Working capital structure and liquidity analysis : an empirical research on indian pharmaceutical industry

Abstract

Liquidity plays a significant role in the successful functioning of a business firm. A firm should ensure that it does not suffer from lack-of or excess liquidity to meet its short-term compulsions. A study of liquidity is of major importance to both the internal and the external analysts because of its close relationship with dayto-day operations of a business. The crucial part in managing working capital is required maintaining its liquidity in day-today operation to ensure its smooth running and meets its obligation.Hence, it is of utmost important to keep a constant eye on liquidity position of the company as without it the company cannot survive. In this paper a comparative study on the liquidity position of five leading Indian pharmaceutical companies has been done to know the liquidity position of the companies. The study covers a period of 10 years viz, 2005-2006 to 2014-2015.For the purpose of investigation purely secondary data is used.The techniques of mean, standard deviation, coefficient of variation, ratio analysis, and Motaal’s ultimate rank test has been applied to analyze the data. It has been found that the liquidity position of small companies is better as compared to big ones. Moreover, low or negative working capital in some cases indicates the aggressive working capital management policy of the firms which implies minimal investment in current assets by the companies so as to derive a higher rate of return.But it has to be remembered that risk of default and bankruptcy increases when a firm adopts more aggressive working capital policies. One should remember that a negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis). In any other situation, it is a sign that a company may be facing bankruptcy or serious financial trouble.