Harley-Davidson Final Harley-Davidson A reputable brand name
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Harley-Davidson Final
Harley-Davidson was initially developed in the United States. They have been
developing their motorcycles since 1901. The founder of the first engine blueprints of the firm
was 21-year-old William S. Harley. His effective planning created a product that was unique
and has provided over 100 years of excellent service and motorcycles. The first line of
production of the motorcycles was manufactured in 1903 by William S. Harley and Arthur
Davidson, hence the company name Harley-Davidson. Outstandingly, the company has endured
many obstacles, for example; the great depression and the recent economic setback for the last
few years. Fluctuations in the oil market have made it difficult for many people to make-ends-
meet, and as such, this has put some restraints on Harley-Davidson’s income and profits.
However, they continue to strive for ways to keep themselves upfront and lead the motorcycle
nation. They are internationally striving to continue to stay on top of competition and to maintain
the relationships with dealers, retailers, and customers.
Ratios
Drafting up an analysis for the Harley-Davidson business profits and losses gets straight
to the point of how each year had varying outcomes for their financial well-being as they pertain
to recent economic issues the industry had developed over the past three years. The following
figures are the company’s computed ratios:
Current ratio shows the company can manage to meet the short term liabilities from the
current assets (McGuigan & Rao, 2007). The standard ratio for Harley-Davidson is 2:1. The
current ratio for the year 2006 was 2.2 as opposed to the ratio of 1.8 for 2007. The liquidity
position of the company has been slightly reduced. The company should take steps to increase
the current ratio. Quick Ratio, which is considered a more reliable indicator of the Harley-
Davidson’s ability to meet its short-term financial obligation, shows the liquidity position of the
company (McGuigan & Rao, 2007). Liquid assets are current assets minus stock. Liquid assets
denote assets which can be easily converted into cash. The standard ratio is 1:1, for example in
2006 (2.0:1) and in 2007 (1.6:1). The industry average was 1.8:1 for both 2006 and 2007. In
comparing inventory turnover ratio, it is also clear that more inventories were held in 2007 than
in 2006. This denotes how fast the inventory has been sold. The ratio for the year 2007 (16) was
decreased from the year 2006 (20). A lower turnover implies poor sales and higher ratio implies
strong sales or ineffective buying. In the year 2007, the company had poor sales compared to the
year 2006. In 2007 they were holding at 10.3, whereas 6.1 in 2006. Since the 2006 ratio was
higher than 2007, this implies the poor sales, which left excess inventory (Harley-Davidson,
2009).
Debt ratio shows the relation between the total liabilities of the firm and the equity. It
also shows the leverage of the company along with its potential risk in terms of debt load in its
capital structure. The debt ratio is more than one as the company has more liabilities than equity
(McGuigan & Rao, 2007). The ratio for the year 2007 (2.38) increased from 2006 (2.06). If the
industry average (let us assume) is 1.5:1, then the company is in weak position as the ownership
funds is less than the debt funds (Harley-Davidson, 2009). The net profit margin ratio shows how
much income has been generated from sales in a year (McGuigan & Rao, 2007). Here, 17% was
created in 2006 and 16% in 2007, resulting in a minor decrease in income in comparison to the
industry average (2007 (2.4%) and 2006 (2.4%)). The company is in the better position now as
the company has earned sound profit and can declare a high amount of dividend - or even keep it
as a reserve for increasing the overall financial health of the company. The return on assets ratio
shows how each dollar of asset has generated the income (McGuigan & Rao, 2007). Return on
asset was 18% in 2006 and 16% in 2007. The industrial average was 11.8% for 2007 and 12.7%
in 2006, which shows that the company is not efficient enough in utilizing the assets of the
company and steps needs to be taken to remove the inefficient operations. The P/E ratio shows
ratio between the market value of the share and the earnings per share. The company has been
maintaining 16% as P/E ratio. In the market the P/E ratio average is usually known to be between
15-25 (Investopedia, 2009). Below is a spreadsheet of the industry averages as follows:
Description P/E
Consumer Goods 12.642
Auto Manufacturers - Major 0
Chicago Rivet & Machine Co. NA
Daimler AG NA
Ford Motor Co. NA
General Motors Corporation NA
Honda Motor Co. Ltd. 23.096
MotivNation Inc. NA
SORL Auto Parts, Inc. 2.317
Tata Motors Ltd. 3.705
Toyota Motor Corp. 14.642
ZAP NA
Knowing if the P/E ratio is higher, the investors are paying more money to purchase the
shares, and as such, the shares of the company are more costly than the other companies’ P/E
ratio. This leads one to believe the higher the P/E ratio is less risk there is with the company.
