Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assts. The current assets should either be liquid or near about liquidity. These
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should be convertible in cash for paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities then the liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met out of the current assets then the liquidity position is bad.
1) Current Ratio Year 2007 2008 2009 Current Assets 9146.50 9420.00 10221.40 Current Liabilities 16087.40 19553.30 22059.00 Current Ratio 0.57 0.48 0.46
Interpretation
: -
As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company for last three years it has decreased from 2007 to 2009. The current ratio of company is less than the ideal ratio. This depicts that company’s liquidity position is not sound. Its current assets are less than its current liabilities.2) Quick Ratio
Year 2007 2008 2009
Quick Assets 6390.70 6249.00 6953.10
Current Liabilities 16087.40 19553.30 22059.00
Quick Ratio 0.40 0.32 0.32
Interpretation
:
- A quick ratio is an indication that the firm is liquid and has the less confidence to meet its current liabilities in time. The ideal quick ratio is 1:1. Company’s quick ratio is less than ideal ratio. This shows company has liquidity problem.3) Absolute Liquid Ratio
Year 2007 2008 2009
Absolute Liquid Assets 357.80 1310.90 2195.70 Current Liabilities 16087.40 19553.30 22059.00
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Interpretation
:
- These ratio shows that company carries a small amount of cash. But there is nothing to be worried about the lack of cash because company has reserve, borrowing power & long term investment. In India, firms have credit limits sanctioned from banks and can easily draw cash.(B) CURRENT ASSETS MOVEMENT RATIO
Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, large is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a firm manages its resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated.
1) Inventory Turnover Ratio
Year 2007 2008 2009
Cost of goods sold/Sales 123253.80 103450.10 99059.50
Average Stock 4032.20 4548.90 4805.15
Inventory Turnover Ratio 30.57times 22.74times 20.62times
Interpretation: - This ratio shows how rapidly the inventory is turning into receivable through sales. In 2007 the company has high inventory turnover ratio but in 2009 it has reduced to 20.62 times. This shows that the company’s inventory management technique is less efficient as compare to last two years.
2) Inventory Conversion Period
Year 2007 2008 2009
Days 365.00 365.00 365.00
Inventory Turnover Ratio 30.57 22.74 20.62 Inventory Conversion Period 11.94days 16.05days 17.71days
Interpretation: - Inventory conversion period shows that how many days’ inventories takes to convert from raw material to finished goods. In the company inventory conversion period is increasing. This shows the inefficiency of management to convert the inventory into cash.
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3) Debtor Turnover Ratio
Year 2007 2008 2009
Sales 123253.80 103450.10 99059.50
Average Debtors 4790.80 4650.65 2986.60
Debtor Turnover Ratio 25.73times 22.24times 33.17times
Interpretation: - This ratio indicates the speed with which debtors are being converted or turnover into sales. The higher the values or turnover into sales. The higher the values of debtors turnover, the more efficient is the management of credit. But in the company the debtor turnover ratio is increasing year to year. This shows that company is utilizing its debtor’s efficiency. Now their credit policy becomes efficient as compare to previous year.
4) Average Collection period
Year 2007 2008 2009
Days 365.00 365.00 365.00
Debtor Turnover Ratios 25.73 22.24 33.17
Average Collection Period 14days 16days 11days
Interpretation: - The average collection period measures the quality of debtors and it helps in analyzing the efficiency of collection efforts. It also helps to analysis the credit policy adopted by company. In the firm average collection period increasing year to year but in 2009 it came down. It shows that the firm has previously Liberal Credit policy but now it recovery. These changes in policy are due to competitor’s credit policy.
5) Working Capital Turnover Ratio
Year 2007 2008 2009
Sales 123253.80 103450.10 99059.50
Net Working Capital -6940.90 -10133.30 -11837.60 Working Capital Turnover Ratio -17.76 -10.21 -8.37
Interpretation: - This ratio indicates high net working capital requires for sales. This company having negative working capital because, they have more current liabilities over current assets. It shows that the short term loans are not sufficient and more money are invested in
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the purchase of fixed assets. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.
Inventory
Year 2006-2007 2007-2008 2008-2009
Inventories 2755.80 3171.00 3268.30
Inventories are a major part of current assets. If any company wants to manage its working capital efficiency, it has to manage its inventories efficiently. The graph shows that inventory in 2006-2007 is 30%, in 2007-2008 is 33% and in 2008-2009 is 31% of their current assets. The company should try to reduce the inventory upto 10% or 20% of current assets.
