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An empirical analysis of capitalstructure & working capital management

on profitability & shareholders value

with reference to FMCG companies

201

1

Submitted by : - Vishal PanditParesh Parmar

Submitted to :- Prof. Sandhya Harkawat

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An empirical analysis of Capital Structure &

Working Capital Management on Profitability &

Shareholders value with reference to FMCG

Companies

Project Guide:

Prof. Sandhya Harkawat

Submitted by:

Vishal L. Pandit (53)

Paresh C. Parmar (56)

S. K. PATEL INSTITUTE OF MANAGEMENT & COMPUTER

STUDIES

Gandhinagar, India

April 2011

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CERTIFICATE

This is to certify that Mr. Vishal l. Pandit & Mr. Paresh C. Parmar

of S.K. Patel Institute of management and Computer Studies,Gandhinagar has submitted their Grand Project titled, An

empirical analysis of Capital Structure & Working

Capital Management on Profitability & Shareholders

value with reference to FMCG Companies in the year

2009-2011 in partial fulfilment of Kadi Sarva Vishwavidhyalaya

requirements for the award of the title of Master of Business

Administration.

Prof. Sonu V. Gupta Prof. Prakash chawla Prof. Sandhya Harkawat

Director in charge Coordinator Project Guide

Date:

Place:

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DECLARATION

We hereby, declare that the grand project titled, An

empirical analysis of Capital Structure & Working

Capital Management on Profitability & Shareholders

value with reference to FMCG Companies is original to

the best of our knowledge and has not been published

elsewhere. This is for the purpose of the partial fulfilment of

Kadi Sarva Vishwavidhyalaya requirements for the award of the

title of Master of Business Administration.

Name: Signature:

Vishal L. Pandit __________________

Paresh C. Parmar __________________

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PREFACE

Knowledge is the ocean that cannot be fathomed the deeper you go, the more

you see its unbounded profundity.

Change in occurring at an accelerated rate. Today is not like yesterday and

tomorrow will not like be today. Todays market place is how to succeed in the

dynamic environment that surrounds the corporate world today. M.B.A. is one

of those professional courses which help students to keep pace the changing

trends in business and its surrounding environment.

The subject Practical Studies particularly helps the students to know the actual

corporate world, the anxieties and stress associated with the job which cannot

be understood sitting in a classroom.

Complying with the objective the report is designed to develop the students

understanding about the industry with the special emphasis on the development

of skills in analyzing and interpreting practical problems through the application

of theory, concepts & techniques of management.

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ACKNOWLEDGEMENTS

Even for a very minute accomplishment the result is not the effort of a single person. Many

persons stand besides the men while and without their acknowledgement the accomplishment

is incomplete.

It is almost a ritual to begin the training report with an acknowledgement. This

acknowledgement is not just an acknowledgement; it is heart full thanks to all those who

made our project a great learning experience.

We are very grateful to our director Prof. Sonu Gupta and to our summer project

coordinatorProf. Samveg Patel for providing such a huge opportunity. Also to our mentor

Prof.Sandhya Harkawat under whose blissful guidance, we were able to finish the report

successfully.

Finally, a special thanks to S K Patel College and staff for all their blessings and support.

And also to our parents who (in their blessings) supported us working sincerely to prepare

this report.

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TABLE OF CONTENTS

Chapter

No

Particulars Page

No

Title page I

Certificate Ii

Declaration Iii

Preface IV

Acknowledgement V

Executive Summary Vi

1) Introduction 1

2) Research Methodology

a) Research Objective

b) Scope of the study

c) Research Designd) Types of Data

e) Hypothesis

3) Literature Review

4) Theoretical aspects of the study

5) Data Analysis & Findings

6) Conclusion

7) Bibliography

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EXECUTIVE SUMMARY

A study of working capital management and capital structure is a major importance to

internal and external analysis because of its close relationship to current day-to-day

operations of business. WCM refers to the management of working capital, or precisely to the

management of current assets.

A firms working capital consists of its investment in current assets, which include mostly

short-term assets, cash and bank balance, inventories, receivable, and marketable securities.

A company's reasonable, proportional use of debt and equity to support its assets is a key

indicator of balance sheet strength. A healthy capital structure that reflects a low level of debt

and a corresponding high level of equity is a very positive sign of investment quality.

In the study of working capital and capital structure for profitability different ratios were use

for analysis purpose. Earning per share, Debt equity ratio, Operating profit ratio were majorimportant parameter taken for analysis purpose.

Following are the main study for working capital and capital structure

Working capital practice in FMCG companies in selected units

Working capital impact on profitability by comparing impact of dependent variable

earning per share and operating profit to other different ratios.

Capital structure impact to profitability indicator operating profit to earning per share.

Individual companies performance based on indicator Earning per share to Debt

equity ratio effect to individual company.

By analysing the companys performance of selected 5 FMCG companies based on BSC

index, we can know that there is impact to capital structure performance but more effect to

working capital of those companies. So working capital play important role in the selected

companies. Nestle played very well role in capital structure compare to other selected units.

For working capital companies managed it very well in all companies. There was also made

impact of dependent variable earning per share and operating profit to other different ratios.

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There is no significant impact show between the operating profit to earning per share in the

study.

INTRODUCTION

The selection of topic was based on interested in work in manufacturing company. Soaccording to us it was seen that there is comparison make between theoretical and real market

condition. We used secondary data for study purpose for this study. Working capital and

capital structure are important parameter to Judge Companys performance.

Working capital is the life blood and courage centre of a business. Just as circulation of blood

is essential in the human body for maintaining life, working capital is very essential to

maintain the smooth running of a business. No business can run successfully without an

adequate amount of working capital.