Reviewing the chart above, there was only one other company P/E ratio higher than Harley-
Davison’s ratio. Therefore, the investors are paying less to purchase the shares of the company.
Long Term Debt Held by the Harley-Davidson
Finance Debt
Commercial paper $ 842,618 $ 894,250
Credit facilities 256,531 191,866
Medium-term notes 1,000,806 586,375
Senior subordinated notes — 30000
million 2007 2006
Mid-term notes 400 5.60% 5.28% due December 2012
400 5.60% 5.28% due in December 2008
200 5.60% 5.28% due in December 2010
Senior subordinated notes are already paid.
Commercial paper
Yield rate: 2007 4.61%, 2006 5.2%
There was a total commercial paper borrowings of 1.4 billion under global credit facility
on December 21, 2007. It has to be repaid within the maximum period of 365 days. Therefore, it
has to be paid by December 31, 2008.
Stocks current selling price: High: 51.75, Low: 44.37
Harley-Davidson Types of Stock
Stock 52 week average: 52 week high: 74.03, 52 week low: 44.37
Average of 52 weeks :( 74.03+44.37)/2: 59.2
Other long term liabilities are:
Pension liability
Post-retirement healthcare benefits
Other long-term liabilities
List of stocks issued:
1. Common stock
2. Treasury stock
Working Capital Management
Working capital is the difference between current assets and current liabilities. Therefore,
working capital management includes management of cash, accounts receivable, inventory,
marketable securities, financial instruments held for sale, accounts payable, accrued liabilities,
etc. The firm must have positive working capital so that it is possible for the firm to continue its
operations without any difficulty and the firm can pay the short term debt and ongoing expenses
in the firm. Otherwise, the company has to rely on other short-term borrowing (McGuigan &
Rao, 2007).
The aim of working capital optimization is to ensure that the financial performance of the
company is increased by improving the profitability and accountability across the organization
from both internal and external sources (McGuigan & Rao, 2007). Harley-Davidson’s working
capital for 2007 was 1,562,235 and 1,954,956 in 2006; therefore the firm has the positive
working capital and the portion of inventory in the current assets is also less. However, the
working capital in 2007 was reduced from 2006 mainly due to the increase in the current portion
of finance debt and there was a decrease in current asset due to the sale of marketable securities.
It is to be noted that the portion of inventory which are not liquid assets is less than the cash and
cash equivalents and the investments. Therefore, the firm has a sound liquid position.
Furthermore, there was an increase in the current portion of finance debt mainly due to the
increase of fresh issue of finance debt. The firm has to be careful of raising capital at the time of
their next issue because of the increase in interest cost (Harley-Davidson, 2009).
In my opinion, even though the company has positive working capital, they should not
have issued finance debt which increases the finance cost. In lieu of that, it should have issued
bonus shares to the existing shareholders and can increase the liquid position of the company.
There is positive inflow from operating activities which shows that the company earns cash
income. Since there was a purchase of 1,153,439 treasury stocks, there is negative cash flow with
respect to financing activities (Harley-Davidson, 2009)
Cash Cycle
A Cash cycle refers to the time it takes for a company to convert resource inputs into cash
flows. The cash cycle attempts to measure the amount of time each net input dollar is tied up in
the production and sales process before it is converted into cash through sales to customers. Cash
cycle takes into consideration the following: the amount of time needed to sell inventory, the
amount of time needed to collect receivables, and the length of time the company is afforded to
pay its bills without incurring penalties (McGuigan & Rao, 2007). The following summarizes the
findings of Harley-Davidson cash cycle:
Cash cycle: days inventory outstanding + Days sales outstanding – day’s payable
outstanding.
