FINANCIAL ACCOUNTING - GROUP PROJECT

Analysis of Financial Statements of Bosch India Ltd

By Sanmeet Dhokay (2015PGPMX025) & Vinod Maliyekal (2015PGPMX029)

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Table of Contents

Introduction............................................................................................................................................2

1. Common-Size Income Statement and Balance Sheet................................................................3

2. DuPont Chart Analysis.....................................................................................................................8

3. Comment on the Liquidity position of the company...................................................................10

4. Comment on Solvency position of the company........................................................................13

5. Comment on Profitability position of the company.....................................................................15

6. Economic Value Added.................................................................................................................17

7. Market Value Added.......................................................................................................................18

8. Valuation Ratios..............................................................................................................................19

9. Market Efficiency analysis.............................................................................................................20

10.Debt Investor Perspective analysis (Leverage Ratios).............................................................21

11.Equity Investor Perspective analysis..........................................................................................22

12.Key Financial performance Ratios..............................................................................................23

13.As a CEO/ CFO, analyze the overall performance and comment on the financial health of the company........................................................................................................................................30

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IntroductionIndia is currently the sixth largest passenger car producer in the world and the automotive industry is one of the key drivers of the Indian economy. The component industry holds a significant place in the growing Indian economy

Bosch India is the largest player in the auto ancillary sector (manufacturing parts, casting etc for automobile manufacturers). As on 20th January 2016 - Bosch had a market capitalization of INR 55,748.12 crore . (www.moneycontrol.com)

The parent company was set up in Stuttgart in 1886 by Robert Bosch (1861-1942) as “Workshop for Precision Mechanics and Electrical Engineering.” In India, Bosch set up its manufacturing operation in 1953, which has grown over the years to include 14 manufacturing sites, and seven development and application centers.

(www.boschindia.com)

Bosch India, along with Motherson Sumi & WABCO India are the largest players in the sector all with a market cap of over INR 10,000 crore.

In this assignment we will analyse the performance of Bosch using the various tools, like common size Income Statement/Balance sheet, Dupont Chart Analysis, EVA, Value Add etc,and look to give a better insight into the performance of Bosch India.

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1. Common-Size Income Statement and Balance Sheet(Please refer to the excel sheet for details)

Analysis (Income Statement)

Revenue

Bosch total revenue growth shows steady improvement from 2013 to 2014, while competitors Motherson Sumi & Wabco show relatively flat line growth for the same period.

Revenue from 2013 to 2014-15 showed a 38.87% jump, while for the corresponding period in Motherson Sumi was 9.45% & Wabco was 20.27%

(Pls note Financial Data for 2014-15 (Bosch India) is for a 15 month period Jan 2014 to March 2015)

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P.A.T

When you compare the companies on P.A.T, Bosch shows a jump in Profit after tax of 51.2% which is a major reversal from the negative P.AT of (7.68%) recorded in 2013-14 vs 2012-13

Motherson Sumi witnessed negative profit growth by (3.77%) .

Wabco showed a minor increase in P.A.T of 2.72%

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E.P.S

Bosch was the only company posting a positive EPS jump of 51.06% (2014-15 vs 2013-14) period where till had posted a negative EPS growth of (7.54%) in 2013-14 vs 2012-13.

Motherson Sumi in the corresponding period was negative (24.03%) in 2013-14 vs 2012-13, but they were able to reduce this negative growth to (3.79%).

Wabco too started off with negative (10.17%) in 2013-14 vs 2012-13, but they returned to positive territory with 2.70% growth in 2014-15

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Conclusion (Common Income Statement)

Bosch showed stellar performance in revenue, PAT & EPS growth versus the previous year and also against its major industry competitors who were clearly struggling in the same time period.

BOSCH 2012-13 vs 2013-14(%) 2013-14 vs 2014-2015(%)

Total Revenue 0.90 38.88

Profit After Tax (PAT) -7.68 51.20

Earnings per Share (EPS) -7.54 51.06

Analysis (Balance Sheet)

(Please refer to the excel sheet for details)

Equity has increased by 16.81% in Bosch, however Liabilities have grown at a faster rate of 18.76%. Total assets have shown growth of 17.32%.

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Motherson Sumi - 10.90% growth in Equity, Liability has seen negative growth of (6.93%) & assets has grown by 2%.

Wabco - 14.45% growth in Equity, Liability has grown at 24.14%. Assets have grown by 16.36%

Bosch have seen good growth in both Equity & assets, but it was accompanied by a faster rise in liabilities - In this regards Motherson Sumi has shown much better overall performance.

