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CHAPTER – 3
TREND AND LIQUIDITY ANALYSIS
3.1 TREND ANALYSIS
3.2 WORKING CAPITAL TREND.
3.3 LIQUIDITY ANALYSIS
3.4 MEASUREMENT OF LIQUIDITY
3.4.1 Working capital trend
3.4.2Current assets trend
3.4.3 Current liabilities trend
3.4.4 Average collection period
3.4.5 Net working capital to current liabilities
3.4.6 Gross working capital to total assets
3.4.7 Working capital to turnover
3.4.8 Sales to Gross working capital
3.4.9 Current ratio
3.4.10 Quick ratio
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TREND AND LIQUIDITY ANALYSIS
3.1 TREND ANALYSIS:- Trend analysis is used to evaluate the trends and tendencies of events. It is a guide to
follow the changes that occur in a business from period to period. Trend analysis reveals the
direction of changes or is a guide to the movement of facts and figures revealed while
comparing the financial statements of different period.
A series of financial statements may be analysed by determining and studying the
trend of the data shown in the statement. This method of analysis is one of the direct up words
or down words and involves the % relationship that each statement items bears to the same
items in the base year. Trend % relative to the base year emphasis changes in the financial
operating data from year to year and makes possible a horizontal study of data.
Business is an dynamic process. It is very difficult to find complete information about
the business by way of analyzing the financial statement of tendency of business. To
determine the direction of business, the past data relating to the problems are studied and the
trend is determined. The analysis of the trends helps to judge the future tendency of a
business.
3.2 WORKING CAPITAL TREND:- A working capital trend analysis indicates the changes, which have taken place from
time to time in the individual components of working capital like current assets and current
liabilities on the basis of any normal year. To analyze the trend in detail, the % of an
individual item of current assets (viz. inventories, receivables and cash and bank balances )
and current liabilities (viz creditors and provisions etc.) may also be calculated since the trend
ratios indicates the trend of the various items of working capital. It is a dynamic study of the
behavior of the items in due course of time.
A series of trend ratio shows whether an item has increased or decreased and the rate
of increase or decrease does not indicate whether the movement is favourable or unfavorable.
For the purpose of forming an opinion as to the satisfaction of the trend of a certain
item, it is necessary to compare it with the trend of some related items in the working capital
statement.
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In working capital analysis the direction of change over a period of time is of crucial
importance. Working capital is one the important fields of financial management. It is,
therefore, very necessary for an analyst to make a study about the trend direction of working
capital. This analysis will provide a base, to whether the practice and prevailing policy of the
management regarding working capital is good enough or an improvement is to be made in
managing the working capital funds.
Further, any one trend by itself is not very important and therefore, an analyst should
also make comparison to the related trend. To illustrate an up word trend in working capital,
coupled with a downward trend in the cost of sales would usually reflect an unfavorable
situation as an up word trend in working capital items such as current assets inventories,
accounts receivable, cash and bank balance and other current assets, in concern with a
downward trend of current liabilities would usually be viewed favourable. All such
conclusions throw light on one or more aspects of the working capital position and have to be
reconciled with those from other aspects.
Trend ratios measure the trend of the various items over a period of time. It shows
whether the various items have increased or decreased and the rate of increase or decrease.
Advantages of Trend Analysis:-
1. It furnishes a bird’s eye view of the positions.
2. The parts are presented in comparative forms.
3. the trends are shown vividly.
4. the figures are easier to interpret.
5. There is less possibility for a gross error because the resulting percentages are
partially self-audited through comparison with the actual figures.
Disadvantages of Trend Analysis:- 1. The base year may not be normal year.
2. The ratio does not give a comprehensive view of the balance sheet relationship.
3. A change in a ratio can be interpreted only in the light of the change between two
variables.
3.3 LIQUIDITY ANALYSIS:- Meaning and Definition of Liquidity:- The concept of liquidity within a business is vital to the understanding of financial
management as it is the basic criteria to test the short-term financial position of the enterprise.
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Liquidity may be defined as the ability to realise value in money the real liquid asset. It has
two dimensions: - The times required converting the assets into money and risks involved.
The certainty of the reliable price. Liquidity refers to affirm continuous ability to meet
its short-term maturing obligations. Cash is used to meet a firm’s obligations, emphasis is
given on holding large investment in current assets which include cash and ‘near cash’ items
like receivables, short-term securities etc. thus, holding relatively large investment in current
assets will result in no difficulty in paying the claims of the creditors and others.
