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Transcript of working capital management of INDIAN OVERSEAS bANK. completed by sarath nairdoc
INTRODUCTION
1.1. INTRODUCTION
Working capital is the life blood and nerve centre of a business. Just
as circulation of blood is essential for 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 adequate amount of
capital.
In general practice, working capital refers to the excess of current
assets over current liabilities. Management of working capital, therefore is
concerned with the problems that arise in attempting o manage current
assets, current liabilities and inter relationship that exists between them.
Working capital management policies of a firm have great effort on its
profitability, liquidity and structural health of the organization.
IOB Bank is India’s first-rural bank with total assets of Rs.
219648.17 billion at March 31, 2012 and profit after tax Rs. 10.8 Billion for
the year ended March 31, 2012. The Bank has a network of 2010 branches
and about 1000 ATMs in India and presence in 18 counties.
1.2. RATIONALE OF THE STUDY
Fund of working capital and funds management are of immense
significance in the working of any organization. Without a well planned
working capital system, the operation becomes very difficult. Large and
more complex the organization is the more complicated the system
becomes.
1
Profit is the most important measures of firm’s performance. An
analysis of effort of various factors on profit is an essential step in the
financial planning and decision making. This analysis can be used to
determine the profit planning process of the firm.
1.3. OBJECTIVES OF THE STUDY
1. To find the liquidity position of IOB Bank.
2. To find out the trend of working capital employed.
3. To find out the long-term solvency position of the organization.
4. To analysis the earning capacity of the organization.
5. To study about the components of funds management or working
capital management such as management of cash, management of
receivable.
6. To make suggestions and recommendations on the basis of the stuffy
to improve the working capital management of the company.
1.4. RESERCH METHODOLOGY
The study is based on both primary data secondary data.
Primary data
Primary data is collected by discussions and interviews with
managers, executives and other informants.
2
Secondary data
Secondary data is obtained from annual reports and other published
accounts of the company for a period of five year from 2007-2008 to 2011-
2012. Besides this information has also been collected from various books
and journals, MIS reports and circulars connected with the object.
1.5. EXPECTED CONTRIBUTION FROM THE STUDY
1) This study will help to carry on the day to day operation of the
company successfully and economically adequate Working Capital
every time.
2) Generally more than half of the total capital of the company is
invested in current assets and this study will help to fix an optimum
level of investment in various current assets.
3) Profitability position of the company.
4) This study enables us to determine an optimal mix of short-term
funds in relation to long term capital.
5) Rate of growth of business.
6) Short term financial solvency of the firm.
7) Optimal source of funds with less cost.
8) This study also enables us to study the increase and decrease in the
current assets and current liabilities and its effect on the working
capital position.
3
1.6. LIMITATIONS OF THE STUDY
1. This study is mainly based on the company’s annual report.
2. Time is another main constraint in the study and within the time
allowed, it is not possible to analyze in detail all document.
3. The data taken for comparison is only five years.
4. This study is based on a single branch only. But this company has lot
of another branches and head office all over the world.
5. The worked out ratios are compared only with the generally accepted
standard ratios of the previous year.
4
PROFILE AND HISTORY OF IOB BANK
2.1 COMPANY PROFILE
IOB Bank is India’s first rural bank with total assets of Rs.
219648.17 billion at March 31, 2012 and profit after tax Rs. 10.8 Billion for
the year ended March 31, 2012. The Bank has a network of 2010 branches
and about 1000 ATMs in India and presence in 18 counties. IOB Bank
offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its
specialized subsidiaries in the areas of investment banking, life and non-life
insurance, venture capital and assets management.
The Bank currently has subsidiaries in the United Kingdom, Russia
and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri
Lanka, Qatar, and Dubai International Finances Centre and representative
offices in United Arab Emirates, China, South Africa, Bangladesh,
Thailand, Malaysia and Indonesia. Our UK subsidiary has established
branches in Belgium and Germany. IOB Bank’s equity shares are listed in
India on Bombay Stock Exchange and the National Stock Exchange of
India Limited and its American Deposit.
IOB launched retail finance – car loans and loans for consumer
durables.
IOB becomes the first Indian Company to list on the NYSE through
an issue of American Depositary Shares.
5
IOB Bank’s pioneer in many fields banking, Insurance and Industry
with the twin objectives of specializing in foreign exchange business
and overseas banking.
IOB Bank enters first three branch in Karaikudi and Chennai in India
and Rangoon in Burma (presently Myanmar) followed by a branch in
Penang.
IOB Bank was one among the first to join Reserve Bank of India’s
negotiated dealing system for security dialing online.
In Pre-nationalization era (1947- 69), IOB expanded its domestic
activities and enlarged its international banking operations.
This led to creation of United Asian Bank Berhad in which IOB had
16.67% of the paid up capital.
The Bank sponsored 3 Regional Rural Banks viz. Puri Gramya Bank,
Pandyan Grama Bank and Dhenkanal Gramya Bank.
The Bank had setup a separate Computer Policy and Planning
Department (CPPD) to implement the programme of
computerizations, to develop software packages on its own and to
impart training to staff members in this field.
Now the Banks has 14 STARS centres and one Controlling Centre
for providing this service and in the same year started tapping the
potential of Internet by enabling ABB cardholders in Delhi to pay
their telephone bills by just logging on to MTNL web site and by
6
authorising the Bank to debit towards the telephone bills.
