CHAPTER-3 DATA ANALYSIS PART-1 CAPITAL STRUCTURE

Transcription

1 CHAPTER-3 DATA ANALYSIS PART-1 CAPITAL STRUCTURE 87

2 CHAPTER 3 DATA ANALYSIS PART - 1: CAPITAL STRUCTURE 3.1 CONCEPT OF CAPITAL STRUCTURE: CAPITAL STRUCTURE ANALYSIS: FINANCIAL TOOLS: TREND ANALYSIS TREND ANALYSIS OF COMPONENTS OF CAPITAL STRUCTURE Trend Analysis of Reserves: Trend Analysis of Net Worth: Trend Analysis of Total Debt: RATIO ANALYSIS INTRODUCTION AND MEANING: NATURE OF RATIO STANDARDS OF COMPARISION IMPORTANCE OF RATIO ANALYSIS PRECAUTIONS TO BE TAKEN WHILE USING RATIO: UTILITY OF RATIO ANALYSIS CLASSIFICATION OF RATIOS STATISTICAL TOOLS: ARITHMETIC MEAN STANDARD DEVIATION CO-EFFICIENT OF VARIATION CAPITAL STRUCTURE RATIOS DEBT-EQUITY RATIO TOTAL DEBT EQUITY RATIO DEBT-TOTAL FUNDS RATIO CAPITAL GEARING RATIO PROPRIETARY RATIO INTEREST COVERAGE RATIO LONG TERM FUNDS TO FIXED ASSETS RATIO NET WORTH TO NET FIXED ASSETS RATIO NET FIXED ASSETS TO CURRENT ASSETS RATIO RESERVES TO CAPITAL RATIO

3 NET CURRENT ASSETS TO NET WORTH CONCLUSION: References. 89

4 3 DATA ANALYSIS PART - 1: CAPITAL STRUCTURE 3.1 CONCEPT OF CAPITAL STRUCTURE: The capital structure is used to represent the proportionate relationship between the various long- term-forms of financing, such as debentures, long term debt, Preference capital and equity capital, reserve and surplus. The term capital structure is frequently used to indicate the long- term sources of funds employed in a business enterprise. In other words, it can be said that it represents permanent financing of the concern. This is usually measured by subtracting current liabilities from total assets. Thus, capital structure, general reserve, preference share and long term debts. 1 According to John and Mayor financial structure of a business as consisting three elements assets, liabilities and capital. 2 The financial structure provides an insight into the various types of sources tapped to finance the total assets employed in a business enterprise that part of financial which represents longterm sources is known as capital structure. This term refers to make up of long term funds as represented by the equity share capital, preference share capital and long-term debt. To circumscribe the real area of the term Capital Structure. it may be necessary to distinguish it from term assets structure, the assets structure refers to make-up of total assets as represented by fixed assets and current assets, 3 since the balance sheet is a detailed form of fundamental or structure equation. It sets forth the financial structure of an enterprise. It states the nature and amount of each of the various assets of the liabilities and of the property interest of the owner. Stating the nature of the assets, liabilities and capital is not difficult as their amount. The financial structure can be made initially from the point of view of the time for which funds are needed. An enterprise needs funds for financing shot-term and long term requirements. However, view is not consistent regarding the duration of each type of finance. The financial structure line is often arbitrary, hazy, and vague. 4 Financial structure includes, therefore, both the sources of finance, i.e., long-term and short-term. From the angle of time there may be short-term capital. The short-term sources will be employed by an enterprise when the size of the funds is such as to generate sufficient cash flow to retire debt within short payment period of a year. They are invested in the current assets as a matter of policy as the current assets are automatically converted into cash during outline business operations. 5 Probably, Gesternberg has used the term capital structure and financial structure interchangeably. According to him financial structure also refers to make up of permanent capital of the Firm. 6 Capital structure means the financial plan of a company in which the various sources of capital are mixed up in such a proportion that they provide a distinct set-up most suitable to the requirements of that particular company. The task of framing capital structure involves determination of the right proportion in which different securities should be blended. Each corporate security has its own merits and demerits. It may be remarked that too much induction on any type of security in the capital structure of a company may prove unprofitable or risky subsequently, for example if the promoters decide to carry on business mainly with the help of 90

