Finance 4th Sem Project Final

7/23/2019 Finance 4th Sem Project Final

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MBA-IV MAJOR PROJECTSubject Code: 5776422(76)

A

PROJECT REPORT

ON

A STUDY ON WORKING CAPITAL

MANAGEMENT AND RATIO ANALYSIS OF

JINDAL STEEL AND POWER LIMITED

Submitted in !"ti!# $u#%##ment $&" t'e !(!"d &$ t'e

de)"ee

M!*te" &$ +u*ine** Admini*t"!ti&n

C''!tti*)!"' S(!mi ,i-e.!n!nd! Te/'ni/!# Uni-e"*it0

Submitted b0

PRIYAL K1IC1ARIYA

M+A Seme*te"2I,

3Se**i&n 456784569:

A!o"ed B#$

%u&ded B#$

D"; SAKET RANJAN PRE,EER D";

APOORWA MIS1RA

'ed o t*e +e!t,et S!.

A//t. P!oe//o!


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S*!& S*0!c*!# Tec*&c1

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S*!& S*0!c*!# %!ou o I/t&tut&o$

cu1t# o M3e,et Stud&e/

Ju&$ B*&1& (C.%.) - 42


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DECLARATION

I PRIA8 9'IC'ARIA Studet/ o MBA 4t* Se,e/te! 2;-24$ t*e

ude!/&3ed /o1e,1# dec1!e t*t t*e !eo!t o t*e !e/e!c* o!0 et&t1ed

A STOR9I=% CAPITA8 MA=A%EME=T A=+ RATIO A=A8SIS O

JI=+A8 STEE8 A=+ PO>ER 8IMITE+? &/ b/ed o ,# o o!0 c!!&ed out

du!&3 t*e cou!/e o ,# /tud# ude! t*e /ue!"&/&o o +!. Aoo!

M&/*!.

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outco,e o ou! !e/e!c* o!0. I u!t*e! dec1!e t*t to t*e be/t o ou!

0o1ed3e d be1&e t*e !eo!t doe/ ot cot& # !t o # o!0

*&c* */ bee /ub,&tted o! t*e !d o MBA de3!ee o! # ot*e!

de3!ee@d&1o,@ce!t&cte & t*&/


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CERTIFICATET*&/ &/ to ce!t t*t t*e o!0 &co!o!ted & t*e !eo!t A STOR9I=% CAPITA8 MA=A%EME=T A=+ RATIO A=A8SIS O JI=+A8 STEE8

A=+ PO>ER 8IMITE+&/ !eco!d o !e/e!c* o!0 c!!&ed out b# PRIYAL

K1IC1ARIYAbe!&3 ROLL NO; 6465>ude! ,# 3u&dce d

/ue!"&/&o o! t*e !t u111,et o! t*e !d o MBA de3!ee o

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ACKNOWLEDGEMENT

I , &ou/ dut# to ,0e 3!teu1 c0o1ed3e o t*e //&/tce d

3u&dce$ *"e obt&ed & t*e cou!/e o !e!t&o t*&/ d&//e!tt&o

o!0 A STOR9I=% CAPITA8 MA=A%EME=T A=+ RATIO A=A8SIS

O JI=+A8 STEE8 A=+ PO>ER 8IMITE+ I t0e t*&/ oo!tu&t# to e!e//

,# *e!t&e/t t*0/ d ob1&3t&o to D"; APOORWA MIS1RA S!. A//t.

P!oe//o! o MBA MS$ SS%I *o / !ede!ed u/ & "1ub1e &/t!uct&o/d 3u&dce o! !e!t&o d u111,et o ,# o!0.

>e !e 1/o 3!teu1 to DR; SAKET RANJAN PRA,EER 1;O;D;o

MBA det. o! 3&"&3 u/ t*&/ oo!tu&t#$ d"&/&3 d &/&!&3 to coduct

t*&/ d&//e!tt&o o!0.

PRIYAL

K1IC1ARIYA M+A SEM;

I,


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TA+LE OF CONTENTS

C*te! o To&c

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Ree!ece


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C1APTER 8 6

INTRODUCTION


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INTRODUCTION

Financial Management is the specific area of finance dealing with the

financial decision corporations make, and the tools and analysis used to make

the decisions. The discipline as a whole may be divided between long-term and

short-term decisions and techniques. Both share the same goal of enhancing

firm value by ensuring that return on capital exceeds cost of capital, without

taking excessive financial risks.

Capital investment decisions comprise the long-term choices about which

projects receive investment, whether to finance that investment with equity or

debt, and when or whether to pay dividends to shareholders. hort-term

corporate finance decisions are called working capital management and deal

with balance of current assets and current liabilities by managing cash,

inventories, and short-term borrowings and lending !e.g., the credit terms

extended to customers".

#orporate finance is closely related to managerial finance, which is slightly

broader in scope, describing the financial techniques available to all forms of

business enterprise, corporate or not.


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ROLE OF FINANCIAL MANAGERS:

The role of a financial manager can be discussed under the following heads$

%. &ature of work

'. (orking conditions

). *mployment

+. Training, ther qualifications and dvancement

. /ob outlook

0. *arnings

1. 2elated occupations

CONTRIBUTIONS:-


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(orking capital refers to the funds invested in the #urrent assets, i.e. tock,

undry

3ebtors, #ash, etc. concern needs current assets to use its fixed assets

properly.

The importance of adequate working capital in a company can never be

emphasi4ed. concern needs fund for its day to day operations. dequacy or

inadequacy of fund would determine the efficiency with which the business may

be carried on. 5anagement of working capital is an essential task of the finance

manager. 6e has to ensure that the amount of the working capital available for

the company is neither too large nor too small. large amount of working capital

would mean that the company has idle funds. s funds have cost, the company

has to pay the interest on such funds. survey conducted by the bureau of public

enterprises on 78 in the year '999-9% has revealed that a large amount of fund

was locked in the working capital, this results in over capitali4ation.

Over Capitaliati!n implies that a company has too large funds for its

requirements, resulting low rate of return which implies lesser use of optimal

resources.

Un"er Capitalie"meansinadequate working capital. 7t means firm runs

under the risk of insolvency. This is because lesser working capital leads to

situation where the firm may not be able to meet its liabilities.


