chapter

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CHAPTER I

INTRODUCTION

1.1 Introduction of the study:

One of the most important areas in the day to day management of the firm is the management of

working capital. Working capital refers to the funds invested in the current assets i.e. investment

in stock, sundry debtors, cash and others current are essential to use fixed assets profitability for

e.g.: A machinery cannot be used without raw materials. The investments on the purchase of raw

material are identified as working capital. It is obvious that a certain amount of the fund is

always tied up in raw material inventories. Working capital may be regarded as lifeblood of a

business. Its effective provision can do much ensure the success of the business, while its

inefficient management can lead not only loss of the profits but also the ultimate downfall of

what otherwise might be considered as promising concern.

The importance of working capital in commercial under takings can never be over emphasized.

A concerned needs funds for its day to day running. A large amount of working capital would

mean that the company has idle funds the various study is conducted by the bureau of public

enterprises have shown that one of the reasons for poor performance of the public sector

undertaking in our country has been the large amount of the funds locked up in working capital.

Since funds have a cost, the company has to pay huge amount as interest on funds. This results in

over the capitalization. Over the capitalization implies that company has too large funds for its

requirements, resulting in low rate of the return, a situation which implies a less than optimal use

of resources. A firm has therefore, to be very careful in estimating its working capital

requirements.

Working capital management is concerned with the problems that arise in attempting to manage

the current assets, the current liabilities and the relationship that exists between them. The term

current assets refer to those assets which is in ordinary course of business can be, or will be

converted into cash within one year without undergoing a diminution in value and without

disrupting the operation of the firms. Examples are cash, marketable securities, account

receivables, current liabilities are those liabilities which are intended, at their inception to be paid

in the ordinary course of business in a year out of current assets or earnings of the concern.

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1.2 Problem statement:

The liquidity management (working capital management) has become the important

issues in harbor. A cargo handling and the storage charges has become the important issue

in harbor and is it better to be aggressive or conservative in managing working capital?

What are the approaches of the finance department to information requested to address

their working capital challenges and how to maximize the firm’s profitability?

1.3 Objectives:

• To analyze the movement of current assets and current liabilities and to determine the

amount of the working capital employed.

• To study the working capital components.

• To measure financial soundness of the company by analyzing various ratios

• To suggest ways for better management and control of working capital at Chennai port

trust.

1.4 Scope of study:

The study is confined to Chennai port trust and analysis of solvency and

profitability of its 5 year financial statements and to assess the proper management of

current assets & current liabilities.

1.5 Research methodology:

Collection of Data

• These data collected from annual reports, balance sheets, profit and loss account of the

company.

Tools used for analysis of data

The methodology, I have adopted for my study is the various tools, which

basically analyses critically financial position of to the organization

i. ratio analysis

ii. comparative balance sheet

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The above parameters are used for critical analysis of financial position. With the evaluation of

each component, the financial position from different angles is tried to be presented in well and

systematic manner. By critical analysis with the help of different tools, it becomes clear how the

financial manager handles the finance matters in profitable manner in the critical challenging

atmosphere, the recommendation is made which would suggest the organization in formulation of

a healthy and strong position financially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis,

the organization would be able to conquer it’s in efficiencies and makes the desired changes.

Sampling design

Last five years’ financial statements.

Tools Used: MS-Excel.

1.6 Limitations of the study:

• In present study the analysis is mainly based on secondary data given in annual audited

balance sheets, profit and loss a/c and reports of CHENNAI PORT TRUST.

• The study does not touch all the units of CHENNAI PORT TRUST.

• Limited span of time is a major limitation of this project.

• The result does not reflect the day to day transactions.

• Balancing liquidity, profitability and risk in managing working capital.

1.7. Chapter scheme:

The chapter I deals with introduction of the study, objective of the study, problem & scope

of the study, limitation and research methodology of the study.

The Chapter II is about the summary of industry and company profile.

The chapter III gives conceptual review of the study and research review of the topic.

The chapter IV deals with data analysis & interpretation of collected data’s.

The chapter V provides findings, suggestions & conclusion of the research.

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CHAPTER II

PROFILES

2.1 Industry profile:

A port is a location on a coast or shore containing one or more harbors where ships can dock and

transfer people or cargo to or from land. Port locations are selected to optimize access to land

and navigable water, for commercial demand, and for shelter from wind and waves. Ports with

deeper water are rarer, but can handle larger, more economical ships. Since ports throughout

history handled every kind of traffic, support and storage facilities vary widely, may extend for

miles, and dominate the local economy. Some ports have an important military role.

Container shipping was first introduced in the 1950s and since the late 1960s has become the

most common method for transporting many industrial and consumer products by sea. Container

shipping is performed by container shipping companies that operate frequent scheduled or liner

services, similar to a passenger airline, with pre-determined port calls, using a number of owned

or chartered vessels of a particular size in each service to achieve an appropriate frequency and

utilization level.

Container shipping has a number of advantages compared with other shipping methods,

including:

Less cargo handling. Containers provide a secure environment for cargo. The contents of a

container, once loaded into the container, are not directly handled until they reach their final

destination.

Efficient port turnaround. With specialized cranes and other terminal equipment, container ships

can be loaded and unloaded in significantly less time and at lower cost than other cargo vessels.

Highly developed intermodal network. Onshore movement of containerized cargo, from points

of origin, around container terminals, staging or storage areas and to final destinations, benefits

from the physical integration of the container with other transportation equipment such as road

chassis, railcars and other means of hauling the standard sized containers. A sophisticated port

and intermodal industry has developed to support container transportation.

https://en.wikipedia.org/wiki/Harbor

https://en.wikipedia.org/wiki/Navigability

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Reduced shipping time. Container ships can travel at speeds of up to 25 knots, even in rough

seas, thereby transporting cargo over long distances in relatively short periods of time.

2.1.1 Growth in global containerization:

In 2010, world container traffic comprised 541,784 thousand TEUs, according to Drewry. The

compound average growth rate (CAGR) of world container traffic from 2000 to 2010 is

estimated at 8.6% compared with a global real GDP CAGR of 2.6% for the same period,

according to Drewry. Key drivers that contributed to the growth in global container throughput

over this period were sustained growth in GLOBAL TRADE, increased global sourcing and

manufacturing, a shift from transporting cargo in bulk to transporting cargo in containers and

growth in transshipment volumes. In 2013, world container traffic growth amounted to 3.0%, flat

with global GDP growth of 3.0%, according to IMF.

India has 13 major ports and about 200 non-major ports. Cargo traffic, which was 976 million

metric tons (MMT) in 2012 is expected to reach 1,758 MMT by 2017. The Indian ports and

shipping industry plays a vital role in sustaining growth in the country’s trade and commerce.

India currently ranks 16th among maritime countries, with a coastline of about 7,517 km.

Around 95 per cent of India's trade by volume and 70 per cent by value takes place through

maritime transport, according to the Ministry of Shipping.

