Question

With this assignment I would like for you to take a topic in economics and analyze it using the concepts and ideas developed in the course. You can follow the format for writing a paper on Wal-Mart, or you can choose to analyze any other applicable topic that interests you using the paper guidelines provided (under 'Assignments'/'Writing Assignment'; I've provided examples of papers and topics composed by previous instructors and students in this course). If you have questions and/or problems understanding the assignment or accessing the aforementioned information please let me know.

The writing assignment should be between 500 - 1000 words. It is due by the Saturday of finals week.

Answer 1

Analysis of CROMPTON GREAVES:

         

	2014-15	2015-16	2016-17
Liquidity ratios
Current Ratio	1.49	2.12	2.31
Asset Ratio	1.2	1.93	2.19
Cash Ratio	0.139	0.253	0.236
SOLVENCY
Debt-Equity	1.875	0.57	0.743
Debt-asset	0.651	0.361	0.422
Interest coverage	4.46	0.21	2.57
OPERATIONAL RATIOS
Inventory turnover	9.7	10.9	6.61
TAT	1.29	0.67	0.67

DuPont analysis is a method of performance measurement with which assets are measured at their gross book value rather than at net book value to produce a higher return on equity (ROE). It is also known as DuPont identity.

According to DuPont analysis, ROE is affected by three things: operating efficiency, which is measured by profit margin; asset use efficiency, which is measured by total asset turnover; and financial leverage, which is measured by the equity multiplier.

Therefore, DuPont analysis is represented in mathematical form by the following calculation: ROE = Profit Margin x Asset Turnover Ratio x Equity Multiplier.

	2016-17	2015-16	2014-15
NPM= PAT/TR	0.03	(0.25)	0.01
TAT= TR/TA	0.67 0.67	0.67	1.29
TA/TE = equity multiplier	1.76	1.60	2.88
ROE=PAT/ATA	2.969%	-26.44%	5.39%
ROA=NPM * TAT	1.687%	-16.526%

The Z-score is a linear combination of four or five common business ratios, weighted by coefficients. The coefficients were estimated by identifying a set of firms which had declared bankruptcy and then collecting a matched sample of firms which had survived, with matching by industry and approximate size (assets).

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5.

X1 = working capital / total assets.

X2 = retained earnings / total assets.

X3 = earnings before interest and taxes / total assets.

X4 = market value of equity / book value of total liabilities.

X5 = sales / total assets.

2016-17

Z= 1.2 * 0.2558+ 1.4* 0.321 + 3.3* 0.0157 + 0.6* 0.75 + 1.0* 0.5706 = 1.83

2015-16

Z= 1.2 * 0.204+ 1.4* 0+ 3.3* 0.0141 + 0.6* 0.121 + 1.0* 0.257 = 0.48

2014-15

Z=1.2 * 0.438+ 1.4* 0.342+ 3.3* 0.102 + 0.6* 0.28 + 1.0* 0.781 = 1.63

The first measure of analysis of the cash flow of the company over four years is through their trade and account receivables. We observe that the value of trade receivables decreased from an initial increase in receivables from ₹630 crores in 2014 to ₹670 crores in 2015, but then the company saw a drastic fall to ₹373 crores in 2016 then to ₹379 crores in 2017. The major thing which can be observed through such statistics is that the company reduced its sales of products on credit or started to go in heavy losses and hence started reducing production. Looking at the other parameters we will clarify that the latter is true.

Another measure for studying the company’s performance is through its inventory management. It was observed that for Crompton Greaves in 2014 had experienced a ₹35 crore increase in inventory which drastically reduced to ₹216 crores decrease in inventories in 2015. The inventories decrease further dropped to ₹4 crores in 2016. In 2017 the company observed an increase in inventory by ₹345 crores. The sudden and explosive decrease in inventory observed in 2015-16 is a pure indicative of desperate measures taken by the company to sale out their stock in exchange for cash to make account for other major losses the company was going through.

The trade payables for a company are also an indicative of what the company was adding liability to and we see that where in 2014 the company had a ₹380 crore increase in trade payable it decreased drastically to ₹573 crores in 2015, there was then a huge ₹651 crores increase in trade payables in 2016 followed by a drop in increase of trade payable to ₹178 crores. The drastic drop in 2015 to the explosive high in 2016 is a pure and simple indicative that the company owes huge money to people and couldn’t pay them back. A multiple times and a few hundred percent increase in the liability of a company is the clearest and purest form to show its downfall in the financial year. Though the company recovered very well by reducing the numbers in 2017 but still the year 2015-16 is a big black dot on the company’s account booklet.

The next three parameters on which the company’s account is analysed over are the cash flows individually from the operating, financial and investing operations in the financial years. For Crompton Greaves it was observed that in 2014 the company was generating ₹320 crores from operating activities changed to ₹680 crores spent on it in 2015. ₹60 crores were spent on it in 2016 and ₹540 crores were spent by cash to allow the operating activities. The investing activities show the company to have invested ₹100 crores in 2014 followed by a drastic increase to ₹430 crores and almost the same in following 2016 and an increase to ₹490 crores in 2017. The company was getting 9 crores from financing activities which increased to ₹126 crores in 2015 but in 2016 the company had to put in ₹222 crores of rupees in the financial activities. In 2017 the company gained ₹50 crores from these activities. In general, when we look at the cash flows individually in all these activities over the four years in study, it is observed that in the year 2016 the company witnessed a huge setback with major decline in operating activities, no returns from financial activities and a relatively similar return from investment in that year. The company was in a bad position as is evident and hence through recovery measures as stated in the previous analysis the company did way better drastically and came back to its usual set of operations like 2014-15 in the financial year 2016-17.

The report also specifically stated the profits, sales and returns from continuing operations from each financial year and it was pretty evident that the profits declined drastically and the sales reduced with lesser return on net worth for the year 2015-16 but better recoveries in 2016-17 to bring back the company to efficient and 2014-15 like results.