View of A BRIEF STUDY ON LIQUIDITY ANALYSIS

(1)

ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING

Peer Reviewed and Refereed Journal ISSN NO. 2456-1037 IMPACT FACTOR: 7.98 (INTERNATIONAL JOURNAL) Vol. 05, Special Issue 05, (ICET-2020)July 2020 Available Online: www.ajeee.co.in/index.php/AJEEE

55

A BRIEF STUDY ON LIQUIDITY ANALYSIS

1Sanjivv Kishor Gandhi, ²Dr. Meenakshi Kaushal

1Research Scholar, ²Supervisor

1-2Department of Commerce, Arunodaya University, Distt, Itanagar, Arunachal Pradesh, India

Abstract- Liquidity analysis is a crucial aspect of financial analysis that focuses on assessing a company's ability to meet its short-term financial obligations. In the case of Jindal Steel & Power Limited, this analysis examines the company's liquidity position by evaluating key metrics such as the current ratio and operating cash flow. By understanding the company's liquidity, stakeholders can gauge its ability to cover short-term expenses, manage working capital, and maintain financial stability.

Keywords: Liquidity analysis, Jindal Steel & Power Limited, Current ratio, Short-term obligations, Current assets, Current liabilities, Operating cash flow, Financial stability, Working capital management, Cash flow generation.

1 INTRODUCTION

Liquidity analysis plays a critical role in evaluating the financial health and stability of a company, particularly its ability to meet short-term financial obligations. In this context, we will focus on conducting a liquidity analysis of Jindal Steel & Power Limited, a prominent player in the steel and power industry.

Jindal Steel & Power Limited (JSPL) is an Indian multinational conglomerate engaged in various sectors, including steel production, power generation, coal mining, infrastructure, and more. As a leading company in its industry, JSPL relies on efficient liquidity management to ensure smooth operations, meet immediate financial needs, and maintain financial stability.

Liquidity analysis involves the assessment of key liquidity metrics, such as the current ratio and operating cash flow. The current ratio measures the company's ability to meet its short-term obligations using its current assets, while operating cash flow indicates the cash generated or used by the company's core operations.

By analyzing the liquidity of Jindal Steel & Power Limited, we aim to gain insights into its financial flexibility, ability to handle short-term financial obligations, and overall liquidity position. This analysis helps stakeholders, including investors, lenders, and management, make informed decisions regarding the company's financial stability and risk management.

In this study, we will delve into the calculation and interpretation of liquidity metrics, focusing on the current ratio and operating cash flow, to assess the liquidity position of Jindal Steel & Power Limited. By examining these key indicators, we can evaluate the company's ability to generate cash, manage working capital, and navigate short-term financial challenges effectively.

Through a comprehensive liquidity analysis, stakeholders can gain a better understanding of Jindal Steel & Power Limited's financial liquidity, which is crucial for maintaining operational continuity, managing financial obligations, and ensuring long-term success in the competitive steel and power industry.

2 CURRENT RATIO

The current ratio is a widely used liquidity ratio that measures a company's ability to meet its short-term financial obligations using its current assets. It provides insight into the company's liquidity position and its capacity to cover immediate liabilities. The current ratio is calculated by dividing current assets by current liabilities.

The formula for calculating the current ratio is as follows:

Current Ratio = Current Assets / Current Liabilities

The current assets typically include cash, cash equivalents, accounts receivable, inventory, and other assets that are expected to be converted into cash within one year.

Current liabilities encompass short-term obligations such as accounts payable, accrued expenses, and short-term debt due within one year.

Interpreting the current ratio involves assessing the resulting ratio value. Generally, a current ratio above 1 indicates that the company has sufficient current assets to cover its

(2)

56

current liabilities. A ratio significantly above 1 may suggest a strong liquidity position, implying the ability to meet short-term obligations comfortably. Conversely, a current ratio below 1 raises concerns about the company's liquidity and its ability to cover immediate financial obligations.

It is important to note that the ideal current ratio varies across industries, and a high or low ratio alone does not provide a comprehensive assessment of a company's financial health. Comparisons with industry peers, historical trends, and other liquidity measures are essential to gaining a more accurate understanding of the company's liquidity position.