The working capital requirements should be met both from short term as well as long term

sources of funds. Financing of working capital through short term sources of funds has thebenefits of lower cost and establishing close relationship with banks. Financing of working

capital through long term sources provides the benefits of reduces risk and increases liquidity.

A company's capitalization (not to be confused with market capitalization) describes the

composition of a company's permanent or long-term capital, which consists of a combination

of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a

company's capital structure is an indication of financial fitness.
http://www.investopedia.com/terms/m/marketcapitalization.asphttp://www.investopedia.com/terms/m/marketcapitalization.asphttp://www.investopedia.com/terms/m/marketcapitalization.asp

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RESEARCH METHODOLOGY

Objectives of the Study

1. To assess the impact of working capital on profitability.

2. To examine the combine effect of the ratios relating to working capital

management and Companies s profitability indicator Earning Per Share.

3. To study the impact of capital structure on profitability & shareholders value of

FMCG companies.

4. To show which company show better performance in working capital and capital

structure compare to each other.

Scope of the study

We have selected 5 FMCG companies for our research. These 5 FMCG companies according

to FMCG BSE index on bases of market capitalization.

BSE FMCG INDEX 01 Nov 15:34

Company Name Industry LastPrice

Change %Chg

Mkt Cap(Rs cr)

Weight

ITC Cigarettes 171.60 0.45 0.26 131,983.50 43.08

HUL Personal Care 293.25 -0.85 -0.29 63,996.53 20.89

Nestle Food

Processing

3,545.20 56.35 1.62 34,181.30 11.16

Dabur India Personal Care 99.50 -0.10 -0.10 17,320.20 5.65

Godrej Consumer Personal Care 423.00 4.15 0.99 13,687.86 4.47
http://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=ITC&compname=ITChttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=HU&compname=HULhttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=NI&compname=Nestlehttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=DI&compname=Dabur%20Indiahttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=GCP&compname=Godrej%20Consumerhttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=ITC&compname=ITChttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=HU&compname=HULhttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=NI&compname=Nestlehttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=DI&compname=Dabur%20Indiahttp://finance.indiamart.com/cgi-bin/pricechart_bse30.cgi?sc_did=GCP&compname=Godrej%20Consumer

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We have selected top 5 FMCG manufacturing companies based on market

capitalization as on 1st Num. 2010.

We are going to analyze above companys capital structure and working capital

position for the purpose of knowing the how they are managing these things and how it will

affects to the profitability and shareholders value.

Data Collection

Secondary data:1. 5 years Annual Reports of the companies.

2. Website of Capital Line

Data Analysis Tools

Ratio analysis.

Average method.

ANOVA(F test).

Correlation.

Regression Analysis.

Approach

Descriptive approach

It is a kind of fact finding research in which we are trying to analyze capital structure and

working capital position of companies.

Hypothesis

Following are the hypothesis to be tested

Ho1= Average ratios of inventory conversion period of companies do not differ

significantly.

Ho2= Average ratios of debtors conversion period of companies do not differ

significantly

Ho3= Average ratios of creditors conversion period of companies do not differ

significantly.

Ho4= Average ratios of cash conversion period of companies do not differ

significantly.

Ho5= There is no significant impact of dependable variable Operating profitindependent variable Earning per share.

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Ho6= There is no significant difference of dependent variable EPS to the debt equity

ratio of ITC.

Ho7= There is no significant difference of dependent EPS variable to debt equity ratio

of HUL.

Ho8= There is no significant difference of dependent variable EPS to debt equity ratio

of Nestle.

Ho9= There is no significant difference of dependent variable EPS to debt equity ratio

of Dabur.

Ho10= There is no significant difference of dependent variable EPS to debt equity

ratio of Godrej.

Literature review

1. Working Capital Management Practices

A case study of Listed Manufacturing Companies in Sri Lanka(Journal of

IPM Meerut Volume 11, January-June-2011)

ABSTRACT

A study of working capital management is a major importance to internal and external

analysis because of its close relationship to current day-to-day operations of business. WCM

refers to the management of working capital, or precisely to the management of current

assets. A firms working capital consists of its investment in current assets, which include

mostly short-term assets, cash and bank balance, inventories, receivable, and marketable

securities. The goal of WCM if 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 upcomingoperational expenses. Therefore, present study is initiated on working capital management

practices. The results reveals that Aban Limied, and Lalu limited that manage their working

capital more efficiently that other companies.

2. Working capital and profitability

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An empirical analysis by P.C.Narvare(Lecturer, Affiliated to Bakatullah

university, Bhopal)

ABSTRACT

Working capital management and profitability of the company disclosed both negative and

positive association. Out of the nine ratios selected for the study three ratios, namely CTSR,

WTR and DTR refistered negative correlation with the selected profitability ratio, RoI. The

sloped of the ROI.

Working capital limited of the company concluded the increase in the profitability of the

company was less than the proportion to decrease in working cpital.

3. Behavioral Dimension of Cross-Sectoral Capital Structure

Decisions: ISE (Istanbul Stock Exchange) Application

AbstractIn our study, we tested whether average leverage level of sector and leverage level

of sector leader are effective on capital structure decisions of selected firms and sectors

listed in ISE. We depended on the Approach of Behavioral Finance to this matter as a

supplementary approach of traditional finance to capital structure. In respect of its

influence on leverage levels of the firms in four sector we addressed for the period of 1999-2006 (White Goods and Electronic, Banking, Cement, Paper and Packing), while sector

averages are effective at a meaningful extent in white goods sector, it was seen that it

affects leverage level of sector leader considerably. In the study we carried out by using

panel data analysis method, when we consider the firms we addressed as a whole without

discrimination in sector-specific terms, however, it was seen that both sector average and

sector leader display a positive relation with leverage level of firms with a significance of

10%.

