CHAPTER-5 DATA ANALYSIS PART-3 LIQUIDITY AND SOLVENCY

CHAPTER-5 DATA ANALYSIS PART-3 LIQUIDITY AND SOLVENCY 190

CHAPTER 5 DATA ANALYSIS PART-3 LIQUIDITY & SOLVENCY 5.1 INTRODUCTION:... 192 5.2 LIQUIDITY & SOLVENCY RATIOS:... 194 5.2.1 CURRENT RATIO:... 194 5.2.2 QUICK RATIO:... 197 5.2.3 FIXED ASSETS TURNOVER RATIO:... 201 5.2.4 INVENTORY TURNOVER RATIO:... 204 5.2.5 CAPITAL TURN OVER RATIO:... 208 5.2.6 NET ASSETS TURNOVER RATIO:... 211 5.2.7 CURRENT TURNOVER RATIO:... 214 5.3 CONCLUSION:... 217 References. 191

5 DATA ANALYSIS PART-3 LIQUIDITY & SOLVENCY 5.1 INTRODUCTION: For the sake of investors, a high volume of trading allows buying and selling with minimum price fluctuations, a market characterization by the ability to buy & sell with relative ease depends on the ability of the corporation to meet its short term obligations. So it is necessary to test & verify the liquidity and solvency of the business unit. If an asset can convert into cash easily and quickly, with little or no loss of value, the asset has liquidity. Thus liquidity is the ability of a person or company to readily and easily obtain cash from its assets in order to meet obligations or make purchases. High liquidity produces flexibility for a firm or an investor to have a low-risk position, but it also tends to decrease profitability. Sometimes it is safer to invest in liquid assets than in illiquid ones because liquid assets make it easier for an investor to get his or her money out of the investment more quickly. Solvency refers to the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth. When a company is insolvent, it means that it can no longer operate and is undergoing bankruptcy. It s a measure of a company's ability to serve debts. It is calculating by adding the company's post-tax net profit with depreciation, and dividing the sum by the quantity of long-term and short-term liabilities; the resulting amount is expressed as a percentage. A high solvency ratio indicates a healthy company, while a low ratio indicates the opposite. A low solvency ratio further indicates likelihood of being default. Different industries have different standards, as to what qualifies as an acceptable solvency ratio, but in general a ratio of 20% or higher is considered healthy. Potential lenders may take the solvency ratio into account when considering making further loans. Liquidity is all about cash and assets near to cash (assets that can be easily converted to cash with incurring minimum cost); while Solvency is the ability of a business entity to meets its debts and financial obligations as they mature. In another word, Liquidity is cash on hand and Solvency is ability to pay debts. The term liquidity is meant by the debt-repaying capacity of an undertaking. It refers to the firm s ability to meet the claims of suppliers of goods, services and capital. According to Archer and D Ambrosio, liquidity means cash and cash availability, and it is from current operations and previous accumulations that cash is available, to take care of the claims of both the short-term suppliers of capital and the long-term ones. 1 It has two dimensions; The short-term liquidity The long-term liquidity Short-term liquidity implies the capacity of the undertaking to repay the shortterm debt which means the same as the ability of the firm in meeting the currently maturing obligations from out of the current assets. The purpose of the short-term analysis is to derive a picture of the capacity of the firm to meet its short-term obligations out of its short-term resources, that is, to estimate the risk of supplying short-term capital to the firm. 2 192

Analysis of the firm s long-term position has for its rationale the delineation of the ability of a firm to meet its long-term financial obligations such as interest and dividend payment and repayment of principal. Long-term liquidity refers to the ability of the firm to retire long-term debt and interest and other long-run obligations. When relationships are established along these lines it is assumed that in the long-run assets could be liquidated to meet the financial claims of the firm. Quite often the expression liquidity is used to mean short term liquidity of the companies. 3 Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios measure the ability of a company to pay off its short-term liabilities when they fall due. The liquidity ratios are a result of dividing cash and other liquid assets by the short term borrowings and current liabilities. They show the number of times the short term debt obligations are covered by the cash and liquid assets. If the value is greater than 1, it means the short term obligations are fully covered. Generally, the higher the liquidity ratios are, the higher the margin of safety that the company posses to meet its current liabilities. Liquidity ratios greater than 1 indicate that the company is in good financial health and it is less likely fall into financial difficulties. Most common examples of liquidity ratios include current ratio, acid test ratio (also known as quick ratio), cash ratio and working capital ratio. Different assets are considered to be relevant by different analysts. Some analysts consider only the cash and cash equivalents as relevant assets because they are most likely to be used to meet short term liabilities in an emergency. Some analysts consider the debtors and trade receivables as relevant assets in addition to cash and cash equivalents as they will add to the liquidity on maturity. The value of inventory is also considered relevant asset for calculations of liquidity ratios by some analysts, as it is certain that it will add to the liquidity of the business at a certain point of time. The concept of cash cycle is also important for better understanding of liquidity ratios. The cash continuously cycles through the operations of a company. A company s cash is usually tied up in the finished goods, the raw materials, and trade debtors. It is not until the inventory is sold, sales invoices raised, and the debtors make payments that the company receives cash. The cash tied up in the cash cycle is known as working capital, and liquidity ratios try to measure the balance between current assets and current liabilities. A company must possess the ability to release cash from cash cycle to meet its financial obligations on maturity and in full. In other words, a company should posses the ability to translate its short term assets into cash. The liquidity ratios attempt to measure the ability of a company. 193

