Journal of Basic and Applied Research

International
11(1): 10–21, 2015
International Knowledge Press
www.ikpress.org

ASSESSING BUSINESS PERFORMANCE OF NSE’S CNX

SMALL AND MID CAP AUTO AND AUTO ANCILLARY
COMPANIES

G. C. VIJAYAKUMAR1,2* AND G. RAJENDRA3

1
Department of Mech. Engg, Dr. Ambedkar Institute of Tech, Bangalore, India.
2
Department of Mech. Engg, School of Engg. and Tech, Jain University, Bangalore, India.
3
Department of IEM, Dr. Ambedkar Institute of Tech, Bangalore, India.

AUTHORS’ CONTRIBUTIONS
This work was carried out in collaboration between both authors. Author GCV conducted the literature survey,
gathered all initial data and performed detailed data analysis. Both authors together designed the study and
interpreted the data. Both authors read and approved the final manuscript.

Received: 4th May 2015

Accepted: 20th May 2015
Published: 7th August 2015 Original Research Article
__________________________________________________________________________________

ABSTRACT

The financial performance of a company can be established through a detailed ratio analysis that has the
potential to measure its operational and financial efficiencies. The Altman’s Z model is built on certain ratios
that have proven to have predictive power up to 2-3 years prior to failure/bankruptcy. Even as several attempts
to predict bankruptcy have been made, post Altman’s Z model, the financial failure prediction research
community has not reached an unambiguous conclusion. This paper seeks to assess the financial health of Indian
small cap (3 in number) and mid cap (7 in number) auto and auto ancillary companies (in all, 10 companies)
listed on the CNX Small Cap and CNX Mid Cap indices and attempts to evaluate their financial performance
considering the said ratios for the period 2000-01 to 2011-12 (12 years).

The current analysis reveals that financial health of small cap and mid cap auto companies (in all, 10 in number)
listed on the CNX Small Cap and CNX Mid Cap is just fair to good. The basis of analysis is the combination of
five key ratios that Altman identified as having the required predicted power. Of the three small cap companies,
the first and the second firm fared quite bad, while the third turned out to be in relatively better financial health
in 11 of the 12 years, the period of study, all in terms of the ratio values. On the other hand, the performance of
the mid cap companies was, by and large, good, posting quite healthy values for the five identified ratios,
though clearly signifying the opportunity to bolster them up.

Keywords: Bankruptcy; failure prediction; Z score; financial performance; ratio analysis.

1. INTRODUCTION being introduced into the market at regular intervals

from the stables of major auto makers operating in
The automobile industry and, hence, the automobile India. In the light of increased market exposure,
ancillary industry, in India is witnessing a major assessing their business performance can be extremely
upheaval in recent times with a number of models useful for them to initiate remedial measures for
_____________________________________________________________________________________________________

