Rakesh Oproject 30
165
A Project Report On ASSESSMENT OF WORKING CAPITAL AND CASH FLOW STATEMENT WITH RATIO ANALYSIS OF INDIA GLYCOL LIMITED Guided By: Submitted by: Mr. MAHARSHI GAUR (Account Head) RAKESH KUMAR SHARMA Ms. MUKESH (Project Guide) M.B.A. STUDENT MARKETING, FINANCE ROLL NUMBER: 0811470060
-
Upload
abhijeet-kumar -
Category
Documents
-
view
235 -
download
3
Transcript of Rakesh Oproject 30
A Project Report
On
ASSESSMENT OF WORKING CAPITAL
AND CASH FLOW STATEMENT
WITH RATIO ANALYSIS OF INDIA GLYCOL LIMITED
Guided By: Submitted by:
Mr. MAHARSHI GAUR (Account Head) RAKESH KUMAR SHARMA
Ms. MUKESH (Project Guide) M.B.A. STUDENT
MARKETING, FINANCE
ROLL NUMBER: 0811470060
Institute Of Professional Excellence & Management
PREFACE
The project is responsible for the assessment of the working capital, cash flow
and fund flow and then the ratio analysis of the India Glycol Limited so that it can
use its resources into the optimum manner and what are the areas which are taken
into consideration to generate more and more profit for the concern. Here the
comparison between all these things is done between the two adjacent years and
on the basis of it the assessment is done.
The regular assessment of working capital, cash flow and fund flow statement of
the concern is very necessary of the proper working and the proper grooming of
the concern in the proper direction.
2
ACKNOWLEDGEMENT
I am thankful to Mr. MAHARSHI GAUR (Project Guide) of India Glycols
Limited of BHARTIYA GROUP OF COMPANIES for his guidance and
suggestions in the project work. As my guide, he has been extremely helpful
in explaining us the practical aspects and implementation of the system. With
his guidance and support I have completed the project within the stipulated
time.
I am extremely grateful to Miss. MUKESH for offering us this excellent
opportunity of project training.
Last but not the least I am thankful to all the Employees of the INDIA
GLYCOL LIMITED whose timely help has proved quite valuable.
RAKESH KUMAR
SHARMA
(M.B.A. STUDENT)
3
DECLARATION
I, the undersigned, hereby declare that this project report submitted by me under
the guidance of MR.MAHARSHI GAUR Accounts Head of INDIA GLYCOLS
LIMITED and Miss. MUKESH Faculty member of
IPEM,GHAZIABAD(affiliated to Uttar Pradesh Technical University) for the
partial fulfillment of Master degree in Business Administration from Institute of
professional excellence and management, Uttar Pradesh Technical University is
exclusively prepared and conceptualized by me and the empirical findings in this
project report are based in the data collected by me, and I have not copied from
any research report or project report submitted by anyone, anywhere earlier.
Date: ……………….
Place: ……………… (RAKESH KUMAR SHARMA)
4
TABLE OF CONTENT
S.No. Contents Page No.
1 Company History 6
2 Introduction 11
3 Company’s Structure 12
4 Main Products of IGL 14
5 Company’s Problem and Future of Company 15
6 Objective 16
7 Research Methodology 17
8 SWOT Analysis 18
9 Manufacturing Process 20
10 Working Capital 30
11 Cash Flow 48
12 Fund Flow Statement 53
13 Ratio Analysis 61
14 Financial Statement Analysis 93
15 Result and Conclusion 104
16 Bibliography 119
5
INDIA GLYCOLS LIMITED
COMPANY HISTORY
YEAR EVENTS:
1983
India Glycols Ltd was incorporated at New Delhi on 19th November as a public
limited company as `U.P. Glycols Limited' and obtained the Certificate of
Commencement of Business on 3rd February 1984. The company was promoted
by Vam Organic Chemicals Ltd. The company manufactures mono-ethylene
glycol (MEG) diethylene glycol (DEG) and triethylene glycol (TEG).
- The company entered into a technical know-how agreement with `Scientific
Design Company Inc. USA (SD) for the supply of process know-how only for the
conversion of ethanol into MEG as the promoter VAM agreed to advise free of
cost on the conversion process of molasses into ethanol.
- The company also entered into an agreement with Toyo Engineering India Ltd.
for implementing the project within guaranteed cost and time limit.
6
1986
The name of the Company was changed to `India Glycols Limited' effective from
4th September.
1988
70 shares subscribed for by the signatories to the Memorandum of Association.
244 99 930 shares then issued at par of which 84 69 930 shares to promoters
directors etc. and Vam Organic Chemicals Ltd. and its wholly owned subsidiaries
and 25 00 000 shares to shareholders of Vam Organic Chemicals Ltd. Ramganga
Fertilisers Ltd. and Hindustan Wires Ltd. were reserved and allotted. Out of the
remaining 135 30 000 shares the following shares were reserved for preferential
allotment: (i) 15 00 000 share to UTI (ii) 7 50 000 shares to SBI Capital Markets
Ltd. (iii) 30 00 000 shares to NRIs on repatriation basis (iv) 2 50 000 shares to
business associates (v) 10 00 000 shares to farmers and rural investors and (vi) 12
25 000 shares to employees/workers of the company as also of the Vam Organic
Chemicals Ltd. (Except 12 01 100 shares of the employees quota all shares taken
up.) The balance 58 05 000 shares along with 12 01 100 shares not taken up by
employees were offered to the public in July 1988.
- Additional 33 82 500 shares allotted to retain oversubscription (7 50 000 shares
to NRIs 62 500 shares to business associates 8 12 500 shares to farmers and 17 57
500 shares to public).
7
1990
The Company received approval for expanding the MEG capacity upto 60 000
MT per annum. The Company proposed to diversify into the field of Ethylene
Oxide (EO) derivatives and had received letter of intent for the manufacture of
1000 MT per annum of EO derivatives.
1991
Steps were initiated to undertake diversification programme to manufacture
Ethylene Oxide condensate/derivatives. The Company undertook the expansion of
effluent treatment and Biogas generation facilities.
1992
The Capacity of MEG was enhanced to 25 000 tonnes per annum.
1995
The company had tied up with Sanyo Chemical Industrial Surfactants Covering
major industries like textiles toiletries pharmaceuticals agrochemicals paper
lubricants etc.
- The Company also proposed to set up facilities for chlorosulphation to produce
other specialty chemicals to maintain better quality standards.
8
1996 –
The Company was implementing cholorosulphation project.
2003
The Board of Directors at their meeting held on December 4 2003 has approved
the merger of wholly owned subsidiary company CDS International Ltd with the
company.
The Board of Directors at their meeting held on December 4 2003 have
approved the merger of wholly owned subsidiary company CDS International Ltd
with the company.
ABOUT INDIA GLYCOL LIMITED GORAKHPUR
India Glycol Limited Gorakhpur is situated at 21 Km from Gorakhpur railway
station. It is established in vast greeneries situated in 57 acres of area, engaging
about 50 Master Degree, Engineering, M.B.A., state of art of Engineering. It was
established in 2005.
India Glycols Ltd. is a market leading player in the business of Ethylene Oxide
Derivatives (EOD). It has significant MEG (and related glycols) operation in the
country at 125,000 TPA. IGL has three reporting segments: Chemicals which
9
covers Glycols, Ethoxylates, Glycol Ethers/Acetates and Performance Chemicals;
Alcohol that is concerned with its IMFL and Country Liquor business and others
–a segment covering the Guar Gum and Industrial Gases.
The Company manufactures these products through the molasses/ethanol route
and thus enjoys inherent margin cushion in pricing its products over those
manufactured via the petrochemical route. Using advanced technologies and
custom solutions to its advantage the Company has built key positions in the
domestic and international (Glycol Ethers) markets. IGL has initiated measures to
strengthen its backward integration –in CY2007 it acquired the operations of
Shakumbari Sugar & allied Industries, where it is planning to raise the distillery
capacity to 300 Kltrs. per day and cane crushing to 10,000 TCD by 2010. IGL is
also using the current round of capex to improve productivity at its EOD
operation.
10
MISSION, VISION, GOAL
MISSION
To provide “Innovative Guar Solutions” and other company’s products like
Medicinal Alcohol, Extra Nutritional Alcohol, and Dry Carbon Dioxide etc to all
the related customers and “Augmenting Customer Satisfaction” as much as the
company can.
GOAL
To exceed the Global requirements of economic Guar and other company’s
products like Medicinal Alcohol, Extra Nutritional Alcohol, and Dry Carbon
Dioxide etc that performs that give the ultimate satisfaction to the company
customers.
VISION
Attaining leadership in Guar Industry and other company’s products like
Medicinal Alcohol, Extra Nutritional Alcohol, and Dry Carbon Dioxide etc
throughout the world by providing best and ultimate products to its
consumers/customers.
Providing the competitive edge with its competitors in all the products that
company is manufacturing.
11
COMPANY’S STRUCTURE
ABOUT THE HEADS OF THE DIVISIONS OF IGL
GORAKHPUR
The Engineering Head of it is Mr. SANJAY KUMAR.