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THEORETICAL ASPECTS OF THESTUDY

Working Capital

Working capital refers to the cash a business requires for day-to-day operations, or, more

specifically, for financing the conversion of raw materials into finished goods, which the

company sells for payment. Among the most important items of working capital are levels of

inventory, accounts receivable and accounts payable. Analysts look at these items for signs of

a company's efficiency and financial strength.

A managerial accounting strategy focusing on maintaining efficient levels of both

components of working capital, current assets and current liabilities, in respect to each other.

Working capital management ensures a company has sufficient cash flow in order to meet its

short-term debt obligations and operating expenses.

There are two concepts of working capital: gross and net working capital.

The term gross working capital, also referred to as working Capital, means the total current

assets. The term net working capital can be defined in two ways: (i) the most commondefinition of net working capital (NWC) is the difference between current assets and current

liabilities; and ii) alternate definition of NWC is that portion of current assets which is

financed with long-term funds.

The common Definition of NWC and its Implications NWC is commonly defined as the

difference between current assets and current liabilities. Efficient working capital

management requires that firms should operate with some amount of NWC, the exact amount

varying from firm to firm and depending, among other things, on the nature of industry. The

theoretical justification for the use of NWC to measure liquidity is based on the premise that

the greater the margin by which the current assets cover the short-term obligations, the more

is the ability to pay obligations when they become due for payment. The NWC is necessary

because the cash outflows and inflows do not coincide. In other words, it is the non
http://www.investopedia.com/terms/w/workingcapital.asphttp://www.investopedia.com/terms/w/workingcapital.asp

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synchronous nature of cash flows that makes NWC necessary. In general, the cash outflows

resulting from payment of current liabilities are relatively predictable. The cash inflows are,

however difficult to predict. The more predictable the cash inflows are, the less NWC will be

required. A firm, say an electricity generation company, with almost certain and predictable

cash inflows can operate with little or no NWC. But where cash inflows are uncertain, it will

be necessary to maintain current assets at a level adequate to cover current liabilities, that isthere must be NWC

Working capital means the funds (i.e.; capital) available and used for day to day operations

(i.e.; working) of an enterprise. It consists broadly of that portion of assets of a business

which are used in or related to its current operations. It refers to funds which are used during

an accounting period to generate a current income of a type which is consistent with major

purpose of a firm existence.

Factors that determine working capital

The working capital requirements of a concern depend upon a large number of factors such as

Size of business Nature of character of business. Seasonal variations working capital cycle,

operating efficiency Profit level, other factors.

Advantages of working capital

It helps the business concern in maintaining the goodwill.

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

It enables a concern to face business crisis in emergencies such as depression.

It creates an environment of security, confidence, and overall efficiency in a business.

It helps in maintaining solvency of the business.

Disadvantages of working capital

Rate of return on investments also fall with the shortage of working capital.

Excess working capital may result into over all inefficiency in organization.

Excess working capital means idle funds which earn no profits. Inadequate working capital can not pay its short term liabilities in time.

Management of working capital

A firm must have adequate working capital, i.e.; as much as needed the firm. It should be

neither excessive nor inadequate. Both situations are dangerous. Excessive working capital

means the firm has idle funds which earn no profits for the firm. Inadequate working capital

means the firm does not have sufficient funds for running its operations. It will be interesting

to understand the relationship between working capital, risk and return. The basic objective

of working capital management is to manage firms current assets and current liabilities insuch a way that the satisfactory level of working capital is maintained, i.e.; neither inadequate

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nor excessive. Working capital some times is referred to as circulating capital. Operating

cycle can be said to be t the heart of the need for working capital. The flow begins with

conversion of cash into raw materials which are, in turn transformed into work-in-progress

and then to finished goods. With the sale finished goods turn into accounts receivable,

presuming goods are sold as credit. Collection of receivables brings back the cycle to cash.

The company has been effective in carrying working capital cycle with low working capitallimits. It may also be observed that the PBT in absolute terms has been increasing as a year to

year basis as could be seen from the above table although profit percentage turnover may be

lower but in absolute terms it is increasing. In order to further increase profit margins, SSL

can increase their margins by extending credit to good customers and also by paying the

creditors in advance to get better rates.

CAPITAL STRUCTURE

Directors to make decision on capital structure should make a choice between debt and

equity. Many studies were carried out on description of factors influencing capital structure

decisions since Modigliani-Miller as an expression of a choice between debt and equity. As a

result of these studies based on rationality within the framework of traditional finance,

different theories were seen regarding description of capital structure in parallel with change

in expectations and preferences of firm directors and shareholders.We may collect

descriptions of traditional finance on formation of capital structure mainly in three groups:

Trade-off Theory, Agency Theory and Pecking Order Theory.

Trade-off Theory which was set forth by Myers (1984) refers to the necessity of establishing

a balance between tax saving arising from debt, decrease in agent cost and bankruptcy and

financial distress costs, since firms may not realize value maximization when they form a

capital structure using only liabilities source or form a capital structure by using no liability.

According to Trade-off Theory, firms should balance between costs in order to reach an

optimal capital structure (Ghosh and Cai,2001).

Agency Theory is a theory dealing with agent problems due to approach or interest

differences between director and shareholders caused by distribution of firm cash flow.

According to the theory, there are agency costs incurred to reduce agent problems in firmscollected under the headings of monitoring costs, guaranty agreement costs and unavoidable

losses cost (Chambers,Lacey, 1999). However, capital structure decisions are made reducing

agency costs of equity by high leverage level and increasing market value of the firm for the

purpose of decreasing agency costs (Berger Allen N.,Pati di Emillia Bonaccorsi, 2002).

