SHORT TERM SOLVENCY ANALYSIS OF LEAD AUTOMOBILE PLAYERS IN INDIA

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1 International Journal of Advanced Research in Management (IJARM) Volume 6, Issue 3, Sep-Dec (2015), pp , Article ID: Available online at ISSN Print: and ISSN Online: IAEME Publication Journal Impact Factor (2015): (Calculated by GISI) SHORT TERM SOLVENCY ANALYSIS OF LEAD AUTOMOBILE PLAYERS IN INDIA Vineet Singh Assistant Professor, Dept. of Commerce, Guru Ghasidas Vishwavidyalaya, Bilaspur, Chhattisgarh. ABSTRACT The present study aims at finding out short term solvency ratio or current ratio in two major car manufacturing companies in India i.e. Maruti Suzuki and Tata Motors. In order to improve the quality of study, a comparison is made between current ratio of both the companies and further t- test is applied to find out that whether there is a significant difference between current ratio of Maruti Suzuki and Tata Motors or not. Keywords: Maruti Suzuki, Tata Motors, Current Ratio. Cite This Article: Vineet Singh, Short Term Solvency Analysis of Lead Automobile Players In India. International Journal of Advanced Research in Management, 6(3), 2015, pp INTRODUCTION In India, Maruti Suzuki had started its business in 1982 by establishing a manufacturing plant at Gurgaon, Haryana. The company s headquarter is situated at Nelson Mandela Road, New Delhi. Maruti Suzuki 800 was the first model manufactured by the company in Today, the company is capable of producing 1.5 million family cars every year. The sales network of the company is spread over 1097 cities with service network in more than 1454 cities. The company has a team of professionals who turned out in manufacturing 14 family cars with over 150 variants successfully. The company also owns a diesel engine plant with a capacity to manufacture 7 lakh diesel cars every year. Maruti Suzuki is also engaged in exporting cars to more than 125 countries including European market like Netherlands, Germany, France, Italy and UK. Alto 800, Alto K10, Celerio, Wagon R, Singray, Ritz, Swift, Dzire, Ciaz, Omni, Eeco, Ertiga, Gypsy and Grand Vitara are the various models of cars manufactured by Maruti Suzuki. Tata Motors was established in 1945 in India and its manufacturing plants are located Jamshedpur (Jharkhand), Pune (Maharashtra), Dharwad (Karnataka), Pantnagar (Uttarakhand), Lucknow (Uttar Pradesh), and Sanand (Gujarat). Tata 11 editor@iaeme.com

2 Vineet Singh Motors group comprises of over employees with over 6600 dealership, sales, service and spare parts network across the world. The company is also renowned of establishing a number of successful joint ventures and acquisitions throughout the world. In 2005 the company established a joint venture with Fiat Group Automobiles at Rajangaon (Maharashtra) to manufacture Tata and Fiat cars along with Fiat powertrains. The major acquisition of Tata Motors includes Daewoo in 2004 which is South Korea s second largest truck maker and Jaguar Land Rover in In the year 2004 the company was listed in New York Stock Exchange. Tata Motors is also having business in number of other countries like Thailand, South Africa UK, South Korea and Indonesia through its subsidiaries and associate companies. The company is engaged in manufacturing both commercial and passenger vehicles which are being marketed in several countries like Africa, Middle East, South East Asia, Europe, South Asia, South America, Australia, Russia and it also has joint ventures in Ukraine, Bangladesh and Senegal. The cars and utility vehicles manufactures by Tata Motors in India includes Nano, Bolt, Vista, Indica, Zest, Manza, Indigo, Safari Storme, Safari Dicor, Sumo Gold, Movus, Venture, Xenon XT, Aria. Apart from cars and utility vehicles the company also manufactures small pickups like magic, ace and winger, trucks like Prima and Construck, buses and even defence vehicles for the Indian Army. Current ratio or working capital ratio is calculated to judge the ability of firm to meet its short term liabilities or current liabilities on time. Current ratio is used to explain the relationship between current assets and current liabilities of an enterprise. Current assets are those assets which can be easily converted into cash within one year such as cash in hand, cash at bank, raw materials, debtors, bills receivables etc. On the other hand current liabilities are those liabilities which mature for payment within a year such as creditors, bills payable, interest payable, dividend payable etc. Thus Current Ratio = Current Assets Current Liabilities. As per standard current ratio of 2:1 is considered to be satisfactory which means that current assets are twice the current liabilities. If current assets are twice or more than twice the current liabilities it reveals that a firm will not find any difficulty to meet its current liabilities on time. On the other hand if current assets are less than twice the current liabilities it means that a firm may face difficulty to pay off its current liabilities whenever they become due. If current ratio is less than 2:1 it reflects lack of working capital and shortage of liquidity in a firm. 2. OBJECTIVES OF STUDY To find out the amount of current assets and current liabilities in Maruti Suzuki from to To find out the amount of current assets and current liabilities in Tata Motors from to To calculate and compare the current ratio of Maruti Suzuki and Tata Motors during to To test whether there is a significant difference between current ratio of Maruti Suzuki and Tata Motors with the help of t test during to RESEARCH METHODOLOGY The study is primarily based on secondary data. The relevant information in this regard has been collected from various sources like articles, websites, journals, 12 editor@iaeme.com