The Unit Head of IGL Gorakhpur is Mr. DEVESH SRIVASTAVA
The Account Head is Mr. MAHARSHI GAUR
The Personal Head is Mr. RAVI RANJAN
Production Head is Mr. P.N. PANDEY
12
KEY OFFICIALS THROUGHOUT THE COUNTRY
Mr. R C Misra
Mr. N Ramachandran
Mr. K N Memani
Mr. Jagmohan Kejriwal
Mr. M K Rao
Mr. Jayshree Bhartia
Mr. Pradip Khaitan
Mr. U S Bhatia
Mr. Autar Krishna
Director
Director
Director
Director
Executive Director
Director
Director
Chairman and Managing Director
Director
13
MAIN PRODUCTS OF IGL
Rectified Sprit.
Medicinal Alcohol.
Extra Nutritional Alcohol.
Dry CO2 (used in Pepsi, Coke etc.).
IMF (India Met Foreign County).
Whisky.
Solomet.
Rum.
Guar Gum
Polyethylene Glycol
IGL IS NUMBER 1 IN WHISKY, GIN, DRY CO2, AND RUM.
THE MAIN PRODUCT OF IGL IS “MC- DOWELL”
14
PROBLEM OF THE ORGANIZATION AND FUTURE
OF THE ORGANIZATION
There is no such problem in the working of the organization.
The Company is running in a sound position.
The Company has shown an increase sign in its growth since
2003.
The company had shown a good growth rate during the recession
period.
The Company is going to collaborate with the foreign companies
to increase its sale out side the country.
The Company has a bright future in upcoming years out the
financial position
15
OBJECTIVE
To find out the financial position of the company
To analyse the working capital, cash flow ,fund flow,
statement and ratio analysis of the company
To find the current asset position of the company.
To analyse the future aspects of the company.
16
RESEARCH METHODOLOGY
Primary data: Taken the information of assets condition of the organization
from the employees.
Secondary data: Taken the data from the employees of the organization and
from the data that were provided by the company on the internet.
Research Method Adopted: I had conducted the personal interview of the
employees of the finance department of the organization.
SWOT ANALYSIS
17
STRENTHS
Has a highly dedicated team of executives and staff backed by skill
workers
Continuously does product improvement in accordance with exacting
customers, standard through a good R&D unit.
A satisfied customer base.
The distribution network of IGL is very wide and spread across the
country.
WEAKNESS-
Product range somewhat narrow with respect to other related companies
Cyclic fluctuation in demand for related industries.
OPPORTUNITIES-
With the rapid industrialization rate of the country IGL is getting more and
more opportunities to get linked up with the related industries. This results
in the increase in demand and production. Also the organization is going
to collaborate with few foreign companies to sell its product outside the
countries.
THREATS
18
Constant demand for price reduction from customer.
Growing competition in the industry, in terms of new ranges and price
undercutting, too is a matter of concern as both sales realizations and
operating margins may come under pressure.
19
MANUFACTURING PROCESS
20
India Glycols Limited has proposed to set up Distillery well equipped with latest
process Technology and equipments so has to have higher productivity. This
includes continuous fermentation followed by multi pressure distillation process
to have less effluent and higher productivity.
Environment is vital input in any field of activity whether
economic ,social ,cultural, moral or spiritual. With increasing awareness about
environment world over, most of the countries have enacted legislations for
protecting Environment.
To meet the legislative requirement the company has adequate facilities to
control Water as well as Air Pollution impact on the Environment.
FERMENTATION PROCESS
Chemistry & Principle
The fermentable sugar present in molasses is converted into alcohol by
fermentation with the help of living microorganisms called yeasts. The following
reaction represents the conversion process.
C12H22O11 + H2O 2C6H12O6
21
SUCROSE + WATER GLUCOSE + FRUCTOSE
ZYMASE
C6H12O6 2C2H5OH + 2CO2
After completion of the above reaction the fermented wash shall contain 8-9%
alcohol by volume.
We proposed to have continuous process for Fermentation so as to achieve.
Maximum Alcohol % in the Fermented wash.
Minimum effluent generation.
DETAILED PROCESS DESCRIPTION IS AS FOLLOWES
FERMENTATION
Two Fomenters of identical size cap 1300 m3 capacity are provided which are
equipped with agitator for mixing of Fermenter mass & facilitate release of CO2
produced. Molasses, diluted with water to the desired concentration is metered
continuously into Fermenter 1 Additives like urea (in the form of pellets or prills)
and defoaming oil are also introduced in the Fermentor 1 as required. There is an
automatic foam level sensing and dosing system for defoaming oil, in both the
Fermenters.
22
Every Kilogram of alcohol produced generates about 290 Kcal of heat. This
excess heat is removed by continuous circulation of the fermenting wash through
an external plate heat exchanger called the Fermenter Cooler 1. The Fermenter
temperature is always maintained between 32 and 34 C, the range optimum for
efficient fermentation. The conversion of 80% sugar is approximately into
ethanol is completed in Fermenter 1. The fermenters are provided with a
provision for stillage recycle for maintaining high dissolved solids concentration
in the Fermenters. The temperature in the Fermenters is maintained between 32 to
34 ۫C for optimum fermentation. Conversion of sugar to ethanol is instantaneous
and the residual sugar concentration in Fermenters is maintained below 0.2% w/w
as glucose. The yeast for the fermentation is initially ( i.e. during start up of the
plant) developed in the propagation section described further on. Once
propagated a viable cell population of about 300-500 million cells/ml is
maintained by yeast recycling and continuous aeration of the fermentor.
Fluctuations in the yeast count of + - 20% have little effect on the overall
fermenter productivity .Yeast cell vitality which is usually above 70% may, in
times of stress (such as prolonged shut downs) drop to 50%without affecting the
fermentation. The aeration rate in both the Fermenters is adjusted for desired
yeast cell vitality; All the nutrient elements necessary for yeast growth exist in
adequate quantities as impurities in molassess. Occasionally, Nitrogen may have
to be supplemented. Defoaming oil (DFO) say Turkey red Oil is added to the
fermenter by an automated DFO dosing system, to control foaming. Usually no
other additives are required.
23
Fermented wash from Fermenter II passes through a series of hydrocyclones
(number depending on plant capacity) which remove grit, iron filings and similar
heavy particulate mater. The overflow from the first set of hydro cyclone is taken
to Yeast Separator which clarified the wash. The hydrocyclones protect the
separator from erosion damage by removing grit and similar hard particles. The
reject from 1st. stage hydroclone is fed to 2nd. Stage hydroclone for further
separation. The reject from 2nd. Stage hydroclone containing sludge along with
some wash is fed to Decanter Centrifuge for separation of sludge which is sent to
composing. The clear wash recovered from the Decanter centrifuge is fed to wash
column for alcohol recovery. The overflow from 2nd. Stage is recycled back to
Fermentor I.
YEAST RECYLING
The yeast in the fermented wash is removed as 40 to 455 v/v slurry, and is
returned to the Fermenter I. This feature ensures that a high yeast cell
concentration is achieved and maintained in the fermenters. By re-circulating
grown, active yeast, sugar that would have otherwise been consumed in yeast
growth is made available for ethanol production, ensuring high process efficiency
and extra alcohol yield. The clarified wash from separators is collected and sent to
distillation section.
24
PROPAGATION
The propagation section is a feeder unit to the Fermenters. Yeast is grown in 3
stages. The first two stages are designed for aseptic growth. Propagation vessel
III, develops the inoculums using pasteurized molasses solution as the medium.
Propagation is carried out only to start up the process initially or after very long
shutdowns during which the fermenter is emptied.
CO2 SECRUBING AND RECOVERY
The carbon-dioxide produced during fermentation from Fermenter I is scrubbed
with water in sieve tray scrubber to recover alcohol from vent gases. The vent
gases from Fermenter II mainly air and carbon dioxide are also scrubbed in sieve
tray scrubber for alcohol recovery. The water from both the scrubber is returned
to respective Fermenters. About 1% of the total alcohol production is saved by
scrubbing the Fermenter off gases.
The CO2 produced from Fermenters is vented off to atmosphere after scrubbing.
25
VINASSE RECYCLING
Part of the Spend wash/Vinasse from the Distillation Section is cooled against
water in the Recycle cooler, and recycled back to the fermenter.
The recycling of Spend wash/Vinasse helps maintain the desired level of
dissolved solids in the fermenter, so that an adequately high osmotic pressure is
achieved. Osmotic pressure and the concentration of alcohol in the fermenter,
together keep off infection and minimize sugar losses. Spend wash/ Vinasse
recycling also reduces the final quantity of effluent (Spent wash/Vinasse)
discharged from the plant that reduces the process water requirement of the plant.
Spent wash/Vinasse at the bottom of the Beer stripping Column passed through a
forced circulation reboiler to generate vapors and get energy from overhead
Rectfier vapours. This avoids direct steam sparing in the Analyser column and
reduces the volume of effluent further.
26
PRESSURE VACCUM DISTILLATION RECTIFIED
SPIRIT PRODUCTION
Fermented beer is continuously pumped to the Beer Stripper after preheating in
beer preheater. The beer feed is preheated from the normal fermentation
temperature in two stages. The function of the beer stipper is to quantitatively
remove ethanol from the beer.
Beer Stripper is based on proprietary Disc & Donut tray Design of KATZEN,
which ensures that there is minimal fouling /clogging of plates along with
excellent operationally efficiency.
The scheme offered by us has Beer Stripper Column under vacuum and Rectifier
Column under pressure. The energy cascades from the rectifier to the beer
stripper, i.e. beer stripper is heated at a controlled rate by using the overhead
vapors from rectifier.
