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AMERICAN POWER CONVERSION CORPORATION
INTRODUCTION
American Power Conversion provides protection against many of the primary causes of
data loss, hardware damage and downtime. Founded in 1981, APC is a leading provider
of global, end-to-end AC and DC-based back-up power products and services, which
include surge suppressors, uninterruptible power supplies (UPS), power conditioning
Nb equipment, power management software, and DC power systems as well as precision
cooling equipment, and professional and consulting services for Nonstop Networking.
APC, known for Legendary Reliability, sets the standard for quality, innovation and
support for power protection solutions from desktop systems to data center operations to
entire facilities. Its comprehensive solutions, which are designed for both home and
corporate environments, improve the manageability, availability and performance of
sensitive electronic, network, communication and industrial equipment of all sizes.
APC sets itself apart from the competition in several ways:
Global one-stop solutions - APC provides worldwide access to "best-of-breed"
offerings;
Financial strength - APC's financial strength makes it an attractive partner;
Efficient manufacturing- APC provides high quality products to customers
worldwide;
Innovative product offerings - APC designs solutions to address "real" customer
needs.
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INFRASTRUCTURE
APCs Infrastructure is on-demand architecture for network-critical physical
infrastructure (NCPI). The Infrastructure design, which integrates power, cooling, rack,
management and services, allows the selection of standardized, modular components to
create a customized solution. This standardization coupled with the APC Design Portal
enables an easily scalable architecture designed to meet changing needs and future
expansion. This patent-pending approach provides increased availability, improved
adaptability and speed of deployment as well as lowered total cost of ownership for IT
environments from wiring closets to computer rooms to data centers.
APC'S CORPORATE MISSION
The mission of APC is to create delighted customers by improving the manageability,
availability, and performance of information and communication systems through rapid
development and delivery of innovative solutions to real customer problems.
GLOBAL PRESENCE
APCs corporate offices are located in West Kingston, Rhode Island. The Company has
sales offices throughout the world; manufacturing facilities in the U.S., Ireland,
Switzerland, Denmark, Philippines, China, India, and Brazil; and ships product to
approximately 160 countries. In 2005, 52% of APCs revenues were in the Americas
(North and Latin America), 30% were in Europe, the Middle East and Africa and 18%
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were in Asia. As of December 31, 2005, APC had approximately 7,580 full-time
employees worldwide.
APC HISTORY
Three Massachusetts Institute of Technology (MIT) Lincoln Labs' electronic power
engineers founded American Power Conversion in 1981. At the time, the research and
development efforts of these three men were focused on solar power. Over the next few
years, APC shifted its focus to power protection introducing its first UPS, the 750, in
1984. The need for capital to support this growing business was satisfied in July 1988
when APC became a publicly held company. The stock, trading under the symbol
"APCC," was priced at $7.50, or $.125 per share when adjusted for stock splits.
Over the years, APC has developed a global, end-to-end, product offering targeted at four
strategic application areas: Home/Small Office; Business Networks; Access Providers;
and Data Centers & Facilities. Internal product development has been augmented with
strategic acquisitions to form an industry leading product portfolio. Throughout the
world, the APC brand has become synonymous with quality power back-up and
management solutions.
KEY APPLICATION AREAS
Today, the Company focuses its efforts on four key application areas:
Home/Home Office
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Business Networks
Access Provider Networks
Data Centers and Facilities
Each requires customized efforts for products, sales and marketing, but each has a
common theme: high availability is increasingly essential. APC is positioning itself to be
the preferred brand worldwide in all four of these application areas.
RECOGNITION AND AWARDS
Over the years, APC has received hundreds of awards worldwide-- more than any other
UPS manufacturer. Such designations have recognized APC both for its reliable
solutions and its overall business performance. The company is among the most
recentFortune 1000 companies and is part of the closely watched S&P 500 Index and the
Nasdaq 100 Index. For its products, APC receives global recognition for its reliability
and innovation.
APC's Vision & Mission
APC's Vision
APC products ensuring availability wherever data is created, transmitted or stored.
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APC's Mission
To create delighted customers by improving the manageability, availability and
performance of information and communication systems through the rapid delivery of
innovative solutions to real customer problems.
APC's Philosophy
To listen to our customers.
Their wants, needs and wishes are our strategic blueprint.
To justify our expenditures as they relate to our goals.
To quantify all aspects of our business in order to create benchmarks for success.
To avoid bureaucracy.
Employees must make direct contributions to our goals.
To emphasize quality.
We believe that good enough never is.
To respond quickly and decisively to opportunity.
To create an environment where ideas are encouraged, recognized and rewarded.
To help employees grow personally and professionally.
To work together toward our goals and be rewarded together when they are achieved.
To commit to leadership in every aspect of our business.
APC History
American Power Conversion, incorporated in March 1981, was founded by three
electronic power engineers from the Massachusetts Institute of Technology. At the time,
the research and development efforts of these three men were focused on solar electricity.
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Over the next few years, government funding and incentives in the solar arena began to
dry up. In response, APC
shifted its focus to power
protection, introducing its first
UPS in 1984, the 750. The need
for capital to support this
growing business was satisfied
in July 1988 when APC became
a publicly traded company. The stock, trading under the symbol "APCC," was priced at
$.125 per share when adjusted for stock splits.
During this time, it was well known that computer systems required back-up power
solutions. It was quite common for a mainframe computer to have a large uninterruptible
power supply (UPS) and generator installed in tandem. APC came at the market from a
different perspective. Industry trends involving the personal computer made APC
management realize that smaller UPSs were necessary for the market that included
personal computers, PC servers and their networks.
Over the years, APC has developed a global, end-to-end, product offering targeted at four
strategic application areas: Home/Small Office; Business Networks; Access Providers
and Data Centers & Facilities. Internal product development has been augmented with
strategic acquisitions to form an industry leading product portfolio. Throughout the
world, the APC brand has become synonymous with quality power back-up and
management solutions.
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Today, APC is a leader in its industry, employing over 5,000 people worldwide, and is
listed among the prestigious Fortune 1000, Forbes 500, Nasdaq 100 and S&P 500
rankings.
Executive Leadership
Laurent Vernerey
President and CEO
Karen Miranda
Chief Financial Officer
Jim Simonelli
Senior Vice President
Chief Technology
Officer
Neil Rasmussen
Senior Vice President of
Innovation
Rob McKernan
Leonid Mukhamedov
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President
Americas
President
Europe, Middle East and Africa
Philippe Arsonneau
President
Asia Pacific and Japan
Chenhong Huang
Senior Vice President
Greater China
WORKING CAPITAL MANAGEMENT LETREATURE
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
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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.
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.
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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.