5.2 LIQUIDITY & SOLVENCY RATIOS: 5.2.1 CURRENT RATIO: This ratio establishes a relationship between current assets and current liabilities. The objective of computing this ratio is to measure the ability of the firm to meet its short term obligations and to reflect short term financial strength/solvency of a firm. In other words the objective is to measure the safety margin available for short term liabilities. It is expressed as follows: Current Ratio = Current assets Current liabilities Where, current assets include cash and those assets which can be converted in to cash within a year, such as marketable securities, Debtors and inventories. Prepaid expenses are also included in current assets as represent time payment that will not be made by the firm in future. It also includes income accrued but not due, advance payment of tax, tax reduced at source (debit balance), and short term loans and advances (debit balance), income due but not received. Book debts outstanding for 6 months and loose tools should not be included in current assets. Current liabilities include creditors, bills payable, accrued expenses, Shortterm bank loan, income tax liability long term debt maturing in current year. Bank overdraft and income received in advance as well as unclaimed dividend. This ratio indicates rupees of current assets available for each rupee of current liability. The higher the ratio, greater the margin of safety for short term creditors and vice - versa. As a conventional rule a Current Ratio of 2 to 1 or more is considered satisfactory. This rule is based on the logic that in a worse situation. Even if the value of current assets becomes half, the firm will be able to meet its obligation. However, an arbitrary standard of 2 to 1 should not be blindly followed. Firms with less than 2 to 1 Current Ratio may be doing well while firms with 2 to 1 or even higher current ratio may he struggling to meet their obligations. However, too high / too low ratio calls for further investigation. This is so because the current ratio is a test of quantity not quality. Liabilities are not subject to any fall in value, they have to be paid. But current assets can decline in value. A very high current ratio is not desirable since it means less efficient use of funds. The current ratio should be seen in relation to the component of current assets and their liquidity. If a large portion of current assets comprise doubtful 194

and slow paying debtors or slow moving and obsolete stocks the company may fail even if the current ratio is higher than 2. The Current Ratio can also be manipulated easily. This may be done either by postponing certain pressing payments or making payments of certain liabilities. So this is quick measurement of liquidity but crude as well. So in general, a higher Current Ratio would indicate inadequate employment of funds while a poor Current Ratio is a danger signal to the management. The relationship between current assets and current liabilities is disturbed on account of a number of factors some of which are mentioned below: (i) Seasonal changes in the business: (ii) Over trading: (iii) Repayment of long term liability: (iv) A change made in the terms of trade Beside above factors it depends on nature of Current assets, Credit policy, turnover of stock etc. Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 822.56 1682.90 0.49 2939.55 3734.97 0.79 2006-07 914.65 1608.74 0.57 3848.25 4517.25 0.85 2007-08 942 1955.33 0.48 1780.67 2019.23 0.88 2008-09 1022.14 2205.90 0.46 2401.45 2602.35 0.92 2009-10 2890.46 4992.04 0.58 3111.75 4466.78 0.70 AVERAGE = 0.52 AVERAGE = 0.83 Table no. 5.1 Current ratio of the selected Automobile Two Wheeler companies in India COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max HHML 0.49 0.57 0.48 0.46 0.58 0.516 0.04923 9.54% 0.46 0.58 BAL 0.79 0.85 0.88 0.92 0.7 0.828 0.07679 9.27% 0.7 0.92 Mean 0.64 0.71 0.68 0.69 0.64 0.672 0.02786 4.15% 0.64 0.71 S.D. 0.15 0.14 0.2 0.23 0.06 0.156 0.05817 37.29% 0.06 0.23 C.V. 23.44% 19.72% 29.41% 33.33% 9.38% 23.21% 208.83% 899.56% 430.77% 47.89% Sources: computed from annual reports of the sample companies. NOTE: In Present Study, I have not used the Published Ratios, but have calculated the Ratios from the Published Annual Reports. The above table No.5.1 shows the current ratio of selected automobile two wheeler companies. During the study period the current ratio of HHML had been below the standard. It varied from 0.49 times in 2005-2006 to 0.58 times in 2009-2010. The average ratio of the company had been 0.516 times. In most of the years the company was not able to meet the current liabilities, the 195

standard deviation is 0.049 and C.V. is 9.54%. Liquidity position of the company is not so good. The above table shows current ratio of BAL. The ratio ranged between 0.70 times in 2009-2010 to 0.92 times in 2008-09. The average ratio of the company was 0.82 times, which was quite high compared to the average ratio of HHML. Company s current ratio shows fluctuating trend during the study period. The standard deviation is 0.076 and the coefficient of variance is 9.27%. Both the companies are advised to increase its current assets to maintain the norms of 2:1. Graph no.5.1 Current ratio of the selected Automobile Two Wheeler companies in India The average Current Ratio of HHML is 0.52 against the Standard ratio by 2. The ratio indicates highly adverse liquidity position of the company, but it clearly indicates that, the company prefers cash sales & the company maintains its stock with credit purchases. Same is the situation with the BAL. Its average Current ratio is 0.83 indicates the same position like HHML with marginal adverse change. It is one of the Best practices of the business enjoying monopsony or biopsony, to enjoy the Order Booking Position or to maintain Current Accounts of the dealers & to purchase the stocks from the vendors on credit. Current Ratio (T-Test) Null Hypothesis: There is no any significant difference in Current Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Current Ratio of selected automobile two wheeler companies under study. 196