The Indian government continues to support the ports sector. It has allowed foreign direct

investment (FDI) of up to 100 per cent under the automatic route for projects regarding

construction and maintenance of ports and harbors. It has also facilitated a 10-year tax holiday to

enterprises engaged in developing, maintaining and operating ports, inland waterways and inland

ports.

2.1.2 Market Size:

The number of containers handled at major ports in India increased 8.32 percent year-over-year

from April through November 2014, the first eight fiscal months, continuing an accelerating

growth trend that leaves state-owned port authorities on track to meet annual throughput targets.

Container-handling in the eight-month period total 5.31 million 20-foot-equivalent units, up from

4.9 million TEUs a year earlier, according to preliminary figures available from major port

authorities. Containerized cargo tonnage in the period was up 5.87 percent, at 80 million tons.

http://www.globalports.com/globalports/about-us/our-industry-overview/container-market/industry-overview#22195530

http://indiainbusiness.nic.in/newdesign/index.php?param=industryservices_landing/361/2#83574832

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The Indian ports sector received FDI worth US$ 1,637.30 million in the period April 2000–

November 2014, as per the Department of Industrial Policy and Promotion (DIPP). The ports

sector was also awarded 30 projects in FY14,INVESTING over Rs.20,000 crore (US$ 3.24

billion) which is a threefold increase over the preceding year.

In FY14, coal cargo traffic grew by 20.6 per cent to 104.5 million tones (MT) from 86.7 MT in

FY13. With regard to commodities, there was a rise of 25 per cent in handling of fertilizers in

April 2014 as against April 2013. Iron ore handling also grew by 16.8 per cent during that

period.

2.1.3 Investments:

A massive investment into India’s ports and its road sector has been announced by Indian

Minister for Shipping, Road Transport and Highways, Mr.Nitin Gadkari, which is expected to

help boost the country’s economy. According to the Economic Times, the Kolkata Port Trust

along with the Indian government is to construct a port in the Sagar Islands at a cost of more than

US$ 1.8 billion. Gadkari has also announced additional investments of more than US$ 520

million in the port sector for floating storages and a dry bulk cargo handling terminal.

Reliance Industries has signed shipping agreements with one of the world’s largest shipping

companies, Mitsui OSK Lines Ltd (MOL), for transporting liquefied ethane from North America

to India. MOL will supervise the construction of six Very Large Ethane Carriers (VLECs),

ordered by Reliance. MOL will also operate and manage the vessels after these are built and

delivered.

Jawaharlal Nehru Port Trust would take 60 per cent equity in the Indian company to be formed

for developing the Chabahar port in southeastern Iran. Kandla Port Trust (KPT) would hold the

remaining equity. The Special Purpose Vehicle (SPV) is likely to be named Indian Ports Global

SKIL Ports and Logistics is planning to INVEST Rs.1,000crore (US$ 162.17 million) to build a

multipurpose terminal at Karanja near here over the next two years. The proposed terminal

would be developed on a 200-acre land parcel at Karanja, off the financial capital's eastern coast,

and would have a sea frontage of 1,000 meters.

Sajjan Jindal, the owner of diversified JSW Group with interests in steel, cement and power, has

bought a 10 per cent stake owned by global hedge fund Eton Park Capital in his privately-owned

ports company JSW Infrastructure for roughly Rs.600 crores (US$ 97.3 million). The stake sale






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signals the bright prospect of the Indian ports sector as cargo traffic rises with increase in

demand for steel, coal and petroleum products.

Hyderabad-based infra player IL&FS Engineering Services has announced that it has secured a

port project worth Rs.179.84 crore (US$ 29.18 million) in Maharashtra. "The company has

received a letter of award (LOA) from IL&FS Maritime Infrastructure Company Limited

(IMICL) on behalf of Dighi Port Limited for engineering, procurement, and construction (EPC)

contract for the development of multipurpose berth, backup yard development and utilities of

multipurpose terminal berth 5 on the north of Dighi Port, Agardanda in Maharashtra," the

company said. According to the company, the project completion period is 545 days from the

date of notice to proceed (NTP) and the scope of work includes design and construction of

multipurpose berth, reclamation of 50 acres of backup area, among others.

2.1.4 Government Initiatives:

The Indian government will develop 10 coastal economic regions as part of plans to revive the

country’s Sagarmala (string of ports) project, according to the Daily Shipping Times. The zones

will be manufacturing hubs supported by port modernization projects and could cover 300-

500km of coastline. The government is also looking to develop the inland waterway sector as an

alternative to road and rail transport for getting goods to the nation’s ports and is hoping to

attract private INVESTMENT into the sector.

The Minister of State for Shipping, Mr Pon. Radhakrishnan has informed that following steps

have been taken by the Government for capacity expansion of ports:

Up to 100 per cent FDI under the automatic route is allowed for port development projects.

Income tax incentives are allowed as per Income Tax Act, 1961.

Bidding documents like RFQ, RFP and Concession Agreement have been standardized

Enhanced delegation of financial powers to Shipping Ministry to accord investment approval for

PPP projects.

Streamlining of security clearance procedures.

Close monitoring of developmental projects in the Major Ports.

The Ministry of Shipping has formulated a Perspective Plan for development of the Maritime

Sector, namely, “The Maritime Agenda (2010-2020).” This Plan has estimated the traffic


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projections and capacity additions at the ports up to the year 2020. Based on the estimated

growth, it has projected capacity of 3130 million tons by 2019-20.

In the Union Budget 2013–14, the government allocated Rs.11,635 crores (US$ 1.88 billion) for

the expansion of the VO Chidambaranar (VOC) Port in Tuticorin. Industry representatives,

especially exporters, feel that the enhancement of berthing facilities there will increase exports

and result in big savings in freight for manufacturers who have to send their products bound for

the west through Colombo in Sri Lanka.

The Ministry of Shipping has finalised guidelines which allows Indian companies to register

their ships under foreign flags. This follows the government’s decision to create a new category

of fleet called ‘1 Indian controlled tonnage’. The guidelines will be announced shortly, as per an

official.

The National Maritime Agenda 2010–2020 is an initiative of the Ministry of Shipping to outline

the framework for the development of the port sector. The agenda also suggests policy-related

initiatives to better the operating efficiency and competitiveness of ports in the country.

The Minister for Road Transport, Highways and Shipping Mr Nitin Gadkari said that his

ministry will coordinate with other ministries of Environment & Forests, Tourism, Power and

Water Resources, River Development and Ganga Rejuvenation for developing transport and

tourism along the river Ganga.

2.2 Company Profile:

Chennai Port, the third oldest port among the 12 major ports, is an emerging hub port in the East

Coast of India. This gateway port for all cargo has completed 128 years of glorious service to the

nation’s maritime trade.

Maritime trade started way back in 1639 on the sea shore Chennai. It was an open road -stead and

exposed sandy coast till 1815. The initial piers were built in 1861, but the storms of 1868 and 1872

made them inoperative. So an artificial harbor was built and the operations were started in

1881.The cargo operations were carried out on the northern pier, located on the north-eastern side

of Fort St. George in Chennai. In the first couple of years the port registered traffic of 3 lakh tone

of cargo handling 600 ships.

