Current Ratio Analysis

Submitted To: Prof. Bijoy Kumar

Submitted By: Abhinav Garg

P101001

Current Ratio an Overview

The Balance Sheet for accounting is an extremely important and often used statement of entity condition. It shows the

extent of entity ownership of assets, liability and equity at a given point in time. This point is the date on the statement. It

is a physical representation of the 'accounting equation.' The equation states that at any point in time, the assets of the

business are equal to the sum of the liabilities and owner's equity.

The Balance Sheet and the Statement of Income are essential, but they are only the starting point for successful financial

management. Apply Ratio Analysis to Financial Statements to analyze the success, failure, and progress of your business.

Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and

condition with the average performance of similar businesses in the same industry. Ratio analysis may also provide the

all-important early warning indications that allow you to solve your business problems before your business is destroyed

by them.

Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay its bills as they come due) and leverage

(the extent to which the business is dependent on creditors' funding) and that can be measured through following liquidity

ratios.

These ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, and Working

Capital. The following report focuses mainly on industry analysis through current ratio. Also, the report consists of

current ratio definition and its components, then formula with an example, a comparison between two companies to

understand about the current ratio, significance and interpretation of current ratio, determinants and limitations.

Current Ratio

The Current Ratio is one of the best known measures of financial strength and it is a very popular liquidity ratio to

determine the short term liquidity of the company means that enough current assets (Cash, prepaid Insurance, Cash

equivalents, Account receivable and Inventory etc) are available with company to meet it short term liabilities obligations.

Current Ratio measures company's ability and resources to pay its debt over the next 12 months or its business cycle by

comparing firm's current assets to its current liabilities. Acceptable current ratio values vary from industry to industry.

The main question this ratio addresses is: "Does any business have enough current assets to meet the payment schedule

of its current debts with a margin of safety for possible losses in current assets, such as inventory shrinkage or collectable

accounts?"

Generally, a current ratio of 2:1 is considered to be acceptable. The higher the current ratio is, the more capable the

company is to pay its obligations. Current ratio is also affected by seasonality. If current ratio is bellow 1 (current

liabilities exceed current assets), then the company may have problems paying its bills on time. However, low values do

not indicate a critical problem but should concern the management. Current ratio gives an idea of company's operating

efficiency. A high ratio indicates "safe" liquidity, but also it can be a signal that the company has problems getting paid

on its receivable or have long inventory turnover, both symptoms that the company may not be efficiently using its

current assets.

If the feel of any business's current ratio is too low, they may be able to raise it by following:

Paying some debts.

Increasing your current assets from loans or other borrowings with a maturity of more than one year.

Converting non-current assets into current assets.

Increasing your current assets from new equity contributions.

Putting profits back into the business.

“One exception to the rule is considered fast-food industry because the inventory turns over much more rapidly than the

accounts payable becoming due”

The current ratio is the best known ratio of financial analysis. It presents in relative terms what net working capital

measures in absolute terms.

Calculation of Current Ratio

The current ratio (CR) is calculated by dividing current assets by current liabilities.

The calculation of the ratio may require any of the modifications mentioned for working capital and current liabilities.

Formula:

Components

The two basic components of this ratio are current assets and current liabilities.

Current Assets: A balance sheet item which equals the sum of cash and cash equivalents, accounts receivable, inventory,

marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. A

company's creditors will often be interested in how much that company has in current assets, since these assets can be

easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a

source of funds for day-to-day operations.

Current Liabilities: A company's debts or obligations those are due within one year. Current liabilities appear on the

company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. These are bills

that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets

in order to pay their current liabilities.

Analysts and creditors will often use the current ratio, (which divides current assets by liabilities) to determine whether a

company has the ability to pay off its current liabilities. Current ratios are commonly explained as a measure of a

company's ability to pay the current debt liabilities.

For the lenders, current ratio is very helpful for them to determine whether a company has a sufficient level of liquidity to

pay liabilities. They would prefer a high current ratio since it reduces their risk.

For the shareholders, current ratio is also important to them to discover the weakness in the financial position of a

business. They would prefer a lower current ratio so that more of the company’s assets can be used for growing business.

Although current ratio is an indicator of liquidity, investors should be aware that it cannot give us the comprehensive

information about company’s liquidity. Every industry has its own norms of current ratio. The better way to evaluate it is

to check a company’s current ratio against its industry average. More importantly, investors should look at the trend of

the current ratio of the company, types of current assets the company has and how quickly these can be converted into

cash to meet company’s current liabilities.