5 equity capital without adequate debt capita, the company may forgo the advantage of trading on equity and thus may not fulfill the objectives of the maximum return to owners, on the other hand if a company with fluctuating income has a high capital leverage and it will undertake a greater risk. Such a capital structure will no doubt maximize the return to owners, but in lean years it would make the position of the company very critical, because the net income might not be enough to meet even the fixed change obligations on preference shares or debentures. Undoubtedly, there should be a uniform capital structure, which suits the requirements of all companies. In other words, the capital structure has to be tailored in such a way so as to suit the needs of a particular company. Thus a model capital structure is possible only for such a Group of Companies, which has similar characteristics. 3.2 CAPITAL STRUCTURE ANALYSIS: Capital structure of the borrower has strong implications. For the analysis of capital structure, various financial & statistical tools have been used here. Structural ratios are based on the allocation of debt and equity in the pattern of firm s assets FINANCIAL TOOLS: TREND ANALYSIS The direction of changes over a period of time is very important in financial analysis. Trend analysis or time series analysis indicates the direction of change. Trends should be studied in relation to fixed expansion or secular trend in the growth of the business and the general price level. The ratio analysis gives a reasonable good picture but it is incomplete in one important respect-it ignores the time dimension. The ratios are snapshots of the picture at one point in time but there may be trends in motion that are in the process of rapidly eroding a relatively good present position. 7 Trend analysis is tool of analysis the financial statement in more simplified form over a period of years, Trend analysis is horizontal analysis of financial statements often called as pyramid method of ratio analysis-a guide to yearly changes. 8 To get a true trend of growth, the figures should be adjusted by a suitable index of general prices. Another method is to tabulate and plot the physical volume of sales expressed in suitable units of measure. If the general price level is not considered while analyzing trend the results may be misleading. They may show unduly optimistic results in periods of prosperity and pessimistic in recession. Generally, index number is used for trend analysis. This method is known as trend percentage method. Trend percentages are immensely helpful in making a comparative study of the financial statements for several years. The method of calculating trend percentages involves the calculation of 91

6 percentage relationship that each item bears to the same item in the base year. Any year may be taken as base year. It is usually the earliest year. Any intervening year may also be taken as base year. Each item of base Year is taken as 100 and percentage changes in each items of other years in relation to the base year is to be calculated. This method is a useful analytical device for the management since by substituting percentages for large amounts; the brevity and readability are achieved. However, percentages are not calculated for all the items in the financial statements but are calculated only for major items since the purpose is to highlight important changes. In the wards one of the most useful forms of horizontal analysis is trend analysis. It is especially helpful in revealing proportionate change over time in selected financial data. 9 For analysis of capital structure of selected automobile (two- wheeler) companies, the trend analyses of components of capital structure as well as of some ratios have been undertaken. By this exercise the effect of trend of components of capital structure on various other items can be analyzed. Also the trend with year-to-year basis variations and percentage change thereof has been put to analysis TREND ANALYSIS OF COMPONENTS OF CAPITAL STRUCTURE (1) Trend Analysis of Share Capital: Table no. 3.1 Trend Analysis of Share Capital of the selected Automobile Two Wheeler companies in India YEAR HERO HONDAMOTORS LTD BAJAJ AUTO LTD Sh.Cap Simple Year To Sh. Cap Simple Year To (in Rs. Trend Year (in Rs. Trend Year cr.) (%) Trend (%) cr.) (%) Trend (%)

7 Graph no.3.1 Simple trend of the Share Capital of selected Automobile Two Wheeler companies in India Graph no.3.2 Year To Year trend of Share Capital of the selected Automobile Two Wheeler companies in India From the table and graph it can be seen that share capital of Hero Honda Motors Ltd is remained Fixed i.e. from the year 2005 to 2010 the share capital of Hero Honda Motors Ltd has neither increased nor decreased. But share capital of Bajaj Auto Ltd has increased from 100% in the year , 06-07, 07-08, to 143% in the year as per simple rate trend. The increase in share capital is due to capitalization of earnings i.e. by issuing bonus shares. Company had issued bonus shares in the year

8 Trend Analysis of Reserves: Table no. 3.2 Trend Analysis of Reserves of the selected Automobile Two Wheeler companies in India YEAR HERO HONDAMOTORS LTD BAJAJ AUTO LTD Reserves Simple Year To Reserves Simple Year To (in Rs. Trend Year (in Rs. Trend Year 100 cr.) (%) Trend (%) 100 cr.) (%) Trend (%) Graph no.3.3 Simple trend of the Reserves of selected Automobile Two Wheeler companies in India 94

9 Graph no.3.4 Year To Year trend of Reserves of the selected Automobile Two Wheeler companies in India The Reserves shows increasing trend (both Simple and Year To Year rate) up-to the year in Hero Honda Motors Ltd. It has increased from 100% in to 191% and 128% in respectively. The main reasons for increase in reserves are transfer of profits to reserves as well as increase in the outstanding balance of the P & L A/C. It shows growth of the company. But in the year both the trends (simple & year-to-year basis) of Hero Honda Motors Ltd shows declining trend. The reason for decline is the company had celebrated their 25th (silver jubilee) anniversary and had paid 5,500 % equity dividend by using the profits of the year and reserves. In Bajaj Auto Ltd. reserves shows increasing trend in all the years except , because a huge amount of reserves was used for issuing bonus - shares. The increasing trend shows that Bajaj Auto is following liberal dividend policy Trend Analysis of Net Worth: Table no. 3.3 Trend Analysis of Net Worth of the selected Automobile Two Wheeler companies in India YEAR HERO HONDAMOTORS LTD BAJAJ AUTO LTD Net Simple Year To Net Simple Worth Trend Year Worth Trend (in Rs. (%) Trend (%) (in Rs. (%) 100 cr.) 100 cr.) Year To Year Trend (%) 95

