amd mbwd5 1128b akash agrawal
TRANSCRIPT
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UNIVERSITY OF WALES
AND
MANAGEMENT DEVELOPMENT INSTITUE OF SINGAPORE
SUBJECT : ACCOUNTING FOR MANAGERIAL DECISIONS
MODULE : MBWD5 1128 B
LECTURER : MR. MANEK MUKESH[
COURSE : MASTER OF BUSINESS ADMINISTRATION
ASSIGNMENT COVER SHEET
No. Name of Group Members Fin No. Signature
1 Akash Agrawal G1099793W
2 Arjun Vasu G1096085T
3 Muarlidharan Mohana Krishnan G1098021L
4 Shivam Srivastava G1101079U
Submitted on Due Date? YES (Date submitted: 9 th Dec 2011)
Submitted Soft Copy? YES (Date submitted: 9 th Dec 2011)
Word Limit Observed? YES (No of words: 3066)
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TABLE OF CONTENTS
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CHAPTER TOPIC PAGE NO
01 Executive Summary 3
02 A Traders Perspective 4
03 A Lenders Perspective 6
04 A Direct Competitors Perspective 8
05 An Operation Managers Perspective 9
06 Information of Interest to Shareholders 11
07 Information provided on annual report 13
08 Conclusion 14
09 Screenshots 15
10 Bibliography 17
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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, theoperational manager, a direct competitor and a lender to the company.
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QUESTION 1:
1. A TRADE SUPPLIERS PERSPECTIVE
Analysis of the annual report of Bajaj Automobiles and Hero Moto Corp of the year 2010:
Ratios Formulas Bajaj Automobiles Hero MotoCorp
Quick Ratio Current Assets-InventoriesCurrent Liabilities
0.59 times 0.15 times
Working Capital Current Assets Current Liabilities -1061.51 -4640.28
Debt to AssetRatio
Total LiabilitiesTotal Assets
0.47 times 0.56 times
Debt to EquityRatio
Total LiabilitiesOwners Equity
0.90 times 2.08 times
Cash Ratio Cash + Cash EquivalentsCurrent Liabilities
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.
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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 tothis 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 shortterm 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.
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2. A LENDERS PERSPECTIVE:
Analysis of the annual report of Bajaj Automobiles and Hero Moto Corp of the year 2010:
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 Corpwhich is 0.24 times, Bajaj automobiles has a better short term financial strength when compared toHero Moto Corp.
Acid Test Ratio:
The Acid Test Ratio of the companies tells that Bajaj Automobiles has more ability to pay itscurrent liabilities through its immediate assets when compared to Hero Moto Corp. So as lender Iwould be willing to lend Bajaj when compared to Hero Moto Corp.
Debt to Equity Ratio:
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Ratios Formulas Bajaj Automobiles Hero MotoCorp
Current Ratio Current AssetsCurrent Liabilities
0.73 0.24
Acid TestRatio
Current Assets-InventoriesCurrent Liabilities
0.59 times 0.15 times
Debt to EquityRatio
Total LiabilitiesOwners Equity
0.90 2.08
Solvency Ratio Total Assets/Total Liabilities 2.106683364 0.580706596
Cash Ratio Cash + Cash EquivalentsCurrent Liabilities
0.14 times 0.01 times
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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 2.08times. This indicates that majority of the total assets of Hero Moto Corp are financed by debtwhich is not profitable for the company. From the above calculations we can see Bajaj is morereliable than Hero Moto Corp since it has a relatively lower ratio. So as a Lender I would bewilling 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 bytotal liabilities of the company. As a lender I would be willing to select Bajaj because the solvencyratio of Bajaj is far better than that of Hero Motor Corp hence the risk of bad debts is lower inBajaj.
Cash Ratio:
Cash Ratio is an indicator of companys short liquidity. It reflects the ability to effectively use itscash 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.
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3. A DIRECTORS COMPETITORS PERSPECTIVE:
Analysis of the annual report of Bajaj Automobiles and LML
Ratios Formulae Bajaj Auto mobiles LML
2010-11 2008-09
Sales Revenue Available in the statementof earnings
16962.11 161.62
Net ProfitMargin
Net Profit x100Sales Revenue
22.5 -8.1
Earnings Per Share
Profit for the year Number of ordinary shares inissue
119.4 -6.4
InventoryTurnover Times
Net Sales/Inventory 27.81553145 1.68425027
Return on Sales Net Profit/Sales 0.21 -0.07
As a direct competitor the performance of the other organization is very important. I would beinterested in the liquidity and profitability of the organization
Sales Revenue: The revenue of Bajaj Automobiles is nearly 10 times higher than LML this showsthat 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 thecompany has good cost controlling techniques. As a direct competitor Bajaj Automobiles is amajor company to compete with.
Earnings Per Share: Shareholders of Bajaj Automobiles earn 119.4 crore rupees per share incomparison to the shareholders of LML who earn -6.4 Crore rupees per share. This can be anadvantage 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 hasa better inventory turnover ratio when compared to LML. It shows that Bajaj has better conversionof 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. Sincethe 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
LML
2010-11 2008-09
Inventory
Turnover Ratio
Cost of Sales
Average Stock
27.81 1.68
Fixed AssetTurnover Ratio
Cost of Sales Net Fixed Assets
10.32 1.14
Inventory DaysHeld
Inventory x100Cost of Sales
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.
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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 conversionof 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 atotal 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 EarningsBefore 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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http://www.heromotocorp.com/hero_admin/data_content/pdf/annual_report/Annual_Report_2010-11.pdfhttp://www.heromotocorp.com/hero_admin/data_content/pdf/annual_report/Annual_Report_2010-11.pdfhttp://lmlworld.com/Pdf/Annual%20Report%202008-09-LML.pdfhttp://www.bajajauto.com/report/BAL_AR_2010-11.pdfhttp://www.heromotocorp.com/hero_admin/data_content/pdf/annual_report/Annual_Report_2010-11.pdfhttp://www.heromotocorp.com/hero_admin/data_content/pdf/annual_report/Annual_Report_2010-11.pdfhttp://lmlworld.com/Pdf/Annual%20Report%202008-09-LML.pdfhttp://www.bajajauto.com/report/BAL_AR_2010-11.pdf