement gives an idea of a business over a period of time. The
changes in absolute data in money values and percentages can be determined to analy.e
the profitability of the business. It has also four columns. 'irst two columns give figures of
various items for two years. Third and fourth columns are used to show increase or
decrease in figures in absolute amounts and percentages respectively.
64
HERO CYCLE LTD.
9) COMPARATI$E STATEMENT
1) C.710+0236' B0)0&4' S/''2
P0+234%)0+, 200; 2007
I&4+'0,'ED'4+'0
,'
F0<
'
A,,'2,
'ixed -ssets 1=:<<<1/4; 1<=4451511 0 ;664=</: 04.<5
Investments /<616>5>>1 4<5454;<:1 T==1=44<:> T45.;=
,eferred Tax -ssets
#+et( 5<=/;15 1=<56:66 T15=6/=51
T4>6.:
/
Current -ssets
0 Inventories ;::6/115/ <>6::1>45 T4=14=<=/ T6.11
0 $undry ,ebtors 1<:>61/56; ///<6=/5<: T4:<><>>/= T1=.;<
0 Cash 8 Bank
Balance :=5<1:65 //145:6; 0 5;45:==; 0:<.15
Hoan and advances 44;::1<4; 56;;<><46 T1/>11<==< T46.6;
T.20) A,,'2, 785=455042 =2707=8=8= G14118888=7 G17.=5
L3093)323',
$hareholder 'und 55/;55:1>6 64:5/41>// T=4:;<5=1; T/1.1:
Hoan 'unds 16:;<;:54/ 1;4///4:=; T1:545;/:6 T1>.5<
Current Hiabilities
0 Hiabilities 1:5>5/6<:; 1=;<6<=154 T44<1:4/;: T/>.:1
0 &rovisions //4;>::4< 1=6;6>>; 0/;=6:6:1 015./<
T.20) L3093)323', 785=455042 =2707=8=8= G14118888=7 G17.=5
I&2'+1+'2023.&
1. Comparative Balance $heet reveals that total -ssets of Hero cycle
increased during a year by 1;.=6J.
2. There has been increase in shareholder funds by /1.1:J.
65
HERO CYCLE LTD
B) C.710+0236' I&4.7' S202'7'&2
P0+234%)0+, 200; 2007 I&4+'0,'E F0<'
D'4+'0,'
(R,).
N'2 S0)',
114:=44;5
1>
144><;>61
1: T1=4=4:;;>: T1;.>:
L',, @ Cost of "oods $old
=;6:4<><4
6
11;44>:=;
:; T1=;::<<=4/ T/>./:
#!aterial consumed*
manufacturing expenses
8
personal expenses(
G+.,, P+.>32
1;12=5;57
5
1575;8584
= (8782122; (2.81
L',, @ 7perating expenses
115;:1654
1
114=51<:6
4 0<1=:;;< 01.;:
#-dministrative
expenses*
financial expenses*
selling
expenses 8
depreciation(
O1'+023&< 1+.>32E).,, 4;5841144 8181;8=8= (2=124448 (;.25
A559 7ther income
1>;;55<1<
5 <=<16<<6< 01;=/<=4/: 01:.:5
L',,@&.& .1'+023&< '?1. =>::16<:6 1/4>5;;6; 0;<46:<1>< 0<:.54
N'2 1+.>32 B'>.+' T0? ;8;1784;8 1211827=7 G575154884 G=0.41
L',, @ Tax provision for 0/<;6;<4= 1<6;5/>6= T/155==<=<
T;56.<
<
wealth tax* taxation* fringe
benefit tax 8 deferred tax
N'2 1+.>32 A>2'+ 20? ;;4=81802
102558578
8 G8;0;5448; G54.24
I&2'+1+'2023.&
There has been decrease in the gross profit by /.41J because the rate
of increase in sales is less than the rate of increase in cost of goods sold. But
the non operating expenses decreases by <:.54J so net profit increases.
CHAPTER 7.2
66
35)COMMON SIHE STATEMENT
1) C.77.& S3I' B0)0&4' S/''2
P0+234%)0+, 200; 2007
A,,'2, -mount Jage -mount Ja
#@s.( #@s.( ge
'ixed -ssets
1=:<<<1/4
; /6.>6
1<=445151
1
/>.
5/
Investments
/<616>5>>
1 4:./<
4<5454;<:
1
51.
5:
,eferred Tax -ssets #+et( 5<=/;15 >.>: 1=<56:66
>.