Cash & Bank Balance
Year 2006-2007 2007-2008 2008-2009
Cash & Bank Balance 357.80 1310.90 2195.70
Cash is basic input or component of working capital. Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirements. The above graph is indicate that in 2007 the cash is 357.80 million but in 2008 it has increase to 1310.90. The result of that it easy for the firms manufacturing operations. In 2009, it is increased upto 2195.70 million cash balance. So in 2009, the company has no problem for meeting its requirement as compare to 2008.
Debtors
Year 2006-2007 2007-2008 2008-2009
Debtors 3352.50 2974.40 1499.40
Debtors constitute a substantial portion of total current assets. In India it constitute one third of current assets. The above graph is depicting that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit policy.
39 Current Assets
Year 2006-2007 2007-2008 2008-2009
Current Assets 9146.50 9420.00 10221.40
This graph shows that there is 92% increase in current assets in 2009. This increase is arising because there is approx. 50% increase in inventories. Increase in current assets shows the liquidity soundness of company.
Current Liabilities
Year 2006-2007 2007-2008 2008-2009
Current Liabilities 16087.40 19553.30 22059.00
Current liabilities shows company short term debts pay to outsiders. In 2009 the current liabilities of the company increased. It is not good sign for the company.
Net Working Capital
Year 2006-2007 2007-2008 2008-2009
Net Working Capital -6940.90 -10133.30 -11837.60
Working capital is required to finance day to day operations of a firm. There should be an optimum level of working capital. It should not be too less or not too excess. In the company there is negative in working capital. The negative in working capital arises because the company has purchase many fixed assets and the short debt is not sufficient to meet the current liabilities.
From the above discussion we get, in 2009 the Hero Honda gets more profit and increase its business but the liquidity position is better in comparison to previous two years.
40 CONCLUSION
After studying the components of working capital management system of Hero Honda Motors, Bajaj Auto Ltd, TVS Company Ltd, LML Ltd and Suzuki Ltd. It is found that the TVS and Suzuki have good liquidity position but profit is low and other Hero Honda and Bajaj having liquidity position is poor but LML is running with loss. Out of five companies four of companies are following aggressive policy. Hero Honda and Bajaj are competing well at the domestic as well as the international level and it is among the low cost producer’s two wheelers. Two wheeler markets is a saturated market in India and cut-throat completion among the firms. Among the five companies Hero Honda made more profit in 2009 is 11681.80 million rupees than other companies and LML is suffering is loss due to the demand of his product and inefficient management. The company is a matured one and it has contributed well in the countries growth and development and will also continue to perform and contribute to the whole nation. The Profit is less due to recession, miss management of fund, not proper Management of working capital.
After the in intra-firm analysis of Hero Honda we found that in 2009 the firm earns 11681.80 million rupees which is high profit in comparison to last two years but the liquidity position is not good. Mainly short term borrowing is not sufficient to meet the immediate obligations and the use more fund in the fixed assets. We found that the working capital is negative which shows the current assets less than the current liabilities. The Hero Honda gets maximum market share in the two wheelers market. Overall the financial position of Hero Honda is good.
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REFERENCE
• http://www.suzukimotorcycle.co.in/suzuki_india.asp • http://www.suzukimotorcycle.co.in/mission_statement.asp • http://www.herohonda.com/ • http://www.automobileindia.com/two-wheelers/lml-india/ • http://www.bajajauto.com/ • http://www.tvsmotor.in/ • http://en.wikipedia.org/wiki/Working_capital• Gupta,Shashi. K & Sharma,R.K. 2003, Management Accounting, Kalyani Publishers, Delhi.
• Gupta, Shashi, K & Mehra, Arun. 2004, Financial Analysis and reporting, Kalyani Publisher, Delhi
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ANNEXURE-1
Profit and Loss Account of Hero Honda Motors
for the year ending December 31,2007,2008 and 2009 Year ending 31 December (In Million Rupees)
2007 2008 2009
Sales 99059.50 103450.10 123253.80
Other Income 837.30 888.50 1085.60
Total Income 99896.80 104338.60 124339.40
Raw Material Cost 72524.60 74795.00 88200.50
Excise 16475.20 17032.90 12278.50 Other Expenses -1959.90 -2055.50 5244.60 Operating Profit 12019.60 13677.70 17530.20 Interest Name 137.60 134.70 130.40 Gross Profit 11882.00 13543.00 17399.80 Depreciation 1397.80 1603.20 1806.60 Profit Bef.Tax 11321.50 12828.30 16678.80 Tax 3882.10 4424.00 4997.00 Net Profit 7439.40 8404.30 11681.80
Other Non-Recurring Income 1139.50 1274.50 1135.80
Reported Profit 8578.90 9678.80 12817.60
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