10 Graph no.3.5 Simple trend of the Net Worth of selected Automobile Two Wheeler companies in India Graph no.3.6 Year To Year Trend of Net Worth of the selected Automobile Two Wheeler companies in India The simple and cumulative trend of Net Worth is increasing in Hero Honda Motors Ltd. up to the year It has increased from 100% in the year to 189% and 127% respectively. But in the year both the trends of Net Worth has decreased to 172% and 91% respectively. The increase in the Net Worth is accompanied by reduction in debt and financial leverage. This is favourable only if the rate of return on investment is less than the interest rates. Otherwise company should take benefit of financial leverage. Similarly, in Bajaj Auto Ltd., the Simple and Year To Year trends of Net Worth are increasing. The effect of increased Net Worth on profitability should also be analyzed. 96

11 Trend Analysis of Total Debt: Table no. 3.4 Trend Analysis of Share Total Debt of the selected Automobile Two Wheeler companies in India YEAR HERO HONDAMOTORS LTD BAJAJ AUTO LTD Total Simple Year To Total Simple Year Debt (in Trend Year Debt (in Trend Year Rs. cr.) (%) Trend (%) Rs. cr.) (%) Trend (%) To Graph no.3.7 Simple trend of the Total Debt of selected Automobile Two Wheeler companies in India 97

12 Graph no.3.8 Year To Year trend of Total Debt of the selected Automobile Two Wheeler companies in India The trend of total debt is continuously decreasing in Hero Honda Motors Ltd, but the trend of total debt is highly fluctuating in Bajaj Auto Ltd. The decreasing trend of debt Shows Company has retired all its major long-term debt such as debentures, institutional loan and bank loan RATIO ANALYSIS INTRODUCTION AND MEANING: To get proper insight about financial strength and weaknesses of the firm proper analysis of financial statement is necessary. The future plans of the firm should be laid down in view of the firm s financial strengths and weaknesses. Ratio Analysis is one of the prevalent and the most popular technique to measure the profitability of the business firm; it is used primarily to gain an insight into financial and operating aspects of a business firm Ratio analysis is the process of determining and presenting in arithmetical terms the relationship between figures and group of figures drawn from financial statements. A ratio may be defined as the indicated quotient of two mathematical expression and as the relationship between two or more things. The tern accounting ratio, is used to describe significant relationship which exist between figures shown in financial statements profit & loss account and balance sheet NATURE OF RATIO The absolute accounting figures reported in financial statements do not provide a meaningful understanding of the performance and financial position 98

13 of the firm. An accounting figure conveys meaning when it is related to some other relevant information. Ratios may be defined as the mathematical expression of the relationship between two accounting figures. But these figures must be related to each other. i.e. these figures must have a mutual cause and effect relationship to produce a meaningful ratio. It indicates a quantitative relationship which the analyst may use to make a qualitative judgment about the various aspects of the financial position and performance of a concern. It may be expressed as: (i) Percentage (ii) Rate or (iii) Pure ratio STANDARDS OF COMPARISION A single ratio in itself does not indicate favourable or unfavorable financial condition. It should be compared with some standard. Standards of comparison may consist of: 1. Time series Analysis / Past Ratios Past ratios are the ratios calculated from past financial statements of the same firm. By comparing current year s ratios with past ratio the improvement or deterioration in firm s performance over the period can be studied. It is also known as time series analysis. 2. Cross-sectional Analysis/ Competitor s Ratios Competitor s ratios are ratios of some selected firms, especially the most progressive competitor, at the same point in time by comparing firm s ratios with competitor s ratios the firm s financial position in respect to competitors can be known. 3. Industry Analysis/ industry Ratios Industry ratios are the ratios of the industry to which the firm belongs. By comparing firm s ratios with industry average ratios the `firm s position Vis- a- Vis other firms in the industry can be understood. 4. Performa Analysis / Projected Ratios Projected ratios are the ratios developed by using the projected financial statements of the firm. The comparison of current or past ratios with future ratios indicates the firm s relative strength and weaknesses in the past and in the future IMPORTANCE OF RATIO ANALYSIS The ratio analysis is the most powerful tool of the financial analysis Ratio analysis simplifies the financial statements and helps various interested parties in the business such as long term creditors, short term creditors, share holders. Management etc. in analyzing financial condition of the concern. 1. Security Analysis This major focus in security analysis is on long-term profitability, the efficiency with which the firm utilizes its assets and the financial risk to which the firm is 99

