Question
The following dialogues are exchanged between Rahul Sharma (RS), M.D. of Maruti Automobiles Ltd. and Rakesh Khurana (RK), CFO of the company: RS: I am
The following dialogues are exchanged between Rahul Sharma (RS), M.D. of Maruti Automobiles Ltd. and Rakesh Khurana (RK), CFO of the company:
RS: I am happy with the quarterly results. Our profits are soaring as compared to Previous year and launching of new product in SUV segment will take us places!
RK: While I agree with you, I am still worried about our liquidity position. The product launch will require huge investments and we are not geared up to match with the same.
RS: I don't understand what you are talking about. I just had a look at the financials and all our ratios seem great. Infact, the Current Ratio is far above the industry average. Isn't that Page supposed to reflect our strong liquidity position? And what about the Profits, aren't they evidence of our liquidity?
RK: Well, profits are not the same as cash. And to state a fact, while our Current assets have increased from previous year, Cash and Short-term investments as a percentage of Current Assets have reduced from 10% previous year to 4.8% current year.
RS: That maybe a cause of concern. I was doing a small comparison of our company versus peers in the Automobile sector and I found that most companies have negative working capital and negative cash cycles. I don't understand how they sustain with such negative balances? Or is it deliberate?
Question
Take any three companies from the Automobile sector and provide your observations with respect to their Working Capital positions. Also, provide a suitable response to Rahul Sharma's concerns stated in the last dialogue.
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