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:
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1. Management of Long Term Assets
2. Management of Long Term Capital
3. 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.
The working capital management includes decisions
i. How much stock/inventory to be hold
ii. How much cash/bank balance should be maintained?
iii. How much the firm should provide credit to its customers?
iv. How much the firm should enjoy credit from its suppliers?
v. What should be the composition of current assets?
vi. What should be the composition of current liabilities?
For eg., 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
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instance, the laborers are pain only periodically. Therefore, a certain amount of funds is
automatically available to finance the current assets requirements. However, the
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?
a. Conversion of cash into raw materials
b. Conversion of raw materials to finished goods
c. Conversion of finished goods into receivables
d. Conversion of receivables into cash
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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.
2.Concepts & Definitions of Working Capital
There are two concepts of working capital
1.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.
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2.Net Working Capital: It is a measure of liquidity and it can be defined in two ways.
a.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.
b.It is that portion of the firms current assets, which is financed by long term funds.
Nett 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 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.
3. Objectives of Working Capital Management
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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.
i. To minimize the amount of capital employed in financing the current assets. This also
leads to an improvement in the Return of Capital Employed.
ii. 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.
iii. 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.
4. Types of Working Capital
A. Permanent Working Capital
B. Temporary Working Capital
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. However the
magnitude of working capital required will not be constant, but will fluctuate. At any
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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.
5. 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:
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a. Nature and Size of Business
b. Production Cycle
c. Business Cycle
d. Production Policy
e. Credit Policy
f. Growth & Expansion
g. Proper availability of raw materials
h. Profit level
i. Inflation
j. Operating Efficiency
6. 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 within the same industry.
Operating Cycle method points towards the length of time considered necessary to
complete the following cycle of events:
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a. Purchase of raw materials by converting cash
b. Storage of raw materials including for buffer stock and safety margin
c. Conversion of raw materials into work in progress
d. Conversion of work in progress into finished goods
e. Conversion of finished goods into debtors and bills receivable
f. 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.
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
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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. For
providing of services and creating of products results 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:
7. 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.
a. Trade Credits
b. Bank Credit
c. Current provisions and non-bank short term borrowings: and
d. 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
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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.
8. 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 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.
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INTRODUCTION
Proper management of working capital is very important for the success of an
enterprise. Constant management is required to maintain appropriate levels in the various
working capital components. It aims at protecting the purchasing power of assets and
maximizing the return on investment. It has been found that the major portion of a
financial managers time is utilized in the management of working capital.
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The management of working capital also helps the management in evaluating
various existing or proposed financial constraints and financial offerings. The two vital
aspects of corporate business life are liquidity and profitability
WORKING CAPITAL
Meaning:
The term working capital refers to that portion of an organization capital which is
required in the short-run to finance current assets such as debtors, cash balance, bank
balance, marketable securities, bills and inventory. The value of these assets keeps
changing over a period.
Working capital has to be regarded as one of the conditioning factors in the long-
run operations of a firm, which is often inclined to treat it as an issue of short- run
analysis and decision-making. The skills of working management are somewhat unique
thought the goals are the same as in managing warrant asset individually viz. to make
an efficient use of fonder for minimizing the risk of breaks to attain profit objectives.
DEFINITION
Working capital is amount of funds necessary to cover the costs of operating the
enterprise. According to the institute of chartered accountants of India, working capital
means the funds available for day-to-day operations of an enterprise.
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CONCEPTS OF WORKING CAPITAL
There are two concepts regarding the meaning of working capital.
a) Net working capital
b) Gross working capital
NET WORKING CAPITAL
The net working capital concept is a qualitative concept indicating the soundness by
the current ratios viz Current assets or current liabilities. The net concept of working
capital is suitable for proprietary, capital and management are united.
Net working capital to the difference between current assets and current liabilities are
those claims of outsiders, which are expected to mature for payment within an accounting
year and include creditors (accounts payable), bills payable and outstanding expenses.
Net working capital can be positive or negative. A positive net working capital will
arise when current assets exceed current liabilities. A negative net working capital occurs
when current liabilities are in excess of current assets. This concept refers to the
differences between, the net working capital help the management loan for permanent
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sources for its financing since working capital under this approach does not increase with
increases in short-term borrowings
GROSS WORKING CAPITAL
The working capital refers to the firms total investment in current assets. It is also
called the circulating capital. It is equal to the total sum of current assets only and it may
represent both owned capital as well as loan capital used for financing the current assets.
Current assets are the assets which can be converted into cash within an
accounting year and include cash, short-term securities, and debtors (accounts receivable
or book debts) bills receivables and stock (inventory).
RATIONALITY OF THE STUDY
Working capital management policies have a great effect on firms profitability,
liquidity and its structural health. Therefore, the basic goal of working capital
management is to manage each firms current assets and current liabilities in such a way
that, as acceptable level of net working capital is always maintained in the business.
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Each current asset must be managed in order to maintain the firms liquidity wile not
keeping too high level of any one of them. It ultimately assists in increasing the
profitability of the concern. Hence, the problem of efficient management of working
capital is to establish a trade-off between liquidity and profitability.
As a matter of fact a business cannot survive in the absence of a satisfactory ratio
between its current assets and current liabilities. Further more its ability to prosper will
be largely determined by the composition of the current assets pool. Management in
setting policies with respect to general operations, purchasing, financing, expansion and
dividend must work within the limitations set by the working capital position.
Hence, we can conclude that the strategies of a firm should be in such a way that it
establishes company trade-off between current assets and current liabilities properly for
achieving outstanding results. Thus, the estimation of working capital affects the firms
stability, which follows the basis for this analysis undertaken. This analysis includes not
only finding out reasons for bad outcomes in the past time but also for justifying the
estimations.
LITERATURE REVIEW
FINANCE:
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In our present day economy, finance is defined as the provision of money at the time
when it is required. Every enterprise whether big, medium or small, needs finance to
carry on its operations and to achieve its targets. Finance refers to the management of
flow of money through an organization. It concerns wit the application of skills in the
manipulation, use and control of money. In fact, finance is so indispensable today that it
is rightly said that it is the lifeblood of an enterprise. Without adequate finance, no
enterprise can possibly accomplish its objectives.
WORKING CAPITAL:
Working capital is the excess of current assets over current liabilities. It is
required for running the day-to-day affairs of the unit. According to Shabin, working
capital is the amount of funds necessary to cover the cost of operating the enterprise.
According to Genstenberg, working capital means current assets of a company that are
changed in the ordinary course of business from one form to another. For e.g. from
cash to inventories, inventories to receivables, receivables to cash.
NEED FOR WORKING CAPITAL:
Every business needs some amount of working capital. The need for working
capital arises due to the time gap between production and realization of cash from sales.