Mobile banking under SMS technology was implemented in
Ahmedabad and Baroda.
During May of the year 2007, Indian rating agency ICRA assigned
an 'A1+' rating to the proposed 20 bln rupee certificates of deposit
programme of Indian Overseas Bank, citing the bank's consistent and
measured growth, the improvement in its asset quality through
effective monitoring and collection systems, and improving core
profitability.
During June of the year 2008, IOB launched two new products
namely IOB Gold' and IOB Silver' in savings account and IOB
Classic' and IOB Super' under current account.
IOB have a network of more than one thousand eight hundred
branches all over India located in various metropolitan cities, urban,
suburban and rural areas.
IOB plans to set up banking operations in Malaysia in a joint venture
with two other India-based banks Bank of Baroda and Andhra Bank
with a minimum capital investment of RM320 million (US$100
million).
In year 2000, it came out with a pubic issue of 11,12,00,000 shares
of Rs 10 each for cash at per aggregating Rs 111.20 crores. It also raised Rs
125 corers through bonds issue in year 2001. it gained the rating of AA for
the issue. Being ranked as the best public sector bank in India in 2007, its
key centre now include Singapore, Seoul, Hong Kong, Bangkok and
7
Germany.
In 2006 total business of the bank crossed Rs. 1,00,000 crores where
as the total net profit exceeded the same figure in 2007. as of September
2008, there were 1425 branches under Core Banking Solution, 525 branches
under Total Branch Automation and a number of branches linked under
services like NEFT and RTGS. IOB has been upgraded to “BBB” (long
term) rating by Standard and Poor’s third bank in India after SBI and ICICI.
Present Scenario
IOB Bank has its equity shares listed in India on Bombay Stock
Exchange and the National Stock Exchange of India limited. Overseas, its
American Depositary Receipts (ADRs) are listed on the New York Stock
Exchange (NYSE). As of December 31, 2012, IOB Bank is India’s first
rural bank with total assets of Rs. 219648.17 billion at March 31, 2012 and
profit after tax Rs. 10.8 Billion for the year ended March 31, 2012.
Branches and ATMs
The Bank has a network of 2010 branches and about 1000 ATMs in
India and presence in 18 counties. The Bank currently has subsidiaries in
the United Kingdom, Russia and Canada, branches in United States,
Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar, and Dubai International
Finances Centre and representative offices in United Arab Emirates, China,
South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK
subsidiary has established branches in Belgium and Germany.
8
2.2 PRODUCT AND SERVICES
Products:
Housing loans
Education loans
Retail loans
Savings account
Services:
NRI accounts
Forex collections services
Agri business consultancy
Personal banking
Corporate banking
E- banking
ATM Services
Trading services
Personal Banking
Deposits
Loans
Cards
Investments
Insurance
Demat Services
Wealth Management
9
NRI Banking
Money transfer
Bank account
Investments
Property Solutions
Insurance
Loans
Business Banking
Corporate Net Banking
Cash Management
Trade Services
FX Online
SME Services
Online Taxes
Custodial Services
10
THEORETICAL FRAMEWORK
A CRITIAL ANALYSIS OF WORKING CAPITAL MANAGEMENT
OF IOB BANK
3.1 INTRODUCTION
Working capital management involves the relationship between a
firm’s short-term assets and 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, accounts receivable, payable and cash.
Working capital management policies of a firm have great effect on
its profitability, liquidity and structural health of the organization. In this
context, working capital management is three dimensional in nature.
1. Dimension1 is concerned with the formulation of policies with
regard to profitability, risk and liquidity.
2. Dimension2 is concerned with the decisions about the composition
and level of current assets.
3. Dimension3 is concerned with the decision about the composition
and level of current liabilities.
The important financial statements, which are used for working
capital analysis, are final accounts, cash flow and found flow statement etc.
11
Final accounts are the important source of information and these have to
be analyzed in detail to know financial position and organization. Final
accounts consist of two parts; one is profit and loss account and the other in
balance sheet.
A balance sheet is a snapshot of a business financial condition at a
specific movement in time, usually at the close of an accounting period. A
balance sheet comprises assets, liabilities, and owners or stockholders
equity. The profit & loss account (P&L) is a report of the company’s profit
on the sale of their service over a trading period, normally one year.
The principle tool of financial analysis is financial ratio. Ratio simply
means one figure expressed in term of another. Ratio analysis is the process
of determining and interpreting the numerical relationship based on
financial statement. Financial ratio analysis is the calculation and
comparison of ratios, which are derived from the information in a
company’s financial statement. The level and historical trends of these
ratios can be used to make inferences about a ratio company’s financial
condition, its operations and attractiveness as an investment.
Another method for analyzing working capital position is fund flow
statement. It represents an analysis changes in the working between two
points of time, along with events causing such changes in working capital is
prepared with the help of its current assets and current liabilities.
The basic goal of working capital management is to mange the
12
current assets and current liabilities of a firm in such a way that a
satisfactory level of working capital is maintained ie, neither inadequate nor
excessive. Through this study it is indented to identify present problem
associated with working capital management of IOB Bank and give
valuable suggestions to rectify that problems.