Another capital structure theory is Pecking Order Theory suggested by Myers and Majluf

(1984). According to the Pecking Order Theory, capital structure of a firm is formed by

focusing onorder of priority of different sources to meet financial requirements of firms

(Frank and Goyal, 2007).

For stock investors that favour companies with good fundamentals, a "strong" balance sheet

is an important consideration for investing in a company's stock. The strength of a company'

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balance sheet can be evaluated by three broad categories of investment-quality

measurements: working capital adequacy,asset performanceandcapital structure.

The equity part of the debt-equity relationship is the easiest to define. In a company's capital

structure, equity consists of a company's common and preferred stock plus retained earnings,

which are summed up in the shareholders' equity account on a balance sheet. This investedcapital and debt, generally of the long-term variety, comprises a company's capitalization, i.e.

a permanent type of funding to support a company's growth and related assets.

The combination of a company's long-term debt, specific short-term debt, common equity,

and preferred equity; the capital structure is the firm's various sources of funds used to

finance its overall operations and growth. Debt comes in the form of bond issues or long-term

notes payable, whereas equity is classified as common stock, preferred stock, or retained

earnings. Short-term debt such as working capital requirements also is considered part of the

capital structure.

The proportion of short-term and long-term debt is considered in analyzing a firm's capital

structure. When people refer to capital structure, they most likely are talking about a firm's

debt/equity ratio, which provides insight into how risky a company is. Usually a company

financed heavily by debt poses greater risks because it is highly leveraged.
http://www.investopedia.com/terms/w/workingcapital.asphttp://www.investopedia.com/terms/w/workingcapital.asphttp://www.investopedia.com/terms/a/assetperformance.asphttp://www.investopedia.com/terms/a/assetperformance.asphttp://www.investopedia.com/terms/c/capitalstructure.asphttp://www.investopedia.com/terms/c/capitalstructure.asphttp://www.investopedia.com/terms/w/workingcapital.asphttp://www.investopedia.com/terms/a/assetperformance.asphttp://www.investopedia.com/terms/c/capitalstructure.asp

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RATIO

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations

The Current Ratio formula is:

Current Ratio = Current Assets/Current Liabilities

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio"

Quick Ratio

An indicator of a company's short-term liquidity. The quick ratio measures a

company's ability to meet its short-term obligations with its most liquid assets. The higher the

quick ratio, the better the position of the company.

The quick ratio is calculated as:

Quick Ratio = Current Assets-Inventories/Current Liabilities

Also known as the "acid-test ratio" or the "quick assets ratio".

Inventory Turnover

A ratio showing how many times a company's inventory is sold and replaced over a period.

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Generally calculated as:

Inventory Turnover = Sales/Inventory

It may also be calculated as: Inventory Turnover = Cost of goods sold/Average inventory

The days in the period can then be divided by the inventory turnover formula to calculate the

days it takes to sell the inventory on hand or "inventory turnover days".

Debtor turnover ratio oraccounts receivable turnover ratio

It indicates the velocity of debt collection of a firm. In simple words it indicates the number

of times average debtors (receivable) are turned over during a year.

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

Debtors Turnover Ratio = Total Sales / Debtors

Investment Turnover Ratio

Return earned on capital invested in a business. It equals: It can be calculated as Sales/Net

worth + Long term Liabilities.

A higher ratio indicates good use of the funds placed into the business

Fixed-Asset Turnover Ratio

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a

company's ability to generate net sales from fixed-asset investments - specifically property,

plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows

that the company has been more effective in using the investment in fixed assets to generate

revenues.

The fixed-asset turnover ratio is calculated as:

Fixed Assets Turnover = Net Sales/Net property,Plan,and Equipment

Asset Turnover

The amount of sales generated for every dollar's worth of assets. It is calculated by dividing

sales in dollars by assets in dollars.

Formula: Asset Turnover = Revenue / Assets

Earnings per ShareEPS

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The portion of a company's profit allocated to each outstanding share of common

stock. Earnings per share serve as an indicator of a company's profitability.

Calculated as:

EPS = Net income-Dividends on preferred stock/Average Outstanding Shares

Operating Profit

The profit earned from a firm's normal core business operations. This value does not include

any profit earned from the firm's investments (such as earnings from firms in which the

company has partial interest) and the effects of interest and taxes.

Also known as "earnings before interest and tax" (EBIT)

Calculated as: Operating profit = operating revenue operating expenses

When calculating, it is more accurate to use a weighted average number of shares outstanding

over the reporting term, because the number of shares outstanding can change over time.

However, data sources sometimes simplify the calculation by using the number of shares

outstanding at the end of the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants

outstanding in the outstanding shares number.

Debt/Equity Ratio

A measure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and debt the

company is using to finance its assets.

Calculated: D/E Ratio : Total liabilities/Shareholders Equity

Management of working capital practice ratios

Type of Ratios Explanations Calculation

The Inventory conversion

period(ICP)

ICP is the time required to

convert inventory into cash

Average stock value*

365/Cost of sales

Debtors Conversion

Period(DCP)

DCP is the time required to

collect the cash from

debtors.

Average Debtors *365/

Net Credit Sales

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Creditors Conversion

period(CCP)

CCP is the length of time the

firm is able to defer

payments on various

resource purchases.

Average Creditors *

365/Cost of Sales

Cash Conversion Cycle

(CCC)

CCC is the length of time

between a firms purchase ofinventory and the receipt of

cash from accounts

receivable

CCC=ICP+DCP-CCP

DATA ANALYSIS & FINDINGS

Working capital practice in the selected companies

A firms working capital consists of its investment in current assets, which include mostly

short-term assets, cash and bank balance, inventories, receivable, and marketable securities.

The goal of WCM if 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 operationalexpenses. Therefore, present study is initiated on working capital management practices.