According to Muraw Bahadur, “Analysis of liquidity provides the measure of the
ability of the enterprise to meet its obligation. It is not sufficient that the final accounts show a
profit and the balance sheet a rosy picture of financial health of the enterprise. All this will
look meaning less, unless the cash available to meet obligations as and when they mature. The
analysis of liquidity should therefore, be taken into consideration, the size of the components
of current assets which can be readily converted into cash to meet maturing liability. The size,
character and sequence of maturity of liabilities are also of significant importance & deserve
due attention.” The term liquid assets are used to describe money and assets that are readily
convertible into money “Liquidity has two dimensions viz. time and risk.”
“The time dimension of liquidity concerns the speed with assets other than cash. The
risk dimension raises the question of the degree of certainty about the conversion of
inventories, receivable, receivable and other into cash with a little sacrifice in price as
possible. Viewed from these, all assets will have a degree of liquidity and assets that comprise
cash and near cash items in most liquid assets.” The liquidity of any business results from its
ability to generate cash. “The financially sound company is able to build up a reserve of cash
in excess of requirement for operation. This surplus of cash is then available for the financing
of expansion and for payment of debts and dividends.” The working capital of a business
represents the amount of current assets which the enterprise has in excess of the claims of the
current creditors and with which, therefore, it is free to work. From this statement it would
appear that the greater the amount of working capital, or net current assets, the greater the
degree of liquidity of the business, and so it is alleged that the amount of working capital is a
measure of liquidity.
The word liquidity was used by the financial accounting standard Board (FASB) “the
amount of time that is expected to elopes until an asset is realized or otherwise converted into
cash or until a liabilities has been paid”
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Liquidity management therefore involves the amount of investment in the group of
assets to meet short term maturing obligations-creditors and others. From the point of
financing, normally a major portion of the fund required for financing current assets is
obtained from long-term sources, equity and for debt, while the rest is met from short-term
sources. It goes without saying that if the maturing obligations are met continuously as and
when become due, creditors and others will have a feeling of confidence in the financial
strength of the firm and this will sustain the credit reputation of the firm and a going firm will
accordingly face difficulty in holding a particular level of current assets. Failure to meet such
obligations on a continuous basis will affect the reputation, and hence credit worthiness of a
firm, which will, in turn, make it more difficult to continue to finance the level of current
assets from the short- term sources.
The word liquidity suggests a kind of measurement or qualification of the prospects of
meeting maturing obligations. In a sound business, the source of finance should be
supplemented by own cash generation. The quantum of conversion of current assets into cash
or in other words, near liquid assets may have to be supplemented by outside borrowing to
make sufficient liquid fund available to meet current obligations. The current obligations will
also include the repayment of borrowing.
The term ‘liquidity’ means conversion of assets into cash during the normal course of
business and to have regular flow of cash to meet outside current liabilities (generally within a
year) as and when due and payable and also to ensure money for day-to-day business
operations. Hence, the flow of current assets should circulate within a year, so that timely
payment is made to outsiders for interest, dividends etc. If the major part of current asset is
blocked in inventories and credit sales( sundry debtors), not only ready cash will not be
available to pay current debt but also there is a risk of shortage in the total current asset
available because of possible fall in the value of inventories, possible losses on account of bad
debts. The quality of current asset is therefore very important for analyzing liquidity.
However, a firm has a strong liquidity if it is able:-
1. To meet the claims of short-term creditors.
2. To maintain sufficient working capital for efficient normal operations.
3. To meet current interest and dividend requirements.
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4. To maintains a favorable credit rating. The efficient management of working capital
requires constant attention to the process of rapid conversion of receivable and inventory
into cash.
For analyzing trend and liquidity of Cement Industry following ratios have been computed:-
1. Chain indices, trends and chi-square test of significance are applicable to working
capital, current assets and current liabilities.
