UNIVERSITY OF WALES AND MANAGEMENT DEVELOPMENT INSTITUE OF SINGAPORE

SUBJECT MODULE LECTURER

[

: ACCOUNTING FOR MANAGERIAL DECISIONS : MBWD5 1128 B : MR. MANEK MUKESH : MASTER OF BUSINESS ADMINISTRATION

COURSE

ASSIGNMENT COVER SHEET

No. 1

Name of Group Members

Fin No.

Signature

Akash Agrawal Arjun Vasu Muarlidharan Mohana Krishnan

G1099793W G1096085T G1098021L

2 3

Shivam Srivastava

G1101079U

Submitted on Due Date?

YES (Date submitted: 9th Dec 2011)

Submitted Soft Copy? YES (Date submitted: 9th Dec 2011) Word Limit Observed? YES (No of words: 3066)

TABLE OF CONTENTS

CHAPTER 01 02 03 04 05 06 07 08 09 10 Executive Summary

TOPIC

PAGE NO 3 4 6 8 9 11 13 14 15 17

A Traders Perspective A Lenders Perspective A Direct Competitors Perspective An Operation Managers Perspective Information of Interest to Shareholders Information provided on annual report Conclusion Screenshots Bibliography

EXECUTIVE SUMMARY: Financial Statement analysis is the procedure of recognizing the potential strength and weakness of the company by calculating the ratios and numbers from the balance sheets and annual reports and profit loss account. These statements declare various facts and figures of the company and provide complete details about the assets and liabilities of the company. Analyzing financial reports shows us the performance of the company financial figures. The methods that can be used for analyzing the financial statements such as ratio analysis, trend analysis. One of the major methods used is ratios which are considered the most powerful tool. Through this report, we analyze the annual reports of the automobile companies of India who are very close competitors. The perspectives in which the ratios were analyzed were trade supplier, the operational manager, a direct competitor and a lender to the company.

QUESTION 1: 1. A TRADE SUPPLIERS PERSPECTIVE Analysis of the annual report of Bajaj Automobiles and Hero Moto Corp of the year 2010: Ratios Quick Ratio Working Capital Formulas Current Assets-Inventories Current Liabilities Current Assets Current Liabilities Bajaj Automobiles 0.59 times -1061.51 Hero Moto Corp 0.15 times -4640.28

Debt to Asset Ratio

Total Liabilities Total Assets

0.47 times

0.56 times

Debt to Equity Ratio Cash Ratio

Total Liabilities Owners Equity Cash + Cash Equivalents Current Liabilities

0.90 times

2.08 times

0.14 times

0.01 times

As supplier I would be interested in the Growth and Solvency of the company. This would help us to take decisions whether to continue the supply to the company which we are dealing. Quick ratio: Quick Ratio helps us to assess whether the company is able to meet up with its short term financial obligations. Bajaj Automobiles has a quick ratio of 0.59 times when compared to Hero Moto corp.s quick of 0.15 times. A high quick ratio results in more security of the company in short run. And so the company would be able to meet its short term financial obligations. Since Bajaj has higher quick ratio As a supplier, I would be willing to supply to Bajaj rather than Hero Moto Corp.

Working Capital: Working capital with which Bajaj operates is -1061.51 crore rupees whereas Hero Moto Corp operates with working capital of -4640.28 crore rupees. Since Bajaj has more number of current assets in terms of Hero Moto Corp there is a vast difference between these two companies. Due to this reason Bajaj is financially healthy and as a supplier I can trust Bajaj more than Hero Moto Corp. Debt to Asset ratio: This ratio indicates to what extent the company has used debts for financing the organization. If the organization has lower debt to asset ratio then the organization is said to be financially wealthy. Bajaj has 0.47 times of debt to asset ratio when compared to Hero Moto Corps ratio of 0.56 times. As a supplier I would be willing to supply to Bajaj since it has lower debt to asset ratio. Debt to Equity ratio: Bajaj has a debt to equity ratio of 0.90 times and Hero Moto Corp has debt to equity ratio of 2.9 times. It is better to have a lower debt to equity ratio because if debt to equity ratio is more than 1 than the majority of companys assets are financed through debt rather than owners equity. From the above calculations we can see Bajaj is more reliable than Hero Moto Corp since it has a relatively lower ratio (i.e. less than 1). So as a supplier I would prefer Bajaj because it has lower debts. Cash Ratio: Cash Ratio is an indicator of companys short liquidity. It reflects the ability to effectively use its cash or cash equivalents to pay the current financial obligations. It is better to have higher cash ratio since it reflects paying capability. Bajaj has a cash ratio of 0.14 times and Hero Moto Corp has ratio of 0.01 times. So as I supplier I would prefer Bajaj as it has more ability to pay its short term finance. Based on the above comparisons, as a supplier it is better to supply Bajaj when compared to Hero Moto Corp. Bajaj is more credit worthy and creditor friendly.