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2. DuPont Chart Analysis

A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity".DuPont analysis tells us that ROE is affected by three things:

- Operating efficiency, which is measured by profit margin- Asset use efficiency, which is measured by total asset turnover

- Financial leverage, which is measured by the equity multiplierROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

Bosch 2014-15

ROE = 0.11 * 1.13 * 1.42 = 0.18 = 18 %

ROE for Bosch has seen improved over the last 2 years, though it is significantly less that Motherson Sumi, it is however delivered better ROE that its other international competitor - WABCO

2015 2014 2013 2012 2011

BOSCH 18.2 14.1 17.2 23.7 21

Motherson Sumi

25.9 25.9 19.4 13.9 24.3

WABCO 14 15.6 20.2 29 33

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The below chart offers a good comparison with industry peers over the last couple of years.

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3. Comment on the Liquidity position of the company

Liquidity Ratios

Current RatioThe current ratio measures a company’s ability to pay off its current liabilities (payable within one year) with its current assets such as cash, accounts receivable and inventories. The higher the ratio, the better the company’s liquidity position.

● Current ratio = Current assets / Current liabilities

= 59265 / 25511 = 2.32 (1.5 - 2.0 ) Healthy Range - Bosch is slightly above the advised range, but is in a comfortable position.

Acid Test or Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets, and therefore excludes inventories from its current assets. It is also known as the “acid-test ratio.”

● Acid-Test Ratio = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable) / Current Liabilities

= (18,960+2,650+11,877) / 25511 = 1.31

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A variation of the acid-test ratio simply subtracts inventory from current assets, making it a bit more generous than the version listed above:

● Acid Test (Var) = (Current assets – Inventories) / Current liabilities

= (59,265 - 12,762) / 25511

= 1.82 (Bosch has adequate liquid assets to meet its liabilities)

Cash Ratio :-The Cash Ratio is the most exacting of the liquidity ratios ,excluding accounts receivable as well as inventories and other current assets.More than the current ratio or acid-test ratio, it assesses an entity’s ability to stay solvent in the case of an emergency. Even highly profitable companies can run into trouble if they do not have the liquidity to react to unforeseen events.

Cash Ratio = (Cash and Cash Equivalents + Short-Term Investments)/ Current Liabilities

= (18,960 + 2,650) / 25511

= 0.85

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4. Comment on Solvency position of the company

Solvency ratioThe solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations.

Solvency ratio = (PAT + depreciation)/(short term + long term liabilities) = (13377+ 5484) / (25511+5327) = 18861 / 30838 = 0.61

Total Debt To Total Assets (Leverage ratio)Total debt to total assets is a leverage ratio that defines the total amount of debt relative to assets. This enables comparisons of leverage to be made across different companies. The higher the ratio, the higher the degree of leverage, and consequently, financial risk. This is a broad ratio that includes long-term and short-term debt (borrowings maturing within one year), as well as all assets – tangible and intangible.

= Total debt / Total assets

= 30838 / 104308 = 0.30

Bosch has not over leveraged itself to fuel growth in the company - At 0.30 - Bosch Debt to Asset ratio is very manageable.

Debt/Equity RatioDebt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated by dividing a company’s total liabilities by its stockholders' equity. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity

= Total debt / Total equity

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=30838 / 73470 = 0.42

Bosch has kept its Debt/Equity level well under control

Interest Coverage Ratio

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio may be calculated by dividing a company's earnings before interest and taxes (EBIT) during a given period by the amount a company must pay in interest on its debts during the same period.

= Operating income (or EBIT) / Interest expense

= 19559 / 143 = 136.78

Bosch is more than adequately positioned to meet its interest payment obligations.

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5. Comment on Profitability position of the companyProfitability is a main aspect in a company’s financial reporting. While all financial statements include certain elements related to profitability, such as retained earnings in the balance sheet and operating cash flows from the statement of cash flows, the income statement directly shows profitability of a company by providing information on net income for a specified accounting period. An income statement can use different formats and have various reporting elements, depending on a company’s business activities.