14 exposed. For this purpose profitability ratios, activity, ratios and leverage ratios can be used. 2. Intra -firm Analysis Ratio analysis makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency in the past and likely performance in the future. 3. Competitive Analysis For meaningful interpretation, the ratios of a firm can be compared with the ratios of similar firms in the industry which highlights the factors associated with successful and unsuccessful firms. Ratios also reveal strong and weak firms and undercapitalized and over capitalized firms. This comparison will reveal whether the firm` is performing better or worse compared to its competitors. 4. Credit Analysis While taking credit from financial institutions ratios are very useful. Profitability ratios, liquidity ratios and leverage ratios indicate firm s capacity to repay the loan amount and interest which is very useful in assessing the creditworthiness of the firm. Though ratio analysis is extremely useful there are certain problems in using ratios PRECAUTIONS TO BE TAKEN WHILE USING RATIO: 1. Standard for Comparison Ratios have meaning only if they are compared with some standards. Usually it is recommended that ratios should be compared with industry average, but industry average data is not easily available in India. Even while comparing ratios with the past ratios forecast may not be correct since several factors like market conditions, management policies etc. may affect the future operations. 2. Price Level Changes Financial analysis based on accounting ratios will give misleading results if the effects of changes in price level are not taken into account. The accounting data, presented in financial statements is assumed to remain constant. Infect, prices change over years which affect accounting earnings. Therefore, financial statements should be adjusted as per price level changes. For this current purchasing power and current cost accounting are quite helpful. 3. Historical Data The ratios indicate what has happened in the past because it is calculated on the oasis of historical financial statements. Analysts are more interested in future and these ratios may not necessarily reflect the firm`s financial position and performance in future. 100

15 4. Ratios Alone Are Not Adequate Ratios are only indicators, they cannot be considered final regarding financial position of the business. Other things also have to be seen. A high current ratio not necessarily mean sound liquidity position if most of current assets comprise outdated stocks. 5. Window Dressing Window dressing means manipulation of accounts in a way so as to conceal vital facts and present financial statements in a way to show better position than what it actually is. In this case ratios cannot indicate true situation. The quality of ratios depends on accuracy of accounts, UTILITY OF RATIO ANALYSIS The various groups of people having different interests are interested in analyzing the financial information. They use ratio analysis to determine a particular financial characteristic of the firm in which they are interested. 1. Investors The investors can determine the magnitude and direction of the movements in firm s earnings through profitability ratios and investors can decide whether to hold, sell or purchase the shares. 2. Short Term Creditors The short - term creditors like bankers and suppliers of material can determine the firm s ability to meet its current obligations with the help of liquidity ratios. 3. Long Term Creditors The long term creditors like debenture holders and financial institutions can determine firm s long - term financial strength and survival with the help of capital structure ratios. 4. Management The management can determine the operating efficiency with which the firm is utilizing its various assets in generating sales revenues with the help of activity ratios. The management can use ratios for forecasting purposes also CLASSIFICATION OF RATIOS Ratios can be classified into different categories depending upon the basis of classification. Traditional Classification: The traditional classification has been on the basis of the financial statements to which a ratio belongs. (i) Profit and Loss Account Ratio: Ratios calculated on the basis of the items of profit and loss account only. (ii) Balance Sheet Ratios: Ratios calculated on the basis of the figures of balance sheet only. 101

16 (iii) Composite Ratios: Ratios based on figures of profit and loss account as well as balance sheet. Modern Classification Modern classification is in view of the requirements of various users of the ratios. The ratios can be classified in following four groups: (i) Capital structure Ratios. (ii) Profitability Ratios (iii) Liquidity Ratios. (iv) Activity Ratios. NOTE: In present study we have not used Published Ratios, but we have calculated Ratios From the Published Annual Reports STATISTICAL TOOLS: ARITHMETIC MEAN It is called as the average of difference of the values of items from some average of the series. According to Gulerian the most commonly used average is the arithmetic mean, briefly referred to as the mean 11 the mean has been found by adding all the variables and dividing it by the total number of years taken STANDARD DEVIATION Standard deviation may be defined as positive square root of the variance. While the variance of a sample is the average square deviation of values from the mean CO-EFFICIENT OF VARIATION Co-efficient of variation has been defined as the percentage of the standard deviation to the mean. It should be noted that higher the variability the greater would be the co-efficient of variation. Therefore, it may be pointed out that for the stability of results, Co-efficient of variation must be low. Coefficient of variation (C.V.) may be calculated with the help of standard deviation and mean. 13 STANDARD DEVIATION CO-EFFICIENT OF VARIATION X 100 ARITHMETIC MEAN 3.3 CAPITAL STRUCTURE RATIOS To judge the long-term financial position of the firm, financial leverage or Capital structure ratios are calculated. These ratios indicate mix of funds provided by owners and lenders. These ratios show the long-term financial solvency and measure the enterprise s ability to pay the interest regularly and 102

17 to repay the principal amount on maturity. Usually, the following ratios are calculated to judge the long-term financial solvency of the concern: (1) Debt -Equity Ratio = Long term debts Shareholder's funds (2) Total Debt Ratio = Total debts (short term + long term) Share holder's funds (3) Debt To Total Funds Ratio = Long term debt Capital employed (4) Capital Gearing Ratio = Fixed intrest bearing securities Ordinary capital (5) Proprietary Ratio = Share holder's fund Total tangible assets (6) Debt Service Coverage Ratio = Earnings before depreciation, interest& tax lnterest (7) Long Term Funds to Fixed Assets Ratio = Long term funds Fixed assets (8) Net Worth to Net Fixed Assets Ratio = Net worth Net fixed assets (9) Net Current Assets to Net worth Ratio = Net current assets Net worth (10) Net Fixed Assets to Current Assets Ratio = Net fixed assets Current assets 103