The ethanol vapors from beer tripper are condensed in beer preheater and in final
condenser after collection in stripper /rectified/feed drum. 40-45% Ethanol water
mixture from beer stripper is passed to the rectification column after preheating
the beer feed. The purposed of the rectifier is to remove water from the dilute
ethanol vapors, resulting in 95-96% v/v ethanol overhead. Side stream of fusel oil
27
draws are also taken from lower in the rectifying section. Fusel oils are
concentrated & recovered.
The rectified spirit steam from rectifier flows to the Rectified spirit cooler & is
taken out as final product. The impure spirit is also drawn from the vent
condenser & taken out to impure spirit cooler for cooling.
CONTROL SYSTEM
To provide continuous stable and efficient plant operation we propose electronic
instruments and a central DCS based control System. All field sensors will be
electronic and from reputed international brands. The control action will be
provided through pneumatically controlled valves.
All critical parameters will be constantly monitored by the system and required
control action will be automatically decided on basis of programmed algorithms.
28
WORKING CAPITAL
INTRODUCTION
The perfect world does not requires or concentrates about current assets or
current liabilities because there would not be uncertainty, no transaction costs,
information search costs, scheduling costs or production and technology
constraints. The unit cost of production would not vary with the quantity
produced. Capital, Labor and products markets shall be perfectly competitive and
would reflect all available information. Thus in such an environment, there would
be no advantage for investing in short term assets. Whereas, the world in which
we live is not perfect. It is characterized by considerable amount of uncertainty
regarding the demand, market price, quality and availability of own products and
those of suppliers. There are transaction costs for purchasing or selling goods or
securities. Information is costly to obtain and is not equally distributed. There are
spreads between the borrowing and lending rates for investments and financing of
equal risk. Similarly each organization is faced with its own limits on the
production capacity and technology it can employ. There are fixed as well as
variable costs associated with producing goods. In other words, the markets in
which real firms operate are not perfectly competitive.
29
These real world facts introduce problems and require the necessity of
working capital. The most important areas in the day to day management of the
firm, is the management of working capital. Working capital management is the
functional area of finance that covers all the current accounts of the firm. It is
concerned with management of the level of individual current assets as well as the
management of total working capital. Working capital management involves the
relationship between a firm's short-term assets and its short-term liabilities. The
goal of working capital management is to ensure that a firm is able to continue its
operations and that it has sufficient ability to satisfy both maturing short-term debt
and upcoming operational expenses. The management of working capital involves
managing inventories, accounts receivable and payable, and cash.
For example, an organization may be faced with an uncertainty regarding
availability of sufficient quantity of crucial inputs in future at reasonable price.
This may necessitate the holding of inventory ie current assets. Similarly an
organization may be faced with an uncertainty regarding the level of its future
cash inflows and insufficient amount of cash may incur substantial costs. This
may necessitate the holding of a reserve of short – term marketable securities,
again a short term capital asset. The unpredictable and uncertain global market
plays a vital role in working capital. Though the globalization of economy and
free trading of products envisages the continuous availability of products but how
much its cost effective and quality based varies concern to concerns.
30
Working capital refers to the funds invested in current assets, ie.,
investment in stocks, sundry debtors, cash and other current assets. Current assets
are essential to use fixed assets profitably. The term current assets refers to those
assets which in the ordinary course of business can be converted into cash within
one year without undergoing diminish in value and without disrupting the
operations of the firm. The current assets are cash, marketable securities, accounts
receivable and inventory. Current liabilities are those which are to be paid within
a year out of the current assets or earnings of the concern. The current liabilities
are accounts payable, bills payable, bank overdraft and outstanding expenses.
The financial manager plays a vital role in management of working
capital. The financial management of any business organization involves the three
following vital functions:
Management of Long Term Assets
Management of Long Term Capital
Management of Short Term Assets and Liabilities
In most of the organizations the first & second one which refers to Capital
Budgeting and Capital Structure respectively will be maintained and cope up with
organization growth. The third one which refers to Working Capital Management
requires more skills for sustaining and steady growth rate for any organization.
31
The working capital management includes decisions:
How much stock/inventory to be hold?
How much cash/bank balance should be maintained?
How much the firm should provide credit to its customers?
How much the firm should enjoy credit from its suppliers?
What should be the composition of current assets?
What should be the composition of current liabilities
For example, a machine cannot be used without raw material. The
investment on the purchase of raw material is identified as working capital. It is
obvious that a certain amount of funds is always tied up in a raw material
inventories, work in progress, finished goods, consumable stores, sundry debtors
and day to day cash requirements. However the businessman also enjoys credit
facilities from his suppliers who may supply raw material on credit. Similarly, a
businessman may not pay immediately for various expenses. For instance, the
laborers are paid only periodically. Therefore, a certain amount of funds is
automatically available to finance the current assets requirements. However, the
32
requirements for current assets are usually greater than the amount of funds
payable through current liabilities. The satisfactory level of working capital is the
main object of working capital management. Any organization which fails to
maintain satisfactory level of working capital may be forced to bankruptcy. The
current assets should always be large enough to cover its current liabilities in
order to ensure a reasonable margin of safety. Thus the interaction between
current assets and current liabilities is the main aim of working capital
management.
The basic objective of financial management is to maximize shareholders
wealth. This objective can be achieved when the company earns sufficient profits.
The amount of profits largely depends on the magnitude of sales. But, sales do not
convert into cash instantly. There is time lag between the sale of goods and the
receipt of cash. Working capital is required to purchase the materials, pay wages and
other expenses in order to sustain sales activity the time lag. The time gap between the
sale of goods and realization of cash is called operating cycle. What operating cycle
stands for?
Conversion of cash into raw materials
Conversion of raw materials to finished goods
Conversion of finished goods into receivables
Conversion of receivables into cash
33
Where is Working Capital Analysis Most Critical?
On the one hand, working capital is always significant. This is especially
true from the lender's or creditor's perspective, where the main concern is
defensiveness: can the company meet its short-term obligations, such as paying
vendor bills?
But from the perspective of equity valuation and the company's growth
prospects, working capital is more critical to some businesses than to others. At
the risk of oversimplifying, we could say that the models of these businesses
are asset or capital intensive rather than service or people intensive. Examples of
service intensive companies include H&R Block, which provides personal tax
services, and Manpower, which provides employment services. In asset intensive
sectors, firms such as telecom and pharmaceutical companies invest heavily in
fixed assets for the long term, whereas others invest capital primarily to build
and/or buy inventory. It is the latter type of business - the type that is capital
intensive with a focus on inventory rather than fixed assets - that deserves the
greatest attention when it comes to working capital analysis. These businesses
tend to involve retail, consumer goods and technology hardware, especially if
they are low-cost producers or distributors.
34
CONCEPTS & DEFINITIONS OF WORKING CAPITAL
There are two concepts of working capital
I) Gross Working Capital
It represents the total current assets and is also referred to as circulating capital
because current capital as current assets, are circulating in nature.
II) Net Working Capital
It is a measure of liquidity and it can be defined in two ways.
The most usually implied definition of net working
capital is that it represents the difference between
current assets and current liabilities. Some people
also define it as excess of current assets over the
current liabilities.
It is that portion of the firm’s current assets, which
is financed by long term funds.
Net working capital as a measure of liquidity is generally not very useful
to compare the performance of different units due to difference in scales of
operation, efficiency, and creditability in the market etc., between the different
35
firms. However it is a very useful measure for internal control purposes. It can
also be used to compare the liquidity position of the same unit over a period of
time. This will help in maintaining the acceptable level of net working capital.
Implementing an effective working capital management system is an
excellent way for many companies to improve their earnings. The two main
aspects of working capital management are ratio analysis and management of
individual components of working capital.
A few key performance ratios of a working capital management system
are the working capital ratio, inventory turnover and the collection ratio. Ratio
analysis will lead management to identify areas of focus such as inventory
management, cash management, accounts receivable and payable management.
36
OBJECTIVES OF WORKING CAPITAL
MANAGEMENT
The main objective is to ensure the maintenance of satisfactory level of
working capital in such a way that it is neither inadequate nor excessive. It should
not only be sufficient to cover the current liabilities but ensure a reasonable
margin of safety also.
To minimize the amount of capital employed in financing the current
assets. This also leads to an improvement in the “Return of Capital
Employed”.
To manage the current assets in such a way that the marginal return on
investment in these assets is not less than the cost of capital acquired to
finance them. This will ensure the maximization of the value of the
business unit.
To maintain the proper balance between the amount of current assets and
the current liabilities in such a way that the firm is always able to meet its
financial obligations, whenever due. This will ensure the smooth working
of the unit without any production held ups due to paucity of funds.
37
TYPES OF WORKING CAPITAL
(A) Permanent Working Capital
(B) Temporary Working Capital
The main objective is to ensure the maintenance of satisfactory level of working
capital in such a way that it is neither inadequate nor excessive. It should not only
be sufficient to cover the current liabilities but ensure a reasonable margin of
safety also.
To minimize the amount of capital employed in financing the current
assets. This also leads to an improvement in the “Return of Capital
Employed”.
To manage the current assets in such a way that the marginal return on
investment in these assets is not less than the cost of capital acquired to
finance them. This will ensure the maximization of the value of the
business unit.