There are time gaps in purchase of and production of and production; production
and sales and sales and realization of cash. Then, working capital is needed for the
following purposes.
For the purchase of raw materials, components and spares.
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To pay wages and salaries.
To incur day-to-day expenses and overhead costs such as fuel power and office expenses.
To meet the selling costs such as packing, advertising etc.
To provide credit facilities to the customers.
To maintain the inventories of raw materials, work-in-progress, store spares and finished
stock.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital
1. Gross Working Capital
2. Net Working Capital
GROSS WORKING CAPITAL
Gross working capital, simply called as working capital refers to the firms investment in
current assets. Current assets are the assets, which in ordinary course of business can be
converted into cash within an accounting year.
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Examples of Current Assets:
Cash and Bank Balances
Short term loans and advances
Bill Receivables
Sundry Debtors
Inventory
Prepaid Expenses
Accrued Income
Money Receivable in 12 month
The gross working capital concept focuses attention of two aspects of current assets
management.
Optimum investment in current assets and
Financing of current assets.
The consideration of the level of investment in current assets should avoid two danger
points-excessive and inadequate investments in current arranging funds to finance current
assets. Whenever a need for working capital funds arises due to the increasing level of
business activity or for any other reason arrangement should be made quickly.
NET WORKING CAPITAL
Net working capital refers to the difference between the current assets and current
liabilities. Current liabilities are those claims of outsides, which are accepted, to mature
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for payment with an accounting year and include creditors, bills payable and outstanding
expenses.
Net working capital = current assets current liabilities
Net working capital can be positive or negative. A positive net working capital will arise
when current assets exceeds current liabilities. It is a quantitative concept. It indicates the
liquidity position of the firm and suggests the extent to which working capital needs may
be financed by permanent sources of funds.
TYPES OF WORKING CAPITAL
Working capital can be classified into two categories i.e.
Permanent working capital
Temporary or variable working capital
PERMANENT WORKING CAPITAL
It is the minimum amount of investment in all current assets which is required at all
times to carry out minimum level of business activities. Tandon Committee has reserved
to this type of working capital as Core Current Assets.
CHARECTERISTICS OF PERMANENT WORKING CAPITAL
Amount of permanent working capital remains in the business in one form or
another. It also grows with the size of the business. It is permanently needed for the
business, and therefore, it should be financed out of long term funds.
VARIABLE WORKING CAPITAL
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The amount of working capital over permanent working capital is known as
variable working capital. The amount of such working capital keeps on fluctuating from
time to time on the business activities. It may again be subdivided into seasonal working
capital and special working capital. Seasonal working capital is required to meet the
seasonal demands of busy periods occurring at stated intervals on the other hand, special
working capital is required to meet extraordinary needs for contingencies.
APPROCHES FOR FINANCING WORKING CAPITAL
There are three approaches to financing the working capital.
Matching approach
Conservation approach
Aggressive approach
MATCHING CONCEPT
The firm can adopt a financial plan, which matches the expected life of assets with the
expected life of the source of funds raised to finance assets. The firm follows matching
approach, long term financing will be used to finance fixed assets and permanent current
assets and short term financing temporary or variable current assets. However, it should
be realized that exact matching is not possible because of the uncertainty about the
expected life of the assets. The firms fixed assets and permanent current assets are
financed with long-term funds and as the level of these assets increases, the long term
financing level also increases. The temporary or variable current assets are financed with
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short-term funds and as their level increases, the level of short-term financing also
increases.
2.COSERVATIVE APPROACH
A firm is practice may adopt a conservative approach in financing its current and fixed
assets. The financing policy of the firm is said to be conservative when it depends more
on long-term funds for financing needs. Under a conservative plan, the firm finances its
permanent assets and also a part of temporary current assets with long term financing. In
the periods when the firm has no need for temporary current assets, the idle long-term
funds can be invested in the tradable securities to conserve liquidity. The conservative
plan relies heavily on long term financing.
3.AGGRESIVE APPROACH
A firm may be aggressive in financing its assets. A firm follows aggressive policy
when it uses more short-term financing than warranted by the matching plan. Under an
aggressive policy, the firm financing a part of its permanent current assets with short-
term financing. Some extremely aggressive firms may even finance a part of their fixed
assets with short-term financing.
DANGER OF EXCESSIVE WORKING CAPITAL
A firm may be tempted to over trade and lose heavily.
Unable to extract benefits of customer credit.
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The situation may lead to unnecessary purchases and accumulation of inventories. This
cause more chances of theft, waste, losses etc.
There arises an imbalance between liquidity and profitability.
Excessive working capital means funds are idle.
The situation leads to greater production, which may not be having matching demand.
The excess of working capital leads to carelessness about cost of production.
DETERMINANTS OF WORKING CAPITAL
The need of working capital is not always the same it varies from year to year or even
month to month depending upon a number of factors. There is no set of rules or formulae
to determine the working capital needs of the firm. Each factor has its own importance
and the importance of the factors changes for a firm overtime.
In order to determine the proper amount of working capital of a concern, the following
factors should be considered carefully.
1.NATURE OF BUSINESS
The amount of working capital is basically related to the nature and volume of
business in concerns where the cost of the raw materials to be used in the manufacturing
of a product is very large in proportion to its total cost of manufacturing the requirement
of working capital will be very large.
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2.SIZE OF BUSINESS UNIT
The size of the business unit has an important impact on its working capital needs.
Size ma be measured in terms of scale of operation. A firm with larger scale of operation
will need more working capital than a small firm.
3.SEASONAL VARIATION
Seasonal industries require more working capital to stock the raw materials during the
season.
4.TIME CONSUMED IN MANUFACTURING
The average time taken in the process of manufacture is also an important factor in
determining the amount of working capital. The longer the period of manufacturing the
larger the inventory required.
5.TURNOVER OF CIRCULATING CAPITAL
Rapidly of turnover determines the amount of working capital. The faster the sales the
larger the turnover hence less working capital.
6.GROWTH AND EXPANSION
Growing concerns requires more working capital than those that are static. It is
logical to expect larger amount of working capital in a growing concern to meant its
growing needs of funds.
7.INVENTORY TURNOVER
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With a better inventory control, a firm is able to reduce its working capital
requirements. If the inventory turnover is high the working capital requirements will be
low.
8.DIVIDEND POLICY
Dividend policy and working capital are interrelated. Management takes a view of
current assets before declaring a dividend.
9.PRICING LEVEL CHANGES
Rising price level requires more working capital to maintain the same level of current
assets.
10.TERM OF PURCHASE AND SALE
Terms of purchase and sales affect the amount of working capital. The practice of
cash purchases with credit sales requires more working capital.
