Liquidity Management of Indian Cement Companies A Comparative Study

Abstract

Liquidity management is a concept that is gaining serious attention all over the world because of the current financial turmoil and the state of the world economy. The concern of business owners and managers all over the world is to devise a strategy which will help in maintaining liquidity as well as to increase profitability and shareholder’s wealth. Liquidity is perceived as the debt paying ability of a going concern. It is the ability of a company to meet the short term obligations. Hence, it is of utmost important to keep a constant eye on liquidity position of the company as without it the company cannot survive. In this paper a comparative study on the liquidity position of five leading Indian cement companies has been done to know the liquidity position of the companies. The study covers a period of 10 years viz, 2000-2001 to 2009-2010. For the purpose of investigation purely secondary data is used. The techniques of mean, standard deviation, coefficient of variation, ratio analysis, and Motaal’s ultimate rank test has been applied to analyze the data. It has been found that the liquidity position of small companies are better as compared to big ones and most interestingly the growth rate of current ratio, quick ratio and working capital to current assets of all the companies are negative which indicates an unsound liquidity position. Moreover, low or negative working capital in some cases indicates the aggressive working capital management policy of the firms which implies minimal investment in current assets by the companies so as to derive a higher rate of return. But it has to be remembered that risk of default and bankruptcy increases when a firm adopts more aggressive working capital policies. One should remember that a negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis). In any other situation, it is a sign that a company may be facing bankruptcy or serious financial trouble. In our case, Motaal’s Ultimate Rank Test shows that the liquidity position of Shree Cements is sounder as compared to other companies.

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