//
6:
Current -ssets
0 Inventories ;::6/115/ =.;: <>6::1>45 <.:=
0 $undry ,ebtors
1<:>61/56
; /4.:;
///<6=/5<
: /5.>5
0 Cash 8 Bank Balance :=5<1:65 >.<< //145:6; >./5
Hoan and advances 44;::1<4; 5.4> 56;;<><46 5.=4
T.20) A,,'2,
785=45504
2 100.00
=2707=8=8
= 100.00
L3093)323',
$hareholder 'und
55/;55:1>
6 6:.44
64:5/41>/
/ 6;.<:
Hoan 'unds
16:;<;:54
/ 1=.=6
1;4///4:=
; 1<.:=
Current Hiabilities
0 Hiabilities
1:5>5/6<:
; />.<;
1=;<6<=15
4 /1.45
0 &rovisions //4;>::4< /.<6 1=6;6>>; /.11
T.20) L3093)323',
785=45504
2 100.00
=2707=8=8
= 100.00
I&2'+1+'2023.&
The investment in fixed assets* current assets and investment are same in
both the years. The ratio of shareholders funds and the loan funds are do not
change much.
35)COMMON SIHE STATEMENT
2) C.77.& S3I' I&4.7' S202'7'&2
P0+234%)0+, 200; 2007
A7.%&2 F0<' A7.%&2 F0<'
(R,.) (R,.)
N'2 S0)', 118;=887410 100.00 1880870511; 100.00
L',, @ Cost of "oods $old =;6:4<><46 <6.<1 11;44>:=;:; <<.1:
#!aterial consumed*
manufacturing expenses
8
personal expenses(
G+.,, P+.>32 1;12=5;575 14.1= 1575;8584= 11.84
L',, @ 7perating expenses 115;:16541 1>.>= 114=51<:64 <.6:
#-dministrative
expenses*
financial expenses*
selling
expenses 8
depreciation(
O1'+023&< 1+.>32E).,, 1147;15481 4.0=
118=418;5
8 8.28
A559 7ther income 1>;;55<1<5 =.5< <=<16<<6< :.;6
L',,@&.& .1'+023&< '?1. =>::16<:6 ;.=; 1/4>5;;6; >.=/
N'2 1+.>32 B'>.+' T0? ;8;1784;8 5.;0 1211827=7 =.10
L',, @ Tax provision for 0/<;6;<4= 0/.64 1<6;5/>6= 1.5>
wealth tax* taxation* fringe
6;
benefit tax 8 deferred tax
N'2 1+.>32 A>2'+ 20? ;;4=81802 5.85 1025585788 7.71
I&2'+1+'2023.&
In />>: the cost of goods sold is <6.<1J of sales which increase to
<<.1:J in year />>; resulting the decrease in gross profit from 15.1=J to
11.<5J but the company is successful in controlling non operating expenses
i.e. ;.=;J to >.=/J so net profit increases in />>;.
CHAPTER 7.8
6
<
HERO CYCLES LTD.
C0,/ F).B S202'7'&2
P0+234%)0+, 200; 2007
I&4+'0,
'E F0<'
D'4+'0
,'
&rofit Before Tax :4:1.;4 1/114./< T6;61.66 =>.51
+et Cash 'low 7perating
-ctivity <4</.<4 /==:.<6 064<6.=< 0:5./6
+et Cash used in Investing 05=<<.// 04154.46 01<55.<; 04:.=<
-ctivity
+et Cash used in 'inancing 045;1.5; 04/:.=; 04155.6> 0=>.6<
-ctivity
+et IncD,ec in Cash 8 0;:.<: 05;4.5; T4=:.:1 T61:.>/
BAuivalent
Cash and BAuivalent at the ;;1.:< :=5.</ 0;:.<: 0=.=:
Begin of the Mear
Cash and BAuivalent at the :=5.</ //1.46 05;4.5; 0:<.15
Bnd of the Mear
CHAPTER 7.4
6=
FUND FLO ANALYSIS
D'>3&323.& .> F%&5
- Auestion arises as to the definition of 1'F+,2. It means9
1 'unds may mean change in cash onlyE
:>
'unds may mean change in working capital #the difference between current
assets and current liabilities( only.
- more comprehensive definition of funds may be given as follows9
1 'unds may mean change in financial resources* arising from changes in working
capital items and from financing and investing activities of the enterprise* which
may involve only non0current items.
The funds flow statement analyses only the causes of changes in the
firm3s working capital position. The cash flow statement is prepared to analy.e
changes in the flow of cash only. These statements fail to consider the changes
in the firm3s total financial resources. They do not reveal some significant items
that do not affect the firm3s cash or working capital position* but considerably
influence the financing position and asset mix of the firm.