SOURCES OF WORKING CAPITAL
After determining the level of working capital on the basis of various determinants the
next step is to consider how it will be financed. A large manufacturing concern may
procure funds from various sources to meet its working capital requirements from time to
time. For the convenience of study the sources of working capital may be classified
under two heads.
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Sources of long term or regular working capital
Sources of short term or seasonal working capital
Sources of Long Term Working Capital:
The long term working capital requirements can be met from the following sources.
1.ISSUE OF SHARES
It is the safest way of procuring permanent and regular working capital without any
fixed charges.
2.ISSUE OF DEBENTURE
Regular and long term working capital may be obtained at lower cost of trade on
equity.
3.RETAINED PROFITS
Accumulated large profits are also considered to be a good source of financing long-
term working capital requirements. It is the best and the cheapest source of finance.
4.SALE OF FIXED ASSETS
If there is any idle fixed assets in the firm can be sold out and the proceeds may be
utilized for financing the working capital requirements.
Sources of Short term Working Capital:
The sources of short-term working capital may be classified in two heads.
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1. Internal sources
2. External sources
INTERNAL SOURCES
Under this category the sources of working capital are tapped from within the internal
sources are depreciation funds, provision for taxation and accrued expenses.
1.DEPRICIATION FUND
Depreciation funds created out of profits provided they are invested in or represented
by assets.
2.PROVISION FOR TAX
There remains a time lag between making the provision for and payment of taxation.
A company may utilize such provision during the intermittent period temporarily.
3.ACCURED EXPENSES
The company sometimes postpones the payment of certain expenditure due to
finalization of the accounts. These accrued expenses also constitute an important source
of working capital.
EXTERNAL SOURCES
External sources mean the sources providing finance for companys working capital
other than those of internal sources. These may be enumerated as given below.
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1.NORMAL TRADE CREDIT
Creditors provide short-term finance to the company by selling the goods, inventories
and equipment on the basis of deferred payment. It is very common source of short-term
finance and normally every concern use this source as a normal trade practice.
2.CREDIT PAPERS
Bills payable or promissory note, which may be discounted from bankers for meeting
short term capital by the drawer.
3.BANK CREDIT
The greater part of the working capital is supplied by commercial banks to their
customers through direct advances in the shape of loans, cash credit or over draft and
through discounting the credit, papers, e.g. bills payable and promissory notes etc.
4.CUSTOMER CREDIT
Advance may also be obtained from customers against the contracts entered into b the
enterprise such advances are generally asked for, by the companies manufacturing large
plants and machinery involving longer time in completing the process of manufacturing
e.g. ship building industries. The amount can be used for purchasing raw materials,
paying wages and so on.
5.PUBLIC DEPOSITS
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Most of the companies in recent years depend on this source to meet their working
capital requirements. Under the companies Act 1956 a company is authorized to raise
funds equal to 25% of paid up capital and free reserves b this source.
6.GOVERNMENT ASSISTANCE
Central and state governments of the country provide short-term finances to industries
or businesses by allowing tax concessions, sanctioning direct loans or grants to industries
or a class of industries to assist their production programs etc.
WORKING CAPITAL POLICY
Working capital management policies have a great effect on firms profitability,
liquidity and its structural health. A finance manager should therefore, chalk out
appropriate working capital policies in respect of each competent of working capital so as
to ensure high profitability, proper liquidity and sound structural health of the
organization.
In order to achieve this objective the financial manager has to perform basically
following two functions.
1. Estimating the amount of working capital.
2. Sources from which these funds have to be raised.
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OBJECTIVES OF WORKING CAPITAL MANAGEMENT
The objectives of working capital management are twofold:
1. Maintenance of working capital and
2. Ability of ample funds at the time of need.
The basic goal of working capital management is to manage each of the funds current
assets and current liabilities in such a way that an acceptable level of networking capital
is always maintained in the business.
WORKING CAPITAL FORECAST
There are number of methods to determine the working capital needs.
1. By Determining the Amount of Current Assets and Current Liabilities:
The assessment of working capital requirement can be made on the basis of the
current assets required for the business and the credit facilities available for the
acquisition of such current assets from the current liabilities.
2. Cash Forecasting Method:
In this method the position of cash at the end of the period is shown after
considering the receipts and payments to be made during the period. Its form assumes
more or less a summary of cashbook. This shows the deficiency or surplus of cash as the
definite point of time.
3. The Balance Sheet Method:
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The Balance sheet method of forecast is made up of the various assets and
liabilities of the business. Afterwards, the difference between the two is taken which will
indicate either cash surplus or deficiency.
4. Profit and Loss adjusted Method:
Under this method the forecasted profits are adjusted after adding the cash
inflows and deducting the cash outflows. The basic idea under this method is to adjust
the estimated profit on cash basis.
5. Working Capital as a Percentage of Sales:
Under this method the working capital is to be related to sales and calculated
as a percentage of sales.
6. Working Capital as a Percentage of Fixed Assets:
In this method working capital is related to fixed capital investment.
Therefore, it is projected as a percentage of fixed capital investment
OPERATING CYCLE:
Working capital is required because of the time gap between the sales and their actual
realization in cash. This time gap is technically terms as operating cycle of the business.
In case of manufacturing company, the operating cycle is the length of time necessary
to complete the following cycle of event.
Conversion of cash into raw materials.
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Conversion of raw materials into work in progress.
Conversion of work in progress into finished goods.
Conversion of finished goods into account receivables.
Conversion of accounts receivable into cash.
This cycle is continuous phenomena. In case of Trading Firm the operating cycle
will include the length of time required to:
Cash into inventories.
Inventories into accounts receivables.
Accounts receivables into cash.
In case of Financing Firm the operating cycle includes the length of time taken for 1
year.
Conversion of cash debtors, and
Conversion of debtors into cash.
WORKING CAPITAL TURNOVER RATIO
It measures the efficiency of the employment of working capital. Generally higher the
turnover, greater is the efficiency and larger the sale of profits. Working capital turnover
ratio can be calculated wit help of the following formula.
SALES
Working Capital Turnover Ratio = ---------------------------------------
NET WORKING CAPITAL
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Permanent and Variable Working Capital
This minimum level of current assets is referred to as permanent or fixed working
capital. The extra working capital, needed to support the changing production and sales
activities is called fluctuating working capital. Difference between permanent and
temporary working capital .It is shown that permanent working capital is stable over
time, while temporary working capital is fluctuating some time increasing and sometimes
decreasing.
SCOPE OF THE STUDY
The scope of the study is concerned with the proper management of funds, as much to
know how effectively funds are utilized for meeting short-term and long-term needs.