Hypotheses

Ho1=Average ratios of inventory conversion period of companies do not differ

significantly.

Ho2=Average ratios of debtors conversion period of companies do not differ

significantly

Ho3=Average ratios of creditors conversion period of companies do not differ

significantly. Ho4=Average ratios of cash conversion period of companies do not differ

significantly.

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Results and discussions

1. The inventory conversion period(ICP)The inventory conversion period of FMCG five companies is given below.

YEAR ITC HUL NESTLEDABUR

INDIA

GODREJ

CONSUMERMEAN

2005-06 51 64 45 39 60 52

2006-07 65 61 44 40 64 55

2007-08 67 64 47 43 76 59

2008-09 83 55 47 45 64 58

2009-10 72 51 44 47 37 50

MEAN 68 59 45 43 60 55

Source: calculated from the figures available in the balance sheets , profit and loss, income

statements of the companies concerned.

From the table it is found that the inventory conversion period of 2007-08 highest of 59 days

and 2005-06 lowest of 52 days. The table indicate that Nestle and Dabur India were

companies to hold inventory for lesser number of days than the yearly industry average

holding period during the entire study period whereas, Itc, Hul, Godrej Consumer held its

inventory for more than the yearly industry average holding during the entire study period

which were much above the yearly industry average and the overall aggregate holding period

of 55 days. Hence Nestle and Dabur India companies were efficient by holding the inventory

lesser period that the overall industry aggregate holding period of 55 days.

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The average ICP of selected companies have been compared using F-test and co relation

tested by the following.

Ho1=Average ratios of inventory conversion period of companies do not differ

significantly.

The significant level at 5%, F critical value (5,16) is 9.72 and result of F-test is 0.081 which

indicates that inventory conversion period s null hypothesis is accepted. ICP period of

companies do not differ significantly.

There is negative relationship between ( -0.8972) industry mean and company mean.

2. Debtors Conversion Period (DCP)The Debtors conversion period of FMCG 5 companies is given below.


INDIA

GODREJ

CONSUMERMEAN

2005-06 46 53 37 33 51 44

2006-07 54 48 38 36 42 44

2007-08 59 40 40 30 47 43

2008-09 71 23 34 34 37 40

2009-10 67 21 36 28 53 41

MEAN 59 37 37 32 46 42

Source: calculated from the figures available in the balance sheets , profit and loss, income


It is seen that from the table the debtors conversion period companies varied between the

highest of 44 days and lowest of 40 days and aggregate holding period was 42 days . The data

in the table indicate that HUL, NESTLE, DABUR INDIA were companies to hold debtors for

lesser number of days than the yearly industry average holding period during the entire study

period whereas, ITC, GODREJ CONSUMER held its debtors for more than the yearly

industry average holding during the entire study period. Hence HUL, NESTLE, DABUR

INDIA companies were efficient by holding the debtors lesser period that the overall industry

aggregate holding period of 42 days.

The average DCP of selected companies have been compared using F-Test and correlationare tested by the following .

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Ho2=Average ratios of debtors conversion period of companies do not differ

significantly


indicates that inventory conversion period s null hypothesis is accepted. ICP period ofcompanies do not differ significantly.

There is positive relationship between ( 0.4811) industry mean and company mean.

3. Creditors conversion Period(CCP)The creditors conversion period of FMCG 5 companies is given below.


INDIA

GODREJ

CONSUMERMEAN

2005-06 61 118 56 69 107 82

2006-07 69 121 58 69 116 87

2007-08 77 125 58 71 123 91

2008-09 92 99 55 63 105 83

2009-10 86 102 52 64 115 84

MEAN 77 113 56 67 113 85

Source: calculated from the figures available in the balance sheets, profit and loss, income


It is clear that from the table the creditors conversion period of companies highest of 91 daysin year 2007-08 and the lowest of 82 days in the year 2005-06 and aggregate holding period

was 85 days . The data in table indicate that HUL, GODREJ CONSUMER were companies

to hold creditors for higher number of days than the yearly industry average holding during

the entire study period whereas, ITC, NESTLE, GODREJ CONSUMER held its creditors for

less than the yearly industry average holding during the entire study period. Hence, we can

say that on an average basis HUL, GODREJ CONSUMER were efficient by holding the

creditors for higher number of days that the overall industry aggregate holding period of 85

days.

The average CCP of selected companies have been compared using one-way ANOVA and

are tested by the following.

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Ho3=Average ratios of creditors conversion period of companies do not differ

significantly.

The significant level at 5%, F critical value (5,16) is 9.72 and result of F-test is 0.00181

which indicates that inventory conversion period s null hypothesis is accepted. ICP period of


There is negative relationship between (-0.25891) industry mean and company mean.

4. Cash Conversion Cycle(CCC)The cash conversion cycle of FMCG 5 companies is given below.


INDIA

GODREJ

CONSUMERMEAN

2005-06 36 -1 26 3 4 14

2006-07 50 -12 24 7 -10 12

2007-08 46 -21 29 2 0 11

2008-09 62 -21 26 16 -4 16

2009-10 53 -30 28 11 -25 7

MEAN 49 -17 27 8 -7 12

Source: calculated from the figures available in the balance sheets, profit and loss, income


From the table it is found that the CCC of companies were varied between the highest of 16

days and lowest of 7 days in the year and the aggregate holding period was 12 days. The data

in table indicate that companies held cash conversion for lesser number of days 2007-08 and

2009-10 than aggregate overall average mean. Hence, HUL, DABUR INDIA, GODREJ

CONSUMER companies were efficient by holding the cash lesser period compare with ITC

and NESTLE.

The average CCC of selected companies have been compared using F-test and correlation

and are tested by the following.