2. A LENDERS PERSPECTIVE: Analysis of the annual report of Bajaj Automobiles and Hero Moto Corp of the year 2010:

Ratios

Formulas

Bajaj Automobiles

Hero Moto Corp 0.24

Current Ratio

Current Assets Current Liabilities Current Assets-Inventories Current Liabilities Total Liabilities Owners Equity Total Assets/Total Liabilities

0.73

Acid Test Ratio Debt to Equity Ratio Solvency Ratio

0.59 times

0.15 times

0.90 2.106683364

2.08 0.580706596

Cash Ratio

Cash + Cash Equivalents Current Liabilities

0.14 times

0.01 times

As a lender I would look at the following ratios to compare the two companies Current ratio: The current ratio of Bajaj Automobiles is 0.73 times is high when compared to Hero Moto Corp which is 0.24 times, Bajaj automobiles has a better short term financial strength when compared to Hero Moto Corp. Acid Test Ratio: The Acid Test Ratio of the companies tells that Bajaj Automobiles has more ability to pay its current liabilities through its immediate assets when compared to Hero Moto Corp. So as lender I would be willing to lend Bajaj when compared to Hero Moto Corp.

Debt to Equity Ratio:

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Bajaj has a debt to equity ratio of 0.90 times and Hero Moto Corp has debt to equity ratio of 2.08 times. This indicates that majority of the total assets of Hero Moto Corp are financed by debt which is not profitable for the company. From the above calculations we can see Bajaj is more reliable than Hero Moto Corp since it has a relatively lower ratio. So as a Lender I would be willing to supply to Bajaj as the company is more secure financially. Solvency ratio: This ratio indicates the probability of a company being solvent as it compares total assets held by total liabilities of the company. As a lender I would be willing to select Bajaj because the solvency ratio of Bajaj is far better than that of Hero Motor Corp hence the risk of bad debts is lower in Bajaj. Cash Ratio: Cash Ratio is an indicator of companys short liquidity. It reflects the ability to effectively use its cash or cash equivalents to pay the current financial obligations. It is better to have higher cash ratio since it reflects paying capability. Bajaj has a cash ratio of 0.14 times and Hero Moto Corp has ratio of 0.01 times. So as Lender I would prefer Bajaj as it has more ability to pay its short term finance.

3. A DIRECTORS COMPETITORS PERSPECTIVE: Analysis of the annual report of Bajaj Automobiles and LML
Ratios Formulae Bajaj Auto mobiles 2010-11 Sales Revenue Net Profit Margin Earnings Per Share Available in the statement of earnings Net Profit x100 Sales Revenue Profit for the year Number of ordinary shares in issue 16962.11 22.5 119.4