2. Working capital turnover.
3. Sales to Gross Working Capital (Sales/Gross Working Capital)
4. Net Working Capital to Current Liabilities(Net Working Capital/Current Liabilities)
5. Gross Working Capital to Total Assets(Gross Working Capital/Total Assets)
6. Current Ratio.
7. Quick Ratio.
8. Average collection period.
3.4 MEASUREMENT OF LIQUIDITY:- 3.4.1 Working Capital Trend:- In financial analysis, the direction of change over a period of time is of crucial
importance. Working capital is one of the important fields of financial management. It is,
therefore, very essential for an analyst to make a study about the trend and direction of
working capital. Further, a study should also be made about the trend of the components of
the working capital movements to provide a deep and broad base while examining the
working capital managements of an industry. This analysis will provide management with a
base to judge whether the practice and prevailing policy of the management with regard to
working capital is good enough or an improvement is to be made in managing the working
capital fund. Further, any one trend by itself is not very important and, therefore, an analyst
should make comparison with related trends. To illustrate, an upward trend in working
capital, coupled with a downward trend in sales would usually reflect an unfavorable
situation, an upward trend of current assets, inventories, accounts receivables, cash in bank
balances and other current assets, in connection with a downward trend of current liabilities
would usually be viewed favorably. All such conclusions throw light on one or more aspects
of the working capital position and have to be reconciled with those from other aspects.
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Table No.3.1 Working capital indices of cement industry in India
Base year-2000-01
Co/Yr. Mar-01
Mar-02
Mar-03
Mar-04
Mar-05 Mar-06 Mar-07
Mar-08 Mar-09 Avg.
ACL 100. -40.45 -126.63 -29.01 -3.50 -75.19 -229.09 -245.65 -461.92 -123.49
GSCL 100. 73.19 -98.63 -78.42 -34.86 2.50 -105.52 N.A -2.79 -18.07
SIL 100. 730.36 -1266 -867.33 103.63 4374.92 6243.89 9692 4634.98 2638.47
SCL 100. 140.42 225.46 303.71 455.54 386.21 130.21 26.35 189.59 217.50
SDCL 100. 173.94 198.84 248.08 85.06 12.15 -90.66 -97.24 -298.94 36.80
UCL 100. 0.00 N.A -751450 -520500 -1391350 -1476850 695700. 172500. -408981
Aveg 100. 179.58 -213.39 -125312 -86649 -231108 -245150 141015 29427 -57523
Sources: computed from annual reports The working capital chain indices of all cement companies shows fluctuating trend
throughout the study period. Most of the companies shows negative trend during financial
year from 2000-2001 to 2008-2009. The average of industry shows high fluctuating trend
during the study period. the minimum working capital chain in ACL are -461.92 (march-09),
GSCL is -105.52 (march-07),SIL is -1266.01 (March-03), SCL is 26.35(March-08), SDCL is
-90.66 (Marhc-07) and UCL is -1476850.00 (March-07) the linear least square trend values
of working capital in the cement industry are shown in the table.
Chart-3.1 Working capital indices of cement industry in India
i. Current assets trend :- Current assets mean the assets that will either be used up or converted into cash
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within a year’s time or normal operating cycle of the business whichever is longer. The
current assets chain indices of cement industry are shown in table-3.2
Table 3.2 Current assets Chain of cement industry in India.
(Base year March-01)
Sources: computed from annual reports The current assets chain indices of cement companies shows fluctuating trend. Except
UCL and ACL which show increasing trend. The average of industry shows decreasing
trend. The minimum current assets chain indices in ACL are 100 (March-01),GDCL is 99.06
(March-06), SIL is 100(March-01), SCL is 58.27(March-04),SDCL is 55.01(March-2004)
and UCL is 100 (Marhc-2001)
Chart-3.2 Indices of current Assets
3.4.3 Current liabilities trend:-
Current liabilities are those which are generally expected to be paid within a
Comp./ Year
2000-01
2001-02
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Ind. avg.
ACL 100.00 104.22 124.99 113.39 127.75 157.30 301.91 433.33 631.26 2310.67
GSCL 100.00 101.41 104.31 111.44 108.36 99.06 160.40 N.A 127.47 114.06
SIL 100.00 216.13 203.02 231.90 288.26 727.91 1008.97 1598.81 1057.62 293.70
SCL 100.00 84.35 74.73 58.27 59.89 71.50 177.29 230.14 95.11 94.60
SDCL 100.00 72.41 66.56 55.01 71.18 54.14 89.44 81.31 168.83 157.89
UCL 100.00 160.00 N.A 1100860. 1309540. 1539900 1916940 2605720 2703840 1397132
Avg. 100.00 115.71 114.72 183572 218366 256835 319780 521613 450987 216831
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financial years. All obligations, which are expected to mature for payment within an
accounting year, are known as current liabilities eg. Creditor, bills payable, Provisions etc.