WORKING CAPITAL MANAGEMENT
Nature Of Working Capital
Working Capital Management is concerned with the problem that
arise in attempting to mange the current assets, the current liabilities and the
inter relationship that exists between them. The term current assets refers to
those assets which in the ordinary course of business ca be, or will be,
converted in to cash within one year without undergoing a diminution in
value and without disrupting the operations of the firm. The major current
assets are cash, marketable securities, accounts receivable and inventory.
Current liabilities are those liabilities, which are intended, at their
inspection, to be earnings of the concern. The basic current liabilities are
accounts payable, bills payable, bank over drafts, and outstanding expenses.
The goal of working capital management is to manage the firm’s current
assets and liabilities in such a way that a satisfactory level of working
capital is maintained. This is so because if the firm cannot maintain a
satisfactory level of working capital, it is likely to become insolvent and
may even be forced into bankruptcy. The current assets should be large
13
enough to cover its current liabilities in order to ensure a reasonable margin
of safety. Each of the current assets must be managed efficiently in order to
maintain the liquidity of the firm while not keeping too high a level of any
one of them. Each of the short-term sources of financing must be
continuously managed to ensure that they are obtained and used in the best
possible way. The interaction between current assets and current liabilities
is, the main them of the theory of working capital management.
The basic ingredients of the theory of working capital management
may be said to include its definition, need, optimum level of current assets,
the trade-off between profitability and risk which is associated with the
level of current assets and liabilities, financing-mix strategies and so on.
3.2 CONCEPTS AND DEFINITIONS OF WORKING CAPITAL
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 common definition of net working capital
(NWC) is the difference between current assets and current liabilities;
and
14
(ii) Alternate definition of NWC is that portion of current
assets which is financed with long-term funds.
1. On the Basic of Concepts
On the basic of concepts working capital can be divided into:
Gross working capital and net working capital.
Gross working capital is represented by the total of current assets and
net working capital is the excess of current assets over current liabilities.
Gross working capital = Total of current assets [Bank accounts, Cash
in hand, Deposits, Loans and advances, Stock in hand, Sundry debtors
etc….]
Net working capital = current assets – current liabilities [Duties and
Taxes, Provisions, Sundry creditors etc….]
2. On the Basic of Periodic
Under this classification, working capital can be classified into
Permanent or fixed working capital and Temporary or Variable working
capital.
(i) Fixed or Permanent working capital
It represents that part of working capital, which is permanently
invested in the current assets to carry out the business smoothly. This
investment in current assets is of permanent nature and will increase as the
size of the business expands.
Examples of such investments are: - investment required maintaining
15
the minimum sort of raw material, work – in – progress, finished products,
loose tools etc…
(ii) Variable or Temporary working capital
It changes with the increase or decrease in the volume of business. It
may be divided into Seasonal and Special working capital.
Need for working capital
The need for working capital (gross) or current assets cannot be
overemphasized. Given the objectives of financial decision making to
maximize the shareholder, wealth, it is necessary to generate sufficient
profits. The extent to which profits can be earned will naturally depend,
among other things, upon the magnitude of the sales. A successful sales
programmed is in other words, necessary for earning profits by any business
enterprise. However sales do not convert into cash instantly; there is
invariably a time-lag between the sales of good and the receipts of cash.
There is, therefore, a need for working capital in the form of current assets
to deal with the problem arising out of the
Operating cycle
Lack of immediate realization of cash goods sold. Therefore,
sufficient working capital is necessary to sustain sales activity. Technically,
this is referred to as the operating or cash cycle. The operating cycle can be
said to be at the heart of the need for working capital. ‘The continuing flow
from cash to suppliers, to inventory, to accounts receivable and back into
16
cash is called the operating cycle’. In other words, the term cash cycle to the
length of time necessary to complete the following cycle of events:-
1. Conversion of cash into inventory;
2. Conversion of inventory into receivables;
3. Conversion of receivables into cash.
The operating cycle, which is a continuous process, is shown below
Phase 3
Phase 1
Operating Cycle
17
CashCash
ReceivablesReceivables
InventoryInventory
Cash Debtors
Raw Material Finished Goods
Working – in Progress
(Receivables)
The speed with which the working capital completes one cycle
determines the requirement of working capital. Longer the period of cycle
larger is the requirement of working capital.
Management of Working Capital
The basic goal of working capital management is to manage the
current assets and current liabilities of a firm is such a way that a
satisfactory level of working capital is maintained. Working capital
management polices of affirm have a great effect on its profitability,
liquidity and structural health of the organization. In this context working
capital management is three dimensional in nature.
Excess or inadequate working capital
Every business concern should have adequate working capital to run
its business operation. It should have excess working capital nor inadequate
working capital both excess as well as short working capital positions are
bad for any business. However, out of two it is the inadequacy of working
capital which is more dangerous from the point of view of the firm.
Disadvantages of excess working capital
Excessive working capital means idle funds which earn which no
profit for the business and hence the business cannot earn a proper
rate of return on its investment.
18
When there is excess working capital is may lead to unnecessary
purchasing and accumulation of inventory causing more chance of
theft waste and loss.
Excessive working capital implies excessive defective credit
policy.
It may result into overall in efficiency in the organization.
When there is excessive working capital relation with banks and
other financial institutions may not maintain.
Due to low rate of return or investment the value of shares may
also decrease.
The excess working capital leads to speculative transactions.
Disadvantage of inadequate working capital
A concern which has inadequate working capital cannot pay its
short-term liabilities in time.