18 (11) Reserves to Capital Ratio = Total assets Share capital DEBT-EQUITY RATIO This ratio shows the proportion of long-term external equities and internal equities. This ratio is determined to ascertain the soundness of the financial policies of the company. It establishes a relationship between long-term debts and shareholder s funds. This ratio determines the relative stake of outsiders and shareholders in the com signifies that in case of liquidation whether company`s total holder s funds are sufficient to repay total debts of the company or not. The objective of computing this ratio is to measure the relative proportion of debt and equity in financing the assets of a firm. The ratio is computed by dividing the long-term debts by the shareholder`s funds. Debt -Equity Ratio = Long term debts Shareholder's funds Here, long term debts means long-term loans whether secured or unsecured which may include debenture, bonds, loan from financial institution etc. And share holder s funds means equity share capital plus preference share capital plus reserves and surplus minus fictitious assets. Generally, in normal condition of trading 1:1 ratio is preferred. But in time of boom higher borrowing is consider while in the period of recession, it is safer to have debt at a lower level in comparison to equity holder s fund. Low Debt-Equity Ratio It indicates the margin of safety to long term creditors. A low Debt Equity Ratio implies the use of more equity than debt which means a larger safety margin for creditors since owner s equity is treated as a margin of safety by creditors and vices versa. From the firm s point of view it indicates that debt servicing is less burdensome as well as there will be less pressure and interference of creditors in management- Moreover. The firm has an additional capacity to raise additional debt but at the same time no benefit of trading on equity would be available when the firm earns a higher Rate of Return on Investment than the interest rate on borrowed funds. High Debt-Equity Ratio A high Debt-Equity Ratio is riskier for creditors because the owners are putting up relatively less money of their own and this is a danger signal for the creditors. if the project fails financially, the creditors will lose heavily. From the firm s point of view if Debt-Equity Ratio is high then debt servicing is burdensome in adverse conditions as well as pressure and interference of creditors in management is also high thirdly the company may find difficulty in raising additional debt. However, If the firm is able to earn on the borrowed 104

19 funds a higher Rate of Return on Investment than the rate of interest on loans, the firm can take advantage of Trading on Equity. Even though, one should keep in mind that the Debt- Equity Ratio be applied mechanically, without regard to the circumstance of each case, such as type and size of business, the nature of industry and the degree of risk involved. OBSERVATIONS: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD AVERAGE = : 1 AVERAGE = 0.56 : 1 Table No.:- 3.5 Debt-equity ratio of selected Automobile Two Wheeler companies in India from to (Times) COMPANY Mean S.D. C.V. Min. Max. HHML BAL Mean S.D C.V Sources: computed from annual reports of the sample companies. The above Table no. 3.5 shows Debt-Equity Ratio. The ratio of HHML shows the declining trend during the study period. The ratio ranged between 0.09 times in to 0.02 times in with an average of times. HHML is using less debt compared to shareholders funds. The average Debt- Equity ratio 0.048:1 shows extremely low which tells us that the company does not want to take benefit of trading on equity. The standard deviation is and coefficient of variation is 58.03%.HHML has large coefficient of variation in compared to BAL, which reveals that it has more dispersion or it is said to be less stable from the variability point of view. In the BAL the ratio indicates fluctuating trend during the span of research period with an average of 0.56 times. The ratio fluctuated from a lowest 0.29 times in to highest 0.83 times in The standard deviation is and coefficient of variation is 48.44%. Bajaj auto Ltd. has taken the benefit of trading on equity but not at the maximum level. The ratio is lower than average in early years but after it increased up to the year The ratio was at a high stage i.e. 0.93:1 in the year

20 Graph no.3.9 Debt-equity Ratio of the Selected Automobile Two Wheeler Companies The ratio indicates the proportion of owners stake in the business and the extent to which the firm depends upon outsiders for its existence. The ratio provides a margin of safety to the creditors. It informs the owners the extent to which they can gain benefits or retains control with a limited investment. In normal condition of trading, ratio of 1:1 is preferred. In other words, the investors may take debt-equity ratio as quite satisfactory if shareholders funds are equal to borrowed funds. However, a lower ratio say 2/3rd borrowed funds and 1/3rd owned funds, may also not be considered as unsatisfactory if the business needs heavy investments in fixed assets and has an assured return on its-investment. For e.g. in case of public utility concern. The Hero Honda Motors Ltd s average debt equity ratio remained at 0.05:1. It shows that in comparison to equity capital of Re.1, the company has maintained Re.0.05 as long term debt. So the company is using lower debt compared to shareholders funds. The ratio is higher than average in early years but after it declined year by year. The ratio was at a high stage i.e. 0.09:1 in the year but in the year & , it declined to 0.02:l that is a decline of 7%. The average Debt-Equity ratio 0.048:1 appears to be extremely low this may lead us to remark that the company does not want to take benefit of trading on equity. Perhaps it may be the intention of the management not to accept the burden of charges and repayment of long term loans. Despite the increase in the ownership fund the effective control has remained with the management and perhaps the loss of benefits on trading on equity are compensated by not having to dilute the controls of affairs of the company. While in Bajaj Auto Ltd, the average ratio 0.56: 1 shows that in comparison to equity capital of Re.1, the company has maintained Re.0.56 as long term 106