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C1APTER 8 4

COMPANY PROFILE


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C!mpan# pr!$ile

T%e &in"al Gr!'p

: ; %' billion !over 2s. 09,999 crores" conglomerate, the /indal', hri ? /indal wondered why steel pipes could not be

made in 7ndia when he spotted one with foreign markings. 6e got working on the

idea and started a small pipe unit at 6owrah in (est Bengal. &o one at that point

of time dreamt where this visionary would take this humble beginning.

Today, the group is a multi-billion, multi-location, multi-product business

empire. @rom mining iron ore and coal, the group produces sponge iron, @erroalloys and a wide range of hot-rolled and cold-rolled steel products ranging from

62 coilsAsheetsAplates, hot-rolled structural sections and rails to #2 coilsAsheets,

high-grade pipes and value added items such as stainless steel, galvani4ed steel

coated pipes. 7t has not only diversified into power generation but also into

petroleum, infrastructure, diamond and high value metals mineral exploration.

The group has manufacturing facilities across 7ndia, : 7ndonesia and

marketingArepresentative offices across the globe.

T%e F!'n"er:

Late S%ri O()(&INDAL * Ba+',i T%e man !$ "e.tin#/

0123-4335/


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8ate hri m ?rakash /indal, @ounder #hairman of the /indal )9, to a farmer in &alwa village of 6isar district of 6aryana.

6aving interest in technical work from a young age, he started his industrial

career with a small bucket-manufacturing unit in 6isar in %>'. 7n %>0+, he

commissioned a pipe unit, /indal 7ndia 8imited followed by a large factory in

%>0> under the name of /indal trips 8imited. hri /indal envisioned a self-

reliant 7ndia in every sector of industry. To fructify this vision, he gathered the

latest technical know-how from around the world and strengthened his own

industrial establishment. Today, the /indal


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&in"al Steel an" )!8er Limite"

(ith an annual turnover of over : ;'.% billion !2s. %9,999 crores", /indal

teel ?ower 8imited !/?8" forms a part of the : ;%' billion !over 2s.09,999 crores" /indal


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/indal


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#reativity and 7nnovation$ *ncourage creative experimentation, embrace

new ideas and institutionali4e continuous improvement in all aspects of

business and performance.

ocial responsibility$ (ork on social and environmental issues to enrich

the quality of life within the community we serve.

C!re Operati!nal Capacitie.

0( Ir!n !re mine 2(33 MT)A

4( C!al mine 04(33 MT)A

2( Sp!nge Ir!n c!al +a.e" / 0(2= MT)A

>( ?!t Metal )ig Ir!n / 0(@5 MT)A

5( T!tal Steel 2(33 MT)A

Rail.9 Beam. < Str'ct'ral.

)late. < C!il.

Sla+.9 R!'n".9 Bl!!m. < +illet.9 7ire

R!".

3(=5 MT)A

0(33 MT)A

0(45 MT)A

@( T!tal Captive )!8er )lant 25 M7

=( &in"al )!8er Limite" 09333 M7


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)r!"'ct )r!$ile

Steel: *xcelling the level of steel making, /?8 has exceeded the production

capacity of '.>9 5T? with its plant at 2aigarh, #hhattisgarh. :pgrading its

existing facility at 2aigarh and by commissioning of additional facilities in

/harkhand and rissa, /?8 is encompassing the future production capacity of

steel that will rise by %' 5T? in coming years.

/?8Cs sinter plant, blast furnaces !%0G%m and )%m", coke oven, state-of the art

teel 5elting hop with electric arc furnace, ladle refining, vacuum degassing

and continuous casting bears testimony to its promise of providing its customers

with international quality steel. ?roduct range includes products in carbon steeland alloy steel grades$ labs, Blooms, 2ounds Billets.

Sp!nge Ir!n: t 2aigarh, coal-based sponge iron is manufactured using %9

indigenously developed rotary kilns, with a capacity of %.)1 5T?, making

/?8 the largest coal based sponge iron manufacturer in the world. s a key raw

material for the manufacture of steel, our focus on sponge iron continues.

Ferr! C%r!me:/?8 has ubmerged rc @urnace !@" at 2aigarh to produce

high carbon @erro #hrome, which is an essential component for the productionof stainless and special steel. The present capacity is )0,999T?. #ontinuous

smelting of chrome ore, coke and quart4 at temperature of %099-%1999 #

ensures consistent quality of @erro #hrome. Throughout the manufacturing

process, the focus is on quality assurance.

(ith a view to benefit from the latest innovations in information technology

tools, iemens 7nformation ystems 8imited has implemented an *nterprise

2esource ?lanning !*2?" ? 2A) Hersion +.00 in all the units. part from

integrating various functions, the *2? program seeks to improve #oordination,

increase productivity and lower cost of production.

?-Beam. an" C!l'mn.:/?8 has been a pioneer in producing 6ot 2olled

?arallel @lange Beams !6-beam" and #olumns in medium and large si4es in

7ndia. The structural engineers, architects and construction companies, consider

these 6-Beams and columns strongest, safest and most stable.


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)late.:/?8 also introduced ).m wide steel plates for the first time in 7ndia.

@ollowing world-class technology in its production of the finest and widest

plates /?8 reaffirmed its commitment to develop state-of-the-art steel

products of international standards. /?8Cs sharp focus on customer relationship

management and manufacturing execution systems ensures delivery of

customi4ed solutions to the customer needs.

)!8er: /?8 has a )G 5( power generation facility 7n 2aigarh based on

waste heat recovery from rotary kilns, washery rejects and coal fines to

meet the captive requirements as well as supply to the tate *lectricity Boards

of #hhattisgarh. /?8 has expansion plans of expanding the power generation

facility to 099 5(. /indal ?ower limited !/?8"$ /?8 a wholly owned subsidiary

of /?8, is setting up a %999 5(

.?. /indal uper Thermal ?ower ?lant at 2aigarh, #hhattisgarh, with an

investment of over 2s. +99 crores. The project has been accorded 5ega ?ower

?roject status by the

5inistry of ?ower,


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#hhattisgarh, parts of /harkhand and 3emocratic 2epublic of #ongo. ponge

7ron$ /?8 has worlds largest coal-based sponge iron manufacturing facility,

which uses industry developed rotary kilns.