It cannot buy its requirements in bulk and avail of discount.
It becomes difficult to for the firm to exploit favorable market
condition and undertake profitable project to lack or working capital.
The firm cannot pay day to day expenses of its operations and it
creates inefficiencies, increases cost and reduce the profit of
business.
It becomes impossible to utilize efficiently the fixed assets due to
non availability of liquid fund.
19
The rate of return on investment also falls with the shortage of
working capital.
3.3 FACTORS DETERMINING WORKING CAPITAL MANAGEMENT
1) Nature or character of the Business
2) Size of Business/Scale of operation
3) Seasonal Variation
4) Working Capital Cycle
5) Credit Policy
6) Business Cycle
7) Rate of growth of business
8) Earning Capacity and Industrial Policy
9) Price Level changes
10) Monetary, Fiscal and Industrial Policies
3.4 TOOLS USED IN WORKING CAPITAL
1) Ratio Analysis
2) Schedule in changes in Working Capital Management
20
ANALYSIS AND INTERPRETATION
4.1 BALANCE SHEET ANALYSIS
Analysis Of Balance Sheet
The balance sheet is one of the important depicting the financial
strength of the concern. It shows on the one hand the properties that utilizes
and on other hand the sources of those properties. The balance sheet shows
all assets owned by the concern and all the liabilities and claims it owners
and outsiders.
Balance sheet is prepared as on a certain data not for a period. The
total of all assets must be equal to the total liabilities. Since capital is noting
but the difference between assets and liabilities to others.
Assets can be put in a balance sheet, in two ways-either in the order
of liquidity or in the order of performance. The order of liquidity is
generally used by sole trader, partnership firms and banks.
21
SUMMARY OF BALANCE SHEET FIGURES FOR LAST
FIVE YEARS
SOURCE OF FUNDS
(Figures in Crore)
Year
Equity
Share
Capital
Preference Share
Capital
Reserve &
Surplus
Unsecured Loans
Total
2007-2008 544.80 - 4197.90 84325.58 89068.28
2008-2009 544.80 - 5396.59 100115.89 106057.28
2009-2010 544.80 - 5804.18 110794.71 117143.69
2010-2011 618.75 - 7546.19 145228.75 153393.69
2011-2012 797.90 - 9989.40 178434.18 189220.58
The applications and sources of funds analysis can be made on the
basis of data given above; graphical presentation of sources of funds can be
analyzed.
Analysis of the sources of funds
The source of funds comprises an equal proportion Loan funds and
Shareholders funds. The above analysis clearly indicated that the financing
pattern of the patter IOB bank LTD has been during the last 5 year. The
proportion of the shareholders funds over the period was same.
Total amount of unsecured loan availed by the company over the 5
year is more than secured loans. The increased portion of unsecured loan
may not be a burden for the company, since the company is going through
22
good business prospectus and continuous level of returns. This company is
maintaining a fixed level of both shareholders funds and loan funds. As the
company is maintaining a fixed proportion of equity, it will ensure a
minimum returns to the equity holders and comparatively more value to the
shares.
Hence IOB bank is one of the companies, which are having adequate
and moderate financing patterns.
23
Table 4.1.1
CURRENT LIABILITIES & CURRENT ASSETS
Year Current Liabilities Current Assets
2007-2008 6323.84 2061.29
2008-2009 7258.26 2340.93
2009-2010 3794.90 2917.70
2010-2011 4875.19 4641.08
2011-2012 5672.50 5352.70
GRAPH SHOWS CURRENT ASSETS & CURRENT LABILITIES FOR THE 5 YEARS
Chart 4.1.1
24
Current Liabilities for the last 5 year shows a phenomenal growth
during the all the 5 years, which is a similar resemblance of the current
assets analysis. I.e. it means the trend of continuous growth of business
prospects of the company. The breakup of current liabilities indicates that
the three components / unearned interest, sundry creditors, other payable are
also resembles a unique trend to that of the total current liabilities.
The table given above shows that the total current liabilities
increasing during the last 5 years. The above analysis is very accurate
because of the fact that it is tune with the trend of other major variables
under consideration and in the process of analysis.
25
ASSETS
Fixed Assets
Fixed assets are those assets, which are employed permanently, or
for a period of more than 6 months normally which regarded as the
fundamental part of the asset base. Plant and Machinery, Land and
Building, Furniture and Fixtures, Motor car etc are considered as fixed
assets. Those assets are meant to increase production capacity of the
business. They are not acquired for sale but are used for a considerable
period of time.
Current Assets
According to Alexander Wall “Current assets are such assets as in
the ordinary and natural courses of business move onward through the
various processes of production, distribution and payment of goods, until
they become cash or its equivalent by which debts may be readily and
immediately paid”. Current assets represent the short term assets like cash
in hand, bank account balance, stock on hire, account receivables etc.
The table below shows current assets position of the company for the
last 5 year as available form the balance sheet.
26
Table 4.1.2
Year Fixed Assets Current Assets Investment
2007-2008 28919.31 10341.32 28474.71
2008-2009 31715.73 10921.90 31215.44
2009-2010 38174.54 9824.64 37650.56
2010-2011 49131.57 12018.66 48610.45
2011-2012 56168.67 16261.10 55565.88
Total 204109.82 59367.62 201517.04
Chart 4.1.2
27
The above analytical figures shows that the resources of the
company are applied mainly on current assets and it is obvious that the ratio
of the current assets increased over the year which means the applications
of funds in productive resources and which is a reason of the productivity of
the company as can be seen from the analysis of balance sheet and profit
and loss account.
