notes

Analysis of Working Capital Management at United Electricals Industries Ltd Kollam

Member Sree Narayana Pillai Institute of Management and Technology, Chavara, Kollam 1


INTRODUCTION

Working capital management is the life blood of any organization. Today, working

capital had got vital importance. Most of the business concern has to give special

attention on their investment than fixed capital. Working capital management usually

involves the administration on current assets namely cash and marketable securities,

receivables and inventories and the administration of current liability. The goal of

working capital is to manage current asset and current liability in such a way that a

satisfactory level of working capital is maintained.

Working capital management is short term financial management which is concerned

with decisions relating current assets and current liability. Funds are needed for short

term purposes i.e. for the purchase of raw materials, payment of wages and other day to

day expenses etc.

For a fast growth and expansion, any firms needs larger amount of working capital.

Therefore estimates of working capital on long term basis are also required to determine

whether or not adequate working capital will be generated to meet the firm’s expansion.

United Electricals Industries Ltd is one among the major public sector undertakings in the

state. Being a manufacturing concern the company has to invest a substantial amount in

working capital and only a nominal amount in fixed assets on the total assets. The

working capital of the company mainly shall consist of stock, debtors and cash. This

study is mainly focusing on analyzing the management of cash, debtors and stock. Efforts

should be made to improve the working capital position and thereby improve the overall

performance of the firm

1.1 OBJECTIVES OF THE STUDY

1. To study the liquidity position of the firm.

2. To understand working capital management of United Electricals Industries Ltd.

3. To study the profitability of the firm.

4. To ascertain the adequacy of working capital during the period of evaluation.



1.2 SCOPE OF THE STUDY

The study aims at assessing the working capital position and liquidity position of the

company. Another scope of the study is to understand the working capital management

practices with the help of ratios like current ratios, liquidity ratios and also by estimation

of working capital.

1.3 RESEARCH METHODOLOGY

The type of research used for the study is descriptive research. It includes fact finding

enquiries of different kinds. The major purpose of descriptive research is description of

the state of affairs as it exits at present.

Data collection

Data collection is done through secondary data collection.

Secondary data

Secondary data are those which already had been collected by someone else and which

have already been passed through statistical process. The secondary data were collected

from

1. company records

2. annual reports

3. journals

4. text books

5. Internet etc.

1.4 DATA ANALYSIS TECHNIQUES

The principle technique of analysis used in the project is ratio analysis. For the purpose of

financial analysis, the profit and loss account and balance sheet of the company has been

analyzed.

1.5 LIMITATIONS

More time is required to have an in-depth study. The time allotted for this work is

for a period of 45 days which is insufficient to make an in-depth study.



PERIOD OF THE STUDY

For the purpose of the study periods of 5 years have been taken. The study is

conducted for 5 years from 2004 – 2005 to 2008- 2009 by using the data collected from

the annual reports of the firm

SCHEMA OF THE STUDY

Chapter I Introduction which Includes objectives of the study, methodology,

period of the study, scope of the study, limitations and schema of the study.

Chapter II includes information about Company profile.

Chapter III includes Working capital management-theory and concepts.

Chapter IV includes data analysis and interpretations

Chapter V includes findings and suggestions

Chapter VI includes Conclusion



INDUSTRY PROFILE

Electrical Industry in India came into existence only after the First World War period.

The first electrical industry to be set up in India was the Fan Industry in Calcutta in 1921.

The manufacture of electrical equipments like transformers, motors, generators and

insulators were taken up later. The first Public Sector Electrical Industry to be set up in

Kerala was the Metropolitan Engineering Company Ltd. Thiruvananthapurarm in 1945.

The starting of United Electrical Industries Ltd. (U.E. I) at Kollam in 1950 closely

followed it. In 1960 the management of the United Electrical Industry Ltd; had taken

over by the Government of Kerala. At present there are five Public Sector electrical

equipment industries in Kerala.

One of the main problems the industrial world faces now is the scarcity of energy. The

demand is more and the supply is less. More research is done to find out alternative

sources of energy. The researchers are still in the beginning phase. Till some new

alternative energy sources is found out, but the dependence will be on the existing

sources. Electricity being the important among them plays a major role in almost all the

industries. Production of electricity has become more expensive which demands careful

utilization and accurate measurement keeping this in mind, analogue measuring

instruments have been replaced by electronic ones by suppliers of electricity.

Up to the 1870s electricity had little use beyond the telephone an telegraph. After the

invention of the incandescent lamp by Edison in 1879 and the subdivision of lighting

circuits for individual control of the lamps, it was no longer practical to measure lamp

hours. Then by the introduction of transformer helped to make the present system of AC

transmission and distribution possible. there was one obstacle ,no meter to accurately

measure and record the usage of electricity. Around this time the first new standard

model watt-hour meter was developed by Elihu Thomson and Thomas Duncan which

was a commercial success. Although it was designed for the AC circuits, worked equally

well with DC circuits at that time. After that meters were made by different

manufacturers in different models and versions according to the demand and consistency

in designs.



With the advances in the electronics in the 1970s the manufacturers started introduction

of electronic registers and automatic meter reading devices. By the mid 1980s hybrid

meters with electronic registers were mounted. By the early 1990s introduction of

electronic parts resulted in the dropping of the induction type models and paved the way

to electronic models which become more feasible and popular.

Most popular electric meters are:

Electronic Energy Meter

Single phase AC Watthour meter

Static energy meters

Induction Meters

In India some of the leading Meter Manufacturing Companies are

Bharath Electric Meters,Coimbatore

Star Enterprices,Mumbai

Syntron Controls, Mumbai

Gayathri control and Automation Pvt Ltd,Gujarat

New India Trading Corporation,Maharashtra



COMPANY PROFILE

The united electrical industries ltd, Kollam a public limited company incorporated in the

year 1950, is the main factory in India to set up for the manufacture of electricity house

service meter. UEI Ltd is located at Pallimukku, about three Km south of Kollam on the

wayside of National Highway-47, to Trivandrum, the capital of Kerala state. The

company started its manufacturing activities in collaboration with MESSOR’S ARON

METERS LTD, now a subsidiary of M/s Ferranti Ltd, Hollinwood.

The company owes its origin to the far sightedness and vision of Sri K.P.S Nair, the chief

Engineer of Travancore-Cochin state and Sri Abraham Pothen an eminent industrialist.