F't're )lan.

/?8 firmly believes that #6&


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C!al t! Li'i" )etr!le'm )r!,ect

/indal teel ?ower has been allotted the 2amchandi ?romotional #oal Block

in rissa for the proposed #oal to 8iquid !#T8" project by the :nion #oal

5inistry,


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A8ar". an" Ac%ievement.

A8ar".

@eatures in @orbes @ab 9 list

#&B# ward for J5ost ?romising &ew *ntrant in big leagueK-

'99>

mong Top '9 EBest #ompanies To (ork @orE by Business Today-'99>

2anked )0th among 7ndiaCs %99 5ost ?rofitable #ompanies by

Business and *conomy 5aga4ine- '99> , '99G

&ational *nergy #onservation ward L '991, '99, '99+,

'99), '99', '99%.

Ac%ievement.

5anufacturer of longest rail of %'% meter long in the world

8argest coal based sponge iron manufacturing unit in the world

@irst #ompany to produce power from waste heat recovery

boiler from sponge iron.

'9%9


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C1APTER 8 7LITERATURE RE,IEW


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WORKING CAPITAL MANAGEMENT

3ecisions relating to working capital and short term financing are referred to asworking capital management. These involve managing the relationship between

a firm=s short-term assets and its short-term liabilities. The goal of working

capital management is to ensure that the firm is able to continue its operations

and that it has sufficient cash flow to satisfy both maturing short-term debt and

upcoming operational expenses.


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T%e primar# !+,ective. !$ 8!ring capital management:

%. 5eet day to day cash flow need.'. ?ay wages and salaries when they fall due.). ?ay creditors to ensure continued supplies of goods and services.+. ?ay government taxation and provision of capital dividends.. *nsure the long team survival of the business entity.

Di$$erent c!ncept. !$ 8!ring capital:

Two thoughts are currently accepted about working capital. They are$

%.


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&et working capital is a qualitative concept. it indicates the liquidity position

of the firm suggests the extend to which working capital needs may be

financed by permanent sources of funds. weak liquidity position posses a

threat to the solvency of the company makes it unsafe unsound and

harmful for the companyCs reputation. Therefore prompt timely action

should be taken by management to improve correct the imbalances in the

liquidity position of the firm.

NET 7ORING CA)ITAL CURRENT ASSETS * CURRENT

LIABILITIES

T#pe. !$ 8!ring capital

#an be divided into two categories on the basis of time$ -

%.)ermanent 8!ring capital

'.Temp!rar# !r ;aria+le 8!ring capital

0( )ermanent 7!ring Capital:

This refers to that minimum amount of investment in all current assets

which is required at all times to carry out minimum level of business activities. 7t

represents the current assets required on a continuing basis over the entire year.

Tandon committee has referred to this type of working capital as Jcore current

assetsK.

The following are the characteristics of this type of working capital$-

%. mount of permanent working capital remains in the business in one form

or another. This is particularly important from the point of view of

financing. The suppliers of such working capital should not expect its

return during the lifetime of the firm.

'. 7t also grows with the si4e of the business.

?ermanent working capital is permanently needed for the business and therefore


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it should be financed out of l!ng-term $'n".(

This is the reason why the current ratio has to be substantially more than N%C.

'. Temp!rar# !r ;aria+le 7!ring Capital:

The amount of such working capital keeps on fluctuating from time to

time on the basis of business activities. 7n other words, it represents additional

current assets required at different times during the operating year. This is also

called Fl'ct'ating 7!ringCapital. 7t is financed by .%!rt term .!'rce..

mount

f Temporary

(orking ?ermanent

#apital

!2s." Time

C!n.e'ence. !$ n!t %aving a"e'ate 8!ring capital:

firm must have adequate working capital, i.e., as much as needed by the

firm. 7t should neither have excessive nor inadequate. Both situations are

dangerous. *xcessive working capital means the firm has idle funds, which earn

no profit for the firm. 7nadequate working capital means the firm does not have

sufficient funds for running its operations, which ultimately results in production

interruptions, and lowering down the profitability.

7t will be interesting to understand the relation between working capital,risk and return. 7n a manufacturing concern, it is generally accepted that higher

levels of working capital decrease the risk and decrease the profitability too

while lower levels of working capital increase the risk but have the potentiality

of increasing the profitability also.

This principle is based on the following assumptions$ -

!i" There is direct relationship between risk and return - higher is the risk,

higher is the profitability, while lower is the risk, lower is the profitability.


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!ii" #urrent assets are less profitable than fixed assets.

!iii" hort-term funds are more expensive than long-term funds.

Management !$ 8!ring capital:-

(orking capital refers to all aspects of the administration of both current

assets and current liabilities.

7n other words, working capital management is concerned with the problems

that arise in attempting to manage the current assets, the current liabilities and

the interrelationships that exist between them.

5oreover, different components of working capital are to be properly

balanced in such a way that during one complete production or operating cycle

the cash should be available for purchase of fresh material and for running the

business including operating expenses, after reali4ation of sale proceeds of

earlier cycle without any hurdles.

7n the absence of such situation, the financial position in respect of the firmCs

liquidity may not be satisfactory in spite of satisfactory liquidity ratio. (orking

capital management policies have a great effect on firmCs profitability, liquidityand its structural health. finance manager should therefore perform the

following two functions$

%" *stimating the amount of working capital.

'" ources from which these funds have to be raised.


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S!'rce. !$ 7!ring Capital:

The working capital requirements should be met both from .%!rt-termas

well l!ng-termsources of funds. 7t will be appropriate to meet at least 'A) rd!if

not the whole" of the permanent working capital requirements from long-term

sources and only for the period needed.

The financing of working capital through short-term sources of funds has

the benefits establishing close relationship with the banks.

@inancing of working capital from long-term resources provides the following

benefits$

!i" 7t reduces risk, since the need to repay loans at frequent intervals is

eliminated.

!ii"7t increases liquidity since the firm has not to worry about the payment of

these funds in the near future.


