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Managing Financial Resources

Table of Contents

Introduction.

Financial analysis.

Possible causes of differences in performance.

Implications for Hero Moto Corp.

Conclusion.

References.

Introduction to Hero Moto Corp. Analysis

Hero Moto Corp. is the largest producer of motorcycles in the whole world. It has created economic value to the developing countries with a positive impact on individuals. Innovation and inclusiveness are two significant strategies of the organization to meet the challenges of the global automotive industry (Hero Moto Crop 2020). This report is based on the financial analysis of Hero Moto Corp Ltd and its major competitor Bajaj Auto Ltd. To evaluate the competitive positive of Hero Moto Corp., financial ratios are identified that can help in evaluating the performances of both the companies and portray the implications for the organization.

Financial Analysis

Financial analysis is considered as a process to investigate the finances and business to determine the financial position and performance of an organization. It is essential to understand and diagnose the financial information to judge the profitability of the form and forecast regarding future prospects (Areas, 2018). The following financial ratios can provide insight about Hero Moto Corp Ltd including a comparison with Bajaj Auto Ltd.

Hero Moto Corp. Ltd.

Ratios

2018-19

2019-20

Return on capital employed (%)

37.09

26.37

Return on sales (%)

14.59

13.16

Asset utilization ratio

1.95

1.58

Gross profit margin

32.02%

32.91%

Current ratio

1.96

2.08

Quick ratio

1.71

1.81

Gearing ratio

0.37

0.33

Interest cover ratio

582.64

176.94

Inventory turnover rate

21.77

18.19

Stock days

16.77

20.06

Current trade receivable days

49.98

32.93

Current trade payables days

131.14

139.19

Return on equity

26.33%

25.70%

Table 1: Financial ratios of Hero Moto Corp

Bajaj Auto Ltd.

Ratios

2018-19

2019-20

Return on capital employed (%)

24.08

26.80

Return on sales (%)