The current liabilities chain indices of cement industry are shown in Table 3.3
Table 3.3 Current liabilities Chain indices of cement Industry in India.
(Base year March -2001) Comp./ Year
Mar-01
Mar-02
Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 ind Avg.
ACL 100 166 121.6 144.17 186.82 212.88 377.40 628.88 792.79 2310.67
GSCL 100 85.3 53.54 71.31 102.69 116.65 119.17 N.A 151.82 100.06
SIL 100 183.6 436 486.32 357.25 342.18 455.81 720.37 608.08 293.70
SCL 100 184.8 209.3 202.36 284.22 186.48 176.03 231.41 188.86 94.60
SDCL 100 118.2 120.1 131.37 82.99 54.78 40.99 41.60 45.81 157.89
UCL 100 114.2 N.A 549071 627571 794357 1078829 1826514 1775314 831484
Avg. 100 147.6 188. 91684 104764 132545 179999 365627 296183 130138
Sources: computed from annual reports.
The current liabilities chain indices of ACL, GSCL and SIL shows increasing trend.
The average of industry showed decreasing trend. The minimum current liabilities chain
indices in ACL are 100 (March-2001), GSCL is 53.54(March-2003), SIL is 100(March-01),
SDCL is 40.99(March-07) and UCL is 100(March-01). The maximum current liabilities
chain indices in ACL are 628.88(March-08), CSCL is 151.82(March-09), SIL is
720.37(March-08), SCL is 100(March-01), SDCL is 40.99 (March-07) and UCL is
100(March-01)
Chart-3.3 Index of current liabilities
3.4.4 Average collection period.
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Average collection period = Debtors X Days in a year(365) Net credit sales
After deducting holidays and weekly holidays generally total working days of a factory are
about 300, but in practice number of working days can be taken as 365. The average
collection period ratio measures the quality of debtors, since it indicates the rapidity or
slowness of their collect ability. The shorter the average collection period the better the
quality of debtors, as a short collection period implies the prompt payment by debtors. The
average collection period should be compared against the firm’s credit terms and policy to
judge its credit and collection efficiency. Higher the ratio from the terms of credit is not
good from concern’s point of view and also indicates that management fails to adopt a
sound policy in this regard. A conventional rule, average collection period of 30 days is
considered satisfactory in a manufacturing industry like cement industry.
Table 3.4 Average collection period in Days
C0/Year Mar-01 Mar-02 Mar-
03 Mar-
04 Mar-
05 Mar-
06 Mar-
07 Mar-
08 Mar-
09 Avg. ACL 8.7 8.72 8.47 7.72 7.53 6.06 3.96 7.28 9.99 7.60
GSCL 57.63 55.96 57.84 64.98 47.69 24.12 18.26 N.A 12.7 42.40
SIL 28.54 72.44 89.99 28.4 12.96 5.32 2.74 2.5 1.58 27.16
SCL 63.3 65.98 43.06 42.12 44.2 40.56 34.71 26.46 15.34 41.75
SDCL 43.41 50.21 33.15 39.45 58.03 21.71 16.55 16.69 15.41 32.73
UCL 0 0 NA 21.88 16.68 11.9 11.62 10.27 10.34
Avg. 33.60 42.22 46.50 36.53 32.05 19.08 14.69 12.91 10.88 27.00 Sources: computed from annual reports of respective companies.
Table no. 3.4 showed the minimum average collection period In ACL is 3.96 (2006-07),
GSCL is 12.7 (2008-09), SIL is 1.58 (2006-07), SCL is 15.41(2006-07), and UCL is
0.00(2000-01). The maximum average collection period in ACL is 9.99 (2008-09), GSCL
is 64.98 (2003-04), SIL is 89.99(2002-03), SCL is 65.98 (2001-02), SDCL is 58.03 (2004-
05) and UCL is 21.88 (2004-05). The highest average is in GSCL and lowest average is in
ACL having very tight credit period.