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Tec%ni'e. $!r t%e A..e..ment !$ 7!ring

Capital

Requirements

0( E.timati!n !$ c!mp!nent. !$ 8!ring capital met%!":

ince working capital is the excess of current assets over current liabilities, an

assessment of the working capital requirements can be made by estimating the

amounts of different constituents of working capital e.g., inventories, accounts

receivable, cash, accounts payable, etc.

4()ercent !$ .ale. appr!ac%:

This is a traditional and simple method of estimating working capital

requirements.

ccording to this method, on the basis of past experience between sales and

working capital requirements, a ratio can be determined for estimating the

working capital requirements in future.

). Operating c#cle appr!ac%:

ccording to this approach,

the requirements of working

capital depend upon the

operating cycle of the

business. The operating

cycle begins with the

acquisition of raw materials

and ends with the collection

of receivables.

perating cycle is also called (orking #apital #ycle. perating cycle is the

time duration required to convert sales, after the conversion of resources into

inventories, into cash. The operating cycle of a manufacturing companyinvolves three phases$


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%. cquisition of resources such as raw material, labour, power fuel.

'. 5anufacture of the product which includes conversion of raw materials into

work- in-progress into finished goods.

). ale of the product either for cash or on credit. #redit sales create accountreceivable for collection.

T%e lengt% !$ !perating c#cle !$ a man'$act'ring $irm i. t%e .'m !$:

%. 7nventory conversion period !7#?"$ 7t is the total time needed for producing

and selling the product. 7t includes$

. 2aw material conversion period !25#?"

B. (ork-in-progress conversion period !(7?#?"

#. @inished goods conversion period !@


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The working capital needs of a firm are influenced by numerous factors. Theimportant factors are$

0( Nat're !$ +'.ine..

The working capital requirement of a firm is closely related to the

nature of its business. service firm, like an electricity undertaking which has

a short operating cycle, which sells predominantly on cash basis, has a modest

working capital requirement. n the other hand, a manufacturing concern like

a machine tools unit, which has a long operating cycle and which sells largely

on credit, has a very substantial working capital requirement.

'. Sea.!nalit# !$ !perati!n.

@irms which have marked seasonality in their operations usually have

highly fluctuating working capital requirements. To illustrate, consider a firm

manufacturing ceiling fans. The sale of ceiling fans reaches a peak during the

summer months and drops sharply during the winter period.

). )r!"'cti!n p!lic#

firm marked by pronounced seasonal fluctuation in its sales pursues a

production policy, which may reduce the sharp variations in working capital

requirements.

+. Maret c!n"iti!n.

The degree of competition prevailing in the market place has an

important bearing on working capital needs. (hen competition is keen, a

larger inventory of finished goods is required to promptly serve customerswho may not be inclined to wait because other manufacturers are ready to

meet there needs.

5( C!n"iti!n. !$ .'ppl#

The inventory of raw materials, spares, and stores depends on the

conditions of supply. 7f the supply is prompt and adequate, the firm can

manage with small inventory.


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RATIO ANALHSIS

Financial Anal#.i.

@inancial analysis is the process of identifying the financial strengths and

weaknesses of the firm and establishing relationship between the items of the

balance sheet and profit loss account.

Rati! Anal#.i.

The term J2atioK refers to the numerical and quantitative relationship between

two items or variables. This relationship can be expressed as$

?ercentages

@ractions

?roportion of numbers.

2atio analysis is defined as the systematic use of the ratio to interpret the

financial statements so that the strengths and weaknesses of a firm, as well as

its historical performance and current financial condition can be determined.

2atio reflects a quantitative relationship and helps to form a quantitative

judgment.

2atio analysis is one of the techniques of financial analysis to evaluate the

financial condition and performance of a business concern. imply, ratio means

the comparison of one figure to other relevant figure or figures.

ccording to M#er.,E 2atio analysis of financial statements is a study of

relationship among various financial factors in a business as disclosed by asingle set of statements and a study of trend of these factors as shown in a series

of statements.E

@inancial ratio analysis is the calculation and comparison of ratios, which are

derived from the information in a companyCs financial statements. The level and

historical trends of these ratios can be used to make inferences about a


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companyCs financial condition, its operations and attractiveness as an

investment. The information derived from 2atio nalysis is used by$

Trade creditors, to identify the firmCs ability to meet their claims i.e.

liquidity position of the company. 7nvestors, to know about the present and future profitability of the

company and its financial structure. 5anagement, in every aspect of the financial analysis. 7t is the

responsibility of the management to maintain sound financial condition in

the company.

Step. in Rati! Anal#.i.

2atio nalysis mainly involves the following three steps$

The first task of financial analysis is to select the information relevant to

the decision under consideration from the statements and calculates

appropriate ratios. To compare the calculated ratios with the ratios of the same firm relating to

the past or future !projected" or with the ratios of another firm of the same

industry. 7t facilitates in assessing success or failure of the firm. Third step is interpretation, drawing of inferences and report writing.

#onclusions are drawn after comparison in the shape of report or

recommended courses of action.


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Ba.i. !r .tan"ar". !$ c!mpari.!n

2atios are relative figures reflecting the relation between variables. They enable

analyst to draw conclusions regarding financial operations. The use of ratios as atool of financial analysis involves the comparison with related facts which is the

basis of ratio analysis. The basis of ratio analysis is of four types$

?ast ratios$ calculated from past financial statements of the same firm.

#ompetitorCs ratio$ ratios of some progressive and successful competitor

firm at the same point of time. 7ndustry ratio$ ratios of the industry to which the firm belongs.

?rojected ratios$ ratios of the future developed from the projected or pro

forma financial statements.

Interpretati!n !$ Rati!.

The interpretation of ratios is an important factor. The inherent limitations of ratio

analysis should be kept in mind while interpreting them. The impact of factors

such as price level changes, change in accounting policies, window dressing etc.,

should also be kept in mind when attempting to interpret ratios. The interpretation

of ratios can be made in the following ways$

ingle absolute ratio


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G'i"eline. !r )reca'ti!n. $!r t%e '.e !$ Rati!.

The calculation of ratios may not be a difficult task but their use is not easy.

@ollowing guidelines or factors may be kept in mind while interpreting variousratios$

ppropriation of data used

bjective or purpose of analysis

election of ratios

:se of standards

#aliber of the analyst.

