Managerial accounting assignment, financial ratio analysis of automobile companies

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Business & Mgmt

Published on February 18, 2014

Author: TusharUpadhyay


Automobile industry Maruti Suzuki India Liquidity Ratios Current Ratio Quick Ratio Activity Ratios Inventory turnover Total assets turnover Debtors turnover ratio Profitability Ratios Gross Profit Margin (%) Return on equity (%) Return on assets Leverage Ratios Debt to Equity Interest coverage Long term Debt to Equity March 2013 1.04 0.90 March 2012 1.02 0.89 March 2011 1.47 1.14 March 2010 0.91 0.68 March 2009 1.51 1.26 26.67 2.23 36.92 22.80 2.22 38.84 33.33 2.59 42.93 30.47 2.32 33.92 30.46 2.06 26.33 5.43 12.87 615.03 4.85 10.76 525.68 6.37 16.50 479.99 9.93 21.10 409.65 5.77 13.04 323.45 0.07 16.76 0.03 0.07 39.85 -- 0.02 126.04 0.02 0.07 105.39 0.04 0.07 34.21 0.07 15 10 5 0 2013 2012 2011 2010 2009 Quick Ratio Current Ratio Inventory turnover Gross Profit Margin (%) Debt to Equity  Source: Hindustan Motors Limited Liquidity Ratios Current Ratio Quick Ratio Activity Ratios Inventory turnover Total assets turnover Debtor’s turnover ratio Profitability Ratios Gross Profit Margin (%) Return on equity (%) Return on assets Leverage Ratios Debt to Equity Interest coverage Long term Debt to Equity March 2012 0.45 0.40 March 2011 0.58 0.34 March 2010 0.65 0.37 March 2009 0.66 0.42 March 2008 0.88 0.59 9.57 3.34 23.98 9.11 4.24 40.62 10.64 4.81 42.37 10.60 2.96 20.33 10.81 2.84 16.72 -24.39 -119.09 1.45 -11.33 2.27 2.53 -12.16 -158.01 2.49 -12.26 -55.18 4.92 -6.36 27.27 7.63 5.60 -5.60 1.17 4.04 -2.73 1.82 2.96 -7.58 2.41 1.55 -6.58 1.04 1.03 -2.20 0.87  Source: 20 10 0 -10 2012 2011 2010 2009 2008 -20 -30 Current Ratio Quick Ratio Inventory turnover Gross Profit Margin (%) Debt to Equity

Analysis and Interpretation   Maruti Suzuki and Hindustan Motors both are starkly contrasting companies in terms of their financials. Share price of Maruti Suzuki quotes around 1370 Rs. while of Hindustan motors bears around 8 Rs. Maruti Suzuki has a market share of 37% while Hindustan motors have a negligent share of 0.9%, the purpose of taking these two companies, who are at the extremities of financial position, was efficient ratio analysis. Maruti Suzuki Hindustan Motors Current Ratio Although the ideal current ratio is 2:1 but Maruti Suzuki has been remaining profitable by maintaining its ratio around the range of 1 to 1.5. It can be said that company is sufficiently solvent Consistently low current ratio for HML, company should aim at bouncing back in the market either by selling a fixed asset or acquiring a long term loan Quick Ratio Quick ratio between 0.5 and 1 is satisfactory and Maruti has been maintaining the level, it shows company is liquid and can meet obligation with short term assets HML has the quick ratio almost same as current ratio which indicates that company is maintaining low inventory which in turn indicates low production output, In simple words co. is not making enough cars Debt to Equity This ratio gives a close look of company’s leverage, and risk involved for the investors. In Maruti Suzuki this ratio is in excellent terms, it’s very low for around 5 years indicating company rarely looks for debts Debt to equity ratio for HML has deteriorated from 2008 and worsening, auto sector where debt to equity maximizes at 2, HML has the ratio of 5.60 indicating company is in a lot of debt over the period of years Debtor’s turnover A high debtor’s turnover ratio is essential for lenders because it indicates how quickly the debts are being collected. In case of Maruti debt collection period is well maintained and consistent Debtor’s turnover ratio has significantly boosted from 16.72 in 2008 to 40.62 in 2011, company should have had a look into its credit policy during the period however it was followed by a sharp decrease to 20.68 in ‘12

Maruti Suzuki Hindustan Motors Gross profit margin Gross profit margin ratio measures overall profitability and financial health of the business, it also measure how much from one rupee company expends in production and other activities. This ratio is average for the co. , Gross profit margin for HML is in a dangerous position, its stooping low year by year showing company’s financially sick health and low activity, low productivity and mismanaged cost structure. Return on Equity Return on equity measures how much profit is made from the amount invested by the shareholders, in case of Maruti whose stock is really valuable, the return on equity is fairly good. HML is losing faith of its investors, share price is already low and return on equity ratio is also in negative. It seems very less investors are willing to invest their money in HML Inventory turnover Inventory turnover is almost triple of what HML has, however it has come down to 26.67 since 2011’s ratio of 33.33. Comparing it to the industry average of 38.50 in 2011-12(source: CMIE), it’s still low. Inventory turnover is very low and consistent around 9-10 showing low sales and purchasing efficiency. Interest coverage Ideal value for interest coverage ratio is 1 to 1.5 and Maruti’s interest coverage percentage is sky high when compared to ideal value indicating ability of company covering the debt interest quickly. However in case of Maruti interest cover ratio is low because debt is low itself Interest coverage ratio below 1 indicates that company is not able to generate enough revenue to pay its interest and in case of HML it has been negative for the past 5 years company’s weak financial condition.

Recommendation and Conclusion  Hindustan motors has been afloat in the market only because it’s sale in taxi segment and for years it has been considered as the cars for all the VVIP’s Minister and even car for the president, however this notion will not last forever and company will have to take some serious action in order to restore efficient working.  The company should realize they have a great classic product in their hand and people of India who are inclined towards maintaining their heritage will buy the car if it’s popularized through marketing and some design upgrades rather than a total overhaul.  Company should learn from Royal Enfield which was a dying company, they revived themselves and came back in the market becoming one of the leading choice for heritage-conscious people.  People have lost faith in HML, they should revive their company’s share price.  To improve the current ratio HML can use sweeping accounts which allows company to earn interest on any cash left after operating costs  It’s time for HML to declare bankruptcy and discharge its accumulated debt and improve debt to equity ratio.  To improve the gross profit margin revenue has to be increased, revenue can only be increased by increasing profitability, to increase the profitability company has to step up, take a loan, try for the last time with engineering and design team and launch a product that employs reliability of ambassador but with a new clean look. Company has already been unsuccessful in joint venturing with Mitsubishi and isuzu.  We can conclude that Maruti Suzuki is a company which attracts investors and lenders and company is financially very healthy, no ratio is extremely deviated while on the other hand Hindustan motors which once was a market leader in passenger cars until the rise of Maruti, is now due becoming sick due to inefficiency of management and lack of ability to cope up with change in market demand. HML tried to replicate Maruti’s success by joint venturing with Mitsubishi but it did not work out. References:

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