*Corresponding author: Email: gc.vijay@jainuniversity.ac.in


robust operational and financial planning, and better
overall governance. Every organization has an
element of risk of business failure; auto companies are
no exception. Altman proposed the popular Z score
model for manufacturing companies which was
essentially an MDA approach to classify
manufacturing businesses as successful or failed. It
can potentially identify bankruptcy before its
occurrence. It uses a multivariate combination of five
financial ratios that together contain failure predictive
power. The five financial ratios are: Working
Capital/Total Assets (WC/TA), Retained
Earnings/Total Assets (RE/TA), EBIT/Total Assets
(EBIT/TA), Market Value of Equity/Book Value of
Debt (MVE/BVD), and Net Sales/Total Assets
(NS/TA).
This study evaluates the financial health of auto
companies listed in the CNX Small Cap and CNX
Mid Cap indices by assessing the values of these
ratios. 10 companies have been identified overall, 3
from the former and 7 from the latter.
2. LITERATURE REVIEW
The first study in business failure prediction is traced
to Fitzpatrick [1] who identified five stages that lead
to business failure, viz., incubation, financial
embarrassment, financial insolvency, total insolvency,
and confirmed insolvency. Tamari’s [2] study focused
on financial ratios as a means to predict failure.
Modern day business failure prediction models took
off emphatically from Altman’s [3] multi-
discriminatory analysis (MDA) that proposed the now
renowned Z score model. Following this, Edmister [4]
tested financial ratios as a tool to predict small
business failure. Aharony, et al. [5] described business
failure as an indication of resource misallocation.
Sharma and Mahajan [6] studied early warning
indicators of business failure. Dambolena and Khoury
[7] sought the significance of ratio stability in
corporate failure.
Gupta [8] studied a sample of Indian companies
financed by ICICI and showed that some cash flow
coverage ratios were better predictors of business
failure. Zordan [9] too studied cash flow ratios.
Zmijewski [10] used probit analysis to develop his
model. Karels and Prakash [11] argued that final
failure occurs when total liabilities exceed the
physical assets of the company.
Blum [12], Bhatia [13], Sahoo, et al. [14], and
Ganesalingam and Kumar [15] used the MDA model
to analyze a sample of failed and non-failed firms.
Platt and Platt [16] sought to establish bankruptcy
discrimination using real variables. Libby [17] and
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Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015
Gilbert et al. [18] studied prediction of failure using
accounting ratios while Keasey and Watson [19]
concentrated on the prediction of small business
failure. Louma and Laitinen [20] used survival
analysis as a tool to predict failure. Acharya, Viral et
al. [21] studied the influence of industry-wide distress
on the propensity for businesses to fail.
Krishnachaitanya [22] measured financial distress of
IDBI on the basis of Altman’s model. Kumar and
Ravi [23] used statistical and intelligent techniques to
study failure in banks and firms. Keasey and Watson
[24] concentrated on the prediction of small business
failure in the UK. Bhargava et al. [25] and Suzanne et
al. [26] focused on bankruptcy in the retail sector
using key measures of company performance.
Mansoor and Mulla [27] conducted a study on textile
mills using the Z score. Selvam et al. [28] and
Venkata Raman et al. [29] conducted studies on
cement companies in India using the Z score model.
Sarbapriya Ray [30] assessed the Indian automobile
industry.
Beaver [31], Altman [3], Deakin [32], Wilcox [33],
Ohlson [34], Taffler [35], Zavgren [36], Sun [37], and
many others used data from developed countries.
Dimitras et al. [38] surveyed failure with respect to
industrial application. Griffin and Lemmon [39] found
that companies with lower book to market ratio have a
negative relationship between returns and failure risk.
Jones [40] brought different techniques in bankruptcy
prediction to the fore. Altman, Narayan, et al. [41]
reviewed international failure studies across 22
countries, including a number of developing
countries, and concluded that multivariate approaches
such as MDA, logistic regression, and probit models
based on financial ratios are better indicators of
failure. These models can perform well over several
time periods and across different countries. From
amongst these models, MDA was found to be more
superior and more acceptable.
Market based models conducted by Black and Scholes
[42] and Merton [43] have also received traction from
the academic community as it is argued that since
market prices reflect future expected cash flows, they
could be more useful in predicting business failure.
Shumway [44] opined that market data such as the
firm’s market size, its previous returns, and the
standard deviation of these returns are better
predictors of bankruptcy than financial ratios based
parameters. Research in this direction continued with
the work of Hillegeist, et al. [45], Reisz and Perlich
[46], and Vassalou and Xing [47]. Campbell et al.
[48] proposed an econometric model that uses both

financial data and market data to predict business
failure.
Vijayakumar C Ganamukkala and Mehmet B Karan
[49] provided and empirical formula to predict
business failure on the Istanbul Stock Exchange.
Ugrulu and Aksoy [50] took to the emerging market
for their failure study in Turkey. Lugovskaja [51]
highlighted financial and non-failure variables in
predicting the failure of Russian SMEs. Kavir Rama
[52] evaluated Altman’s model on South African JSE
listed companies.
While several financial ratios based models/
techniques such as multi-discriminatory analysis
(MDA), multi-regression analysis (MRA), logit,
probit, recursive partitioning, artificial neutral
networks (ANN), Classification and Regression Trees
(CRT), case based reasoning (CBR), rough set theory
(RST), genetic algorithms, support vector machines
(SVM), survival analysis, etc. have been propounded
by researchers, literature survey indicates that a vast
majority of international business failure prediction
studies employ the MDA technique. Having said this,
the superiority of market based models over financial
ratios based models is still mixed and questionable
(Stein [53], Blochlinger and Leippold [54], Agarwal
and Taffler [55]).
3. OBJECTIVES OF THE STUDY
The objectives of this study are two-fold, viz:
- To evaluate the financial health of Indian auto
companies within the CNX Small Cap and Mid
Cap indices using financial ratios as described
by Altman’s Z Score model (1968) for
manufacturing companies.
- To predict the risk of business failure of these
companies through these ratios.
4. RESEARCH METHODOLOGY
This research is based on both empirical and
analytical studies. It focuses on Indian auto companies
that are part of the NSE’s CNX Small Cap and CNX
Mid Cap indices. Secondary data from
www.moneycontrol.com are used for the research.
Twelve years’ financial data from 2000-01 to 2011-12
are used to evaluate the financial health of these
companies. Data are annual in nature. Financial ratio
analysis is used as it has proven to be an important
financial tool to analyze the operational and financial
efficiencies of a company. The CNX Small Cap index
consists of three companies within the auto and auto
ancillary sector while the CNX Mid Cap index
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Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015
consists of seven companies from the sector; in all,
ten companies are included in this research paper. The
companies included in this study are: Amtek Auto,
Escorts Ltd., and TVS Motor Co. from the small cap
index and Amara Raja Batteries, Apollo Tyres, Ashok
Leyland, Eicher Motors, Exide Industries, Motherson
Sumi, and MRF Ltd. from the mid cap index.
5. ALTMAN’S Z SCORE MODEL
Edward Altman’s Z score model (1968) is the most
widely recognized and accepted model to predict
financial failure. It pre-supposes that the company has
publicly traded equity and belongs to the
manufacturing sector. For his study, Altman collected
extensive data from 33 bankrupt and 33 non-bankrupt
companies (in all 66 companies) from the period
1946-1965, to find variables that have the ability to
discriminate between bankruptcy and non-bankrupt
companies. He examined 22 variables of these
companies by using multi-discriminate analysis
(MDA) to propound a discriminant function with five
significant variables (ratios). While working up the
model, Altman considered a number of financial
ratios representing liquidity, leverage, activity and
profitability, to propose one that could effectively
predict business failure. The final Z score, therefore,
is a set of five financial ratios within a multivariate
context.
The Z score is determined from the company’s
financial statements. The score, represented by Z, is
the dependent variable and is based on the degree of
contribution of five key variables (financial ratios)
called independent variables as measured through
their coefficients. The discriminant function is:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
where,
X1 = Working Capital/Total Assets (WC/TA)
X2 = Retained Earnings/Total Assets (RE/TA)
X3 = EBIT/Total Assets (EBIT/TA)
X4 = Market Value of Equity/Book Value of Debt
(MVE/BVD)
X5 = Net Sales/Total Assets (NS/TA).
Z = Failure/Bankruptcy Index
It is noticed that the independent variable, X3, ratio of
EBIT/TA, contributes most to the Z score with a
coefficient of 3.3 while other independent variables
explain the Z score in lower measures.