A"vantage. an" U.e. !$ Rati! Anal#.i.

There are various groups of people who are interested in analysis of financial

position of a company. They use the ratio analysis to workout a particular

financial characteristic of the company in which they are interested. 2atio

analysis helps the various groups in the following manner$ -

T! 8!r!'t t%e pr!$ita+ilit#: ccounting ratio help to measure the

profitability of the business by calculating the various profitability ratios. 7t

helps the management to know about the earning capacity of the business

concern. 7n this way profitability ratios show the actual performance of the

business. T! 8!r!'t t%e .!lvenc#:(ith the help of solvency ratios, solvency of

the company can be measured. These ratios show the relationship between

the liabilities and assets. 7n case external liabilities are more than that of the

assets of the company, it shows the unsound position of the business. 7n

this case the business has to make it possible to repay its loans. T! %elp in anal#.i. !$ $inancial .tatement: 2atio analysis help the

outsiders just like creditors, shareholders, debenture-holders, bankers to

know about the profitability and ability of the company to pay them

interest and dividend etc. T! %elp in c!mparative anal#.i. !$ t%e per$!rmance: (ith the help of

ratio analysis a company may have comparative study of its performance to

the previous years. 7n this way company comes to know about its weak

points and is able to improve them.


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T! .impli$# t%e acc!'nting in$!rmati!n: ccounting ratios are very

useful as they briefly summari4e the result of detailed and complicated

computations.

T! 8!r!'t t%e !perating e$$icienc#:2atio analysis helps to workout the

operating efficiency of the company with the help of various turnover

ratios. ll turnover ratios are worked out to evaluate the performance of the

business in utili4ing the resources.

T! 8!r!'t .%!rt-term $inancial p!.iti!n: 2atio analysis helps to

workout the short-term financial position of the company with the help of

liquidity ratios. 7n case short-term financial position is not healthy efforts

are made to improve it.

?elp$'l $!r $!reca.ting p'rp!.e.: ccounting ratios indicate the trend of

the business. This trend is useful for estimating future. (ith the help of

previous yearsC ratios, estimates for future can be made. 7n this way these

ratios provide the basis for preparing budgets and also determine future line

of action.

Limitati!n. !$ Rati! Anal#.i.

7n spite of many advantages, there are certain limitations of the ratio analysis

techniques and they should be kept in mind while using them in interpreting

financial statements. The following are the main limitations of accounting ratios$

Limite" C!mpara+ilit#: 3ifferent firms apply different accounting

policies. Therefore the ratio of one firm can not always be compared with

the ratio of other firm. ome firms may value the closing stock on 87@

basis while some other firms may value on @7@ basis. imilarly there

may be difference in providing depreciation of fixed assets or

certain of provision for doubtful debts etc. Inappr!priate Re.'lt.: ccounting ratios are based on data drawn from

accounting records. 7n case that data is correct, then only the ratios will

be correct.


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E$$ect !$ )rice Level C%ange.: ?rice level changes often make the

comparison of figures difficult over a period of time. #hanges in price

affect the cost of production, sales and also the value of assets. Therefore,

it is necessary to make proper adjustments for price-level changes before

any comparison.

'alitative $act!r. are ign!re": 2atio analysis is a technique of

quantitative analysis and thus, ignores qualitative factors, which may be

important in decision making. @or example, average collection period

may be equal to standard credit period, but some debtors may be in the

list of doubtful debts, which is not disclosed by ratio analysis.

E$$ect !$ 8in"!8-"re..ing$ 7n order to cover up their bad financialposition some companies resort to window dressing. They may record the

accounting data according to the convenience to show the financial

position of the company in a better way.

Mi.lea"ing Re.'lt.$ 7n the absence of absolute data, the result may be

misleading. @or example, the gross profit of two firms is 'I, where the

profit earned by one is just 2s. ,999 and sales are 2s. '9,999 and profit

earned by the other one is 2s. %9,99,999 and sales are 2s. +9,99,999.*ven the profitability of the two firms is same but the magnitude of their

business is quite different.


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C1APTER 8 9

RESEARC1

MET1ODOLOGY


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Re.earc% Met%!"!l!g#

2esearch 5ethodology is the way to systematically solve the problem, in it we

study the various steps that are generally adopted in the study along with the

logic behind them. 7t is a conceptual structure with in which study is conductedM

it constitutes the blue print of the collection, measurement and analysis of data.

7n the context of the study the methodology applied is as follows$

O+,ective. !$ t%e St'"#:

To study the need and importance of working capital.

To study the various sources of working capital in /..?.8.

To study relevancy of ratios in the financial management of the organi4ation.

To assess liquidity position, long term solvency, operationalefficiency and overall profitability of /..?.8.

C!llecti!n !$ Data:

0( Sec!n"ar# Data:

3ata collected from financial statements of the companyM

?rofit 8oss Ac,

Balance heet,

nnual 2eport, etc.

2eferring books, journals and maga4ines

7nformation collected from 7nternet.


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Stati.tical T!!l. '.e":

7 have covered (orking #apital 2atio nalysis in this project. (orking

#apital

is simply #urrent ssets minus #urrent 8iabilities. There is no particular

statistical

tool used in it. 7n case of 2atio nalysis, there are four major 2atios-

%. 8iquidity 2atio-

#urrent 2atio

Fuick 2atio

bsolute 8iquid 2atio

'. ?rofitability 2atio-


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3ebtors Turnover 2atio

#reditors Turnover 2atio

verage #ollection ?eriod

verage ?ayment ?eriod &et ssets Turnover 2atio

Total ssets Turnover 2atio

@ixed ssets Turnover 2atio

#urrent ssets Turnover 2atio

(orking #apital Turnover 2atio


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C1APTER 8 =;=> >46;76


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Calc'lati!n !$ rati!. !$ &(S()(L( an" Anal#.i. +a.e" !n

t%em:

0( C'rrent Rati!:

C'rrent Rati! C'rrent A..et. J C'rrent Lia+ilitie.(

)artic'lar. 4304-02 in R.(

Cr(/

4300-04 in

R.( Cr(/

4303-00in

R.( Cr(/

C'rrent A..et. 5031(>4 2411(5= 030(@@

C'rrent Lia+ilitie. 2>24(30 0@43(0 003(25

C'rrent Rati! 0(>1:0 4(3>:0 0(54:0

Anal#.i.: The #urrent 2atio of a firm measures its short term solvency.

