ANALYZING SOLVENCY OF COMPANIES: A CASE

STUDY

Compiled By:Dhrumil Shah

TYBBA Div 1Roll No. 38

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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