Harley Davidson

Financial analysis

Since 1996, Harley Davidson has known a dramatic increase in its sales with a yearly growth average of 18%, due largely to the expansion of the American economy on one hand. On the other hand, Harley Davidson is the leader in North America market in the production and dealership of heavyweight motorcycles. In fact, the prosperity of Davidson allowed the company to develop a good financial situation due to many factors.

Liquidity ratio and assets management

Even if in 2001, the current and quick ratios has decreased slightly compared to 2000, however, in the five past years, both the current and quick ratios have tremendously improved. This means that the company has enough cash or liquidity to meet its short-term duties towards its creditors. This flow of liquidity could be clarified by the continous decline of days sales outstanding based on the wholesale and retail receivables, which was 12 days in 2000. Clearly, there is an inverse relationship between the liquidity ratios and DSO as shown in the below chart.

As pointed out in the below graph, we should notice that the company is also doing well compared to its major competitors (Ducati and Honda) as well as to the industry average. This is due largely to a low level of account receivables and of DSO which means that Davidson has an efficient collection department and that it also applies a rigorous credit policy towards its insolvable customers. Nevertheless, it is forecasted that in 2002, both the current and quick ratios will decline by 16.34% and 16.48% respectively because the DSO will increase to 17 days.

Leverage ratios

From 1996 to 2001, total debt to total assets ratio is decreasing. This means that the company is using less debt to acquire assets even if it expands its equipment at two of its Wisconsin facilities. Therefore, we can say that HDI is becoming less risky since it is relying more on cash than on debts in making its new investment. On the other hand, concerning the total debt to common equity ratio, we notice that it is decreasing from 1996 to 2001. This implies that debtholders are having a low proportion of equity as debt.

Regarding the competitor comparison, we can say that HDI is much more relying on cash than external funds in making its assets Investments mainly because it has a higher liquidity ratio. As matter of fact, HDI has a lower total debt to total assets in comparison to Ducati and Honda. Furthermore, it has a lower total debt to common equity compared to its competitors, which is an advantage for its debtholders.

In 2002, the total debt to total assets increased to 0.26. This can be explained by the will of the company to extent its net fixed assets because they were used in 2001 at full capacity. Thus, the company will need some additional funds of 194,723 borrowed as note payables in order to make its sales reach 17.3% growth. Moreover, the AFN cited previously, will make the total debt to equity ratio increase to 0.50 which means that debtholders will not get their money back as easily as before in the short term. Nevertheless, in the long run, they will benefit more from this expansion through debt.

Efficiency ratios:

During the last 6 years, both the ROA and the ROE have increased at a steady rate that were 13.72% and 24.50% respectively in 2001. This implies that HDI has used its assets and equity efficiently. On the other hand, the good financial performance of the company could be explained by its leadership in the American market and the introduction of new heavyweight motorcycles that were well commercialized in Europe and Asia. As a result, the net income has constantly increased at an average of 10% per year meanwhile the total assets and the common equity have grown at an average of 7% and 8.5% respectively. Nevertheless, Ducati and Honda did not do as well as Harley Davidson mainly because of their low level of sales and net income. Furthermore, HDI is clearly above the industry average. To notice, a high ROA and ROE indicate that the firm is taking advantage of a quasi-monopoly in the American market to charge excessive prices in order to earn more than the cost