T-Test: Normality Test: Passed (P = 0.596) Equal Variance Test: Passed (P = 0.465) Group Name N Missing Mean Std Dev SEM Current ratio of HHML 5 0 0.516 0.0550 0.0246 Current ratio of BAL 5 0 0.828 0.0858 0.0384 Difference -0.312 t = -6.841 with 8 degrees of freedom. (P = <0.001) 95 percent confidence interval for difference of means: -0.417 to -0.207 The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistically significant difference between the input groups (P = <0.001). Power of performed test with alpha = 0.050: 1.000 In short, t: calculated value is -6.841 and p-value = 0.001< 0.596 Hence, the test is significant. Therefore H 0 is rejected and H 1 is accepted. (The Current ratios of the two sample companies do differ significant.) 5.2.2 QUICK RATIO: The ratio reveals whether the business is in a position to pay all its Time Bound Current Liabilities in time (on the date of maturity) or not. If the business is in a position to pay off all such obligations in time, business may enjoy Goodwill amongst the creditors, will allow the business to purchase the goods on easy credit terms. The standard ratio is 1.5:1, because the creditors are interested in their dues & business may or may not receive the fullest amount from the debtors in time. While Acid Test Ratio means in any adverse conditions, whether the business is in a position to pay-off all its Time Bound Current Liabilities before the maturity (on any given day) or not. Such a situation is a rare event in the life of the business, so the standard ratio is 1:1. Quick ratio is also termed as Liquidity Ratio. Quick ratio establishes a relationship between quick assets and current liabilities. Quick assets means those current assets which can be converted into cash immediately or at a short notice without a loss of value and includes all current assets except inventory and prepaid expenses. Inventory is not considered as quick assets because: 197

(a) (b) There is uncertainty as to whether or not and at what price the inventories can be sold; inventory value has a tendency to fluctuate. Time is required to convert the raw - materials and work-in - progress into finished goods and to convert the finished goods into debtors or cash. Prepaid expenses are also not included in quick assets because they cannot be converted into cash and hence are not available to pay off liabilities. Similarly, bank overdraft is not included in liquid liabilities because bank overdraft is not likely to be called on demand and is treated as a sort of permanent mode of financing. Hence, it is not treated as a quick liability. This ratio is computed by dividing the quick assets by the current liabilities. This ratio is usually expressed as pure ratio e.g. 1.5:1.. In the form of a formula, it can be expressed as under; Quick ratio = Quick assest Liquid liabilities This ratio is an indicator of short term solvency of a firm. It indicates rupees of quick assets available for each rupee of current liability. Traditionally, a Quick Ratio of 1.5:1 is considered to be a satisfactory ratio. However, this traditional rule should not be used mechanically since a firm having a Quick ratio of more than 1.5, may not be meeting its short- term obligations in time and does not necessarily imply sound liquidity position if its current assets consist of doubtful and slow paying debtors. While a firm having Quick Ratio less than l may be prospering and may be meeting its short term obligations in time because of its efficient liquidity management. A comparison of the Current Ratio with Quick; Ratio shall indicate the inventory hold-ups. For example, if two units have the same Current Ratio but different Quick ratio, it indicates over - stocking by the concern having low Quick ratio as compared to the concern which has a higher Quick Ratio. Quick ratio is more penetrating than Current Ratio. To get an idea regarding the firms relative current financial condition, Its Current Ratio and Quick Ratio should be compared with the industry averages. While computing and using Quick Ratio, it must be ensured (a) the quality of the receivables, (debtors and bills receivable) has been carefully assessed and (b) that all quick assets and liabilities are property valued. So, liquidity ratios should be subject to qualitative test. What is important is the quality of current assets, how fast and to what extent they can be converted in to cash otherwise the ratio may be grossly misleading. 198

Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 596.01 1682.90 0.35 2666.62 3734.97 0.71 2006-07 639.07 1608.74 0.40 3538.55 4517.25 0.78 2007-08 624.90 1955.33 0.32 1431.06 2019.23 0.71 2008-09 695.31 2205.90 0.32 2062.61 2602.35 0.79 2009-10 2454.06 4992.04 0.49 2665.54 4466.78 0.60 AVERAGE = 0.38 AVERAGE = 0.72 Table no. 5.2 Quick ratio of the selected Automobile Two Wheeler companies in India COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max HHML 0.35 0.4 0.32 0.32 0.49 0.376 0.06406 17.04% 0.32 0.49 BAL 0.71 0.78 0.71 0.79 0.6 0.718 0.06794 9.46% 0.6 0.79 Mean 0.53 0.59 0.515 0.555 0.545 0.547 0.02542 4.65% 0.515 0.59 S.D. 0.18 0.19 0.195 0.235 0.055 0.171 0.06094 35.64% 0.055 0.235 C.V. 33.96% 32.20% 37.86% 42.34% 10.09% 31.26% 239.78% 767.00% 319.88% 41.71% Sources: computed from annual reports of the sample companies. The above table No.5.2 shows quick ratio of HHML. The ratio ranged between 0.32 times in 2007-2008 to 0.49 times in 2009-10. The average ratio of the company is 0.376 times. Company s current ratio shows fluctuating trend during the study period. The standard deviation is 0.064 and the coefficient of variance is 17.04%. Quick Ratio in BAL varied from 0.79 times in 2008-09 to 0.71 times in 2005-06. The average ratio of the company is 0.718 times. The trend was highly fluctuating trend during the research period. The company is not able to maintain the standard norm of 1.5:1. The standard deviation is 0.067. The liquid position of the company is not good. It can be said that the liquid position of the companies are very much disturbed because the funds of their current creditors are not safe. 199

