The following is a financial analysis of the company Harley Davidson. It will include an

Transcription

1 Marioly Alvarado Harley Davidson Analysis November 5, 2012 The following is a financial analysis of the company Harley Davidson. It will include an analysis of the company's ability to pay current liabilities and long term debt, the ability to sell inventory and collect receivables, as well as an analysis of the company's profitability and its attractiveness in form of investment. This will be done by using financial statement ratios and other information. It is based on current year to prior year trend data, and includes a comparison to industry average data. The first topic which will be discussed is Harley Davidson's ability to pay current liabilities, sell inventory and collect receivables. The first ratio used will be, current ratio. Using current ratio, one can see how quickly non-cash assets can be converted into cash. The quicker they can be converted the more useful they are for paying liabilities that must be paid in the near future. The Industry Average when it comes to current ratio is 1.27%. Comparing that to Harley Davidson's current ratio for 2010, which was 2.02, it is fair to say they have a good ability to pay current liabilities. What that number tells us is that the company has more liquidity than the industry advices, and due to that it will be easier for Harley Davidson to pay its current maturing debts. However, in 2011 Harley Davidson's current ratio dropped to 1.68, while that might seem alarming, when comparing it to the industry average, Harley Davidson still has a very good ability to pay current liabilities because that number is above 1.27%. The next two ratios, Inventory Turnover Ratio and Average Days to Sell Inventory, will help assess how long it takes Harley Davidson to sell the goods it has in merchandise inventory. Inventory Turnover Ratio will explain how many times per year a Harley Davidson's inventory

2 is sold, the higher this ratio is the better. For 2010, Harley had an Inventory Turnover Ratio of, This is significantly higher than the industry average of This means Harley's ability to sell inventory is high, and its average days to sell inventory for 2010 was which is lower than the industry average of Both these ratios signal that Harley Davidson has a very good ability to sell inventory. In 2011, as with current ratio, the inventory turnover ratio dropped to 7.43 and its average days to sell inventory increased to Although, it did not perform as well as it did in 2010, compared to the industry averages of 8.42 and 71.29, Harley Davidson is doing very well, and has the ability to sell inventory. The last ratios used to assess Harley Davidson's ability to collect receivables will be Accounts Receivable Turnover Ratio and Average Days to Collect Receivables. Accounts Receivable Turnover Ratio explains how many times per year a company's receivables are collected, generally higher is better. For 2010 Harley Davidson's ratio was 24.2 which when compared to the industry average of 5.12 is very very good. In 2011 the ratio decreased a bit from 24.2 to 18.52, however this is still a very favorable measurement. When it comes to collecting receivables, in 2010 Harley had an average of 19.7 days to collect receivables and in 2011 it had an average of This is incredibly better than the industry average of It's save to say Harley collects its cash quickly. After analyzing Harley Davidson's ability to pay current liabilities, sell inventory and collect receivables through the calculation of ratios and comparison to industry averages, the outcome certainly states that Harley Davidson is doing amazing in the area of liquidity and efficiency. The second topic discussed will be, the ability of Harley Davidson to pay long term liabilities. There are three solvency ratios that will be used to analyze this, Debt to Asset Ratio, and Times Interest Earned Ratio. The first ratio we will examine will be Debt to Asset Ratio. This ratio reveals the percentage of a company's assets that is financed with borrowed money.

3 The higher the number the higher the financial risk. For 2010, Harley had a debt to asset ratio of 77%, which when compared to the industry average of 84.9% is very good. In addition, there was a favorable decrease to 75% in Harley's debt to asset ratio in 2011 signaling good progress. Ultimately, this means that Harley is not having to borrow excessive amount of money to purchase assets resulting in less long term liabilities to repay. The second ratio Times Interest Earned Ratio helps assess a company's ability to make interest payments on its debt. If a company cannot pay interest payments it can cause a company to become bankrupt. In 2010 Harley had a time interest earned ratio of The industry average is 9.6. This is very alarming, Harley's time interest earned ratio is well below the industry average and signals financial risk. Fortunately, in 2011 Harley fixed this problem by raising its time interest earned ratio to 18.51, this is not only an increase from 5.32 but is above the average of 9.6, this certainly restores financial security to Harley, and means it has the ability to make interest payments on its debt. Harley Davidson proves it has the ability to pay long term debt through its ratios, both the debt to asset ratio and time interest earned ratio show that the company has improved from 2010, and is very strong in The third topic revolves around profitability. To calculate profitability we will use Return on Sales, Return on Assets, Return on Equity, Gross Margin Percentage. These will help determine how profitable Harley Davidson is. Starting with Return on asset ratio indicates how much of each dollar of sales remains as profit after all expenses have been deducted. Higher is better for this ratio. For 2010, Harley had a ratio of 8.11 which is higher than the industry average of 6.33%. In addition, in 2011 it raised its ratio to 36.24% showing that for every dollar Harley has a profit of 36 dollars after expenses. This shows how very profitable the company is.

4 The second ratio, Return on Assets, helps to measure how well a company is using the assets available to it. The higher the ratio the better because it shows the company is utilizing its assets. For 2010, Harley had an return on assets ratio of 1.5, which when compared to the industry average of 4.25 is not good at all. However, there was a favorable increase in 2011 when the ratio jumped up to 6.1, a big improvement. This means in 2011 Harley utilized its assets much better. The third ratio Return on Equity helps to measure how much the owners of a company are earning on the money they have invested in the business. The higher the ratio the better. For 2010 Harley had a ratio of 6.6 which again is low when compared to the industry average of 12.6 but in 2011 they made that up when the ratio increased to 24.7 meaning that the investors are making a good amount of profit. The fourth ratio, Gross Margin Percentage is used to help compare the amount a company pays for the goods it sells to the price the company is able to charge for those goods. The difference between that is what makes up profit. The industry average for gross margin percentage is 56.2%. In 2010, Harley's gross margin percentage was 42% and for 2011 it was 43%. For both these years they have a ratio below the industry average, although not much, but still signals that perhaps Harley could improve its pricing strategy. Overall, Harley Davidson's ratios, reflect profitability and also shows that from 2010 to 2011 it has made progress and improved in its ratios, with the only exception being gross margin percentage. All in all, the company Harley Davidson, after going over all three aspects from its liquidity and efficiency to solvency and profitability, is moving in the right direction as a company. For each section its ratios tended to be above the industry average, with one exception being gross margin percentage which they could not manage to increase about the industry average neither in 2010 or However,

5 overall Harley Davidson is a very attractive investment, which has financial security. In conclusion, in order to analyze Harley Davidson's ability to pay current liabilities and long term debt, sell inventory, collect receivables, and profitability, a number of ratios were calculated from the year 2010 and 2011 and were compared to the industry average. This resulted in realizing the Harley Davidson is an attractive investment, and is working above industry standards..