Example:

Let’s assume company ABC balance sheet contains currents assets of Rs.10, 000 Rs.5, 000 current liabilities.

Then Current Ratio = 10,000/ 5000 = 2.0x

Significance of Current Ratio

The current ratio is a good tool to investigate company liquidity but sometimes it’s misleading. Higher current ratio is not

necessarily mean better liquidity and lower current ratio is not necessarily bad liquidity. Current ratio focuses on amount

of current assets and liabilities although the fact is that turning current assets to cash require time which varies company

to company.

This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to

the creditors. It is an index of the firm’s financial stability. It is also an index of technical solvency and an index of the

strength of working capital.

A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in

time and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of

the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. An

increase in the current ratio represents improvement in the liquidity position of the firm while a decrease in the current

ratio represents that there has been deterioration in the liquidity position of the firm. A ratio equal to or near 2: 1 is

considered as a standard or normal or satisfactory. The idea of having doubled the current assets as compared to current

liabilities is to provide for the delays and losses in the realization of current assets. However, the rule of 2:1 should not be

blindly used while making interpretation of the ratio. Firms having less than 2 : 1 ratio may be having a better liquidity

than even firms having more than 2 : 1 ratio. This is because of the reason that current ratio measures the quantity of the

current assets and not the quality of the current assets. If a firm's current assets include debtors which are not recoverable

or stocks which are slow-moving or obsolete, the current ratio may be high but it does not represent a good liquidity

position.

CURRENT RATIO ANALYSIS OF THE AUTO SECTOR- HERO HONDA, BAJAJ AUTOS AND TVS MOTOR COMPANY

31st March' 2006

31st March' 2007

31st March' 2008

31st March' 2009

31st March' 2010

HERO HONDA LIM-ITED

0.523233939083696

0.61499094080424

0.510258995802141

0.490836994963027

0.59149606429593

BAJAJ AU-TOS LTD.

0.785367697672057

0.872979348036817

0.836184073851137

0.902373685160571

0.677193056325542

TVS MO-TOR COM-PANY LTD.

1.11657863349804

1.31168727562824

1.36654609616233

1.44723381452674

1.31187336530078

0.100

0.500

0.900

1.300

CURRENT RATIO

CU

RR

EN

T R

AT

IO

The two-wheeler industry in India is the 2nd largest in the world with an ever increasing sale of vehicles. Hero Honda is

the market leader with more than 50% market share and Bajaj Autos follows at a distant second with around 20% market

share, while TVS Motors is at 4th position with about 10% share in the market.

The current ratio for all the three companies is almost constant for last five years which shows that the companies have

had a balanced approach towards current assets and liabilities. Though comparatively higher current ratios for TVS Motor

Company Ltd.; are due to lesser liabilities.

The current ratios of Hero Honda & Bajaj Auto indicate a negative working capital (as shown by graph below) i.e. higher

inventory turnover rates. The ratios for Hero Honda are constantly around 0.5 indicating that current liabilities are almost

double the current assets. Hero Honda is the market leader in the segment and it is well represented by its effective

utilization of resources indicated by high inventory turnover rates. There is however a change in the trend as a large

amount of cash and bank balance is observed for FY2009-10, which may be due to the company preparing for demerger.

Bajaj Autos shows a decrease in working capital for the FY2009-10 due to increase in current liabilities as the company

once again consolidates its market standing and makes up for the lost sales in the previous three financial years. Bajaj

showed increasing current ratios for FY2006-07 & FY2008-09 due to increase in loans & advances and cash & bank

balance respectively.

TVS Motors shows an increase in current ratio for FY2006-07 due to increase in sundry debtors and cash & bank

balances. Though there is a fall in cash & bank balances for the next fiscal but it is compensated by a decrease in

liabilities and increase in loans & advances. In the next fiscal a further increase in loans & advances leads to a further

increase in current ratio.

It can be said that TVS follows a more traditional approach of positive working capital and maintains it around 1.3 while

Bajaj and Hero Honda maintain a negative net current assets or working capital with current ratio below 1. The sector

thus shows higher inventory turnover rates.

31st March' 2006

31st March' 2007

31st March' 2008

31st March' 2009

31st March' 2010

HERO HONDA LIMITED

-745.09 -569.49 -893.65 -1045.22 -1973.65

BAJAJ AUTOS LTD.

-760.82 -550.35 -307.53 -237.97 -1379.99

TVS MO-TOR COM-PANY LTD.

