Analyzing solvency of companies
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Transcript of Analyzing solvency of companies
ANALYZING SOLVENCY OF COMPANIES: A CASE
STUDY
Compiled By:Dhrumil Shah
TYBBA Div 1Roll No. 38
&
SOLVENCY RATIOSSolvency ratio is one of the various ratios used to measure the ability of a company to meet its long term debts and short term obligations.It has further sub-categories: Long Term Solvency Ratios
Debt Equity Ratio Debt Assets Ratio Interest Coverage Ratio
Short Term Solvency Ratio Current Ratio Acid Test/ Quick Ratio
LONG TERM SOLVENCY RATIOS Debt Equity Ratio = Long Term Debt
Networth + Preference Capital
Comment: Industry Standard= 1.25:1The Indegenious company (TATA) is performing manifoldly compared to Maruti Suzuki. TATA Motors has relatively more debt than its counter part to finance its equity. Both companies do not rely much on external borrowings.
DE Ratio= 1,448 + 1,054 1,510 + 235,532
DE Ratio= 12,318 + 286 14,862
DE Ratio= 2502 237042
DE Ratio= 12,604 14,862
DE Ratio= 0.0105:1 DE Ratio= 0.84806:1
*All figures in ₹ Millions
LONG TERM SOLVENCY RATIOS Debt Assets Ratio = Total Debt
Total Assets
Comment:Maruti Suzuki proves its competitiveness by having more assets than Maruti Suzuki. Maruti Suzuki has more capacity to repay it’s debt through its assets.
DA Ratio= 1,448 + 4,810 + 1,054 335,510
DA Ratio= 12,318 + 286 49,943
DA Ratio= 2502 335,510
DA Ratio= 12,604 49,943
DA Ratio= 0.0105:1 DA Ratio= 0.252:1
*All figures in ₹ Millions
AD Ratio= 134:1
AD Ratio= 3.96:1
LONG TERM SOLVENCY RATIOS Interest Coverage Ratio = PBIT
Interest
Comment:Investing in Maruti Suzuki is much more preferable than in TATA Motors as the returns which investors receive in the former is ₹ 22 when ₹ 1 is invested when compared to latter where ₹ 1.21 is received.
IC Ratio= 48,682 – 2,060 2,060
IC Ratio= 3,570 – 1,611 1,611
IC Ratio= 46,622 2,060
IC Ratio= 1,959 1,611
IC Ratio= 22.63:1 IC Ratio= 1.21:1
*All figures in ₹ Millions
SHORT TERM SOLVENCY RATIOS Current Ratio: Current Assets
Current Liabilites
Comment: Industry Standard= 0.58:1Maruti Suzuki has enough Current Assets to pay off its Current Liabilities when compared to TATA Motors but none of the companies are able to fulfill the ideal ratio of 2:1.
Current Ratio= 81,979 88,230
Current Ratio= 8,572 20,370
Current Ratio= 0.929:1 Current Ratio= 0.42:1
*All figures in ₹ Millions
Acid Test Ratio: Current Assets- Inventories Current Liabilites
Comment: Industry Standard= 0.62:1The liquid assets of Maruti Suzuki are more compared to TATA Motors but not enough to satisfy the ideal ratio of 1:1.
Acid Test Ratio= 81,979 - 26,150 88,230
Acid Test Ratio= 8,572- 4,802 20,370
Acid Test Ratio= 0.632:1 Acid Test Ratio= 0.185:1
*All figures in ₹ Millions