The statement of changes in financial position is an extension of the funds flow
statement or the cash flow statement. Therefore* to get better insights* a firm may
prepare a comprehensive* all inclusive* statement of changes in financial position
incorporating changes in the firm3s cash and working capital positions involving9
1 Changes in the firm3s working capital position*
2 Changes in the firm3s cash position* and
3 Changes in the firm3s total financial resources.
:1
S202'7'&2 .> C/0&<', 3& .+C3&<
C01320)
P0+234%)0+, 200; 2007 E>>'42 .& .+C3&<
C01320)
I&4+'0,
'
D'4+'0,
'
C%++'&2 A,,'2,
0 Inventories ;::6/115/ <>6::1>45 4=14=<=/ 0
0 $undry ,ebtors
1<:>61/56
;
///<6=/5<
: 4:<><>>/= 0
0 Cash 8 Bank
Balance :=5<1:65 //145:6; 0 5;45:==;
(
A
)
2;=;51525
8
805;88817
7
C%++'&2 L3093)323',
0 Hiabilities
1:5>5/6<:
;
1=;<6<=15
4 0 44<1:4/;:
0 &rovisions //4;>::4< 1=6;6>>;; /;=6:6:1 0
(
B
)
18;418250
5
217488=22
0
)orking capital #-0
B( <4/4</;5< <</>5<=6; 0 0
+et increase in
working
5=::/
>= 0 0 5=:::/>=
capital
T.2
0) 882048=57 882048=57 48517;482 48517;482
N.2' @ &rovision should be taken as current liability
FUND FLO STATEMENT
S.%+4', A7.%&2 A11)34023.&, A7.%&2
(R,.) (R,.)
@aising of Hoans 1:545;/:6
+et Increase in )orking
Capital 5=:::/>=
'unds from
operation
11461;;1=
= &urchase of Investment ==1=44<:>
&urchase of 'ixed -ssets 14;<>64=;
Hoan of -dvances given 1/>11<==<
12==5244;
4
12==5244;
4
OR!ING NOTES
A5:%,2'5 P+.>32 0&5 L.,, A44.%&2
P0+234%)0+, A7.%&2 P0+234%)0+, A7.%&2
(R,.) (R,.)
To ,ep. on fixed
/14456//
4 By Balance bDd 5>/=/444>6
-ssets
To Balance cDd
5=::>1<//
/ By ,eferred Tax 15=6/=51
By 'und from 7peration 11461;;1==
:/
#Bal.
'igure(
517=8;8445 517=8;8445
FIAED ASSETS
P0+234%)0+, A7.%&2 P0+234%)0+, A7.%&2
(R,.) (R,.)
To Balance bDd 1=:<<<1/4;
By -dusted & 8 H -Dc
#,ep.( /14456//4
To purchase on 'ixed 14;<>64=; By Balance cDd 1<=4451511
-ssets #Bal. figure(
210;;8;;84 /1>::<::45
Interpretation : -s seen from the above analysis that there is increase in
working capital which* indicate that company is having sufficient current
assets to pay back the current liabilities in time. There is increase in
amount of loans by 1>.5<J and it is being utili.ed in financing the fixed
assets 8 investments.
CHAPTER 7.5
:
4
MEANING OF RATIO
- ratio is a simple arithmetical expression of the relationship of one number to
another. -ccording to -ccountant3s Handbook by )ixon* Gell and Bedford* a ratio 1is an
expression of Auantitative relationship between two numbers2. -ccording to Gohler* a
ratio is the relation* of the amount a* to another* b* expressed as the ration of a to b* a9b
#a is to b(E or as a simple fraction* integer* decimal* fraction or percentage.
- financial ratio is the relationship between two accounting figures
expressed mathematically. - ratio can also be expressed as percentage by
simply multiplying the ratio by 1>>. @atios provide clues to the financial strength*
soundness position or weakness of an enterprise. 7ne can draw conclusions
about the exact financial position of a concern with the help of ratios.
:5
MEANING AND CONCEPT OF RATIO ANALYSIS
@atio analysis is a techniAue of analysis and interpretation of financial
statements. It is the process of establishing and interpreting various ratios for helping in
making certain decisions. However* ratio analysis is not an end itself. It is only a means
of better understanding of financial strength and weakness of a firm. Calculation of
ratios does not serve any purpose* unless several appropriate ratios are analy.ed and
interpreted. There are a number of ratios which can be calculated from the information
given in the financial statements* but the analyst has to select the appropriate data and
calculate only a few appropriate ratios from the same keeping in mind the obective of
analysis. The following are four steps involved in the ratio analysis 9
1 $election of relevant data from financial statement depending upon obective
of analysis.
2 Calculation of the appropriate ratios from the above data.
3 Comparison of the calculated ratios with the ratio of same firm in the past* or the
ratios developed from proected financial statements or the ratios of some
other firms or the comparisons with ratios of the industry to which the firm belongs.