6. INDEPENDENT RATIOS IN THE
ALTMAN MODEL
X1, the ratio of Working Capital to Total Assets
(WC/TA), is a liquidity ratio. It signifies the liquidity
of the assets relative to the size of the firm. It is a
measure of the firm’s ability to meet its short-term
obligations.
X2 is the ratio of Retained Earnings to Total Assets
(RE/TA). It signifies the profitability accumulated
over time. It is a measure of the management’s
efficiency in managing manufacturing, sales,
administrative and other activities.
X3, the ratio of EBIT to Total Assets (EBIT/TA), is a
productivity ratio. It signifies the long-term survival
of the company in terms of the productivity of the
company’s assets. It is a measure of the firm’s ability
to effectively use its resources and the management’s
efficiency in posting returns generated through the
firm’s sales and investments.
X4 is the ratio of the Market Value of Equity to the
Book Value of Debt (MVE/BVD). It signifies how the
market perceives the firm in terms of its overall worth
vis-à-vis its debt. Equity here represents all shares,
while debt represents current liabilities and long term
liabilities. It is a measure of the extent to which the
value of the assets of the firm can decline before
liabilities exceed its assets and it fails, i.e., it measure
the extent to which the firm can be financed by debt.
X5, the ratio of Net Sales to Total Assets (NS/TA),
signifies the capability of a firm’s assets to generate
sales.
7. EMPIRICAL RESULTS
The three companies from CNX Small Cap Index are
designated S1, S2, and S3 while the seven from CNX
Mid Cap Index are designated M1, M2, M3, M4, M5,
M6, and M7. Financial data of these companies have
been taken from their balance sheets, profit and loss
accounts, and cash flow statements from
www.moneycontrol.com. The ratio-wise data are
shown in the tables with the corresponding
discussions following the tables.
Working Capital to Total Assets (WC/TA) ratio is a
liquidity ratio that expresses a company’s operational
efficiency. Continued operating losses lead to a
decrease in current assets vis-à-vis total assets which
is reflected in this ratio. When most of the firm’s cash
is in the form of inventory or when its customers are
unable to pay their dues for formidable period of time,
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Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015
the firm is in a situation wherein it will be unable to
meet its financial commitments/obligations. Such a
situation is reflective of inefficient operation in terms
of the average collection period.
Working Capital must be so managed that there is less
need to borrow; firms having surplus cash must also
manage their working capital by investing it in
opportunities that have high potential to generate
attractive returns to its share holders. This would
ensure better liquidity. Lower the WC, greater the risk
and higher the profitability. Decreasing WC causes to
less liquidity leading to problems in purchasing
materials and stock outs. However, it also indicates
less debt (signifying less chances if bad debts) that
can increase overall efficiency of the firm.
Table 1 shows that the average WC/TA ratio for small
cap firms has progressively decreased from 2001 to
2004, picked up slightly until the year 2008 before
falling again from 2008 to 2012. In fact, for the year
2012, it happens to be least across the 12 years of the
research period, except for the year 2004 when it was
even lower. This indicates that these firms, in general,
faced liquidity issues during the period 2001 to 2004
and that the situation would be worse staring the year
2012. This could be due to bad average collection
period of the accounts receivables. Of all small cap
firms, only firm S1 could manage its WC deftly to
enjoy a WC/TA ratio of 30% or higher during the last
8, i.e., from 2005 to 2012. Firm S2 had a respectable
value of the ratio until 2008 but slipped into negative
zone the very next year (2009). The following two
years it could just hold up but went down further to
just 1.7% for the year 2012. Firm S3 is the worst hit of
all the small cap firms. It ran into negative WC/TA
ratios from 2003 up to 2006, did pretty well to post
more than 7% n the year 2011 but went back into the
negative in the year 2012. This is clear indication that
form S3 is on a hard drive and is trying to get a hold
of the ratio but without much success.
This average for the mid-cap firms has remained
range bound (average of about 25%) from 2001 to
2008 indicating tight control during this period.
However, from the year 2009, the ratio has fallen
formidably from 24% to about 11%. It is quite evident
that even mid-cap firms have had problems in their
WC management. Of the 7 mid-cap firms, only M1
managed more than 45% on the trot from the year
2007. It indicates good WC management but the ratio
being more than 5 times the average shows that the
firm uses a more cautious approach to its operations.
M4 happens to be the firm with the worst WC/TA
ratio with seven of the twelve years posting negative