Analyzing the current ratio of Jindal Steel & Power Limited allows stakeholders to evaluate the company's ability to manage working capital, meet short-term obligations, and maintain financial stability. By tracking changes in the current ratio over time and comparing it with industry benchmarks, stakeholders can gain valuable insights into the company's liquidity profile and make informed decisions regarding its financial health.

2.1 Operating Cash Flow

Operating cash flow is a key liquidity measure that provides insights into a company's ability to generate cash from its core business operations. It reflects the cash inflows and outflows resulting from the company's day-to-day activities, excluding financing and investing activities. Operating cash flow is an important indicator of a company's ability to fund its operations, invest in growth, and meet its financial obligations.

2.2 Calculation of Operating Cash Flow:

Operating cash flow is typically derived from the company's cash flow statement or statement of cash flows. It is calculated by adjusting net income for non-cash expenses, changes in working capital, and other operating activities. The formula for calculating operating cash flow is as follows:

Operating Cash Flow = Net Income + Depreciation and Amortization + Changes in Working Capital + Other Operating Activities

Interpretation of Operating Cash Flow:

Analyzing operating cash flow involves assessing the resulting value and its implications.

Here are a few key considerations:

Positive Operating Cash Flow: A positive operating cash flow indicates that the company is generating sufficient cash from its core operations. This signifies the ability to cover operating expenses, fund growth initiatives, and meet financial obligations.

Negative Operating Cash Flow: A negative operating cash flow suggests that the company is not generating enough cash from its operations to cover its expenses. This may indicate financial challenges, such as liquidity constraints or operating inefficiencies.

Trends and Comparisons: Evaluating operating cash flow over multiple periods helps identify trends and assess the company's cash flow performance. Comparisons with industry peers or historical data provide insights into the company's relative financial health and efficiency.

Cash Flow Drivers: Analyzing the components that contribute to operating cash flow, such as changes in working capital, non-cash expenses, and other operating activities, helps identify areas of strength or weakness in the company's cash flow generation.

Operating cash flow analysis is essential for stakeholders, including investors, lenders, and management, to evaluate a company's cash flow generation capacity and its ability to sustain operations and fulfill financial obligations. It complements other liquidity measures and financial ratios, providing a comprehensive view of the company's liquidity position and financial performance.

3 CONCLUSION

In conclusion, the analysis of liquidity, specifically the current ratio and operating cash flow, is vital for assessing the financial health and stability of Jindal Steel & Power Limited.

Here are the key points to consider:

Current Ratio: The current ratio provides insights into the company's ability to meet short- term financial obligations. By comparing current assets to current liabilities, stakeholders can evaluate Jindal Steel & Power Limited's liquidity position. A current ratio above 1

(3)

57

indicates a favorable liquidity position, suggesting the company can cover its immediate liabilities. Monitoring the current ratio over time and comparing it with industry benchmarks provides a better understanding of the company's liquidity trends and performance.

Operating Cash Flow: The analysis of operating cash flow allows stakeholders to assess the company's ability to generate cash from its core operations. Positive operating cash flow indicates the company's capacity to cover operating expenses, fund growth initiatives, and meet financial obligations. On the other hand, negative operating cash flow may indicate potential liquidity challenges or operational inefficiencies. Monitoring operating cash flow trends and drivers, such as changes in working capital, helps identify areas of strength or weakness in the company's cash flow generation.

By conducting a comprehensive liquidity analysis that includes evaluating the current ratio and operating cash flow, stakeholders can make informed decisions about Jindal Steel & Power Limited's financial stability, ability to manage short-term obligations, and overall liquidity position. This analysis helps identify potential risks, assess the company's cash flow generation capacity, and enables effective liquidity management. It is important to consider industry benchmarks and historical trends when interpreting these liquidity metrics to gain a well-rounded understanding of the company's financial position.

Ultimately, a strong liquidity position contributes to the company's operational continuity, financial resilience, and the ability to seize growth opportunities. Regular monitoring and analysis of liquidity metrics provide valuable insights for strategic decision- making and ensuring the long-term sustainability of Jindal Steel & Power Limited.

REFERENCES

1. http://www.jindalsteelpower.com 2. http://www.google.co.in

3. http://www.performance.com 4. http://www.indiatimes.com 5. http://www.economictimes.com 6. http://www.wikipedia.com 7. http://www.ventureline.com