I&2'+1+'2023.& .> 2/' R023.,
@atio analysis is one of the most powerful tools of financial analysis. It is used
as a device to analy.e and interpret the financial health of enterprise. It is with help of
ratios that the financial statements can be analy.ed more clearly and decisions made
from such analysis. The use of ratios is not confined to financial managers only. There
are different parties interested in the ratio analysis for knowing the financial position of a
firm for different purposes. The supplier of goods on credit* banks* financial institutions*
investors* shareholders and management all make use of ratio analysis as a tool in
evaluating the financial position and performance of a firm for granting credit* providing
loans or making investments in the firm. )ith the use of ratio analysis* one can
measure the performance of the firm is improving or deteriorating. Thus* @atios have
wide applications and are of immense use today.
:6
G%35')3&', .+ 1+'40%23.&, >.+ %,' .> +023.@
1. A44%+04* .> >3&0&430) ,202'7'&2,@ The ratios are calculated from the data available
in financial statements. Before calculating ratios one should see whether proper
concepts and conventions have been used for preparing financial statements or not.
These statements should also be properly audited by competent auditors. The
precautions will establish the reliability of data given in financial statements.
2. O9:'4236' .+ 1%+1.,' .> 0&0)*,3,@ The type of ratios to be calculated will depend
upon the purpose for which these are reAuired. The purpose or obect for which
rations are reAuired to be studied should always be kept in mind for studying
various ratios. ,ifferent obects may reAuire the study of different ratios.
3. S')'423.& .> +023.,@ -nother precaution in ratios analysis is the proper
selection of appropriate ratios. The ratios should match the purpose for
which these are reAuired. 7nly these ratios should be selected which can
throw proper light on the matter to be discussed.
4. U,' .> ,20&50+5,@ The ratios will give on indications of financial position
only when discussed with reference to certain standard. These standard
may be rule of thumb as in case of current ratio U/91Vand acid test
ratioU191V* may be industry standards* may budgeted or proected ratios etc.
5. C0)39'+ .> 2/' 0&0)*,2@ The ratios are the only tools of analysis and their
interpretation will depend upon the caliber and competence of the analyst.
He should be familiar with various financial statements and the significance
of changes etc.
6. R023., 1+.635' .&)* 0 90,'@ The ratios are only guidelines for the analyst
he should not base his decision entirely on them. He should study any
other relevant information* situation in the concern* general economic
environment etc. before reaching final conclusions.
F%&423.&0) 4)0,,3>34023.& .+ 4)0,,3>34023.& 044.+53&< 2. 2',2,
::
In view of financial management or according to tests satisfied* various ratios
have been classified as below9
1. L3J%3532* +023.,@ These are the ratios* which measure the short term
solvency or financial position of the firm and are calculated to comment upon
the short term paying capacity of concern or firm3s ability to meet its current
obligations. The various liAuidity ratios are9 current ratio* liAuid ratio and
absolute ratio.
2. L.&< 2'+7 ,.)6'&4* 0&5 )'6'+0<' +023.,@ Hong term solvency ratios
convey firms ability to meet the interest cost and repayment schedule of its long
term obligations* example debt eAuity ratio and interest coverage ratio.
Heverage ration show the proportions of debt and eAuity in financing of the firm.
3. A423632* +023.,@ -ctivity ratios are calculated to measure the efficiency
with which the resources of a firm have been employed. These ratios are also
called turnover ratios because it indicates the speed with which assets are
being turned over in to sales example debtor turnover ratio.
C)0,,3>34023.& 044.+53&< 2. ,3<&3>340&4' .+ 371.+20&4'
The @atios have also been classified according to their significance or
importance. $ome ratios are more important than others and the firm may classify
them as primary and secondary ratios. The British Institute of management has
recommended the classification of ratios according to importance for inter firm
comparisons. 'or inter firm comparisons* the ratios may be classified as primary and
secondary ratios. The primary ratio is one which is of prime importance to a concern*
thus return on capital employed is named as primary ratio. The other ratios which
support or explain the primary ratio are called secondary ratio* e.g. the relationship of
operating profit to sales or the relationship of sales to total assets of the firm.
A&0)*,3, O> S/.+2(T'+7 F3&0&430) P.,323.&
The short0term obligation of a firm can be met only when there are
sufficient liAuid assets. If a firm fails to meet such current obligations* its
goodwill in the market is likely to be affected beyond repair. !oreover a very
high degree of liAuidity will tie funds in current assets.
:;
Therefore it is necessary to have a proper balance in regard to liAuidity of the firm.
Two types of ratio are calculated to measure short0term solvency of a firm.
I( HI?FI,ITM @-TI7$
II( B''ICIB+CM @-TI7$
III( $7H%B+CM @-TI7$
I%(&@7'IT-BIHITM @-TI7$
9) LIDUIDITY RATIO
It refers to the ability of a concern to meet its current obligation as and when
these become due. The short0term obligations are met by reali.ing amounts
from current* floating or circulating assets. These should be convertible into
cash for paying obligations of short L term nature. The sufficiency or
insufficiency of current assets should be assessed by comparing them with
short0term liabilities. If current assets can pay0off current liabilities* the liAuidity
position is satisfactory. 7n the other hand* if current liabilities may not easily
met out of current assets then the liAuidity position will be bad.
