Motaal's Comprehensive Test of Liquidity

Motaal prescribes a comprehensive test for determining the soundness of a firm as regards liquidity
position. According to him, a process of ranking is used to arrive at a more comprehensive measure of liquidity in
which the following three ratios are combined in a point score:
The higher the value of both working capital to current asset ratio and liquid resources to current asset ratio,
relatively the more favorable will be the liquidity position of a firm and vice-versa. n the other hand, lower the
value of stock to current assets ratio, relatively the more favorable will be the liquidity position of the firm. The
ranking of the above three ratios of a firm over a period of time is done in their order of preferences. !inally, the
ultimate ranking is done on the basis of the principle that the lower the points score, the more favorable will be the
liquidity position and vice-versa.
Table-2 Motaal's Comprehensive Test of Liquidity of ONGC (over the period !!"-!! to 2##$-#%&
"ear
#$ to
$A
%atio
&'(
%ank
)tock to
$A %atio
&'(
%ank
*% to
$A
%atio
&'(
%ank
Total
%ank
+ltimate
%ank
,--.-,--- //.-0 - ,1.2/ - .2.11 - 34 -
,----3000 54.5- . ,2.,1 . .1../ . 3/ .
3000-300, 15./, 5 ,,.00 4 .-.00 4 ,- 4
300,-3003 1,../ 1 ..33 5 -,.4. 5 ,1 1
3003-3002 5-.,/ 4 4..2, , -3.1- 3 ,, /
3002-300/ 1..31 2 ..54 1 -,./2 1 ,5 5
300/-3005 11.,- / ..00 2 -3.00 2 ,0 2
3005-3001 4,./- , ..,. / -,..3 / - 3
3001-3004 1../. 3 1..2 , -2.,4 , / ,
This test has been applied for determining the liquidity position of 67$ over the period under consideration. n
the basis of ultimate ranking as suggested by Motaal it may be concluded that liquidity position of 67$ in the
year 3001-04 was best followed by the years 3005-3001, 300/-3005, 3003-3002, 3002-300/, 300,-3003, 3000-
300,, ,----3000, ,--.,--- respectively in that order. 8t indicates that liquidity position of the enterprise is more or
less improving over the period under study. The result of the Motaal test as revealed in the study corroborates with
the result about the liquidity position of 67$ by other important set of ratios presented in Table-,.
Profitability Position of ONGC through Profitability Ratios: 8n the following table we analy9e the data
relating to profitability of 67$ in terms of important ratios.
Table-' (rofitability )atios of ONGC over ! years (i*e* !!"-!!! to 2##$-2##%&
"ear
6et
:rofit
%atio
&'(
%eturn on
Assets &'(
%eturn on $apital
;mployed &'(
%eturn on 6et
worth &'(
;arnings
per share
&'(
,--.-,--- ,..3 ,0.0 35.2 ,,./ ,-.2
,----3000 ,4.- -.2 2/., ,2.1 35.5
3000-300, 3,.5 ,2., /3./ ,4.2 21.4
300,-3003 31.0 ,2.- 2-.3 3,.0 /2.5
3003-3002 3-.. 3,., 5/.0 3-.1 42..
3002-300/ 31.2 ,2.. /5.. 3,.4 10..
300/-3005 34.5 ,..2 5... 3..0 -,.05
3005-3001 3-.3 ,4.2 54.5 31.- ,0,.30
3001-3004 31.5 ,1., 51.4 35.5 42.,/
$ompound growth rate
&'(
5.- 4.11 -.4- ,,.0 3,.2/
Average &'( 3/.44 ,/.44 /5.-. 3,.14 5..22
)tandard deviation &'( /.3, 2.1, ,,.04 1.0- 34.32
$o-efficient of variation
&'(
,1.-- 3/.// 3/.04 3..,0 /1.1.
