The evaluation basis, called the acid-test ratio, calculated the financial position of a company by a ratio of quick assets (sundry debtors, cash and bank balances and marketable investments) to current liabilities.
For the study sample of 250 companies, spanning across selected 23 industries, the acid test ratio marginally declined from 1.22 in 1994-95 to 1.07 in the 1995-96 financial year.
The acid test ratios for 1994-95 and 1995-96 were compiled from the data collected from the balance sheets. Of the 250 companies, the top 10 in terms of the acid test ratio (ATR) in 1995-96 are Hoechst Schering(16.10), Su-Raj Diamonds(7.35), DCM(6.81), Mcleod Russel(6.41), Steel Strips(5.96), Sutlej Industries(5.91), Suashish Diamonds(5.39), Dewan Rubber(5.13), Tata Tea(4.07) and Finolex Cables(3.66).
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Among the sample, 143 showed a decline in the acid test ratio while 101 companies registered an increase in the ATR between 1994-95 and 1995-96. The remaining six posted unchanged results.
Essar Oil (down from 5.25 in 1994-95 to 0.88 in 1995-96) was the worst sufferer while Steel Strips (1.27 to 5.96) showed the maximum leap in ATR.
Similarly, the bottom 10 in terms of acid test ratio in 1995-96 are Smithkline Bee Con.(0.14), Balarampur Chini(0.19), Bajaj Hind(0.23), Lakshmi Machine Work(0.24), S I Shipping(0.26), Hero Honda(0.26), Svadeshi Mills(0.27), Kodak India(0.29), Procter & Gamble(0.29) and Swaraj Mazada(0.31).
The acid test ratio, however, failed to include inventories, a vital component of the financial strength of a company.
If the inventories are in balance, ATR will be on the higher side which in turn reveals a lower share of inventories in current assets. Mcleod Russel has an ATR of 6.41 while its share of inventories in current assets is only 10.51. Of the 250 companies, 146 have shown a fall in share of inventories in current assets during 1995-96 during 1995-96.
Sesa Goa revealed a drop in the share of inventories in current assets from 63.14 per cent in 1994-95 to 29.78 per cent in 1995-96. About 103 companies revealed a rise in share of inventories in current assets in 1995-96 against 1994-95.
A rise was noted in case of Orchid Chem from 13.74 per cent in 94-95 to 51.26 per cent in 95-96. The highest share of inventories in current assets was witnessed for Balarampur Chini(81.88 per cent) and the lowest was recorded for Varun Shipping(0.28 per cent) during the same year.
Companies which have more than 60 per cent share of inventories in current assets are KCP(62.36 per cent), Bengal Tea(61.66 per cent), Punjab Tractors(61.36 per cent), Sakthi Sugars(68.08 per cent), Gujarat Steel Tube(69.76 per cent), Facor(67.01 per cent), Upper Ganges Sugar(80.42 per cent), Bajaj Hind(80.17 per cent), Balarampur Chini(81.88 per cent) and Smithkline Bee Con(64.82 per cent). The acid test ratio of the sample survey of 250 companies fell from 1.22 in 1994-95 to 1.07 in 1995-96, implying that, for every rupee of current liabilities, quick assets decreased from 122 paise to 107 paise in 1995-96.
The ATR for aluminium & non-ferrous metals dropped from 2.28 to 2.02, auto & auto ancillaries from 0.88 to 0.73, cement & products from 1.13 to 0.91, other chemical from 0.95 to 0.89, construction from 1.03 to 0.95, electricity from 0.93 to 0.79, fertilisers from 1.25 to 1.13, paper & products from 2.20 to 1.32, pharmaceuticals from 1.18 to 1.13, shipping from 2.41 to 0.71, tea & plantations from 2.82 to 2.38, textiles-cotton from 1.60 to 1.25, textiles-manmade from 1.84 to 1.38, tobacco from 1.58 to 1.12 and miscellaneous from 1.92 to 1.48.
A rise in the ratio from 1994-95 to 1995-96 was witnessed in electrical goods from 1.09 to 1.12, engineering goods from 0.69 to 0.79, food products from 0.72 to 0.73, hotels from 0.88 to 1.14, steel, sponge iron & ferro alloys from 0.53 to 1.56, sugar & breweries from 0.33 to 0.60, trading from 0.81 to 1.10 and tyres & tubes from 1.17 to 1.19.
The highest and lowest ATR for 1995-96 were recorded in tea & plantations, shipping, aluminium & non-ferrous metals, paper & products and miscellaneous, while in 1996-97, the top five were tea & plantations, aluminium & non-ferrous metals, steel, sponge iron and ferro-alloys, miscellaneous and textiles-manmade. Only three industries were included in the two years list of top five industries.
Aluminium & non-ferrous metals, electrical goods, engineering goods, hotels, steel, sponge iron & ferro alloy, textiles-manmade, trading, tyres & tubes and miscellaneous improved rankings in 95-96.
Auto and auto ancillaries, cement and products, other chemicals, constructions, electricity, fertilisers, food products, paper and products, shipping, and tobacco scored low ranks compared with their ranks in in the previous year . The industry-wise analysis of acid test ratios revealed the sound liquidity position of the top five industries -- tea & plantation, aluminium & non-ferrous metals, pharmaceuticals, textiles-manmade, and tyres & tubes during both the years.
The share of inventories in their current assets was less than 50 per cent during both 94-95 and 1995-96.
The share of inventories in current assets declined from 1994-95 to 1995-96 in the case of aluminium and non-ferrous metals, auto and auto ancillaries, constructions, electricity, electrical goods, engineering goods, food products, hotels, paper & products, steel, sponge & ferro alloys, tea & plantation, textiles-cotton, textiles manmade, trading, and tyres tubes.
Despite a higher share of inventories in current assets for both the years, textiles-cotton, showed higher acid test ratio.
The maximum and minimum share of inventories to current assets during 95-96 was witnessed in case of sugar & breweries and hotels respectively.