68.4199999999999

195.35 207.74 275.42 228.94

-2250.000

-1750.000

-1250.000

-750.000

-250.000

250.000

WORKING CAPITAL (All Figures are in Rs. crores)

Wor

king

Cap

ital

CURRENT RATIO ANALYSIS OF THE POWER SECTOR - NHPC, BGR ENERGY AND NCC

31st March' 2006

31st March' 2007

31st March' 2008

31st March' 2009

31st March' 2010

NHPC 0.859 0.993 1.341 1.159 2.223

BGR En-ergy

2.204 2.234 2.544 1.945 1.733

NCC 3.23020063357972

2.47337428973824

1.74576090852074

2.00426522372928

2.17575132508599

0.25

0.75

1.25

1.75

2.25

2.75

3.25

CURRENT RATIO

CU

RR

EN

T R

AT

IO

31st March' 2006

31st March' 2007

31st March' 2008

31st March' 2009

31st March' 2010

NHPC -228.26 -14.909999999

9999

1148.22 605.76 5403.95

BGR En-ergy

7008 10293.69 80076.76 122759.4 162161.4

NCC 992.64 1213.53 1331.75 1674.08 2211.6

-10000.000

10000.000

30000.000

50000.000

70000.000

90000.000

110000.000

130000.000

150000.000

170000.000WORKING CAPITAL

Wo

rkin

g C

ap

ita

l

We find that there is an increase in the current ratio of NHPC as compared to other two companies. A very large part of

NHPC current assets is constituted by cash and bank balance which is safe for a public sector company and the liquidity

also comes in handy for the rapidly increasing generation capacity in its portfolio.

BGR Energy, on the other hand has fairly high percentage of debtors in its current assets and also its loans and advances

component is fairly high.

The line for current ratios of BGR shows increase in the beginning and then a decline due to inflation in 2008. Over a

period company reduces its increase in debt due to repayment of such a huge amount in limited period of time.

The Inventories of the company was totally controlled and this shows the management of the inventory was very good

and the liquidity may increase due to proper inventory management. The cash and bank balances were increased in the

successive years, this shows the company is not into proper investments and they show some profit in to savings for

future benefit. The sundry debtors of the company shown a massive increase, the company was giving maximum benefit

to their debtors.

It shows decline characteristics in the ratio because current assets almost shown a two times increase in the growth and

even liabilities grown much faster rate compare to the current assets.

The Inventories of the company was not controlled till 2008 and then it was controlled due to inflation at that period.

From then they started using limited inventories and were expecting market to be grown.

The cash and bank balances were shown little growth compare to all other components. Also it has been decreased in the

middle, shows company might have concentrated in more investing plans.

The sundry debtors of the company shown a massive increase, the company was giving maximum benefit to their debtors.

The loans and advances of the company has shown massive increase rate, because were little bit stuck in getting their

money back and paying back the interest amounts to their short term debt holders.

It shows increase characteristics in the beginning and then started declining due to inflation at 2008. Then the ratio shows

a consistent increase, because the current liabilities almost shown a two times growth and for current assets it has shown 8

times increase in few years.

The Inventories of the company was totally controlled and this shows the management of the inventory was very good

and the liquidity may increase due to proper inventory management.

The cash and bank balances have shown a massive increase in short span of time. The company have not even shown

their interest in investing and very poor management in handling the cash.

The sundry debtors of the company were in control till 2009 and then started increasing because of client expansion and

in to expansion of new projects.

The loans and advances of the company has shown some increase rate and then stabilized, because were little bit stuck in

getting their money back and paying back the interest amounts to their short term debt holders.

CURRENT RATIO ANALYSIS OF THE CEMENT SECTOR- ACC, ULTRA TECH & MCL

31st March' 2006

31st March' 2007

31st March' 2008

31st March' 2009

31st March' 2010

ACC 0.510094631864491

0.463478508929866

0.413547867576782

0.371109767801279

0.295380771980573

UTC 0.684456076467911

0.732356486364321

0.718169974543611

0.695297090885245

0.694731172310679

MYCEM

0.704282074463713

1.15715647555495

0.904106666666667

0.663956127080182

0.384480524430216

0.1

0.3

0.5

0.7

0.9

1.1

1.3

CURRENT RATIO

CU

RR

EN

T R

AT

IO

31st March' 2006

31st March' 2007

31st March' 2008

31st March' 2009

31st March' 2010

ACC -865.07 -1147.26 -1558.52 -2018.31 -2572.29

UTC -360.49 -355.27 -517.02 -604.04 -657.43

MYCEM -35.98 11.54 -8.99 -53.31 -161.5

-2750.000

-2250.000

-1750.000

-1250.000

-750.000

-250.000

250.000WORKING CAPITAL

Wor

king

Cap

ital

ACC Limited (ACC) is engaged in the manufacture of cement and ready-mixed concrete. The Company manufactures a

range of portland cement for general construction and special applications. In addition, ACC also offers two products

namely, bulk cement and ready mix concrete. Its subsidiaries include ACC Concrete Limited, Bulk Cement Corporation