LML
2008-09 161.62 -8.1 -6.4

Inventory Turnover Times Return on Sales

Net Sales/Inventory

27.81553145

1.68425027

Net Profit/Sales

0.21

-0.07

As a direct competitor the performance of the other organization is very important. I would be interested in the liquidity and profitability of the organization Sales Revenue: The revenue of Bajaj Automobiles is nearly 10 times higher than LML this shows that Bajaj Automobiles are ahead of LML in terms of the sales and is a major competitor to other motorcycles manufacturers. This means that Bajaj is a tough competitor than LML. Net Profit Margin: The ratio gives us an idea of the cash that is available after all its expenses. Bajaj Automobiles has a higher Net profit margin at 22.5% when compared to LMLs -8.1%. Bajaj Automobiles has been successful in generating a high net profit margin and it shows the company has good cost controlling techniques. As a direct competitor Bajaj Automobiles is a major company to compete with. Earnings Per Share: Shareholders of Bajaj Automobiles earn 119.4 crore rupees per share in comparison to the shareholders of LML who earn -6.4 Crore rupees per share. This can be an advantage to attract investors to invest in Bajaj Automobiles. As a competitor we must develop our organization to attract further investments. Inventory Turnover Times:
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Bajaj has inventory turnover ratio of 27.81 when compared to LMLs 1.68. Bajaj Automobiles has a better inventory turnover ratio when compared to LML. It shows that Bajaj has better conversion of stock into sales and efficiently manages the inventory and sales. Return on Sales: Return on sales determines the profit margin and determines that the growth of the company. Since the return on sales for Bajaj is efficient and that of LML is is negative so from a competitors perspective Bajaj is a stronger competitor.

4. AN OPERATIONAL MANAGERS PERSPECTIVE:

Analysis of the annual report of Bajaj Automobiles and Hero Moto Corp

Ratios

Formulas

Bajaj Automobiles 2010-11

LML

2008-09 1.68

Inventory Turnover Ratio Fixed Asset Turnover Ratio Inventory Days Held

Cost of Sales Average Stock Cost of Sales Net Fixed Assets Inventory x100 Cost of Sales

27.81

10.32

1.14

13.12

216.71 days

Total Inventory Provided in Balance Sheet

576.25 days

92.7 days

As an operational a manager I would be interested in the following ratios to compare the two companies.

Inventory Turnover Ratio: Bajaj has inventory turnover ratio of 27.81 when compared to LMLs 1.68. Bajaj Automobiles has a better inventory turnover ratio when compared to LML. It shows that Bajaj has better conversion of stock into sales and efficiently manages the inventory. Fixed asset turnover ratio: Bajaj has effective utilization of fixed assets to improve the profit earning capacity of the company. LML does not use its fixed assets properly. It is evident from the fixed assets turnover ratio of 1.14 times comparing to 10.32 times of Bajaj. So as an operational I would support bajaj. Inventory Days Held: Bajaj is managing its stock better than LML. The inventory days held by Bajaj is just 13.12 days whereas LML holds its stock for 261.71 days. So as an Operational manager I would not be interested in LML and I would be interested in Bajaj. Total Inventory: The inventory days shows how fast the company can sell its products. Bajaj sells its product faster than LML. It is evident from the Bajaj has a total inventory of 576.25 days whereas LML has a total inventory of 92.7 days.

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QUESTION 2.1 If you owned shares in a company, what information would be of particular interest to you? If we are the shareholders in a company we would like to analyze the annual report and financial statements of the company in order to take decision regarding weather to hold, buy or sell the shares held by us and also to keep a check on our Return on investment.

Earnings per Share: = Net earnings/No. of shares. It is the most important perspective of any share holder as it provides the information regarding the return on investment made by us. Every share holder invest in a company to get good returns from that, hence if the EPS of our company is good than we shall hold the shares and enjoy the profits.

Return on Capital Employed: = EBIT/ (Total Assets-Current liability). This ratio is very crucial from a shareholders view as it shows the efficiency and profitability of companys capital investment. Grater the ROC of a company, the better is its performance. Hence we can find out the performance of our company by comparing it with the performance of other companies in the industry.

Debt Equity Ratio: = Total Debts/Shareholders fund. The debt equity ratio defines the financial structure of the company as it shows the ratio between total liabilities and shareholders fund. This means that if this ratio is higher than the company is more into loans and debentures rather than self financing which can be risky if the company does not earn sufficient profits and it also reduces the earning per share by way of interest charges. So we will ensure that this ratio should not be more than 1.
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Solvency Ratio: =Total Assets/Total Liabilities. This ratio indicates the probability of a company being solvent as it compares total assets held by total liabilities of the company. As a share holder we would observe this ratio to feel secured that in future if the company dissolves than it has enough assets to pay off its debts and no liability comes on us.

Past Performance and Growth: As a share holder, observance of past performance and growth is necessary in order to know whether the company is in a growing stage or not. This will help us to estimate the future performance of the company n help us to take decisions regarding when to hold, buy or sell the shares.