Through the company was incorporated in the year 1950, but it could start its production

only in 1951.

The company commenced its manufacturing activities with the assembling of “single

house service KWH” Meter with imported components and sub assemblies. In 1956 the

company acquired the present premises to set up a full fledged factory with its own

machine shop. In the same year the company started the manufacturing of some

assemblies of meter. In 1956 the company acquired 5 acres of land at the present

premises for the present factory and office. At the starting time the company had a paid

up capital of 400 crores jointly held by the state government and KSIDC. The Company

remained a proprietorship until 1960. By 1960 the management was taken over by the

Kerala Government. In 1962, the company started diversifying in the areas such as

manufacturing of motor control gears with the technical assistance of Mysore Electrical

Industries and with substantial participation of Kerala Financial Corporation. As a part of

diversification the R&D wing of the company designed and developed polyphase energy

meters in the 1965.UEI Ltd was the only company to manufacture and market polyphase

meters without foreign technical know how. The commercial production of motor control

gears was started during 1968 and production of switch gears started in 1974.

Now the products are marketed under the Brand Name “UNILEC”. In 1970 the company

entered into technical collaboration with General Electrical Company of India ,Ltd



Calcutta for the Manufacture of oil and air breakers, circuit breakers upto 22KV rating.

The production of low tension (L.T) circuit breakers in 1974. Further during 1975 and

1977 the company as a part of diversification program started commercial production of

plastic film capacitors in technical collaboration of RUBYCON, Japan. The company

further diversified to Manufacture of carbon film resistors 1978 in technical collaboration

with SHINE EL JAPAN I association with M/s Akhane Ohm of Japan.

The main factory building covers a floor space on nearly 30000sq.ft with provision for

future addition and expansion. In addition a parallel wing of 7500sq.ft. It accommodates

the main material stores and fabrication shop.

The Main factory is divided into three basic departments like meter department, starter

department and machine shop. The general layout of each department permits free and

continuous flow of material with particular stress on material handling. Again each

department is subdivided into sections with several built in features and special facilities

to make it independent self contained and efficient from the point of view of economy,

quality control and high standard of production.

The machine shop comprises of press shop, lathe shop and drilling and tool room

consisting of mechanical and hydraulic presses, capsthan lathes, automatic lathes a series

of multiple drilling and tapping machines and special purpose machinery like gear

Hibbing and coil winding machines. One complete portion is set apart for plating and

painting of components. The panting section has provision for mass production both in

dipping and spray painting. The plating section is equipped for vat and barrel type plating

for nickel, copper, zinc, tin and silver.

R&D wing of the company is vigilant on quality improvement of existing products and to

diversify its activities by taking up new items of production. Owing to globalization and

economic liberalization policies , the meter industries in India has now become highly

competitive. The products which the company stopped its production due to acute

competition are 11KV switch gears, IML switch gears, carbon film resistors and magnet



of generators. But now in 2008 onwards UEI.Ltd is producing a new product named A-B

Switch.

The company sells its products under the trade name ‘UNILEC’. They also take repairs

of meters and starters. The main consumer o UEI Ltd is Kerala State Electricity Board.

They meters starters and A-B switches as per receiving orders from KSEB and other

Companies.

PRODUCT/SERVICE PROFILE

PRODUCT PROFILE

'UNILEC' SINGLE PHASE, TWO WIRE WHOLE CURRENT WATT HOUR METER

Product Description

Type KVI-M magnetic suspension bearing meters are designed and manufactured to

satisfy the highest standards of accuracy and reliability of energy measurement in Single

Phase AC Circuits.

The metering elements are completely enclosed in a dust proof mechanically strong,

tamper-proof steel/ Polycarbonate cabinet. Superior quality laminated core and copper

wire coils are used as voltage and current elements.

Highly polished, hardened stainless steel pin is used as top bearing.

FEATURES

• It provides the highest standard of accuracy and reliability of energy measurement in

single AC Circuits.

• It designed for tropical climate

• It fully complies with is 13010 [2002] and its latest amendments

• Highly polished, hardened stainless steel pin is used as top bearing

SINGLE PHASE & THREE PHASE

Product Description

Type UEM static meter is designed and manufactured to satisfy the highest standard of

accuracy and reliability of energy measurement in single phase and three phase circuits.



It is UV (Ultra Violet) stabilized for out door application. The meter is broadly divided

into base, top cover and terminal cover. The meter base consists of two compartment ie.

PCB Compartment & Terminal Compartment. In the PCB Compartment brass terminal

suitable upto 40 A positioned securely. A synthetic rubber gasket is used between the top

cover and the base to ensure protection against moisture and dust. The top cover is

transparent to facilitate easy and clean reading of counter and display of other parameters.

FEATURES:

> Conforms to ISO 779 and CBIP Technical Report No: 88

> Flame retardant & high compact strength Polycarbonate enclosure

> Computerized Calibration

> One time 'Life - time' calibration, No Trimpots used

> Meters perform with low power loss

> Low voltage operation, at 120V AC

> Safety protection against high voltage AC

OIL IMMERSED AC MOTOR STARTERS

Product Description

Oil Immersed Star Delta Starter Type ‘NSD’

These control gears available in the range of 10 H.P. to 200 H.P. Correct sequence device

in corporate in the unit ensures proper sequence of operation so that the Starter is first put

into the Star position for starting before a quick changeover is possible to the Delta

position for running.

The contact tips are of electrolytic copper extrusion, silver plated to prevent corrosion

and pitting. These are of self aligning type and are easily replaceable. The starter is with a

sheet metal case and facilities are provided to fix pedestal type Ammeter.

Oil immersed Auto transformer Starter Type ‘ATS’

It minimizes the starting currents and attains a higher starting torque. These starters

embody an auto-transformer and reduce the current taken by the motor while starting.



The starter unit is separate from the transformer and this eliminates carbonized oil from

the starter entering the auto- transformer oil. These starters are of floor mounting type

and facilities are provided for mounting a pedestal type Ammeter.

Oil Immersed Slipring Motor starter Typel & Type

They have electrical interlock between the stator and rotor circuits, so that it is not

possible to start the motor unless all the rotor resistances are in circuits. The starter is

fool-proof as the motor can only be started from the full of position. Rotor resistances are

of high grade resistance wires, wound on ceramic tubes.