Graph no.5.2 Quick ratio of the selected Automobile Two Wheeler companies in India As mentioned above quick ratio shows short-term solvency of the selected automobile two wheeler companies. Normally this ratio should be l.5: l i.e. the value of quick assets should be equal to current liabilities. The average Quick Ratio of HHML for the period under study has remained at 0.38: l. It shows that the company has maintained liquid assets of the value of Re.0.38 as compared to the current liabilities of Re.1. It means that company is not able to meet all its current liabilities from quick assets on the maturity. On comparison with the standard ratio of l.5: l the company s quick ratio is less than standard norm. So it is very unsatisfactory situation for the company. The standard Quick ratio is 1.5 and the average Quick ratio of HHML is only 0.38, simply indicates that the liquidity position may force the company to create long term borrowing to pay the current liabilities, which may increase the financial cost & reduce the profits. Same is the case with the BAL with minor difference. But both the companies are profit making units, enjoying monopoly in the respective segments & have invested very huge amount as Investments Outside the businesses (3 to 5 times to net block), with thin borrowed capital & earn good amount of net interest (including Dividends). Quick Ratio (T-Test) Null Hypothesis: There is no any significant difference in Quick Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Quick Ratio of selected automobile two wheeler companies under study. 200

T-Test: Normality Test: Passed (P = 0.962) Equal Variance Test: Passed (P = 0.493) Group Name N Missing Mean Std Dev SEM Quick ratio of HHML 5 0 0.376 0.0716 0.0320 Quick ratio of BAL 5 0 0.718 0.0760 0.0340 Difference -0.342 t = -7.325 with 8 degrees of freedom. (P = <0.001) 95 percent confidence interval for difference of means: -0.450 to -0.234 The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistically significant difference between the input groups (P = <0.001). Power of performed test with alpha = 0.050: 1.000 Less than desired power indicates the results are less likely to detect a difference when one actually exists. Negative results should be interpreted cautiously. In short, t: calculated value is -7.325 and p-value = 0.001< 0.962 Hence, the test is significant. Therefore H 0 is rejected and H 1 is accepted. (The Quick ratios of the two sample companies do differ significant.) 5.2.3 FIXED ASSETS TURNOVER RATIO: The objective of computing this ratio is to determine the efficiency with which the fixed assets are utilized. This ratio is computed by dividing the net sales by the net fixed assets. This ratio is usually expressed as x number of times. In the form of a formula, it may be expressed as under: Fixed assets turnover ratio = Net sales Net fixed assets Higher the Turnover Ratio indicates the more efficient the management and utilization of the fixed assets, while low turnover ratio indicates the under utilization of available resources and presence of idle capacity. This ratio can be higher in case of the established company as compared to a new company. In such case this ratio can express misleading impression regarding the relative efficiency with which fixed assets are being used. This ratio measures as how many Rs. of sales are supported by each rupee in total fixed assets, a high ratio suggests management ability to make a good use its investments made in fixed assets but the low ratio may be caused due to large outlays. 201

This ratio indicates the extent to which the investments in fixed assets contribute towards sales. If compared with previous period. It indicates whether the investment in fixed assets has been judicious or not. Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 8719.21 949.37 9.18 7572.13 1133.00 6.68 2006-07 9905.95 1165.53 8.50 9420.24 1273.60 7.40 2007-08 10345.01 1156.26 8.95 8827.15 1268.61 6.96 2008-09 12325.38 1573.71 7.83 8700.17 1542.29 5.64 2009-10 15839.58 1658.78 9.55 11813.25 1479.59 7.98 AVERAGE = 8.80 AVERAGE = 6.93 Table no. 5.3 Fixed assets turnover ratio of the selected Automobile Two Wheeler companies in India COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max HHML 9.18 8.5 8.95 7.83 9.55 8.802 0.59334 6.74% 7.83 9.55 BAL 6.68 7.4 6.96 5.64 7.98 6.932 0.78114 11.27% 5.64 7.98 Mean 7.93 7.95 7.955 6.735 8.765 7.867 0.64907 8.25% 6.735 8.765 S.D. 1.25 0.55 0.995 1.095 0.785 0.935 0.2446 26.16% 0.55 1.25 C.V. 15.76% 6.92% 12.51% 16.26% 8.96% 11.89% 37.69% 317.08% 841.39% 265.36% Sources: computed from annual reports of the sample companies. The table No.5.3 shows the fixed assets turnover ratio of HHML. The ratio shows fluctuating trend during the study period. The average ratio of the company is 8.80 times. The fixed assets turnover ratio of HHML ranged from 7.83 times in 2008-2009 to 9.55 times in 2009-10. The standard deviation is 0.59 and co-efficient of variation is 6.74%. It indicates higher efficiency. Company is more efficient is to use of fixed assets. The FATR of the BAL shows mix trend during the span of research. The average ratio of the BAL is 6.932 times. The fixed assets turnover ratio of BAL ranged from 5.64 times in 2008-2009 to 7.98 times in 2009-10. The standard deviation is 0.78 and co-efficient of variation is 11.27%. It indicates the more efficient of the management and utilization of the fixed assets. Among the selected companies HHML has higher FATR than the BAL during the study period. A high ratio suggests management ability to make a good use its investments in fixed assets. 202

Graph no.5.3 Fixed turnover ratio of the selected Automobile Two Wheeler companies in India The ratio indicates the firm s ability to generate sales per rupee of investment in fixed assets. Higher the ratio, the more efficient the management and utilization of fixed assets and there is no direct relationship between sales and fixed assets since the sales are influenced by other factors as well. Higher the Fixed Turn Over Ratio, even with the lower profit margin, allow the business to serve the owners at the higher rate, particularly when the business is the market leader, branded & well excepted product, thin borrowed capital, huge retained earnings. The average fixed assets turnover ratio of HHML is 8.80 which indicate that by investing Re.1 in fixed assets, 8.80 times sales can be generated. Over the period of study the ratio is fluctuating. While in BAL, the average fixed Assets Turnover Ratio is 6.98.The figures of sales and fixed assets both are continuously increasing which indicates that increase in investment in fixed assets has brought about commensurate gain in sales, so the investment in fixed assets is judicious. Fixed Turnover Ratio (T-Test) Null Hypothesis: There is no any significant difference in Fixed Turnover Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Fixed Turnover Ratio of selected automobile two wheeler companies under study. 203