6igher the ratio better is the firmCs ability to meet its short term obligations.

#urrent 2atio of '$% is considered to be ideal !banks consider this ratio to be

favorable till %.))$%".

@rom the above table, it can be inferred that liquidity of /..?.8. has

deteriorated from '9%' to '9%) as the #urrent 2atio has gone down from

'.9+$% to %.+>$% !although it is still favorable". 7t means that its ability to meet

its current obligations !liabilities" has gone down. The reason why this ratio

decreases mainly is more than proportionate decrease in #urrent ssets when

compared to #urrent 8iabilities. 7t may be due to initiation of new projects.

'. 'ic Rati!:


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'ic Rati! C'rrent A..et. * Invent!rie. J C'rrent Lia+ilitie.(

)artic'lar. 4304-02 in

R.( Cr(/

4300-04 in

R.( Cr(/

4303-00 in

R.( Cr(/

C'rrent A..et. * Invent!rie. 211(>@ 4201(30 0051(44

C'rrent Lia+ilitie. 2>24(30 0@43(0 003(25

'ic Rati! 0(0>:0 0(>2:0 3(1:0

Anal#.i.: Fuick 2atio represents a firmCs ability to meet its current

obligations within a very short period of time, i.e. within one month. Fuick

2atio of %$% is considered to be ideal.

Fuick 2atio of /..?.8. in the year '9%) is %.%+$% which shows that the

companyCs financial position is quite strong. The company is capable of

meeting its current obligations within a short period of time. lthough this

ratio has gone down from %.+)$% in '9%' to %.%+ in '9%), it still has a strong

liquidity position and wonCt face any problem in getting creditors.

2( De+t *E'it# Rati!:

De+t-E'it# Rati! L!ng term "e+t J S%are%!l"er.K $'n". e'it#/(

)artic'lar. 4304-02 in R .(

Cr(/

4300-04 in R.(

Cr(/

4303-00 in R.(

Cr(/

L!ng term "e+t >04(> 2@@2(4= 20=>(4

E'it# 52(02 2=45(4@ 4>=(>0

De+t-E'it# Rati! 3(1:0 3(1:0 0(4:0

Anal#.i.: This ratio offers one of the best pictures of a companyCs leverage. The

higher the figure the higher is the leverage the company enjoys. 7t is a

relationship describing the lendersC contribution for each rupee of the ownersC

contribution. 7t reflects the relative claim of the creditors and owners against the


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assets of the firm. lternatively, it also indicates the relative proportion of the

debt and equity in financing the assets of the firm.

The 3ebt-*quity 2atio of /..?.8. has shown a decreasing trend over the years

showing that the company has focused more on financing its growth with equityas compared to debt. The company has a better support from the shareholders.

ratio of 9.G>$% shows that the claim of the owners is greater than those of the

creditors. @rom the point of view of creditors, it represents a satisfactory situation

since a high proportion of equity provides a larger margin of safety to them.

+. Capital Empl!#e" t! Net 7!rt% Rati!:

C J N Rati! Capital Empl!#e" J Net 7!rt%(

)artic'lar. 4304-02 in R .(

Cr(/

4300-04 in R.(

Cr(/

4303-00 in R.(

Cr(/

Capital Empl!#e"

De+t Net 7!rt%/ 03253(= =5(@0 51@(02Net 7!rt% 52(02 2=45(4@ 4>=(>0

C J N Rati! 0(14:0 4(3>:0 4(>4:0

Anal#.i.:This ratio shows the amount of funds being contributed together by

lenders and owners for each rupee of the ownersC contribution. 7t is an alternative

way of expressing the basic relationship between debt and equity.

The ratio of %.>' times shows that the net worth of the company is approximatelyhalf of the total investment in the company and hence company has very sound

financial position. (e can also say that owners finance around 9I of the total

investment in the company.

. Intere.t C!verage Rati!:

Intere.t C!verage Rati! EBIT J Intere.t(


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)artic'lar. 4304-02 in Cr(/ 4300-04 in Cr(/ 4303-00 in Cr(/

EBIT '%19.1> %1%%.% %9>.%%

Intere.t %0G.>% '9G.> %9.'1

Intere.t C!verage Rati! %'.>$% G.'$% 1.'$%

Anal#.i.:This ratio is a measurement of the number of times a company could

make its interest payments with its earnings before interest and taxes. 8ower the

ratio, higher is the companyCs debt burden.

The ratio of %'.>$% is high and hence the company has very sound financial

position. 7t has no tension of paying interests over its loans as it creates much

more wealth from the debts than the interests to be paid. lso, this ratio is showing

an increasing trend over the years which depict the strengthening of the financial

position of the company and continuous improvement in its operating efficiency.

0. Gr!.. )r!$it Margin :

Gr!.. )r!$it Margin Gr!.. )r!$it J Net Sale./ 033(


Gr!.. )r!$it 245@(>= 4=(2= 00@(01

Net Sale. =@52(01 5>03(=5 2501(0

Gr!.. )r!$it Margin >4(55 50(52 50(@

Anal#.i.:The


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ratio is still high and satisfactory. This shows the firmCs efficiency of production. 7t

represents that /..?.8. has been able to make good profits although not as high as

previous years.

=( Net )r!$it Margin:

Net )r!$it Margin )r!$it a$ter ta )AT/ J Net Sale./ 033(


)AT %)0.+G %')0.>0 19'.>>

Net Sale. 10).%> +%9.1 )%>.G%

Net )r!$it Margin '9.9GI ''.G0I %>.>1I

Anal#.i.:This ratio establishes a relationship between net profit and net sales and

indicates managementCs efficiency in manufacturing, administering and selling the

products.

The &? 2atio of /?8 in '9%'-%),i.e., '9.9GI is quite impressive and shows that

the company is performing well and has high level of efficiency. The company is

able to achieve satisfactory return on shareholdersC funds. lso, the firm has the

capacity to withstand adverse economic conditions. ?T is showing an upward

trend which is very good. lthough this ratio is showing a decline in '9%'-%) from

'9%%-%', this decline is nominal and can be overlooked. 7t is not harming the

profitability of the firm.

