How Does Financial Performance of MNCs in the Automobile Sector Compare with Indian Companies? An Analysis Using Financial Ratios

Abstract

We compare the financial performance of three Indian companies, Tata Motors, Maruti, and Mahindra & Mahindra with two MNCs, Honda and Hyundai. While it would be desirable to include other MNCs in the study, data on only these two MNCs are available in the PROWESS database as these are the only ones listed on the stock exchange. In order to compare the financial performance, we use ten ratios. There are four profitability ratios, four liquidity ratios and two solvency ratios. The profitability ratios used are profit margin, asset turnover, return on assets, and return on equity. The liquidity ratios used are current ratio, quick ratio, debtor turnover and inventory turnover. The solvency ratios used are debt to equity ratio and interest coverage ratio. For each ratio we find the average performance for the three Indian companies and the average performance for the two MNCs. The averages are compared. We also find the coefficient of variation for Indian companies and for MNCs for each of the ten ratios. A high average performance on a particular ratio combined with a lower coefficient of variation would definitely indicate a better performance by a particular group. Based on this criterion, MNCs have a better performance than Indian companies on return on assets and interest coverage ratio. On the other hand, Indian companies have a better performance than MNCs on return on equity. For each of the ten ratios, we also look at data from 2002 to 2006 for each of the five companies. Using regression, we see if the trend in each ratio for each company is statistically significant. This would indicate whether a company is on an improvement path, based on a particular ratio.