Oil dashpot type relays control the overload, no-volt releases and trip the starter in case of

low voltage or power failure.

The contacts are of electrolytic copper extrusions of ample size and are silver plated.

These are of self aligning type and are replaceable.

FEATURES

> Overload protection. Oil dashpot time lag type magnetic overload relays

calibrated from full load to double full load which are easily adjustable.

> Electrolytic grade copper contacts. The starter is provided with easily replaceable

oil break contacts.

> Manual tripping is provided by a lever at the side of the starter.

> Cable arrangement. Provision for cable entry/cable box provided.

> Starting torque. Rotor resistance suitable for higher starting torque can be

provided for stator rotor starters.

> Spare parts. All spare parts are available from the factory and stockists.

> Normal operation at 3 starts per hour.

FULLY AUTOMATIC AUTO TRANSFORMER STARTER TYPE FAATS

Product Description

The salient feature of this starter is its automatic switch over to frill rated voltage. The

starting current is minimized to attain higher starting torque with the help of an auto

transformer. The panel consists of Thermal Overload Relay, Star Contractor with timer

(0-30 sec), a Main Contractor and a Run Contractor. The starting time can be set by the



user depending upon the application thermal overload relay is provided for overload

protection.

FEATURES

> Fully Automatic change over from Start to Run for pre-set time

> Under voltage and overload protection

> Conforming to IS: 13947 part JV/Sec.1

> Available in oil cooled and air cooled versions of Auto Transformers

> Range available from 10 HP to 400 HP

> Also available in star-delta configuration without Auto Transformer (Type

FANSD)

> Micro Processor based motor protection relay available on request.

Air break switches

Product Description

Air Break Switches are used for to isolate 11KV lines from transformers.

FEATURES

• All Ferrous parts are hot dip galvanized

• The contact ends are Tin Coated

• The fixed contact element are made of excruded electrolytic grade copper flat

with flexible ends

• The leakage current passes to earth and not between terminals of the poll or

between polls

• The operating mechanism is suitable for normal operation by one man without

undue effort

• Switch is permitted to pad locking in both open and close position.

KONARAK

DOMESTIC WATER METER

Product Description

Konark water meters are used to measure the flow of water. Konark water meters are

inferential, mul-tijet, dry dial, and magnetic type. Konark water meters are inferential,



Multijet, dry dial magnetic type. They have both pointer & cyclometer reading counters

and is sealed against tampering

FEATURES

• The hydrostatically tasted brass body is machined to a very high degree of

accuracy.

• Both Nuts and Nipples are made in Brass.

• Internal components are made of high quality, self lubricating, wear resistant and

anti—corrosive Engineering plastics.

• Is specification no. IS: 779 - 1994 Class B (Latest amendment) Equivalent to

international standard ISO- 4064.

UNILEC UPS

Product description

The Unilec Model is off-line UPS system, providing power for your computer or other

electronic devices. When Inputted main voltage ranges beyond 165 to 270V (Brownout)

or if there is power failure (Black out). In this condition the Inverter battery comes into

action and supplies power through output socket. Changeover time is less than 8ms, so

supply to computer remains virtually uninterrupted.

FEATURES

• Safety protection against short circuit, over load, low battery

• Low voltage operation, at 270 V AC

• Electronic shutdown with continuous buzzer sound

• Designed to suit the Indian environmental conditions.

But now production of this product has been stopped due to low demand



WORKING CAPITAL MANAGEMENT-THEORY ANDCONCEPTS

WORKING CAPITAL-DEFINITION AND CONCEPTS

Working capital refers to the difference between currents assets and current liabilities.

Working capital classified into fixed and variable part. The minimum level of investment

in current assets regularly employed in business is called fixed or permanent working

capital and extra working capital needed to support the changing business activity is

called variable working capital.

Management of working capital refers to the management of current assets as well as

current liabilities. The major trust is of course on the management of current assets. This

is understandable because current liabilities arise in the context of current assets.

The importance of working capital management is reflected in the fact that finance

mangers spend a great deal of time in managing current assets and current liabilities.

Arranging short term financing, negotiating favorable credit terms, controlling the

movement of cash, administering accounts receivables and investing short term surplus

funds consume great deal of time of financial managers.

Working capital or investment in current assets, however small it is, necessary for the

purchase of raw materials ,for meeting the day to day expenditure on wages, rents etc and

for maintaining the fixed assets. The fate of large scale investment in fixed capital is

often determined by a relatively small amount of current assets. Working capital is like

the heart of organization. If it is weak, the business cannot prosper and survive although

there is a large investment of fixed assets. Besides the existence of working capital in the

organization, it must be adequate as well. Inadequate as well as redundant working

capital is dangerous for the health of the organization. Adequacy of working capital is the

life blood and controlling nerve of the organization.



DEFINITION

In accounting, "working capital is the difference between the inflow and outflow of

funds. It is the excess of current assets over current liabilities and provisions".

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 and inventories.

Working Capital Concepts

There are two general working capital concepts:

1. Net working capital concept

2. Gross working capital concept

1. Net working capital concept

Net working capital is the difference between current assets and current liabilities. This

concept is useful to groups interested in determining the amount and nature of assets that

may be used to pay current liabilities.

2. Gross working capital concept

Gross working capital refers to the amount of funds invested in current assets that are

employed in the business process. This is a going concern concept.

Classification and sources of working capital

Working capital may be classified in the following ways.

1. Permanent or fixed working capital requirements

2. Temporary or variable working capital requirements

1. Permanent or fixed working capital requirements

It is the amount of funds required to produce the goods and services necessary to satisfy

demand at its lowest point. As part of working capital investment this type of working

capital is as permanent investments in fixed assets. This is so because there is always a



minimum level of current assets which is continuously required by the enterprise to carry

out its day to day business operations and this minimum cannot be expected to reduce at

any time.

Sources of permanent or fixed working capital requirements

a) Shares

b) Debentures

c) Public deposits

d) Loans from financial institutions

e) Ploughing back the profits

2. Temporary or variable working capital requirements

It changes its form from cash to inventory to receivables and back to cash but it differs in

that it is not always gainfully employed. Businesses that are seasonal and cyclical in

nature require more temporary working capital that firms that are not so influenced.

