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.
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