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    Working Capital Leverage Components

    Observation

    Working capital leverage increase in 2009-10 as compare to 2005-06 its shows the

    efficient use of current assets and current liabilities. In year 2007-08 lowest working capital

    leverages. Company reduces its current assets and tries to increasing in profitability.

    3&4.Working Capital Ratio Analysis & Comparison with ROI

    INTRODUCTION

    Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as

    the indicated quotient of two mathematical expressions and as the relationship between

    two or more things. The absolute figures reported in the financial statement do not provide

    meaningful understanding of the performance and financial position of the firm. Ratio helps

    to summaries large quantities of financial data and to make qualitative judgment of the firms

    financial performance.

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    ROLE OF RATIO ANALYSIS

    Ratio analysis helps to appraise the firms in the term of there profitability and

    efficiency of performance, either individually or in relation to other firms in same industry.

    Ratio analysis is one of the best possible techniques available to management to impart the

    basic functions like planning and control. As future is closely related to the immediately past,

    ratio calculated on the basis historical financial data may be of good assistance to predict the

    future. E.g. On the basis of inventory turnover ratio or debtors turnover ratio in the past, the

    level of inventory and debtors can be easily ascertained for any given amount of sales.

    Similarly, the ratio analysis may be able to locate the point out the various arias which needthe management attention in order to improve the situation. E.g. Current ratio which shows a

    constant decline trend may be indicate the need for further introduction of long term finance

    in order to increase the liquidity position. As the ratio analysis is concerned with all the

    aspect of the firms financial analysis liquidity, solvency, activity, profitability and overall

    performance, it enables the interested persons to know the financial and operational

    characteristics of an organization and take suitable decisions.

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    EFFICIENCY RATIO

    1. Working capital turnover ratio

    It signifies that for an amount of sales, a relative amount of working capital is needed. If any

    increase in sales contemplated working capital should be adequate and thus this ratio helps

    management to maintain the adequate level of working capital. The ratio measures the

    efficiency with which the working capital is being used by a firm. It may thus compute net

    working capital turnover by dividing sales by net working capital.

    Working Capital Turnover Ratio =

    Years 2005-06 2006-07 2007-08 2008-09 2009-10Sales 989,129,942 1,290,284,137 1,217,733,969 803,977,774 1,168,174,548

    Net W.C 147,766,758 142,536,699 246,785,954 231,351,865 195,623,613W.C. TOR 6.69 9.05 4.93 3.48 5.97

    Sales

    Net Working Capital

    (Amnt. In Rs.)

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    Relation between Working Capital Turnover and ROI

    Year W.C. TOR ROI2005-

    066.69 7.73

    2006-

    079.05 7.13

    2007-

    084.93 4.55

    2008-

    093.47 1.73

    2009-

    105.96 0.59

    Observation:

    From the above figure we can say that the Working Capital Turnover was fluctuated year by

    year. The highest ratio in 2006-07 and low in 2008-09 year. It means that company fails to

    use of working capital efficiently in the 2008-09. But in the year 2009-10 company increase

    the ratio by 72%. Company decreased inventory, cash & bank balance and sundry debtors as

    compare to previous year and increased current liabilities as compare to previous year.

    Correlation between working capital turnover and return on investment is 0.66 it means

    relation between them is partial positive. Working capital turnover ratio leads towards

    profitability so, we can say that effective utilization of working capital resources is very

    essential for maintain and improve profitability of the business.

    Co-relation r =

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    2. Inventory turnover ratio

    Inventory turnover ratio indicates the efficiency of the firm in producing and selling its

    product. This ratio indicates the effectiveness and efficiency of the inventory management.

    The ratio shows how speedily the inventory is turn into cash or receivables through sales. It is

    calculated by dividing the cost of good sold by average inventory.

    Inventory Turnover Ratio =

    Inventory Turnover

    Years 2005-06 2006-07 2007-08 2008-09 2009-10Cost of Goods

    Sold944,744,377 1,225,196,366 1,169,161,821 784,863,874 1,162,235,516

    Average Inventory 58,360,743 86,361,010 153,995,270 200,589,406 185,181,788

    Inventory TOR 16.19 14.19 7.59 3.91 6.28

    Cost of Goods Sold

    Average Inventory

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    Inventory Turnover Ratio

    Relation between Inventory Turnover and ROI

    Year InventoryTOR

    ROI

    2005-

    0616.19 7.73

    2006-

    0714.19 7.13

    2007-

    087.59 4.55

    2008-

    093.91 1.73

    2009- 6.28 0.59

    Correlation (r) =

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    10

    Observation

    It was observed that Inventory turnover ratio indicates maximum sales achieved with the

    minimum investment in the inventory. As such, the general rule high inventory turnover is

    desirable but high inventory turnover ratio may not necessary indicates the profitable

    situation. An organization, in order to achieve a large sales volume may sometime sacrifice

    on profit, inventory ratio may not result into high amount of profit. Companys inventory

    level is high as compare to the sales. So the turnover ratio may be decline and profitability

    also decreases. Inventory turnover ratio and Return on investment have strong correlation. So

    it means that Inventory strongly affects the profitability of Atul Auto Ltd.