The basic scope of the researcher is to enroll the firms involvement in rising of funds
and their effective utilization keeping in view the overall objectives of the firm.
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The scope of the study enabled the researcher to analyze the risk return possibilities in
the employment of funds, applying analytical tools to procure the profitability of the
business.
Ascertaining the working capital will come to know either inadequacy or excess funds
with the concern. The inadequacy of funds will adversely affect the day-to-day working
of the concern where as excess funds may tempt management to include in extravagant
spending.
Analyzing the capital structure, inferences the kind and proportion of different
securities for raising funds and proper decision about the kind of securities to be
employed which influences the short-term and long-term financial planning of an
enterprise.
Finding the investment pattern is essential so that it will come to know the source of
funds. The decision-making technique such as capital budgeting may be applied in
making decision about capital budgeting.
Assessing cash position of the concern will achieve greater task, such as cash
requirements for,
Purchase of raw materials
Making payment to creditors
Meet wage bill
Meet day-to-day expenses
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And different sources of cash may be from
Cash sales
Collection of debtors
Preparing cash flow statement is able to find us the various sources and applications.
Some of the financial control devices are,
Return on investment
Budgetary control
Ratio analysis will help in evaluating the performance in various areas and take
corrective measures wherever needed.
7. OBJECTIVES OF THE STUDY
To determine working capital requirement.
To view fluctuations in working capital changes.
To ascertain the trend of sales and working capital for next year.
To analyze the relationship between sales and debtors.
To study ratio analysis of working capital.
To analyze the overall performance of the company.
To suggest measures for improvement, if necessary.
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STATEMENT OF NET WORKING CAPITAL FOR 2010
PARTICULARS 2010
CURRENT ASSETS
Sundry Debtors 58.69
Stock 632.08
Cash and Bank 2.20
Loans & Advances 223.32
TOTAL 916.29
Current Liability & Provisions
Current Liability & Provisions 1087.94
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TOTAL 1087.94
NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITY
CURRENT ASSETS = 916.29
CURRENT LIABILITY = 1087.94
-------------
NET WORKING CAPITAL = (171.65)
-------------
STATEMENT OF NET WORKING CAPITAL FOR 2011
PARTICULARS 2011
CURRENT ASSETS
Sundry Debtors 115.97
Stock 1541.18
Cash and Bank 8.41
Loans & Advances 212.89
TOTAL 1878.45
Current Liability & Provisions
Current Liability & Provisions 1877.68
TOTAL 1877.68
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NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITY
CURRENT ASSETS = 1878.45
CURRENT LIABILITY = 1877.68
-------------
NET WORKING CAPITAL = 0.77
-------------
STATEMENT OF NET WORKING CAPITAL FOR 2012
PARTICULARS 2012
CURRENT ASSETS
Sundry Debtors 71.73
Stock 1726.59
Cash and Bank 5.24
Loans & Advances 439.48
TOTAL 2243.04
Current Liability & Provisions
Current Liability & Provisions 1169.35
TOTAL 1169.35
NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITY
CURRENT ASSETS = 2243.04
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CURRENT LIABILITY = 1169.35
-------------
NET WORKING CAPITAL = 1073.69
-------------
SCHEDULE OF CHANGES IN WORKING CAPITAL FOR 2010-2011
PARTICULARS 2010
lakhs)
2011
(lakhs)
CHANGES IN WORKING CAPITAL
INCREASE
(lakhs)
DECREASE
(lakhs)
CURRENT
ASSETS
Sundry debtors 58.69 115.97 - 57.28
Stock 632.08 1541.18 - 909.10
Cash and Bank 2.20 8.41 6.21 -
Loans & Advances 223.32 212.89 - 10.43
Total Current
Asset
916.29 1878.45
CURRENT
LIABILITIES
Current Liability
Provisions
1087.94 1877.68 789.74
Total current
Liability
1087.94 1877.68
Working Capital 171.65 0.77
Decrease in
Working Capital
- 170.88 1760.44
Total 171.25 171.25 1766.65 1766.55
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INTERPRETATION:
There is a Net Decrease in working Capital of 170.88 lakhs due to decrease in current
assets like Sundry debtors, cash & bank, Loans & Advances, increase in current assets
(Fixed deposits) and also decrease in current liability (Liability and Provisions). The Net
effect is Net Decrease in Working Capital.
SCHEDULE OF CHANGES IN WORKING CAPITAL FOR 2011-2012
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PARTICULARS 2011
(lakhs)
2012
(lakhs)
CHANGES IN WORKING CAPITAL
INCREASE
(lakhs)
DECREASE
(lakhs)
CURRENT
ASSETS
Sundry debtors 115.97 33.36 - 82.61
Stock 1541.18 1511.51 - 29.61
Cash and Bank 8.41 11.50 3.09 -
Loans & Advances 212.89 385.56 172.67 -
Total Current
Asset
1878.45 1941.93
CURRENT
LIABILITIESCurrent Liability
Provisions
1877.68 1374.73 - 566.49
Total Current
Liability
1877.68 1374.73
Working Capital 0.77 567.2
Increase in working
capital
566.43 - 566.43
Total 567.2 567.2 678.71 678.71I
INTERPRETATION:
There is a Net increase in working Capital of 566.43 lakhs due to decrease in current
assets such as fixed deposits, increase in current assets like sundry Debtors, Cash &
Bank, Loans & Advances and also decrease in current liability like Provisions. The Net
effect is Net Increase in Working Capital.
INTERPRETATION:
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There is a Net increase in working Capital of 506.49 lakhs due to increase in current
assets like sundry Debtors, Cash & Bank, Loans & Advances and also decrease in current
liability like Provisions. The Net effect is Net Increase in Working Capital.
RATIO ANALYSIS
INTRODUCTION
Analysis and interpretation of financial statements with help of ratios is termed as
ratio analysis involves the process of computing, determining and presenting the
relationship of items or groups of items of financial statements ratio analysis was
pioneered by ALEXANDER WALL who presented a system of ratio analysis in the year
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1909. Alexander contention was that interpretation of financial statements can be made
easier by establishing quantitative relationships between various items of financial
statements.
MEANING OF RATIO
A ratio is mathematical relationship between two items expressed in a quantitative
form.
Ratios can be defined as Relationships expressed in quantitative terms, between
figures which have cause and effective relationships or which are connected with each
other in some manner or the other.
Accounting ratios are designed to show how one number is related to another and the
meaning of such relationships. The ratio is worked out by dividing one number by
another number. Accounting ratios measure and indicate efficiency of an in all aspects.
STEPS IN RATIO ANALYSIS
Selection of relevant information: the first step in ratio analysis is to select a
relevant information from financial statements and calculate appropriate ratios required
for decision under consideration.