values. M2 is just okay while the other firms have the
ratio at the levels of around 15%.
Retained Earnings to Total Assets (RE/TA) ratio is a
measure of the firm’s profitability over its many years
of operation. It shows to what extent the firm’s assets
are financed by its profits. While this is an important
ratio, it is accepted that it may be biased in favour of
well-established firms that have had sufficient time to
accumulate their earnings over the years. A high value
is a positive indication that the firm is able to finance
assets through its RE; i.e., the firm is in a good
position to generate good reserves that it can invest in
areas with high growth potential. On the contrary, a
low RE/TA ratio signifies paucity of earnings to
invest in future growth. Under such circumstances,
when the firm identifies an area for future growth, it
will be constrained to borrow funds from external
resources thereby increasing its debt. This can turn
out to be option that may not be sustainable in the
long run.
Table 2 shows that the average RE/TA ratio for small
cap firms ranged from 0.85% to 9.38% over the
period of analysis with 2004 being the worst year; the
average ratio for mid cap firms ranged from about 6%
to 13% with 2002 being the worst year. S3 has
performed well from 2003 to 2005 and again in 2011
and 2012. In recent years, however, M1 and M7 have
done quite well. S2 and M4 posted negative values in
the same year, 2007, while S2 and M1 posted
formidable negative values both in the year 2004. M4,
M5, and M6 managed to post respectable values at
near or more than 12% quite consistently. Reasons for
the firms not doing well can be attributed to high
input costs and, to some extent, high fund-servicing
costs.
EBIT to Total Assets (EBIT/TA) ratio is a measure of
how efficiently the firm manages its assets and the
projects it chooses to invest in to generate profits
before meeting its financial obligations. The better the
company manages its assets, the more profitable the
company is; therefore, less likely is it to be a failure.
A high value indicates efficient operations and that
projects invested in are well identified, chosen, and
managed to generate future profits. A low EBIT/TA
ratio signifies that the firm is not using its assets
efficiently and that chosen projects are not profit-
driven, sometimes driving the ratio to negative values.
Table 3 shows that the EBIT/TA ratio for small cap
firms has consistently increased from about 6% in
2008 to about 12% in 2012 indicating a healthy trend,
the best year being 2004 when the ratio was almost
22%. The mid cap firms, on an average, have done
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Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015
pretty well throughout the 12-year period, posting
more than 20% for 6 years, with the lowest being a
respectable 15% in the year 2002.
Small cap firms, S1, S2, and S3, have all been
inconsistent in their values of EBIT/TA, with S2 even
posting a negative value in the year 2004. It did well
to rebound the very next year but has not really picked
itself up in the future years. It has not posted more
than 10.5% in recent years indicating that its
management has been very wanting in efficient
management of its assets. Of the three small cap
firms, only S3 has done quite well to post more than
16% in 8 of the 12 years.
Of the mid cap firms, except for M2 and M3, all other
firms have managed their assets well to post an
EBIT/TA ratio exceeding 14% more often than not.
M6 has managed this ratio the best, closely followed
by M5, M4, and M1. The trend indicates that managers
of mid cap firms have been able to better manage their
firm’s assets and post good profitability vis-à-vis the
assets employed to generate these profits.
Overall, however, both small cap and mid cap firms
have done quite well to post good EBIT/TA ratios,
though the former have done only half as well as the
latter. This is understandable since small cap firms
work with constrained budgets and limited resources
with limited availability of funds to invest in
profitable ventures. Given this situation, senior
managers must devise ways that can unmistakably
increase the ratio.
Market Value of Equity to Total Liabilities
(MVE/TL) ratio indicates to what extent a company’s
assets can decline in value before its liabilities exceed
its assets and it becomes a business failure. It is
commonly used in the study of business failure
analysis. Normally, MVE falls when there is a decline
in profitability due to the perceptions and sentiments
of the market towards the firm’s profitability. A value
exceeding 2.00 is considered very safe.
The performances of the small cap firms (Table 4)
indicate that for most of the time (close to 50% of the
time) their debts have been more than the MVE, a
precarious situation. At the barest minimum, it is
expected that MVE exceeds debt by at least 50%.
Using this measure, S1 is a sure failure, while S2 has
remarkably improved since the period 2001 to 2005, a
period of low MVE/BVD. S3 has done well in 1011
and 2012 but, by and large, its value is inconsistent.
Mid cap firms have done well only in recent years. In
the past, most of the firms have carried more debt

