Question: Is financing policy of the Hero Honda motors satisfactory? How is unlevered capital structure of the firm justified?

It is not always advisable to have zero debts in the company but some time it is important to have debts. Many business owners focus a lot of their efforts on increasing sales to achieve profitability and growth, but unfortunately often neglect to monitor their cash flow situation as carefully.

A debt is ‘‘good” if it helps in bridging this company’s cash needs and supporting its sales and profitability.

According to the case Financing policy of the hero Honda Motors is satisfactory as company has been a debt free for the five year (2001 to 2005)which is interest free and has no holding cost and company is meeting its financing needs from its internal sources of financing.

Most important ratio are capital structure ratio also known as leverage ratio, they indicate how the assets of the firm are funded in other words types of the liability used to finance assets. in the year 2011 because of the speculation of the Hero and Honda hero need to purchase their own assets and because of this reason their debt-equity ratio is also increase drastically which is shown as below,

1) Debt-equity ratio : it refers to the portion of debt in relation to equity or assets

= Long term debts/Net worth2001 = 66.48/608.99

= 0.112002 =116.44/675.54

= 0.172003 =134.28/860.33

= 0.162004 =174.70/1138.81

= 0.152005 =201.76/1493.38

= 0.152006 =185.78/2009.33

= 0.092010 =66.03/3465.02

= 0.022011 =1491.16/2956.06

= 0.50 From the above we can say that company’s debt-equity ratio is diminishing year after year till 2010 which shows company is becoming less dependent on the external funds (debts) and concentrating on the internal funds. But in the year 2011 its debt is increase drastically Because of the speculation of the Hero and Honda.