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Comparison of calculated ratios: in order to assess the relative meaning, the ratios
calculated are compared with the past ratios and industry ratios.
Interpretation and reporting: the third in ratio analysis is to interpret the significance of
various ratios draw inferences and write a report. The report may recommend specific
action in the matter of the decision situation or may present alternatives with comparative
merits or it may just state the facts and interpretation.
ADVANTAGES OF RATIO ANALYSIS:
Forecasting: rations reveal the trends in costs, sale, profit and other interrelated facts,
which will be helpful in forecasting future events. Managerial control : ratios can be used
in instrument of control regarding sales, cost and profit.
Facilitates communication: ratios facilitate the communication function of
Management as ratios convey the information relating to the present and
the future quickly, force fully and clearly.
Measuring efficiency: - ratio help to know operational efficiency comparison of present
ratios with those of the past working and also with those of the other firms in the
industry.
Facilitating investment decisions: ratios are helpful in computing return on
investment. This helps the management in exercising effective decisions
regarding profitable avenues of investment.
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LIMITATIONS OF RATIO ANALYSIS
Practical knowledge: the analyst should have through knowledge and experience
the firm and industry.
Ratios are means: ratios are not end in themselves but they are mean to achieve a
practical purpose or end.
Interrelationship: ratios are inter-related and therefore a single ratio cannot convey and
meaning. It has to be interpreted by reference to other related ratios to draw meaningful
conclusions.
Non Availability of standards and norms: ratios will be meaningful if they can be
compared with standards or norms. Expect for a few financial ratios, other ratios are lack
standards which are universally recognized
Change in price level: ratio analysis becomes redundant during periods of heavy price
fluctuations.
RATIOS
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CURRENT RATIO
Current assets mean assets that will either be used up or converted into cash
within a years of time or normal operating cycle of the business, whichever is longer.
Current liabilities mean liabilities payable within a year or during the operating cycle of
the business, whichever is longer.
An ideal current ratio is 2. The ratio of 2 is considered as a safe margin of
solvency due to the fact that if the current assets are reduced to half, i.e., 1 instead of 2,
then also the creditors will be able to get their payments in full.
A higher current ratio would indicate inadequate employment of funds while a
poor current ratio is a danger signal to the management. It shows that business is trading
beyond its resources.
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
TABLE SHOWING CURRENT RATIO FOR THE YEAR 2008-2012
YEAR CURRENT CURRENT CURRENT
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ASSETS LIABILITIES RATIO
2008-2009 916.29 1087.94 0.84
2009-2010 1878.45 1877.68 1.00
2010-2011 1941.93 1374.73 1.41
2011-2012 2243.04 1169.35 1.92
CURRENT RATIO FOR THE YEAR 2009-2012
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INFERENCE:
The current ratio of 2:1 is considered as ideal ratio . the current ratio for
the last 4 accounting period shows increasing trend. The current ratio is stepping up due
to decreases in current liabilities. The ratio is health ratio
LIQUID RATIO
CURRENT RATIO
0.84 11.41
1.92
0
0.5
1
1.5
2
2.5
2009 2010 2011 2012
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The liquid ratio gives a better picture of the firms capacity to meet is short term
obligations out of the short-term assets. However it is difficult to establish a standard fo
this ratio and it is also dangerous to rely too much on a 1:1.
LIQUID RATIO = LIQUID ASSETS
CURRENT LIABILITIES
10.3.2TABLE SHOWING LIQUID RATIO FOR THE YEAR 2009-2012
YEAR LIQUID ASSETS CURRENT
LIABILITIES
RATIO
2008-2009 284.21 1087.94 0.26
2009-2010 337.28 1877.68 0.18
2010-2011 430.42 1374.73 0.31
2011-2012 516.45 1169.35 0.44
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0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
2009 2010 2011 2012
INFERENCE:
The liquid ratio refers to asset quickly convertible into cash .The liquid ratio
for the last 4 years is increasing. The last year (2012) ratio is 0.44. It is not in good liquid
position
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CASH POSITION RATIO:
This ratio is also called Absolute Liquidity ratio or super quick ratio. This ratio is
calculated when liquidity is highly restricted in terms of cash and cash equivalents. This
ratio measures liquidity in terms of cash and near cash items and short term current
liabilities.
Cash & Bank Balances
CASH POSITION RATIO = ---------------------------------------
Current liabilities
TABLE SHOWING CASH POSITION RATIO FOT THE YEAR 2009-2012
YEAR CASH &BANK
BALANCE
CURRENT
LIABILITIES
RATIO
2008-2009 2.20 1087.94 0.20
2009-2010 8.41 1877.68 0.45
2010-2011 11.50 1374.73 0.84
2011-2012 5.24 1169.35 0.45
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0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
CASH RATIO
2009
2010
2011
2012
INFERENCE:
The ideal cash position ratio is called super quick ratio. The standard
norm for the cash position ratio is 75:1 But the company to meet the ideal standard for
the year (2010-2011) ratio is 0.84.The other years ratio is low.
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OPERATING PROFIT RATIO:
The operating profit is the ratio of profit made from operating sources to sales, usually
shown as percentage. It is a measure of the managements efficiency in running the
routine operations of the firm.
PROFIT BEFORE INTEREST, DEP & TAX
OPERATING PROFIT RATIO = --------------------------------------------*100
NET SALES
TABLE SHOWING OPERATING PROFIT RADIO FOR THE YEAR2009-2012
YEAR PBT &I &DEP NET SALES RATIO
2008-2009 94.47 1448.81 6.52
2009-2010 286.63 3794.99 7.55
2010-2011 400.73 4752.99 8.43
2011-2012 507.94 4671.77 10.87
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0
2
4
6
8
10
12
OPERATING
RATIO
20092010
2011
2012
INFERENCE:
This analysis is used to measure of management efficiency in running the
routine operations of the business. The higher the ratio in the year (2012) indicates higher
efficiency.
NET PROFIT RATIO:
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This ratio indicates what portion of sales is left to the firm after all costs, charges, and
expenses have been deducted. It is extremely useful to the firm being an indication of
cost control and sales promotion.