( Operating )r!$it Margin:

Operating )r!$it Margin Operating )r!$it J Net Sale./ 033(


Operating )r!$it '0)1.G0 ''>.>% %+9>.G%

Net Sale. 10).%> +%9.1 )%>.G%

Operating )r!$it Margin )+.+1 +'.+) +9.9

Anal#.i.:This ratio indicates the earning capacity of the concern on the basis ofits business operations and not from earnings from other sources. 7t shows whether


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the business is able to stand in the market or not. 7t ensures adequate coverage for

operating expense of the firm and sufficient return to the owners of the business.

lthough perating ?rofit of /?8 increased over the years, the relative increase

in operating profit and net sales of '9%'-%) as compared to '9%%-%' were not inproportion. Because of this, a decrease in operating profit margin can be observed.

But in spite of this, the ratio in '9%'-%) is good !)+.+1I" which represents the

firmCs good earning capacity solely from its business operations leaving aside

earnings from other sources.

1( Ret'rn !n Inve.tment ROI/:

ROI )AT Intere.t J Net A..et./ 033(


)AT Intere.t %19.)> %++. G).'0

Net A..et. %9>1+.1' G%%%.'0 0+%0.'

ROI %.+I %1.G'I %).)I

Anal#.i.:2eturn on investment or 2eturn on capital employed measures the profit

which a firm earns on investing a unit of capital. The profit being the net result ofall operations, the return on capital expresses all efficiencies and inefficiencies of

a business. To shareholders it indicates how much their capital is earning and to

the management as to how efficiently it has been working. This ratio influences

the market price of the shares. The higher the ratio, the better it is.

The 27 of %.+I signifies that /?8 is getting good return on its investments.

The consistency in good value of this ratio is showing that the companyCs key

decision makers are doing a great job.

03( Ret'rn !n E'it# ROE/:

ROE )AT J E'it# S%are%!l"er.K $'n"./ 033(


)AT %)0.+G %')0.>0 19'.>>

E'it# S%are%!l"er.K $'n". )G1.%) )1'+.'0 '+11.+%ROE 'G.'I )).'%I 'G.)GI


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Anal#.i.:2eturn on *quity judges the profitability from the point of view ofequity shareholders. This ratio has great interest to equity shareholders. The return

on equity measures the profitability of equity funds invested in the firm. The

investors favor the company with higher 2*.

The 2* of 'G.'I for '9%'-%) is quite good and it shows that the company is

utili4ing the equity funds in a good way to generate more profits for its equity share

holders. lthough the ratio has gone down in '9%'-%) as compared to '9%%-%', it is

still favorable and adequate for generating capital.

00( Invent!r# T'rn!ver:

Invent!r# T'rn!ver Net Sale. J Average Invent!r#(


Net Sale. 10).%> +%9.1 )%>.G%

Average Invent!r# %9>.'0 G%%. 09.G'

Invent!r# T'rn!ver 0.>> times 0.00 times .G% times

Da#. !$ Invent!r# ?!l"ing.

2@5 J Invent!r# T'rn!ver/

' days days 0) days

Anal#.i.:The 7nventory Turnover shows how rapidly the inventory is turning into

receivable through sales. >times. The company has been able to sell its stock or convert its


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inventories into receivables 0.>>times a year which can be considered to be

moderate depending on the nature of manufacturing sector. lso, the companyCs

utili4ation of inventories in generating sales is satisfactory and the yearly holding of

all types of inventories is decreasing.

04( Net A..et. T'rn!ver:

Net A..et. T'rn!ver Net Sale. J Net A..et. Capital Empl!#e"/(

)artic'lar. 4304-02 in R.( Cr(/4300-04 in R.(

Cr(/

4303-00 in R.(

Cr(/

Net Sale. 10).%> +%9.1 )%>.G%

Net A..et. %9>1+.1' G%%%.'0 0+%0.'

Net A..et. T'rn!ver 9.1 times 9.01 times 9. times

Anal#.i.: firmCs ability to produce a large volume of sales for a given amount

of net assets is the most important aspect of its operating performance.

:nutili4ed or under utili4ed assets increase the firmCs need for costly financing.

The net asset turnover of 9.1 times implies that /?8 is producing 2s 9.1 of sales

for one rupee of capital employed in net assets. 7t can be observed that the

companyCs net assets turnover is improving over the years which means its

efficiency and operating performance is improving.

02( T!tal A..et. T'rn!ver:

T!tal A..et. T'rn!ver Net Sale. J T!tal A..et.(

)artic'lar. 4304-02 in R.( Cr(/4300-04 in R.(

Cr(/

4303-00 in R.(

Cr(/

Net Sale. 10).%> +%9.1 )%>.G%

T!tal A..et. %++90.1) >1)'.91 1>0.0

T!tal A..et. T'rn!ver 9.) times 9.0 times 9.+0 times


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Anal#.i.:The Total assets turnover ratio shows the firmCs ability in generating

sales from all financial resources committed to total assets.

The total asset turnover of 9.) times implies that /?8 generates a sale of 2s

9.) for one rupee investment in fixed assets and current assets together. consistency can be observed in this ratio over the years, which is a good thing.

0>( C'rrent A..et. T'rn!ver:

C'rrent A..et. T'rn!ver Net Sale. J C'rrent A..et.(


Net Sale. 10).%> +%9.1 )%>.G%

C'rrent A..et. %9>.+' )'>>.1 %G9%.00

C'rrent A..et. T'rn!ver %. times %.0+ times %.> times

Anal#.i.:#urrent ssets Turnover of /?8 is showing a decline over the years.

o, it can be inferred that the speed with which the firm converts its current

assets into sales is declining. This means that the efficiency with which the firm

utili4es its current assets is decreasing. o this should be looked upon by the

management.