Therefore, managers should obtain the capital that is temporarily invested in current

assets from sources that will allow its return when it is use.

Sources of temporary or variable working capital requirements

a) Trade creditors

b) Depreciation as a source of finance

c) Commercial bankers

d) Indigenous bankers

e) Tax liabilities

f) Accounts receivable credit

Objectives of working capital management

1. To minimize the amount of capital employed in financing the current assets. This

will also lead to an improvement in ‘return on capital employed’.

2. To manage the current assets in such a way that the marginal return on investment

in these assets is not less than the cost of capital acquired to finance them. This will

ensure the maximum of the value of the business unit.



3. To maintain a proper balance between the amount of current assets and current

liabilities in such a way that a firm is always able to meet its financial obligations

whenever due. This will ensure smooth working of the unit without any production held

up due to paucity of funds.

Thus, the objective sis to ensure the maintenance of satisfactory level of working capital

in such a way that it is neither inadequate nor excessive. It should not only be sufficient

to cover the current liabilities but should ensure a reasonable margin of safety also.

Importance of working capital

Working capita; is the life blood and nerve centre of a business. The main advantages of

maintaining adequate amount of working capital are as follows

1. Solvency of the business

Adequate working capital helps in maintaining solvency of the business by providing

uninterrupted flow of production.

2. Goodwill

Sufficient working capital enables a business concern to make prompt payments and

hence helps in creating and maintaining goodwill.

3. Easy loans

A concern having adequate working capital ,high solvency and food credit standing

can arrange loans from banks and others on easy and favorable terms.

4. Cash discount

Adequate working capital also enables a concern to avail cash discounts on the

purchase and hence it reduces cost.

5 Regular supply of raw materials

Sufficient working capital ensures regular supply of raw materials and continuous

production.

6 Regular payment of salaries, wages and other day-to-day commitments

A company which has ample working capital can make regular payment of

salaries ,wages and other day-to-day commitments which raises the morale of its



employees, increase their effciency,reduces wastages and costs and enhance

production and profits.

7. Exploitation of favorable market conditions

Only concerns with adequate working capital can exploit favorable market

conditions such as purchasing its requirements in bulk when the prices are lower

and by holding its inventories for higher prices

8. Ability to face crisis

Adequate working capital enables a concern to face business crisis in emergencies

such as depression because during such periods generally there is much pressure on

working capital.

9. Quick and regular return on investments

Sufficiency of working capital enables a concern to pay quick and regular dividend to

investors as there may not be much pressure to plough back profits.

10 High morale

Adequacy of working capital created an environment of security, confidence and

high morale and creates overall efficiency in a business.

DETERMINANTS OF WORKING CAPITAL

There are a number of factors to determine the working capital requirement of

firm.The major factors influencing the working capital requirement of a firm are

discussed below:

1. Nature and size of the business:

The working capital needs of a firm are basically influenced by the nature of its

business. Trading and financial firms generally have a low investment in fixed aasets, but

require large investment in working capital. In the case of public utilities, they have a

limited need of working capital and have to invest abundantly in fixed assets. Their

working capital requirements are nominal because they have only cash sales and they

supply services and not products. Thus the amount of funds tied up with debtors or stocks

is either nil or very small. The working capital need of the manufacturing concerns fall

between the two extreme requirements of trading firms and public utilities. The size of



the business also has an important impact on the working capital needs. Size may be

measured in terms of the scale of operations.

2. Production policy:

In certain industries the demand is subject to wide fluctuations due to seasonal

variations. In such case the requirements of working capital depends upon the production

policy.

3. Length of manufacturing process/production cycle:

In manufacturing business the requirement of working capital increases in direct

proportion to the length of manufacturing process. Longer the process period of

manufacture, larger is the amount of working capital required.

4. Seasonal variations:

In certain industries raw material is not available throughout the year. They have to

buy raw materials in bulk during the season to ensure uninterrupted flow and process

them during the entire year. Thus a large amount is blocked in the form of material

inventories during such season which give rise to more working capital requirement.

5. Working capital cycle or operating cycle:

In manufacturing concern the working capital cycle starts with the purchase of raw

material and ends with the realization of cash from the sale of finished products. This

cycle involves purchase of raw materials and stores ,its conversion into finished goods

through work in progress with progressive investment of labour and service cost,

conversion of finished stock into sales, debtors and receivables and ultimately realisation

of cash and this cycle continues again from cash to purchase of raw materials and so on.

The speed with which the working capital completes one cycle determines the

requirements of working capital. Longer the period of cycle, larger is the requirement of

working capital.

6. Rate of stock turnover:



There is a high degree of inverse co relationship between the quantum of working

capital and the speed with which the sales are affected. A firm having a high rate of stock

turnover will need lower amount of working capital as compared to a firm having a low

stock turnover.

7. Business cycle:

Business cycle refers to alternate expansion and contraction in general business

activity. In a period of boom ie when the business is prosperous, there is a need for larger

amount of working capital due to the increase in sales, rise in prices, expansion of

business etc.One the times of depression, the business contracts, sales declines,

difficulties are faced in collection from debtors and firms may have a large amount of

working capital lying idle.

8. Credit policy:

The credit policy of a concern in its dealings with debtors and creditors influence

considerably the requirement of working capital.

9. Earning capacity and dividend policy:

A firm that maintains a steady high rate of cash dividend irrespective of its

generation of projects needs more working capital than the firm that retains larger part of

its projects and does not pay so high rate of cash dividend. Thus the dividend policy of a

concern also influences the requirement of its working capital.

10. Other factors:

Certain other factors such as operating efficiency, management ability, price

level changes, irregularities of supply, import policy, asset structure, importance of

labour, banking facilities etc also influence the requirements of working capital.

DANGERS OF INADEQUATE WORKING CAPITAL

1. The company will not be able to buy it requirements in bulk and cannot avail of



discounts.

2. The firm cannot pay its short term liabilities in time.

3. The rate of return on investments also falls with shortage of working capital.

4. It becomes impossible to utilize efficiently the fixed assets due to non availability

of liquid funds.