21 debt. Bajaj auto Ltd. has used trading on equity but not at the maximum level. The ratio is lower than average in early years but after it increased up to the year The ratio was at a high stage i.e. 0.93:1 in the year but in the year , it declined to 0.45: l that is a decline of 48%. Debt- Equity Ratio (T-Test) Null Hypothesis: There is no significant difference in Debt-Equity Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Debt-Equity Ratio of selected automobile two wheeler companies under study. T-Test: Normality Test: Passed (P = 0.389) Equal Variance Test: Failed (P < 0.050) Group Name N Missing Mean Std Dev SEM DER of HHML DER of BAL Difference t = with 8 degrees of freedom. (P = 0.005) 95 percent confidence interval for difference of means: to The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistically significant difference between the input groups (P = 0.005). Power of performed test with alpha = 0.050: In short, t: calculated value is and p-value = 0.005< Hence, the test is significant. Therefore H 0 is rejected and H 1 is accepted. (The Debt Equity ratios of the two sample companies do differ significant.) TOTAL DEBT EQUITY RATIO Another method of computing Debt Equity Ratio is to take all types of debts long term and short term in place of long term debts only. The argument in favour of this view is that like long term debts, short term are also received from outside creditors and they add to the financial risks Similarly, interest is to be paid on short term debts as m case of long-term debts besides the pressure from short term creditors is much more on the management. So total debt equity ratio is computed as 107

22 Total Debt Ratio = Total debts (short term + long term) Share holder's funds OBSERVATIONS: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD AVERAGE = 0.05 : 1 AVERAGE = 0.57 : 1 Table No.:- 3.6 Total Debt-equity ratio of selected Automobile Two Wheeler companies in India COMPANY Mean S.D. C.V. Min. Max HHML BAL Mean S.D C.V Sources: computed from annual reports of the sample companies. The above table no 3.6 shows Total Debt-Equity Ratio. The ratio of HHML shows the decreasing trend during the study period. The ratio ranged between 0.09 times in to 0.02 times in with an average of 0.05 times. The company could not take benefit of trading on equity due to less outsiders fund. The standard deviation is and coefficient of variation is 58.03%. The average ratio of HHML is too lower in comparison with BAL. The lower ratio reveals that HHML has not invested short term debt in fixed assets, which is considered as good decision in capital budgeting. The co. is advised to increase the net worth to invest in fixed assets. In the BAL the ratio indicates fluctuating trend during the span of research period with an average of 0.56 times. The ratio fluctuated from a lowest 0.29 times in to highest 0.83 times in The standard deviation is and coefficient of variation is 48.44%. The total debt equity ratio of the company is satisfactory. 108

23 Graph no Total Debt Equity Ratio of Selected of Automobile Two Wheeler Companies This ratio indicates that whether the owner`s funds are sufficient to meet longterm as well as short term debt of the company or not. If this ratio is compared with Long-term Debt-Equity Ratio it shows the increase or decrease in shortterm loan. For Hero Honda Motors Ltd the average ratio is 0.05:1 which is equal to average long term debt equity ratio which means for every Re.1 of equity the company has Rs.0.05 borrowed funds. And in Bajaj Auto Ltd the average ratio is 0.57:1 which is equal to average long term debt equity ratio which means for every Re.1 of equity the company has Rs.0.57 borrowed funds. In most of the years the ratio is equal to long-term debt equity. It means the company is not relying much on short-term debt. So there is less pressure on management. Total Debt- Equity Ratio (T-Test) Null Hypothesis: There is no significant difference in Total Debt- Equity Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Total Debt- Equity Ratio of selected automobile two wheeler companies under study. 109