204 T-Test Normality Test: Passed (P = 0.849) Equal Variance Test: Passed (P = 0.612) Group Name N Missing Mean Std Dev SEM FTR of HHML 5 0 8.802 0.663 0.297 FTR of BAL 5 0 6.932 0.873 0.391 Difference 1.870 t = 3.813 with 8 degrees of freedom. (P = 0.005) 95 percent confidence interval for difference of means: 0.739 to 3.001 The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistically significant difference between the input groups (P = 0.005). Power of performed test with alpha = 0.050: 0.906 Less than desired power indicates the results are less likely to detect a difference when one actually exists. Negative results should be interpreted cautiously. In short, t: calculated value is 3.813 and p-value = 0.005 < 0.849 Hence, the test is significant. Therefore H 0 is rejected and H 1 is accepted. (The Fixed Turnover ratios of the two sample companies do differ significant.) 5.2.4 INVENTORY TURNOVER RATIO: The number of times the average stock is turned over during the year is known as stock turnover. It is computed by dividing the cost of goods sold by the average stock in the business. Average stock is the average of opening and closing stock of the year. If however, the monthly figures of the stock are available, the average monthly stock will give a better turnover ratio. It is calculated dividing the cost of goods sold by the average inventory. If figures for cost of goods sold are not available, then the ratio may be calculated on the basis of sales. Symbolically, Inventory Turnover = COGS or Sales Average inventory The inventory / stock turnover ratio measures how quickly inventory is sold. It is a test of efficient inventory management to judge whether the ratio of a firm is satisfactory or not, it should be compared over a period of time on the basis of trend analysis. It can also be compared with the level of other firms in that line of business as well as with industry average.

The ratio is very important in judging the ability of management with which it can move the stock. A high inventory turnover ratio is better than a low ratio. A high ratio implies good inventory management yet, a very high ratio calls for a careful analysis. It may be indicative of under investment in, or very low level of inventory. Inventory turnover Ratio Indicates the Efficiency of firm s Inventory management. It shows rapidity of turning inventories into sales. Generally, a high turnover is indicative of good inventory management. Simultaneously, a low inventory turnover implies excessive inventory level that warranted by production and sales activities, or a slow moving or obsolete inventory. A high level of sluggish inventory amounts to unnecessary tie-up of funds, impairment of profit and increased cost. On the other hand, a very high inventory turnover may be the result of a very low level of inventory turnover may be the result of a very low level of inventory which results in frequent stockiest. The inventory will also be high if the firm replenishes its inventory in too many small lot sizes. The situation of frequent stick outs and too many small inventory replacements are costly for the firm. Thus, too high and too low inventory turnover rates are not preferred. The higher the turnover, the more profitable the business would be, the firm in such a case, will be able to trade on a smaller margin of gross profit. A low turnover indicates accumulation of slow moving obsolete and low quality goods, which is a danger signal to the management. The inventory turnover ratio has been calculated by dividing the figure of sales by the figure of the inventory. The ratio (which is shown in days) is to be worked out by dividing the inventory and receivables with the Net Sales. A low ratio indicates that the inventory/receivables are being turned over a large number of times during the year or in other words, goods are being sold promptly and sales proceeds realized quickly, that inventory management and control is good. This also indicates lesser accumulation of stocks and therefore lesser change of the stocks containing obsolete or unsalable items. A high ratio on the other hand indicates lock up of larger sums in inventory and or slow moving stocks. If the ratio shows an increasing trend, this would indicate that sales are falling or that there are inventory hold-ups. Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 8719.21 215.41 40.47 7572.13 248.55 30.47 2006-07 9905.95 251.07 39.45 9420.24 291.32 32.34 2007-08 10345.01 296.34 34.91 8827.15 329.66 26.78 2008-09 12325.38 643.93 19.14 8700.17 344.23 25.27 2009-10 15839.58 381.62 41.51 11813.25 392.53 30.10 AVERAGE = 35.10 AVERAGE = 28.99 205

Table no. 5.4 Inventory turnover ratio of the selected Automobile Two Wheeler companies in India COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max HHML 40.47 39.45 34.91 19.14 41.51 35.096 8.28981 23.62% 19.14 41.51 BAL 30.47 32.34 26.78 25.27 30.1 28.992 2.58331 8.91% 25.27 32.34 Mean 35.47 35.895 30.845 22.205 35.805 32.044 5.27174 16.45% 22.205 35.895 S.D. 5 3.555 4.065 3.065 5.705 4.278 0.95886 22.41% 3.065 5.705 C.V. 14.10% 9.90% 13.18% 13.80% 15.93% 13.35% 18.19% 136.24% 749.04% 549.79% Sources: computed from annual reports of the sample companies. The above table No.5.4 shows the inventory turnover ratio of HHML. The inventory turnover ratio shows mix trend during the period of study. The ITR was 40.47 times in 2005-06 which was declined to 39.45 times in 2006-07. Again in 2007-08 the ITR was declined to 34.91 times and it is further declined to 19.14 in 2008-09. The average ratio of the company is 35.096 times. The standard deviation is 8.28981 times and co-efficient of variation is 23.62%. A high ratio implies good inventory management. The inventory turnover ratio of the BAL shows fluctuating trend during the span of research. The average Ratio of the company is 28.992 times. The ITR of BAL is ranged between 25.27 times to 32.34 times. The ratio was 30.47 times in the year 2005-06 which was increased to 32.34 times in the year 2006-07, but it was declined to 26.78 times in the 2007-08 and 25.27 times in the year 2008-09 respectively. The standard deviation is 2.58331 times, and the co-efficient of variation is 8.91%. Among the selected sample companies, HHML has higher Inventory Turnover Ratio during the period of study. This shows that the company is very efficient in converting the finished goods into sales. On the other hand even though BAL has lower ITR compared to HHML but, It does not mean that company has not maintained the proper inventory management, this may be treated as satisfactory turnover. The average ITR of HHML is 35 times or the company converts its stocks into the sales only within 10.5 days. The average ITR of BAL is 29 times or the company converts its stocks into sales within 12.6 days. Either the ITR in times or in days, including the long production, assembly line and dispatch periods, shows satisfactory level. 206