5. Difficult for the firm to exploit favorable market conditions.

RATIO ANALYSIS

Ratio simply means highlighting in arithmetical terms the relationship between

figures drawn from various financial statements. Ratio analysis is the most commonly

used technique which practically deals with cash and every aspects of the working capital

analysis. The ratios can facilitate comparison, interpretation of each and every aspects of

the working capital analysis. Ratio analysis is a yard-stick which measures the

relationship between two variables. Ratio analysis is the most important method of

financial analysis. Theses are widely used as they are simple to understand and easy to

calculate. The ratios can be expressed in quotient, percentage and rates.

CLASSIFICATION OF RATIOS

Ratios can be broadly classified in to the following ways:-

L.Statement wise classification:

This classification is based on the statements from which items are taken.

a) Balance sheet ratios: These ratios deal with relationship between two items or group

of items which are both in the Balance sheet. Eg: - Current ratio, acid test ratio, debt-

equity ratio etc.

b) Income statement ratios: These ratios focus on the relationship between two items or

group of items, all of which are drawn from revenue statement. These ratios are also

known as operating ratios. Eg; - Gross profit ratio, net profit ratio, stock turnover ratio



c) Combined ratios: These ratios depict the relationship between two items, one of lien

is drawn from the Balance sheet and the other from the revenue statement Eg: Debtors

turnover ratio, asset turnover ratio, return on capital employed etc.

2. Classification according to the nature:

This type of classification includes the following types of accounting ratios,

a) Liquidity ratios: These ratios indicate the capacity of the business unit to meet its

short-term obligation out of its short-term assets. Eg: Current ratio, acid test ratio, etc.

b) Leverage ratios: These ratios are also called efficiency ratios. These ratios measure

the owner's stake in the business as well as that of outsiders. The long term solvency of

the business can be examined by using leverage ratios.Eg: Debt-equity ratio, proprietory

ratio etc.

(c) Profitability ratio: The profitability of the business concern can be measured by

the profitability ratios. These ratios highlight the end result of business activities by

which alone the overall efficiency of the business unit can be judged.

(d). Activity ratios: These ratios evaluate the total use of the business concern along

with the use of components of total assets. These ratios are intended to measure the

asset management. The efficiency with which the assets are used would be reflected in

the speed and rapidly with which the assets are converted in to sale. The greater the rate

of turnover indicates the efficiency in the management of assets. Eg: stock

turnover ratio, fixed assets turn over ratio etc.

3. Classification according to importance:

It is evident that ratios are more important than others. According to this classification

the ratios can be classified into:



a) Primary ratios: As success of any business undertaking is measured by the

quantum of profit earned by it, the ratio which relates the profit to capital employed is

termed as primary ratios. Eg: return on capital employed, operating profit ratio etc.

b) Secondary ratios: This classification is effected to facilitate inter firm comparison and

to focus on some factors responsible for the success of unit. When such factors are

isolated by means of ratio, they are called secondary ratios.

Statement wise classification of ratio is a traditional form while functional

classification is more useful and purposive.

DATA ANALYSIS

In this project for analysis ratios are used.

The Ratios used are:

Current Ratio

Quick Ratio

Cash velocity ratio

Cash reservoir ratio

Fixed asset turn over ratio

Current asset turn over ratio

Total asset turn over ratio

Working capital turn over ratio

Debtors turn over ratio

Inventory turn over ratio

DATA ANALYSIS

CURRENT RATIO

Current ratio shows the short term solvency .In other wards the availability of current assets



to meet current liabilities. In a business concern a sound ratio of 2:1. It is considered as an

ideal one

Current ratio= Current Assets

Current Liabilities

DISTRIBUTION OF CURRENT ASSETS AND CURRENT LIABILITIES

Year Current assets Current liabilities Current ratio

2004-2005 67909570.22 31918267.05 2.13

2005-2006 51435492.21 42600894.20 1.21

2006-2007 227831675.87 169723853.4 1.34

2007-2008 261522808 172587506 1.51

2008-2009 314649777 206510895 1.52

Table No: 3.01

Source: Annual report of United Electricals Industries limited

PICTORIAL REPRESENTATION OF CURRENT ASSETS AND CURRENT

LIABILITIES



CURRENT RATIO

0

0.5

1

1.5

2

2.5

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

YEAR

RA

TIO

Figure No: 3.01

SIGNIFICANCE

The current ratio 2:1 is considered to be satisfactory. Here the current ratio of the

company is 2.13, 1.21, 1.34, 1.51, and 1.52 respectively for the last 5 years . In the first

year ratio is above 2:1 that means company has a sound liquidity position for meeting its

oblgation but the next four years ratio is declaining that indicates not so good for meeting

its obligations.

QUICK RATIO

Quick ratio is the ratio of quick assets to current liabilities. It is also known as “acid test

ratio” or “liquidity ratio”. This ratio shows availability of Quick/Liquid assets to

discharge current assets.

Quick ratio= Quick Assets

Current Liabilities

DISTRIBUTION OF QUICK ASSETS AND CURRENT LIABILITIES



Year Quick assets Current liabilities Quick ratio

2004-2005 64634352.22 31708567.05 2.03

2005-2006 36130496.21 42600894.20 0.85

2006-2007 223752240.9 165103728.39 1.35

2007-2008 223200662 170561086.38 1.31

2008-2009 263060126 20389473900 0.01

Table No: 3.02


PICTORIAL REPRESENTATION OF QUICK ASSETS AND CURRENT

LIABILITIES



Quick ratio

0

0.5

1

1.5

2

2.5

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Year

Rati

o

Figure No: 3.02

SIGNIFICANCE

A quick ratio of 1:1 is considered as a standard ratio. Here the quick ratio of the

company is2.03, 0.85, 1.35, 1.31, 0.01 respectively for the last 5 years. in this case the

quick ratio shows that the position of the company is good except in 2 years i.e. 2005-

2006 and2008-2009

CASH VELOCITY RATIO

Cash velocity ratio shows how the cash realized from the sales is effectively utilized in

the business. A high velocity indicate ineffective utilization of cash that means cash is

held as cash itself without effectively employed in working capital. A low velocity

shows that cash s effectively utilized.