Inventory Conversion Period
Year Inventory Cost of goods sold Cash Cycle
2007 349,697 3,612,748 35.33028182
2006 287,798 3,567,839 29.44254772
Receivable Conversion Period
Year Receivable Sales Cash Cycle
2007 181,217 5,726,848 11.5498447
2006 143,049 5,800,686 9.001156932
Payable Conversion Period
Year Payable Cost of goods sold Cash Cycle
2007 300,188 3,612,748 30.32833179
2006 283,477 3,567,839 29.00049722
Year 2007 2006
Cash Cycle 16.5517947 9.44320743
Since there was an increase in the cash conversion cycle from the year 2006 to 2007,
there is no optimization of cash.
Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is the rate a company is expected to pay to
finance its assets. WACC is also the minimum return that a company must earn on their existing
asset base to satisfy its creditors, owners, and other providers of capital (Wikiwealth, 2008). The
following statistics were used to find Harley-Davidson average WACC for an industry:
Weighted Average Cost Table 2007
Overall WACC is 7.6%
Debt Weights % Income Tax Cost
Medium Term Notes 603,300 .179 5.60 36% .003574
Commercial paper 376,700 .112 4.61 36% .001837
Equity 2,375,491 .707 10 .070794
Total 3,355,491 1(assumed) .076206
i.e.,
7.620571
Weighted Average Cost Table 2006
Overall WACC Rate is 8.05%
Debt Weights % Income tax Cost
Medium Term Notes 586,375 .161 5.28 35.80 .003056
Commercial Paper 253,625 .069 5.20 35.80 .0001302
Senior Subordinated Notes 30,000 .008 6.79 35.80 .000201
Equity 2,756,737 .760 10 .076011
Total 3,626,737 1(assumed) .080571
i.e.,
8.057059
Comparison to the Industry Average
It is noted that Harley Davidson controls 9.6% of the market share in motorcycle
registration in Europe and a 48% of the market share in North America (both Canada and
America). In 2007, Harley Davidson had nearly 250,000 units of motor registration and total
industry registration amounting to 266,300 units in North America. However, in Europe, the
company has 13,000 units registered against 387,000 registrations by the rest of other motor
cycle companies (Harley-Davidson, 2009).
Investing Recommendations
It is advisable to buy the shares of the company because the company has a sound liquid
position as a result of positive working capital and sound current ratio and liquid ratio.
Furthermore, the company’s return on assets was 16% in 2007 and 18% in 2006. Additionally,
the net profit to sales ratio was 16% in the year 2007 and 17% in 2006 which is considered good
operating income. Also, the company has substantial market share, and as such, it is advisable to
buy the company’s share (Harley-Davidson, 2009).
Conclusion
Harley-Davidson is unique when compared to its competition. There are no other major
motorcycle manufactures in the United States. In Japan, all of Harley-Davidson’s competitors are
much larger and more diversified than they are. There are no Harley cars or lawnmowers, just
motorcycles and motorcycle financing. Harley-Davidson has no non-recurring items. With the
concern for growing wealthier sometimes companies forget what their business is. Harley-
Davidson makes classic super heavyweight motorcycles. They make their motorcycles so well
that no other company even comes close. Harley customer’s are loyal and form the foundation
in which the company was built upon. With demand for their motorcycles at a point where
production is one year behind orders, Harley-Davidson motorcycles can cost as much as twice as
their competitors. By keeping the number of custom super heavyweight motorcycles low,
customers are more excited about the product. There is no substitute for a Harley because each
one is unique. Keeping the total volume low will keep the prices high and allow for a high net
profit margin. By introducing a larger volume of high quality low priced standard motorcycles
Harley-Davidson can appeal to the entry-level market. Also, there will be greater potential for
increased sales of their aftermarket upgrades.
