8/9/2019 Question 4 & 6

1/2

Solvency & Liquidity

QUESTION 4 – Solvency and Liquidity

1) Evaluate the liquidity of both rms. At a minimum, your analysis should discuss

operatin cash !o"s and include liquidity metrics such as current ratio and cash

conversion cycle measured in days.

#) Evaluate the solvency of both rms. $our response should include a reasoned

conclusion based on quantitative and qualitative facts and appropriate ratio

analysis.

%) ata 'otors( report in note 1# Leases includes information about future

operatin lease payments. *uantify the e+ect of this lease treatment at ata 'otors

on the company(s solvency. s this e+ect sinicant- Eplain.

Answer 1

 ata 'otors /ord

0urrent atio 2.34 1.156peratin 0ash /lo" 7 58%9 'n 7 44%3 'n0ash 0onversion 0ycle :33 ;ays 9% ;ays*uic< atio 2.8# 2.95

At the rst lance, /ord seems to have the better liquidity of the t"o companies,

"ith a better 0urrent atio and a better *uic< atio.

=o"ever, /ord has a very hih 0ash 0onversion 0ycle, "hile ata 'otors has a

neative cash conversion cycle, implyin that it essentially uses money from its

suppliers to nance its business>

An analysis of the ata 0ash /lo" statement also conrms this as ata used a lare

portion of cash to pay o+ debts ?Short erm@ #54 and Lon erm@ 1931). t is not

possible that a company "ith a liquidity problem "ould be able to ma

8/9/2019 Question 4 & 6

2/2

6peratin lease liabilities as on 'arch #21% "as@

0urrent@ 12.9

Don 0urrent@ %%.3

Assumin these "ere debt, the ratios "ould have chaned as@

 ata 'otors

As s

 ata 0onsiderin 6peratin Lease

as ;ebt;ebt to Equity atio 1.59 1.59;ebt to Assets atio 2.%% 2.%%

 hus the e+ect of the Lease treatment is insinicant on ata(s solvency ratios.

QUESTION ! – I"#S vs$ Indian %AA&

0ompute the percentae di+erences bet"een ata 'otors(s ndian and /S netincome and endin shareholders( equity based on the ures provided for /$#21%.

• Bhich system "as more conservative "ith respect to the balance sheet ?i.e.,

shareholders( equity)-

• Bhich system "as more conservative "ith respect to the income statement-

• se the data provided to outline t"o plausible accountin reasons for these

di+erences.

ndian /S C ;i+erenceDet ncome 939#8.1 393%.# :12CShareholder(s

Equity

%48%4% %42#83. 1.8C

/S "as more conservative "ith respect to Det ncome for ata 'otors

 he ndian FAAG "as more conservative "ith respect to Shareholder(s Equity.

 hese di+erences

evenue reconition

Asset Haluation

'ethodoloy ;i+erencentanibles calculated di+erently