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    3. Receivable Turnover Ratio

    Receivable turnover ratio provides relationship between credit sales and receivables of a firm.

    It indicates how quickly receivables are converted into sales.

    Receivable Turnover Ratio =

    Receivable Turnover Ratio

    Particulars 2005-06 2006-07 2007-08 2008-09 2009-10Sales 989,129,942 1,290,284,137 1,217,733,969 803,977,740 1,168,174,548Avg. Debtors 56,950,707 75,164,572 84,527,787 60,639,803 37,416,036Rec. TOR 17.36 17.17 14.41 13.26 31.22

    Net Sales

    Average gross Receivables

    (Amnt. In Rs.)

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    Receivable Turnover Ratio

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    Relation between Receivable Turnover and ROI

    Year ReceivableTOR

    ROI

    2005-

    0617.36 7.73

    2006-

    0717.17 7.13

    2007-

    0814.41 4.55

    2008-

    09 13.26 1.732009-

    1031.22 0.59

    Observation

    From 2005-06 to 2008-09 there were no huge difference in Receivable turnover ratio. But in

    2009-10 this ratio increase by 80% as compare to 2005-06 it was highest changes in last 5

    years period of time. Company decreases average debtors so the collection turnover ratio

    increment possible. Company increased the receivable turnover ratio but it was not affected

    to the positive profitability indices. Here inverse correlation between receivable turnover ratio

    and return on investment. It indicates that receivables failed to give positive impact in

    profitability of the Atul Auto Ltd.

    Correlation r = -

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    4. Current Assets Turnover Ratio

    Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current

    assets .current assets includes the assets like inventories, sundry debtors, bills receivable, cash

    in hand or bank, marketable securities, prepaid expenses and short term loans and advances.This ratio includes the efficiency with which current assets turn into sales. A higher ratio

    implies a more efficient use of funds thus high turnover ratio indicate to reduced the lock up

    of funds in current assets. An analysis of this ratio over a period of time reflects working

    capital management of a firm.

    Current Assets Turnover Ratio =

    Current Assets Turnover Ratio

    Particulars 2005-06 2006-07 2007-08 2008-09 2009-10Sales 989,129,942 1,290,284,137 1,217,733,969 803,977,740 1,168,174,548Current Assets. 202,827,813 297,983,139 354,668,069 312,977,074 307,865,931C. A. TOR 4.87 4.33 3.43 2.57 3.79

    Sales

    Average total assets

    (Amnt. In Rs.)

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    Current Assets Turnover Ratio

    Relation between Current Assets Turnover and ROI

    YearC.A.

    TOR ROI

    2005-

    064.87 7.73

    2006-

    074.33 7.13

    2007-

    083.43 4.55

    2008-

    092.57 1.73

    2009-

    103.79 0.59

    Observation

    Correlation r =

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    Current Assets turnover ratio decreased every year compare to 2005-06. In 2005 -06 ratio

    was highest and in 2008-09 the ratio of current assets is very low because of high inventory.

    In year 2009-10 this ratio increased by 47%. But it has not given any positive impact on the

    profitability. Current assets ratio not indicates any particular trend over the period of time.

    Here strong correlation between current assets turnover and return on investment. Its indicate

    that company use the current assets effectively. Effective utilization of current assets helps to

    create healthy profit.

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    LIQUIDITY RATIO

    1. Current Ratio

    Current assets include cash and those assets which can be converted in to cash within a year,such marketable securities, debtors and inventories. All obligations within a year are include

    in current liabilities. Current liabilities include creditors, bills payable accrued expenses, short

    term bank loan income tax liabilities and long term debt maturing in the current year. Current

    ratio indicates the availability of current assets in rupees for every rupee of current liability.