3 Amount in Rs. Short Term Solvency Analysis of Lead Automobile Players In India textbooks, and annual reports of Maruti Suzuki and Tata Motors., The analysis is carried out through various statistical tools like percentage, average, t test etc. 4. ANALYSIS AND INTERPRETATION In order to analyze short-term solvency of Maruti Suzuki and Tata Motors current ratio has been calculated and is explained with the help of table and graphical representation followed by a comparative analysis. Table 1 Current Ratio (Maruti Suzuki) Years Current Assets Current Liabilities Current Ratio Average Figure 1Current Ratio (Maruti Suzuki) Current Ratio (Maruti Suzuki) Years Current Assets Current Liabilities Current Ratio The above table no. 1 and figure no. 1 exhibits that current ratio of Maruti Suzuki stood at an average of 1.48:1 for the study period to The current ratio of the company fluctuates from 0.93:1 to 1.76:1 during the study period. In the year the company is able to maintain highest current ratio of 1.76:1 and the lowest current ratio was witnessed in the year During the entire study period, it was in when the company had maximum amount of current assets i.e. Rs crores, and the maximum amount of current liabilities was witnessed in the year i.e. Rs crores. The company s current assets and current liabilities stood at an average of Rs crores and Rs crores 13 editor@iaeme.com

4 Amount in Rs. Vineet Singh respectively. A current ratio of 2:1 is considered to be satisfactory, which means that current assets are twice the current liabilities. If current assets are less than, twice the current liabilities it reflects that a firm may find it difficult to pay its current liabilities on time. Since, the current ratio of Maruti Suzuki stood at an average of 1.48:1 it reveals that the company s current ratio is less than standard and the company needs to improve it. Table 2 Current Ratio (Tata Motors) Years Current Assets Current Liabilities Current Ratio Average Figure 2: Current Ratio (Tata Motors) Current Ratio (Tata Motors) Years Current Assets Current Liabilities Current Ratio Table 2 and Figure 2 reveal that the current ratio of Tata Motors stood at an average of 0.53:1 for the study period to During the study period the current assets of the company stood at an average of Rs crores whereas the current liabilities of the company stood at an average of Rs crores. The current ratio of Tata Motors ranges from 0.36:1 to 0.87:1 during the study period. It is in the year when the company is able to maintain highest current ratio of 0.87:1 and the lowest current ratio was witnessed in the year i.e. 0.36:1. During the entire study period, it was in when the company had maximum amount of current assets i.e. Rs crores and maximum amount of current liabilities was held by the company in i.e. Rs crores. The current 14 editor@iaeme.com