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Chart-3.4 Average collection period in Days
3.4.5 Net working capital to current liabilities :-
It shows the financing mix that is used for financing the current assets. It also
reveals the equity and long term vis-à-vis current liability financed portion of current
assets. From the liquidity angle it throws light on the equity and long-term financed asset
cushion for a given amount of current liabilities.
Table 3.5 Net working capital to current liabilities
Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-6 Mar-07 Mar-08 Mar-09 Avg. ACL -1.09 0.26 1.13 0.22 0.02 0.38 0.66 0.43 0.63 0.29
GSCL -0.66 -0.56 1.21 0.72 0.22 -0.01 0.58 N.A 0.01 0.19
SIL 0.14 0.58 -0.42 -0.26 0.04 1.85 1.98 1.95 1.10 0.78
SCL -0.49 -0.37 -0.52 -0.73 -0.78 -1.01 -0.36 -0.06 -0.49 -0.53
SDCL -0.36 -0.53 -0.60 -0.69 -0.37 -0.08 0.80 0.85 2.37 0.15
UCL -0.29 0.00 N.A 0.39 0.24 0.50 0.39 -0.11 -0.03 0.14
Avg. -0.46 -0.10 0.16 -0.06 -0.10 0.27 0.68 0.61 0.60 0.17Source: computed from annual report of respective companies
The net working capital to current liabilities of all the cement companies shows
fluctuating trend except SCL which shows decreasing trend. The minimum Net working to
current liabilities in ACL is -1.09(2000-01), GSCL is -0.66(2000-01), SIL is -0.42(2002-
03), SCL is -1.01(2005-06), SDCL is - 0.69(2003-04) and UCL is -0.29 (2000-01). The
maximum Net working to current liabilities in ACL is 1.13 (2002-03), GSCL is 1.21(2000-
01), SIL is 1.98 2006-07, SCL is 0.06(2007-08), SDCL is 2.37(2008-09) and UCL is 0.50
(2005-06).
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Chart-3.5 Net working capital to current liabilities
3.4.6 Gross working capital to total assets ;-
This ratio indicates the amount of working capital per rupee of total assets. It also
reveals the proporation of current and non-current assets in total. A high ratio may indicates
higher liquidity and a low ratio the opposite.
Table No.3.6
Gross working capital to total assets
Com./yrs 2000-
01 2001-
02 2002-
03 2002-
03 2003-
04 2004-
05 2005-
06 2007-
08 2008-
09 industry avg
ACL 0.127 0.109 0.118 0.105 0.115 0.141 0.202 0.241 0.294 0.161
GSCL 0.409 0.444 0.258 0.273 0.277 0.249 0.356 N.A 0.367 42.398
SIL 0.026 0.050 0.037 0.043 0.054 0.133 0.169 0.241 0.158 0.101
SCL 0.210 0.149 0.128 0.105 0.102 0.138 0.317 0.353 0.164 0.185
SDCL 0.481 0.367 0.288 0.260 0.432 0.383 0.519 0.398 0.521 0.405
UCL 0.016 0.026 N.A 0.147 0.180 0.212 0.205 0.208 0.175 0.022
Avg. 0.212 0.224 0.166 0.155 0.193 0.209 0.295 0.288 0.280 0.225Source: computed from annual of respective companies
The gross working capital to total assets of all the cement companies are shown in the
table No. 3.6. The cement companies showed high fluctuating trend. The ratio of ACL
ranged between 0.105 in 2002-03 and 0.294 in 2008-09 with an average of 0.161.The highest
was 0.444 and lowest ratio was 0.249 in GSCL during the year of 2001-02and 2004-05. The
minimum ratio in SIL was 0.026 in 2000-01 and maximum ratio was 0.241 in 2007-08 with
an average of 0.101.In SCL ratio ranged between 0.102 and 0.353 during the year of 2003-04
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and 2007-08 with an average of 0.185. The minimum ratio was 0.26 (2002-03) in SDCL and
maximum ratio was 0.521 (2008-09) in SDCL. The average ratio in SDCL was 0.405. The
ratio ranged between 0.016(2000-01) and 0.212(2004-05) in UCL with an average of 0.022.
Chart-3.6 Gross working capital to total assets
3.4.7 Working capital turnover (Sales/Net working capital):-
A close relationship exists between sales and net working capital. With any increase
in sales volume, there is a corresponding increase in the working capital. Therefore, a good
amount of net working capital may be needed to support the increase in sales. The ratio
helps to assess the degree of efficiency in the use of short-term funds for generating sales.