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Being an artificial harbor, the port was vulnerable to the cyclones, accretion of sand inside the

basin due to underwater currents, which reduced the draft. Sir Francis Spring a visionary skilfully

drew a long-term plan to charter the course of the port in a scientific manner, overcoming both

man-made and natural challenges. The shifting of the entrance of the port from eastern side to the

North Eastern side protected the port to a large extent from the natural vulnerabilities. By the end

of 1920 the port was equipped with a dock consisting of four berths in the West Quays, one each

in the East & South Quay along with the transit sheds, warehouses and a marshalling yard to

facilitate the transfer of cargo from land to sea and vice versa. Additional berths were added with

a berth at South Quay and another between WQ2 & WQ3 in the forties.

India’s Independence saw the port gathering development, momentum. The topography of the Port

changed in 1964 when the Jawahar dock with capacity to berth 6 vessels to handle Dry Bulk

cargoes such as Coal, Iron ore, Fertilizer and non-hazardous liquid cargoes was carved out on the

southern side.

In tune with the international maritime developments, the port developed the Outer Harbour,

named Bharathi Dock for handling Petroleum in 1972 and for mechanized handling of Iron Ore in

1974. The Iron ore terminal is equipped with Mechanized ore handling plant, one of the three such

facilities in the country, with a capacity of handling 8 million tonnes. The Chennai port’s share of

Iron ore export from India is 12%. The dedicated facility for oil led to the development of oil

refinery in the hinterland. This oil terminal is capable of handling Suezmax vessels.

In 1983, the port heralded the country’s first dedicated container terminal facility commissioned

by the then prime minister Smt.Indira Gandhi on 18th December 1983. The Port privatized this

terminal and is operated by Chennai Container Terminal Private Limited. Having the capability of

handling fourth generation vessels, the terminal is ranked in the top 100 container ports in the

world. Witnessing a phenomenal growth in container handling year after year the port is added

with the Second Container Terminal with a capacity to handle 1.5 M TEUs to meet the demand.

To cater to the latest generation of vessels and to exploit the steep increase in containerized cargo

the port is planning to welcome the future with a Mega Container Terminal, capable of handling 5

Million TEUs expected to be operational from 2013.

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The Chennai port is one among the major ports having Terminal Shunting Yard and running their

own Railway operations inside the harbor on the East Coast. The port is having railway lines

running up to 68kms and handles 25% of the total volume of the cargo, 4360 rakes (239412

wagons) during 2009-10.

The port with three Docks, 24 berths and draft ranging from 12m to 16.5m has become a hub port

for Containers, Cars and Project Cargo in the East Coast. The port has handled an all-time high of

61.06 Million tons of cargo registering an increase of 6.2% over previous year. An increase of

10.14% in handling of cars from 273917 Units in the year 2009-10 when compared with 248697

Units in the year 2008-09 and an increase of 6.39% in handling of containers from 1143373 TEUs

in the year 2008-09 to 1216438 TEUs in the year 2009-10. The long term plan for Chennai Port

envisages that the Port will mainly handle 4C’s i.e. Containers, Cars, Cruise and Clean Cargo.

2.2.1 Future Plans:

Master plan for Port Railway, Realigning Rail and Road network.

Dedicated Elevated Expressway from Chennai Port to Maduravoyal upto NH4 has

been approved by the Government to enhance the hinterland connectivity.

Development of Ro-Ro Terminal and a Multi-level car parking facility with a capacity

of 5000 cars.

Chennai Mega Container Terminal with a continuous quay length of 2 km with 18-

22m side along draft. Capable of handling ultra large container ships carrying over

15000 TEU’s.

The break water extension from existing outer arm will be utilized to develop deep

draft oil berth for handling VLCCs.

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2.2.2 History:

The little fishing village called Chenna Patnam, which was founded in 1639, became prominent

during the early part of the 18th Century when the East India Company was active on the East

Coast. In the absence of the harbor, the Company ships were anchored about quarter mile offshore

and the cargo to and from the ships were transported through small lighters called Masula

boats. As the loss of cargo while transporting through Masula boats was high, it was proposed to

build a pier to berth larger crafts and an Iron screw pile pier was built in 1861 to a length of 1,100

ft., perpendicular to the shore during November 1881, due to violent cyclone over half a mile of

breakwater was breached and equipment and human lives lost. Though there was a demand for

relocating the entrance, the restoration was resumed in 1885.

Port of Chennai (Madras then!) until the year 1875, was simply an open roadstead on open

sandy coast swept by storms and occasional monsoons.

Sir Francis Spring, the then Chairman of Madras Port Trust in 1904 created a new North-

Eastern Entrance after closing the original Eastern Entrance to control the siltation of the channel

in front of the basin. Subsequently Quays were constructed at different periods (i.e.) South Quay-

I in 1913, the five West Quay berths in 1916 to 1920, North Quay in 1931 and South Quay II in

1936 in the Inner Harbor which was later, christened as Dr. Ambedkar Dock.

The official inauguration of the wet dock was done on 6th November 1964 by Shri. Lal

Bahadur Shastri, the then Prime Minister of India. The dock was christened Jawahar Dock in

memory of Shri. Jawaharlal Nehru, India’s first Prime Minister.

The Bharathi Dock was originally constructed as an outer Harbour to handle vessels

upto16.2 M draft. An Oil jetty to handle Crude Oil imported by the Manali Oil Refinery (presently

Chennai Petroleum Corporation Ltd) was constructed initially during the year 1970. An Iron Ore

berth was constructed in the same dock in 1974 for exporting Iron Ore to Japan and other Far East

countries. Subsequently one more oil jetty was constructed during the year 1985 to meet the

additional demand for crude/products

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In 1970s the Madras Port Trust started handling containers in Inner Harbour and as the

container traffic was increasing, a Container Terminal of 380 M length was constructed at Bharathi

Dock during the year 1983 as a first full-fledged Container Hub of the Country with Container

Storage Yard of 51,000 sq.m and a Container Freight Station of 6000 sq.m. area. The terminal was

provided with two shore cranes and other shore facilities required for Container Terminal.

Subsequently the terminal was further extended by 220 M during the year 1991 with

additional two shore cranes and other matching infrastructural facilities. As the container traffic

was constantly increasing the terminal was further extended by 285 M, during July 2002. This

Container Terminal of 885 M total berth length with backup area was privatized under

concessional agreement with M/s. Chennai Container Terminal Private Ltd., on BOT basis for 30

years from November 2001.

Consequent to the renaming of the city of Madras as Chennai with effect from 30.9.1996,

the Madras Port Trust has been renamed as Chennai Port Trust.

With the number of car manufacturing companies located around Chennai, potential exists

for large-scale car exports through pure car carriers (PCC) shipment. In fact shippers have already

started from July, 2000 onwards.