To maintain the proper balance between the amount of current assets and
the current liabilities in such a way that the firm is always able to meet its
financial obligations, whenever due. This will ensure the smooth working
of the unit without any production held ups due to paucity of funds
Permanent Working Capital:
The operating cycle is a continuous feature in almost all the going concerns and
therefore creates the need for working capital and their efficient management.
38
However the magnitude of working capital required will not be constant, but will
fluctuate. At any time, there is always a minimum level of current assets which is
constantly and continuously required by a business unit to carry on its operations.
This minimum amount of current assets, which is required on a continuous and
uninterrupted basis, is after referred to as fixed or permanent working capital.
This type of working capital should be financed (along with other fixed assets)
out of long term funds of the unit. However in practice, a portion of these
requirements also is met through short term borrowings from banks and suppliers
credit.
For eg. In a manufacturing unit, basic raw materials required for
production has to be available at all times and this has to be financed without any
disturbance.
Temporary Working Capital
Any amount over and above the permanent level of working capital is
variable, temporary or fluctuating working capital. This type of working capital is
generally financed from short term sources of finance such as bank credit because
this amount is not permanently required and is usually paid back during off
season or after the contingency. As the name implies, the level of fluctuating
working capital keeps on fluctuating depending on the needs of the unit unlike the
permanent working capital which remains constant over a period of time.
39
DETERMINANTS OF WORKING CAPITAL
Working capital management is an indispensable functional area of
management. However the total working capital requirements of the firm are
influenced by the large number of factors. It may however be added that these
factors affect differently to the different units and these keep varying from time to
time. In general, the determinants of working capital which are common to all
organizations can be summarized as under:
Nature and Size of Business
Production Cycle
Business Cycle
Production Policy
Credit Policy
Growth & Expansion
40
Proper availability of raw materials
Profit level
Inflation
Operating Efficiency
ESTIMATING OF WORKING CAPITAL
REQUIREMENTS
The amount of the different constituents of the working capital such as
debtors, cash, inventories, creditors, etc are estimated separately and the total
amount of working capital requirement is worked out accordingly.
Percent Sales method is the most simple and widely used method in
combination with other scientific methods. A ratio is determined for estimating
the future working capital requirements. This is generally based on the past
experience of the management as this ratio varies from industry to industry and
unit to unit with in the same industry.
41
Operating Cycle method points towards the length of time considered
necessary to complete the following cycle of events:
Purchase of raw materials by converting cash
Storage of raw materials including for buffer stock and safety
margin
Conversion of raw materials into work in progress
Conversion of work in progress into finished goods
Conversion of finished goods into debtors and bills receivable
Conversion of debtors into cash
Cash Conversion Cycle is a measure of working capital efficiency, often
giving valuable clues about the underlying health of a business. The cycle
measures the average number of days that working capital is invested in the
operating cycle. It starts by adding days inventory outstanding (DIO) to days sales
outstanding (DSO). This is because a company "invests" its cash to acquire/build
inventory, but does not collect cash until the inventory is sold and the accounts
receivable are finally collected.
42
The finance profession recognizes the three primary reasons offered by
economist John Maynard Keynes to explain why firms hold cash. The three
reasons are for the purpose of speculation, for the purpose of precaution, and for
the purpose of making transactions. All three of these reasons stem from the need
for companies to possess liquidity.
Speculation: Economist Keynes described this reason for holding
cash as creating the ability for a firm to take advantage of special
opportunities that if acted upon quickly will favor the firm. An
example of this would be purchasing extra inventory at a discount
that is greater than the carrying costs of holding the inventory.
Precaution: Holding cash as a precaution serves as an emergency
fund for a firm. If expected cash inflows are not received as
expected cash held on a precautionary basis could be used to
satisfy short-term obligations that the cash inflow may have been
bench marked for.
Transaction: Firms are in existence to create products or provide
services. The providing of services and creating of products results
43
in the need for cash inflows and outflows. Firms hold cash in order
to satisfy the cash inflow and cash outflow needs that they have.
Receivable are essentially loans extended to customers that consume
working capital; therefore, greater levels of DIO and DSO consume more working
capital. However, days payable outstanding (DPO), which essentially represent
loans from vendors to the company, are subtracted to help offset working capital
needs. In summary, the cash conversion cycle is measured in days and equals DIO
+ DSO – DPO:
SOURCES OF WORKING CAPITAL
The working capital necessary and what constitutes working capital have
been analyzed in depth. Now we look out what are the ways we can generate
working capital.
Trade Credits
Bank Credit
Current provisions and non-bank short term borrowings: and
44
Long term sources ie., equity share capital, preference share capital
and other long term borrowings.
Short term source of funds are generally available at comparatively lower
costs but theoretically these funds can be called back any moment and therefore it
is more appropriate to meet at least two thirds of the permanent working capital
requirements from the long term sources. The advantages of long term sources is,
it reduces risk as there is no need to repay the loans at frequent intervals and funds
can be employed gainfully and it increases liquidity.
SUMMARY
Traditional analysis of working capital is defensive; it asks, "Can the
company meet its short-term cash obligations?" But working capital accounts also
tell you about the operational efficiency of the company. The length of the cash
conversion cycle (DSO+DIO-DPO) tells you how much working capital is tied up
in ongoing operations. And trends in each of the days-outstanding numbers may
foretell improvements or declines in the health of the business.
Implementing an effective working capital management system is an
excellent way for many companies to improve their earnings. The two main
aspects of working capital management are ratio analysis and management of
45
individual components of working capital. Thus the importance of adequate of
working capital in commercial undertakings can never be over emphasized. The
various studies conducted by the Bureau of Public Enterprises have shown that
one of the reasons for the poor performance of public sector undertakings in our
country has been the large amount of funds locked up in working capital. This
results in over capitalization. Over Capitalization implies that a company has too
large funds for its requirements, resulting in a low rate of return a situation which
implies a less than optimal use of resources. Insolvency risk is there in the case of
under capitalization of working capital. Hence working capital management plays
a pivotal role in growth or to sustain in market for any organization.
46
CASH FLOW STATEMENT
Preparing a Cash Flow Statement
The statement is prepared annually, half yearly, quarterly or monthly with the
help of two Balance Sheets (one at the beginning an the other at the end). Income
statement and other information available from the receipts and disbursement
account.
Key to preparation of a Cash Flow Statement lies in raising the fact that all items
appearing in income statement are to be computed on cash basis which so far have
been shown an accrual basis. It is also divided in two parts-(i) Sources of cash and
(ii) Application of cash. All transactions involving inflow of cash are designated
as 'sources of cash' and all transactions resulting in outflow of cash are
summarized under the heading 'application of cash'. Cash Flow Statement may be
prepared in two forms:- (i) report form and (ii) Account from as explained below:
Cash Flow Statement (Report Form)
47
Cash Balance in the beginning
Add- Source of cash (or Cash Inflows)
(i) Cash from operations
(ii) Cash from operations
(iii) Sale of Investment and any other Fixed Asset
(iv) Issue of Share Capital/Debentures
(v) Loans raised during the year.
Total cash available
Less- Application of Cash (or Cash outflows)
(i) Purchase of Machinery of any other Fixed Asset
(ii) Dividend Paid
(iii) Decrease in Account Payable
.............................
..
.............................
..
.............................
..
.............................
..
.............................
..
.............................
..
.............................
..
.............................
..
...........................
...
...........................
...
...........................
...
...........................
...
...........................
...
48
(iv) Repayment of Loans
(v) Redemption of Preference shares or debentures in
cash.
Total Cash Payments
Cash balance at the end
.............................
.
.............................
..
Cash Flow Statement (Account Form)
49
Cash balance at the beginning
(i) Cash from operations
(ii) Collection form debtors
(iii) Sale of Investment
(iv) Sale of Fixed Asset
(v) Insurance of share capital or
debentures
(vi) Loan
..................
..................
.
..................
.
..................
.
..................
.
..................
.
..................
.
(i) Decrease in Accounts Payable
(ii) Purchase of Machinery or
other Asset
(iii) Dividend Paid
(iv) Repayment of Loan
(v) Redumption of Pref. Shares or
Debentures
Cash Balance at the end
..................
..
..................
..
..................
..
..................
..
..................
.
..................
..
50
51
FUND FLOW STATEMENT
Form of Funds Flow Statement
Generally, Funds Flow Statement can be prepared in two formats:
1) In report form or
2) In an account form which is generally used to find the fund flow statement.
Cash from Operations
Cash from Operations:
Cash from operations shown in the Cash Flow Statement, shall be calculated a
follows:
Cash from operations= Cash sales (Total sales-Credit sales )- Cash purchases
+ Cash operating expenses after adjusting accruals and prepayments).
Cash purchases may be calculated by deducting credit purchases i.e., increase in
accounts payable creditors and B/P from the total purchases.
52
Cash from operations may also be calculated by making necessary adjustments
for non-cash transactions in the net profits as shown by profit and loss account
i.e., by adding non-cash and non-trading payments and losses and by deducting
non-cash an non-trading receipts and profits.
Distinction between Funds Flow Statement and Cash Flow
Statement
We have fully explained the meaning and importance of both the statements-
Funds Flow a Cash Flow statements.
A distinction between these two statements may be briefed as under:-
(i) Funds Flow Statement is concerned with all items constituting funds (Working
Capital) for the business while Cash Flow Statement deals only with cash
transactions. In other words, a transaction affecting working capital other than
cash will affect Funds statement, and not the Cash Flow Statement.