To measure liAuidity of a firm* the following ratios can be calculated9
(1) Current ratio
(2) ?uick ratio
(3) -bsolute Auick ratio
(1) C%++'&2 R023.
It is also known as )orking capital ratio. It is a measure of liAuidity and used in making
analysis of short term financial position.
Current @atio W
Current -ssets D Current
Hiabilities.
TABLE 1.1 (C%++'&2 R023.)
Y'0+ 200; 2007
Current assets /:=:616/64 4>6:4<<1;;
Current
liabilities 1:5>5/6<:; 1=;<6<=154
Current @atio 1.:5 1.65
:<
C%++'&2 0,,'2, C%++'&2 )3093)323',
8500000000
(R,.)
8000000000
A7.%&2
2500000000
2000000000
1500000000
1000000000
500000000
0
200; 2007
Y'0+,
FIGURE 1.1
C%++'&2 R023.
2
1.5
1
0.5
0
200; 2007
Y'0+,
I&2'+1+'2023.& @ It is decreasing in the year />>; because current liabilities are
increased this year as compare to />>:. 7verall this ratio is satisfactory as it is
nearest to the thumb rule i.e. /91
:=
(2) L3J%35 R023.
HiAuid @atio is more rigors test of liAuidity than the current ratio. It is the ratio
between Auick ratio 8 current liabilities. ?uick ratio refers to all current assets
except Inventory 8 prepaid expenses.
HiAuid @atio W HiAuid assets D Current Hiabilities
HiAuid assets W Current -ssets0 &repaid Bxp L Inventories
Y'0+ 200; 2007
HiAuid assets 1=/===5111 //6>;/;154
Current liabilities 1:5>5/6<:; 1=;<6<=154
HiAuid @atio 1.1< 1.15
TABLE 1.2(L3J%35 R023.)
L3J%35
0,,'2, C%++'&2 )3093)323',
2500000000
2000000000 (R,.)
1500000000 A7.%&2
1000000000
500000000
0
200;
2007
Y'0+,
;>
L3J%35 R023.
1.5
1
0.5
0
200; 2007
Y'0+,
FIGURE 1.2
I&2'+1+'2023.&@ -s seen from the analysis this ratio is almost same in both the
years Auite satisfactory with a thumb rule i.e. 1.6 9 1. Company3s current assets
involved large amount of debtors in it.
(3) A9,.)%2' L3J%35 R023.
Cash is the most liAuid ratio asset. -bsolute liAuid assets include Cash in hand*
Cash at bank* marketable securities or temporary investments.
-bsolute HiAuid @atio W -bsolute HiAuid -ssets D Current Hiabilities
-bsolute HiAuid -ssets W Cash T Bank T !arketable $ecurities
Y'0+ 200; 2007
-bsolute HiAuid
assets :=5<1:65 //145:6;
Current liabilities 1:5>5/6<:;
1=;<6<=15
4
-bsolute HiAuid
@atio >.>5 >.>1
TABLE 1.8(A9,.)%2' L3J%35
R023.)
;1
-bsolute HiAuid
assets
Current
liabilities
/6>>>>>>>>
/>>>>>>>>>
16>>>>>>>>
1>>>>>>>>>
6>>>>>>>>
>
/>>: />>;
FIGURE 1.8
A9,.)%2' L3J%35
R023.
0.0;
0.05
0.04
0.08
0.02
0.01
0
200; 2007
Y'0+,
I&2'+1+'2023.& @ %iewing the trend of the cash ratio of both the years it can be said
that this ratio is not satisfactory because cash and bank balance has been
decreased very much in the year />>; approx. :<J.
II) EFFICIENCY RATIOS OR ACTI$ITY RATIOS
;/
-ctivity ratio measures the efficiency and the effectiveness with which a firm
can manage its resources. These are known as the Turnover ratios * because
they indicate the speed with which assets are converted into cash.
!aor ratio given as under 9
1. )orking capital ratio
/. Inventory turnover ratio
13 ,ebtor turnover ratio
4. Creditor turnover ratio
1. .+C3&< C01320) T%+&.6'+ R023.
It indicates the velocity of utili.ation of net working capital. It indicates the
efficiency with which working capital is being used by the company.
)orking Capital Turnover @atio W +et $ales D-verage working capital
Y'0+ 200; 2007
+et sales 114:=44;51>
144><;>611
:
-verage working capital 11;>:1/=6:.6 1>::=55/1>
)orking Capital Turnover @atio =.;1 1/.5;
TABLE 2.1 (.+C3&< C01320) T%+&.6'+ R023.)