Dividend Policy and Cash Observance: As an investor, we would like to go through the companys dividend policy as it shows that the company is maintaining enough retained earnings in order to meet the bad circumstances in future. Also that the company does not have excess liquid cash to make sure that it is not misused and if it has excess cash than the company should buy back its shares so that higher EPS is achieved.

Others; Other important factors like Market Share, Goodwill, Contingent liabilities, Future Plans, Risk Assessment, AGM Report, Directors Report etc, will also be observed by us as a shareholder to make sure that our investment are making High returns and risk involved is minimum.
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Question 2.2 Do you consider that the information outlined in (i) is provided in the Annual Report of your chosen company?

Except Goodwill(Which Cant be calculated in monetary terms practically), all other information and ratios outlined by us in order to take decisions regarding the shareholders perspective, is provided in the Annual Reports of the companies taken by us and this can be verified by the information given below:

1) Earnings per share: It is provided in the annual report of all the companies chosen by us with

its method of calculation. The EPS of Bajaj Auto Limited is Rs. 119.4, of Hero Moto Crop Ltd. Is Rs. 100.53 while for LML Limited is Rs. -6.4. this means that shareholders of Bajaj and Hero are enjoying a high return on investments while the shareholders of LML had no profits and may result to capital reduction in future.
2) Return On Capital employed: The Annual reports provide information regarding Earnings

Before Interest and Tax, total assets and current liabilities by which it becomes easy to calculate ROC. ROC for Bajaj, Hero and LML are 0.70, 0.53 and 0.20 respectively which indicates that Bajaj is performing much better than Hero and LML.
3) Debt Equity Ratio: The annual report helped us to calculate The Debt Equity Ratio of Bajaj,

Hero and LML which are 0.90, 2.08, 1.4 respectively. This means Bajaj is again better than Hero and LML since its has more of self funding than through loans while the funding of Hero and LML is more from loans and creditors which shows a higher risk involvement.
4) Solvency Ratio: The financial report also provides us with the information which is useful for

calculating Solvency Ratio. The solvency ratio of Bajaj is 2.1 for Hero is 1.75 and LML is 0.58. This indicates that the shareholders of Bajaj are at a minimum risk as compared to that of Hero and LML
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5) Past Performance and Growth: The Companys past performance and growth can also be observed by reading the annual reports of all the three companies. The reports shows balance sheet of present n previous years along with many graphical data of last 5 years.

6) Dividend Policy and cash observance: This information can also be found in the annual reports of all the three companies by looking into its Balance sheet and Income Statement. 7) Others: All the other information like Market Share, Contingent liabilities, Future Plans, Risk
Assessment, AGM Report, Directors Report except Goodwill is available in annual reports and Audit

Report of these companies. However the annual report of LML does not provide with the information of its market share and future plans. CONCLUSION As a shareholder (Potential) it can be concluded from above data that investing in Bajaj Auto Ltd. is much more better than the other two companies since it provides higher returns with low risk. The Shareholders (Existing) of Bajaj should continue to hold its share for long term benefits and continue to invest in this company, while the shareholders of Hero must also hold the shares but must observe the companys performance carefully as the risk level is a bit high and the shareholders of LML Ltd. Must sell out there shares as soon as possible to avoid further losses in future. However our conclusion may not be the accurate conclusion as it is just the observance of Annual reports and ratios which provides just a better understanding of the companys workings and its financial statement. Hence it can be said that this conclusion is just an estimate of future performance of the company based on its past and present performance.

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Workings Screenshots:

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Bibliography:
Atrill P and Mclaney E (2008), Accounting and Finance For Non-Specialists, 6th Edition, Pearson Education Limited, London. Rice A (2003), Accounts Demystified: How to Understand Financial Accounting and Analysis, 4th Edition, Prentice Hall Business, London.
Annual Report of Hero Moto Corp of 2010 2011 from http://www.heromotocorp.com/hero_admin/data_content/pdf/annual_report/Annual_Re port_2010-11.pdf Annual Report of LML ltd 2008 2009 from http://lmlworld.com/Pdf/Annual%20Report%202008-09-LML.pdf Annual Report of Bajaj Auto ltd of 2010 2011 from http://www.bajajauto.com/report/BAL_AR_2010-11.pdf

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