Cash velocity ratio= Net Sales

Cash

DISTRIBUTION OF NET SALES AND CASH



Year Net sales Cash Cash velocity ratio

2004-2005 71163808.83 25334619.78 2.80

2005-2006 49724331.69 524312.5 94.84

2006-2007 357974396.69 38014979.14 9.41

2007-2008 388412099 12736420 30.49

2008-2009 429407301 31558528 13.60

Table No: 3.03


PICTORIAL REPRESENTATION OF NET SALES AND CASH



CASH VELOCTY RATIO

0

20

40

60

80

100

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Year

Rati

o

Figure No 3.03

SIGNIFICANCE

In the years 2004-2005, 2006-2007, 2007-2008, 2008-2009 this ratio shows a better

position except in the year 2005-2009. In 2005-2006 this ratio is 94.84 that means a high

velocity indicates ineffective utilization of cash i.e. cash is held as cash itself without

effectively employed in working capital.

CASH RESERVOIR RATIO

Cash reservoir ratio shows availability of available cash reservoir to meet the current

liabilities. If the ratio is more than one, it reveals a better position and if the ratio is less

than one, it shows a reverse position.

Cash Reservoir Ratio= Cash Reservoir

Current Liabilities

DISTRIBUTION OF CASH RESERVOIR AND CURRENT LIABILITIES



Year Cash reservoir Current liabilities Cash reservoir ratio

2004-2005 25334619.78 31918267.05 0.79

2005-2006 524312.5 42600894.20 0.20

2006-2007 38014979.14 169723853.4 0.22

2007-2008 12736420 172587506 0.07

2008-2009 31558528 206510895 0.15

Table No: 3.04


PICTORIAL REPRESENTATION OF CASH RESERVOIR AND CURRENT

LIABILITIES



CASH RESERVOIR RATIO

00.10.20.30.40.50.60.70.80.9

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Year

Rati

o

Figure No 04

SIGNIFICANCE

If the ratio is more than one, reveals a position. Here the ratios are 0.79, 0.20, 0.22, 0.07,

and 0.15 which means that, the ratio shows an unsatisfactory position.

FIXED ASSET TURN OVER RATIO

Fixed asset turn over ratio shows how is fixed asset effectively utilized for generating

sales.

Fixed asset turn over ratio = Sales

Fixed assets

DISTRIBUTION OF SALES AND FIXED ASSETS



Year Sales Fixed Assets Fixed asset turn over

ratio

2004-2005 71163808.83 5750792.90 12.37

2005-2006 49724331.69 5351686.78 9.29

2006-2007 357974396.69 7366622.32 48.59

2007-2008 388412099 8623351 45.04

2008-2009 429407301 12901344 33.28

Table No: 3.05


PICTORIAL REPRESENTATION OF SALES AND FIXED ASSETS



FIXED ASSET TURN OVER RATIO

0

10

20

30

40

50

60

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Year

Rati

o

Figure No 3.05

SIGNIFICANCE

Fixed asset turn over ratio a favorable sign in the company. Here the ratios are 12.37,

9.29, 48.59, 45.04, and 33.28 for the consecutive 5 years respectively. In all the years

fixed asset turn over ratios shows a better position

CURRENT ASSET TURN OVER RATIO

Current asset turn over ratio shows investment in current assets in relation to turnover. In

other wards employment of current assets to generate sales turnover. Efficiency of

utilizing current asset to create sales can be analyzed with the help of this ratio. If current

asset is effectively utilized, this ratio shows a better position. If the ratio is below the

acceptable level, it depicts the fact that current asset is not effectively utilized for creating

sales.

Current asset turn over ratio= Net sales

Current assets

DISTRIBUTION OF NET SALES AND CURRENT ASSETS



Year Sales Current Assets Current asset turn

over ratio

2004-2005 71163808.83 67909570.22 1.04

2005-2006 49724331.69 51435492.21 0.96

2006-2007 357974396.69 227831675.87 1.57

2007-2008 388412099 261522808 1.48

2008-2009 429407301 314649777 1.36

Table No: 3.06


PICTORIAL REPRESENTATION OF NET SALES AND CURRENT ASSETS



CURRENT ASSET TURNOVER RATIO

00.20.40.60.8

11.21.41.61.8

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Year

Rati

o

Figure No 3.06

SIGNIFICANCE

In the years 2004-2005, 2006-2007, 2007-2008, 2008-2009 current asset turn over shows

a better position except in the year 2005-2006. In 2005-2006 this ratio is 0.97 that means

one rupee of current asset is employed to generate 0.97 rupee sales. Hence current asset is

not effectively utilized.

TOTAL ASSETS TURN OVER RATIO

This ratio shows that the firm’s ability in generating sales from all financial resources

committed to total assets.

Total asset turn over ratio = sales

Total assets

DISTRIBUTION OF SALES AND TOTAL ASSETS



Year Sales Total Assets Total asset turn over

ratio

2004-2005 71163808.83 73660363.12 0.97

2005-2006 49724331.69 56787178.99 0.87

2006-2007 357974396.69 235198298.2 1.52

2007-2008 388412099 270146159 1.44

2008-2009 429407301 327551121 1.31

Table No: 3.06


PICTORIAL REPRESENTATION OF SALES AND TOTAL ASSETS



TOTAL ASSETS TURN OVER RATIO

00.20.40.60.8

11.21.41.6

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Year

Rati

o

Figure No 3.07

SIGNIFICANCE

In the year 2005-2006 the ratio is 0.87 and in the next year the ratio is increased to 1.52,

then it is decreased to 1.44. the ratio of the company shows an unfavorable sign in the fist

2 years and in the next 3 years shows a favorable sign. The assets of the company are not

effectively utilized by the management initially. But later it is utilized effectively.

WORKING CAPITAL TURN OVER RATIO

This ratio shows how working capital is effectively utilized for generating sales.

Working capital turn over ratio = sales

Net working capital

DISTRIBUTION OF SALES AND NET WORKING CAPITAL



Year Sales

Net

Working capital Working capital turn

over ratio

2004-2005 71163808.83 35991303.17 1.98

2005-2006 49724331.69 8834598.01 5.62

2006-2007 357974396.69 58107822.47 6.16

2007-2008 388412099 88935302 4.37

2008-2009 429407301 108138882 3.97

Table No: 3.08


PICTORIAL REPRESENTATION OF SALES AND NET WORKING CAPITAL



WORKING CAPITAL TURN OVER RATIO

0

1

2

3

4

5

6

7

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Year

Rati

o

Figure No 3.08

SIGNIFICANCE

Working capital turn over ratio shows a favorable sign in the company. Here the working

capitals turn over ratio are1.98, 5.63, 6.16, 4.37, and 3.97 for the consecutive 5 years

respectively. In all the years, working capital turn over ratio shows a better position.

