ANALYSIS OF TREND AND LIQUIDITY POSITION AT KECL

1. Introduction

An organisation is a group of people who congregate to pursue commonly shared objectives. A business organisation distinguishes itself from other organizations by its profit-making objective. Profit is the reason for which a business organization exists. However, earning profit entails different types of risk with it. A risk is any exposure to the probability of loss. Risk and return are directly related. Greater the risk greater is the return and vice versa. So the organisation has to strike a trade off between risk and return. This necessitates the finance manager to ensure optimum profitability by guarding against the risk involved.

In this research, an attempt has been made to analyze the liquidity position and projection of net profit and sales for the next two years using the least square method of Kirloskar Electric Company Limited.

2. Research Methodology

Title of the problem

“Analysis of trend and liquidity position at KECL”

Statement of the Problem

Financial statements are just a snap-shot of financial position of a business organization. They do not lead any help for decision-making. Proper techniques will have to be employed to draw meaning out of the statements.

Ratio analysis seeks to establish relation between any two items of financial statements and the relationship is examined over a period of time. The TREND in the relationship is ANALYSED to draw inferences that help I making decisions.

Objectives of the Study

To find the liquidity ratios and comment upon their implication on the liquidity position of KECL

To project the net profit and sales for the next two years. To bring out the trend in liquidity management at KECL.

Scope of the Study

This research focuses on the changes in the liquidity position of KECL over a period of four years between 2008-09 and 2011-12 as reflected by the financial statements for the given period.

Methodology/Research Tool

The research makes use of two techniques of Analysis.

1. Trend AnalysisTrend analysis refers to the process of analyzing changes in the variables and relationship between variables over a period of time. Ascertaining whether the variables are changing in the positive direction or not, is the subject matter of Trend Analysis. If the variables are not moving in the positive direction, steps are taken to correct the deviations.

2. Ratio AnalysisA ratio is simply the comparison between two quantities. Ratio Analysis with respect to Financial Analysis is nothing but establishing relationship between the any two required quantities in the financial statements- Balance Sheet and Profit & Loss Account.

Sources of Data

1. Primary Data - Interaction with finance manager to understand the reason behind changes in the liquidity position.

2. Secondary Data- Secondary data in the form of financial statements as produced in annual reports for the years from 2008-09 to 2011-12.

Sampling Design

Sampling Plan Sample DesignSample unit Financial StatementsSampling Technique Judgmental SamplingSample Size 4 years financial statements

Limitations of the Study

The study is limited to only 4 years. The study is restricted by the data provided by the KECL. The source documents are not given access to. The interpretation is based on the discussion with the finance manager and hence

it is prone to the subjective evaluation of the finance manager.

Analysis and Interpretation

The Analysis of data includes Analysis of financial statements of firm using ratios and trend analysis as a tools and techniques. This section includes computation of various ratios having relevance to ascertainment of liquidity position of KECL. The trend in the

change in the various ratios is computed to check the direction of change in the ratios. Once the trend is established, the trend is interpreted to appropriate its implication on the liquidity and profitability position.

3. CURRENT RATIO

Current ratio reveals the ability of an organization to discharge its current liabilities from the proceeds of current assets.

Current Ratio = Current Assets\ Current Liabilities (in Rs Cr)

2008-2009 2009-2010 2010-2011 2011-2012

Current Assets 388.84 370.73 416.43 384.50

Current Liabilities 310.89 295.58 350.66 463.33

Current Ratio 1.25 1.25 1.19 0.83

% Change - 0 -4.8 -30.25

Current Assets and Current Liabilities

2008-2009 2009-2010 2010-2011 2011-20120

50

100

150

200

250

300

350

400

450

500

Current assets

Current liabilities

2008-09 2009-10 2010-11 2011-120

0.2

0.4

0.6

0.8

1

1.2

1.4

Current ratio

Current ratio

Analysis:

The current ratio of KECL has remained the same for over two years i.e. 2008-09 and 2009-10 and gradually decreased in the next two years to 1.19 and 0.83 in the year 2010-11 and 2011-12 respectively.

Interpretation:

The ideal or standard current ratio is 2:1. The current ratio of KECL is not upto the standards. The current ratio remained same for the first two years and drastically decreased their after. It means for every Rs.1 of liability Rs.2 of current asset should be paid. KECL’s current ratio is in negative figure. Thus, the KECL’s liquidity position is not favorable, there is problem of bankruptcy.

4. QUICK RATIO

The investment in inventories cannot be realized into cash soon. So Quick ratio provides a better measure of liquidity since it does not consider stock as a part of current assets.

Quick Ratio or Acid Test Ratio= Quick Assets\Quick Liability

Quick Assets =current assets-inventories

Quick Liability =current liabilities-bank overdraft-cash credit (in Rs Cr)

Analysis

The Quick Ratio has decreased drastically in the first two years and then improved in the last financial year. From -9.2%, -17.11% the quick ratio has increased to 83% in the year 2011-12. The comparison of stock from year to year implies that KECL has started to follow conservative policy and hence the investment in stock is reduced for the year 21011-12.

Interpretation

The ideal quick ratio is 1:1. KECL satisfies the ideal standard set of by attaining the quick ratios of 1.22, 1.11 and 1.69 in the year 2008-09, 2009-10 and 1011-12 respectively. But in the year 2010-11 the quick ratio is not upto the standards, it was just 0.92. This ratio reflects the financial soundness of the firm in terms of liquidity.

Trend Analysis (least square method)

Net Profit (in Rs. Cr)

YEAR Y X X² XY Yc2008-09 9.57 -1.5 2.25 -14.355 5.2652009-10 2.11 -0.5 0.25 -1.055 15.0002010-11 37.59 0.5 0.25 18.795 24.7392011-12 30.21 1.5 2.25 45.3 34.476

N=4 Σ Y= 79.48 ΣX=0 Σ X²=5 Σ XY=48.685 Σ Yc= 79.48

Yc=a+bx

a= ΣY = 79.48 = 19.87 N 4b= Σ XY = 48.685= 9.737

Σ X² 5

Yc for 2012-13= 44.21

Yc for 2013-14= 53.95

PARTICULARS 2008-2009 2009-2010 2010-2011 2011-2012

Quick Assets 315.21 279.51 300.26 252.76

Quick Liability 258.52 261.58 326.37 148.85

Quick Ratio 1.22 1.11 0.92 1.69

% Change - -9.2 -17.11 83.00

Sales (in Rs. Cr)

YEAR Y X X² XY Yc2008-09 946.21 -1.5 2.25 -1419.32 924.912009-10 905.57 -0.5 0.25 -452.79 923.792010-11 895.22 0.5 0.25 447.61 922.682011-12 945.95 1.5 2.25 1418.93 921.57

N=4 Σ Y=3692.95 ΣX=0 Σ X²=5 Σ XY=-5.57 Σ Yc=3692.95

Yc=a+bx

a= ΣY = 3692.95 = 923.24 N 4

b= Σ XY = -5.57 = -1.114

Σ X² 5

Yc for 2012-13= 920.46

Yc for 2013-14= 919.34