17.04

17.19

Asset utilization ratio

1.35

1.36

Gross profit margin

14.05%

15..13%

Current ratio

1.45

1.55

Quick ratio

0.96

0.96

Gearing ratio

0.24

1.42

Interest cover ratio

1583.52

2618.57

Inventory turnover rate

22.67

16.88

Stock days

16.10

21.62

Current trade receivable days

29.38

19.89

Current trade payables days

132.97

108.90

Return on equity

22.87%

24.46%

Table 2: Financial ratios of Bajaj Auto Ltd

  • Return on capital employed (ROCE): It is useful to address the profitability of the company and well the company is using its capital. This ratio is a long-term profitability ratio. A higher percentage of ROCE shows an effective value to the company with a better return of profit. It shows that the company is using the capital efficiently (Bratt and Larsson 2015). The ROCE ratio of Hero Moto Corp is 26.37% for the year 2019-2020 which has been reduced from the previous year. Wherein the ROCE ratio of Bajaj is 26.80% for the year 2019-2020 (Bajaj Auto 2020; Hero Moto Corp 2020). Both of the companies are using the capital effectively to make profits.
  • Return on sales: It is usually known as the operating profit margin which shows the efficiency of an organization in generating profits using the revenue. A higher return on sales shows the proficiency of the firm in earning higher profits (Dayal and Singh 2016; Mahamuni and Poma 2019). The Return on sales ratio of Hero Moto Corp has been reduced from 14.59% to 13.16%. The efficiency of the organization has reduced which can create a competitive disadvantage to the firm. Although the return on sales ratio of Bajaj Auto is 17.19% for the year 2019-20 which has significantly increased from its previous year (Bajaj Auto 2020; Hero Moto Corp 2020). A high ratio of Bajaj shows a better operating efficiency of the organization as compared to Hero MotoCorp.
  • Asset utilization ratio: The financial efficiency of the organization can be determined through asset utilization ratio (Dayal and Singh 2016; Mahamuni and Poma 2019). For the year 2019-20, the asset utilization ratio of Hero MotoCorp is 1.58 which shows that the organization needs to focus on utilizing its resources in a more efficient way (Bajaj Auto 2020; Hero Moto Corp 2020). The aim of the company for asset utilization should be 2.5 or more that can help in effectively managing the resources. Asset utilization ratios of Bajaj are lower than Hero that shows, Hero is utilizing its assets more efficiently than its competitor (Dayal and Singh 2016; Mahamuni and Poma 2019)
  • Gross profit margin: It measures the profitability of the organization with a percentage of revenue. A good profit margin is considered as 20% while a profit margin of 10% is average for the companies (Dayal and Singh 2016; Mahamuni and Poma 2019). Hero MotoCorp is enjoying an effective gross profit margin with 32.91% and 32.02% for the year 2019-20 and 2018-19 respectively. Whereas the profit margin of Bajaj is below 20% for both the years (Bajaj Auto 2020; Hero Moto Corp 2020). Higher profitability of Hero shows its effective earnings and successful future growth.
  • Current ratio: It shows a comparison of current assets to current liabilities. It helps in identifying the liquidity of the organization to pay off its short-term debts. A good current ratio is identified between 1.2 to 2 wherein the current assets are 2 times than the current liabilities that shows its ability to manage its debts (Dayal and Singh 2016; Mahamuni and Poma 2019). The current ratio of Hero MotoCorp is 2.08 for the year 2019-20 and 1.96 for 2018-19 which shows an efficient ratio while the ratio of Bajaj is lower than Hero MotoCorp (1.45 and 1.55 for the year 2018-19 and 2019-20 respectively) (Bajaj Auto 2020; Hero Moto Corp 2020). Although Bajaj has also maintained a good current ratio to indicate effective liquidity.
  • Quick ratio: Through the identification of quick ratio, short term liquidity position of a firm can be identified. A normal quick ratio is recognized as 1 while a quick ratio less than 1 shows that the organization might face some issues in paying the debts (Dayal and Singh 2016; Mahamuni and Poma 2019). The quick ratio of Hero is 1.81 for 2019-20 and 1.71 for 2018-19 that shows the quick ability of the firm to pay off its debts (Bajaj Auto 2020; Hero Moto Corp 2020). Wherein the quick ratio of Bajaj is less than 1 that represents that Bajaj needs to maintain its liquidity.
  • Gearing ratio: This financial ratio measures the equity capital and debt of the firm to evaluate financial leverage. An optimal ratio between 25% to 50% is identified as effective and optimal for the business wherein lower than 25% shows the low risk for lenders and investors (Dayal and Singh 2016; Mahamuni and Poma 2019). The gearing ratio of Hero is between 25% to 50% (33% for 2019-20) which means the organization is effectively managing the optimum level of equity and debts. Although the gearing ratio of Bajaj is 32% which shows an optimum level while for the previous year the ratio was less than 24% (Bajaj Auto 2020; Hero Moto Corp 2020).
  • Interest cover ratio: It shows the ability of the organization to pay the interest payment with the available earnings. The minimum acceptable interest coverage ratio is 2 wherein lower than 1 ratio shows the poor financial health of the organization. Higher interest coverage ratio shows the better financial health of the organization based on its operating earnings (Dayal and Singh 2016; Mahamuni and Poma 2019). The interest coverage ratio of both Hero MotoCorp and Bajaj are higher that shows the effective financial health of both the organizations to manage its interests (Bajaj Auto 2020; Hero Moto Corp 2020).
  • Inventory turnover ratio: It signifies the ratio of the organization to sold and replaces its inventory in a financial year. A high inventory ratio is considered as a good ratio to sell off the inventory quickly and the products are in demand (Dayal and Singh 2016; Mahamuni and Poma 2019). The inventory turnover ratio of Hero is declined since the previous year from 21.77 to 18.19. Although it is an effective inventory ratio with the capability of the firm to fulfil the demand of individuals. The inventory turnover ratio of Bajaj is 16.88 for the year 2019-20 that shows a compatible sale for its products (Bajaj Auto 2020; Hero Moto Corp 2020).
  • Stock days: It shows the number of days of inventory hold by the company before selling it in the market. Usually, lower days are better to indicate the performance of the organization in the market (Dayal and Singh 2016; Mahamuni and Poma 2019). Both the companies, Hero MotoCorp and Bajaj are usually taking around 16 to 22 days in the inventory for stock. Thus the demand for the products of both the organization is effective in the market (Bajaj Auto 2020; Hero Moto Corp 2020).
  • Current trade receivable days: It is also considered as accounts receivable days wherein the outstanding customer invoice can be received by the organization. A typical time for accounts receivable is identified as 60.8 days (Dayal and Singh 2016; Mahamuni and Poma 2019). Wherein the current trade receivable days of Hero MotoCorp are 32 which has been reduced from the previous year. This reduction shows that the organization is effectively focusing on managing its sales revenue and receiving the payments on time. However, Bajaj has an optimum trade receivable day time of 20 days which enhances the sales revenue and organization is focusing on a strict policy for credit (Bajaj Auto 2020; Hero Moto Corp 2020).
  • Current trade payable days: This ratio indicates the ability of the firm to pay off its creditors. It is essential for an organization to manage a short time for paying the bills and creditors (Dayal and Singh 2016; Mahamuni and Poma 2019). The average time of paying bills by Hero MotoCorp is 139 days while Bajaj has paid off the bills in 108 days (Bajaj Auto 2020; Hero Moto Corp 2020). A high trade payable ratio is favourable for the organization as it can use the additional amount of cash for short investments.
  • Return on equity (ROE): It represents the ability of the organization to generate revenue from the available equity (Dayal and Singh 2016; Mahamuni and Poma 2019). Generally, 15-20% ROE is identified as optima (Bajaj Auto 2020; Hero Moto Corp 2020). Wherein a higher ROE is better for the business that shows an effective capability of the firm to manage investments. Efficient ROE is identified for both the companies with a compatible outcome (Mahamuni and Poma 2019).