driving their MVE/BVD ratio down. M4 has been
particularly extremely bad pushing itself to the brink
of failure. M6 and M7 have done respectably well
since 2004, and M3 since 2005 (except in the year
2009). The case of M5 is interesting: It has used
minimum debt since 2007; in the year 2012, it had
zero debt driving its EBIT/BVD to infinity!
Firms such as S1 and M4 can look to restructure their
debt at the first sign of business failure to marginally
stabilize their operations while realigning themselves
to a healthy position. Such a decision has the potential
to safeguard the firms from sub-optimal financial
performance and hence negative market value impact.
Net Sales to Total Assets (NS/TA) is a measure of a
firm’s effectiveness in using its assets to generate
sales. It is generally expected to be around or more
than 2. It is well recognized that overall financial
performance and profitability is dependent on sales
revenue. A high ratio is good as it indicates that the
firm is using its assets efficiently to drive sales. A low
ratio indicates that the firm is unable to fully and
effectively employ its assets to provide enough sales
revenues; this will adversely impact its overall
financial performance and profitability in the long
run.
From Table 5, we see that small cap firms have, on
average, posted a ratio of less than 2 except for the
year 2003; the worst year was 2009 when NS
exceeded TA only by 19%. The ratio has,
nevertheless, increased from 2009 to 2012 indicating
that TA have been used quite effectively to generate
appreciable sales revenue. Mid cap firms, on the other
hand, have, on average, performed pretty well having
posted a ratio of more than 2 in 7 of the 12 years
under study indicating that mid cap have employed
their assets better to drive sales revenue. Yearly
performance of mid cap firms has been consistently
better than the corresponding year’s performance of
small cap firms signifying that the former are better
placed in managing their assets to achieve higher
levels of sales revenue.
Both S1 and S2 have not posted a ratio exceeding 2 in
any of the years under study, though the latter’s
performance was far better than that of the former. S3
has done exceedingly well in generating sales by
managing its assets very intelligently. Of the mid cap
firms, only M7 was able to achieve the same status. In
independent terms, most of the mid cap firms have to
do much better to generate sales through efficient use
of their assets.
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Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015
8. THE Z SCORE
The Z sore of the 10 companies are calculated and are
as given in Table 6. S indicates successful as defined
by Altman, F indicates failure, and I indicates an
indeterminate condition. Altman stated different
financial status of companies for different ranges of
their Z score thus:
Z score < 1.81 signifies failed companies or
having high probability of failure
Z score > 2.67 signifies successful companies or
having low probability of failure
Z score between 1.81 and 2.67 signifies
companies that are in an indeterminate condition
Using the above definition, we understand that
companies with a Z score of less than 1.81 can be
classified as failed and those with a Z score of more
than 2.67 can be classified as successful. However,
companies with scores between 1.81 and 2.67,
representing a grey or an indeterminate situation, can
be classified as marginal and must be monitored
closely in terms of their capability to take on risk in
their operations and other financial characteristics;
this is to ensure that they have a good amount of time
with them to identify and implement remedial
measures that best fit their then prevalent situation to
turn them around as soon as possible.
It is observed that S1 can be classified as a failed
company in recent years and as being in the
indeterminate or grey area in the past; S2, on the other
hand, has been successful in the recent years, while
being largely in the failed or indeterminate area in the
past. S3 is the only small cap company that has
predominantly been successful except during the 2009
when it was in the indeterminate area.
The scores also reveal that most of the mid cap
companies have, more often than not, been successful.
M7 has been successful throughout, M2 and M6 have
been in the indeterminate area just once in the distant
past, and M3 has been in the indeterminate area twice
though spread well apart. M1 appears to have had
problems in the earlier years but did good to turn
around completely in the year 2006 and have not
looked back since then. M5 too had had problems in
the initial three years of the period of study but has
improved vastly over the years. The only exception in
the mid cap space is M4 which, while having fared
very well up until 2008, finds itself suddenly in the
failed or indeterminate areas.
 Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015