05( 7!ring Capital T'rn!ver:

7!ring Capital T'rn!ver Net Sale. J Net 7!ring Capital(


Net Sale. 10).%> +%9.1 )%>.G%

Net 7!ring Capital %011.+% %01G.10 0'%.)%7!ring Capital T'rn!ver +.0 times ).'' times .00 times


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Anal#.i.: 7t can be seen that the speed with which the firm is converting itsworking capital or net current assets into sales has increased in '9%'-%) as

compared to '9%%-%'. The case was opposite for current assets. This means that

the efficiency of the firm to utili4e its working capital is more than its efficiency

to utili4e its current assets.

The return of +.0 times is a representative of companyCs good performance. The

company is generating +.0 times of turnover from its working capital annually.

This means that the company manages its working capital very efficiently.

The reciprocal of the ratio for the year '9%'-%) is 9.''. Thus, it indicates that for

one rupee of sales the company needs 2s. 9.'' of net current assets. This gap

will be met by bank borrowings and long- term sources of funds.

0@( De+t!r. T'rn!ver:

De+t!r. T'rn!ver Cre"it Sale. J Average De+t!r.(

!Because of the unavailability of credit sales net sales has been used in its place".


Net Sale. 10).%> +%9.1 )%>.G%

Average De+t!r. ))>.+' )9).G )9>.>)

De+t!r. T'rn!ver ''. times %1.G%times %%.)0 timesAverage C!llecti!n )eri!"

2@5 J De+t!r. T'rn!ver/

%0 days '% days )' days

Anal#.i.:3ebtors turnover indicates the number of times debtors turnover eachyear.


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credit. The average collection period measures the quality of debtors since it

indicates the speed of their collection. The shorter the average collection period,

the better is the quality of debtors, since it implies the prompt payment by

debtors.

The 3ebtor Turnover of /?8 is increasing over the years. o, more reali4ation is

being achieved. This is very good. The debtors turnover of ''. times in '9%'-

%) is a representative of the efficient management of credit in /?8. The increase

in debtors turnover is leading to the reduction of average collection period of the

company. This shows that debtors of /?8 are good and the chances of bad debt

losses are less.

0=( Cre"it!r. T'rn!ver:

Cre"it!r. T'rn!ver Cre"it )'rc%a.e J Average Cre"it!r.(


Cre"it )'rc%a.e '01'.9 %))9.)' 111.>>

Average Cre"it!r. 0%G.)> +%%.)> )%+.>>

Cre"it!r. T'rn!ver +.)' times ).') times '.+1 times

Average )a#ment )eri!"

2@5 J Cre"it!r. T'rn!ver/

G+ days %%) days %+G days

Anal#.i.:#reditors Turnover ratio of the company is increasing over the years.

This means that creditors liability on the company is increasing. This is not good.

firm should have a low creditors turnover and it should not be increasing over

the years. This increase may be a result of inflation present in the market during

this period which resulted in an increase in the price of raw materials. The increase

in creditors turnover ratio is leading to a decrease in average payment period

which means that time available for the company to pay back creditors liabilities is

decreasing. o, this should be looked upon by the management.


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56/67


C1APTER 8 >

FINDINGS OF T1E STUDY

FINDINGS OF T?E STUDH


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/?8 has been successful in maintaining sufficient working capital during

the past. There was tremendous increase in working capital value in '9%%-

%' as compared to the previous year !%19I". There was no increase in

'9%'-%) but /?8 was able to maintain the high value of %011.+% during

this year which is very good and shows companyCs efficient working

capital management.

#urrent ssets of /?8 has been increasing significantly over the years.

@rom a value of %G9%.00 #r in '9%9-%% it reached )'>>.1 #r in '9%%-%'

and finally it attained the value of %9>.+' #r in '9%'-%) !+.G+I

growth". This is really appreciable.

7n spite of such high increase in current assets, working capital was

constant in last two years because there was a proportionate growth in

current liabilities of the company.

The liquidity ratios have shown a decrease. #urrent ratio has gone below

the ideal value !%.+>$%" in '9%'-%). This has led to the conclusion that the

liquidity of the company has deteriorated.

3ecrease in 3ebt-*quity ratio over the years is a representative of higher

focus of the company on financing its requirements with equity as

compared to debt.

3ecrease in


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(orking capital turnover is +.0 times showing that the company

manages its working capital very efficiently.

The debtors of /?8 are good and the chances of occurrence of bad debtsare very less.


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60/67


C1APTER 8 =

RECOMMENDATIONS

RECOMMENDATIONS OF T?E STUDH


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Based on the study and the conclusions drawn, 7 would like to put forward some

recommendations which are as follows$

The company should either try to bring about an increase in its current

assets or a decrease in its current liabilities to pull up its current ratio nearthe ideal value. This will result in an increase in the liquidity of the firm

and will make its position safer.

5anagement should take steps to reduce the expenditure or cost of

production in order to increase profit margins. @or this, company should

go for better quality raw materials and improved technology. /?8 is

already planning to adopt


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C1APTER 8

LIMITATIONS

LIMITATIONS OF T?E STUDH


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(hile carrying out my study, 7 came across certain limitations which the

company might face. These limitations are$

There is very high level of competition in the market as /?8 has strong

market leaders like TT teel and 78 as its competitors. o, carrying

out business processes in such a way so as to increase the profit margins

of the company and make its hold on the market stronger is the prime

challenge for /?8.

?roper operation of the (orking #apital #ycle is very important for

proper functioning of a business. Therefore, if anything goes wrong with

any step of the working capital cycle of /?8 and this cycle is

interrupted, business will be hampered drastically.

s /?8 has become one of the biggest industries today with a big and

continuously operating manufacturing unit, it needs to maintain a

sufficient amount of working capital with it always to meet its current and

emergency needs and to prevent any adverse situation.


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C1APTER 8 @

CONCLUSIONS


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CONCLUSIONS OF T?E STUDH

/?8 has been keeping sufficient working capital with it. 7t provides a strong

financial base for the company. 7t has been rising in relations to the growth of

the company. The working capital investment decisions made by the company

have also helped it to gain a strong financial status in a market where strong and

well established market leaders like TT teel are its competitors. 7t will not

be wrong to conclude with saying that the companyCs financial management is

highly appreciable and it is assumed that this would help the company to

continue its race on the path of continuoussuccess.


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REFERENCES


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REFERENCES

7. 5. ?andey - @inancial 5anagement.

3r. . D.

Documents

Finance 4th Sem Project Final