2. Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki
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Motors in India includes Nano for the entry level customers, Bolt, Vista and Indica for
hatchback enthusiast, Zest, Manza and Indigo for sedan loving customers, Safari
Storme and Safari Dicor for those who prefer Sports Utility Vehicle, Sumo Gold,
Movus, Venture and Xenon XT are for people who likes Utility Vehicles and a Multi
Utility Vehicle ‘Aria’ for those who have a big family and want to travel in comfort
without compromising on quality, looks and presence. Apart from cars and utility
vehicles the company also manufactures small pickups like ace, magic and winger,
trucks like Prima, Construck and Light Trucks, buses and even defence vehicles for
the Indian Army.
‘Maruti Suzuki’ is a subsidiary of Japanese automobile and motorcycle
manufacturer ‘Suzuki’. In India, ‘Maruti Suzuki’ had started its business in 1982 by
establishing a manufacturing unit at Gurgaon, Haryana. The company’s headquarter is
situated at Nelson Mandela Road, New Delhi. ‘Maruti Suzuki 800’ was the first
model to hit Indian roads in 1983. Today, the company manufactures 1.5 million
family cars every year that is equivalent to one car in every 12 seconds and moreover
it has a team of 12500 professionals who turned out in manufacturing 14 family cars
with over 150 variants successfully. In addition, the sales network of the company is
spread over 1097 cities with service network in more than 1454 cities. The company
also owns a diesel engine plant with a capacity to manufacture 7 lakh diesel cars
every year. ‘Maruti Suzuki’ also exports cars to more than 125 countries including
European market like Netherlands, Germany, France, Italy and UK. The company
manufactures cars keeping in view the preferences of different categories of
customers, such as for entry level the company manufactures Alto 800, Alto K10 and
Celerio, for hatchback enthusiast consumers it has Wagon R, Singray, Ritz and Swift.
Further the company also manufactures Dzire and Ciaz in sedan segment, Omni and
Eeco in the ‘C’ segment, a multipurpose vehicle Ertiga along with sports utility
vehicles Gypsy and Grand Vitara.
Debt equity ratio is calculated to estimate the long term solvency of an enterprise
or in other words, it conveys the relationship between long-term debts and
shareholders fund of a company. Debt Equity Ratio indicates the proportion of funds
which are obtained by long-term borrowings in comparison to shareholders fund. The
major sources of long-term funds comprises of debentures, mortgaged loan, loan from
financial institutions, bank loan etc. whereas, in order to calculate shareholders fund
the sum total of accumulated losses and fictitious assets such as preliminary expenses,
underwriting commission, share issue expenses are to be deducted from the sum total
of equity share capital, preference share capital, share premium, general reserve,
capital reserve, credit balance of profit and loss account and other reserves.
Thus, Debt Equity Ratio = Debt ÷ Equity or Long Term Loans ÷ Shareholder’s
Fund. The objective behind calculating this ratio is to assess the ability of firm to meet
its long term liabilities or to ascertain the soundness of long-term financial policies of
the firm. Normally debt equity ratio of 2:1 is considered to be safe which reflects that
debts are twice the equity. A debt equity ratio of more than 2:1 reflects a risky
financial position of a firm from long-term point of view because it means that a firm
may find it difficult to meet its long term commitments.
1.1. Objectives of Study
To find out the amount of debt and equity in Tata Motors from 2010-11 to 2014-15.
To find out the amount of debt and equity in Maruti Suzuki from 2010-11 to 2014-15.
3. Vineet Singh
http://www.iaeme.com/IJM/index.asp 46 editor@iaeme.com
To calculate and compare the debt equity ratio of Tata Motors and Maruti Suzuki
during 2010-2011 to 2014-15.
To test whether there is a significant difference between debt equity ratio of Tata
Motors and Maruti Suzuki with the help of t test during 2010-11 to 2014-15.
2. RESEARCH METHODOLOGY
The study is mainly based on secondary data. The relevant information in this regard
has been collected from various sources like journals, articles, textbooks, websites and
annual reports of Maruti Suzuki and Tata Motors., The analysis is carried out through
various statistical tools like percentage, average, t test etc.
3. ANALYSIS AND INTERPRETATION
In order to analyze long-term solvency of Tata Motors and Maruti Suzuki debt equity
ratio has been calculated and is explained with the help of table and graphical
representation followed by a comparative analysis.