Table 1. Ratio X1: Working capital to total assets (WC/TA)

Company 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
S1 0.3032 0.3938 0.3600 0.3699 0.3554 0.2992 0.6448 0.5586 0.2277 0.2436 0.2223 0.1823
S2 0.0170 0.1326 0.0980 -0.0003 0.2232 0.1636 0.1543 0.1981 0.1874 0.2722 0.2757 0.2389
S3 -0.0659 0.0721 0.0624 0.0754 0.0357 0.0254 -0.0697 -0.1729 -0.2178 -0.1390 0.0741 0.2366
Average S 0.0848 0.1995 0.1735 0.1483 0.2048 0.1627 0.2431 0.1946 0.0658 0.1256 0.1907 0.2193
M1 0.5564 0.4967 0.4574 0.4678 0.5830 0.5338 0.4097 0.4132 0.3613 0.2855 0.2711 0.5022
M2 0.0919 0.0941 0.0538 0.1603 0.1923 0.1928 0.3357 0.2064 0.2150 0.2617 0.1628 0.3509
M3 -0.0815 0.0552 0.1240 0.1325 0.0717 0.2267 0.2791 0.4007 0.2907 0.3455 0.4120 0.4628
M4 -0.3056 -0.1588 -0.1364 0.1168 0.0687 0.0554 0.0725 -0.0745 0.0167 -0.2316 -0.1989 0.1849
M5 0.1649 0.1694 0.1125 0.1365 0.1861 0.1209 0.1278 0.2314 0.1648 0.2237 0.2404 0.3295
M6 0.1767 0.2228 0.1234 0.0679 0.2455 0.2557 0.3359 0.0410 0.1345 0.1300 0.1901 0.2044
M7 0.1640 0.1664 0.2795 0.1728 0.3381 0.3903 0.4238 0.4583 0.4482 0.4720 0.4282 0.4419
Average M 0.1095 0.1494 0.1449 0.1792 0.2408 0.2537 0.2835 0.2395 0.2330 0.2124 0.2151 0.3538

Table 2. Ratio X2: Retained earnings to total assets (RE/TA)

Company 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
S1 0.0356 0.0078 0.0187 0.0244 0.0538 0.0663 0.0468 0.0482 0.0832 0.0852 0.0427 0.0756
S2 0.0265 0.0480 0.0596 0.0472 0.0072 -0.0041 0.0118 0.0304 -0.2108 0.0097 0.0006 0.0457
S3 0.0994 0.0797 0.0318 0.0084 0.0102 0.0322 0.0748 0.1232 0.1532 0.1865 0.0675 0.0747
Average 0.0538 0.0452 0.0367 0.0267 0.0237 0.0315 0.0445 0.0673 0.0085 0.0938 0.0369 0.0653
M1 0.2014 0.1468 0.2241 0.1065 0.1392 0.1120 0.0878 0.0314 -0.0017 0.0308 0.0776 0.0902
M2 0.0372 0.0455 0.1319 0.0417 0.1146 0.0579 0.0440 0.0450 0.0535 0.1472 0.0348 0.0139
M3 0.0454 0.0552 0.0378 0.0105 0.0888 0.0957 0.0796 0.0744 0.0673 0.0362 0.0201 0.0209
M4 0.1398 0.1460 0.0966 0.0456 0.0747 -0.0332 0.3326 0.1288 0.0623 0.2422 0.1215 0.1674
M5 0.1091 0.1963 0.1970 0.1508 0.1587 0.1296 0.0927 0.0755 0.0745 0.0590 0.0277 0.0311
M6 0.1060 0.1001 0.0983 0.0226 0.0929 0.1129 0.0838 0.1580 0.1601 0.0977 0.0482 0.0935
M7 0.1251 0.1596 0.1259 0.1485 0.0641 0.1024 0.0524 0.0245 0.0181 0.1094 0.0814 0.0235
Average 0.1091 0.1214 0.1302 0.0752 0.1047 0.0825 0.1104 0.0768 0.0620 0.1032 0.0588 0.0629

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 Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015

Table 3. Ratio X3: Earnings before interest and tax to total assets (EBIT/TA)

