International
International Journal
Journalofof
Financial
Financial
Management
Management
Research
Research
and Development
and
(IJFMRD), ISSN 2248– 9320
(Print) ISSN 2248
– 9339 (Online),
Volume
1, Number
Development
(IJFMRD),
ISSN 2248–
9320
(Print) 1, January - April (2011)
ISSN 2248 – 9339 (Online), Volume 1, Number 1
January - April (2011), pp. 61-68
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© PRJ Publication, http://www.prjpublication.com/IJFMRD.asp
IJFMRD
CORPORATE SHORT TERM SOLVENCY ANALYSIS: A CASE
STUDY ON NEYVELI LIGNITE CORPORATION LIMITED, NEYVELI
Govindarajan, Research Scholar,
Sathyabama University, Chennai-119
A.
Dr. R. Thamilselvan, Research Supervisor,
Sathyabama University, Chennai-119
ABSTRACT
The current paper aims to study and assess the Short term solvency position of Neyveli
Lignite Corporation Ltd.(NLC). Considering NLC as a sample among public sector under
taking giving maximum contribution of power generation to Tamil Nadu and other southern
states. NLC is a PSU which generates power from lignite and it was graded as ‘mini
rathana’ then and now attained the status as one of the ‘navarathans’ of India. The study was
made by extracting data for a period of 10 Years from 31st March 2001 to 2010 from the
published financial statements of the company. Various Short term solvency ratios and
statistical tools were applied to test the Short term solvency position of NLC. From the
analysis the PSU under study has been maintaining the short term solvency position so as to
have a favorable impact on banckruptcy.
Key Words: Short term solvency, solvency, stability, financial crunch, saturation.
INTRODUCTION
Solvency ratio measured in short term is known as liquidity and in the long term is
known as stability Short term solvency is maintaining the current asset and current Liability
and it is an important task to every company. For the analysis, a known public sector under
taking Neyveli Lignite Corporation Ltd (NLC Ltd) was taken for study.. NLC Ltd among
other public sector under taking gives maximum contribution of Power generated to Tamil
Nadu and other southern states. It is referred as ‘Nava Rathana’ under Government of India.
The Short term solvency position of NLC Ltd is analysed as under.
OBJECTIVES OF THE STUDY
The study has been carried out to fulfill the following objectives.
i)
To analyse over all Short term solvency position of NLC Ltd using
appropriate ratios.
61
International Journal of Financial Management Research and Development (IJFMRD), ISSN 2248– 9320
(Print) ISSN 2248 – 9339 (Online), Volume 1, Number 1, January - April (2011)
ii)
iii)
iv)
To compare and analyse the percentage spread of various constituents of
current assets.
To test statistically the degree of association between various constituents of
current assets and Short term solvency percentage .
To examine the level of Bankruptcy condition of the company under study.
METHODOLOGY
The present study is carried out on the basis of the objectives under three categories as
1. Short term solvency Ratios
2. Measurement of relationship between current asset and Short term solvency.
3. Measure on level of Bankruptcy.
Short term solvency ratios that are carried out are Current ratio, Quick ratio, Cash ratio and
advance ratio. The ratios gives precise measurement on NLC ltd’s ability to meet its current
obligations. The second Part deals with the measurement of relationship between the selected
variables . If it is said that the level of current assets play a dominant role in maintaining sound
Short term solvency policy , then there is a strong bond that exists between each and every
constituents of current assets and Short term solvency . Hence this part has been constituted to
measure the degree of association between various components of current assets and Short term
solvency position of NLC and the influence of the former on the later . For the purpose , some of
the current asset components taken into consideration are given as follow :
Inventories = Inventories / TCA X 100
Debtors = Debtors / TCA X 100
Cash and Bank Balance(CBB) = CBB/ TCA X 100
Other current asset(OCA) = OCA/ TCA X 100
Loans and Advances (L&A) = L & A / TCA X 100
TCA = Total Current assets as per Balance sheet
The Short term solvency position of the NLC has been computed by appropriating Total Current
Assets (TCA) with Total assets(TA) of the NLC.
Short term solvency(%) = TCA/ TA X 100
Statistical tools like spearman’s rank correlation and students ‘t’ test have been employed to test
the degree of association and influence of various current assets on Short term solvency with the
following hypothesis
Ho: There is no significant correlation between current assets constituents and Short term
solvency.
H1 : There is significant correlation between current assets constituents and Short term solvency.
In this respect the Short term solvency position of NLC is measured by the ratio between
Current Assets and Total Assets expressed in percentage whereas Bankruptcy condition is
measured by Altman Z Score.