Possible Causes of Differences in Performance

Several differences can be identified through the evaluation of financial analysis between Hero MotoCorp and Bajaj Auto Ltd. Each organization works according to its resources, people and demand. Operational activities and management of funds create a difference in the financial performance of the organizations (Dayal and Singh 2016; Mahamuni and Poma 2019). Increase in operating expenses, management of payments and receivables also create a different. The profit margin of Hero MotoCorp is significantly higher than Bajaj that shows a favourable impact on future growth. The ability of Hero MotoCorp to manage its current payable days also shows effective utilization of cash for investment purpose. The financial ratios signify that Hero MotoCorp is using financial leverage optimally to meet the desired outcomes and attain competitive advantage (Bajaj Auto 2020; Hero Moto Corp 2020).

Implications for Hero Moto Corp.

The identification of financial ratios and comparison with Bajaj Auto Ltd can provide an effective opportunity to Hero MotoCorp for maintaining its resources efficiently (Bajaj Auto 2020; Hero Moto Corp 2020). Although the comparison shows that optimum utilization of resources is identified in the organization that promotes higher investment and provide stability to the firm. High profitability and high sales show a large demand for its products which can help in attaining a good cash flow (Dayal and Singh 2016; Mahamuni and Poma 2019).

Conclusion on Hero Moto Corp. Analysis

It can be concluded that both Indian companies are performing effectively in the world. The financial resources are effectively managed by Hero MotoCorp Ltd as compared to Bajaj Auto Ltd. The ROCE ratio of Hero Moto Corp is 26.37% for the year 2019-2020 which has been reduced from the previous year. Wherein the ROCE ratio of Bajaj is 26.80% for the year 2019-2020. For the year 2019-20, the asset utilization ratio of Hero MotoCorp is 1.58 which shows that the organization needs to focus on utilizing its resources in a more efficient way. A good current ratio is identified between 1.2 to 2 wherein the current assets are 2 times than the current liabilities that shows its ability to manage its debts. The current ratio of Hero MotoCorp is 2.08 for the year 2019-20 and 1.96 for 2018-19 which shows an efficient ratio while the ratio of Bajaj is lower than Hero MotoCorp (1.45 and 1.55 for the year 2018-19 and 2019-20 respectively). High liquidity can be seen in the company with effective utilization of resources.

References for Hero Moto Corp. Analysis

Areas, B. 2018. Financial analysis. Growth30, pp.10.

Bajaj Auto. 2020. Annual reports 2019-20. [Online]. Available at: https://www.bajajauto.com/investors/annual-reports [Accessed on: 28th September 2020].

Bratt, W. and Larsson, L. 2015. Cash flow and capital employed: Its relationship and impact on firm value–a Case Study of a firm operating in the technique development industry. [Online]. Available at: https://gupea.ub.gu.se/bitstream/2077/40688/1/gupea_2077_40688_1.pdf [Accessed on: 28th September 2020].

Dayal, S. and Singh, S. 2016. Profitability and Liquidity Analysis of Bajaj Auto Ltd. and Hero MotoCorp Ltd. Global Journal of Enterprise Information System8(2), pp.1-12.

Hero Moto Corp. 2020. Annual report 2019-20. [Online]. Available at: https://www.heromotocorp.com/mr-in/financials.php [Accessed on: 28th September 2020].

Mahamuni, P.N. and Poma, A.A. 2019. Evaluating profitability performance of bajaj auto ltd & hero motocorp by using dupont model. International Journal of Management, IT and Engineering9(6), pp.338-351.

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