28
TABLE SHOWING CURRENT ASSETS, CURRENT LIABILITIES
AND NET CURRENT ASSETS
Table 4.1.3
(Figures in Crore)
Year Current AssetsCurrent
LiabilitiesNet Current
Assets
2007-2008 2061.29 6323.84 -4262.55
2008-2009 2340.93 7258.26 -4917.34
2009-2010 2917.70 3794.90 -877.20
2010-2011 4641.08 4875.19 -234.11
2011-2012 5352.70 5672.50 -319.80
Heavy investment in current assets means that the nature of the
industry needs more working capital than usual business ventures. The
outstanding figures of the loans and advances were showing an increasing
trend over the 5 year. The loan gives more liquidity to the company.
29
CHANGES IN CURRENT ASSETS / NET WORKING CAPITAL
Table 4.1.4
(Figures in Crore)
YearTotal
Current Assets
Net Working Capital
Changes in TCA
Changes in NWC
2007-2008 2061.29 -4262.55 329.18 635.16
2008-2009 2340.93 -4917.34 279.64 654.78
2009-2010 2917.70 -877.20 576.77 4040.13
2010-2011 4641.08 -234.11 1723.38 643.09
2011-2012 5352.70 -319.80 711.62 85.69
The above figure shows that the changes in the total current assets
for all the years. This depicts increase in total current assets. Changes in
total current assets position as shows indicate that the company was in
continuous growth all five year. The company won to not achieve a position
working capital in the all five year. Because the percentage decrease in
current assets are less than the percentage decrease in current liabilities.
30
THE NET WORKING CAPITAL POSITION
An analysis of the last five years net working capital shows that the
company’s working capital position as growing during all the years, and
was in comfortable position. To be accurate net working capital maintained
was almost sufficient with regard to the nature of business and volume of
business transactions that is expected for the forthcoming years also, as can
be seen the figure given above.
The change in Net Working Capital position of the Company shows
that the Net Working Capital was always positive, which means that the Net
Working Capital segment exhibited a phenomenal growth during all the
years expect for the years. The trend is an indicator of the good business
prospects and business growth of the company during most of the years. A
detailed scrutiny of the above figure gives us a picture of the normal
business growth and cordial environment, free from the figures of the last
five years.
31
4.2 RATIO ANALYSIS
Ratio Analysis
The term ‘ratio’ simply means one number expressed in term of
another. It describes in mathematical terms the quantitative relationship that
exists between two numbers. Ratio analysis, simply defined, refers to the
analysis and interpretation of financial statement through ratios. Now a day
it is used by all business and industrial concerns in their financial analysis.
Ratios are considered to be the best guides or the efficient execution of
basic managerial functions like planning, forecasting, control etc.
Accounting ratios are relationships expressed in mathematics terms between
which are connected with each other in some manner.
According to Sir Robert Antony, “Ratio is simply nothing but one
number expressed in terms of another”. A ratio is a means of highlighting in
arithmetical terms the relationship between two or more variables in the
basic financial statement such as income statement or Position statement. A
ratio as a financial analysis can be expressed as percentage, fraction or a
stated comparison between numbers. A single figure by itself has no
meaning, but when expressed in terms of related figure will yield significant
inferences.
Uses or Advantages of Ratio Analysis
Simplification of mass of accounting data.
An invaluable aid to management.
32
Facilitates better coordination and control.
A tool to assess important characteristics of business.
An effective tool of analysis for intra-firm and inter-firm
comparisons.
Limitations of Ratio Analysis
Limitations of Financial Statements.
No fixed standards.
Qualitative factors are ignored.
Lack of Standards formulae.
It is no substitute for personal judgments.
Problems of price level changes.
Financial statements can be analyzed with the help of Funds
Flow/Cash Flow statements analysis on of balance sheet.
1. ANALYSIS OF LIQUIDITY OR LIQUIDITY RATIOS
Liquidity ratios play a key role in assessing the short-term financial
position of the business. Commercial banks and other short term creditors
are generally interested in such an analysis. However managements can
employ these ratios to ascertain how efficiently they utilize the working
capital in the business. This type of ratios normally indicates the ability of
the business to meet the maturing of current debts, the efficiency.
33
4.2.1 CURRENT RATIO
Current Ratio = Current Assets / Current Liabilities
Current Ratios may be defined as the ratio of current assets to current
liabilities. It is also known as Working Capital Ratio or 2:1 Ratio. It shows
the relationship between the total current assets and total current liabilities,
expressed as formulae given below:
Table 4.2.1
Current Ratio
Year Current AssetsCurrent
LiabilitiesCurrent Ratio
2007-2008 2061.29 6323.84 0.325955432
2008-2009 2340.93 7258.26 0.322519446
2009-2010 2917.70 3794.90 0.768847664
2010-2011 4641.08 4875.19 0.951979307
2011-2012 5352.70 5672.50 0.943622741
Interpretation
The Current Ratio of is said to be unfavorable in all the five years.
This shows the liquidity position of the organization. So the company’s
overall position for the past five years is said to be unfavorable.