;4
.+C3&< C01320) T%+&.6'+ R023.
15
10
T37',
5
0
200; 2007 Y'0+,
FIGURE 2.1
I&2'+1+'2023.& @ )orking capital turnover ratio is increasing as we can see from the
above table becomes 1/.5; in />>; from =.;1 in />>: due to increase in sales
2. I&6'&2.+* T%+&.6'+ R023.
It indicates whether the inventory has been efficiently used or not. It
indicated the number of times the stock has been turned over during the period
and evaluates the efficiency with which a firm is able to manage its inventory.
Inventory Turnover @atio 9 +et
$ales D -vg. Inventory at Cost
Y'0+ 200; 2007
+et sales 114:=44;51> 144><;>611:
-verage inventory at cost ;></<161/.6 ;<:>=1><<
Inventory Turnover @atio 1:.>6 1:.=4
TABLE 2.2 (I&6'&2.+* T%+&.6'+ R023.)
;5
I&6'&2.+* T%+&.6'+ R023.
20
15
T37',10
5 0
200; 2007 Y'0+,
FIGURE 2.2
I&2'+1+'2023.& @ -s seen from the analysis there has been slight increase in the
ratio. Being a manufacturing concern company has to maintain large amount of
inventories in different forms but on the other side sales are increasing so it is
good sign for the company.
3. I&6'&2.+* C.&6'+,3.& P'+3.5
It is calculated to see the average time taken for clearing the stocks.
Inventory conversion period W +o. of days in a year DInventory Turnover @atio
Y'0+ 200; 2007
+o. of days in a year 4:6 4:6
Inventory Turnover @atio 1:.>6 1:.=4
Inventory conversion period /4 #days(
//
#days(
TABLE 2.8(I&6'&2.+* C.&6'+,3.& P'+3.5)
;6
I&6'&2.+* 4.&6'+,3.& 1'+3.5
D
0
*
,
2
5
2
0
1
5
1
0
5
0
200; 2007
Y
'
0
+
,
FIGUR
E 2.8
I&
2'
++
'2
02
3.
&@
T
h
e

c
o
m
pany3s
inventor
y
conversi
on
period
is
approxima
te /6 days
which
indicates
there is no
fear of
obsolesce
of
m
at
eri
al.
4. D'9
2.+
T%+
&.
6'+
R02
3.
Thi
s
rati
o
ind
ica
tes
the
vel
oci
ty
of
de
bt
col
lec
tio
n
ge
ner
all
y
hig
her
the
rati
o
m
ea
ns
th
e
m
o
r
e

e
ff
i
c
i
e
n
t
m
a
n
a
g
e
m
e
n
t
o
f
d
e
b
t
o
r
s
or more
liAuid
are
debtors
and
vice
verse.
,ebtor Turnover @atio
W Total sales D -verage Trade ,ebtors
Y'0+ 200;
Total $ales 114:=44;51> 144><;>611:
-verage trade
debtors 1<554/15<1 />5566/5;1.6
,ebtor Turnover
@atio :.1;
TABLE 2.4(D'92.+ T%+&.6'+ R023.)
;:
T
3
7
'
,
D'92.+ T%+&.6'+ R023.
10
8
;
4
2
0
200; 2007 Y'0+,
FIGURE 2.4
I
&
2
'
+
1+'2023.&9 This ratio has
been increased by 45J due
to increase in sales but at
the same time debtors are
also increasing which is not
feasible in long run.
5. A6'+0<' C.))'423.& P'+3.5
It represents the average
number of days for which a firm
has to wait before its receivables
are converted into cash.
-ver. Collection period
W
Y'0+
+o. of days in a year
-vg. Collection period
-verage Collection
&eriod
;
;
D
0
*
,
A6'+0<' C.))'423.& P'+3.5
;0
50
40
80
20
10
0
200; 2007 Y'0+,
FIGURE 2.5
I
&
2
'
+1+'2023.& @
Company3s
average
collection period
is approximate
:> days or two
months. It means
company3s is
allowing sufficient time to
debtors. It should not be very
much increasing in the long
run.
6. C+'532.+ T%+&.6'+
R023.
This ratio indicates the
velocity with which the
credito
rs are
turned
over in
r
e
l
a
t
i
o
n

t
o

p
u
r
c
h
a
s
e
s
.

"
e
n
e
r
a
ll
y
h
i
g
h
e
r
t
h
e

r
a
ti
o

b
e
t
t
e
r
it
i
s
o
r
o
t
h
e
r
w
i
s
e

l
o
w
e
r

t
h
e

c
r
e
d
i
t
o
r

v
e
l
o
c
i
t
y
*
less favorable
are the results.
Creditor Turnover @atio W -nnual &urchases D -verage
Creditors.
