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Financial Insights

Navin Kumar
6010091005085
FINANCIAL MANAGEMENT AT BAJAJ AUTO
3 (a) Financial Rations are considered to be the most efficient way of evaluating the
financial performance of a company. There are some different financial ratios that an
analyst can use to evaluate the performance of a company:

Liquidity Ratios: - It determines the relative strength of the concern in meeting its
current obligations, so as to maintain the sound liquidity. There is some important
formula to determine liquidity ratio like current Ration, Liquid/ Quick Ratio etc.
Profitability or Efficiency Ratios: - It measures the efficiency of the firms activity
and its ability to generate profits. There are some Ratios to determine profitability
Ratio i.e.- Gross profit Margin Ratio, Net profit Margin Ratio, Asset Turnover
Ratio, Earning Power Ratio, Return on Equity, Return on Capital Employed etc.
Ownership Rations: - It helps the stockholder to analyze their present and future
investment in a firm. These ratios are classified into Earnings Ratios, Leverage
Ratios, and Dividend Ratio etc.

Performance of Bajaj Auto by using different Financial Ratios:1. Liquidity Ratios: - Bajaj always maintained a cash reserve of Rs. 2700 cr. This
surplus cash return on capital Employed (ROCE) of Rs. 4000 over a time and
from this only Rs. 1300 cr. was deployed in two-wheeler operation. So this
generated an excellence ROCE of 60% Because ROCE= Earning before Interest
& Tax/ Net Assets Employed.
2. Leverage Ratio:- Bajaj Succeeded in reducing inventory levels by using the direct
online delivery of material from vendors and debtor declined from Rs. 198 cr. On
March 2002 to Rs. 167 cr. on March 2003. Bajaj debt-Equity ratio was 0.26 and
interest coverage was 717.76 times in 2000. This time Bajaj had Rs. 3139 cr. Of
reserved & surplus this was 49% of its total assets.
3. Dividend Ratio: - Bajaj Had a cash reserve of $575 million and paid a final
dividend of 120% and a special dividend of 20% in 2002 and a final dividend of
140% in 2003. The company dividend yield showed that Bajaj had a yield of
2.7%.
4. Profitability &Efficiency Ratio:- Bajaj invested its surplus funds in secured
investment like Govt. or Govt. approved securities and Treasury Bills etc and it
was comparable to Mutual funds return that time. In 2003, Bajaj got an
appreciation in value to cost of Rs. 343 million.
Advertising & Marketing, Raw Materials and Taxes were
the major cost heads for Bajaj but improving relations with the vendors. Bajaj was
able to reduce its material costs. This reduces operating expense from 63% in 200102 to 62% in 2002-03.
Bajaj: Ratios

Ratios
LIQUIDITY
RATIO
Current Ratio
Quick Ratio
SOLVENCY
RATIO
Debt-equity ratio
Interest Coverage
EFFICIENCY
RATIO
( IN DAYS )
Average days of
finished goods
stock
Average days of
debtors
Average days of
creditors
Net working
capital cycle
PROFITABILITY
RATIO
PBDIT (NNRT)
as % of Sales
PBIT (NNRT) as
% of Sales
PAT (NNRT) as %
of Sales
Return on net
worth
Return on capital
employed
Dividend rate
(sum of interim
and final)
MARKET RATIO
P/E
P/B

2003

Bajaj Auto
2002
2001

2003

Hero Honda
2002
2001

TVS Motor
2003
2002 2001

2.07
1.20

1.88
1.01

1.11
0.16

1.20
0.25

1.44
0.81

1.01
0.34

1.12
0.47

1.16
0.36

0.26
0.22
0.20 0.16
717.16 161.91 45.04 33.85

0.17
21.23

0.11
11.83

0.29
18.43

0.52
5.63

0.66
4.58

9.90

10.27

11.38 3.91

3.53

3.93

14.09

14.97 13.13

13.80

13.95

15.42 8.62

5.80

4.28

8.14

15.95 19.82

42.40

43.47

49.54 35.57

32.71

31.10

52.96

52.05 44.89

-5.68

0.69

6.61

-7.47

-4.79

2.05

-14.15

-1.24

7.54

20.19

16.87

13.07 17.59

16.77

14.66

9.23

6.79

8.18

16.65

13.12

9.18

16.45

15.63

13.07

6.66

4.57

5.78

11.07

8.63

8.24

10.02

9.72

7.87

3.94

2.47

3.47

17.50

13.13

10.26 67.10

67.67

47.52

32.89

16.05 18.80

21.47

16.74

9.98

95.27

70.98

42.10

20.86 20.74

1.69
0.69

94.64

140.00 140.00 80.00 900.00 850.00 150.00 120.00 90.00 80.00

16.61
3.19

9.54
1.63

9.25
1.32

13.46
7.63

9.27
5.62

13.66
6.21

18.41
5.02

10.35 10.39
3.08 0.99

We found that Bajaj Auto has been getting


remarkable growth since 2000 and by using good financial management it gives good
performance.
(b) Gross profit margin is not the only factor that determines the profitability of the
company, there are various other factors that have to be considered while evaluating the

profitability of the company like Net Profit Margin Ratio, Asset Turnover Ratio, Earning
Power Ratio, Return on Equity, Return on Capital Employed etc.
The Duo Pont analysis developed by the Duo Pond Company of the US,
which analyze return ratio in terms of Profit margin and Turnover Ratios.
A method of performance measurement was started by the DuPont
Corporation in 1920s. With this method, assets are measured at their gross book value
rather than at net book value in order to produce a higher return on equity (ROE). It is
also known as "DuPont identity".
DuPont analysis tells us that ROE is affected by three things:
- Operating efficiency, this is measured by profit margin.
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity
Multiplier (Assets/Equity)
The return-on-equity measure is widely used by investors to determine how
efficiently a company is using its money. There are two ways of calculating ROE: the
traditional approach and the DuPont formula. Under the traditional formula, the
companys net profit after taxes for the past 12 months is divided by shareholder equity.
As this approach fails to account for the effect of borrowed funds, the DuPont Analysis
formula was developed to link the use of debt to the outcome.
The idea behind the more detailed DuPont Analysis is that companies that demonstrate a
higher ROE with minimal debt can expand without large capital outlays, allowing its
owners to access cash generated by the business for consumption or re-investment. In
other words, two companies can have the same ROE, yet one may be much more
effective.
The Items of the DuPont Analysis:Net Profit Margin: The profit margin offers an indication of how much profit a company
makes for every dollar of revenue it generates. While profit margins vary by industry, in
general, the higher a companys profit margin compared to its competitors, the better.
Asset Turnover: Asset turnover provides a measure of a firms efficiency in the use of its
assets in to generate revenue. The higher the number is better. Looking at asset turnover
can also help an investor to understand the companys pricing strategy as companies with
lower profit margins tend to see higher asset turnover.
Equity Multiplier: The equity multiplier is used to measure of financial leverage,
allowing the investor to determine what portion of the ROE is the result of debt. Savvy
investors understand that it is possible for a company with weak sales results and poor
margins to artificially increase its ROE by taking on an extraordinary amount of debt.

ROE of Bajaj Auto by using Duo Pont analysis:-

ROTA 2004-05:-

2003-04:-

ROCE 2002-03:-

RONW 2004-05:-

RONW 2003-04:-