24 T-Test: Normality Test: Passed (P = 0.389) Equal Variance Test: Failed (P < 0.050) Group Name N Missing Mean Std Dev SEM TDER of HHML TDER of BAL Difference t = with 8 degrees of freedom. (P = 0.005) 95 percent confidence interval for difference of means: to The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistically significant difference between the input groups (P = 0.005). Power of performed test with alpha = 0.050: In short, t: calculated value is and p-value = 0.005< Hence, the test is significant. Therefore H 0 is rejected and H 1 is accepted. (The Total Debt Equity ratios of the two sample companies do differ significant.) DEBT-TOTAL FUNDS RATIO This ratio is a variation of the Debt- Equity Ratio and gives the similar indications as the debt-equity ratio. In this ratio, the outside long term liabilities are related to the total capitalization of the firm and not merely to the shareholder`s funds. This ratio is computed by dividing the long-term debt by the capital employed. In the form of a formula, this ratio may be expressed as under. Debt To Total Funds Ratio = Long term debt Capital employed Where, the Capital Employed comprises the long term debt and the shareholders funds. The firm may be interested in knowing the proportion of interest bearing debt in the capital structure. It may therefore compute debt ratio by dividing long term debt by capital employed on net assets Because of the equality of the capital employed and net assets. Debt ratio can also be defined as long term debt divided by net assets. Debt-total fund ratio = Long term debt Net assets 110

25 Capital employed equals net assets which consist of Net Fixed Assets (NFA) and Net Current Assets (NCA). Net current assets are current assets minus current liabilities excluding interest bearing short term debt for working capital. These relationships can be expressed as under: NFA + CA = NW + TD + CL NFA + CA - CL = NW + TD NFA + NCA = NW + TD NA = CE Where, NFA = Net fixed assets NCA = Net current assets CA = Current assets CL = Current liabilities NW = Net worth TD = Total debt NA = Net assets CE = Capital employed OBSERVATIONS: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD AVERAGE = 0.04 AVERAGE = 0.34 Table No.:- 3.7 Debt-total funds ratio of selected Automobile Two Wheeler companies in India from to (Times) COMPANY Mean S.D. C.V. Min Max HHML % BAL % Mean % S.D % C.V % 57.14% 83.67% 92.00% 87.88% % Sources: computed from annual reports of the sample companies. The above table no.3.7 shows Debt to Total funds Ratio. The ratio of HHML shows the decreasing trend during the study period, with an average ratio of The ratio was 0.08 times in the year which was gradually decreased to 0.02 in the year and In the year the ratio was double than average and from the year the ratio is half than average. It is because in later years the owners fund has been increased due to increase in reserves. Thus we can say from this ratio that the owners are able to pay long term debts. In the BAL, the Debt to Total funds Ratio indicates fluctuating trend during the study period, with an average ratio of The ratio was 0.22 times in the year which was increased to 0.48 times in the year and again it decreased to 0.31 times in the The standard deviation is and coefficient of variation is 31.40% which is quite lower to the C.V.

26 of HHML i.e %. Debt-Total Fund Ratio indicates that the company has not use trading on equity at its maximum level.if the company has used the Trading on Equity at its maximum, the Profit after Tax and earning per share both should have-been gone up. Graph no.3.11 Debt to Total funds Ratio of Selected Automobile Two Wheeler Companies This ratio indicates the proportion of long-term debt to total funds employed which includes owner`s funds as well as borrowed funds. The Hero Honda Motors Ltd s average Debt-Total Funds Ratio remained at 0.04: l during the period under study which shows that in comparison with total capital employed of Re.1 the company have maintained a proportion of Re.0.04 for long term debt. Before the year the ratio was double than average and after from the year the ratio is half than average. The main reason for this is an increase in shareholder s funds in later years. The main reason for increase in shareholder s funds is increase in reserves because of increase in general reserve and profit transferred to reserves. So, from this ratio it can be interpreted that if any project fails, the risk of creditors is very low because the owner`s themselves have put forward more amount in total funds employed. The shareholders funds are sufficient to pay long-term debts. The average ratio of 0.04: l means that the lenders have financed 4% of Hero Honda Motors Ltd s net assets (capital employed). It obviously implies that owner`s have provided the remaining finance. While in Bajaj Auto ltd, the average Debt-Total Funds Ratio remained at 0.34: l during the period under study which shows that in comparison with total capital employed of Re.1 the company have maintained a proportion of Re.0.34 for long term debt. Debt-Total Fund Ratio indicates that the company has not use maximum benefit of the trading on equity and the average 112

27 Operating Profit Margins is % against the average prevailing rate of interest of 11 % (Average effective rate of interest may be 7.5 %). If the company has used the Trading on Equity at its maximum, the Profit after Tax should have-been increased and so the EPS. Debt to Total Fund Ratio (T-Test) Null Hypothesis: There is no significant difference in Debt to Total Fund Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Debt to Total Fund Ratio of selected automobile two wheeler companies under study. T-Test: Normality Test: Passed (P = 0.661) Equal Variance Test: Failed (P < 0.050) Group Name N Missing Mean Std Dev SEM DTFR of HHML DTFR of BAL Difference t = with 8 degrees of freedom. (P = <0.001) 95 percent confidence interval for difference of means: to The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistically significant difference between the input groups (P = <0.001). Power of performed test with alpha = 0.050: In short, t: calculated value is and p-value = 0.001< Hence, the test is significant. Therefore H 0 is rejected and H 1 is accepted. (The Debt to Total Fund ratios of the two sample companies do differ significant.) CAPITAL GEARING RATIO This ratio expresses the proportion of fixed charge bearing capital or debt to ordinary capital. The higher the ratio, the greater the proportion of preference capital and debentures to ordinary capital and reserves the capital structure of the company is said to be highly geared. In such cases, the ordinary shares of the company will be speculative the reason is due to a small increase in profit, and the rate of return on ordinary capital will increase substantially. The higher the ratio more unstable will be the ordinary shares because major share of the earnings will be absorbed by interest and preference dividend and there will be greater fluctuations in the rate of equity dividend. Some 113