Y'0+
-nnual purchases
-verage creditors
Creditor Turnover
@atio
;
<
C+'532.+ T%+&.6'+ R023.
20
15
T37', 10
5
0
200; 2007 Y'0+,
FIGURE 2.;
7. A6'+0<' P0*7'&2 P'+3.5
-verage &ayment &eriod W +o. of days in a year D Creditor Turnover @atio
Y'0+ 200; 2007
+o. of days in a year 4:6 4:6
Creditor Turnover @atio :.=4 :.<<
-verage &ayment &eriod 64 #days(
64
#days(
TABLE 2.7 (A6'+0<' P0*7'&2
P'+3.5)
D
0
A6'+0<' P0*7'&2 P'+3.5
;0
50
40
8
0
2
0
1
0
0
200; 2007
Y
'
0
+
,
FIGURE 2.7
;
=
I&2'+1+'2023.&@ The payment track record of the company is properly designed
such that timely payment is made to the suppliers. By analy.ing the trend it can
be said that creditors are paid with in two months this shows as and when
payment is received from the debtors then it is being paid and more over
company is enoying credit policy by the creditors.
61) SOL$ENCY RATIOS
The term Isolvency3 refers to ability of a concern to meet its long0term
obligations. The long0term indebtness of a firm includes debenture0holders* financial
institutions providing medium and long0term loans and other creditors selling goods on
installments basis .Hong0term solvency ratio indicate a firm3s ability to meet the fixed
interest and costs and repayment schedules associated with its long0term borrowings.
'ollowing solvency ratios have been used for this purpose90
(1) ,ebt0eAuity ratio
(2) BAuity ratio
(3) $olvency ratio
(4) 'ixed assets to net worth
(1) D'92 EJ%32* R023.
It shows the relationship between external and internal eAuities 8 it is calculated
to measure the claim of outsiders and owners against company3s assets
The outsiderOs funds include all debtsD liabilities to outsiders* whether in
form of debentures* bonds* mortgage or bills.
The shareholders funds include eAuity T preference share capital
included capital reserve* revenue reserve and reserves representing
accumulated profits and surpluses.
,ebt BAuity @atio W Hong term ,ebts D $hareholders 'undsX1>>
Y'0+ 200; 2007
Hong term ,ebts 16:;<;:54/
1;4///4:=
;
$hareholders
'unds 55/;55:1>6
64:5/41>/
/
,ebt BAuity @atio 46.51 4/./=
TABLE 8.1(D'92 EJ%32* R023.)
<>
P
'
D'92 EJ%32* R023.
40
80
20
10
0
200; 2007 Y'0+,
FIGURE 8.1
I
&
2
'
+1+'2023.& @ There has been a
slight decrease in this ratio
due to the fact that now the
company is relying more on
own funds then on outsiders
funds. -s such ratio has been
improved and that amount is
blocked in inventories.
(2) EJ%32* R023.
Bstablish the relationship
between shareholders funds
and total assets of the
company* the components of this
ratio are
BAuity @atio W $hareholder3s 'unds
D Total -ssets X1>>
Y'0+ 200; 2007
$hareholder3s 'unds 55/;55:1>6
64:;/41>/
/
Total -ssets ;61:=>>5=1
<;=41:;55
=
BAuity @atio 6= :1
TABLE 8.2(EJ%32* R023.)
<
1
P
'
EJ%32* R023.
70
;0
50
40
80
20
10
0
200; 2007 Y'0+,
FIGURE 8.2
I
&
2
'
+
1+'2023.& @ Company is
relying more shareholder
funds than on loan funds. This
is favourable point for the
creditors as company3s eAuity
ratio in />>: is 6=J and in
/>>; is :1J .
3. S.)6'&4* R023.
This ratio indicates the
relationship between total liabilities
to outsiders 8 total assets of the
company.
$olvency ratio W 1>>0 BAuity ratio
Mear
/>>:
/>>;
TABLE 8.8(S.)6'&4*
R023.)
</
S.)6'&4* R023.
50
P'+4'&20<' 40
80
20
10
0
200; 2007 Y'0+,
FIGURE 8.8
I&2'+1+'2023.& @ .The ratio in />>: is 51J and in />>; is 4=J * so it implies
lower the ratio of total liabilities to total assets* more satisfactoryDstable in the
long term solvency position of the firm.
4. F3?'5 A,,'2, 2. N'2 .+2/ R023.
The ratio established the relationship between fixed assets and
shareholders funds i.e. share capital plus* reserves and surplus and retained
earning The ratio can be calculated as follows9 'ixed -ssets to +et worth @atio
W 'ixed -ssets #after ,ep.( D $hareholder funds X 1>>
Y'0+
P'+4
'&20
<'
5
0
4
0
8
2
0
1
0
0
200; 2007
Y'0+,
I&2'+1+'2023.&@ the company3s fixed assets to net worth is 55.5;J and 46.4>J
in years />>: and />>;. It implies that owners funds are more than total fixed
assets and a part of the working capital is provided by the shareholders.