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H0=Average ratios of cash conversion period of companies do not differ

significantly.


indicates that inventory conversion period s null hypothesis is accepted. ICP period of


There is positive relationship between (0.3781) industry mean and company mean.

FINDINGS

WCM ensure a company has sufficient cash flow in order to meet its short-term debt

obligations and operating expenses. These involve managing the relationship between the

short-term assets and its short-term liabilities.

Following are results by which company performing well in different ratios.

Type of Ratio Company nameICP DABUR,NESTLE

DCP HUL,NESTLE,DABUR INDIA

CCP HUL, GODREJ CONSUMER

CCC

HUL, DABUR, GODREJ

CONSUMER

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Working capital and profitability

In Conventional production function approach for determination of relationship between

output and profit, fixed capital is taken in to account as explanatory variable amongst others,

the role of working capital is ignored. It is therefore felt that there is the need to study the

important role working capital in profit generating process. The impact of working capital has

been examined by computing co-efficient of correlation and regression between profitability

ratio and working capital.

Name ofCompany Year

CurrentRatio

QuickRatio

InventoryTurnover

Ratio

DebtorsTurnover

Ratio

InvestmentsTurnover Ratio

ITC

2005-06

1.25 0.57 3.82 18.22 6.43

2006-07

1.33 0.58 3.76 20.79 6.05

2007-08

1.36 0.56 5.51 20.43 5.51

2008-09

1.42 0.61 5.26 21.32 5.26

2009-10

0.92 0.39 6.04 24.31 6.04

HUL

2005-06

0.7 0.33 8.57 22.12 9.97

2006-07

0.73 0.34 8.02 25.42 9.27

2007-08

0.68 0.25 7.2 31.41 8.2

2008-09

0.92 0.51 9.26 41.83 9.26

2009-10

0.84 0.46 8.99 29.24 8.99

NESTLE 2005-06

0.66 0.28 9.87 87.32 12.02

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2006-07

0.67 0.31 10.28 65.35 12.01

2007-08

0.66 0.23 8.79 64.09 10.02

2008-09

0.66 0.29 11.39 87.37 11.39

2009-10

0.6 0.24 11.61 93.68 11.61

DABURINDIA

2005-06

0.82 0.52 11.65 35.3 14.44

2006-07

0.97 0.63 11.11 39.7 13.44

2007-08

0.91 0.58 12.52 25.94 12.52

2008-09

1.19 0.99 10.94 22.63 10.94

2009-10

0.93 0.68 11.31 23.62 11.31

GODREJCONSUMER

2005-06 0.68 0.19 7.54 112.08 8.08

2006-07

0.75 0.33 6.53 93.26 6.96

2007-08

0.86 0.34 5.7 81.1 5.7

2008-09

2.07 1.72 9.25 99.37 9.25

2009-10

1.3 0.95 7.93 59.25 7.93

NAME OF

COMPANY YEAR

FIXEDASSETS

TURNOVER

RATIO

TOTALASSETS

TURNOVER

RATIO

EARNINGSPER

SHARE

DEBTEQUITY

RATIO

OPERATINGPROFIT

ITC

2005-06 2.31 1.08 5.95 0.01 34.36

2006-07 2.42 1.17 7.18 0.02 32.51

2007-08 1.59 1.16 8.28 0.02 31.57

2008-09 1.44 1.09 8.65 0.01 32.84

2009-10 1.58 1.33 10.64 0.01 33.02

HUL

2005-06 8.47 5.14 6.4 0.02 14.14

2006-07 9.3 4.67 8.41 0.03 14.74

2007-08 9.8 10.53 8.12 0.06 14.95

2008-09 7.81 9.22 11.47 0.2 14.46

2009-10 5.35 7.66 10.09 0 15.74

NESTLE

2005-06 5.61 7.67 32.11 0.04 20.29

2006-07 5.77 8.02 32.68 0.04 18.86

2007-08 6.1 9.52 42.92 0.01 19.5

2008-09 3.2 10.29 55.390 19.33

2009-10 3.24 9.75 67.94 0 19.74

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DABURINDIA

2005-06 7.3 2.94 3.3 0.05 17.9

2006-07 8.51 4.3 2.92 0.05 17.45

2007-08 4.67 3.98 3.67 0.03 18.6

2008-094.84 2.81 4.32 0.19 18.33

2009-10 4.31 3.44 4.99 0.14 19.17

GODREJCONSUME

R

2005-06 11.82 14.31 21.47 0.06 21.1

2006-07 9.47 5.01 5.4 1.02 20.01

2007-08 4.6 4.18 6.56 0.89 22.27

2008-09 4.18 1.84 6.29 0.12 15.54

2009-10 4.73 1.53 8.05 0.01 21.47

ANALYSIS OF HYPOTHESIS

Ho1: There is no significant impact of dependable variable Earning per share to independent

variable current ratios, Quick ratios, inventory turnover, debtor turnover, asset turnover,

investment turnover, fixed assets turnover, total assets turnover.

Model Summary

Model R R

Square

Adjusted R

Square

Std. Error of

the Estimate

1 0.925 0.856 0.796 7.8293

a Predictors: (Constant), total assests turnover, investment turnover, debtor turover, fixed

assets turnover, Quick ratio, inventory turnover, current ratio

ANOVA

Model Sum of

Squares

df Mean

Square

F Sig.

1 Regression 6177.818 7 882.54

5

14.398 0

Residual 1042.055 17 61.297

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Total 7219.873 24



b Dependent Variable: earning per share

Coefficients

Unstandardize

d Coefficients

Standardized

Coefficients

t Sig.