2.2.3 Port Details:

2.2.3.1 Geographical Location:

Latitude - 13° 06’ N

Longitude - 80° 18’ E

Climate - Tropical

Time - +5 Hrs. 30 Minutes

Temperature - 30° C Max.

18° C Min.

Annual Rainfall - About 125 Cms.

Spring Tides - 1.2 Meters

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Water Area - 420.00 acres (169.97 hectares)

Land Area - 586.96 acres (237.54 hectares)

2.2.3.2 Navigation Channel:

Soil - Predominantly sandy and silt

Length of Channel - About 7 kilometers

Depth of Inner Channel - 18.6m at chart datum

Depth of Outer Channel - 19.2m at chart datum

Depth of Outer Channel - 19.2m at chart datum

Swell Allowance - 3.00 Meters

Width of Channel - The width of channel gradually increases from

244m to 410m at the bent portion, then

maintains a constant width of 305m

2.2.3.3 Total Length of Breakwater:

2.2.3.3.1 Inner harbor:

Eastern Breakwater - 1325 m

Northern Breakwater - 575 m

2.2.3.3.2 Outer harbor:

Eastern Breakwater - 590 m

Northern Breakwater - 460 m

Outer Arm - 1000 m

Upper Pitch Revetment - 950 m

2.2.3.4 Port Entrances:

Entrance in Bharathi Dock - 350 m

Entrance in Dr. Ambedkar Dock - 125 m

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2.2.3.5 Storage Facilities:

Transit Shed/over flow shed - 7 Nos. - 30,693 sq.mts

Warehouse - 5 Nos. - 30,138 sq.mts

Container Freight Station - 3 Nos. - 40,644 sq.mts

Open space - 3,84,611 sq.mts

Container parking Yard - 2,50,600 sq.mts

2.2.4 Mission and Vision:

2.2.4.1 Mission:

Achieve excellence in Port operations with State-of-the-Art technologies.

Enhance competence and enthuse workforce to maximize customer satisfaction.

Anticipate and adapt to the changing global scenario.

Act as a catalyst for sustained development of the Region.

2.2.4.2 Vision:

To be recognized as a futuristic Port with foresight.

2.2.4.3 Quality Policy:

Provide efficient, prompt, safe and timely services at optimum cost

Ensure quick turn round of vessels by providing facilities for efficient handling of cargo

Maintain total transparency in all our transaction.

Continually improve our services to meet the expectations of the port users, employees and the society

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CHAPTER III

LITERATURE SURVEY

3.1 Conceptual and theoretical review:

3.1.1 Working capital management:

Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day

operations. Long terms funds are required to create production facilities through purchase of fixed

assets such as plant & machinery, land, building, furniture, etc. Investments in these assets

represent that part of firm’s capital which is blocked on permanent or fixed basis and is called

fixed capital. Funds are also needed for short-term purposes for the purchase of raw material,

payment of wages and other day – today expenses etc.

These funds are known as working capital. In simple words, working capital refers to that

part of the firm’s capital which is required for financing short- term or current assets such as cash,

marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving

fast and are being constantly converted in to cash and this cash flows out again in exchange for

other current assets. Hence, it is also known as revolving or circulating capital or short term capital.

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3.1.2 Concept of working capital:

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises

current assets are those assets which can convert in to cash within a short period normally one

accounting year.

3.1.3 Constituents of current assets:

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the networking. Net working capital

is the excess of current assets over current liability, or, say:

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NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceed the

current liabilities are more than the current assets. Current liabilities are those liabilities,

which are intended to be paid in the ordinary course of business within a short period of

normally one accounting year out of the current assets or the income business.

3.1.4 Constituents of current liabilities:

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation.

6. Bills payable.

7. Sundry creditors

The gross working capital concept is financial or going concern concept whereas net working

capital is an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following

reasons:

1. It enables the enterprise to provide correct amount of working capital at correct time.

2. Every management is more interested in total current assets with which it has to operate

then the source from where it is made available.

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3. It take into consideration of the fact every increase in the funds of the enterprise would

increase its working capital.

4. This concept is also useful in determining the rate of return on investments in working

capital. The net working capital concept, however, is also important for following reasons:

It is qualitative concept, which indicates the firm’s ability to meet to its

operating expenses and short-term liabilities.

It indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital requirement out

of the permanent sources of funds.

3.1.5 Classification of working capital:

Working capital may be classified in two ways:

On the basis of concept.

On the basis of time.

On the basis of concept working capital can be classified as gross working capital and

net working capital. On the basis of time, working capital may be classified as:

Permanent or fixed working capital.

Temporary or variable working capital

3.1.5.1 Permanent or fixed working capital:

Permanent or fixed working capital is minimum amount which is required to ensure effective

utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has

to maintain a minimum level of raw material, work- in-process, finished goods and cash balance.

This minimum level of current assets is called permanent or fixed working capital as this part of

working is permanently blocked in current assets. As the business grow the requirements of

working capital also increases due to increase in current assets.

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3.1.5.2 Temporary or variable working capital:

Temporary or variable working capital is the amount of working capital which is required to meet

the seasonal demands and some special exigencies. Variable working capital can further be

classified as seasonal working capital and special working capital. The capital required to meet the

seasonal need of the enterprise is called seasonal working capital. Special working capital is that

part of working capital which is required to meet special exigencies such as launching of extensive

marketing for conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is required

for short periods and cannot be permanently employed gainfully in the business.

3.1.6 Importance or advantage of adequate working capital:

Solvency of the business: Adequate working capital helps in maintaining the

solvency of the business by providing uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to make prompt

payments and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing can

arrange loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to avail cash

discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures regular supply

of raw material and continuous production.

Regular Payment of Salaries, Wages and Other Day to Day Commitments: It

leads to the satisfaction of the employees and raises the morale of its employees,

increases their efficiency, reduces wastage and costs and enhances production and

profits.

Exploitation of Favorable Market Conditions: If a firm is having adequate working

capital then it can exploit the favorable market conditions such as purchasing its

20

requirements in bulk when the prices are lower and holdings its inventories for higher

prices.

Ability to Face Crises: A concern can face the situation during the depression.

Quick and Regular Return On Investments: Sufficient working capital enables a

concern to pay quick and regular of dividends to its investors and gains confidence of

the investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of securities,

confidence, high morale which results in overall efficiency in a business.

3.1.7 Excess or inadequate working capital:

Every business concern should have adequate amount of working capital to run its business

operations. It should have neither redundant or excess working capital nor inadequate nor

shortages of working capital. Both excess as well as short working capital positions are bad for

any business. However, it is the inadequate working capital which is more dangerous from the

point of view of the firm.

3.1.8 Disadvantages of redundant or excessive working capital:

Excessive working capital means ideal funds which earn no profit for the firm and

business cannot earn the required rate of return on its investments.

Redundant working capital leads to unnecessary purchasing and accumulation of

inventories.

Excessive working capital implies excessive debtors and defective credit policy

which causes higher incidence of bad debts.