Graph no.5.4 Inventory turnover ratio of the selected Automobile Two Wheeler companies in India Net profit is being generated on each sale, and the average inventory ratio of HHML & BAL are 35 and 29 times respectively, indicates that the companies have earned the net profits by 35 and 29 times during the period. This very clearly indicates the higher annual net profits available to serve the owners. Inventory Turnover Ratio (T-Test) Null Hypothesis: There is no any significant difference in Inventory Turnover Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Inventory Turnover Ratio of selected automobile two wheeler companies under study. T-TEST Normality Test: Failed (P < 0.050) Equal Variance Test: Passed (P = 0.387) Group Name N Missing Mean Std Dev SEM ITR of HHML 5 0 35.096 9.268 4.145 ITR of BAL 5 0 28.992 2.888 1.292 Difference 6.104 t = 1.406 with 8 degrees of freedom. (P = 0.197) 95 percent confidence interval for difference of means: -3.908 to 16.116 The difference in the mean values of the two groups is not great enough to reject the possibility that the difference is due to random sampling 207

variability. There is not a statistically significant difference between the input groups (P = 0.197). Power of performed test with alpha = 0.050: 0.135 The power of the performed test (0.135) is below the desired power of 0.800. In short, t: calculated value is 3.908 and p-value = 0.005 > 0.387 Hence, the test is not significant. Therefore H 0 is accepted. (The Inventory Turnover ratios of the two sample companies do not differ significantly.) 5.2.5 CAPITAL TURN OVER RATIO: The objective of computing this ratio is to determine the efficiency with which the capital employed is utilized. This ratio is computed by dividing the net sales by the capital employed and is usually expressed as x' number of times. In the form of a formula; Capital turnover ratio = Net sales Capital employed It indicates the firm s ability to generate sales per rupee of capital employed. Higher the ratio indicates the more efficient the management and better utilization of capital employed. Too high ratio may indicate the situation of over trading (or under capitalization). A close relationship exists between net sales and capital employed. With any increase in sales volume, there is a corresponding increase in the capital employed. Therefore, a good amount of capital employed may be needed to support the increase in sales. The turnover of capital employed is computed to test the efficiency with which capital employed is utilized. Capital turnover ratio reveals whether a business is being operated with a small or large amount of capital employed in relation to sales. A very high capital turnover ratio may be the result of favorable or may reflect an inadequacy of capital employed and over trading. On the other hand, a very low ratio may be the outcome of an excess of capital employed. The very low ratio is also an indicator of under trading which means more capital funds have been invested in the business than needed. Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 8719.21 2195.11 3.97 7572.13 6237.88 1.21 2006-07 9905.95 2635.23 3.76 9420.24 7159.75 1.32 2007-08 10345.01 3118.24 3.32 8827.15 2921.93 3.02 2008-09 12325.38 3879.24 3.18 8700.17 3439.69 2.53 2009-10 15839.58 3531.05 4.49 11813.25 4266.92 2.77 AVERAGE = 3.74 AVERAGE = 2.17 208

Table no. 5.5 Capital turnover ratio of the selected Automobile Two Wheeler companies in India COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max HHML 3.97 3.76 3.32 3.18 4.49 3.744 0.47026 12.56% 3.18 4.49 BAL 1.21 1.32 3.02 2.53 2.77 2.17 0.7558 34.83% 1.21 3.02 Mean 2.59 2.54 3.17 2.855 3.63 2.957 0.4043 13.67% 2.54 3.63 S.D. 1.38 1.22 0.15 0.325 0.86 0.787 0.48243 61.30% 0.15 1.38 C.V. 53.28% 48.03% 4.73% 11.38% 23.69% 26.61% 119.32% 448.34% 375.73% 83.80% Sources: computed from annual reports of the sample companies. The above table No.5.5 shows the Capital Turnover Ratio of selected automobile two wheeler companies in India. The CTR of HHML shows decreasing trend up to the fourth year of study period i.e. from 2005-06 to 2008-09. The CTR of HHML was 3.97 times in the year 2005-06 which was gradually started declining. The CTR of HHML was 3.18 in the year 2008-09 which was the lowest ratio during the span of research. But in the last year of the study period i.e. in 2009-10 the CTR was the highest at 4.49 times. The average CTR of HHML is 3.744 times and standard deviation is 0.47026 with the co-efficient of variation of 12.56%s the ratio is showing the good efficiency of capital employed. The CTR of BAL shows fluctuating trend during the period of study. The ratio is ranged between 1.21 times to 3.02 times in the year 2005-06 and 2007-08 respectively. The average CTR of BAL is 2.17 times with the standard deviation of 0.7558 and co-efficient of variation of 34.83%. on the basis of above analysis it can be said that the CTR of the selected automobile two wheeler companies, the HHML has more efficient in the utilization of its capital employed. 209

