Financial Ratio Analysis: What You Need to Know

Investors, analysts, and bankers carry out financial ratio analysis which assists them to inquire about a company’s ability to repay the short time obligation as stipulated the analysis. The analysis is done together with SEC report which is obtained from the company. The reports provide the ratios used to calculate the company’s financials and compare the results with other industries offering competition of the same standards. The analysis consists of Randi which is the current ratio, debt ratio, gross profit margin, net profits margin, returns on equity, inventory turnover and equal multiplier. All the financial analysis presented in this paper is for 2014 and 2015 for the Harley and Davidson Company. 

Current Ratio 

Harley Davidson,  Consolidated Balance Sheet	2014	2015
Current Assets	3,948,095.00	3,983,154.00
Current Liabilites	2,389,286.00	2,752,578.00
Current Ratio	3,948,095.00/2,389,286.00  1.65	3,983,154.00/2,752,587.00  1.45

The current ratio is calculated by dividing the current company assets to the current company liabilities. It perceived that the current ratio provides analysis and investors with clues on how to determine the company’s efficiency while operating in cycles or the company’s ability to monetize all their merchandises. It is also perceived that a company can pay off their obligations if they have a higher ratio while specifications of certain companies mostly affect the accepted ratio investments varying from 1.5 to 3.0 which are considered healthy. If other companies have a lower financial ratio, it makes Harley Davidson Company superior in the market. 

Total Asset Turnover 

Total Asset Turnover = Sales / Average Total Assets 

2015 

264,627.00/ 9,991,167.00 

=0.02640 

2014 

267,999.00/9,528,097.00 

= 0.028120 

In 2014 AND 2015 the company does not earn less revenue per dollar of assets. Since the total asset turnover was less than 1 it means that the company had large asset basses compared to sales volume. 

Return on Sales 

ROS = Operating Profit / Net Sales 

2015 

1,952,460/ 264,627= 7.3781 

2014 

2,025,080 / 267,999= 7.55562 

ROS is used as an indicator of both profitability and efficiency of a company. The ROS of the company in 2014 and 2015 is approximately 7. The industrial average of ROS is 0.4 implying that the management of Harley Davidson Co is successful since it cuts costs and increases profit. 

Return on Assets 

	2015	2014
Net Income	752,207	844,611
Total Assets	9,991,167	9,528,097
Return on Assets	752,207/9,991,167=  0.075	844,611/9,528,097=  0.088

The calculation of dividing the net income by the total assets helps in getting the returns on the Assets. It is also another way of measuring profit per dollar in every asset. Earning can be obtained from the returns of assets in that the company will receive all the profits they make. 

Return on Equity 

Harley Davidson Company shows a great performance from the returns of equity they obtain. Net income is important for a company to calculate their yearly ROE from the previous year total average shareholder equity against their fiscal year. Considering the 2014 case, the company had ROE of 28.54, and for it to be calculated, the profit margin needs to be multiplied by the equity multiplier and the assets turnover ratio ("Harley-Davidson Inc. Roe," 2017). In the case of 2014, the profit margin was estimated to be 13.56, the multiplier equity was 3.19, and the assets turnover ratio was 0.66. The following year, the profit margin was 12.55, while the multiplier equity was 4.16 and the assets turnover ratio was 0.61 ("Harley-Davidson Inc. Roe," 2017). Any company’s ability to generate profits helps in measuring the company’s efficiency form every unit of the equity of their shareholders. The company uses its investment to fund the company generation earnings. Despite the difference in inflation between the two years of operation of Harley Davidson Inc., their ROE was still better than all the other average companies producing recreational vehicles globally. 

Inventory Turnover 

2015 

Average Accounts Receivable of 2015= ($64,000 .00+ $72,000.00) / 2.00 = $68,000.00 

Receivables turnover ratio of 2015= $800,000.00 / $68,000.00 = 11.7600 

2014 

Average Accounts Receivable of 2014= ($76,000 + $80,000.00) / 2.00 = $116,000.00 

Receivables turnover ratio of 2014= $956,000.00 / $116,000.00 = 8.2413 

The average industry’s Accounts Receivable is 5 it implies that Harley Davidson Inc. collects more receivables that the expected average. 

Harley Davidson,  Consolidated Balance Sheet	2015	2014
Cost of Goods Sold	3,356,284	3,542,601
Inventory	585,907	448,871
Inventory Turnover  =Cost of Goods Sold/Inventory	3,356,284/585,907=  5.73 Times	3,542,601/448,871=  7.89 Times
Industry Average Inventory Turnover	6.37 Times (MSN, 2017)

Evaluating inventory turnover is one best way to assess the efficiency of a company to use their assets to generate more revenue. If a company has a higher ratio, it implies that the company is using its assets effectively under a condition that their assets are not exhausted given the available stock (Ross, Westerfield, and Jordan, 2016). In the market, Harley Davidson Company is ranked above average. Studies show that Harley Davidson was much efficient in 2014 than 2015 with their inventory being 7.89 times while average market company is operating at 6.37 times (MSN, 2017). 

Debt Ratio 

Harley Davidson,  Consolidated Balance Sheet	2015	2014
Total Liabilities	2,752,578	2,389,286
Total Assets	3,983,154	3,948,095
Debt Ratio  =Total Liabilities/Total Assets	2,752,578/3,983,154=  .6910 or 69%	2,389,286/3,948,095=  .6052 or 61%
Debt/Equity Ratio  =Total Debt/Total Equity	.69 in debt for every dollar of assets; therefore .31 is equity  .69/.31 = 2.23	.61 in debt for every dollar of assets; therefore .39 is equity  .61/.31 = 1.56
Industry Average Debt/Equity Ratio	1.8 (MSN, 2017)

The debt/ equity ratio majorly reflects the amount of the company’s debt and how they finance their assets in comparison to the equity of their shareholders. In the last few years Harley Davidson’s debt to equity ratio has been on the rise; from 1.56 to 2.23 while in the market, an average company’s ratio is at 1.8. This state is most common in industries of capital intense like manufacturing factories may have a high debt to equity ratio. Harley Davidson is considered to be in the ballpark even though it is an above average company. 

The SEC report for Harley Davidson Company was further reviewed by financial analysts, and they were able to establish the company as above average in comparison to other industries with the same standards. Analyzing return on assets, net profit margin, inventory turnover, current ratio, equal multiplier, debt ratio, return on equity, time interest earned and gross profit margin, Harley Davidson was established to be above average from their inline business competitions in the financial aspects. All these analyses show that the Harley Davidson Company has all it takes to offset their entire obligation owed to its investors. 

References  

Folger, J. (2017, March 29). What is the formula for calculating the current ratio? Retrieved April 02, 2017, from http://www.investopedia.com/ask/answers/070114/what-formulacalculating-current-ratio.asp 

Harley-Davidson, Inc. (n.d.). Retrieved April 02, 2017, from http://www.annualreports.com/Company/harley-davidson-inc 

Harley-Davidson Inc ROE. (2017). Retrieved from http://www.gurufocus.com/term/ROE/HOG/Return-on-Equity/Harley-Davidson-Inc 

Harley-Davidson Inc HOG. (2017). Retrieved from http://financials.morningstar.com/ratios/r.html?t=HOG 

Harley-Davidson Inc. (n.d.). Retrieved April 02, 2017, from http://financials.morningstar.com/competitors/industry-peer.action?t=HOG 

MSN . (2017). MSN: Money. Retrieved from https://www.msn.com/en- us/money/stockdetails/analysis/fi-126.1.HOG.NYS