It may reduce the overall efficiency of the business.

If a firm is having excessive working capital, then the relations with banks and other

financial institution may not be maintained.

Due to lower rate of return in investments, the values of shares may also fall.

The redundant working capital gives rise to speculative transactions

21

3.1.9 Disadvantages of inadequate working capital:

Every business needs some amounts of working capital. The need for working capital arises due

to the time gap between production and realization of cash from sales. There is an operating cycle

involved in sales and realization of cash. There are time gaps in purchase of raw material and

production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and spares

and finished stock.

For studying the need of working capital in a business, one has to study the business under

varying circumstances such as a new concern requires a lot of funds to meet its initial

requirements such as promotion and formation etc. These expenses are called preliminary

expenses and are capitalized. The amount needed for working capital depends upon the size of

the company and ambitions of its promoters. Greater the size of the business unit, generally

larger will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and expensing of

the business till it gains maturity. At maturity the amount of working capital required is called

normal working capital.

There are others factors also influence the need of working capital in a business.

22

3.1.10 Factors determining the working capital requirements:

1. NATURE OF BUSINESS: The requirements of working are very limited in public

utility undertakings such as electricity, water supply and railways because they offer

cash sale only and supply services not products, and no funds are tied up in inventories

and receivables. On the other hand, the trading and financial firms requires less

investment in fixed assets but have to invest large amt. of working capital along with

fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement

of working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating

inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw

material and other supplies have to be carried for a longer in the process with

progressive increment of labor and service costs before the final product is obtained.

So working capital is directly proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger

working capital than in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes

one cycle determines the requirements of working capital. Longer the cycle larger is

the requirement of working capital.

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the

question of working capital and the velocity or speed with which the sales are affected.

A firm having a high rate of stock turnover will need lower amt. of working capital as

compared to a firm having a low rate of turnover.

23

8. CREDIT POLICY: A concern that purchases its requirements on credit and sales its

product / services on cash requires lesser amt. of working capital and vice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is

need for larger amt. of working capital due to rise in sales, rise in prices, optimistic

expansion of business, etc. On the contrary in time of depression, the business

contracts, sales decline, difficulties are faced in collection from debtor and the firm

may have a large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require

large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning

capacity than other due to quality of their products, monopoly conditions, etc. Such

firms may generate cash profits from operations and contribute to their working capital.

The dividend policy also affects the requirement of working capital. A firm maintaining

a steady high rate of cash dividend irrespective of its profits needs working capital than

the firm that retains larger part of its profits and does not pay so high rate of cash

dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital

requirements. Generally, rise in prices leads to increase in working capital.

Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.

24

3.1.11 Analysis of financial statements:

3.1.11.1 Financial statements:

Financial statement is a collection of data organized according to logical and consistent accounting

procedure to convey an under-standing of some financial aspects of a business firm. It may show

position at a moment in time, as in the case of balance sheet or may reveal a series of activities

over a given period of time, as in the case of an income statement. Thus, the term ‘financial

statements’ generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

3.1.11.2 Objectives of financial statements:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business

firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations)

missing out of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.

3.1.11.3 Limitations of financial statements:

Though financial statements are relevant and useful for a concern, still they do not present a final

picture a final picture of a concern. The utility of these statements is dependent upon a number of

25

factors. The analysis and interpretation of these statements must be done carefully otherwise

misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not give a final picture of the concern. The data given in these statements

is only approximate. The actual value can only be determined when the business is sold or

liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year,

during the life of a concern. The costs and incomes are apportioned to different periods with a

view to determine profits etc. The allocation of expenses and income depends upon the personal

judgment of the accountant. The existence of contingent assets and liabilities also make the

statements imprecise. So financial statement is at the most interim reports rather than the final

picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and

accurate position. The value of fixed assets in the balance sheet neither represent the value for

which fixed assets can be sold nor the amount which will be required to replace these assets. The

balance sheet is prepared on the presumption of a going concern. The concern is expected to

continue in future. So fixed assets are shown at cost less accumulated depreciation. Moreover,

there are certain assets in the balance sheet which will realize nothing at the time of liquidation but

they are shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs or original costs. The value

of assets decreases with the passage of time current price changes are not taken into account. The

statement is not prepared with the keeping in view the economic conditions. The balance sheet

loses the significance of being an index of current economic realities. Similarly, the profitability

shown by the income statements may be representing the earning capacity of the concern.

26

3.2 Research review:

Best practices for treasury and working capital management (2007): The

PricewaterhouseCoopers‟ Global Best Practices team researches and writes about leading

business practices in today’s global marketplace. Best practices are the means by which leading

companies have achieved top performance, and they serve as goals for other companies striving

for excellence. Best practices are not the definitive answer to a business problem but should

serve as a source of creative insight for business process improvement.

Deloof(2003): discussed that most firms had a large amount of cash invested in working capital.

It can therefore be expected that the way in which working capital is managed will have a

significant impact on profitability of those firms. Using correlation and regression tests he found

a significant negative relationship between gross operating income and the number of days’

accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results

he suggested that managers could create value for their shareholders by reducing the number of

days’ accounts receivable and inventories to a reasonable minimum. The negative relationship

between accounts payable and profitability is consistent with the view that less profitable firms

wait longer to pay their bills.

Ghosh and Maji, (2003): in this paper made an attempt to examine the efficiency of working

capital management of the Indian cement companies during 1992 – 1993 to 2001 – 2002. For

measuring the efficiency of working capital management, performance, utilization, and overall

efficiency indices were calculated instead of using some common working capital management

ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also

tested the speed of achieving that target level of efficiency by an individual firm during the

period of study. Findings of the study indicated that the Indian Cement Industry as a whole did

not perform remarkably well during this period.

According to Raheman and Nasr, (2007) Management of current assets to meet short term

obligations of the company is WCM. Objective of the WCM is to make sure that firm meets the

operating requirements and also remain in a position to pay short term debt when they fall due

27

(Mohammad & Noriza 2010). Mismanagement of working capital will lead a firm to liquidity

crisis by reducing its profitability and creditability, so managing working capital effectively is

necessary for going concern of the business and also for its profitability (Siddique & Khan

2009). Earlier we have classified WCM as temporary and permanent, now we are classifying it

as aggressive and conservative. Aggressive WCM refers to the firm’s strategy of having fewer

current assets in proportion of total assets or having high proportion of current liabilities as

compared with the total liabilities of the company. It leads a company to low liquidity or higher

profitability (Van horne & Machowicz 2004).

According to Gill et al (2010) who extended Lazaridis & Tryfonidis (2006) study on relationship

between WCM and profitability, there exists a significant relationship between CCC and

profitability. They analyzed a sample of 88 firms listed on NYSE (New York Stock Exchange)

for three years from 2005 to 2007 using correlation and regression analysis to conclude that their

study was in line with the study of Lazaridis and Tryfonidis study and said that if a manager

efficiently manages accounts receivables, accounts payables and inventory he can increase the

profits of the firm.