In order to test the efficiency with which working capital is utilized the working capital
turnover is calculated. It is calculated by dividing the net working capital to sales. It
indicats whether a business is being operated with a small or large amount of net working
capital, which is related to the cost of sales. A high working capital turnover may be the
result of favourable turnover of inventories and receivables of may reflect an inadequacy of
working capital. On the other hand, a low turnover of working capital may be an outcome
of the excess of working capital of slow turnover of inventories and receivables or a large
cash balance or investment of working capital in the form of temporary investment.
However, a very high turnover of working capital might indicate that the working capital is
insufficient for the given volume of business. A very low working capital turnover ratio
should clearly be taken to mean that the capital is not sufficient active. So a high ratio
indicates that management is aggressive in its use of working capital. However, an
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excessive high ratio indicates inefficient working capital management may be inadequate at
present sales.
Table 3.7
Working capital turnover
comp /years 2000-1 2001-2 2002-3 2002-3 2003-4 2004-5 2005-6 2007-8 2008-09 Ind/ avg
ACL -6.44 17.68 6.18 34.51 325.04 19.89 15.14 12.87 7.59 48.05
GSCL -4.30 -6.90 5.18 6.09 16.68 -365.8 12.08 N.A 670.39 41.68
SIL 29.19 2.78 -1.33 -6.47 136.37 4.80 4.55 3.19 6.28 19.93
SCL -4.48 -3.00 -2.28 -1.56 -0.96 -1.27 -4.68 -37.22 -9.14 -7.18
SDCL -6.73 -2.94 -2.87 -1.75 -3.24 -53.07 8.43 7.68 2.96 -5.73
UCL 0.00 0.00 N.A. 17.92 29.37 13.60 18.57 -45.18 -207.55 -21.66
Avg. 1.21 1.27 0.98 8.12 83.88 -63.64 9.02 -11.73 78.42 11.95 Sources: computed from annual reports of respective companies.
Above table showed the working capital turnover ratio cement industry in India. The
ratio of ACL ranged between -6.44 in 2000-01 and 325.04 in 2008-09 with an average of
48.05. The highest ratio was -365.81 and lowest ratio was 670.39 in GSCL during the year of
2004-05 and 2007-08. The minimum ratio in SIL was -6.47 in 2002-03 and maximum ratio
was 136.37 in 2003-04 with an average of 19.93 In SCL ratio ranged between minus 37.22
and minus 0.96 during the year of 2007-08 and 2003-04 with an average of -7.18. The
minimum ratio was -53.07 (2004-05) in SDCL and maximum ratio was 8.43 (2005-06) in
SDCL. The average ratio in SDCL was -5.73. The ratio ranged between -207.55(2008-09)
and 29.37(2003-04) in UCL with an average of -21.66.
Chart-3.7 Working capital turnover
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3.4.8 Sales to gross working capital (sales/gross working capital):-
This ratio is also termed as gross working turnover ratio. It suggest that a high ratio
indicates that management is aggressive in its use of working capital. However an
excessive high ratio may indicate poor working capital management since working capital
may be adequate at present sales.
Table-3.8 Sales to gross working capital
comp /years
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07 2007-08 2008-09 Ind.avg
ACL 3.56 3.80 3.46 4.89 4.93 5.26 6.36 4.04 3.07 4.37
GSCL 2.49 2.88 2.84 2.48 3.11 5.34 4.60 N.A 8.50 4.03
SIL 3.19 1.03 0.90 2.64 5.35 3.15 3.07 2.11 3.00 2.71
SCL 2.10 2.34 3.23 3.82 3.43 3.21 1.61 2.00 8.54 3.36
SDCL 2.79 2.93 3.56 3.27 1.61 4.94 3.55 3.81 2.17 3.18
UCL 0.00 0.00 N.A 4.89 4.67 4.92 5.72 4.82 5.30 4.27
Avg. 2.35 2.16 2.80 3.66 3.85 4.47 4.15 3.36 5.10 3.55 Sources: computed from annual reports of respective companies.
