Search & Research
Vol-II No. 2 (191-193) : (2011)
Liquidity, Risk and Profitability Analysis :
A Case Study of Maruti India Ltd.
Dr. Vivek Sharma
Director, C. Rajagopalachari Institute of Management, U.T.D. Barkatullah University,
Bhopal (M.P.) India
MS Received : 23 June 2010
MS Accepted : 06 Aug 2010
Abstract :
Liquidity risk and return both are very important aspects to be considered while making any decisions regarding
company’s finance. It affects the liquidity and profitability in any ways. This paper attempts to study these three
elements in company’s existence and their relationship.
Key words : Liquidity, Risk, Profitability
Introduction :
Liquidity management has been taken as an
important tool to analyze the sustainability and
liquidity position of any enterprise that may also help
any organization to derive maximum profits at
minimum cost. A company must maintain its ability
to pay off its current obligations and have a sound
base of working capital to stay for a long in the
competitive market. The management of working
capital is an important aspect to be considered for
attaining sound liquidity position.
Profitability, in this reference may be the return
earned on the total assets of the company. Every firm
aims to dig up maximum profits out of the invested
capital pool. The success of the company usually
depends on its returns earned, keeping the liquidity
prospects in view. Usually, it is a difficult task to trade
off between the liquidity and profitability, as the
conservative policy of working capital may ensure
sound liquidity but endangers the profitability. On
the other hand, aggressive policy helps in making
profits but the liquidity is in not promised. Before
deciding on an appropriate level of working capital
investment, a firm’s management has to evaluate the
trade off between expected profitability and the risk
that it may be unable to meet its financial
obligations.1
Finance deals with creating a proper framework to
maximize profits at a given level of risk. In pursuing
this balance, the firm must develop controls over the
flows of funds while allowing sufficient flexibility to
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respond to changes in the operating environment.2
Thus, the firms must attain a level of adequate
liquidity at a minimum risk so as to achieve
maximum profitability.
Company Snapshot:
Maruti Suzuki India Limited (MSIL) is a passenger car
company. The Company is engaged in the business of
manufacturing, purchase and sale of motor vehicles
and spare parts (automobiles). The other activities of
the Company include facilitation of pre-owned car
sales, fleet management and car financing. The
Company is a subsidiary of Suzuki Motor
Corporation, Japan. The Company has a portfolio of
13 brands and over 150 variants across India and
abroad. The Company's two manufacturing facilities
are located at Gurgaon and Manesar, south of New
Delhi. The Company's subsidiaries include Maruti
Insurance Business Agency Limited, Maruti
Insurance Distribution Services Limited, Maruti
Insurance Agency Solutions Limited, Maruti
Insurance Agency Network Limited and Maruti
Insurance Agency Services Limited.
Objectives of the Study :
The study is being done with the following
objectives:1.
To examine the association between liquidity
and risk.
2.
To test the correlation between profitability and
risk.
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Hypothesis of the Study :
The above stated objectives are to be achieved by
testing the following hypothesis:
1.
There is negative association between liquidity
and risk.
2.
Profitability and risk of the firm are negatively
correlated.
Research Methodology :
The study is concerned with the ten years data of
Maruti Suzuki India Ltd. for a period of (2001 2010).The data is of secondary nature and is obtained
from the published annual reports of Maruti Suzuki
India Ltd. The collected data has been analyzed
through various liquidity and profitability ratios and
drawing out the risk factor. Further, t test has been
applied to test the hypothesis and draw conclusions.
Results and Discussions :
Tables given forward show the liquidity and
profitability position of the company along with the
risk factor has been calculated to study the inter
relation ship.
Liquidity Position of Maruti India Ltd.
assets viz. cash in hand and at bank and market
securities with current liabilities. This ratio helps in
examining the absolute liquid position. The ratio at
highest in year 2008 at 0.10 and thus ranked as 1 and
the lowest ratio is in year 2003, 2004 & 2006.In these
years the company struggled with shortfall of cash
balances to meet their short term obligations.
Further, the ultimate ranks denote that in year 2001
and 2005, the company was having highest liquidity
and the poorest performed year in reference of
liquidity was 2010.
Profitability Position of Maruti Suzuki India Ltd.
Table No 2 exhibits the profitability position of the
company by using three very basic ratios of
profitability. The return on assets (ROA) percentage
shows how profitable a company's assets are in
generating revenue. Table 2 reveals an increasing
trend in spite of the first year to give a negative
percentage at -7.18%.This shows that the company is
managing to get good returns out of their assets pool.
Return on capital employed is the indicator of the
operational efficiency of the company. The resulting
ratio represents the efficiency with which capital is
being utilized to generate revenue. Table 2 shows that
the ratio is at negative value in year 2001 at -9.88% and
is showing a fluctuating trend till 2010.
Table No.1 exhibits the three basic ratios of test of
liquidity, viz. Current Ratio, Quick Ratio and
Absolute Ratio. The ratios are ranked in the order of
their influence on liquidity. The higher is the ratio,
the greater is the liquidity. Further, ultimate rank has
been calculated form the total of the ranks of ratios.