The period of study related to NLC Ltd is from 31st March 2001 to 31st March 2010.
DISCUSSION AND RESULTS
Short term solvency Ratios that measure the ability of NLC to meet its current obligation is
shown in Table 1
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International Journal of Financial Management Research and Development (IJFMRD), ISSN 2248– 9320
(Print) ISSN 2248 – 9339 (Online), Volume 1, Number 1, January - April (2011)
Table : 1 Short term solvency Ratios
Ratio
analysis
CR
QR
CASR
AR
2001
2.29
1.90
0.35
0.76
2002
3.29
2.78
0.48
0.43
2003
3.53
3.17
0.29
0.26
2004
2.43
2.15
1.12
0.22
2005
3.89
3.50
2.18
0.23
2006
5
4.5
3.44
0.46
2007
3.27
2.98
2.57
0.22
2008
3.21
2.96
2.59
0.17
2009
2.65
2.46
1.91
0.21
2010
2.56
2.39
1.61
0.19
Sources: www.nlcindia.com annual reports from 2001 to 2010
As a conventional rule , a current ratio of 2 to1 or more is considered satisfactory. The NLC is
maintaining the ratio so it is interpreted as having enough Short term solvency. Generally a quick
ratio of 1 to 1 is considered satisfactory in this respect also NLC is performing better by
marinating better Short term solvency. The cash and bank balance ratio and Loans & Advances
ratio also plays a good role. But considering overall performance current ratio, quick ratio and
cash& bank balance ratio show a decreasing trend and Advances ratio tends to be fluctuating
over the years.
Measurement of Relationship between constituents of Current assets and Short term
solvency:
If Short term solvency management deals with maintaining optimum level of current
assets of a firm to meet its current obligation, then it is implied that the level of current assets
affects the firms Short term solvency. Table 2 shows the statement of ranking of various
constituents of current assets and Short term solvency of NLC
Table: 2 Ranking of liquid assets of NLCLtd.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
I/CA
Rank DB/CA Rank
CBB/CA Rank
OCA/CA Rank L &A/CA Rank
CA/TA Rank
0.17
1
0.32
3
0.15
8.5
0.03
6
0.33
1
0.36
6
0.15
2
0.55
2
0.15
8.5
0.02
9
0.13
2
0.34
7
0.1
5
0.72
1
0.08
10
0.02
9
0.07
7.5
0.38
5
0.12
3
0.22
4
0.46
7
0.11
1
0.09
3.5
0.26
10
0.1
5
0.2
6
0.56
6
0.08
2
0.06
9
0.33
8.5
0.1
5
0.04
8.5
0.7
4
0.06
3
0.09
3.5
0.33
8.5
0.08
7.5
0.02
10
0.79
2
0.04
4
0.07
7.5
0.44
1.5
0.08
7.5
0.04
8.5
0.8
1
0.03
6
0.05
10
0.41
4
0.07
9.5
0.1
7
0.72
3
0.03
6
0.08
5.5
0.44
1.5
0.07
9.5
0.21
5
0.63
5
0.02
9
0.08
5.5
0.43
3
To measure the degree of association between various constituents of current asset and Short
term solvency of NLC ltd. Spearmans correlation co-efficient has been employed and to examine
whether the computed value of such correlation coefficient is significant or not students ‘t’ test
has been applied as shown in table. 3
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International Journal of Financial Management Research and Development (IJFMRD), ISSN 2248– 9320
(Print) ISSN 2248 – 9339 (Online), Volume 1, Number 1, January - April (2011)
Table 3. Rank correlation analysis between various constituents of current asset and Short term
solvency and student ‘t’ test of NLC ltd
RANK DIFFERENCE
YEAR
SHORT
TERM
SOLVENCY
(1)
D2
INVENTORY
(2)
DEBTORS
(3)
CBB
(4)
OCA
(5)
L&A
(6)
2-1
(a)
3-1
(b)
4 -1
©
5-1
(d)
6-1
(e)
a2
b2
c2
d2
e2
2001
6
1
3
8.5
6
1
-5
-3
2.5
0
-5
25
9
6.25
0
25
7
2
2
8.5
9
2
-5
-5
1.5
2
-5
25
25
2.25
4
25
5
5
1
10
9
7.5
0
-4
5
4
2.5
0
16
25
16
6.25
10
3
4
7
1
3.5
-7
-6
-3
-9
-6.5
49
36
9
81
42.25
8.5
5
6
6
2
9
-3.5
-2.5