(India) Limited, ACC Mineral Resources Limited, Lucky Minmat Limited and National Limestone Co. Pvt. Limited. On

April 20, 2009, the Company acquired National Limestone Company Private Limited. On January 28, 2010, it acquired

Encore Cements & Additives Private Limited. In December 2010, Ambuja Cement India Pvt. Ltd. and Holderind

Investments Ltd., along with Holcim Ltd., Holderfin BV and Holcim India Pvt. Ltd., bought a 2.01% interest in the

Company.

The current ratio of the company is constantly decreasing from 2006 to 2010, as cement comes under consumer

commodity it is in great demand. Although there was a constant increase in inventories and expansions were being

completed by company. The company is handling its financial in a healthier way, since the current ratio is in the declined

rate.

The sundry Debtors have shown an increase rate in the beginning then decreased. This indicated that company was

proper in collecting their money back. Cash in Bank has reduced in the five years data, this proves the company is in to

investment which is shown in their Annual Reports (mutual funds). PAT is increasing through the years and the reason

behind the same in reduction in operating cost.

D-E ratio of ACC Ltd. decreased from 0.5 to 0.11 from 2005 -07 and then increased to 0.09 in 2009 which indicates the

debts have been cleared. Profitability of ACC Ltd. varied marginally from 17.28% to 20.03%. It was observed that current

ratio of ACC Ltd. was always less than 1 from 2004 -09 which indicates that liquidity position of the company is poor.

From ratio analysis of Balance Sheet and P & L Statement of ACC Ltd. of 2007-09 it was concluded that liquidity

position of the company is not good.

Ultra Tech Cement Limited is an India-based company engaged in the production of cement. The Company has an annual

capacity of 23.1 million tons. It manufactures and markets ordinary portland cement, portland blast  furnace slag cement

and portland pozzalana cement. It also manufactures ready mix concrete (RMC). UltraTech Cement Limited has five

integrated plants, six grinding units and three terminals: two in India and one in Sri Lanka. It is an  exporter of cement

clinker. The export markets span countries around the Indian Ocean, Africa, Europe and the Middle East. The Company's

subsidiaries include Dakshin Cement Limited, UltraTech Cement Lanka (Pvt.) Ltd. and UltraTech Cement Middle East

Investments Limited.

The current ratio was increasing in the beginning and then started declined. From the balance sheet we can infer that there

has been a regular increase in current assets and also current liabilities. From 2006 to 2010 D/E ratio has also seen a

downfall from 0.7 to 0.65 this shows that many of the pending debts have been cleared. It was observed that current ratio

of Ultra Tech Ltd. was always less than 1 from 2004 -09 which indicates that liquidity position of the company is poor

The cement industry is likely to record an annual growth of over 10% in the coming years on the back of higher domestic

demand. The Company has earmarked around Rs. 2,600 crores towards capex to be spent over the next 3 years. Company

has invested surplus funds into debt schemes of recognised Mutual Funds hence it has high or increase in investments.

Growth in volume and improved cost performance resulted in higher cash from operations during the year.

Heidelberg Cement India Limited is a subsidiary of Cementrum I. B.V.( a Company incorporated under the laws of The

Netherlands, which is 100% controlled by HeidelbergCement AG). Heidelberg Cement Group, with its core products

being cement, ready mixed concrete, aggregates and related activities, is one of the leading producers of building

materials worldwide, and it employs around 46,000 people in more than 50 Countries.

If we compare the current ratio of all five years we can see that there is no definite trend maintained by the company in

2006 the current ratio was 0.7 which increased to 1.1 the subsequent year and in 2010 it is 0.40. The liabilities have

increased drastically from 2006 to 2010 by more than 100%. Inventories and debtors have remained more or less the same

across all the years. Loans and advances have increased from 68 crores to 150 crores in five years this shows and supports

the negative working capital structure. Also the fixed short term deposits have increased from 0.5 crore to 481 crore this

shows their lack of investment.