NET PROFIT
NET PROFIT RATIO = ------------------------- * 100
NET SALES
TABLE SHOWING NET PROFIT RATIO FIR THE YEAR 2005-2008
YEAR NET PROFIT NET SALES RATIO
2008-2009 52.37 1448.81 3.59
2009-2010 94.33 3794.99 2.49
2010-2011 270.27 4752.99 5.68
2011-2012 402.43 4671.77 8.61
5. NET PROFIT RATIO:
INFERENCES:
64
3.59
2.49
5.68
8.61
0
2
4
6
8
10
2009 2010 2011 2012
NET PROFIT RATIO
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This analysis measures the efficiency of the business from the owners
point of view the higher ratio in the year (2012) its indicates higher efficiency of the
business during that period increases in sales. The lower the ratio may be due to low
efficiency or increases the cost of raw material etc
CURRENT ASSET TURNOVER RATIO
CURRENT ASSET TURNOVER RATIO = SALES
--------------------------
CURRENT ASSET
TABLE SHOWING CURRENT ASSET TURNOVER RATIO FOR THE
YEAR2009-2012
YEAR SALES CURRENT ASSET RATIO
2008-2009 1448.82 916.29
1.58
2009-2010 3794.99 1878.45
2.02
2010-2011 4752.99 1941.93
2.45
2011-2012 4671.77 2243.04
2.08
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0
0.5
1
1.5
2
2.5
3
CURRENTRATIO
2009
2010
2011
2012
INFERENCE:
This ratio show continuous increases in ratios. In the middle year(2011)is ratio is
fluctuating the radio is 2.45, because the sales in the year is increases.
DEBTORS TURN OVER RATIO
Debtors Turnover or debtors velocity indicates the velocity of debt collection of a
firm. In simple words, it indicates the number of times average debtors
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(Receivables) are turned over during a year, thus:
Debtors Turnover ratio( Debtors velocity)
=Net credit sales / Average Trade Debtors
=No of time
Trade debtors = Sundry debtors + Bills Receivables
DEBTORS TURNOVER RATIIO = NET CREDIT SALES
SUNDRY DEBTORS
TABLE SHOWING DEBTORS TURNOVER RATIO FOR THE YEAR
2009-2012
YEAR SALES SUNDRY DEBTORS RATIO
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2008-2009 1448.82 58.6924.68
2009-2010 3794.99 115.9732.72
2010-2011 4752.99 33.36142.47
2011-2012 4671.77 71.7365.13
7.DEBTORS TURN OVER RATIO
0
20
40
60
80
100
120
140
160
DEBTORS RATIO
2009
2010
2011
2012
INFERENCE:
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Debtors turnover ratio for the sale is 65.13 in 2012. which shows efficient management of
debtors. Debtors Turnover Ratio for the year 2010-2011 is 142.47 as the ratio increases
because of growth in sales.
CAPITAL TURNOVER RATIO:
Managerial efficiency is also calculated by establishing the relationship between
sales with the amount of capital invested in the business. Higher ratio indicates higher
efficiency and lower ratio indicates ineffective usage of capital.
SALES
CAPITAL TURNOVER RATIO = -----------------------------------
CAPITAL EMPLOYED
TABLE SHOWING CAPITAL TURNOVER RATIO FOR THE YEAR 2005-5008
YEAR SALES CAPITAL
EMPLOYED
RATIO
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2008-2009 1448.82 89.00
16.27
2009-2010 3794.99 1011.63
3.75
2010-2011 4752.99 1757.63
2.702011-2012 4671.77 2250
2.07
8.CAPITAL TURNOVER RATIO:
0
2
4
6
8
10
12
14
16
18
CAPITAL
TURNOVER
RATIO
2009
2010
2011
2012
INFERENCE:
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The Capital turnover ratio is constantly decreasing from 2009 to
2012, it is mainly due to continuous increase in sales. In the ratio is decreased due to
increase in capital employed when compared to increase in sales. High ratio indicates the
effective usage of the capital.
FIXED ASSETS TURNOVER RATIO:
The fixed assets turnover ratio determines efficiency of utilization of fixed
assets and profitability of a business concern. Higher the ratio, more is the efficiency in
utilization of fixed assets. A lower ratio is the indication of under utilization of fixed
assets.
FIXED ASSET TURNOVER RATIO = __SALE_____
FIXED ASSET
TABLE SHOWING FIXED ASSETS TURNOVER RATIO FOR THE YEAR 2005-
2008
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The fixed assets turnover ratio shows an increasing trend for the 4 years
(2009-2012) .The ratio in the year (2009) 1.37 which indicates the under utilization of
fixed assets which is due to increase in net fixed assets.
DEBT EQUITY RATIO:
The debt equity ratio is determined to ascertain the soundness of the long-
term financial policies f the company. It is also known as external-internal equity ratio.
The debt equity ratio is calculated by dividing total long-term debt by share holders
funds. The share holders funds includes shares capital plus reserves and surplus. The
ideal ratio for the debt equity ratio is 1:1.
DEBTORS EQUITY RATIO = LONG TERM DEBT
SHARE HOLDERS FUND
TABLE SHOWING DEBT EQUITY RATIO FOR THE YEAR 2005-2008
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YEAR LONG TERM DEBT SH. HOLDER
FUNDS
RATIO
2008-2009 676.50 213.523.17
2009-2010 779.69 231.933.36
2010-2011 1161.38 596.241.95
2011-2012 1460.54 790.451.85
.DEBT EQUITY RATIO
0
0.5
1
1.5
2
2.5
3
3.5
DEBT EQUITY
RATIO
2009
2010
2011
2012
INFERENCE:
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The debt equity ratio indicates that the company does not view debt as a
source of funds on it is self sufficient with huge internal cash balances. The ideal ratio for
debt equity ratio is 1. The ratio is continuous decreases because issue of fresh share
capital is issued in 2011
PROPRIETARY RATIO
PROPRIETARY RATIO = SHARE HOLDER FUNDS
----------------------------------------
TANGIBLE ASSETS
TABLE SHOWING PROPRIETARY RATIO FOR THE YEAR 2009-2012
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YEAR SH. HOLDER
FUNDS
TANGIBLE ASSET RATIO
2008-2009 213.52 1974.39
0.11
2009-2010 231.93 2886.63
0.08
2010-2011 596.24 3129.75
0.19
2011-2012 790.45 3411.08
0.23
11. PROPRIETARY RATIO
0
0.05
0.1
0.15
0.2
0.25
PROPRITARY
RATIO
2009
2010
2011
2012
INFERENCES:
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In this proprietary ratio are increases in 2011 & 2012. In the middle year
(2010) ratio is low, because the values of share holder funds are 231.93. In Ratio is
increasing in other two year in issue of fresh share capital.
CASH TO CURRENT ASSET
Cash is important and sensitive current assets. Cash is also viewed as most liquid asset.
When the proportion of cash is high in current assets, company can viewed as more liquid
one. This kind of analysis will be helpful to the managers to understand the turnover
capacity of the concern.