Table 1 Debt Equity Ratio (Tata Motors)
Years
Debt/Long Term
Loan
Equity/Net Worth
Debt Equity
Ratio
2010-11 15898.75 20013.30 0.79
2011-12 9964.13 19626.01 0.51
2012-13 9290.22 19134.84 0.49
2013-14 10901.93 19176.65 0.57
2014-15 12605.76 14862.59 0.85
Average 11732.16 18562.68 0.63
Figure 1 Debt Equity Ratio (Tata Motors)
The above table no. 1 and figure no. 1 exhibits that debt equity ratio of “Tata
Motors” stood at an average of 0.63:1 for the study period 2010-11 to 2014-15. The
debt equity ratio of Tata Motors fluctuates from 0.49:1 to 0.85:1 during the study
period. It is in the year 2012-13 when the company is able to maintain lowest debt
equity ratio of 0.49:1 and the highest debt equity ratio was witnessed in the year 2014-
15. During the entire study period, it was in 2010-11 when the company had
maximum amount of debt as well as equity i.e. Rs. 15898.75 crores and Rs. 20013.3
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
0
5000
10000
15000
20000
25000
2010-11 2011-12 2012-13 2013-14 2014-15
AmountinRs.
Years
Debt Equity Ratio (Tata Motors)
Debt/Long Term Loan
Equity/Net Worth
Debt Equity Ratio
4. Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki
http://www.iaeme.com/IJM/index.asp 47 editor@iaeme.com
crores respectively which resulted in debt equity ratio of 0.79:1. The company’s debt
and net worth stood at an average of Rs. 11732.16 crores and Rs. 18562.68 crores
respectively. A debt equity ratio of 2:1 is considered to be satisfactory, which means
that debts are twice the equity. If debts are more than, twice the equities it reflects a
risky financial position of the firm in the long run. Since, the debt equity ratio of Tata
Motors stood at an average of 0.63:1 it reveals that the company is lesser dependent
on debt and it will also be able to repay its long term commitments in time.
Table 2 Debt Equity Ratio (Maruti Suzuki)
Years
Debt/Long Term
Loan
Equity/Net
Worth
Debt Equity
Ratio
2010-11 309.30 13867.50 0.02
2011-12 96.60 15187.40 0.01
2012-13 646.50 18578.90 0.03
2013-14 699.00 20978.00 0.03
2014-15 250.20 23704.20 0.01
Average 400.32 18463.20 0.02
Figure 2 Debt Equity Ratio (Maruti Suzuki)
Table no. 2 and figure no. 2 reveal that the debt equity ratio of “Maruti Suzuki”
stood at an average of 0.63:1 for the study period 2010-11 to 2014-15. During the
study period the entire debt of the company stood at an average of Rs. 400.32 crores
whereas the net worth of the company stood at an average of Rs. 18463.20 crores. The
debt equity ratio of Maruti Suzuki ranges from 0.01:1 to 0.03:1 during the study
period. It is in the years 2011-12 and 2014-15 when the company is able to maintain
lowest debt equity ratio of 0.01:1 and the highest debt equity ratio was witnessed in
the years 2012-13 and 2013-14. During the entire study period, it was in 2013-14
when the company had maximum amount of debt i.e. Rs. 699.00 crores and maximum
amount of equity was held by the company in 2014-15 i.e. Rs. 23704.2 crores. The
debt equity ratio of Maruti Suzuki stood at an average of 0.02:1 which reveals that the
company is very lesser dependent on debt and it will not face any difficulty to pay off
its long term commitments in time.
0.00
0.01
0.01
0.02
0.02
0.03
0.03
0.04
0.04
0
5000
10000
15000
20000
25000
2010-11 2011-12 2012-13 2013-14 2014-15
AmountinRs.
Years
Debt Equity Ratio (Maruti Suzuki)
Debt/Long Term Loan
Equity/Net Worth
Debt Equity Ratio
5. Vineet Singh
http://www.iaeme.com/IJM/index.asp 48 editor@iaeme.com
Table 3 Debt Equity Ratio (Tata Motors vs Maruti Suzuki)
Years
Debt Equity Ratio (Tata
Motors)
Debt Equity Ratio (Maruti
Suzuki)
2010-11 0.79 0.02
2011-12 0.51 0.01
2012-13 0.49 0.03
2013-14 0.57 0.03
2014-15 0.85 0.01
Average 0.63 0.02
Figure 3 Debt Equity Ratio (Tata Motors vs Maruti Suzuki)
Table no. 3 and figure no. 3 portray a comparison between debt equity ratio of
Tata Motors and Maruti Suzuki. The above analysis interprets that both the companies
are able to maintain a far satisfactory debt equity ratio than standard. The debt equity
ratio of Tata motors and Maruti Suzuki stood at an average of 0.63:1 and 0.02:1
during the study period which means that both the companies are able to control the
debt level in their capital structure. When debts are more than twice the equities it
means that the company is excessive dependent on debt which is not a favourable
condition from long term point of view. If the proportion of debt is more than twice
than that of equities/net worth it reveals that a firm might face difficulty to reimburse
its long term debts in time.