Ultimate ranking has been done on the principle that
the lower the aggregate of the individual ranks, the
more profitable is the liquidity position and vice
versa. Current ratio is a relationship between the
current assets and current liabilities and thus is used as
measure of general liquidity. It can be noted form
Table No.1 that the current ratio in year 2001 and
2006 is the highest at 1.77 times. The rule of thumb is
2:1 but it can vary from firm to firm. The least value
of the current ratio is 1.02 in year 2010. Quick ratio is
an indicator of the liquidity in sense of the
relationship between the quick assets and current
liabilities. Again, the higher ratio is an indicator of
higher liquidity. Years 2003 and 2005 are the period
of the highest quick ratio at 1.32.The ratio was at least
value in year 2010 at 0.68 which is very low and that’s
why ranked as 10.
Where, Rk = Risk factor, Ej = Equity + Retained
Earnings, Lj = Long term Loans, Aj = Fixed Assets,
Cj = Current Assets
Absolute ratio shows the relation of absolute liquid
The above formula helps to know about the
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Return on net worth is the relationship between the
net profit and the shareholder’s funds of the
company. Table 2 reveals that the ratio is showing a
negative percentage in year 2001 and showing a
increasing trend till 2007, but is showing some
fluctuations till the end of the period.
Trade off between risk and profitability:
Trade off between risk and profitability can be made
by calculating the risk factor. The analysis can be
done through which it can be said about the policies
adopted while managing the working capital of the
company. Risk factor has been calculated & shown in
Table no 3. Risk factor can be calculated through the
following formula:A1
Rk = (Ej + Lj ) - Aj
Cj
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financing of the current assets through long term
funds after fixed assets are financed in full. Based on
the above formula, following inferences can be
drawn:
!
Value of Rk is zero or less would mean that the
firm is using the aggressive policy and normally
the profitability would be high.
!
Value of Rk is 1 or close to 1 would mean that the
firm is using a conservative policy and the
profitability would be low.
Under aggressive policy the firm opts for a lower
level of working capital thereby investing in current
assets at lower proportion to total assets. When a firm
adopts this policy, the profitability is high but at
higher risk of liquidity. In case of conservative policy,
the firm adopts a conservative approach of having
high proportion of working capital. The profitability
is relatively low as the return on current assets is
normally less. But ensuring good liquidity as the risk
of meeting current obligations is reduced. Table no 3
discloses the risk factor that has been ranked and is
indicating the policy adopted by the company in
various periods.
Conclusion:
Maruti Suzuki India Ltd being an established
company from past few decades is satisfactorily
giving out profits and maintaining its liquidity
position but at increased risk factor. The liquidity
position of the company is fluctuating but is
acceptable. The risk factor calculated is a needle of the
working capital management and the policy adopted.
The company is timely changing its policies for better
results but at higher risk. The profitability is
increasing at good pace showing the efficiency of the
company. Thus, it can be concluded that the
company is earning good profit with moderate
liquidity and at higher risk.
References :
1.
Bhalla V.K.1 (1997), Financial Management and
Policy, Anmol Publications Pvt. Ltd pp 200.
2.
Hampton John J.2 ( 1990), Financial Decision
Making, Prentice- Hall of India Pvt. Ltd. pp 9.
3.
Gupta S.P. (2004) Management Accounting,
Sahitya Bhawan Publications.
4.
Luther C.T. Sam (2007) The Management
accountant, Liquidity, Risk and Profitability
Analysis, A Case Study of Madras Cements Ltd.
5.
The null hypothesis stated that there is negative
association between liquidity and risk.
Sur Debasis,(2001),”Liquidity Management: an
overview of four companies in Indian power
sector”, The Management Accountant, pp 407412
6.
Calculated Value of ‘t’=1.43 and Critical value of ‘t’=
2.31
Sharma R.K. and Gupta Shashi K. (2008),
Financial Management, Kalyani Publishers.
7.
Annual reports of Maruti Suzuki India Ltd.
8.
www.moneycontrol.com
9.
www.economic times.com
The hypothesis drawn are tested by using student’s’
test for confirming the association between the risk,
liquidity and profitability. Table no 4 exhibits that
there is low degree of association between liquidity
and risk, further, this association is tested.
Conclusion: As the calculated value is less than the
critical value, thus, the null hypothesis is accepted. Thus,
it can be said that there is no significant association
between liquidity and risk of this company.
The table shows that the profitability and risk are
negatively associated but again, it has to be tested
using‘t’ test.
10. www.google.com
Corresponding Author
Dr. Vivek Sharma
The null hypothesis states that profitability and risk of
the firm are negatively correlated.
Calculated value of ‘t’ = -3.63 & Table value of ‘t’ = 2.31
As the calculated value is less than the table value, the
null hypothesis is accepted. Hence, it can be said that the
profitability and risk are negatively correlated.
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