Solvency & Liquidity

QUESTION 4 Solvency and Liquidity

1) Evaluate the liquidity of both firms. At a minimum, your analysis should discuss
operating cash flows and include liquidity metrics such as current ratio and cash
conversion cycle measured in days.
2) Evaluate the solvency of both firms. Your response should include a reasoned
conclusion based on quantitative and qualitative facts and appropriate ratio
analysis.
3) Tata Motors report in note 12 Leases includes information about future
operating lease payments. Quantify the effect of this lease treatment at Tata Motors
on the companys solvency. Is this effect significant? Explain.
Answer 1
Current Ratio
Operating Cash Flow
Cash Conversion Cycle
Quick Ratio

Tata Motors
0.87
$ 4639 Mn
-88 Days
0.62

Ford
1.14
$ 7738 Mn
93 Days
0.94

At the first glance, Ford seems to have the better liquidity of the two companies,
with a better Current Ratio and a better Quick Ratio.
However, Ford has a very high Cash Conversion Cycle, while Tata Motors has a
negative cash conversion cycle, implying that it essentially uses money from its
suppliers to finance its business!
An analysis of the Tata Cash Flow statement also confirms this as Tata used a large
portion of cash to pay off debts (Short Term: 2457 and Long Term: 1981). It is not
possible that a company with a liquidity problem would be able to make such
payments.
Answer 2
Debt to Equity Ratio
Debt to Assets Ratio
Liability to Assets Ratio

Tata Motors
1.49
0.33
0.77

Ford
4.34
0.56
0.86

Tata has a better Debt to Assets and a better Debt to Equity ratio. While Debt to
Equity is higher than 1 for both Tata and Ford, only 33% of Tatas assets are
financed by Debt, while 56% of Fords assets are financed by Debt.
Correlating with above, Tata appears to be more solvent than Ford. Further evidence
is given by a better Liability to Assets ratio.
Answer 3

Operating lease liabilities as on March 2013 was:

Current: 10.9
Non Current: 33.8
Assuming these were debt, the ratios would have changed as:
Tata Motors
As Is
1.49
0.33

Debt to Equity Ratio

Debt to Assets Ratio

Tata Considering Operating Lease

as Debt
1.49
0.33

Thus the effect of the Lease treatment is insignificant on Tatas solvency ratios.

QUESTION 6 IFRS vs. Indian GAAP

Compute the percentage differences between Tata Motorss Indian and IFRS net
income and ending shareholders equity based on the figures provided for FY2013.

Which system was more conservative with respect to the balance sheet (i.e.,
shareholders equity)?
Which system was more conservative with respect to the income statement?
Use the data provided to outline two plausible accounting reasons for these
differences.

Net Income
Shareholders
Equity

Indian
98926.1
376373

IFRS
89583.2
370268.5

% Difference
-10%
1.6%

IFRS was more conservative with respect to Net Income for Tata Motors
The Indian GAAP was more conservative with respect to Shareholders Equity.
These differences
Revenue recognition
Asset Valuation
Methodology Difference
Intangibles calculated differently