Financial Analyst Research Assignment: Harley-Davidson Inc

Financial Analyst Research Assignment: Harley-Davidson Inc., (HOG)

1. Overview of Harley-Davidson Inc.

Harley-Davidson Inc. is a premier motorcycle manufacturer based in Milwaukee, Wisconsin. The company was founded in 1903 and is currently ranked number 458 in the list of Fortune 500 companies 2012. Harley-Davidson Inc. top competitors include: Ultra Motorcycle Company Inc., Triumph Motorcycles Limited and Viper Motorcycle Company. The company's total revenue for 2011 was $5.31 billion while its operating income for the year was $829.9 million (Yahoo Finance 2012).

Harley-Davidson made nearly $600 million in net income in 2011 and its total assets rose to nearly $10 billion. The company has a workforce of 6,000 employees and its current CEO is Keith E. Wandell. Over the last 100 years, Harley-Davidson has built a loyal brand community and distinguished itself as a manufacturer of high quality and stylish motorcycles. The company's major business lines include manufacturing and sale of heavyweight motorcycles, motor cycle parts, apparel, customization and licensing of the Harley-Davidson© brand (Nasdaq, 2012)

Financial Ratios

The following table summarizes Harley-Davidson's key ratio indicators from 2009 to 2011. The ratios include: liquidity, management efficiency, financial leverage and profitability.

Ratio Definition 2011 2010 2009

Liquidity

1 Current Ratio Current assets ÷ Current liabilities 1.68 2.02 1.91

2. Quick Ratio (acid test) Current assets - Inventories ÷ Current liabilities 1.53 1.86 1.77

Asset Management

3. Average collection period Accounts receivable ÷ Credit sales ÷ 365 65 days 67 days 71 days

4. Inventory turnover Cost of sales ÷ Average inventory 8.97 9.30 9.07

5. Fixed-asset turnover Sales ÷ Fixed assets 1.04 0.91 0.99

6. Total asset turnover Sales ÷ Total assets 0.55 0.52 0.52

Financial Leverage Management

7. Debt ratio Total debt ÷ Total assets 59.16% 60.99% 61.56%

8. Debt-to-equity Total debt ÷ Total equity 236.49% 260.63% 267.36%

9. Times interest earned EBIT ÷ Interest charges 3.24 5.57 1.66

10. Times fixed charges earned (EBIT + Lease payments) ÷ (Interest + Lease Payments + Before-tax sinking fund + Preferred stock dividends before tax) 3.24 5.57 1.66

Profitability

11. Gross profit margin Sales - Cost of sales ÷ Sales 37.20% 37.81% 33.40%

12. Net profit margin Earnings after Taxes (EAT) ÷ Sales 10.32% 5.34% 1.48%

13. Return on investment Earnings after Taxes (EAT) ÷ Total assets 5.67% 2.75% 0.78%

14. Return on stockholders' equity Earnings after Taxes (EAT) ÷ Stockholder's equity 22.65% 11.77% 3.37%

2. Analysis of key ratios and vulnerability to current financial threats

In regards to liquidity, Harley-Davidson's current ratio indicates that the company could easily raise the funds to meet its current financial obligations using its current assets. This means that the company was not at risk of falling into financial difficulties. In addition to this, the company's quick ratio was above 1.5 throughout the period under review implying that Harley-Davidson did not have to rely on selling its inventory in order to raise the funds to pay its creditors. The company's performance shows that the company has largely benefitted from its restructuring exercise and investors have become increasingly confident about its stock.

Harley-Davidson's asset management indicators show that the management is efficient in using the resources at the company's disposal to raise revenue. In particular, the company's average collection period is allong the industry average and in fact in 2011, Harley-Davidson's average collection period of 65 days was better than the industry average for the year which stood at 68 days. The other key asset management indicators including inventory turnover, fixed-asset turnover and total asset turnover all show that the management's use of resources to raise revenues over the period under review kept improving. The figures are from Harley-Davidson's form 10k, its financial reports for 2011, 2010 and 2011 as reported on Yahoo Finance, Google Finance, Nasdaq and Bloomberg.

Year 2011 2010 2009

Current Liabilities $2,699 $2,014 $2,268

Inventories $418 $326 $323

Accounts Receivable $1,388 $1,343 $1,705

Cost of Sales $3,336 $3,022 $3,185

Average Inventory $372 $325 $351

Sales $5,312 $4,859 $4,782

Current Assets $4,542 $4,067 $4,342

Fixed Assets $5,131 $5,364 $4,814

Total Assets $9,674 $9,431 $9,156

Total Debt $5,723 $5,752 $5,636

Total Equity $2,420 $2,207 $2,108

Earnings before interest and and taxes (EBIT) $793 $390 $179

Interest Charges $245 $70 $108

Earnings after taxes (EAT) $548 $260 $71

Stockholder's Equity $2,420 $2,207 $2,108

Table 1: Summary of Harley-Davidson's key financial indicators

The financial leverage management indicators of Harley-Davidson shows that the company has not incurred too much debt to finance its operations. The debt-ratio for the three years under consideration have averaged about 60.10% indicating that the company has been able to effectively balance between using retained earnings to finane its operations and incurring long-term debt for the same. The times interest earned and times fixed charges earned has improved from a low of 1.66 in 2009 to a high of 3.24 in 2011 (Google Finance 2012). Similarly, the profitability ratios have improved over the period under review. In 2009, the gross margin was 33.40% but it improve