28 authors suggest that while computing this ratio, the equity shareholders funds must be compared with preference capital and debentures, it means that reserves should be added to equity capital but general opinion is that it should be added only if the reserves are of substantial amount. Capital Gearing Ratio = Fixed interest Bering securities Ordinary capital OBSERVATIONS: Both Companies do not have Preference share capital and Debentures, so observing capital Gearing Ratio is not worthwhile in case of both sample companies PROPRIETARY RATIO It is variant of Debt Equity Ratio. It establishes a relationship between the proprietor`s funds and total tangible assets. It may be expressed as: Proprietary Ratio = Share holders Funds Total Tangible Assets This ratio focuses the attention on the general financial strength of the business enterprise. The ratio is of a particular importance to creditors who can find out the proportion of shareholder`s funds in the total assets employed in the business. The higher the ratio, the stronger the financial position of the company as it signifies that the proprietors have provided larger funds to purchase the assets. It is relatively little dangerous to creditors in the event of forced reorganization or winding up of the company. A low proprietary ratio indicates greater risk to the creditors since in the event of losses a part of their money may be lost besides loss to the proprietors of the business. This ratio cannot exceed 100%. If it is 100%, it means that the business does not use any outside funds. There are no outside liabilities. Purchases are made for cash only and the firm carries on the business entirely with owned funds and a very high ratio is therefore not desirable, it means that insufficient use is being made of outside funds. OBSERVATIONS: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD AVERAGE = 0.96 AVERAGE =

29 Table No.:- 3.8 Proprietary Ratio of selected Automobile Two Wheeler companies in India from to (Times) COMPANY Mean S.D. C.V. Min Max HHML BAL Mean S.D C.V Sources: computed from annual reports of the sample companies. The above table no.3.8 shows Proprietary Ratio. The ratio of HHML shows increasing trend during the span of research. It was 0.92 times in the year and gradually it was increased year by year and became stable with 0.98 times in the year The average ratio of HHML is times, which is to be considered as most satisfactory as 96% of the assets are employed from proprietor s funds. It is safe for creditors. It shows that proprietors have used borrowed fund and took the benefit of financial leverage along with providing larger funds to buy the assets. The standard deviation is and coefficient of variation is 2.44%, which reveals that it is more stable & of less dispersion as its c.v. is smaller than c.v.of BAL. In the BAL, the Proprietary Ratio indicates fluctuating trend during the study period, with an average ratio of The ratio was higher at 0.77 times in the year which was decreased to 0.52 times in the year and again it is increased to 0.69 times in the The standard deviation is and coefficient of variation is 16.26% which is higher than the HHML. Thus the ratio is considered to be satisfactory in BAL. Graph no.3.12 Proprietary Ratio of Selected Automobile Two Wheeler Companies 115

30 There cannot be any standard proprietary ratio for all businesses, but it can be said that the proprietor s funds should be enough to cover the fixed assets. Secondly, a reasonable proportion must be maintained between owned funds and borrowed funds, so that benefit of trading on equity can be obtained. This will increase the rate of equity dividend. Generally it is assumed that the ratio should be between 0.50 to 1 because if it is less than 0.50 it may be dangerous for creditors at the time of winding up and if it is 1 then it means that company does not use borrowed funds and if its rate of return on investments is higher than rate of interest then it loses, the benefit of trading on equity. In Hero Honda Motors Ltd, average proprietary ratio is 0.96:l which can be considered as most satisfactory as 96% of the assets are employed from proprietor s funds. So it is less dangerous for creditors. It indicates that proprietors have provided larger funds to purchase the assets. And at the same time by using borrowed funds company takes benefit of trading on equity. This ratio is continuously increasing. In the year it is low i.e. 0.92:1 and in the year and it is high i.e. 0.98:1 as compared to the year In Bajaj Auto Ltd, average proprietary ratio is 0.66:l which can be considered as most satisfactory as 66% of the assets are employed from proprietor s funds. This ratio is fluctuating in nature because in the year of it is very high i.e. 0.77:1 and in the year it is very low as compared to year i.e. 0.52:1. Proprietary Ratio (T-Test) Null Hypothesis: There is no any significant difference in Proprietary Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Proprietary Ratio of selected automobile two wheeler companies under study. T-Test: Normality Test: Passed (P = 0.531) Equal Variance Test: Failed (P < 0.050) Group Name N Missing Mean Std Dev SEM PR of HHML PR of BAL Difference t = with 8 degrees of freedom. (P = <0.001) 95 percent confidence interval for difference of means: to