(ii) In Funds Flow Statement, net increase or decrease in working capital is
recorded while in Cash Flow Statement; individual item involving cash is taken
into the account.
53
(iii) Funds Flow statement is started with the opening cash balance and closed
with the closing cash balance records only cash transactions.
(iv) Cash Flow Statement is started with the opening cash balance and closed with
ht closing cash balance while there a no opening or closing balances in Funds
Flow Statement.
Example:
The following are the balance sheet for India Glycol Limited Gorakhpur for the
year ending March 31 2007 and March 31 2008:
Balance Sheet
As on 31 March
2007 2008
Rs Rs
Capital and Liabilities
Share Capital 6, 75,000 7, 87,500
General Reserve 2, 25,000 2, 81,250
54
55
56
57
-
58
59
RATIO ANALYSIS
What is RATIO..??
An Arithmetical Expression of relationship between two related or Inter-
Dependent items.
What is ACCOUNTING RATIO..??
The term Accounting Ratio is used to describe the significant relationship which
exists between figures shown in a Balance Sheet, in a Profit/Loss Account, in a
Budgetary Control system or in any part of the accounting organization.
EXPRESSION OF RATIO
PURE –
Expressed as a Quotient.
e.g. Current Ratio = Current Assets/Current Liabilities
= Rs. 2, 00,000/ Rs. 1, 00,000
= 2:1
60
PERCENTAGE –
Expressed in Percentage
e.g. Gross Profit Ratio = Gross Profit/Net Sales X100
= 25%
TIME –
Expressed in number a particular figure is compared to another figure.
E.g. Stock turnover ratio which studies relationship between costs of goods sold
and average stock is (say) 4times.
FRACTION –
Expressed as Fraction.
E.g. Ratio of fixed assets to share Capital is (say) 3/4
(0.75)
DAYS –
Expressed in number of Days.
E.g. The average collection period for IGL is 73 Days.
61
MEANING OF RATIO ANALYSIS
It’s a technique or process of determining and interpreting relationship between
the items of financial statements to provide a meaningful understanding of the
performance and financial position of an enterprise. It’s a study of relationship
among various Financial factors in a Business.
OBJECTIVE OF RATIO ANALYSIS
Its main Objective is to Test and make Qualitative Judgment about the Firm’s
Profitability, Financial Position (Liquidity & Solvency), and Operating
Efficiency. E.g. a Current Ratio is calculated by dividing current assets by current
liabilities; the ratio indicates a relationship-a qualified relationship between
current assets and current liabilities. It measures the Firm’s Liquidity: The Greater
the Ratio, the greater the firm’s liquidity and vice-versa. In Financial Analysis, a
ratio is used as a benchmark for evaluating the financial position and performance
of a firm. An Accounting figure conveys meaning when it is related to some other
relevant information. E.g. a Rs. 5Crore Net Profit may look impressive, but the
firm’s performance can be said to be good or bad only when the net profit is
related to the firm’s investment.
TYPES OF RATIOS
62
Liquidity Ratios: They Measure the Firm’s ability to meet current
Obligations.
Solvency Ratios: They Show the Proportions of Debt & Equity in financing the
Firm’s assets.
Activity Ratios: They reflect the Firm’s efficiency of utilizing assets.
Profitability Ratios: They measure overall performance and effectiveness of
the Firm.
Coverage Ratios: They measure the profit to measure the interest charges.
LIQUIDITY RATIOS
Liquidity ratios measure the ability of firm to meet its current obligations. In fact,
analysis of liquidity needs the preparation of cash budgets and cash and fund flow
statement; but liquidity ratios, by establishing a relationship between cash and
other current assets to current obligations, provide a quick measure of liquidity. A
firm should ensure that it does not suffer from lack of liquidity, and also that it
does not have excess liquidity.
63
TYPES OF LIQUIDITY RATIOS
1) Current ratio
2) Quick or acid test or liquid ratio
3) Cash ratio
4) Net working capital ratio
CURRENT RATIO
The current ratio is calculated by dividing current assets by current liabilities:
Current ratio = Current assets / Current liabilities
The current ratio is a measure of the firm’s short-term solvency. It indicates the
availability of current assets in rupees for every one rupee of current liability. A
ratio of greater than one means that the firm has more current assets than current
claims against them. As a conventional rule, a current ratio of 2:1 or more is
considered satisfactory.
QUICK RATIO
64
It is found out by dividing: Quick ratio = Quick assets / Current liabilities
Quick assets = current assets – inventories – prepaid expenses
Generally, a quick ratio of 1:1 is considered to represent satisfactory current
financial conditions.
CASH RATIO
The computation of cash ratio: Cash ratio = Cash + marketable securities/Current
liabilities
Since cash is the most liquid asset, a financial analyst may examine cash ratio and
its equivalent to current liabilities. Trade investment or marketable securities are
equivalent of cash; therefore, they may be included in the computation of cash
ratio.
NET WORKING CAPITAL RATIO
It can be computed by: NWC Ratio = Net working capital / Net assets
The difference between current assets and current liabilities excluding short - term
bank borrowings is called net working capital or net current assets. NWC is
sometimes used as the measure of a firm’s liquidity. It however, measures the
firm’s potential reservoir of funds
65
SOLVENCY RATIOS
The term ‘solvency’ implies ability of an enterprise to meet its long-term
indebtedness and thus, solvency ratios convey an enterprises ability to meet its
long-term obligations. Some important solvency ratios are :
a) Debt-Equity Ratio,
b) Interest Coverage Ratio,
c) Debt to Total Funds Ratio,
d) Fixed Asset Ratio,
A) Debt Equity Ratio.
The debt-equity ratio is worked out to ascertain soundness of the long-term
financial policies of the firm.
The ratio ascertained as follows;
Debt-Equity Ratio = Debt (Long-Term Loans)/ Equity (Shareholders’ Funds)
66
Dept – equity ratio indicates the proportion between shareholders’ funds and the
long-term borrowed funds. A higher ratio indicates a risky financial position
while a lower ratio indicates safer financial position.
Objective and Significance
This ratio is sufficient to assess the soundness of long-term financial position. It
also indicates the extent to which the firm depends upon outsiders for its existence
Ascertain Dept-Equity ratio for IGL (*1000):
a) Equity share capital 2, 00,000
b) General reserve 1, 60,000
c) 10% debenture 1, 50,000
d) Current liabilities 1, 00,000
e) Preliminary expenses 10,000
Solution: Dept-equity Ratio = Dept/ Equity
Dept = debentures = Rs. 1, 50,000
Equity= Equity Share Capital + General Reserve- preliminary Expenses
= 2, 00,000+1, 60,000-10,000 = 3, 50,000
Dept-Equity ratio= 1, 50,000 / 3, 50,000
= 15:35= 3:7
67
B) Interest Coverage ratio:
When a business borrows money, the lender is interested in finding out whether
the business would earn sufficient profit to pay periodically the interest charge. A
ratio which expresses this is called Interest Coverage Ratio or Dept service Ratio
or fixed charges cover.
This ratio is determined by dividing profit before interest by the interest charges
Interest Coverage Ratio =Net profit before interest and tax/ Interest on fixed
(long-term) loans or Debentures.
Objective and Significance:
This ratio indicates how many times the profit covers fixed interest. It measures the
margin of safety for the lenders. The higher the number, more secure the lender is in
respect of his periodical interest income.
Example:
The operating profit of Exe. Ltd. After charging interest on debentures and tax is Rs
1, 00,000. The amount of interest is Rs 20,000 and the provision for tax has been
made at Rs 40,000. Calculate the interest coverage ratio.
Solution:
Interest Coverage Ratio = net profit before interest and tax/ Interest charges
= 1, 60,000/20,000
68
C) Debt to Total Fund Ratio
The Debt to Total Funds Ratio is a measure for long term financial soundness.
Debt Total Funds Ratio =Debt /(Equity + Debt)
Objective and Significance:
The main purpose of the ratio is to determine the relative stock of outsiders and
shareholders.
Calculate debt to total funds ratio for IGL with following data:
a) 9% Pref. Share Capital 10, 00,000
b) Equity Share Capital 20, 00,000
c) Reserves 10, 00,000
d) 10% Debentures 30, 00,000
e) Loans From Industrial Finance corporation 20, 00,000
f) Current liabilities 8, 00,000
Solution:
Debt to Total Funds Ratio = Long-term loans/(Shareholders funds +Long-term
loans)
=(30,00,000 + 20,00,000)/(10,00,000 + 20,00,000 + 10,00,000 + 30,00,000+
20,00,000)
Debt to Total Funds Ratio= 5: 9 or 0.56.
69
D) FIXED ASSETS RATIO
Fixed Assets Ratio = (Shareholders’ funds + Long-term loans)/Net Fixed Assets
Objective and Significance:
This ratio indicates as to what extent fixed assets are financed out of long-term
solvency.
Example:
Calculate Fixed Assets Ratio for IGL with following data (*1000):
a) Share capital 2, 00,000
b) Reserves 50,000
c) 9% Debentures 2,00,000
d) Trade Creditors 75,000
e) Plant and Machinery 2, 00,000
f) Land and Building 2, 00,000
g) Furniture 50,000
h) Trade Debtors 60,000
i) Cash Balance 40,000
j) Bills Payable 24,000
k) Stock 80,000
70
Solution:
Fixed Assets Ratio = Long-term Funds/Fixed Assets
= (2, 00,000 + 50,000 + 2,00,000)/ (2, 00,000 + 2, 00,000 + 50,000)
= 4, 50,000/4, 50,000
=
ACTIVITY RATIOS
A) Activity ratios are also known as turnover or efficiency ratios.