Haq et al (2011) conducted a study in Pakistan on WCM of cement industry by taking a sample

of 14 cement firms listed on KSE (Karachi Stock Exchange) from year 2004-2009 in panel data

set. They used eight accounting ratios (CR, QR, CATA ratio, CATS, cash turnover ratio, ITO

ratio, DTO, creditor turnover ratio) as independent variables and ROI as the dependent variable.

Estimated results based on Pearson correlation and Pooled Ordinary Least Square Regression

shows moderate relationship between WCM and profitability of firm

Karaduman et al (2011) studied this relationship of WCM and profitability by taking data of

five years of non-financial companies listed at Istanbul Stock Exchange. A balanced panel

sample of 127 companies was analysed which gives total of 635 observations. CCC was used as

a measure of WCM and for profitability ROA acted as a measure. The result showed that

efficient management of CCC will give greater returns

28

Afza and Nazir (2007) conducted an investigation into the relationship between aggressive/

conservative working capital policies for 17 industrial groups and a large sample of 263 public

limited companies listed on the Karachi Stock Exchange for a period of 1998-2003. The study

revealed significant differences among their working capital investment and financing policies

across different industries.

Finally, Falope and Ajilore(2009) conducted investigation using a sample of 50 Nigerian

quoted non-financial firms for the period1996-2005. They found a significant negative

relationship between net operating profit and the average collection period, inventory turnover in

days, average payment period and cash conversion cycle.

Maswadeh (2015) conducted the relationship between working capital management strategies on

profitability at pharmaceutical industry. He found a moderate strategy of cash conversion cycle for

profitability, aggressive strategy of DPO, moderate strategy both DCO and DIO for profitability.

Further he mentions that there is a momentous outcome among aggressive working capital

management strategy and profitability of industrial pharmaceutical firms. There is a moderate

outcome between working capital management strategy and the profitability of industrial

pharmaceutical firms.

Jafari and Rao (2015) measured the relationship between working capital management and

profitability. According to their results they found positive relationship between day’s inventory

outstanding and profitability. They argued that the fewer inventories will lead to fewer sales for

firms. If managers want to increase the profitability, they have to increase the inventory and sell

them efficiently. They also found negative relationship between day’s cash collection and return

on asset. They suggest that firms have to collect the receivables and manage the ration effectively

and on time.

Almazari (2014) routed the test to find out the relationship between working capital management

and profitability on Saudi cement companies. He found negative relationship between net

operating profit and days cash outstanding, day’s inventory outstanding, days payable outstanding

and cash conversion cycle. Further he suggested that managers can increase the profitability of

organizations by reducing the day’s collection and days of inventories sold. The more soon

29

organizations sell their inventories and collect their receivables the more chances to increase the

organization profitability. The negative correlation between days payable and net operating profit

is interpret that less profitable companies wait longer to pay their credit purchases which is wrong

according to past conducting research on WCM and profitability of organization.

Toby (2014) found the negative relationship between working capital management and

profitability. His results suggest that cash conversion cycle is a strong negatively co related with

profitability of a firm. Further he suggests that if a firm effectively managed the working capital

then I will be more probability to increase the profitability of firm. The quickly firm will collect

his receivables and sell inventories the more chances to increase the wealth of shareholders.

Chaklader and Shrivatava (2013) they found return on asset is highly and positively correlated

with day’s payable outstanding. It means that extended disbursement periods to creditor increase

the profitability of the organization as firm is able to reduce its operating on that cash which it pays

to creditor. This relation also suggests that the firm is following aggressive working policy to

increase the profitability. Further they found the highly and negative relationship between DIO

and DCO and also has a negative relationship with cash conversion cycle

Akoto, Vitor and Angmor (2013) found negative relationship between day’s cash outstanding

and return on asset. If manufacturing organizations reduce their average account receivable period

its impact will be tremendously positive on profitability. On the other hand they found positive

relationship between day’s payable outstanding and cash conversion cycle with return on asset.

The higher ratio of average payable days will lead positive impact on profitability.

Panigrahi (2013) assessed the relationship between average day’s inventory and net operating

profit of cement firms. His results explored that there is a negative relationship exist between day’s

inventory outstanding and profitability (net operating profit). Further he explained that the

statistical results explain that if a firm inventory day’s outstanding increase the profitability will

be decrease, obviously if inventory is tight up with operation for long time it will be decline trend

in sales for firms.

Alavinasab and Davoudi (2013) examined the relationship of cash conversion cycle and return

on asset to find out whether there is positive or negative relationship between them. According to

30

their results they found negative relationship between working capital (CCC) and profitability

(ROA). Further they suggest that if firm want to increase their profitability for that they have to

reduce their average collection period. With that they will also increase the shareholder’s wealth

and maximization of operation.

Mansoori and Muhammad (2012) found negative relation between cash conversion cycle and

profitability (ROA). This suggests that if manager overly reduce the cash conversion cycle it

impact will be increasing of profitability of a firm. Moreover, their results found the negative

relationship between average accounts receivable and profitability which is same according to

previous studies. They also find the negative relationship between average accounts payable with

return on assets. This result is not satisfactory because according to previous conduct studies days

payable outstanding has a positive relationship with profitability, they longer firms will pay to

creditor purchases the more efficient use of cash in working capital

Rahman (2011) his study reveals positive correlations exist between working capital management

and profitability. Further he suggests that inventory should be sold quickly, accounts receivables

turnover should be reduced and cash conversion cycle should be reduced.

Stephanou, Elfani and Lois (2010) conduct the research on relationship between working capital

management and profitability. They found inversely relationship between working capital and

profitability. The working capital variables days’ inventory outstanding, days collection

outstanding, days payable outstanding and cash conversion cycle are inversely correlated with

profitability which is familiar results with past research demeanor on WCM and profitability

relationship.

31

CHAPTER IV

4.DATA ANALYSIS AND INTERPRETATION:

4.1Short term solvency ratio:

4.1.1 Current ratio:

It is a ratio, which express the relationship between the total current Assets and current

liabilities. It measures the firm’s ability to meet its current liabilities. It indicates the availability

of current assets in rupees for every one rupee of current liabilities. A ratio of greater than one

means that the firm has more current assets than current liabilities claims against them. A standard

ratio between them is 2:1.

Current Ratio= Current Assets

Current Liabilities

YEARS CURRENT

RATIO

2009-10 1.376518317

2010-11 1.321778008

2011-12 1.021208952

2012-13 0.959511657

2013-14 0.86741555

INTERPRETATION: -

It is seen from the above chart that during the year 2010 the current ratio was 1.37 ,

during the year 2011 it was 1.32 and in the year 2012 it was 1.02 . This shows the current

ratio decreases every year but in the year 2013 the current ratio was dropped to 0.95 due to

increase in current liabilities. In the year 2014 the current ratio has decreases 0.86.