CASH TO CURRENT ASSET = CASH
------------------------
CURRENT ASSET
TABLE SHOWING CASH CURRENT ASSET FOR THE YEAR 2009-2012
YEAR CASH CURRENT ASSET RATIO
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2008-2009 2.20 916.29
0.24
2009-2010 8.41 1878.45
0.45
2010-2011 11.50 1941.930.59
2011-2012 5.24 2243.04
0.23
0
0.1
0.2
0.3
0.4
0.5
0.6
2009
2010
2011
2012
INFERENCE
From the above we can see that cash played a very small role in all the years. But
in the year 2010-2011 it occupies a major place in current assets. The high level of cash
& bank balances in the year may be due to substantial collection from debtors during
2010-2011 financial year.
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CASH TO CURRENT LIABILITIES
Percentage of cash in relation to current liabilities will enable us to understand the
creditors repayment capacity of the concern without damaging the regular operation.
CASH TO CURRENT LIABILITIES = CASH
---------------------------------
CURRENT LIABILITIES
TABLE SHOWING CASH TO CURRENT LIABILITIES FOR YEAR 2009-2012
YEAR CASH CURRENT
LIABILITIES
RATIO
2008-2009 2.20 1087.94
0.20
2009-2010 8.41 1877.08
0.45
2010-2011 11.50 1374.73
0.84
2011-2012 5.24 1169.35
0.04
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TABLE SHOWING CURRENT ASSETS TO TOTAL ASSETS FOR THE YEAR
2009-2012
YEAR CURRENT ASSET TOTAL ASSET RATIO
2008-2009 916.29 1974.39
46.41
2009-2010 1878.45 2886.63
65.07
2010-2011 1941.93 3129.75
62.05
2011-2012 2243.04 3411.08
65.76
0
10
20
30
40
50
60
70
CURRENT
ASSET TO
TOTAL
ASSET
2009
2010
2011
2012
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CURRENT ASSETS TO TOTAL ASSETS
INFERENCE
This ratio indicates the proportion of current assets to total assets of the
company. This ratio is fluctuating in nature. The higher ratio in the year 2012(65.76)
indicates maintenance of sufficient cash balance and inventories. The lower ratio in the
year 2009(46.41) indicates lower level of inventory and cash balance.
CURRENT LIABILITIES TO TOTAL LIABILITIES
CURRENT LIABILITIES TO TOTAL LIABILITIES = CURRENT LIABILITIES
---------------------------------
TOTAL LIABILITIES
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TABLE SHOWING CURRENT LIABILITIES TO TOTAL LIABILITIES
FOR THE YEAR 2009-2012
YEAR CURRENT
LIABILITIES
TOTAL LIABILITIES RATIO
2008-2009 1087.94 1764.44
61.67
2009-2010 1877.68 2657.37
70.66
2010-2011 1374.73 2536.11
54.21
2011-2012 1169.35 2629.90
44.46
CURRENT LIABILITIES TO TOTAL LIABILITIES
0
10
20
30
40
50
60
70
80
CURRENTLIABILITY TO
TOTAL
LIABILITY
200
201
201
201
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INFERENCE
This indicates the proportion of current liability to total liability of the
company. Generally current liability will be short term in nature. This is mainly taken to
meet or carry out day-to-day requirements of the business. The current liability increase
in accordance with the volume of operation but not proportionately to total liability. The
current liabilities are such liability that has to met in the immediate future.
COMMON SIZE BALANCE SHEET FOR THE YEAR 2009 AND 2010
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PARTICULARS 2009 2010
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(RS) (%) (RS) (%)
ASSETS
CURRENT ASSETS
S.DRS 58.69 2.97 115.97 4.02
STOCK 632.08 31.96 1541.18
53.34
CASH AND BANK BALANCES 2.20 0.11 8.41 0.29
LOAN AND ADVANCES 223.32 11.29 212.89 7.37
OTHER 3.57 0.18 2.67 0.09
TOTAL CURRENT ASSET 919.86 1881.72 65.11
FIXED ASSETS
Fixed assts 1058.10 53.49 1008.18 34.89
Total assets 1977.96 100 2889.30 100
Liabilities and capital
Current liabilities
Current liabilities & provision 1087.94 55 1877.68 64.99
Loan funds 676.50 34.20 779.69 26.98
Total liabilities 1764.44 89.21 2657.37 91.97
Capital and reserves
Share capital & Reserves and surplus 213.52 10.79 231.93 8.03
Total share holders funds 213.52 10.79 231.93 8.03Total liabilities and capital 1977.96 100 2889.30 100
COMMON SIZE BALANCE SHEET FOR THE YEAR 2011 AND 2012
PARTICULARS 2011 2012
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(RS) (%) (RS) (%)
ASSETS
CURRENT ASSETS
S.DRS 115.97 4.02 33.36 1.07
STOCK 1541.18
53.34
1511.51 48.25
CASH AND BANK BALANCES 8.41 0.29 11.50 0.37
LOAN AND ADVANCES 212.89 7.37 385.56 12.31
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OTHER 2.67 0.09 2.60 0.08
TOTAL CURRENT ASSET 1881.72 65.11 1944.53 62.08
FIXED ASSETS
Fixed assts 1008.18 34.89 1187.82 37.92
Total assets 2889.30 100 3132.35 100
Liabilities and capital
Current liabilities
Current liabilities & provision 1877.68 64.99 1374.73 43.89
Loan funds 779.69 26.98 1161.38 37.08
Total liabilities 2657.37 91.97 2536.11 80.97
Capital and reserves
Share capital & Reserves and surplus 231.93 8.03 596.24 19.03
Total share holders funds 231.93 8.03 569.24 19.03
Total liabilities and capital 2889.30 100 3132.35 19.03FINDINGS
The increase in working capital is due to the increase in sales in 2009-2010
the company has a better current ratio which is equal to the ideal ratio.
In 2006 and 2008 company maintained overstocking of materials.
This can be understood by the quick ratio of the company.
The fixed asset ratio of the company shows how efficiently the funds are utilized
for working capital than fixed asset.
Debtors turnover ratios for the year 2008-2009 show better performance of the
company.
The current asset proportion towards total asset for the year 2012 shows
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better utilization of funds as it shows an higher increases.
However there was an operating profit during the years 2010-2011 and 2011-2012
due to increase in sales and reduction in manufacturing and other expenses.
Cash flows of the company seems to be good. It is observed that the company is
continuously looking for the better sources of fund over the period of years.
Issue of fresh share capital can help to reduce the radio debt equity.
The cash position ratio has been decreasing due to increase in current liabilities.
The net working capital has been increasing continuously due to continuous
increase in current assets over current liabilities.
The continuous increase in operating profit for the past four years shows more
income over expenditure
Share capital & Reserves and surplus of the company is showing an increasing
trend