Liquidity ratio and assets management
Even if in 2001, the current and quick ratios has decreased slightly compared to 2000, however, in the five past years, both the current and quick ratios have tremendously improved. This means that the company has enough cash or liquidity to meet its short-term duties towards its creditors.
This flow of liquidity could be clarified by the continous decline of days sales outstanding based on the wholesale and retail receivables, which was 12 days in 2000.
Indeed, we should notice that the company is also doing well compared to its major competitors Honda as well as to the industry average. This is due largely to a low level of account receivables, means that Davidson has an efficient collection department and that it also applies a rigorous credit policy towards its insolvable customers. Nevertheless, it is forecasted that in 2001, both the current and quick ratios will decline by 16.
34% and 16.48% respectively.
From 1999 to 2001, total debt to total assets ratio is decreasing. This means that the company is using less debt to acquire assets even if it expands its equipment at two of its Wisconsin facilities. Therefore, we can say that HDI is becoming less risky since it is relying more on cash than on debts in making its new investment.
On the other hand, concerning the total debt to common equity ratio, we notice that it is decreasing from 1999 to 2001. This implies that debtholders are having a low proportion of equity as debt.
Regarding the competitor comparison, we can say that Honda is much more relying on cash than external funds in making its assets Investments mainly because it has a higher liquidity ratio. As matter of fact, Honda has a lower total debt to total assets in comparison to Harley Davidson.
In 2001 HDI, the total debt to total assets increased to 0.26.
This can be explained by the will of the company to extent its net fixed assets because they were used in 2001 at full capacity. Thus, the company will need some additional funds of 194,723 borrowed as note payables in order to make its sales reach 17.3% growth.
During the last 6 years, both the ROA and the ROE have increased at a steady rate that was 13.
72% and 24.50% respectively in 2001. This implies that HDI has used its assets and equity efficiently. On the other hand, the good financial performance of the company could be explained by its leadership in the American market and the introduction of new heavyweight motorcycles that were well commercialized in Europe and Asia.
As a result, the net income has constantly increased at an average of 10% per year meanwhile the total assets and the common equity have grown at an average of 7% and 8.5% respectively. Nevertheless, Honda did not do as well as Harley Davidson mainly because of their low level of sales and net income. Furthermore, HDI is clearly above the industry average.
To notice, a high ROA and ROE indicate that the firm is taking advantage of a quasi-monopoly in the American market to charge excessive prices in order to earn more than the cost of their capital. The forecasted pro-forma income statement and balance sheet of 2001 showed that the ROA and ROE would be 13.91% and 26.34% respectively. The slight increase of both ratios could be explained by the sales growth maintained at 17.
3% even if the American economy is in recession mainly after the tragedy of September 11TH. The profit margin on sales and the gross margin have also increased during the last 6 years. They have attained 11.84% and 34.
85% respectively in 2001. These improvements could be related to the increase in net sales. Besides, the gross margin and net profit were positively impacted in 2001 by favorable motorcycle mix and model year price increases. In comparison to the competitors, HDI is obviously doing better.
During 2001, both the profit margin on sales and the gross profit will be 11.74% and 34.85% respectively. As we can conclude, both ratios will be unchanged from the prior year.
However, the companys ability to reach the 2001 targeted sales and net income depends upon two main factors. The first one is the companys ability to successfully implement production capacity increases in its capacities. The second factor is the companys ability to successfully introduce new products.
Market value ratios:
Before analyzing the market value ratios, we have found interesting to exhibit the price stock growth over the past 6 years in the below chart.
The price-earning ratio (P/E) has dramatically increased since 1999. This could be explained by the growth of the stock price and of the earnings.
As a result, HDI has a great esteem from the investors. Meanwhile, both the dividend yield and the dividend payout have enormously declined since 1999 because as the company realized high earnings, it reinvested in new projects in order to expand and to get more market share mainly in Europe and Asia where there was a rude competition.