34
Chart 4.2.1
35
Current Ratio
0
0.2
0.4
0.6
0.8
1
2007-08 2008-09 2009-10 2010-11 2011-12
Year
Rat
io Quick Ratio
4.2.2 Cash Ratio
The cash ratio shows the cash positions with respect to meet current
liabilities Cash Ratio is found by the following method
Cash Ratio = Cash / Current Liabilities
Table 4.2.2
CASH RATIO
Year CashCurrent
LiabilitiesCash Ratio
2007-2008 10341.32 6323.84 1.64
2008-2009 10921.90 7258.26 1.50
2009-2010 9824.64 3794.90 2.59
2010-2011 12018.66 4875.19 2.47
2011-2012 16261.10 5672.50 2.87
Interpretation
The ratio of 0.75:1 is considered as the favorable cash ratio. The cash
ratio of the firm is considered as unfavorable. The overall trend shows
improvement in cash position of the company with respect to meet their
current liabilities.
36
Chart 4.2.2
37
4.2.3 Debt-Equity Ratio
The term Debt-Equity is used to describe the relationship between
debentures and long term loans to equity share capital, preference share
capital and reserves and surplus.
It shows the relationship between debt securities and share holders
funds of an organization.
Debt-Equity Ratio = Total Long-term debt / Equity Shareholders Fund
Table 4.2.3
DEBT-EQUITY RATIO
YearShare Holder
FundTotal Long Term Debts
Debt-Equity Ratio
2007-2008 4856.67 90679.23 18.67
2008-2009 7150.96 106664.17 14.91
2009-2010 7524.58 119776.91 15.91
2010-2011 9324.93 164584.15 17.64
2011-2012 11927.66 202048.03 16.93
Interpretation
The standard ratio of 1:1 is considered to be good but the company
did not maintain their shareholder funds in a proper way in all the five year.
The overall ratio for the five years shows an improvement in the debt equity
position.
38
Chart 4.2.3
39
4.2.4 Capital Gearing Ratio
Capital gearing ratio shows the relation between fixed interest
bearing securities and non fixed interest bearing securities. Fixed interest
bearing securities include debentures, preference share capital and long
term loans. Non fixed interest bearing securities include the equity share
capital, reserves and surplus etc.
Capital Gearing Ratio = Fixed interest bearing securities / Non fixed interest bearing securities
Table 4.2.4CAPITAL GEARING RATIO
YearFixed Interest
Bearing Securities
Non Fixed Interest Bearing
Securities
Capital Gearing Ratio
2007-2008 6353.65 4742.701.33966
2008-2009 6548.28 5941.391.10214
2009-2010 8982.20 6348.981.41474
2010-2011 19355.40 8164.942.37055
2011-2012 23613.85 10786.402.18922
Interpretation
In the year 2007-2008 the capital gearing ratio is 1.34 and it
increasing in the next four year 2008-2012.
40
Chart 4.2.4
41
4.2.5 Return on Total Assets Ratio
Return on total assets shows the relation between the net profit after
interest and tax to total assets.
Return on total assets = Net profit after interest and tax / Total assets
Table 4.2.5
RETURN ON TOTAL ASSETS RATIO
Year EBIT Total AssetsReturn on total
assets
2007-2008 1724.62 101859.73 1.693132
2008-2009 2088.65 121073.40 1.725110
2009-2010 1043.57 131096.40 0.976032
2010-2011 1824.76 178784.27 1.020649
2011-2012 1889.86 219648.17 0.860403
Interpretation
In the year 2007-2008 the return on total assets ratio is 1.69. the ratio
is maintain by the organization till 2011-2012.
42
Chart 4.2.5
43
4.2.6 Fixed Assets Turnover Ratio
Fixed assets turnover ratio shows the relationship between net fixed
assets after depreciation with net sales.
Fixed Assets Turnover Ratio =
Table 4.2.6
FIXED ASSETS TURNOVER RATIO
Year Fixed Assets Net EarningsFixed Assets
Turnover Ratio
2007-2008 28919.31 7986.25 0.276
2008-2009 31715.73 9641.40 0.303
2009-2010 38174.54 10245.77 0.268
2010-2011 49131.57 12101.47 0.246
2011-2012 56168.67 17897.08 0.318
Interpretation
In the year 2007-2008 the fixed assets turnover ratio is 0.28 and it
gradually increased and reached at 0.32 in the year 2011-2012 and shows
the better and efficient utilization of fixed assets.
44
Chart 4.2.6
45
4.2.7 Return on Capital Employed
The profits are related to total capital employed. The capital
employed refers to long term funds supplied by the lenders and owners of
the firm. The capital employed is equal to concurrent liabilities plus
owners’ equity. Alternatively it is equivalent to net working capital plus
fixed assets. The higher the ratio the more efficient is the use of capital
employed.
Return on capital Employed =
Table 4.2.7
RETURN ON CAPITAL EMPLOYED
Year EBITTotal Capital
EmployedReturn Capital
Employed
2007-2008 1724.62 89068.28 1.936
2008-2009 2088.65 106057.28 1.969
2009-2010 1043.57 117143.69 0.890
2010-2011 1824.76 153393.69 1.189
2011-2012 1889.86 189220.57 0.998
Interpretation
All the five year 2007-2008 to 2011-2012 the Return capital
employed is maintain a steady rate.