Model B Std. Error Beta

1 (Constant) 12.164 23.54 0.517 0.61

current ratio -7.204 23.051 -0.143 -0.31 0.76

Quick ratio -5.872 23.331 -0.111 -0.25 0.8

inventory turnover -1.573 2.432 -0.231 -0.65 0.53debtor turover 0.206 0.067 0.369 3.071 0.01

investment turnover 2.825 1.825 0.433 1.548 0.14

fixed assets turnover -4.657 0.883 -0.772 -5.28 0

total assests turnover 2.961 0.874 0.639 3.388 0

a Dependent Variable: earning per share

Findings

Here in significance level of F value in ANOVAs table is less than 0.05 which show there is

accepted alternative hypothesis and by showing coefficient table we can see there is

significant effect of debtor turnover , fixed assets turnover, total assets turnover effect.

Following regression model can be made by this

Y = a + bx

= 12.164 -7.204x1-5.872x2-1.573x3+0.206x4+2.825x5-4.657x6+2.961x7

x1=current ratios, x2=quick ratios, x3=inventory turnover, x4=debtor turnover,

x5=investment turnover, x6=fixed assets turnover, x7=total assets turnover

By changing any value in above ratio we can see effect to EPS by this model.

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Ho1: There is no significant impact of dependable variable Operating profit independent

variable current ratios, Quick ratios, inventory turnover, debtor turnover, asset turnover,

investment turnover, fixed assets turnover, total assets turnover.

Model Summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 0.93 0.863 0.806 2.8193



ANOVA

Model Sum of Squares df Mean Square F Sig.

1 Regression 847.986 7 121.141 15.24 0

Residual 135.126 17 7.949

Total 983.111 24



b Dependent Variable: operating profit

Coefficients

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Unstandardized

Coefficients

Standardized

Coefficients

t Sig.


1 (Constant) 26.303 8.477 3.103 0.006

current ratio 15.651 8.301 0.842 1.886 0.077

Quick ratio -19.587 8.401 -0.999 -2.331 0.032

inventory turnover -1.026 0.876 -0.409 -1.171 0.258

debtor turover 2.19E-02 0.024 0.106 0.907 0.377

investment turnover 0.559 0.657 0.232 0.851 0.407

fixed assets turnover -0.967 0.318 -0.434 -3.04 0.007

total assests turnover -0.426 0.315 -0.249 -1.353 0.194

a Dependent Variable: operating profit

Findings

Here in significance level of F value in ANOVAs table is less than 0.05 which show there is

accepted alternative hypothesis and by showing coefficient table we can see there is

significant effect of fixed assets turnover , quick ratio effect.


Y = a + bx

= 26.303 +15.651x1-19.587x2-1.026x3+2.191x4+0.559x5+0.967x6+0.426x7

a=constant, x1=current ratios, x2=quick ratios, x3=inventory turnover, x4=debtor turnover,

x5=investment turnover, x6=fixed assets turnover, x7=total assets turnover

By changing any value in above ratio we can see effect to Operating profit by this model.

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Analysis for capital structure

Ho1: There is no significant impact of dependable variable Operating profit independent

variable Earning per share.

Model Summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 0.09 0.007 -0.036 6.5144

a Predictors: (Constant), debt equity ratio

ANOVA

Model Sum of

Squares

Df Mean Square F Sig.

1 Regression 7.054 1 7.054 0.166 0.687

Residual 976.058 23 42.437

Total 983.111 24


b Dependent Variable: operating profit

Coefficients

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Unstandardized

Coefficients

Standardize

d

Coefficients

T Sig.


1 (Constant) 21.371 1.445 14.79 0

debt equity ratio -2.103 5.159 -0.085 -0.41 0.69

a Dependent Variable: operating profit

Findings

Here in significance level of F value in ANOVAs table is more than 0.05 which show there

is rejected alternative hypothesis and by showing coefficient table we can see there is no

significant.

Comparison of individual companys performance for capital structure

Ho1: There is no significant difference of dependent variable EPS to the debt equity ratio of

ITC.

Correlations

earning per share debt equityratio

Pearson

Correlation

earning per share 1 -0.214

debt equity ratio -0.21 1

Sig. (1-tailed) earning per share . 0.365

debt equity ratio 0.37 .

N earning per share 5 5

debt equity ratio 5 5

Model Summary

R R

Square

Adjusted

R Square

Std. Error

of the

Estimate

Change

Statistics

Durbin-

Watson

Model R

Square

Change

F

Change

df

1

df

2

Sig. F

Change

0.2

1

0.046 -0.272 1.9737 0.046 0.14 1 3 0.73 0.764

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ANOVA


1 Regression 0.56 1 0.56 0.144 0.73

Residual 11.687 3 3.896

Total 12.247 4



Coefficients

Unstandardized

Coefficients

Standar

dized

Coeffic

ients

t Sig. 95%

Confidenc

e Interval

for B

Model B Std.Error

Beta Lower Bound

UpperBound

1 (Con

stant)

9.1 2.672 3.4 0.042 0.592 17.602

debt

equit

y

ratio

-68.3 180.178 -0.21 -

0.3

8

0.73 -641.731 505.065


Conclusion :- The value of F significant is more than 0.05 so there is accepted null

hypothesis. So we can see that there is no impact show of EPS to the debt equity ratio ITC.

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Ho1: There is no significant difference of dependent EPS variable to debt equity ratio of

HUL.

Correlations

earning per share debt equity

ratioPearson

Correlation

earning per share 1 0.647

debt equity ratio 0.65 1





Model Summary

R R

Square

Adjusted

RSquare

Std. Error

of theEstimate

Change

Statistics

Durbin-

Watson

Model R Square

Change

F Change df1 df2 Sig. F

Change

1 0.65 0.419 0.225 1.7119 0.419 2.16 1 3 0.24 0.96



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ANOVA

R R

Squar

e

Adjusted

R

Square

Std.

