Creditors conversion Period (ICP): This ratio tells the time taken to make payments to the creditors. Higher the ratio, the better it is, since it means that the company has more time by their side in order to ‘OFF make ten payments to Its creditors. I en analyses snows Tanat Baja] auto Is snowing a insistent performance on a higher note for the last two FYI 2006-07 & 2007-08 in this parameter as compared to the competitors in the period of the study.
It is at par with the industry leader, Hero Honda if not better. The other players like TV’S Motors and Yamaha do not show much of a promise in this criterion.
The high credit period enjoyed by the company can be attributed to enhanced confidence in the financial of the company due to its better performance over the years. This also reflects the fact that the liquidity position of Baja] Auto is not a matter of concern for its suppliers or creditors.
Net Operating Cycle: Throughout the six year period of study the net operating cycle of Baja] Auto is found to be negative which means that the credit period enjoyed by the company from creditors is more than the credit period allowed by the company as well as the lag in payment of expenses and other overheads.
This is a good sign for the company because it prevent blockage of capital as well as reduces the working capital requirement considerably. When we compare the net operating cycle of Baja] Auto with Hero Honda, TV’S Motors and Yamaha, the three major competitors it is seen that Baja] Auto is better placed than TV’S or Yamaha for Hero Honda, there is some scope for improvement notwithstanding the fact that in the last FYI 2007-08, the two companies were placed at par.
Net Working Capital: We see that Baja] Auto is having a very volatile net working capital requirement over the course of the study, though remaining on the negative side.
The company snouts adopt a netter working capital management policy post demurrer to match the standards of Hero Honda. Due to negative net operating cycle, the cash available to Baja] is high. So it invests this extra cash in short term investments which allow it to earn more profits. Baja] first sells its goods and later on pay its raw material suppliers. In such a situation, it is always in a position to arm-twist the suppliers by taking more credit. Other Liquidity Ratios: Current Ratio: We can see from the graph* that Baja] has maintained a sort of consistency in current ratio for all the years.
The ratio has fallen after 2003, indicating that the company has more of current liability as compared to the current asset. While at the same time TV’S has a better position in this aspect and Yamaha has higher ratio imparted to others. This position indicates that Baja] Auto may not be having a relatively good short term financial. Quick ratio As seen from the graph*, Baja] Auto shows a volatile pattern for the period. But currently the ratio has fallen to 5 year low of 0. 6 which is higher than Hero Honda.
In the recent years it has shown a gradual fall there by indicating that it may be difficult for the company to meet its short term obligations with its most liquid assets. Cash to sales ratio: The graph shows that the company has a lenient credit policy from the past 6 years ND also in the year 2006 and 2007 the ratio shows a negative value which may not be good for the company. If we compare it with the competitors, they have fluctuating values which shows that they follow both strict as well as lenient credit policy depending on the circumstances.
Recommendations and conclusion: Monthly Sales Month 2008 2007 September 245,381 232496 October 191,840 278,176 November 159,747 235,797 Given the current condition amidst signals that the economy is heading towards a recession and the decreasing sales figures for the last three months suggest that Baja] Auto may be having difficulties to continue with their negative working capital policy. There is a chance that more money will be kept locked in finished goods inventory. They may be facing a liquidity crunch in near future given the tighter credit policy by banks and other financial institutions.
Thus it is advisable to improve their liquidity position now by raising short-term loans or by investing in marketable securities like T-bills or CDC. They may also tie-up with Baja] Finesse, the sister concern post demurrer in 2007-08 to provide easy credit terms to prospective customers, thus boosting sales figures. To put it in a nutshell, Baja] Auto had adopted a nearly perfect working capital policy in previous years but they need to change their outlook in the present situation. ?-?O?Y *Please refer the MS Excel file ? for graphs and charts.