46
Chart 4.2.7
47
4.2.8 Current Liability To Total Liability Ratio
Formula to find out current Liability to Total Liability is
Current Liabilities / Total Liabilities
Table 4.2.8
CURRENT LIABILITY TO TOTAL LIABILITY RATIO
Year Total LiabilitiesCurrent
Liabilities
Current Liability to
Total Liability ratio
2007-2008 95535.90 6323.84 0.066
2008-2009 113815.14 7258.26 0.063
2009-2010 127301.50 3794.90 0.298
2010-2011 173909.09 4875.19 0.028
2011-2012 213975.68 5672.50 0.026
Interpretation
The current liability to total liability ratio is maintained a steady ratio
throughout the five year. This shows the portion of current liability in total
liability. The current liabilities are paid out of within a short period of time.
The overall long term liabilities of the organization is said to be very high.
48
Chart 4.2.8
49
4.2.9 Current Assets To Total Assets Ratio
The formula used to find out Current Assets to Total Assets Ratio is
Current Assets / Total Assets
Table 4.2.9
CURRENT ASSETS TO TOTAL ASSETS RATIO
Year Total Assets Current AssetsCurrent Assets to Total Assets
ratio
2007-2008 101859.73 2061.29 0.020
2008-2009 121073.40 2340.93 0.019
2009-2010 131096.40 2917.70 0.022
2010-2011 178784.27 4641.08 0.025
2011-2012 219648.17 5352.70 0.024
Interpretation
The current asset to total asset ratio is maintained a steady ratio
throughout the whole five year 2007-2008 to 2011-2012. This ratio shows
the portion of current assets in the total assets. The amount of current assets
to total assets are said to be very low.
50
Chart 4.2.9
51
0
0.005
0.01
0.015
0.02
0.025
Ratio
2007-08 2008-09 2009-10 2010-11 2011-12
Year
Current Assets To Total Assets Ratio
Current Assets To TotalAssets Ratio
4.2.10 Operating Profit Ratio
Every enterprise has a typical operating ratio. Operating ratio
indicates the operating efficiency of the company. It depicts the cost picture
or the debit aspect of the profit margin higher the operating ratio, given a
level of sales, lower will be the profit margin or the net profit ratio.
Operating Profit / Net Earnings X 100
Table 4.2.10
OPERATING PROFIT RATIO
YearOperating
ProfitNet Earnings
Operating Profit Ratio
2007-2008 6136.11 7986.25 76.83
2008-2009 7130.29 9641.40 73.95
2009-2010 6995.79 10245.77 68.28
2010-2011 8342.73 12101.47 68.94
2011-2012 12497.58 17897.08 69.83
Interpretation
In the year 2007-2008 operating profit ratio is favorable than
compare to another year, in the year 2007-2008 it reach 76.83 and other
years comparatively low, but it is increased in the year 2011-2012 it reach
69.83.
52
Chart 4.2.10
53
4.2.11 Net Profit Ratio
Net Profit ratio measures the rate of net margin earned on sales. The
profit is usually only the operating income i.e., income from non-trading
assets and expenses, which do not relate to trading of manufacturing are not
included, the higher the ratio, the better it is.
Net Profit Ratio =
Table 4.2.11
NET PROFIT RATIO
Year Net Profit Net Earnings Net Profit Ratio
2007-2008 1202.34 7986.25 15.06
2008-2009 1325.79 9641.40 13.75
2009-2010 706.96 10245.77 6.90
2010-2011 1072.54 12101.47 8.86
2011-2012 1050.13 17897.08 5.87
Interpretation
In the year 2007-2008 the net profit ratio is in a favorable position
that is 15.06 but it is gradually deceased and in the year 2011-2012 it reach
5.87 it shows a decrease in trend.
54
Chart 4.2.11
55
PRESENT WORKING CAPITAL POSITION AND POLICIES
Table 4.2.12
Year Current AssetsCurrent
LiabilitiesNet Current
Assets
2007-2008 2061.29 6323.84 -4262.55
2008-2009 2340.93 7258.26 -4917.34
2009-2010 2917.70 3794.90 -877.20
2010-2011 4641.08 4875.19 -234.11
2011-2012 5352.70 5672.50 -319.80
CURRENT ASSETS AND CURRENT LIABILITIES
56
Chart 4.2.12
57
4.3 COMPARITIVE STUDY OF WORKING CAPITAL
MANAGEMENT
Schedule of change in working capital 2008-2009
Particulars 2008 2009 Increase Decrease
Current Assets
Loans & Advances and other current assets
Current Liabilities
C.A – C.
Working Capital
2061.29
6323.84
4262.55
654.78
2340.93
7258.26
4917.33
279.64
654.78
934.42
4917.33 4917.33 934.42 934.42
Interpretation
In 2008 the current assets is 2061.29 and in 2009 it is 2340.93 so
current assets is increased by 279.64. And the current liability in 2008 is
6323.84 and in 2009 it is 7258.26 and it is increased by 934.42. Total
working capital increased by 654.78 because of increase in current liability
is more than current assets.