B) Activity ratios indicate the efficiency with which the resources available to the
firm are utilized.
C) Higher turnover ratio means better use of resources available to the firm.
71
CAPITAL TURNOVER RATIO
This ratio expresses the relationship between net sales and capital employed.
Formula:
NET SALES/CAPITAL EMPLOYED
NET SALES= Sales – Sales returns
CAPITAL EMPLOYED=
Two methods:
i. Shareholder funds +Long term debts
Shareholder funds: Equity share capital +Preference share capital+ Reserves &
surplus+ P&La/c
Less:
Preliminary expenses, underwriting commission, discount on issue of shares
&debentures,
P&la/c (Dr.)
Long term debts:
Debentures +loans + public deposits
ii. Fixed assets +current assets –current liabilities
72
Objective:
The objective of working out this ratio is to determine how efficiently the capital
employed is being used.
Interpretation:
A higher ratio means efficient utilization of capital employed & vice
versa.
A very high capital turnover ratio would indicate overtrading or under
capitalization.
Example: From the following Balance sheet of IGL Ltd. For the year ended
31st December, 2007, calculate Capital Turnover Ratio (* 1000):
LIABILITIES AMOUNT ASSETS AMOUNT
Equity share 75,000 Fixed Assets 40,000
Capital
Profit for the year 47,000 Stock 90,000
73
Reserves 25,000 Debtors 86,000
Trade Creditors 76,000 Cash 7,000
2, 23,000 2, 23,000
Sales for the year amounted to Rs. 3, 50,000.
Solution:
Capital employed = Fixed Assets + Working capital.
=40,000+90,000+86,000+7,000-76,000
=Rs. 1, 47,000
Capital Turnover Ratio = Net sales/Capital employed
= 3, 50,000/1, 47,000
= 2.38 Times
74
SALES TO FIXED ASSETS OR
FIXED ASSETS TURNOVER RATIO
This ratio indicates the extent to which investment in fixed assets contribute
towards sales.
Formula: NET SALES / NET FIXED ASSETS
NET FIXED ASSETS =Fixed Assets – Depreciation
Objective:
Fixed Asset Turnover Ratio indicates how efficiently fixed assets are used.
Interpretation:
If there is increase in the ratio it will indicate that there is improvement in the
utilization of
fixed asset & a decline in ratio will indicate that fixed assets have not been used
efficiently by the firm.
75
Example:
From the following data, calculate the Fixed Assets Turnover Ratio for a section
of IGL:
1) Gross Fixed Assets = Rs. 3, 00,000
2) Accumulated Depreciation = Rs. 1, 00,000
3) Total Sales = Rs. 8, 50,000
4) Sales Returns = Rs. 50,000.
Solution:
NET SALES = TOTAL SALES – SALES RETURNS
= RS. 8, 50,000 – RS. 50,000
= RS. 8, 00,000
NET FIXED ASSET = GROSS FIXED ASSETS – ACCUMULATED
DEPRECIATION
= RS. 3, 00,000 – RS. 1, 00,000
= RS. 2, 00,000
FIXED ASSETS TURNOVER RATIO = SALES/NET FIXED
ASSETS
= RS. 8, 00,000
Rs 2, 00,000
= 4 Times
76
NET WORKING CAPITAL TURNOVER RATIO
This ratio indicates whether the working capital has been efficiently utilized or
not in making sales.
Formula: NET SALES / NET WORKING CAPITAL
Objective:
This ratio indicates whether or not working capital has been effectively utilized
in making sales. In other words, it measures the rate of working capital utilization.
Interpretation:
A high working capital turnover ratio shows the efficient utilization of working
capital & vice versa.
Example:
Calculate the working capital turnover ratio from the following data for IGL (*
1000):
1) Current Assets = Rs. 9, 00,000
2) Total Sales = Rs. 30, 50,000
3) Current Liabilities = Rs. 3, 00,000
4) Sales Return = Rs. 50,000.
77
Solution:
Calculation of Working Capital Turnover Ratio:
Net Sales = Rs. 30, 50,000 – Rs. 50,000 = Rs. 30, 00,000
Working Capital = Current Assets – Current Liabilities
= Rs. 9, 00,000 – Rs. 3, 00,000= Rs. 6, 00,000
Working Capital/Turnover Ratio = Rs. 30, 00,000/Rs. 6, 00,000= 5 Times
CREDITORS’ TURNOVER RATIO
Indicates the velocity with which the payments for credit purchase are made to
creditors. The term accounts payable includes creditors and bills payable. The
ratio is calculated as follows:
1) CREDITORS TURNOVER RATIO =
TOTALCREDITPURCHASES/AVERAGEACCOUNTS PAYABLE
2) AVERAGE ACCOUNTS PAYABLE = OPENING CREDITORS
+OPENING BILLS PAYABLE + CLOSING CREDITORS + CLOSING BILLS
PAYABLE
78
Objectives and Significance:
1) Creditors turnover ratio and the debt payment enjoyed both indicates whether
the firm is enjoying actually the credit promised by suppliers.
2) If the firm enjoys lower credit period, it means the creditors are being paid
promptly and the firm is not taking the full advantage of credit facilities.
AVERAGE PAYMENT PERIOD (days payables outstanding) =
ACCOUNTS PAYABLE / (ANNUAL CREDIT PURCHASES / 365
DAYS)
Indicates the time within which the payments for credit purchases are made to
creditors.
The ratio is calculated as follows:
AVERAGE PAYMENT PERIOD =
MONTHS (OR DAYS) IN A YEAR /CREDITORS
TURNOVER
OR
AVERAGE PAYMENT PERIOD =
ACCOUNTS PAYABLE/MONTHLY CREDIT PURCHASES
OR
79
AVERAGE PAYMENT PERIOD =
ACCOUNTS PAYABLE x MONTHS IN A YEAR/CREDIT PURCHASES IN
A YEAR
Objectives and Significance:
1) Proper employment of capital being one part of good management working
capital one should ascertain whether the firm is actually enjoying the credit
promised by suppliers.
2) If suppliers allow credit period of one month but if, as per calculations, a firm
is taking 2 months credit period, it may mean either that the facilities given by the
creditors are not being properly utilized are that the firm is unnecessarily
damaging its credits in the markets.
PROFITABILITY RATIO
Main object –earn profit
Profit as compared to the capital employed
Measures overall efficiency of business
80
GROSS PROFIT RATIOS
Shows relationship of sales with D.C. (purchases, manufacturing cost)
G.P.R. =Gross Profit *100/Net Sales
G.P. net sales –cost of goods sold (no a/c of exp charged to P/L)
Net Sales = Gross sales - (sales tax +excise duty)
Shows average margin on goods sold.
Gross Profit Is Calculated As:
81
Example:
For the head of a section of IGL Mr. Hemant Goel
P/L A/C OF HEMANT GOEL FOR YR ENDING 31ST MARCH 2007PARTICULAR To O.S.To PurchasesTo WagesTo Carriage & FreightTo Office & Adm ExpTo S&D ExpTo Finance Exp
Int on B/P 1,200Discount 2,400Bad Debts 3,400
To Int on DebenturesTo Loss on Sale of
SecuritiesTo Loss on Sale of
FurnitureTo Provision for Legal SuitTo Net Profit
AMOUNT76,2503,15,250
5,0002,000
1,01,00012,000
7,0008,000
350
6,000
1,65070,000
6,04,500
PARTICULARBy SalesBy C.S.By Int on SecuritiesBy Dividend on SharesBy Profit on Sale of
Shares
AMOUNT5,00,000
98,5001,5003,750
750
6,04,500
Net Profit Ratio
N.P.R. = Net Profit *100/Net Sales
Net Profit =Gross Profit -[op. exp (S&D…) +Non-op exp (int on
debentures…)] +Non-op income (int on shares..)
Can be PBT/PAT
82
Reveals overall efficiency of business.
Higher the N.P.R. the better it is.
Expense Ratios
Ascertains relationship b/w operating exp & volume of sales
Indicates portion of sales consumed by various operating expenses
Throws light on the level of efficiency in different aspects of work
It includes the following ratios:
Ratio of materials used to sales:
Direct material cost to sales =D.M.C. *100/Net Sales
Ratio of labour to sales:
Direct labor cost to sales =D.L.C. *100/Net Sales
83
Factory exp
Office & administration expenses
S&D Expenses
Operating Profit Ratio
Operating profit ratio establishes relationship between operating profit & net
sales.
Operating profit is the net profit arising from the normal operation of an
enterprise.
Operating profit ration: operating profit x 100/Net sale
Operating profit = NP + Non- operating expenses – Non operating income
Objective & significance
This ration is indicator of operational efficiencies of management as against the
net profit ration, which reveals overall efficiency.
84
Example:
For a section of IGL
1) Sales 3,00,0000
2) Gross profit 120,000
3) Administration expenses 35000
4) Selling & distribution expenses 25000
5) Income on investment 15000
6) Loss by fire 9000
Solution:
Operating profit ration = net operating profit x 100/ Net sale
Operating profit = G.P. (Administrative Exp. + Selling exp)
= 1.2 lac – (25000+ 35000)
= 60000 X 100/3 lac
= 20%
OPERATING RATIO
Thais ratio establishes relationships between operating cost & net sales. This ratio
indicates the proportion that the cost of sales.