I$ PROFITABILITY RATIOS
The following ratios are known as general profitability ratio
1) ".&. @atio
2) +.&. @atio
3) @eturn on Investment
1. G+.,, P+.>32 R023.
"ross profit ratio measures the relationship of gross profit to net sales
and is usually represented as a percentage. Thus it is calculated by dividing the
gross profit by sales.
"ross &rofit @atio W "ross &rofit D $ales X 1>>
Y'0+ 200; 2007
"ross &rofit 1:1/=6:6;6 16;6:4645=
$ales 114:=44;51>
144><;>611
:
"ross &rofit @atio 15.1= 11.<5
TABLE 4.1(G+.,, P+.>32 R023.)
<5
P
'
G+.,, P+.>32 R023.
20
15
10
5
0
200; 2007 Y'0+,
FIGURE 4.1
I&2'+1+'2023.&@ There has been
decrease in the "ross &rofit by
/.41J because the rate of increase
in sales is less than the rate of
increase in cost of goods sold.
<
2. N'2 P+.>32 R023.
+et profit ratio established a relationship between net profit and sales.
This ratio is the overall measure of firms profitability and is calculated as9
+et &rofit @atio W +et profit after tax D +et $ales X1>>
Y'0+ 200; 2007
+et profit after tax ::5=414>/ 1>/66<6;4<
+et sales 114:=44;51>
144><;>611
:
+et &rofit @atio 6.<5 ;.;1
TABLE 4.2(N'2 P+.>32 R023.)
N'2 P+.>32 R023.
P'+4'&20<'
1
0
;
8
4
2
0
200; 2007 Y'0+,
FIGURE 4.2
I&2'+1+'2023.& @ There has been decrease in the "ross &rofit by /.41J because
the rate of increase in sales is less than the rate of increase in cost of goods sold.
The non0operating expenses decrease by <:.54J so net profit increases.
<:
3. R'2%+& .& I&6',27'&2
@eturn on Investment W &rofit Before interest and taxes D Total investment X1>>
Y'0+ 200; 2007
&rofit Before interest and taxes :4:1;45:4
1/114/;;=
;
Total investment /<616>5>>15
4<5454;<:
1
@eturn on Investment //.41 41.6/
TABLE 4.8(R'2%+& .&
I&6',27'&2)
R'2%+& .& I&6',27'&2
85
80
P'+4'&20<' 25
20
15
10
5
0
200; 2007 Y'0+,
FIGURE 4.8
I&2'+1+'2023.&@ The Company3s overall profitability is improving as return on
investment increases from //.41J to 41.6/J.
CHAPTER 8
<
;
<<
FINDINGS
1. Company3s is utili.ing long term loans to finance fixed assets and
investments but it has started relying on own funds.
2. There is decrease in gross profit of the company due to increase in cost of goods
sold but there is increase in net profits due to decrease in non operating expense.
3. ,ebtors are also increasing which is not good sign for the company in long run.
4. Current liabilities are increasing by />.:1J. )here as cash decreases
very much by :<.15J
5. There is stability in eAuity share capital.
<
=
CHAPTER =
=
>
SUGGESTIONS
1. The Company is enoying a good current position. It should take steps to
further improve its position by repositioning the composition of current
assets as large amount has been block in debtors and inventories.
2. Harge amounts of funds are blocked in debtors. Company should reduce
its debtors so that the blocked amount is properly utili.ed.
3. Inventory control is not proper. The Company has not defined the minimum and
the maximum stock level scientifically. Therefore there is blockage of funds.
!oreover* the safety stock level is also not defined. $o the company should
apply the proper Inventory Control $ystem so that there is no wastage of funds.
=1
CHAPTER 10
=
/
LIMITATION
'inancial analysis is a powerful mechanism of determining financial strength
and weakness of a firm. But the analysis is based on the information available
in the financial statements. Thus the financial analysis suffers from some
serious inherent limitation of financial statements* which are as follows 90
1. It is only a study of interim reports.
2. 'inancial analysis is based only upon monetary information 8
non0monetary factors are ignored.
3. It does not consider changes in price level.
4. -s financial statement are prepared on the basis of a going concernE it
does not give exact position.
5. -nalysis is only a mean not an end in itself. The analyst has to
make interpretation and draw his own conclusion.
=
4
CHAPTER 11
REFERENCES
S32',@ (
www.herocycles.com
www.google.com
B..C A%2/.+
!anagement -ccounting @.G.$harma
-nnual @eports of HB@7 CMCHB$ HI!ITB, at ending year 41
$T
!-@CH />>:
-+, />>;.
CHAPTER 12
=6
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