5 Short Term Solvency Analysis of Lead Automobile Players In India ratio of Tata Motors stood at an average of 0.54:1 which reveals that the company is having shortage of working capital due to which it can face difficulty to meet its current liabilities on time. Table 3 Current Ratio (Maruti Suzuki vs Tata Motors) Years Current Ratio (Maruti Suzuki) Current Ratio (Tata Motors) Average Figure 3 Current Ratio (Maruti Suzuki vs Tata Motors) 2.00 Current Ratio (Maruti Suzuki vs Tata Motors) Current Ratio (Maruti Suzuki) Current Ratio (Tata Motors) Table no. 3 and figure no. 3 portray a comparison between current ratio of Maruti Suzuki and Tata Motors. The above analysis interprets that both the companies are not able to maintain a satisfactory current ratio than standard. The current ratio of Maruti Suzuki and Tata Motors stood at an average of 1.48:1 and 0.54:1 during the study period which means that both the companies are not able maintain a standard current ratio of 2:1. When current assets are less than twice the current liabilities it means that the company is having shortage of working capital due to which it may not be able to meet its current liabilities on time. The above analysis also reveals that Maruti Suzuki is in a better position to meet its short term liabilities on time as compared to Tata Motors, because the former is having a better current ratio than the latter editor@iaeme.com

6 Vineet Singh 5. HYPOTHESIS TESTING ON CURRENT RATIO (MARUTI SUZUKI AND TATA MOTORS) To test whether there is a significant difference between current ratio of Maruti Suzuki and Tata Motors the following hypothesis is framed and tested through t-test at 95% confidence level: H 0 There is no significant difference between current ratio of Maruti Suzuki and Tata Motors H 1 There is a significant difference between current ratio of Maruti Suzuki and Tata Motors t-test: Two-Sample Assuming Unequal Variances PARAMETERS CURRENT RATIO (MARUTI SUZUKI) CURRENT RATIO (TATA MOTORS) Mean Variance Observations 5 5 Hypothesized Mean Difference 0 df 7 t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Since the calculated value of t two tail at at.05 level of significance is less than table value of t, alternate hypothesis is rejected and null hypothesis is accepted that there is no significant difference between current ratio of Maruti Suzuki and Tata Motors. 6. CONCLUSION On the basis of above analysis and interpretation in can be concluded that Maruti Suzuki and Tata Motors are maintaining current ratio at an average of 1.48:1 and 0.54:1 respectively during the study period of to , which is less than, standard current ratio of 2:1. A current ratio of more than 2:1 is considered to be good and a current ratio of less than 2:1 is considered to be risky from the view point of short term solvency. Current ratio elucidates the relationship between current assets and current liabilities of a firm. If the proportions of current assets are twice or more than twice the current liabilities it reflects that a firm is having sufficient working capital to pay its current liabilities on time. If current assets are less tha n twice the current liabilities it reveals that a firm is having shortage of working capital. Shortage of working capital may increase the difficulty of firm to meet its short term liabilities on time or whenever they become due. Since, both the companies are maintaining current ratio of less than 2:1 it means that both the companies i.e. Maruti Suzuki and Tata Motors are maintaining current ratio less than standard for the study period. As far as short term solvency is concerned, it can be concluded that Maruti Suzuki is having an edge over Tata Motors. Both the companies are expected to increase their current ratio. In order to increase current ratio both the companies are expected to either increase their current assets or decrease their short term liabilities. In addition, the above analysis also 16 editor@iaeme.com

7 Short Term Solvency Analysis of Lead Automobile Players In India reveals that there is no significant difference between current ratio of Maruti Suzuki and Tata Motors. REFERENCES [1] Annual Reports of Maruti Suzuki to [2] Annual Reports of Tata Motors to [3] Agarwal, N.K., Management of Working Capital, Sterling Publication Pvt. Ltd., New Delhi, [4] James, C. Van Horne, Financial Management and Policy, Prentice-Hall of India Pvt. Ltd, New Delhi, [5] Hompton, J.J. and Wagnes, C. L., Working Capital Management, John Wiley & Sons, [6] Kallberg, J. and Pakinsan, K., Current Assets Management, John Wiley, New York, [7] Kallberg, Jarl G. and Palison, Kenneth I., Current Asses Management: Cash Credit and Inventory, John Wiley and Sons, New York, [8] Vineet Singh and Abhinna Srivastava. Receivables Management in Leading Heavy Electrical Industries in India, International Journal of Management, 6(4), 2015, pp [9] Vineet Singh. Significance of Working Capital Turnover Ratio: A Case Study of BHEL and Crompton Greaves, International Journal of Management, 6(3), 2015, pp [10] A. Nithya. A Study on Effectiveness of Advertisements of Four Wheeler of Tata Motors LTD, International Journal of Management, 4(2), 2015, pp editor@iaeme.com