DEBTORS TURN OVER RATIOThis ratio shows the credit collection power and policy of the firm.

Debtors turn over ratio = Sales Debtors

DISTRIBUTION OF SALES AND DEBTORS



Year Sales Debtors Debtors turn over

ratio

2004-2005 71163808.83 20820293.49 3.41

2005-2006 49724331.69 32173766.98 1.54

2006-2007 357974396.69 146534994.90 2.44

2007-2008 388412099 199910795 1.94

2008-2009 429407301 231255816 1.85

Table No: 3.09


Debtors holding period= 365 Debtors turn over ratio

DISTRIBUTION OF DEBTORS TURN OVER RATIO AND COLLECTION

PERIOD



Year Sales Debtors Debtors turn

over ratio

Debtors

collection period

2004-2005 71163808.83 20820293.49 3.41 107.03

2005-2006 49724331.69 32173766.98 1.54 237.01

2006-2007 357974396.69 146534994.90 2.44 149.59

2007-2008 388412099 199910795 1.94 188.14

2008-2009 429407301 231255816 1.85 197.29

Table No: 3.10


PICTORIAL REPRESENTATION OF DEBTORS TURN OVER RATIO AND

DEBTORS COLLECTION PERIOD



0

50

100

150

200

250

Ratio

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Year

DEBTORS TURNOVER RATIO

Debtors turn over ratio

Debtors collection period

Figure No 3.09

SIGNIFICANCE

Debtors turn over ratio can be analyzed that collection period is longer for almost all the

years. A larger collection period indicates inefficiency in credit collection performance.

But in 2004-2005 the collection period is shorter. A shorter collection period implies

prompt payment by debtors. It reduces the change of debtors.

INVENTORY TURN OVER RATIO

Inventory turn over ratio indicates the number of times inventory stock is replaced during

the year. A slow rate would signify that inventory does not sell fast and stays on in the

ware house for long time. A high ratio is good from the point of view of liquidity.

Inventory turnover ratio = Cost of goods sold

Average stock

DISTRIBUTION OF COST OF GOODS SOLD AND AVERAGE STOCK



Year Cost of goods sold Average stock Inventory turn over

ratio

2004-2005 68770000 67155719.84 1.02

2005-2006 52559864.75 7652498 6.86

2006-2007 322025890.56 19469362 16.54

2007-2008 358130170 30250424 11.83

2008-2009 376469605 31872957.5 11.81

Table No: 3.11


Inventory holding period

Inventory holding period shows how many times inventory is held in stock for

production. A low holding period shows low production and unnecessary blocking of

working capital into inventory.

Inventory holding period= 365

Inventory turn over ratio

DISTRIBUTION OF INVENTORY AND SALES



Year Cost of goods sold Average stock Inventory turn

over ratio

Inventory holding

period

2004-2005 68770000 67155719.84 1.02 357.84

2005-2006 52559864.75 7652498 6.86 53.20

2006-2007 322025890.56 19469362 16.54 22.06

2007-2008 358130170 30250424 11.83 30.85

2008-2009 376469605 31872957.5 11.81 30.90

Table No: 3.12

Source: Annual report of United Electricals Industries limited.

PICTORIAL REPRESENTATION OF INVENTORY TURN OVER RATIO AND INVENTORY HOLDING PERIOD



0

50

100

150

200

250

300

350

400

Ratio

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Year

INVENTORY TURN OVER RATIO

Figure No 3.10

SIGNIFICANCE

In 2005-2006 inventory is held for 53 days so the position of 2005-2006 is unsatisfactory

in relation to remaining years.

SCHEDULE OF CHANGES IN WORKING CAPITAL

Schedule of changes in working capital in 2004-2005



Particulars 2004 2005 Increase Decrease

Current assets

Inventories 26438043.63 16712087.82 9725955.81

Sundry debtors 51746994.91 20820293.49 30926701.42

Cash and bank balances

16736253.28 25334619.78 8598366.5

Loans and advances 12301487.91 5042569.13 725891.78

Total current assets 107222779.7 67909570.22

Current liabilities

Current liabilities & provision

49793299.22 31918267.05 17875032.17

Total current liability49793299.22 31918267.05 17875032.17

Working capital 57429480.51 35991303.17 26473398.67 47911576.01

Net working capital(decrease)

21438177.34 21438177.34

The decrease in working capital during the period 2004-2005 was due to the decrease in

inventory, sundry debtor and loans and advances.





Current assets

Inventories 16712087.82 13530336 3181751.82

Sundry debtors 20820293.49 32173766.98 11353473.49


25334619.78 524312.5 24810307.28


Total current assets 67909570.22 51435492.21 11517981.09 27992059.1

Current liabilities


31918267.05 42600894.20 10682627.15

Total current liability31918267.05 42600894.20 10682627.15

Working capital 35991303.17 8834598.01 11517981.09 38674686.25

Net working capital(decrease)

27156705.16 27156705.16

The increase in working capital during the period 2005-2006 was due to the increase in

sundry debtor and loans and advances.





Current assets

Inventories 13530336 34859289 21328953

Sundry debtors 32173766.98 146534994.90 114361227.9


524312.5 38014979.64 37490667.14


Total current assets 51435492.21 227585894.1 176150401.8

Current liabilities


42600894.20 162581045.9 119980151.7

Total current liability 42600894.20 162581045.9 119980151.7

Working capital 8834598.01 65004848.2 176150401.8 119980151.7

Net working capital(increase)

56170250.19 56170250.19


inventory, sundry debtor, cash and bank balances and loans and advances.





Current assets

Inventories 34859289 46090126 11230837

Sundry debtors 146534994.90 199910795.40 53375800.5 25278559.33


38014979.64 12736420.31 5636945.53

Loans and advances 8176630.53 2539685 64606637.5 30915504.86

Total current assets 227585894.1

Current liabilities


162581045.9 165322638.2 2741592.3

Total current liability 162581045.9 165322638.2 2741592.3

Working capital 65004848.2

95954388.5 64606637.5 33657097.16

Net working capital(increase)

30949540.3 30949540.3


inventory, and sundry debtor.