Company 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
S1 0.0755 0.0621 0.0495 0.0458 0.0816 0.1178 0.0811 0.0851 0.1618 0.1657 0.1405 0.1699
S2 0.0889 0.0793 0.1040 0.1001 0.0617 0.0486 0.0765 0.1664 -0.1760 0.0967 0.0628 0.1220
S3 0.1982 0.1786 0.0821 0.0568 0.0328 0.0936 0.1661 0.2421 0.3240 0.3904 0.2052 0.1774
Average 0.1209 0.1067 0.0785 0.0676 0.0587 0.0867 0.1079 0.1645 0.1033 0.2176 0.1362 0.1564
M1 0.3530 0.3003 0.4157 0.2095 0.2480 0.1983 0.1621 0.0614 0.0609 0.1182 0.1659 0.1380
M2 0.1291 0.1204 0.2489 0.1307 0.2442 0.1719 0.1250 0.1299 0.1439 0.2966 0.1489 0.1168
M3 0.1431 0.1496 0.1089 0.0673 0.2379 0.2511 0.2333 0.1824 0.2232 0.1586 0.1287 0.1137
M4 0.2682 0.2586 0.1878 0.1140 0.1582 0.1700 0.3467 0.2688 0.2369 0.5179 0.0932 0.2517
M5 0.2135 0.3458 0.3552 0.3019 0.3017 0.2669 0.2106 0.1434 0.2062 0.1803 0.1318 0.1233
M6 0.2322 0.2320 0.2602 0.1223 0.2194 0.2389 0.1879 0.3551 0.3535 0.2819 0.2200 0.2900
M7 0.2210 0.1527 0.2255 0.2826 0.1279 0.1946 0.1093 0.0684 0.0671 0.2094 0.1829 0.1276
Average 0.2229 0.2228 0.2575 0.1755 0.2196 0.2131 0.1964 0.1728 0.1845 0.2518 0.1531 0.1659

Table 4. Ratio X4: Market value of equity to book value of debt (MVE/BVD)

Company 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
S1 0.6699 1.1598 1.3379 0.5175 1.4290 4.1824 2.1905 2.0278 0.6928 0.3410 0.2546 0.3375
S2 1.6583 1.9426 7.3623 3.7911 1.2452 2.2346 1.5404 1.0984 0.4523 0.3111 0.6227 0.9345
S3 2.7225 3.6202 0.9750 0.2976 0.6221 1.1166 4.3327 4.3201 8.3464 0.3932 0.2617 0.0682
Average 1.6836 2.2409 3.2251 1.5354 1.0988 2.5112 2.6879 2.4821 3.1638 0.3484 0.3797 0.4467
M1 14.8859 8.5262 7.6901 0.5476 1.1742 0.1837 0.4697 0.2985 0.2916 0.3741 0.4599 0.2967
M2 1.8688 1.8373 3.1541 1.3225 4.3791 0.2099 0.1488 0.2027 0.2227 0.1583 0.1037 0.0484
M3 3.3709 1.4228 1.6276 0.6157 2.6532 3.9691 3.5574 1.4224 0.3017 0.0801 0.0538 0.0302
M4 0.0054 0.0032 0.0026 0.0048 0.0000 0.0000 0.0001 0.0001 0.0001 0.0001 0.0001 0.0000
M5 #DIV/0! 5671.279 116.368 10.454 15.471 9.4564 0.6580 0.3585 0.4453 0.0456 0.0324 0.0297
M6 3.7199 4.6909 5.0225 1.9979 3.8065 1.8856 1.9808 5.9383 2.2876 0.1060 0.0304 0.0923
M7 2.6705 1.8510 3.9002 8.3236 1.3582 2.6233 3.1208 2.4525 2.1691 2.1607 1.4503 0.6626
Average #DIV/0! 812.8015 19.6807 3.3237 4.1203 2.6183 1.4194 1.5247 0.8169 0.4178 0.3044 0.1657

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 Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015

Table 5. Ratio X5: Net sales to total assets (NS/TA)

Company 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
S1 0.2931 0.2389 0.1943 0.1770 0.2769 0.3776 0.2975 0.4123 0.9923 0.9862 0.7607 0.7690
S2 1.8776 1.4936 1.3569 1.2753 1.2270 1.3375 1.1017 1.0093 0.7509 0.4566 0.6822 0.7830
S3 3.7810 3.4622 2.3349 2.1354 2.1638 2.6718 2.8102 3.3222 4.0639 4.9639 3.9371 3.0793
Average 1.9839 1.7316 1.2954 1.1959 1.2226 1.4623 1.4031 1.5813 1.9357 2.1356 1.7933 1.5438
M1 2.6056 2.3751 2.3202 1.9343 1.6950 1.5675 1.6599 1.1656 0.9373 0.9390 0.8997 0.7249
M2 1.9487 1.4410 1.7646 1.9943 2.1876 2.0600 1.8929 2.0004 1.9236 2.2839 2.3447 1.4569
M3 2.0144 1.7228 1.2526 1.1349 2.6256 2.9029 2.5470 2.0844 2.2297 1.6487 1.2167 1.0962
M4 1.6166 1.2021 0.9322 0.9158 3.3816 3.2339 2.6678 5.3994 3.5928 5.0017 4.3085 3.3755
M5 1.6739 1.8489 1.8253 2.3995 2.2923 2.0915 1.8290 1.6777 1.6437 1.3625 1.1573 0.9322
M6 1.6592 1.5698 1.5406 1.3758 1.5209 1.5468 1.1844 2.2692 2.2369 1.8940 1.5023 1.7375
M7 2.6398 2.5476 2.8234 3.4334 2.4296 2.7667 2.7463 2.2944 2.2982 2.1983 2.1367 2.0304
Average 2.0226 1.8153 1.7798 1.8840 2.3047 2.3099 2.0753 2.4130 2.1232 2.1897 1.9380 1.6219