The Sales to gross working capital ratio of cement industry was explained in Table
No.3.8. The ratio of ACL showed fluctuating trend during the study period. The average
ratio was 4.37. The ratio ranged between 3.073 in 2001-02 and 6.36 in 2006-07. The ratio
of GSCL ranged between 2.480 in 2003-04 and 8.50 in 2008-09. The average ratio of
GSCL was 4.03. The ratio of SIL was minimal of 0.902 in 2002-03 and maximum 5.35 in
2004-05 with an average 2.71. The ratio of SCL was showing fluctuating trend with an
average 3.36. The ratio of SCL ranged between 1.612 in 2006-07 and 4.94 in 2005-06. The
ratio of SDCL ranged between 1.608 in 2004-05 and 4.94 in 2005-06. The ratio of UCL
showed very high fluctuating trend with an average of 4.27. The ratio of UCL ranged
between 0.000 in 2000-01, 2001-02 to 5.72 in 2006-07. The ratio of ACL was the best ratio
among the selected companies.
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Chart-3.8 Sales to gross working capital
3.4.9 Current Ratio:
Current ratio = Current assets/Current liabilities
This ratio is an indicator of the firm’s commitment to meet its short-term liabilities.
Current assets mean the assets that will either be used up or converted into cash within a
year’s time or normal operating cycle of the business whichever is longer. Current
liabilities means liabilities payable within a year or operating cycle, whichever is longer,
out of the existing current assets or by creation of current liabilities. It is an index of the
solvency f a concern. An ideal current ratio 2:1. The ratio is considered as a safe margin of
solvency due to the fact that if the current assets are reduced to half i.e. one instead of two
then also the creditor will be able to get their payments in full. However, a business having
seasonal trading activity may show a lower current ratio at certain period of the year.
A very high current ratio is also not desirable since it means less efficient use of
funds. This is because a high current ratio means excessive dependent on long-term sources
of raising funds. Long-term liabilities are costlier than current liabilities and therefore, this
will result in considerably lowering down the profitability of the concern.
The object of ascertainment this ratio is to measure the extent to which payment is
to be made in a year. It is a measure of strength of the working capital positions of a
concern and it also indicates the solvency of the concern. The current ratio is the index of
the concern’s financial stability since it shows the extent of the working capital, which in
the amount by which current assets exceeds the current liabilities.
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Table-3.9 Current ratio
Com/year 2000-01 2001-
02 2002-
03 2003-04 2004-05 2005-
06 2006-07 2007-
08 2008-09 Avg.
ACL 0.64 1.27 2.28 1.16 1.02 1.36 1.72 1.46 1.68 1.399
GSCL 0.63 0.71 2.21 1.69 1.23 0.99 1.61 N.A 1.01 1.260
SIL 1.12 1.58 0.6 0.71 1.04 2.91 3.08 2.95 1.92 1.768
SCL 0.68 0.56 0.41 0.29 0.22 0.28 0.74 0.95 0.52 0.517
SDCL 0.71 0.5 0.45 0.35 0.67 0.91 1.73 1.99 3.77 1.231
UCL 0.71 1 N.A 1.38 1.19 1.57 1.45 0.9 0.98 1.148
Avg. 0.75 0.94 1.19 0.93 0.90 1.34 1.72 1.65 1.65 1.22 Sources: computed from annual reports of respective companies.
The Current ratio of selected unit of cement industry was explained in Table
No.3.9. The ratio of ACL showed progressive and fluctuating trend during the study period.
The average ratio was 1.39. The ratio ranged between 0.64 in 2000-01 and 2.28 in 2002-03.
The ratio of GSCL ranged between 0.63 in 2000-01 and 2.21 in 2002-03. The average ratio
of GSCL was 1.26. The ratio of SIL was minimum of 0.60 in 2002-03 and maximum 3.08
in 2006-07 with an average 1.78. The ratio of SCL was showing fluctuating trend with an
average 0.517. The ratio of SCL ranged between 0.22 in 2004-05 and 0.95 in 2007-08. The
ratio of SDCL ranged between 0.35 in 2003-04 and 3.77 in 2008-09. The ratio of UCL
showed very high fluctuating trend with an average of 1.48. The ratio of UCL ranged
between 0.71 in 2000-01, to 1.57 in 2005-06. The ratio of SIL was the best ratio among the
selected companies.