-2.5
-6.5
0.5
12.2
5
6.25
6.25
42.25
0.25
12.2
5
0
20.25
30.25
25
2002
2003
2004
2005
2006
8.5
5
8.5
4
3
3.5
-3.5
0
-4.5
-5.5
-5
1.5
7.5
10
2
4
7.5
6
8.5
0.5
2.5
6
36
72.25
0.25
6.25
36
12.2
5
20.25
9
4
36
2007
2008
4
7.5
8.5
1
6
10
3.5
4.5
-3
2
6
1.5
9.5
7
3
6
5.5
8
5.5
1.5
4.5
4
64
30.25
2.25
20.25
16
2.5
42.2
5
4
4
36
6.25
TOTAL
278
219
84.5
240
218
2009
2010
3
9.5
5
5
9
5.5
6.5
2
2
6
Applying Edward Spearmans formula the rank correlation(r) between various constituents of
current asset and Short term solvency is presented in Table 4
Table 4: Edward Spearman’s Formula
SL.NO
CONSTITUENTS
OF
CURRENT ASSETS
1
Inventories
2
Debtors
3
Cash
4
OCA
5
L& A
RANK CORRELATION
-0.727
-0.366
0.483
-0.500
-0.342
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International Journal of Financial Management Research and Development (IJFMRD), ISSN 2248– 9320
(Print) ISSN 2248 – 9339 (Online), Volume 1, Number 1, January - April (2011)
Correlations
Short term solvency
Spearman's Short
Correlation
rho
term
Coefficient
solvency
Sig. (2-tailed)
N
inventory
Correlation
inventory
Debtors
CBB
OCA
L&A
1.000
-.727
*
-.366
.483
-.500
-.342
.
.017
.298
.157
.141
.334
10
10
10
10
10
10
*
.152
.608
*
1.000
.593
-.712
.017
.
.071
.021
.675
.062
10
10
10
10
10
10
**
-.454
.477
-.727
Coefficient
Sig. (2-tailed)
N
Debtors
Correlation
-.366
.593
1.000
-.960
.298
.071
.
.000
.188
.163
10
10
10
10
10
10
.483
-.712
*
**
1.000
.287
-.497
.157
.021
.000
.
.422
.144
10
10
10
10
10
10
-.500
.152
-.454
.287
1.000
-.082
.141
.675
.188
.422
.
.823
10
10
10
10
10
10
-.342
.608
.477
-.497
-.082
1.000
.334
.062
.163
.144
.823
.
10
10
10
10
10
10
Coefficient
Sig. (2-tailed)
N
CBB
Correlation
-.960
Coefficient
Sig. (2-tailed)
N
OCA
Correlation
Coefficient
Sig. (2-tailed)
N
L&A
Correlation
Coefficient
Sig. (2-tailed)
N
*. Correlation is significant at the 0.05 level (2-tailed).
**. Correlation is significant at the 0.01 level (2-tailed).
Observed value of ‘t’ which is calculated by
r n √ (n-2)
----------√ (1-rn 2 )
for various constituents are given
Mod of
65
International Journal of Financial Management Research and Development (IJFMRD), ISSN 2248– 9320
(Print) ISSN 2248 – 9339 (Online), Volume 1, Number 1, January - April (2011)
S.LO
1
2
3
4
5
Factors
‘t’ value
Inventory
Debtors
Cash and Bank Balances
Other current Assets
Loans and Advances
9.227
3.144
4.771
2.219
2.244
Critical value of ‘t’ at 5% Level of significance with (n-2) i.e.. 3 degree of freedom = 3.182. The
result shows that the rank correlation co-efficient of the NLC was statistically significant at 5%
level of significance because the observed level of ‘t’ is more than the critical value of ‘t’ (3.182)
leading to rejection of null hypothesis. It indicates that although with a degree of association
between selected variables of NLC ltd, factors like inventory , Debtors, OCA and L&A are
negatively correlated whereas Cash and bank balance is Positively correlated . There is a strong
association with respect to short term solvency between inventory, cash and bank balance at the
same time Debtors ,other current asset, Loans and Advances shows a low level of association
with Short term solvency.
Prediction of Bankruptcy:
There are multiple number of ratios. The Altman Z Score takes into account few required ratios of
balance sheet and trading and profit and loss account , and combined them into a unique formula. Z
score has different formula to judge Public manufacturer, Private manufacturer and Private general
firm.