Current assets

Inventories 46090126 47165380 1075254

Sundry debtors 199910795.40 231255816 31345021


12736420.31 31558528 18822108

Loans and advances

2539685 4424271 1884586

Total current assets 261277026 314403995 53126969

Current liabilities


165322638.2 200246662 34924023.8

Total current liability 165322638.2 200246662 34924023.8

Working capital 95954388.5 114157333 53126969 34624023.8

Net increase in working capital

18202945.2 - - 18202945.2

114157333 114157333

53126969 53126969


inventory, sundry debtor, cash and bank balances and loans and advances



FINDINGS

The solvency position of the company is increasing due to increase in current

ratio.

. The debtors turn over ratio shows fluctuating trend. This shows the strength of

credit management capacity of the company.

Fixed asset turn over ratio of the company is increased in the last years.

The total assets turn over ratio shows that the assets of the firm are not effectively

utilized by the management initially. But later it is utilized effectively.

Current assets turn over ratio shows that current assets are effectively utilized in

the company except in the year 2005-2006.

Cash velocity ratio shows decreasing tend which means an effective utilization of

cash except in the year 2005-2006.

Working capital turn over ratio shows an increasing trend, which means working

capital is effectively utilized in the company.

Cash reservoir ratio shows a downward trend. It means that the unavailability of

available cash reservoir to meet the current liabilities.

Quick ratio of the company shows a better position. From this it is analyzed that

the liquidity position of the firm is satisfactory.

Inventory turn over ratio shows a better position except in the year 2005-2006

Debtor’s collection period shows an increasing trend .it affects the speed of

working capital cycle and effective re-investment of working capital and

ultimately affects internal rate return of the company.

Inventory holding period shows a constant trend. It saves the company from the

risk of waste due to obsolence, waste due to changes in technology and trend,

inventory carrying and holding cost and finally unnecessary blocking of working

capital into inventory.



SUGGESTIONS

It should be taken into account to keep the current ratio at 2:1

Since the company has an efficient production line they should have to utilize the

maximum capacity and should avoid unnecessary costs.

Company can reduce the cost of producing by reducing cost, wastage etc.

company should purchase the raw materials from any source where they are

getting cheaper rate.

The company should increase the efficiency of production and delivery of goods.

It helps the company to acquire new business and charge premium prices for

newly introduces products.

Measures may be taken to reduce liabilities there by current ratio can be

improved.

The old debts of the company must be collected as quickly as possible.

Appointment of factors (brokers) may be considered for collection of debtors

outstanding for a period exceeding 3 years.

Care should be given in the area of working capital management and capital

structure. Efforts may be taken to provide an adequate amount of working capital

in line with company’s optimum production capacity achievement.

Utilization of working capital is not proper n the unit. There fore it is advisable

for the management to consider the working capital policy,inorder to ensure the

proper utilization of working capital.

Investment in fixed assets should be effectively utilized there by fixed asset turn

over ratio can be decreased.

It is suggested to hold sufficient amount of liquid cash so as to meet unforeseen

contingencies and absolute quick liabilities.



CONCLUSION

The investment in current assets should be optimum for any firm for smooth,

uninterrupted production and sales. So in the management of current liabilities .Both

these provide adequate working capital position to the firm. In shaping the working

capital of a firm, it should kept in mind the relative asset liquidity and relative financial

liquidity of the working capital management. The consideration of working capital

management and financing miens are thus crucial to the working capital management,

which is further supported by a good inventory management, optimum credit policy and

fine cash management.



BIBLIOGRAPHY

Bhalla V.K,Working Capital Management Text and Cases” Anmol Publications

Pvt Ltd , New Delhi (2003)

Pandey I.M- " Financial Managemnt”,Vikas Publishing House Pvt Ltd, New

Delhi(2002)

Prasanna Chandra,” Financial Management Theory and Practices”

Reports

Annual report of United Electricals Industries Ltd

Website

www.unilecindia.com

DEBTORS TURNOVER RATIO.



DTO is calculated by dividing the net credit sales by average debtors outstanding during

the year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit

sales minus returns, if any, from customers. Average debtors are the average of debtors at

the beginning and at the end of the year. This ratio shows how rapidly debts are collected.

The higher the DTO, the better it is for the organization.

Net Credit Sales

Debtors turnover ratio= ---------------------------

Average Debtors

Higher the ratio is better the position of the firm in collecting the overdue means the

effectiveness of the collection department and vice versa.

INVENTORY TURNOVER RATIO

The ratio expresses the speed of converting the stock into sales. In other words, how fast the stock

is being converted into sales in a year. The greater the ratio of conversion leads to lesser the

number of days /weeks /months required to convert the stock into sales.

Cost of Goods Sold

Inventory turnover ratio = --------------------------------

Average Stock

Higher the ratio is better the firm in converting the stock into sales and vice versa

ITR reflects the efficiency of inventory management. The higher the ratio, the more

efficient is the management of inventories, and vice versa. However, a high inventory

turnover may also result from a low level of inventory, which may lead to frequent stock

outs and loss of sales and customer goodwill. For calculating ITR, the average of

inventories at the beginning and the end of the year is taken. In general, averages may be



used when a flow figure (in this case, cost of goods sold) is related to a stock figure

(inventories).

TREND ANALYSIS

Time or trend analysis of ratio indicates the direction of change. This kind

of analysis is particularly applicable to the items in profit and loss account. The

trend of sales and net income may be studied as a rate of fixed expansion trend in

the growth of the business and general price level. In order to attain a true trend of

growth, the sales figure is adjusted by suitable index of general price.

WORKING CAPITAL TURNOVER RATIO

This is also known as working capital leverage ratio. This ratio indicates whether or

not working capital has been effectively utilized in marketing sales. This ratio

indicates the number of times the working capital is turned over in the course of a

year.

Sales

Working Capital Turnover Ratio = -----------------------------

Net Working Capital



A higher ratio indicates efficient utilization of working capital and a low ratio indicate

otherwise. But a very high working capital turnover ratio is not a good situation for

any firm and hence care must be taken while interpreting the ratio.


notes

Documents

working capital position

estimation of working

adequacy of working

goal of working capital

adequate working capital

fixed capital

study chapter

management of cash