32

4.1.2 Quick ratio:

Quick ratio = Quick Assets

_______________

Quick Liabilities

Table 4.1.2 showing computation of quick ratio

Findings

Quick ratio for the year 2007-08 was 0.98; it was 1.13 for 2008-09, 1.23 for 2009-10, 1.17

for 2010-11, 1.06 for 2011-12, 0.74 for 2012-13 and 0.73 for 2013-14.

Inference

The benchmark ratio is 1. For the years 2008-12 the quick ratio was above the

benchmark. This indicates ability to meet short term obligation. For the period 2012-14 the ratio

was lesser. This indicates weakened ability to meet short term obligation.

YEARS QUICK RATIO

2007-2008 0.98

2008-2009 1.13

2009-2010 1.23

2010-2011 1.17

2011-2012 1.06

2012-2013 0.74

2013-2014 0.73

33

4.1.3 Absolute liquidity ratio:

Absolute liquidity ratio = cash and bank balances + market securities

______________________________________

Current liabilities

Table 4.1.3 showing computation of absolute liquidity ratio

Findings

Absolute liquidity ratio for the year 2007-08 was 0.94; it was 1.06 for 2008-09, 1.05 for

2009-10, 1.02 for 2010-11, 0.87 for 2011-12, 0.94 for 2012-13 and 0.67 for 2013-14.

Inference

The benchmark ratio is 0.75:1. For the years 2007-13 the ratio was above the benchmark.

This indicates better ability to meet immediate obligation. For the period 2013-14 the ratio was

declined below the benchmark. This indicates lower capacity to meet emergencies.

YEARS ABSOLUTE LIQUIDITY RATIO

2007-2008 0.94

2008-2009 1.06

2009-2010 1.05

2010-2011 1.02

2011-2012 0.87

2012-2013 0.94

2013-2014 0.67

34

4.2 SOLVENCY RATIO

4.2.1 Debt-equity ratio:

Debt-equity ratio = Long term debt

_________________

Shareholders fund

Table 4.2.1 showing computation of Debt-equity ratio

YEARS

DEBT-EQUITY RATIO

2007-2008 0.96

2008-2009 0.87

2009-2010 0.81

2010-2011 0.86

2011-2012 0.83

2012-2013 1.17

2013-2014 1.08

Findings

Debt-equity ratio for the year 2007-08 was 0.96; it was 0.87 for 2008-09, 0.81 for 2009-10,

0.86 for 2010-11, 0.83 for 2011-12, 1.17 for 2012-13 and 1.08 for 2013-14.

Inference

The benchmark ratio is 1. The debt-equity ratio is determined to ascertain the soundness

of the long term financial policies of the company. For the years 2007-12 the ratio was lesser the

benchmark ratio. This indicates weakened ability to meet the long term obligation. For the period

2012-14 the ratio was equal to the benchmark ratio. This indicates ability to meet the long term

obligation.

35

4.2.2 Proprietary ratio:

Proprietary ratio = Shareholders fund

______________________________

Total tangible assets

Table 4.2.2 showing computation of Proprietary ratio

YEARS PROPRIETARY RATIO

2007-2008 0.5

2008-2009 0.53

2009-2010 0.54

2010-2011 0.53

2011-2012 0.54

2012-2013 0.53

2013-2014 0.52

Findings

Proprietary ratio for the year 2007-08 was 0.50; it was 0.53 for 2008-09, 0.54 for 2009-

10, 0.53 for 2010-11, 0.54 for 2011-12, 0.53 for 2012-13 and 0.52 for 2013-14.

Inference

The proprietary ratio is shows the relationship between shareholder fund to total tangible

asset of the concern. It is desirable to keep this ratio as high as possible for it indicates a strong

financial position. The proprietary ratio is higher than 0.50%. this indicates a relative less risk to

the creditors.

36

4.2.3 Fixed assets ratio:

Fixed asset ratio = Fixed assets

___________________

Long term debt

Table 4.2.3 showing computation of Fixed asset ratio

Findings

Fixed assets ratio for the year 2007-08 was 0.34; it was 0.33 for 2008-09, 0.32 for 2009-


Inference

Fixed assets ratio shows the relationship between fixed assets to long term debt. The ratio

has consistently declined.

YEARS FIXED ASSET RATIO

2007-2008 0.34

2008-2009 0.33

2009-2010 0.32

2010-2011 0.3

2011-2012 0.34

2012-2013 0.31

2013-2014 0.28

37

4.2.4 Fixed assets to proprietary ratio:

Fixed assets to proprietary ratio = Fixed assets

_______________________

Proprietors fund

Table 4.2.4 showing computation of fixed assets to proprietor’s ratio

YEARS

FIXED ASSETS TO PROPRIETOR FUND RATIO

2007-2008 0.31

2008-2009 0.3

2009-2010 0.27

2010-2011 0.27

2011-2012 0.29

2012-2013 0.35

2013-2014 0.32

Findings

Fixed assets to proprietor ratio for the year 2007-08 was 0.33; it was 0.28 for 2008-09,

0.26 for 2009-10, 0.26 for 2010-11, 0.28 for 2011-12, 0.27 for 2012-13 and 0.26 for 2013-14.

Inference

A fixed asset to proprietor’s ratio has declined continuously.

38

4.2.5 Total debt ratio:

Total debt ratio = Total debt

_________________________

Total capital employed

Table 4.2.5 showing computation of total debt ratio

YEARS TOTAL DEBT RATIO

2007-2008 0.01

2008-2009 0.007

2009-2010 0.005

2010-2011 0.004

2011-2012 0.003

2012-2013 0.002

2013-2014 0.001

Findings

Total debt ratio for the year 2007-08 was 0.010; it was 0.007 for 2008-09, 0.005 for 2009-


Inference

This ratio measures the proportion of total capital which has been funded by debt. It

determined by dividing total debt by total capital employed.

39

4.3 Profitability ratio:

4.3.1 Net profit ratio:

Net profit ratio = net profit

_______________ * 100

Sales

Table 4.3.1 showing computation of net profit ratio

Findings

Net profit ratio for the year 2007-08 was 36.82; it was 48.15 for 2008-09, 27.79 for 2009-


Inference

It establishes the relationship between net profit and sales. This ratio indicates the

profitability and efficiency of the business. This ratio shows the no of rupees that remains out of

every 100 rupees of sales. The net profit ratio has declining; this indicates lower profit earning

capacity.

YEARS NET PROFIT RATIO

2007-2008 36.82

2008-2009 48.15

2009-2010 27.79

2010-2011 20.43

2011-2012 6.46

2012-2013 1.93

2013-2014 2.84

40

4.3.2 Operating profit ratio:

Operating profit ratio = Operating profit

________________ *100

Sales

Table 4.3.2 showing computation of operating profit ratio

Findings

Operating profit ratio for the year 2007-08 was 34.93; it was 36.17 for 2008-09, 32.16 for


Inference

This ratio shows the profit earning capacity of a business. It also indicates the portion of

sales which is left over after all current operating cost and expense are met. The ratio has declined.

This indicates declining trend in profitability.