4. HYPOTHESIS TESTING ON DEBT EQUITY RATIO (TATA
MOTORS AND MARUTI SUZUKI)
To test whether there is a significant difference between debt equity ratio of Tata
Motors and Maruti Suzuki the following hypothesis is framed and tested through t-test
at 95% confidence level:
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
2010-11 2011-12 2012-13 2013-14 2014-15
Debt Equity Ratio (Tata Motors vs Maruti Suzuki)
Debt Equity Ratio (Tata Motors) Debt Equity Ratio (Maruti Suzuki)
6. Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki
http://www.iaeme.com/IJM/index.asp 49 editor@iaeme.com
H0 There is no significant difference between debt equity ratio of Tata Motors and
Maruti Suzuki
H1 There is a significant difference between debt equity ratio of Tata Motors and
Maruti Suzuki
t-Test: Two-Sample Assuming Unequal Variances
PARAMETERS
DEBT EQUITY RATIO
(TATA MOTORS)
DEBT EQUITY RATIO
(MARUTI SUZUKI)
Mean 0.640855 0.021468
Variance 0.028412 0.000167
Observations 5 5
Hypothesized Mean Difference 0
df 4
t Stat 8.192707
P(T<=t) one-tail 0.000605
t Critical one-tail 2.131847
P(T<=t) two-tail 0.001209
t Critical two-tail 2.776445
Since the calculated value of t one tail at at.05 level of significance is less than table
value of t, alternate hypothesis is rejected and null hypothesis is accepted that there is
no significant difference between debt equity ratio of Tata Motors and Maruti Suzuki.
5. CONCLUSION
On the basis of above analysis and interpretation in can be concluded that Tata Motors
and Maruti Suzuki are maintaining debt equity ratio at an average of 0.63:1 and 0.02:1
respectively during the study period of 2010-11 to 2014-15, which is less than,
standard debt equity ratio of 2:1. A debt equity ratio of less than 2:1 is considered to
be good and a debt equity ratio of more than 2:1 is considered to be risky from the
view point of long term solvency. Debt equity ratio indicates the proportion of funds
which are obtained by long-term borrowings in comparison to shareholders fund. If
the proportions of long term borrowings are more than twice the shareholders funds it
reflects that a firm is more dependent on long term borrowings. Higher dependence on
long term borrowings reduces the solvency of firm in long term and lesser
dependence on long term borrowings increases the solvency of firm in the long run. If
debts are twice the equity or less than twice the equity it means that a firm will be able
to repay its debts in long run without any problem, and if debts are more than twice
the equity it means that a firm might face difficulty to repay its debts in long term.
Since, both the companies are maintaining debt equity ratio of less than 2:1 for the
study period it means that both the companies i.e. Tata Motors and Maruti Suzuki are
maintaining good solvency from long term point of view and both will be able to meet
their long term commitments without any problem. In addition, the above analysis
also reveals that there is no significant difference between debt equity ratio of Tata
Motors and Maruti Suzuki.
REFERENCES
[1] Annual Reports of Tata Motors 2010-11 to 2014-15.
[2] Annual Reports of Maruti Suzuki 2010-11 to 2014-15.
7. Vineet Singh
http://www.iaeme.com/IJM/index.asp 50 editor@iaeme.com
[3] James, C. Van Horne, Financial Management and Policy, Prentice-Hall of India
Pvt. Ltd, New Delhi, 2008.
[4] Johnson, R.W., Financial Management, Allyn and Bacon, Boston, 1998.
[5] Keown, A.J., Martin, J.D., Petty, J.W. & Scott, D.F., Financial Management-
Principles and Applications’, Pearson Education India, 2007.
[6] Khan, M.Y. and Jain, P.K., ‘Financial Management: Text and Problems’, Tata
McGraw-Hill Publication Company Limited, New Delhi, 2010.
[7] Joy, O.M., ‘Introduction to Financial Management’, Richard D. Irwin,
Homewood III, 2003.
[8] Vineet Singh and Abhinna Srivastava. Receivables Management in Leading
Heavy Electrical Industries in India, International Journal of Management, 6(4),
2015, pp. 1 - 8.
[9] Vineet Singh. Significance Of Working Capital Turnover Ratio: A Case Study of
BHEL and Crompton Greaves, International Journal of Management, 6(3), 2015,
pp. 1 – 7.