The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. It is these ratios that can give insight into the all-important profit

● Gross Profit Margin = Gross Profit / Net Sales (Revenue)

= 19839 / 126508 = 16%

● Operating Profit Margin = Operating Profit / Net Sales (Revenue)

= 19839 / 126508 = 16%

● Pretax Profit Margin = Pretax Profit / Net Sales (Revenue)

= 19559 / 126508 = 15%

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● Net Profit Margin = Net Income / Net Sales (Revenue)

= 13377 / 126508 = 10.5%

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6. Economic Value Added

A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".)

Capital = INR 314 Million

Cost Of Capital :-Dividend per Share = INR 85Current Market Value of Stock = 25383.5 Growth Rate of Dividend Calculation:-Dividend for 2014-2015 = INR 85Dividend for 2013-2014 = INR 55Growth Rate = (85-55)/55 * 100 = (30/55) *100 = 54.5 % Cost of Capital = Dividend per Share + Growth Rate of Dividend Current Market Value of Stock = (85/25383.5 ) + 54.5 % = 0.5483 The formula for calculating EVA is as follows:= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)

= 13377 - (314 * 0.5483)= 13377 - 172.16 = 13204.84 million

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7. Market Value Added

A calculation that shows the difference between the market value of a company and the capital contributed by investors (both bondholders and shareholders). In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity.Calculated as:  MVA = Company’s Market Value - Invested Capital

Market Value Calculation :-

Company’s Market Value = No of Shares * Price per Share = 31398900 * 25383.5

= 797014 (in INR Millions)

Invested Capital = 104308

Market Value Added = 797014 - 104308 = 692706

High MVA indicates that the Bosch has created substantial wealth for the shareholders

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8. Valuation RatiosThe Price/Earnings ratio (P/E) is the best known of the investment valuation indicators. The P/E ratio has its imperfections, but it is nevertheless the most widely reported and used valuation by investment professionals and the investing public. The financial reporting of both companies and investment research services use a basic earnings per share (EPS) figure divided into the current stock price to calculate the P/E multiple (i.e. how many times a stock is trading (its price) per each dollar of EPS).

Earnings per Share(EPS) = Net Income / Average Outstanding Shares

= 13377000000/31398900

= 426

Dividend per Share(DPS) = Dividends Paid Out / Outstanding Shares

= 2668906500/ /31398900

= 85

Price/Earnings Ratio = 25383.5/ 426 = 59.58 (Closing Stock Price as of 31st March 2015)

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9. Market Efficiency analysis

The Three Basic Forms of the EMH

The efficient market hypothesis assumes that markets are efficient. However, the efficient market hypothesis (EMH) can be categorized into three basic levels:

1. Weak-Form EMH

The weak-form EMH implies that the market is efficient, reflecting all market information. This hypothesis assumes that the rates of return on the market should be independent; past rates of return have no effect on future rates. Given this assumption, rules such as the ones traders use to buy or sell a stock, are invalid.

2. Semi-Strong EMH

The semi-strong form EMH implies that the market is efficient, reflecting all publicly available information. This hypothesis assumes that stocks adjust quickly to absorb new information. The semi-strong form EMH also incorporates the weak-form hypothesis. Given the assumption that stock prices reflect all new available information and investors purchase stocks after this information is released, an investor cannot benefit over and above the market by trading on new information.

3. Strong-Form EMH

The strong-form EMH implies that the market is efficient: it reflects all information both public and private, building and incorporating the weak-form EMH and the semi-strong form EMH. Given the assumption that stock prices reflect all information (public as well as private) no investor would be able to profit above the average investor even if he was given new information.

Looking at the above data, we can infer that BOSCH has Strong Market Efficiency

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10.Debt Investor Perspective analysis (Leverage Ratios)

Companies rely on a mixture of owners' equity and debt to finance their operations. A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.

The most well known financial leverage ratio is the debt-to-equity ratio. It is expressed as:Leverage Ratio = Total Debt / Total Equity  = 30838/73470 = 0.42

BOSCH has a very low Leverage Ratio which shows low volatility and high financial stability of the company.

                        

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11.Equity Investor Perspective analysis

We have covered the below points in the different sections.

Return on Equity - Please refer Page 25

Return on Assets - Please refer Page 24

Fixed Assets Turnover - Please refer Page 27

Gross Profit Margin - Please refer Page 15

Operating Profit Margin - Please refer Page 15

Net Profit Margin - Please refer Page 16

Liquidity : - Please refer Page 10

● Quick Ratio ● Current Ratio● Cash Ratio

Solvency : - Please refer Page 13

● Debt Equity Ratio● Coverage Ratios

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12.Key Financial performance Ratios

For calculations ,please refer the embedded excel sheet

Price ratios are used to get an idea of whether a stock's price is reasonable or not. They are easy to use and generally pretty intuitive, but do not forget this major caveat: Price ratios are "relative" metrics, meaning they are useful only when comparing one company's ratio to another company's ratio, a company's ratio to itself over time, or a company's ratio to a benchmark. 