Table 6. Altman’s Z scores

Co. 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
S1 1.3579F 1.6233F 1.6185F 1.1166F 1.9053I 3.7277S 2.7188S 2.6475I 2.3317I 2.1494I 1.7036F 1.8568I
S2 3.2234S 3.1471S 6.3183S 3.9461S 2.4559I 3.0292S 2.4799I 2.4978I 0.3713F 1.3026F 1.5948F 2.0968I
S3 6.1285S 6.4219S 3.3103S 2.6037I 2.7023S 3.7262S 5.9788S 6.6784S 10.0941S 6.5823S 4.9548S 4.0940S
M1 13.6515S 9.2834S 9.1685S 3.6648S 4.1125S 3.1294S 3.0913S 2.0872I 1.7444F 1.9393S 2.1573I 2.0873I
M2 3.6584S 3.1172S 4.7276S 3.4697S 6.0120S 3.0657S 2.8589S 2.8613S 2.8648S 3.8778S 3.1423S 2.3118I
M3 4.4748S 3.2137S 2.7902S 1.9000I 5.2127S 6.5193S 5.8977S 4.1247S 3.5904S 2.6856S 2.1963S 2.0741I
M4 2.3338I 2.0713S 1.5252F 1.4987F 4.0906S 3.8149S 4.3646S 6.3775S 4.4819S 6.7719S 4.5473S 4.6622S
M5 #DIV/0! # 3406.235 73.2296S 10.0436S 13.0160S 8.9726S 3.2018S 2.7492S 2.8935S 2.3359I 1.9389I 1.7960F
M6 5.0177S 5.5575S 5.6986S 3.0911S 4.9534S 3.9315S 3.5134S 7.2742S 5.1616S 3.1806S 2.5420I 3.1261S
M7 5.3432S 4.5853S 6.4195S 9.7753S 4.1619S 5.5947S 5.5612S 4.5760S 4.3843S 4.9053S 4.2385S 3.4124S
#
Total debt for the year was zero

18

9. CONCLUSION
This research study demonstrates that the financial
health of small cap and mid cap auto companies listed
on the CNX Small Cap and CNX Mid Cap is fair to
good. The basis of analysis is the combination of five
key ratios that Altman identified as having the
required predicted power. The ratios are Working
Capital/Total Assets (WC/TA), Retained
Earnings/Total Assets (RE/TA), EBIT/Total Assets
(EBIT/TA), Market Value of Equity/Book Value of
Debt (MVE/BVD), and Net Sales/Total Assets
(NS/TA).
Of the three small cap companies, the first and the
second firm fared badly, while the third turned out to
be quite healthy financially in 11 of the 12 years, the
period of study, all in terms of the ratio values. This
indicates that the risk of business failure for firms S1
and S2 are potentially higher as compared to that of
S3. This is compounded by the fact that the financial
position of both S1 and S2 is quite precarious and
requires the direct intervention of top management to
set them on the right track to better financial health
and hence mitigate the risk of impending business
failure.
On the other hand, the performance of the mid cap
companies was, by and large, good, posting quite
healthy values for the five identified ratios, though
clearly signifying the opportunity to bolster them up.
To this extent it is very necessary that their working
capital be better managed even as they appear to have
good control over their total assets turnover much of
the time. While their EBIT is appreciable, top
management must be more proactive to seek ways to
increase their EBIT so that that they are bold enough
to plough back a good part of it into business
operations in terms of investing in well-identified
potential high return opportunities to continue this
cycle.
The Z scores of these companies indicate that mid cap
firms are in a better financial situation as compared to
the small cap firms. Some of them have done
consistently good while some have been intermittently
bad. The scores suggest that top management will
have to put their heads and thoughts together to come
out with creative and innovative ideas that can be
relatively easily implemented and take their respective
companies along directions that see their companies
come out successful in the years to come. In doing so,
they must necessarily lay focus not just on the short
term but also on long term goals and objectives that
will hold them in good stead vis-à-vis their
competitors.
19
Vijayakumar and Rajendra; JOBARI, 11(1): 10-21, 2015
COMPETING INTERESTS
Authors have declared that no competing interests
exist.
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