Financial Analyst Research Assignment: Harley-Davidson Inc
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Financial Analyst Research Assignment: Harley-Davidson Inc., (HOG)
1. Overview of Harley-Davidson Inc.
Harley-Davidson Inc. is a premier motorcycle manufacturer based in Milwaukee, Wisconsin. The company was founded in 1903 and is currently ranked number 458 in the list of Fortune 500 companies 2012. Harley-Davidson Inc. top competitors include: Ultra Motorcycle Company Inc., Triumph Motorcycles Limited and Viper Motorcycle Company. The companys total revenue for 2011 was $5.31 billion while its operating income for the year was $829.9 million (Yahoo Finance 2012).
Harley-Davidson made nearly $600 million in net income in 2011 and its total assets rose to nearly $10 billion. The company has a workforce of 6,000 employees and its current CEO is Keith E. Wandell. Over the last 100 years, Harley-Davidson has built a loyal brand community and distinguished itself as a manufacturer of high quality and stylish motorcycles. The companys major business lines include manufacturing and sale of heavyweight motorcycles, motor cycle parts, apparel, customization and licensing of the Harley-Davidson© brand (Nasdaq, 2012)
Financial Ratios
The following table summarizes Harley-Davidsons key ratio indicators from 2009 to 2011. The ratios include: liquidity, management efficiency, financial leverage and profitability.
Ratio
Definition
Liquidity
1 Current Ratio
Current assets ÷ Current liabilities
2. Quick Ratio (acid test)
Current assets – Inventories ÷ Current liabilities
Asset Management
3. Average collection period
Accounts receivable ÷ Credit sales ÷ 365
65 days
67 days
71 days
4. Inventory turnover
Cost of sales ÷ Average inventory
5. Fixed-asset turnover
Sales ÷ Fixed assets
6. Total asset turnover
Sales ÷ Total assets
Financial Leverage Management
7. Debt ratio
Total debt ÷ Total assets
59.16%
60.99%
61.56%
8. Debt-to-equity
Total debt ÷ Total equity
236.49%
260.63%
267.36%
9. Times interest earned
EBIT ÷ Interest charges
10. Times fixed charges earned
(EBIT + Lease payments) ÷ (Interest + Lease Payments + Before-tax sinking fund + Preferred stock dividends before tax)
Profitability
11. Gross profit margin
Sales – Cost of sales ÷ Sales
37.20%
37.81%
33.40%
12. Net profit margin
Earnings after Taxes (EAT) ÷ Sales
10.32%
5.34%
1.48%
13. Return on investment
Earnings after Taxes (EAT) ÷ Total assets
5.67%
2.75%
0.78%
14. Return on stockholders equity
Earnings after Taxes (EAT) ÷ Stockholders equity
22.65%
11.77%
3.37%
2. Analysis of key ratios and vulnerability to current financial threats
In regards to liquidity, Harley-Davidsons current ratio indicates that the company could easily raise the funds to meet its current financial obligations using its current assets. This means that the company was not at risk of falling into financial difficulties. In addition to this, the companys quick ratio was above 1.5 throughout the period under review implying that Harley-Davidson did not have to rely on selling its inventory in order to raise the funds to pay its creditors. The companys performance shows that the company has largely benefitted from its restructuring exercise and investors have become increasingly confident about its stock.
Harley-Davidsons asset management indicators show that the management is efficient in using the resources at the companys disposal to raise revenue. In particular, the companys average collection period is allong the industry average and in fact in 2011, Harley-Davidsons average collection period of 65 days was better than the industry average for the year which stood at 68 days. The other key asset management indicators including inventory turnover, fixed-asset turnover and total asset turnover all show that the managements use of resources to raise revenues over the period under review kept improving. The figures are from Harley-Davidsons form 10k, its financial reports for 2011, 2010 and 2011 as reported on Yahoo Finance, Google Finance, Nasdaq and Bloomberg.
Current Liabilities
$2,699
$2,014
$2,268
Inventories
Accounts Receivable
$1,388
$1,343
$1,705
Cost of Sales
$3,336
$3,022
$3,185
Average Inventory
Sales
$5,312
$4,859
$4,782
Current Assets
$4,542
$4,067
$4,342
Fixed Assets
$5,131
$5,364
$4,814
Total Assets
$9,674
$9,431
$9,156
Total Debt
$5,723
$5,752
$5,636
Total Equity
$2,420
$2,207
$2,108
Earnings before interest and and taxes (EBIT)
Interest Charges
Earnings after taxes (EAT)
Stockholders Equity
$2,420
$2,207
$2,108
Table 1: Summary of Harley-Davidsons key financial indicators
The financial leverage management indicators of Harley-Davidson shows that the company has not incurred too much debt to finance its operations. The debt-ratio for the three years under consideration have averaged about 60.10% indicating that the company has been able to effectively balance between using retained earnings to finane its operations and incurring long-term debt for the same. The times interest earned and times fixed charges earned has improved from a low of 1.66 in 2009 to a high of 3.24 in 2011 (Google Finance 2012). Similarly, the profitability ratios have improved over the period under review. In 2009, the gross margin was 33.40% but it improve