58
Schedule of change in working capital 2009-2010
Particulars 2009 2010 Increase DecreaseCurrent Assets
Loans & Advances and other current assets
Current Liabilities
C.A – C.L
Working Capital
2340.93
7258.26
4917.33
2917.70
3794.90
877.20
4040.13
576.77
3463.36
4040.13
4917.33 4917.33 4040.13 4040.13
Interpretation
In 2009 the current assets is 2340.93 and in 2010 it is 2917.70 so
current assets is increased by 576.77. And the current liability in 2009 is
7258.26 and in 2010 it is 3794.90 and it is increased by 3463.36. Total
working capital decreased by 4040.13 because of increase in current
liability is more than current assets.
59
Schedule of change in working capital 2010-2011
Particulars 2010 2011 Increase DecreaseCurrent Assets
Loans & Advances and
other current assets
Current Liabilities
C.A – C.L
Working Capital
2917.70
3794.90
877.20
4641.08
4875.19
234.11
643.09
1723.38
1080.29
643.09
877.20 877.20 1723.38 1723.38
Interpretation
In 2010 the current assets is 2917.70 and in 2011 it is 4641.08 so
current assets is increased by 1723.38. And the current liability in 2010 is
3794.90 and in 2011 it is 4875.19 and it is increased by 1080.29. Total
working capital decreased by 643.09 because of increase in current liability
is more than current assets.
60
Schedule of change in working capital 2011-2012
Particulars 2011 2012 Increase Decrease
Current Assets
Loans & Advances and other current assets
Current Liabilities
C.A – C.L
Working Capital
4641.08
4875.19
234.11
85.69
5352.70
5672.50
319.80
711.62
85.69
797.31
319.80 319.80 797.31 797.31
Interpretation
In 2011 the current assets is 4641.08 and in 2012 it is 5352.70 so
current assets is increased by 711.62. And the current liability in 2011 is
4875.19 and in 2012 it is 5672.50 and it is increased by 797.31. Total
working capital increased by 85.69 because of increase in current liability is
more than current assets.
61
FINDINGS, SUGGESTIONS AND CONCLUSION
5.1 FINDINGS
The Current Ratio of the company is said to be unfavorable in all the
five years but in last year the ratio reached at least nearer to the
standard ratio. This shows the liquidity position of the organization.
So the company’s liquidity position is not at all favorable in all the
five years.
The company wants to achieve the standard Quick Ratio. The ratio is
at most favorable.
The cash ratio of the firm is not considered as good. The five year
the ratio shows a good management of cash. The overall trend shows
improvement in cash position of the company with respect to meet
their current liabilities.
Debt-Equity ratio of the organization is not constructive. The
standard ratio of 1:1 is considered to be good but the company didn’t
maintain their shareholders funds in a proper way.
Fixed Assets Turnover Ratio is directly related with the effective
utilization of fixed assets. A high ratio is said to be favorable,
organization wants to maintain a poor ratio.
The company’s working capital is not favorable in all the five years.
62
Operating Profit Ratio of the company is satisfactory. The company
gained a high amount of profit in the year 2011-2012. The Operating
Profit Ratio of the company shows the level of operating expenses. A
lower operating ratio is preferable by the organization because it
shows a higher operating profit.
The Net Profit Ratio of the company is not satisfactory.
As per the capital gearing ratio the portfolio of fixed interest bearing
securities are more than the non fixed interest bearing securities. This
means the excess of outsider ‘funds over owners’ fund. It shows the
long-term solvency position of the organization and it is said to be
favorable.
Return on capital employed shows the earning capacity of the
organization. In 2011-12 the ratio shows a poor figure that means
unconstructive earning by the company in that year.
5.2 SUGGESTIONS
The company must try to increase their current ratio by reducing
their short term liabilities
The organization must maintain a proper cash management.
The company can raise their funds through issuing non fixed interest
securities to public so that organization can increase long-term
solvency position.
63
By investing more funds in current assets or reducing the level of
current liabilities the organization can achieve favorable working
capital position.
The net profit of the organization should be increased by reducing
the cost of operation.
The Return on investment such as return on capital employed and
return on assets should be increased along with the net earning so
that the company’s overall profitability will be increased.
The organization should give priority to liquidity, solvency and
profitability so that they improve their operations.
5.3 CONCULSION
The regular educational prospectus provides only the theoretical
knowledge to the students but these kinds of project works are very helpful
to them for acquiring knowledge regarding the operation, functions of a
business unit about how an organization is working capital is the life blood
and nerve centre of a business. Since the topic is finance, the collections of
data are much related to the secondary sources.
The study of working capital management provides the researcher
with a lot of knowledge regarding how an organization collects the funds
from various sources and its effective utilization. The ratio analysis is very
helpful to obtain the liquidity and solvency position of an organization. In
general practice, working capital refers to the excess of current assets over
64
current liabilities. Management of working capital therefore is concerned
with the problem that arises in attempting to manage current assets, current
liabilities and inter relationship that exists between them. Working capital
management policies of a firm have great effort on its profitability, liquidity
and structural health of the organization.
65
BIBLIOGRAPHY
BOOKS
V.K.Bhalla, “Working Capital Management”, Anmol Publications
Pvt.Ltd New Delhi, 9th edition 2008.
C.R.Kothari, “Research Methodology”, Viswaprakashan Publication,
New Delhi, 1990.
Prasanna Chandra, “Financial Management”, Tata Mc Graw Hill
Publishing Co, Ltd, New Delhi, 1997.
WEBSITES
www.iobbank.com
JOURNAL
Annual Report of the IOB Bank.
66