1) Price-to-Earnings Ratio (P/E) Income Statement, Most Recent Stock PriceP/E Ratio = Price per Share / Earnings Per Share

= 59.59

2) Price-to-Sales RatioIncome Statement, Most Recent Stock PricePrice-to-Sales Ratio = Price per Share / Annual Sales Per Share

= 5.96

3) Price-to-Book Ratio (P/B) 

P/B Ratio = Price per Share / Book Value per Share    

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Book value (BV) is already listed on the balance sheet, it's just under a different name: shareholder equity. Equity is the portion of the company that owners (i.e. shareholders) own free and clear. Dividing book value by the number of shares outstanding gives you book value per share.

= 10.84

4) Dividend Yield

Dividend Yield = Dividend per Share / Price per ShareDividends are the main way companies return money to their shareholders. If a firm pays a dividend, it will be listed on the balance sheet, right above the bottom line. Dividend yield is used to compare different dividend-paying stocks. Some people prefer to invest in companies with a steady dividend, even if the dividend yield is low, while others prefer to invest in stocks with a high dividend yield.

=0.00

5) Dividend Payout Ratio

Dividend Payout Ratio = Dividend / Net IncomeThe percentage of profits distributed as a dividend is called the dividend payout ratio. Some companies maintain a steady payout ratio, while other try to maintain a steady number of dollars paid out each year(which means the payout ratio will fluctuate). Each company sets its own dividend policy according to what it thinks is in the best interest of its shareholders. Income investors should keep an especially close eye on changes in dividend policy. = 19.9

Profitability RatiosProfitability ratios tell you how good a company is at converting business operations into profits. Profit is a key driver of stock price, and it is undoubtedly one of the most closely followed metrics in business, finance and investing. 

6) Return on Assets (ROA)

Return on Assets =  Net Income / Average Total AssetsA company buys assets (factories, equipment, etc.) in order to conduct its business. ROA tells you how good the company is at using its assets to make money.

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For example, if Company A reported $10,000 of net income and owns $100,000 in assets, its ROA is 10%. For ever $1 of assets it owns, it can generate $0.10 in profits each year. With ROA, higher is better.

= 0.19

7) Return on Equity (ROE)

Return on Equity = Net Income / Average Stockholder Equity        Equity is another word for ownership. ROE tells you how good a company is at rewarding its shareholders for their investment. For example, if Company B reported $10,000 of net income and its shareholders have $200,000 in equity, its ROE is 5%. For every $1 of equity shareholders own, the company generates $0.05 in profits each year. As with ROA, higher is better.

= 0.27

8) Profit Margin

Profit Margin = Net Income / Sales        Profit margin calculates how much of a company's total sales flow through to the bottom line. As you can probably tell, higher profits are better for shareholders, as is a high (and/or increasing) profit margin.   = 0.17

Liquidity  Ratios Liquidity ratios indicate how capable a business is of meeting its short-term obligations. Liquidity is important to a company because when times are tough, a company without enough liquidity to pay its short-term debts could be forced to make unfavorable decisions in order to raise money (sell assets at a low price, borrow at high interest rates, sell part of the company to a vulture investor, etc.). 

9) Current Ratio

Current Ratio = Current Assets / Current Liabilities        The current ratio measures a company's ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the

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company could be vulnerable to unexpected bumps in the economy or business climate. 

= 2.32

10) Quick Ratio 

Quick Ratio = (Current Assets - Inventory) / Current Liabilities        The quick ratio (also known as the acid-test ratio) is similar to the quick ratio in that it's a measure of how well a company can meet its short-term financial liabilities. However, it takes the concept one step further. The quick ratio backs out inventory because it assumes that selling inventory would take several weeks or months. The quick ratio only takes into account those assets that could be used to pay short-term debts today. = 1.82

Debt RatiosThese ratios concentrate on the long-term health of a business, particularly the effect of the capital and finance structure on the business:

 

11) Debt to Equity Ratio 

Debt-to-Equity Ratio = Total Liabilities / Total Shareholder Equity

 Total liabilities and total shareholder equity are both found on the balance sheet. The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Generally speaking, as a firm's debt-to-equity ratio increases, it becomes more risky because if it becomes unable to meet its debt obligations, it will be forced into bankruptcy. 