!rom Table-2 it is seen that net profit on sales ratio of 67$ is slightly fluctuating over time. The average
net profit ratio of the firm is 3/.44'. The compounded growth rate of this ratio is 5.-' which indicates that the ratio
is improving to a favorable e<tent over the period under study. Therefore it may be said that the profitability on sales
of the company is satisfactory. 8t also indicates that the management operates the firm successfully in relation to
earned revenues and the costs associated with it. The same trend is observed in case of %A, %6# = %$;. The
average growth rate of these three ratios is 4.11', -.4-' and ,,' respectively. Moreover the average values of
%A, %6# %$; are found to be ,/.44', 3,.14' and /5.-.' respectively. The profitability ratios discussed
above are found to be, more or less, in a stable position over time on the scrutiny of their coefficient of variations
shown in Table-2. The ;arning :er )hare ratio fluctuates considerably over the period of - years. The instability of
;:) is clearly shown by its coefficient of variation, which is found to be /1.1.'. The average ;:) figure is 3,.2/'
with standard deviation 5..22'. !rom the analysis of ;:) it is clear that the company is in a favorable position
towards the earnings available to equity shareholders on per share basis though it fluctuates over time. Thus, in
totality, it can be said that the overall profitability position of 67$ is satisfactory enough for the period under
study and the company is in a favorable position to create sufficient surplus for its growth and survival stability in
the present competitive business environment.
Liquidity and Profitability Analysis by using simple rank correlation: 8n the following table the
relationship between liquidity and profitability is analy9ed with the help of rank correlation:
Table-+* Liquidity and (rofitability, The relationship (usin- ran. /orrelation&
"ear
$urrent
Assets
&$A(
Total
Assets
&TA(
$apital
;mployed
&$;(
;arnings
>efore
8nterest
dep. =
Ta<
&;>8?T(
$ATA
&'(
%ank
n
$ATA
&x,(
%eturn on
$apital
;mployed
&%$;(
&'(
%ank
n
%$;
&x3(
d@&x
, x3(
d3
@&x,
x3(3
,--.,--
-
,1,.1
,4020
0
314351 14/-5 51./. - 35.2 - 0 0
,---300
0
,,.-,-
,.3-3
0
3-2,.5 ,00044 15.0, . 2/., . 0 0
3000300
,
,2-4,5
,-.10
.
2,022, ,2/231 40.25 4 /3./ 1 , ,
300,300
3
,4115-
32311
4
23-01, ,3-34- 45.-2 1 2-.3 4 -, ,
3003300
2
3,/-40
31..-
.
2534,0 ,-0/-3 .,.00 5 5/.0 / , ,
3002300
/
3.01,5
22420
,
2-53-- ,.,320 .2.,- 2 /5.. 5 -3 /
300/300
5
23,15.
2.003
2
/,--31 3/14./ ./.1/ , 5... , 0 0
3005300
1
24,1,5
/5002
4
/-2412 3.242, .3.54 / 54.5 3 3 /
3001300
4
//2-52
5232/
/
5/04// 201/15 .2./0 3 51.4 2 -, ,
d3 @
,3
The relationship between liquidity &measured by $ATA( and profitability &measured %$;( of 67$
over the period of - years is presented in Table-/. This relationship is established by using )pearmanAs %ank
$orrelation $oefficient. The rank correlation between $ATA and %$; is computed by applying the formula
difference in rank and n @ number of pairs of observations. :utting the respective values of d and n in rank
correlation formula above we obtain
r
Rank @ 0.-0 which indicates that there is a high positive correlation between
liquidity and profitability of the company. To find out the significance of the above result we test the hypothesis as
under:
)ince computed value of t &5./13.( is greater than the table value of t &i.e. 3.215 at 5' level and 2./-- at
,' level of significance(, the null hypothesis, B0: @0 is reCected both at 5' and ,' level of significance and
thus, the alternative hypothesis, B,:
0 is accepted both at -5' and --' level of confidence. Therefore, we may conclude that there is a direct
relationship between liquidity and profitability of the firm under study. This relationship is statistically significant
both at 5' and ,' level.