Error of

the

Estimate

Change

Statistics

Durbin-

Watson

Model R

Square

Change

F

Change

df1 df2 Sig. F

Change

1 0.6

5

0.419 0.225 1.7119 0.419 2.16 1 3 0.24 0.96



Coefficients


Findings

The value of F significant is more than 0.05 so there is accepted null hypothesis. So we can

see that there is no impact show of EPS to debt equity ratio to HUL.

Unstandardized

Coefficients

Standar

dized

Coeffici

ents

t Sig. 95%

Confidence

Interval for B

M

od

el

B Std. Error Beta Lower

Bound

Upper

Bound

1 (Constant) 7.925 1.012 7.828 0 4.703 11.15

debt equity

ratio

15.698 10.682 0.647 1.469 0.24 -18.298 49.69

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Ho1: There is no significant difference of dependent variable EPS to debt equity ratio of

Nestle.

Correlations

earning per share debt equity ratio

Pearson Correlation earning per share 1 -0.901






Model Summary

R RSquare

Adjusted R

Square

Std. Errorof the

Estimate

ChangeStatistics

Durbin-Watson

Mode

l

R Square

Change

F Change df1 df2 Sig. F

Change

1 0.9 0.812 0.749 7.7117 0.812 13 1 3 0.04 1.636



ANOVA

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1 Regression 770.751 1 770.751 12.96 0.037

Residual 178.409 3 59.47

Total 949.16 4



Coefficients

Unstandard

ized

Coefficient

s

Standa

rdized

Coeffi

cients

t Sig. 95%

Confidence

Interval for

B

Model B Std.

Error

Beta Lower

Bound

Upper Bound

1 (Constant) 58.4 4.834 12.08 0 43.018 73.78

debt equity

ratio

-677.333 188.145 -0.901 -3.6 0.04 -1276.09 -78.6


Findings:

The value of F significant is less than 0.05 so there is rejected null hypothesis. So we can see

that there is impact show of EPS to debt equity ratio of NEstleI.


Y = a + bx

= 58.400-677.33x1

a=constant, x1=debt equity ratio

By changing any value in above ratio we can see effect to EPS by this model to NESTLE.

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Dabur.

Correlations


Pearson Correlation earning per share 1 0.76

debt equity ratio 0.76 1





Model Summary

R RSquar

e

AdjustedR Square

Std.Error of

the

Estimate

ChangeStatistic

s

Durbin-Watson

Model R

Square

Change

F

Chan

ge

df1 df2 Sig. F

Change

1 0.7

6

0.578 0.437 0.6185 0.578 4.11 1 3 0.14 2.527



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ANOVA

Model Sum of Squares Df Mean

Square

F Sig.

1 Regression 1.572 1 1.572 4.11 0.14

Residual 1.148 3 0.383

Total 2.72 4



Coefficients

Unstandar

dized

Coefficien

ts

Standardi

zed

Coefficien

ts

t Sig. 95%

Confide

nce

Interval

for B

M

od

el

B Std.

Error

Beta Lower

Bound

Upper Bound

1 (Constant) 3.009 0.494 6.086 0.01 1.436 4.583

debt equity ratio 9.03 4.454 0.76 2.027 0.14 -5.146 23.21


Findings


see that there is no impact show of EPS to debt equity ratio of DABUR.

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Godrej.

Correlations


Pearson Correlation earning per share 1 -0.498






Model Summary

R R

Square

Adjuste

d R

Square

Std. Error

of the

Estimate

Change

Statistics

Durbin-

Watson

Model R Square

Change

F

Change

df1 df2 Sig. F

Chang

e

1 0.5 0.248 -0.003 6.739 0.248 0.99 1 3 0.39 0.898



ANOVA

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1 Regression 44.884 1 44.884 0.988 0.39

Residual 136.243 3 45.414

Total 181.127 4



Coefficients

Unstandard

izedCoefficient

s

Standardize

dCoefficient

s

t Sig. 95%

ConfidenceInterval for

B

Mode

l

B Std.

Error

Beta Lower

Bound

Upper Bound

1 (Constant) 12.413 4.166 2.98 0.06 -0.844 25.67

debt

equity

ratio

-6.807 6.847 -0.498 -0.99 0.39 -28.598 14.98


Findings


see that there is no impact show of EPS to debt equity ratio of GODREJ CONSUMER.

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CONCLUSION

In todays scenario, even common man is an investor for them it is crucial decision whether

to relay on tips, trends or perception or ratio analysis; which ratios should consider and which

should be ignored.

By using ratios of different companies we can concluded following results

For working capital practice following companies played important role

Type of Ratio Company name

ICP DABUR,NESTLE

DCP HUL,NESTLE,DABUR INDIACCP HUL, GODREJ CONSUMER

CCC

HUL, DABUR, GODREJ

CONSUMER

For Working capital impact on profitability by comparing impact of dependent variable

earning per share and operating profit to other different ratios companies played important

and vital role. They were performing well in working management performance. They were

managing it very well.

For Capital structure impact to profitability indicator operating profit to earning per share.

Companies were have no significant relation between these two variable. We can see that

overall impact of FMCG s 5 companies were no such impact to earning per share by

operating profit.

For Individual companies performance based on indicator Earning per share to Debt equity

ratio effect to individual company Nestle played an vital role on it.

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Bibliography

Journal of Financial and Strategic Decisions, Vol.9, No.2, pp.55-67.

The Journal of Finance, Vol.XLIV, No.1, pp.19-40.

www.bseindia.com

www.capitalline.com
http://www.bseindia.com/http://www.capitalline.com/http://www.bseindia.com/http://www.capitalline.com/

042a2_5th Yr Pjt

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