Cost of sale included direct cost of good sold & as well as other operating
expenses administration, selling & distribution expenses
Operating ratio = (Cost of good sold + operating expenses) X 100/ Net sale
= Operating cost X 100/ Net sale
85
Cost of good sold = opening stock + purchase + direct expenses –closing stock –
GP
Operating expenses = administrative expenses + selling & distribution expenses
Objective & significance
Operating ration is the test of the operational efficiency of the business .it shows
the percentage of sales that is absorbed by the cost of sales & operating expenses.
This ratio serves following objective:
1) To determine whether the cost content has increased or decreased in the figure
of sales.
2) To determine which element of the cost has gone up.
Example:
For a section of IGL
1) Cost of good sales 6 lac
2) Operating expenses 40,000
3) Sales 8, 20,000
4) Sales returns 20,000
86
Solution:
Operating Ratio = (Cost of good sold + operating expenses) X 100/Net Sales
= (6 lac + 40000) X 100/ (820000-20000)
= 640000 X 100/ 800000 = 80%
RETURN ON EQUITY
Common shareholders are entitled to the residual profit. The rate of
dividend is not fixed and earning may be distributed to shareholders or
retained in the business.
A ROE is calculated to se the profitability of owner’s investment.
ROE indicates how well the firm has used the resources of owners.
It is a most important relationship in financial analysis.
Formula:
ROE= PAI /Net Worth Equity
87
EARNING PER SHARE
It is a measure for calculating the profitability of shareholder’s investment.
EPS is calculated as; EPS=PAT/NO. OF OUTSTANDING SHARES
EPS shows the profitability of the firm on share basis, it doesn’t reflect
how much is paid as dividend and how much is retained in the business?
But as profitability index as it is valuable.
The higher the EPS, the more attractive will be the investment plan or
vice-versa
RETURN ON INVESTMENT
The term investment refers to total asset or net asset.
The conventional approach of calculating ROI is to divide PAT by
investment; investment represents pool of funds, supplied by shareholders
and lenders.
While pat represents residue income of shareholders.
88
The formulae for calculating ROI is;
ROI=ROTA=EBIT (1-T)/ TA OR NA
Since taxes are not controllable by management and firm’s opportunities far
availing tax incentives differ, it may be more prudent to use before tax measure of
ROI, thus the before tax ratios are;
ROI=ROTA=EBIT/TA OR NA
COVERAGE RATIO
Fixed Interest Cover
Fixed Divident Cover
Fixed Interest Cover:
Income before Interest and Tax/Interest Charges
Fixed Divident Cover:
Net Profit after Interest and Tax/Preference Divident
89
Turnover Ratio
Turnover Ratio
Net Profit Ratio
Overall Profitability Ratio
1) Net Profit Ratio = Net Profit/ Sales * 100
2) Turnover Ratio = Sales/ Capital Employed
3) Profitability Ratio = net profit ratio * turnover ratio
=net profit/ capital *100
4) Working Capital Turnover Ratio = Net Sales/ Working Capital
5) Debtor’s turnover Ratio = Credit Sales/ Average Account Receivable
6) Debt Collection Period Ratio = Months in year/ Debtor turnover
=Average a/c receivable*months in year/ credit
sales
=a/c receivable/ average monthly credit sales
90
91
FINANCIAL STATEMENT ANALYSIS
RATIO ANALYSIS
A Ratio gives the mathematical relation ship between one variable and
another.
Ratio analysis helps in valuing the firm in quantitative terms.
Ratios are classified as follows
a) Liquidity Ratios
b) Ownership Ratios
i) Earnings Ratios
ii) Leverage Ratios
c) Capital Structure Ratios
d) Coverage Ratios
e) Dividend Ratios
92
1) Liquidity Ratios:
Liquidity implies firm’s ability to pay its debts in short run
This ability can be measured by Liquidity Ratios
Current Ratio and Quick Ratio are the two ratios which directly measure
Liquidity
Receivables turnover Ratio n Inventory Turnover Ratio are the two ratios which
in directly measure Liquidity
I. Current ratio = Current assets /Current Liabilities
Current assets which are converted into cash within one year
Current liabilities are liabilities which are to be repaid within a period of 1
year.
Current Assets Current Liabilities
Cash Loans And
Advances
Marketable Securities Trade Creditors
Debtors O.S.Expenses
Inventories Provisions
93
Loans and Advances Pre Received
incomes
Prepaid Expenses
O.S.Incomes
IDEAL RATIO = 2:1
II. Quick ratio or Acid Test ratio = Quick Asset/ Quick liability
(Current Assets – Inventories- Prepaid expenses ) .
(Current Liabilities – Bank O.D. – Income Received in Advance)
Ratio of quick assets to quick liabilities.
Quick assets which can be converted into cash very quickly.
Quick liabilities are liabilities which have to be necessarily paid with in 1
year.
Ideal ratio 1
1 is considered as inadequate liability of the business.
III. Absolute Liquid Ratio = Absolute Liquid Assets/Current Liabilities
> Ratio of quick Absolute liquid assets to current liabilities.
> Absolute liquid Assets = Cash + Bank + Short Term Investments.
> Ideal Ratio = 1:2 or 0.5
94
IV. Bank Finance to working Capital Gap ratio =Short Term Bank Borrowings
Working Capital Gap
Working Capital Gap = Current Assets – Current Liabilities
It shows firms Reliance on short term bank finance for financing the
working capital gap.
Turn over Ratios (Activity Ratios)
1. Accounts Receivable Turn over ratio
Or Debtors Turn over Ratio =. Net Credit Sales .
Average Account Receivable
Average Account Receivable = Opening receivable + Closing receivable
2
Relationship between debtors and sales
Ideal Ratio – 10 – 12
2. Average collection period
Or Debt Collection Period = No. of Days in a year
Debtors Turn over Ratio
No. of days it takes for the debtors to get converted in to cash.
Ideal Ratio – 30-36 days
High Debtors turn over ratio or low debt collection period indicates
sound credit management policy
.
95
3. Inventory Turnover Ratio = Cost of goods Sold
Average Inventory
It indicates no. of times stock has been turned into sales in a year
Ideal Ratio = 8
Cost of goods sold = Sales – gross profit
Average Inventory = (Opening Stock + Closing Stock)/2
Stock Conversion Period = Cost of goods Sold * NO. of days in a year
Average Inventory
4. Creditors Turn over ratio = Net Credit Purchases.
Average Creditors
Average Creditors = (Opening Creditors + Closing Creditors)/2
Relation ship between Creditors and Purchases
Ideal Ratio –12 or More
5. Average Payment period
Or Debt Payment Period = No. of Days in a year
Creditors Turn over Ratio
No. of days Taken by the business to pay off its debts
Ideal Ratio – 30 or less
Low Creditors turn over ratio or High debt Payment period indicates
sound credit management policy.
96
2) Profitability or Efficiency Ratios:
These Ratios measure the efficiency of forms activities and its ability to
generate profits. Two Types of profitability ratios:
A. Profits in relation to sales:
i. Gross Profit Margin Ratio
ii. Net Profit Margin Ratios
B. Profits in relation to assets:
i. Assets Turn Over Ratio
ii. Earning Power
iii. Return On Equity
A. Profits in relation to sales: These Ratios identify the sources of the
business efficiency.
Gross Profit Margin Ratio = Gross Profit/ Net Sales
Gross Profit = Sales – Cost Of goods sold
Net Sales = Sales – Sales Return - Excise Duty
There Is no Ideal Ratio
Higher the ratio better will be performance of the business.
97
Net Profit Margin Ratio = Net Profit /Net Sales .
It measures the overall efficiency of production, administration, selling,
financing, pricing and tax management
It shows the result of overall operation of the firm.
B. Profits in relation to assets:
Assets Turn over Ratio = Sales / Average assets
Ability to generate a large volume of sales on a small asst base is an
important part of firms profit picture.
Improperly used assets increase the firms need for costly financing.
Earning Power = EBIT / Average total assets
It is a measure of operating Profitability.
It is a measure of operating business performance which is not effected
by and tax payments interest charges
Return on Equity = Net Income / Average Equity
Net income = PAT (Profit after Tax)
It is an important profit indicator to share holders of the firm.
98
3) Ownership ratios:
a. Earning Ratios
b. Leverage Ratios
i. Capital Structure Ratios
ii. Coverage Ratios
c. Dividend Ratios
A. Earning Ratios:
Earning per Share = Net Income (PAT) / No. of outstanding Shares
EPS is the net profit after tax which is earned on the capital
representative of one equity share.
Higher the EPS, better the performance of the company
.
Price Earning Ratio = Market Price of the share/ EPS
It gives the relation ship between market price of the stock and its
earnings by revealing how earnings affect the market price of the firm’s
stock.
P/E Ratio has Practical application in forecasting the market price of a
share.
There is no ideal ratio
99
.
Capitalization Rate or Earnings Yield = EPS / Market Price of the shares
B. Leverage Ratios
a) Capital Structure Ratio
i. Debt Equity Ratio = Debt /Equity
= (Long Term Liabilities + Current Liabilities)/ Share Holders Funds
Ratio 2 or Less – Exposes Its Creditors Lesser Risk
Higher Risk Ratio >2 – Exposes Its Creditor Higher Risk
ii. Debt Assets Ratio = Debt /Assets
b) Coverage Ratios
i. Interest Coverage Ratio or Debt Service Ratio
= EBIT .
