Liquidity, Risk and Profitability Analysis: A Case Study of Steel Authority of India Limited

IntroductionOne of the most important areas in day-to-day management of a firm is to deal with the management of the liquidity, which is defined as the ability of a concern to pay in cash its current obligations when they become due for payment by realizing amounts from current assets. Liquidity implies conversion of current assets into cash during the normal course of business and to have regular uninterrupted flow of cash to meet outside current liabilities as and when due and payable and also ensure availability of money for day-to-day business operations. It is an attribute that signifies the capacity to meet current financial obligations as and when required.The effective management of liquidity requires both medium-term planning and immediate reactions to the fast changes taking place in the present business environment. Liquidity management is the functional area of finance. It is concerned with the adequacy of current assets as well the level of risk posed by current liabiUties. It is a discipline that seeks proper poUcies for managing current assets and liabilities and practical techniques for maximising the benefits from managing liquid capital. The firm's policies for managing liquidity should be designed to achieve three goals, viz. adequate liquidity, minimisation of risk, and maximising the profitability.Adequate LiquidityLiquidity is a firm's ability to meet its maturing obUgations. Such liquidity of a firm may be ascertained by assessing its ability to hold necessary cash at the time of meeting obligations. A firm must have a certain level of cash above its excepted needs to act as a reserve to meet emergencies. The liquidity management is a prerequisite for the very survival of the concern. The short-term creditors of the firm are primarily interested in knowing the firm's ability to meet its current and short-term obligations. If the firm fails to meet such current obligations due to lack of liquidity position its goodwiU in the market is likely to be affected. Therefore a concern should have requisite degree of liquidity. It should be neither excessive nor inadequate.Minimisation of RiskA firm should maintain adequate level of liquidity to meet the current obligations and maintain uninterrupted business operation. It should ensure that it does not suffer from lack of liquidity. The failure of the firm to meet its obligations due to lack of sufficient liquidity is highly risky as it wiU result in bad credit image, loss of creditors' confidence, unnecessary legal battles, interruptions of business operations, lower rate of return and loss of business opportunities or even closure of the firm. At the same time, if the level of Uquidity is more, means accumulation of idle liquid funds, holding cost of current assets would be more, which may lead to lower profitability, increased speculation and unjustified expansion again would badly affect the profitability. A proper balance between these two extreme situations therefore should be maintained. In other words, the liquidity should not be either too high or too low. A well monitored minimum level of liquidity at a calculated risk is always good for better profitability.Maximising the ProfitabilityThe word profitability may be defined as the ability of a given investment to earn a return from its use. The overall objective of business is to earn at least a satisfactory return on the funds invested in it, consistent with maintaining a sound financial position. Satisfactory return depends upon several factors including the nature of business, risk involved in business etc. If an enterprise fails to earn profit, invested capital is eroded and if this situation prolongs, the business enterprise may ultimately cease to exist. Modern management is engaged in the task of maximising profits. The efficiency of a business concern is measured by the amount of profits earned. The larger the profit the more efficient and profitable the business become. …