    Current Ratio =

    Particulars 2005-06 2006-07 2007-08 2008-09 2009-10Current Assets. 202,827,813 297,983,139 354,668,069 312,977,074 307,865,931Current Liabilities 55,061,055 155,446,441 107,882,116 81,625,209 112,242,318Current Ratio 3.68 1.92 3.28 3.83 2.74

    Current Assets

    Current Liabilities

    (Amnt. In Rs.)

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    Current Ratio

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    Relation between Current Ratio and ROI

    YearCurrent

    Ratio ROI

    2005-

    063.68 7.73

    2006-

    071.92 7.13

    2007-

    083.28 4.55

    2008-

    093.83 1.73

    2009-

    102.74 0.59

    Observation

    The current ratio indicates the availability of funds to payment of current liabilities in the

    form of current assets. A higher ratio indicates that there were sufficient assets available with

    the organization which can be converted in cash, without any reduction in the value. As idealcurrent ratio is 2:1, where current ratio of the firm is more than 2:1, it indicates the

    unnecessarily investment in the current assets. Ratio is higher in the 2008-09 because current

    liability decreased by 24%. Correlation between current ratio and return on investment is

    negative. To improve the profitability company must decrease the current ratio because some

    unnecessary investment in current assets blocked the money.

    Correlation (r) = -

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    2. Quick Ratio

    Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset

    is liquid if it can be converting in to cash immediately or reasonably soon without a loss of

    value. Cash is the most liquid asset .other assets which are consider to be relatively liquid andinclude in quick assets are debtors and bills receivable and marketable securities. Inventories

    are considered as less liquid. Inventory normally required some time for realizing into cash.

    Their value also be tendency to fluctuate. The quick ratio is found out by dividing quick

    assets by current liabilities

    Quick Ratio =

    Quick Ratio

    Particulars 2005-06 2006-07 2007-08 2008-09 2009-10Liquid C. A. 130,521,793 197,567,139 147,093,530 119,372,802 131,106,627Current Liabilities 55,061,055 155,446,441 107,882,116 81,625,209 112,242,318Quick Ratio 2.37 1.27 1.36 1.46 1.17

    Quick Ratio

    Current Assets - Inventory

    Current Liabilities

    (Amnt. In Rs.)

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    Relation between Quick Ratio and ROI

    YearQuick

    Ratio ROI

    2005-

    062.37 7.73

    2006-

    071.27 7.13

    2007-

    081.36 4.55

    2008-

    091.46 1.73

    2009-

    101.17 0.59

    Observation

    Quick ratio indicates that the company has sufficient liquid balance for the payment of

    current liabilities. The standard liquid ratio is 1:1 but here liquid ratio is more than 1:1 over

    the period of 5 years, it indicates that the firm maintains the over liquid assets than actualrequirement of such assets. Here, correlation between quick ratio and return on investment is

    moderate. Such a policy is called conservative policy of finance affects on the cost of the

    fund and return on the funds.

    Correlation (r) =

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    3. Absolute Liquid Ratio

    Even though debtors and bills receivables are considered as more liquid then inventories, it

    can not be converted in to cash immediately or in time. Therefore while calculation of

    absolute liquid ratio only the absolute liquid assets as like cash in hand cash at bank, shortterm marketable securities are taken in to consideration to measure the ability of the company

    in meeting short term financial obligation. It calculates by absolute assets dividing by current

    liabilities.

    Absolute Liquid Ratio =

    Absolute Liquid Ratio

    Particulars 2005-06 2006-07 2007-08 2008-09 2009-10Absolute Liquid

    assets11,441,798 16,113,867 2,387,963 3,752,117 18,628,235

    Current Liabilities 55,061,055 155,446,441 107,882,116 81,625,209 112,242,318Absolute Liquid

    Ratio0.208 0.104 0.022 0.046 0.166

    Absolute Liquid Ratio

    Absolute Liquid Assets

    Current Liabilities

    (Amnt. In Rs.)

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    Relation between Absolute Liquid Ratio and ROI

    YearAbsolute

    Quick RatioROI

    2005-06 0.208 7.732006-07 0.104 7.132007-08 0.022 4.55

    2008-09 0.046 1.732009-10 0.166 0.59

    Observation

    Absolute liquid ratio indicates the availability of cash with company is sufficient because

    company also has other current assets to support current liabilities of the company. In the

    year 2005-06 the ratio high. Because cash was law as compare to current liabilities.

    Correlation between Absolute Liquid Ratio and Return on investment is low. But its not anydrastic impact on profitability.