YEARS OPERATING PROFIT RATIO(%)

2007-2008 34.93

2008-2009 36.17

2009-2010 32.16

2010-2011 25.82

2011-2012 15.83

2012-2013 9.93

2013-2014 6.99

41

4.3.3 Return on investment:

Return on investment = Operating profit

______________ *100

Capital employed

Table 4.3.3 showing computation of return on investment

YEARS RETURN ON INVESTMENT(%)

2007-2008 10.56

2008-2009 10.94

2009-2010 9.01

2010-2011 7.25

2011-2012 3.95

2012-2013 2.27

2013-2014 1.57

Findings

Return on investment for the year 2007-08 was 10.56; it was 10.94 for 2008-09, 9.01 for


Inference

This ratio also known as return on capital employed. This ratio establishes the relationship

between operating profit and capital employed return on capital employed shows the overall

profitability of business. The ratio has declined. This indicates lower profit in earning capacity.

42

4.3.4 Return on shareholder funds:

Return on shareholder fund = net profit after tax

_______________________ *100

Shareholder funds

Table 4.3.4 showing computation of return on shareholder fund

Findings

Return on shareholder fund ratio for the year 2007-08 was 11.12; it was 14.68 for 2008-

09, 7.83 for 2009-10, 5.76 for 2010-11, 1.68 for 2011-12, 0.44 for 2012-13 and 0.64 for 2013-14.

Inference

This ratio establishes the relationship between net profit and shareholder funds. This ratio

is used to measures the overall efficiency of a concern. This ratio has declined. This indicates

reduced capacity to generate shareholders returns.

YEARS

RETURN ON SHAREHOLDER FUND(%)

2007-2008 11.12

2008-2009 14.68

2009-2010 7.83

2010-2011 5.76

2011-2012 1.68

2012-2013 0.44

2013-2014 0.64

43

4.3.5 Operating expense ratio:

Operating expense ratio = Operating expense

_____________________ *100

Sales

Table 4.3.5 showing computation operating expense ratio

YEARS OPERATING EXPENSE RATIO(%)

2007-2008 65.07

2008-2009 63.83

2009-2010 67.84

2010-2011 74.18

2011-2012 84.17

2012-2013 90.07

2013-2014 93.01

Findings

Operating expense ratio for the year 2007-08 was 65.07; it was 63.83 for 2008-09, 67.84

for 2009-10, 74.18 for 2010-11, 84.17 for 2011-12, 90.07 for 2012-13 and 93.01 for 2013-14.

Inference

The operating expense ratio measures the cost of operation per rupees sales. This ratio is

a yardstick of operating efficiency. The operating expense ratio was higher. This indicates less

favorable position.

44

4.4 Turnover ratio:

4.4.1 Working capital turnover ratio:

Working capital turnover ratio = Net sales

_____________________________

Working capital

Table 4.4.1 showing computation of working capital turnover ratio

YEARS

WORKING CAPITAL TURNOVER RATIO

2007-2008 1.39

2008-2009 1

2009-2010 0.78

2010-2011 0.87

2011-2012 0.97

2012-2013 0.89

2013-2014 2.34

Findings

Working capital turnover ratio for the year 2007-08 was 1.39; it was 1.00 for 2008-09,

0.78 for 2009-10, 0.87 for 2010-11, 0.97 for 2011-12, 0.89 for 2012-13 and 2.34 for 2013-14.

Inference

The ratio indicates the number of items the working capital is turned over in the course

of a year. The working capital turnover ratio measures the efficiency with which the working

capital is being used by the firm. For the period 2013-14 the ratio was higher. It indicates the

efficient utilization of working capital. for the years 2007-13 the ratio was lesser. This indicates

the inefficient utilization of working capital.

45

4.4.2 Capital turnover ratio:

Capital turnover ratio = Sales

____________________________

Capital employed

Table 4.4.2 showing computation of capital turnover ratio

YEARS CAPITAL TURNOVER RATIO

2007-2008 0.3

2008-2009 0.3

2009-2010 0.28

2010-2011 0.28

2011-2012 0.25

2012-2013 0.22

2013-2014 0.22

Findings

Capital turnover ratio for the year 2007-08 was 0.3; it was 0.3 for 2008-09, 0.28 for 2009-


Inference

It is the relationship between sales and the capital employed. This ratio measures the

efficiency or effectiveness with which a concern utilizes it resources. Capital turnover ratio has

declining. This indicates lesser efficiency of capital utilization.

46

4.4.3 Fixed assets turnover ratio:

Fixed assets turnover ratio = Sales

__________________________

Net fixed assets

Table 4.4.3 showing computation of fixed assets turnover ratio

YEARS FIXED ASSET TURNOVER RATIO

2007-2008 0.91

2008-2009 1.05

2009-2010 1.04

2010-2011 1.17

2011-2012 0.96

2012-2013 0.84

2013-2014 0.86

Findings

Fixed assets turnover ratio for the year 2007-08 was 0.91; it was 1.05 for 2008-09, 1.04

for 2009-10, 1.17 for 2010-11, 0.96 for 2011-12, 0.84 for 2012-13 and 0.86 for 2013-14.

Inference

This ratio indicates the extent to which the investment in fixed assets contribute towards

sales. If compared with previous period, it indicates whether the investments in fixed assets has

been judicious or not. There has been a decline in the fixed assets turnover ratio though an absolute

figure of sales has gone up. It means increase in the investment in fixed assets has not brought

about commensurate gain.

47

4.4.4 Owned capital turnover ratio:

Owned capital turnover ratio = Sales

___________________________

Shareholders fund

Table 4.4.4 showing computation of owned capital turnover ratio

YEARS OWNED CAPITAL TURNOVER RATIO

2007-2008 0.3

2008-2009 0.3

2009-2010 0.28

2010-2011 0.28

2011-2012 0.26

2012-2013 0.22

2013-2014 0.22

Findings

Owned capital turnover ratio for the year 2007-08 was 0.3; it was 0.3 for 2008-09, 0.28for


Inference

It is the relationship between the sales and shareholder funds. This ratio has consistently

declined.it indicates lesser efficiency in utilization of shareholder funds.

48

4.4.5 Debtor’s turnover ratio:

Debtors turnover ratio = Net credit sales

________________________

Average receivable

Table 4.4.5 showing computation of debtors turnover ratio

Findings

Debtors turnover ratio for the year 2007-08 was 6.2; it was 4.98 for 2008-09, 1.93 for


Inference

Debtors constitute an important constituent of current assets and therefore the quality of

debtors a great extent determines a firm liquidity. For the year 2007-12 the ratio has been declined.

This indicates inefficient management of debtors/sales. For the period 2012-14 the ratio was

higher. This indicates efficient management of debtors/sales.

YEARS

DEBTORS TURNOVER RATIO

2007-2008 6.2

2008-2009 4.98

2009-2010 1.93

2010-2011 2.04

2011-2012 1.7

2012-2013 4.28

2013-2014 4.17

chapter

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