Liquidity Analysis of Selected Pharmaceutical Companies- a Comparative Study

Abstract

Liquidity plays an important role in the successful functioning of the business firm. A firm should ensure that it does not suffer from lack of or excess liquidity to meet its short- term compulsions. The critical part in managing working capital is maintaining its liquidity in day-to-day operation to ensure its smooth running and to meet its obligations. Hence, it is of utmost importance to keep a constant eye on liquidity position of the company as without it the company cannot survive. The present paper aims to analyses the liquidity position of the selected pharmaceutical companies by making use of liquidity ratios such as current ratio, quick ratio and absolute liquid ratio for the period 2012-2016. Short term creditors are mainly interested in the liquidity position of the firms to know the promptness of company to meet its current liabilities. The result shows that among the five selected pharmaceutical companies, i.e. Ajanta Pharma, Biocon Ltd, Torrent Pharma, /pea labs and Lyka labs., the liquidity position of Ajanta Pharma is best as far as current ratio and quick ratio are concerned but when absolute liquid ratio is concerned, mixed results are found. The techniques of Mortal’s ultimate rank test have been applied to analyses the data. For investigation, purely secondary data is used. 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 to derive a higher rate of return. But it must be remembered that the risk of default and bankruptcy increases when a firm adopts more aggressive working capital polices. One should remember that a negative working capital is a sign of managerial efficiency in a business with low inventory in accounts receivable, while in other situation, it is a sign that a company may be facing bankruptcy or serious financial trouble. Our study reveals that Biocon is at rank• 1 indicating that it is most liquid company among the five companies.