    Correlation (r) =

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    CHAPTER

    V

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    FINDINGS,SUGGESTIONS

    AND CONCLUSION

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    Findings, Conclusion and Suggestion

    Working capital management is important aspects of financial management. The study of

    working capital of Atul Auto Ltd. Has reviled that the efficiency and liquidity ratios were as

    per the standard industrial practices but liquidity position of the company showed an

    increasing trend. The study has been conducted on working capital ratios analysis, working

    capital leverage, working capital size a level analysis and comparison with profitability ratio

    (Return on Investment) which helped the company to manage its working capital efficiency

    and affectively.

    Return on investment of the company reduced year by year. So the profitability of the

    firm automatically down. Compare to year 2005-06 with 2009-10 return on

    investment down by 92%.

    Working capital size of Atul Auto Ltd. not indicate any specific trend and fluctuate

    every year. Company decrease the working capital size in year 2009-10 as compare to

    previous year. Here lack of combination between current assets and current liabilities

    so the profitability was reduced.

    Current assets are more than current liabilities indicates that company use long term

    funds for short term requirements, where long term funds are most costly than short

    term funds.

    Company has a more inventories in total current assets. It is very good because

    inventory is essential for the smooth business operation. Company increases the

    current liabilities size and tries to maintain liquidity ratios as per standard industrial

    practices.

    Atul Auto Ltd. Increase the working capital leverage but its failed to increased

    profitability.

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    Working capital turnover ratio leads towards profitability. Working capital turnover

    ratio and ROI have a positive correlation (0.66). It means that changes in working

    capital turnover directly effect on profitability of the business. Thus, working capital

    turnover is very important for the business.

    Correlation between inventory turnover ratio and return on investment near to perfect.

    If there is a positive change in inventory turnover ratio it gives positive sign in

    profitability of the company and vice versa. So company should keep the inventory as

    per the sales. Raw material is major part of the inventory. Company required reducing

    the raw material size and holding period so, company need less funds for working

    capital and increase the profitability.

    There is a negative correlation between receivable turnover ratio and return on

    investment. It is due to the strict credit policy of the Atul Auto Ltd. It has given

    negative impact on the sales of the company. Company should develop liberal credit

    policy so, it will help in increasing sales and also the profitability of the firm.

    Positive correlation of current assets turnover ratio and return on investment. It means

    that current assets plays vital role in profitability. Companys current assets were

    always more than requirement it affect on profitability of the company. The higher

    current assets turnover ratio implies more efficient use of the funds.

    Current ratio of the company in last years above the ideal current ratio. It indicates

    companys good liquidity position and also indicates unnecessary investment in

    current assets. Correlation with return on investment is 0.19 and it is negative. It

    means that our funds have blocked in unnecessary current assets.

    Quick ratio of Atul Auto Ltd. also above the ideal ratio. We found moderate

    correlation between quick ratio and return on investment. Here company require to

    reduce some investment in current assets so the cost of fund reduce and profitability

    increase.

    Correlation between absolute liquid ratio and return on investment is weak. This ratiodid not match with ideal ratio and it was below as compare to ideal ratio. Its not big

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    impact on profitability of the Atul Auto Ltd. as per our view it is good because cash is

    less performing assets in working capital.

    Atul Auto Ltd. working capital shows the good liquidity position. Positive working capital

    indicates that company has the ability of the payments of short terms liabilities. Working

    capital of Atul Auto Ltd. not indicates any trend for particular period of time. All over

    working capital management of the company is average and its impact on profitability is

    average.

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    BIBLIOGRAPHY

    BIBLIOGRAPHY

    Books Referred

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    1. I.M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd. - Ninth

    Edition 2006

    2. Ravi M. Kishore Financial Management - Taxman Allied Services Pvt. Ltd.,

    New Delhi. 7 th Edition 2008

    3. G. Sudarsana Reddy Financial Management - Himalaya Publication House Pvt.

    Lt. Mumbai 1 st Edition 2008.

    4. Dr. R.S. Khandelwal Quantitative Analysis For Management -Ajmera Book

    Company-2 nd Edition 2008

    Websites References

    1. www.atulauto.co.in

    2. www.google.co.in

    Annual Reports

    1. Annual report of Atul Auto Ltd. 2005-06

    2. Annual report of Atul Auto Ltd. 2006-07

    3. Annual report of Atul Auto Ltd. 2007-08

    4. Annual report of Atul Auto Ltd. 2008-09

    5. Annual report of Atul Auto Ltd. 2009-10

    http://www.atulauto.co.in/http://www.google.co.in/http://www.google.co.in/http://www.atulauto.co.in/