Interest Coverage
Ideal Ratio - 6
Indicates whether Business is carrying Sufficient Profit to pay
interest charges.
Higher – Good , Lower - Not Good
100
i)Fixed Charges Coverage Ratio
= EBIT ( Before Depreciation & Lease Rentals) Debt +
Lease + Loan Repayment + Preference
Interest Rent Installment . Dividend .
(1 – Tax Rate ) (1 – Tax Rate )
ii)Debt Service Coverage Ratio
=Pat + Depreciation + Non Cash Charges + Inerest on Term Loan
Interest on Term Loan + Repayment of Term Loan
Indicates whether Business is Earning Sufficient Profits to pay not only
interest but also installments of personal amount.
C. Dividend Ratios:
i. Dividend Pay out Ratio = DPS
EPS
i. Dividend Yield = DPS
MPS
Dividend Yield Ratio Gives Current Return on ones Investment.
101
102
RESULT AND CONCLUSION
SERIOL
NUMBER
PARTICULAR QUARTER
ENDED
(30/06/08)
QUARTER
ENDED
(30/06/07)
Gross sales/Income
from operation
-domestic
-export
Total
Less: Excise Duty
24160
5335
28518
4498
29495
4489
33016
5895
1
2
3
a)
b)
c)
d)
Net sales/Income
from operation
Other Income
Total Expenditure
Increase/Decrease
in stock
Consumption of
raw material
Purchase of good
for trading
Employees cost
25006
773
(50)
12094
99
1161
27121
1901
534
12030
-
1389
103
e)
f)
g)
Power And Fuel
Depreciation
Other
Total Expenditure
3940
1476
4263
3708
1416
3921
22983 22998
4) Profit Before
Interest And Tax
2796 6024
5) Interest(net) 1096 1190
6) Profit Before Tax 1700 4034
7) Provision For
Taxation/Credit
-Current Tax
-Deferred Tax
-Fringe Benefit Tax
Minimum alternate
tax credit
Entitlement
-Tax for earlier
year
written back
191
413
19
(136)
-
931
322
18
-
-
8) Net Profit/Loss 1243 3563
9) Paid up equity 2788 2788
104
10)
11)
12)
share
Reserve excluding
revaluation reserves
Basic/Diluted EPS
for the period
Aggregate of public
shares holding
- No. of shares
-% of share holding
4.35
13934682
49.98%
12.78
14326628
51.38%
Segment Wise
Revenue, Results
and Capital Emp
Segment Revenue
-Chemicals
-Ethyl Alcohol
-Others
Total
Segment Profit
Before Interest And
Tax
-Chemicals
24508
4799
188
29495
3071
447
27504
5314
198
33016
4798
342
105
-Ethyl Alcohol
-Others
Total
Less:
Interest(Net)
-Unallocated
corporate expenses
net of unallocated
income
Profit Before Tax
Capital Employed
-Chemicals
-Ethyl Alcohol
-Others
Total
_
(104)
3414
1096
618
1700
109389
6941
4348
120678
(27)
5023
1190
(1001)
4834
97072
4617
1999
103688
106
Notes:
1) Profit for the quarter was affected on account of planned shutdown for 21 days
for debottlenecking of capacities and catalyst change.
2) CO2 plant of 80 TON per day capacity at Kashipur has started commercial
production in April 08.
3) The company has unrealized exchange loss of Rs. 1557 lacs on reinstatement
of all foreign currency borrowing as on 30 June 2008. Such losses being national
and not effecting cash flow of the company and the actual gain/loss in this respect
is ascertained and getting accured only on the final liquification of such loans. No
provision has been considered necessary in this quarter and will give effect to at
the end of the year or on the date of respective liquification.
4) Catalyst amortization over the technical assessed useful life is being charged to
profit and loss account as chemical consumption instead of depreciation and it has
no effect on the profit for the quarter.
5) Information’s on the investor’s complaint for the quarter – (Nos): Opening
balance-NIL New-25, Disposal-25, and Closing Balance-NIL.
107
6) Figure for the previous year /period have been regrouped/redessified, wherever
necessary.
7) Strong growth prospects are also seen in IMFL and county liquor business,
where the company has plans to improve the distribution of its range to other
markets nationally.
8) New business initiatives were taken by the Company i.e. Nutraceuticals and the
CO2 can also be expected to show better traction in the same period.
INDIA GLYCOLS LIMITED
Balance sheet as at 31march 2007
108
(Rs)
Schedule As a31/.Mar/.2007
SOURCE OF FUND
1. Share Holders Fund
a) Share Capital A
b) Reserve and Surplus B 130329852.8 130329852.8
2. Loan Funds C
Secured Loans 21673558.06
Unsecured Loans 21673558.06
3. Deferred Tax Liability
4. Inter Unit Balance 1589787241
TOTAL 1741790652
APPLICATION OF FUNDS
1. Fixed Asset D
Gross Block 1090791713
Less Depreciation 42765395.68
109
Capital Work In Progress 249630369.5
1297656687
(Including Pre-Operative Expenses)
2. Investments E
3. Current Assets, Loans and Advances F
Inventories 634896140.7
Sundry Debtors 38072276.87
Cash and Bank Balances 30011576.71
Loan and Advances 219256801.4
922236795.7
Less: Current Liabilities and Provisions G
Current Liabilities 478102864.2
Provisions 478102864.2
Net Current Assets 444133931
TOTAL 1741790619 33.40
INDIA GLYCOLS LIMITED
Profit and Loss account for the period ended 31March 2007
110
Schedule
INCOME
Sales H
746516524.68
Less: Excise Duty Recovered on sales
559739943.25
Net Sales
Other Income H
186776581.43
Increase/Decrease in Stoel I
EXPENDITURE
Manufacturing and Other Exp J
10727766.96
Finance Charges (Net) K
2176200.01
Profit before depreciation and Tax
110003966.52
Depreciation
40051697.71
111
Profit before Tax and Exceptional Item
133467168.81
Less: Exceptional Items
Profit after Exceptional Items
133467168.81
Provision for doubtful Advances/loans to body corporates
Less: Transfer from general Reserves
Profit Before Tax
133467168.81
Provision for Taxation
-Current Tax
-Deferred tax charged/(Credit)
-Taxation for earlier years written back
-Fringe Benefit tax
-Minimum Alternate Tax Credit entitlement
Net profit of the year
133467168.81
Taxation for the year written back
112
Debenture redemption reserve written back
Amount withdrawn from reserve and contingencies
Taxation for earlier years written back
125449538.21
Balance brought forward -
2713697.97
Transfer from Investment Allowance Reserve
Balance available for Appropriation
130753470.84
From the balance sheet we get the following conclusions in Ratio Analysis:
1) Liquidity Ratio
Liquidity Ratio: Current Asset/ Current Liability
Current Asset = 922236795.7
Current Liability = 478102864.2
113
Liquidity Ratio = 1.93:1
So in 2007 the liquidity ratio was 1.93:1
In 2008 it improved to 1.95:1
It is better performance to that of 2007 as the Ideal Ratio is 2:1. It shows India
Glycols Limited Gorakhpur has improved its performance.
.
2) Profitability Ratio
In relation to sales there are two ratios;
a) Gross Profit Margin ratio=Gross profit/Net Sales
b) Net Profit Margin Ratio=Net Profit/Net Sales
Gross Profit =173518866.52
Net Profit = 133467168.81
Net Sales = 186776581.43
Hence,
114
a) Gross Profit Margin Ratio in year 2007 was 0.92.
It goes to 0.94 in the year 2008.
It shows the improvement in the performance of India Glycols Limited Gorakhpur
as far as the business is concerned
b) Net Profit Margin Ratio in year comes 0.71.
Record shows it becomes 0.76 in the year 2008.
It shows the improvement in overall operation of the firm.
3) Turnover Ratio
Fixed Asset Turnover Ratio or Sales to Fixed Assets = Net Sales/ Net Fixed
Assets
Net Fixed Assets= Fixed Assets – Depreciation
Fixed Assets=1090791713
Depreciation=42765395.68
Net Sales= 186776581.43
Hence,
Fixed Assets Turnover Ratio in year 2007=0.178
115
Records shows that the Ratio in year 2008= 0.183
It shows that the Fixed Assets are used more efficiently with respect to the
previous year.
ALL THESE RESULTS SHOWS THAT THERE IS ALL AROUND
IMPROVEMENT IN THE PERFRMANCE OF INDIA GLYCOLS LIMITED
GORAKHPUR IN THE YEAR 2008 WITH RESPECT TO THE OVERALL
PERFORMANCE IN THE YEAR 2007.
116
117
BIBILOGRAPHY
1) The account section of INDIA GLYCOLS LIMITED GORAKHPUR,
2) The press release of INDIA GLYCOLS LIMITED GORAKHPUR,
3) Various sites from GOOGLE,
4) Maheshwari S.N. And Maheshwari S.K. - A text book of Accounting For
Management (Vikas, 1st Edition),
5) Ghosh T.P. – Financial Accounting for Managers (Taxman, 3rd Edition),
6) Mukherjee – Financial Accounting for Management (TMH, 2nd Edition)
118