Graph no.5.5 Capital assets turnover ratio of the selected Automobile Two Wheeler companies in India This ratio indicates the firm s ability to generate sales from all sources of finances, by investment in fixed assets as well as working capital. The average ratio of HHML remained at 3.74. It indicates that by employing capital worth Re1 sales of Rs.3.74 is generated so, this shows good utilization of capital employed by the efficient management but at the same time it must be checked whether it is due to overtrading. While in BAL, The ratio remained at higher stage in the year 2007-08 i.e. at 3.02 and average ratio is remained at 2.17. It indicates that by employing capital worth Re.1 sales of Rs.2.17 is generated. On the whole, The average Capital turn Over Ratio of both the companies are 3.74 and 2.17 times respectively, can t be interpreted in a way that we commonly do, as both the companies have invested very thin amount in their net blocks from the Capital Employed (remaining out-side the business). Capital Turnover Ratio (T-Test) Null Hypothesis: There is no any significant difference in Capital Turnover Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Capital Turnover Ratio of selected automobile two wheeler companies under study. 210

T-TEST Normality Test: Passed (P = 0.430) Equal Variance Test: Passed (P = 0.302) Group Name N Missing Mean Std Dev SEM CTR of HHML 5 0 3.744 0.526 0.235 CTR of BAL 5 0 2.170 0.845 0.378 Difference 1.574 t = 3.536 with 8 degrees of freedom. (P = 0.008) 95 percent confidence interval for difference of means: 0.548 to 2.600 The difference in the mean values of the two groups is greater than would be expected by chance; there is a statistically significant difference between the input groups (P = 0.008). In short, t: calculated value is 3.813 and p-value = 0.005 < 0.432 Hence, the test is significant. Therefore H 0 is rejected and H 1 is accepted. (The Capital Turnover ratios of the two sample companies do differ significant.) 5.2.6 NET ASSETS TURNOVER RATIO: Business has to serve the expected rate of return to the investors from profits generated out of the utilization of the amount. Higher the turnover indicates greater the possibility to pay the return at a higher rate. The objective of computing this ratio is to determine the efficiency with which the net assets are utilized. The Net Assets Turnover Ratio is an indication of financial soundness of the business in terms of the sales revenue generated against net assets employed in the business. This ratio also indicates the efficiency with which the assets of the company have been utilized. A high ratio suggests better utilization of the net assets and vice-versa. However, care should be taken in drawing conclusions. Sometimes the purchase of assets may not result in higher the sales but may however, cause reduction in cost and thereby result in an increasing the profit. In such cases even if the ratio declines, the situation is considered favorable. Thus, this ratio is a measure of performance of the business. This ratio is computed by dividing the net sales by the net assets and is usually expressed as x' number of times. In the form of a formula; NET ASSETS TURNOVER RATIO = NET SALES NET ASSETS 211

It indicates the firm s ability to generate sales per rupee of net assets. Higher the ratio indicates the more efficient the management and utilization of net assets. Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 8719.21-860.34-10.13 7572.13-795.42-09.52 2006-07 9905.95-694.09-14.27 9420.24-669.00-14.08 2007-08 10345.01-1013.33-10.21 8827.15-238.56-37.00 2008-09 12325.38-1183.76-10.41 8700.17-200.90-43.31 2009-10 15839.58-2101.58-07.54 11813.25-1355.03-08.72 AVERAGE = -10.51 AVERAGE = -22.53 Table no. 5.6 Net assets turnover ratio of the selected Automobile Two Wheeler companies in India COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D C.V. Min Max HHML -10.13-14.27-10.21-10.41-7.54-10.512 2.1542-20.49% -14.27-7.54 BAL -9.52-14.08-37 -43.31-8.72-22.526 14.6463-65.02% -43.31-8.72 Mean -9.825-14.175-23.605-26.86-8.13-16.519 7.45422-45.13% -26.86-8.13 S.D. 0.305 0.095 13.395 16.45 0.59 6.167 7.21553 117.00% 0.095 16.45 C.V. -3.10% -0.67% -56.75% -61.24% -7.26% -37.33% 96.80% -259.28% -267.86% 103.31% Sources: computed from annual reports of the sample companies. The above table No.5.6 shows the Net Assets Turnover ratio of selected automobile two wheeler companies. The net assets turnover ratio of HHML shows fluctuating trend with negative signs. The ratio was -10.13 times in the year 2005-06 which was increased to -14.27 times in its next year i.e. in 2006-07. But in the year 2007-08 the ratio declined to -10.21 times which was again increased to -10.41 times in the year 2008-09. The ratio was -7.54 times in the year 2009-10 which was the lowest during the span of research. The average ratio of HHML is -10.512 times with the standard deviation of 2.1542 and co-efficient of variation of -20.49%. The net assets turnover ratio of BAL shows mix trend with negative signs during the period of research. The ratio was -9.52 times in the year 2005-06 which was increased to -14.08 times in 2006-07, -37 times in the year 2007-08, and -43.31 times in the year 2008-09. But in the year 2009-10 the ratio was declined heavily to -8.72 times. The average ratio of BAL is -22.526 times with the standard deviation of 14.6463 and co-efficient of variation of -65.02%. From the above analysis we can conclude that BAL has better utilized the net assets to the HHML. 212

