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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




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

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