Chart-3.9 Current ratio
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3.4.10 Quick ratio:-
The quick ratio is of quick assets to current liabilities. These current assets, which
can be easily converted into cash, are called quick assets. They usually consist of cash in
hand and at bank, bills receivables, sundry debtors and marketable securities. A quick ratio
of 1:1 indicates good financial position of an enterprise. This ratio is also known as “acid
Test Ratio” of the firm’s soundness. It is more effective ratio than current ratio because
current ratio does not throw a light on the liquidity of a concern which liquid ratio can.
The fundamental object of calculating this ratio is to enable a finance officer to
ascertain for immediate payment. The ratio also indicates that if it is not possible to push
up the sale of closing stock or if sold on credit, cash will not be available to pay quick
liabilities and face liquidity crises. Closing stocks are two steps away from cash because
their price is more or less uncertain according to market demand.
This is the true test of going concern solvency of a business. As a general rule,
when the quick assets equals or exceeds the current liabilities, the financial position may be
considered satisfactory. This is measure of the extent to which the quick assets are
available to meet the immediate liabilities. This indicates the ability of business to meet its
commitments as they fall due for payments.
It has been observed that when the quick assets equals or exceeds the current liabilities the
financial position may be considered satisfactory. This ratio is a measure of the extent to
which the liquid assets are available to meet the immediate liabilities. The quick current
asset consists of cash and bank balances, trade investment, sundary debtors and
miscellaneous assets. It does not include closing stock and prepaid expenses, as they are
not immediately converted into cash.
Table-3.10 Quick ratio
Sources: computed from annual reports of respective companies.
Company /Year
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09 Avg.
ACL 0.32 0.58 0.94 0.42 0.34 0.48 0.93 0.89 0.95 0.65 GSCL 0.27 0.35 1.28 0.99 0.57 0.45 0.83 0.38 0.64 SIL 0.46 1.19 0.17 0.39 0.58 2.20 2.48 1.98 0.91 1.15 SCL 0.36 0.31 0.20 0.10 0.11 0.15 0.56 0.74 0.24 0.31 SDCL 0.28 0.13 0.13 0.09 0.15 0.21 0.32 0.70 2.55 0.51 UCL 0.71 0.63 0.76 0.61 0.71 0.65 0.37 0.40 0.61 Avg. 0.40 0.53 0.54 0.46 0.39 0.70 0.96 0.94 0.91 0.64
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Quick ratio of selected cement companies from 2000-01 to 2008-09 are shown in
the table No.3.10. The quick ratio ACL showed fluctuating trend with an average of 0.65.
The ratio was 0.32 in 2000-01 and it went up to 0.58 in 2001-02. The ratio was the highest
of 0.95 in 2008-09 and the lowest was in 0.32 in 2000-01. The quick ratio of GSCL ranged
between 0.27 in 2000-01 and 1.28 in 2002-03. The ratio was on an average of 0.64. The
ratio of SIL ranged between 0.17 in 2002-03 and 2.48 in 2006-07 with an average of 1.15.
The ratio of SCL was showing fluctuating trend throughout the study period with an
average of 0.31. The ratio SDCL was also indicating highly fluctuating trend with an
average of 0.51. The range was 0.09 and 2.55 during the study period. The quick ratio of
UCL was minimum of 0.37 during the year of 2007-08 and 0.76 during the year of 2003-04
with an average of 0.61.
Chart- 3.10 Quick ratio
*****
100
REFERENCES:
1. ABR Choudhary analysis and interpretation of financial statement through financial
ratio’s (New Delhi Orient & Longman,1970)
2. B. Banerjee, Financial policy and Management accounting, (Calcutta ; the world press
pvt. Ltd. 1987)
3. FASB propose statement of financial accounting concepts, “Reporting income, cash flows
and financial position of a business enterprise standard 1981”
4. Harry Gross, Financing small and Medium size business,( New Jersey Prentice Hall, inc
Engle wood cliffs),
5. J.C.Van Horn, Financial Management and policy. (New Delhi : Prentice Hall of India pvt.
Ltd. 1979)
6. J.E.Waller. “Etermination of Technical Insolvency.”Journal of business, January 1957
7. John N. Myer, Financial statement Analysis Ived, (Eaglewood cliffs New Jersey, Prentice
Hall, Inc.)
8. Murao Bahadur, Management accounting, (New Delhi : Meenakshi Prakashan, 1982)