Graph no.5.6 Net assets turnover ratio of the selected Automobile Two Wheeler companies in India The average Net Assets Turn Over Ratio of both the companies are 10.51 and 22.53 times respectively, indicates better utilization of the fixed assets by the BAL to HHML. We have no room to analyze the ratio in depth as the PAT margins of both the companies are nearly the same. Net Assets Turnover Ratio (T-Test) Null Hypothesis: There is no any significant difference in Net Assets Turnover Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Net Assets Turnover Ratio of selected automobile two wheeler companies under study. T-TEST Normality Test: Passed (P = 0.411) Equal Variance Test: Passed (P = 0.072) Group Name N Missing Mean Std Dev SEM NTR of HHML 5 0-10.512 2.408 1.077 NTR of BAL 5 0-22.526 16.375 7.323 Difference 12.014 t = 1.623 with 8 degrees of freedom. (P = 0.143) 95 percent confidence interval for difference of means: -5.055 to 29.083 The difference in the mean values of the two groups is not great enough to reject the possibility that the difference is due to random sampling 213

variability. There is not a statistically significant difference between the input groups (P = 0.143). Power of performed test with alpha = 0.050: 0.195 The power of the performed test (0.195) is below the desired power of 0.800. Less than desired power indicates the results are less likely to detect a difference when one actually exists. Negative results should be interpreted cautiously. In short, t: calculated value is 1.623 and p-value = 0.005 < 0.411 Hence, the test is significant. Therefore H 0 is rejected and H 1 is accepted. (The Net Assets Turnover ratios of the two sample companies do differ significant.) 5.2.7 CURRENT TURNOVER RATIO: The Current Turnover ratio is indicative of the over-all marking efficiency of the organization. The ratio also shows the unnecessary blocking up of capital in inventories and funds tied up in unrealized sundry debts. Further, this ratio also suggests whether the sales are adequate in comparison to current assets or whether the current assets are too high in comparison to the sales. Thus, the ratio is an index of efficiency or profitability of a business firm. The current asset of a business firm includes inventories, sundry debtors, bills receivable, cash and bank balance, short-term loans and advances and other current asset. The objective of computing this ratio is to determine the efficiency with which the current assets are utilized. This ratio is computed by dividing the net sales by the current assets and is usually expressed as x' number of times. In the form of a formula; CURRENT ASSETS TURNOVER RATIO = NET SALES CURRENT ASSETS It indicates the firm s ability to generate sales per rupee of assets. Higher the ratio indicates greater the efficient the management and utilization of current assets and vice-versa. Too high ratio may indicate the situation of over or under investment in current assets. Observations: YEAR HERO HONDA MOTORS LTD BAJAJ AUTO LTD 2005-06 8719.21 408.43 21.35 7572.13 655.32 11.55 2006-07 9905.95 646.09 15.33 9420.24 901.69 10.45 2007-08 10345.01 745.12 13.88 8827.15 679.66 12.99 2008-09 12325.38 694.26 31.26 8700.17 833.17 10.44 2009-10 15839.58 2408.27 06.58 11813.25 819.25 14.42 AVERAGE = 17.68 AVERAGE = 11.97 214

Table no. 5.7 Current assets turnover ratio of the selected Automobile Two Wheeler companies in India COMPANY 2005-06 2006-07 2007-08 2008-09 2009-10 Mean S.D. C.V. Min Max HHML 21.35 15.33 13.88 31.26 6.58 17.68 8.25903 46.71% 6.58 31.26 BAL 11.55 10.45 12.99 10.44 14.42 11.97 1.54082 12.87% 10.44 14.42 Mean 16.45 12.89 13.435 20.85 10.5 14.825 3.55874 24.01% 10.5 20.85 S.D. 4.9 2.44 0.445 10.41 3.92 4.423 3.34907 75.72% 0.445 10.41 C.V. 29.79% 18.93% 3.31% 49.93% 37.33% 29.83% 94.11% 315.43% 335.18% 106.26% Sources: computed from annual reports of the sample companies. The above table No. 5.7 shows the Current Turnover Ratio of selected automobile two wheeler companies. The ratio of HHML shows decreasing trend up to the third year of the research period. The ratio was 21.35 times in the year 2005-06 which was declined to 15.33 times in the year 2006-07. After that the ratio was again declined to 13.88 times in the year 2007-08. But the ratio increased by 50% in the year 2008-09 with 31.26 times which was drastically declined to 6.58 times in the year 2009-10. The average ratio of HHML is 17.68 times with the standard deviation of 8.25903 and co-efficient of variation of 46.71%. The analysis reveals that HHML have more efficiently utilized the current assets to generate the sales. The Current Turnover Ratio of BAL shows fluctuating trend during the span of research. The ratio was ranged between 10.44 to 14.42 times in the given period of study. The ratio was 11.55 times in the year 2005-06 which was decreased to 10.45 times in its next year i.e. in 2006-07. Thereafter in the year 2007-08 the ratio was increased up to 12.99 times which was again declined to 10.44 times in the year 2008-09. But in the year 2009-10, the ratio gained to 14.42 times shows the better use of current assets for the generation of sales. The average ratio of BAL is 11.97 times with the standard deviation of 1.54082 and co-efficient of variation of 12.87%. On the basis of above analysis we can clearly conclude that the HHML has more efficiently used its current assets for the generation of sales compared to BAL. 215

Graph no.5.7 Current assets turnover ratio of the selected Automobile Two Wheeler companies in India Higher the Current Turnover ratio, even with lower profit margin allows the business to serve the owners at par with their expectation. The average Current Turnover Ratio of both the companies is 17.68 & 11.97 times respectively, indicates that HHML has used the current assets in much profitable way to BAL. But still the companies may practice the Just in Time Theory to reduce the cost to maintain the stocks. Current Turnover Ratio (T-Test) Null Hypothesis: There is no any significant difference in Current Turnover Ratio of selected automobile two wheeler companies under study. Alternative hypothesis: There is significant difference in Current Turnover Ratio of selected automobile two wheeler companies under study. T-Test Normality Test: Passed (P = 0.343) Equal Variance Test: Passed (P = 0.081) Group Name N Missing Mean Std Dev SEM CTR of HHML 5 0 17.680 9.234 4.130 CTR of BAL 5 0 11.970 1.723 0.770 Difference 5.710 t = 1.359 with 8 degrees of freedom. (P = 0.211) 95 percent confidence interval for difference of means: -3.977 to 15.397 216