Now we will consider z-score for a Public Sector Manufacturer the frame work of Z score for such
companies is
Z = 1.2 Ratio A +1.4 Ratio B + 3.3 Ratio C + 0.6 Ratio D + Ratio E
Evaluation on the ratios:
To cover the justification Whether the Z score is applicable to the appraisal of companies. Here are
the valid points
Ratio A - Working capital / total assets - Which measures a Short term solvency .
Ratio B- Retained earnings/ Total Assets - Which a measures reinvested earnings.
Ratio C- EBIT / Total Assets - Which measures the Profitability the profitability of the Company.
Ratio D- Market value of Equity/ Book Value of total liability- Which measures the firms leverage.
Ratio E- Sales /Total assets–Which measures the sales generating ability of the firms Assets.
The above formula is applicable only for public manufacturing companies. Its prediction is, when the
Z Score is 3.00 and above, it indicates that bankruptcy is not likely, but a score of 1.8 or below is a
strong indicator that bankruptcy is likely. Probability of bankruptcy in the above range is 95% for first
one year and 70% within two years. Obviously a high score is desirable
66
International Journal of Financial Management Research and Development (IJFMRD), ISSN 2248– 9320
(Print) ISSN 2248 – 9339 (Online), Volume 1, Number 1, January - April (2011)
Application of Altman Z Score on NLC Ltd
Year/
Items
Working
capital
Total
Asset
EBIT
Market
Value of
Equities
Total
liability
Retained
Earning
Sales
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
150648
176603
242490
154898
261713
289449
374481
404971
470551
468117
740792
772267
885811
996989
1059937
1078373
1217477
1427089
1704993
1797565
103422
118477
169757
147273
182971
91565
91305
143275
106187
163527
169616
369096
438721
825013
1128260
1286384
918546
2093362
1300225
2599611
740792
772267
885811
996989
1059937
1078373
1217477
1427089
1704993
1797565
329235
340718
429046
516885
600147
63108
665280
736257
779152
864696
244004
223695
268148
280754
300194
250291
210811
298105
335491
412103
Sources: www.nlcindia.com annual reports from 2001 to 2010
YEAR
Z.SCORE
2001
1.79
2002
1.97
2003
2.24
2004
2.18
2005
2.58
2006
1.63
2007
2.01
2008
2.48
2009
1.83
2010
2.38
According to Altman Zscore Year 2001 and 2006 are unsafe because of huge fall in the market price
of the share . All the other years they are in the gray area of bankruptcy. The variations that occur in
the z score is due to increase in salary to the employees in the year 2006, limited supply of raw
material to Mine –II during 2006 and 2007, and due to heavy rain fall that made the government to
use more of hydel power instead of thermal power. Similarly during the year -2008-2009 due to
reduction in power generation pay revision there was a considerable decrease in EBIT.
YEAR
CA/TA
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
RANK
0.36
0.34
0.38
0.26
0.33
0.33
0.44
0.41
0.44
0.43
6
7
5
10
8.5
8.5
1.5
4
1.5
3
67
Z SCORE
1.79
1.97
2.24
2.18
2.58
1.63
2.01
2.48
1.83
2.38
RANK
9
7
4
5
1
10
6
2
8
3
International Journal of Financial Management Research and Development (IJFMRD), ISSN 2248– 9320
(Print) ISSN 2248 – 9339 (Online), Volume 1, Number 1, January - April (2011)
Correlations
VAR00002
Spearman's rho
VAR00002
Correlation Coefficient
1.000
.024
.
.947
10
10
Correlation Coefficient
.024
1.000
Sig. (2-tailed)
.947
.
10
10
Sig. (2-tailed)
N
VAR00003
VAR00003
N
The co efficient of correlation between Z Score and Liquidity shows that there is no significant
correlation between these two. This shows that Liquidity alone cannot plays a greater roles in making
a company bankrupt.
CONCLUSION
From the above analysis it is very clear that the corporate under study is maintaing the solvency
position. The fluctuation is mainly due to the policies of the government related to payment of
dues, subsidies, pay revision aging of thermal plant which leads to reducing in power generation.
The Altman z score reflects that the corporation under study is away form bankruptcy.
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of Delhi.
3. Krishnamurthy ,K., and Sastry . 1973. D.U. Dividends , external finance and investment
; an analysis of the corporate sector in India , Institute of Economics Growth, University
of Delhi.
4. Neuman ,A.M.1936. The Doctrine of Short term solvency , The review of Economics
Studies, Vol . 111, No.2, 1936, p.82.
5. Peter Drucker. 1980. Managing in turbulent times , p.13 .
6. Slater , S.D. 1974. The strategy of cash : A Short term solvency approach to maximizing
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