 = 1.42

12) Interest Coverage Ratio

 Interest Coverage Ratio = EBIT / Interest Expense

 

Both EBIT (aka, operating income) and interest expense are found on the income statement. The interest coverage ratio, also known as times interest earned (TIE), is a measure of how well a company can meet its interest payment obligations. If a company

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can't make enough to make interest payments, it will be forced into bankruptcy. Anything lower than 1.0 is usually a sign of trouble.

= 136.78

 

 

Efficiency Ratios

 

These ratios give investors insight into how efficiently a business is employing resources invested in fixed assets and working. It's can also be a reflection of how effective a company's management is. 

 

13) Asset Turnover Ratio

 

Asset Turnover Ratio = Sales / Average Total Assets

 

Like return on assets (ROA), the asset turnover ratio tells you how good the company is at using its assets to make products to sell. For example, if Company A reported $100,000 of sales and owns $50,000 in assets, its asset turnover ratio is 2x. Forever $1 of assets it owns, it can generate $2 in sales each year. 

 

= 1.13

14) Inventory Turnover Ratio 

 

Inventory Turnover Ratio = Costs of Goods Sold / Average Inventory

 If the company you're analyzing holds has inventory, you want that company to be selling it as fast as possible, not stockpiling it. The inventory turnover ratio measures this efficiency in cycling inventory. By dividing costs of goods sold (COGS) by the average amount of inventory the company held during the period, you can discern how

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fast the company has to replenish its shelves. Generally, a high inventory turnover ratio indicates that the firm is selling inventory (thereby having to spend money to make new inventory) relatively quickly.

= 5.06

Key Financial Performance Ratios

P/E Ratio

P/E Ratio = Price per Share / Earnings Per Share 59.59

Price-to-Sales Ratio

Price-to-Sales Ratio = Price per Share / Annual Sales Per Share 5.96

P/B Ratio

P/B Ratio = Price per Share / Book Value per Share 10.84

Dividend Yield

Dividend Yield = Dividend per Share / Price per Share 0.00

Dividend Payout Ratio

Dividend Payout Ratio = Dividend / Net Income 19.90

Return on Assets

Return on Assets = Net Income / Average Total Assets 0.19

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Return on Equity

Return on Equity = Net Income / Average Stockholder Equity 0.27

Profit MarginProfit Margin = Net Income / Sales 0.17

Current Ratio

Current Ratio = Current Assets / Current Liabilities 2.32

Quick Ratio

Quick Ratio = (Current Assets - Inventory) / Current Liabilities 1.82

Debt-to-Equity Ratio

Debt-to-Equity Ratio = Total Liabilities / Total Shareholder Equity 1.42

Interest Coverage Ratio

Interest Coverage Ratio = EBIT / Interest Expense 136.78

Asset Turnover Ratio

Asset Turnover Ratio = Sales / Average Total Assets 1.13

Inventory Turnover Ratio

Inventory Turnover Ratio = Costs of Goods Sold / Average Inventory 5.06

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13.As a CEO/ CFO, analyze the overall performance and comment on the financial health of the company

Bosch Group in India employs over 29,000 associates .The Group in India has close to 12,000 research and development associates and has filed for around 150 patents in 2014.In India, Bosch Limited is the flagship company of the Bosch Group.

Shareholder’ Capital

For the year 2014 - 2015,Reserves and Surplus stand at Rs. 73156 Million which is grown at 16.81 % from Rs 62629 Million in the previous year

Assets

The company added Rs 15398 million in Assets in the year 2014-15. Cash and Bank balances has increased at a high rate of 31.53 % and the Noncurrent investments increased at a rate of 161.88 %.

Liabilities

Current Liabilities have increased from Rs 21770 Million to Rs 25511 Million.

Revenues

The Company achieved revenue of Rs 126508 Million in the financial year 2014-15 as compared to Rs 91093 in the financial year 2013-14, registering a growth of 38.88% which is very high as compared to our competitors.

The Profit for the financial year 2014-15 is Rs 13377 Million as compared to Rs 8847 Million in financial year 2013-14, registering a growth of 51.20% which is also very high as compared to our competitors.

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Sales have increased year after year which is a good sign

2012-2013 and 2013-2014 saw a dip in EPS and DPS , but it is showing an upward trend in 2014-2015