determinants of working capital & their impact on
TRANSCRIPT
CHAPTER – 1
INTRODUCTION
1.1 General Introduction
Efficient Management of working capital is one of the pre-conditions for the success
of an enterprise. Efficient management of working capital means management of various
components of working capital in such a way that an adequate amount of working capital is
maintained for smooth running of a firm and fulfillment of twin objectives of liquidity and
profitability. While inadequate amount of working capital impairs the firm’s liquidity,
holding of excess working capital results in the reduction of the profitability .But the proper
estimation of working capital actually required, is a difficult task for the management
because the amount of working capital varies across firms over the periods depending upon
the nature of the business, scale of operation, Production Cycle, Credit Policy and availability
of raw materials. For this, significant amount of funds is necessary to invest permanently in
the form of various current assets.
For instance, due to time lag between sales of goods and their actual realization in cash,
adequate amount of working capital is always required to be made available for maintaining
the desired level of sales. Empirical results show that ineffective management of working
capital is one of the important factors causing industrial sickness. Modern financial
management aims at reducing the level of current assets without ignoring the risk of stock
out. Efficient management of working capital is thus, an important indicator of sound health
of an organization, requires reduction of unnecessary blocking capital in order to bring down
the cost of financing. In the light of the above, an attempt is made in this study to look into
Determinants of working capital management of Nile Ltd.
Liquidity, Profitability, Turnover and Long term solvency are the four important and vital
aspects of corporate business life. No company can survive without profitability and
liquidity. A firm not making profit may be considered as sick but, one having no liquidity
may soon meet its down fall and ultimately die.
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1.2 Industry Profile
Engineering Industry
Primarily deals with the design, manufacture and operation of structures, machines or
devices. Engineering industry primarily comprise of sectors like civil, industrial, mechanical
and chemical. Parts of engineering industry with their respective functions Engineering
industry comprises of chemical, civil, industrial and mechanical engineering divisions, where
civil engineering division basically concerned with the activities like planning, construction,
designing or manufacturing of structures. The chemical industry is concerned with
engineering activities like construction, design and operation of plants and machinery of
chemical products like drugs, synthetic rubber etc. Electrical engineering primarily deals
with all engineering activities like manufacturing of devices for generation of electricity or
designing devices for transmission of electricity. This electrical engineering division is also
concerned with the designing and manufacturing of electronic devices including computers
and it's accessories.
Prospect of Engineering Industry
Modern technologies and innovative techniques, specifically in sectors like electronic
engineering add to the prosperity of the engineering industry.
Mechanical Engineering Industry
Electrical Engineering Industry
Civil Engineering Industry
Computer Engineering Industry
Environmental Engineering Industry
Mechanical Engineering Industry
Encompasses all mechanical operations like designing, manufacturing or maintenance of
mechanical structures. Mechanical engineering industry also deals with the engineering
equipments and accessories like spacecrafts, automobiles etc. Mechanical engineering
industry can be treated as a profitable industry, specifically in the field of robotics .
2
(a) Areas of mechanical engineering industry
Major areas of mechanical engineering industry include designing, manufacturing, finding
out the strength of materials or the amount of heat transfers or energy conversion etc.,
studying solid mechanics, thermodynamics, fluid mechanics, instrumentation and
measurement etc.
(b) Research works in mechanical engineering industry
Major research works are going on mechanical engineering field of Robotics, which is a field
of mechanical engineering primarily concerned with the development and application of
robots. Robots can produce mechanical motion for locomotion of mechanical parts of any
mechanical components or machines. Some other major areas of mechanical engineering
fields, where lots of research works are going on are micro or nano mechanics.
Electrical Engineering Industry
Primarily concerned with the technology of electricity, specifically in the design and
application of devices and circuitry for generation of electricity. The other major activities of
electrical engineering industry comprises of controlling power generated equipments and
communication devices of telephone, radio and satellite systems. Electrical engineering
industry also covers areas like electronics, signal processing and telecommunications.
(a) Some Of the Major Application Areas of Electrical Engineering Industry:
Involve control, generation, and delivery of electricity for domestic and industrial purposes.
Some of the commonly used electrical engineering industry products are transformer, circuit
breaker, battery charger, electric furnace transformer, dimmer switch, light switch, adapters,
fuse, welding generator, MP3 player, FM modulator, power supply , battery tester, TV game
controller, and some other specific electronic products. The application fields of electrical
engineering industry can be sub-divided into activities like designing and developing.
(b) Electrical Engineering Industry Economy and Market Potentiality:
3
Encompasses a wide area of activities from lighting to mobile communications and that is
why this industry has a huge capital earning potentiality, which can strengthen the economy
of a country. Electrical engineering industry can reduce the growing world economies from
the vulnerability to energy shortages. Clean electrical energy can be an alternative source of
power, which we normally acquire from hydrocarbons, like coal, petroleum products etc. and
this way it is gradually becoming a booming industry. Electricity can be treated as a clean
energy source.
Civil Engineering Industry :
Primarily covers activities of engineering discipline from planning, designing and
construction of buildings to development of water supplying structures. Civil engineering
industry also encompasses areas like soil and rock mechanics, surveying, material science
and environmental science.
Computer Engineering Industry:
Specifically deals with designing, manufacturing and development of computer hardware and
software. Some of the major activities of computer engineering industry are designing of
microprocessors, VLSI chips, embedded controllers etc. Computer engineering industry also
concerned chips, embedded controllers etc. Computer engineering industry also concerned
with activities of power electronics and electrical engineering sectors.
(a) Some Of the Major Application Fields of Computer Engineering:
Computer engineering industry primarily concerned with activities on some application fields
like microprocessor designing, firmware, circuit board, robotics research etc. Some other
common areas of application are developing system software like operating systems,
designing of analog sensors etc. Computer engineering industry has an enormous impact over
the economy of any country, as today's modern technological advancements are largely
dependent on computer engineering industry. Over time, this industry is booming in such a
way, that it may exceed all expectations.
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(b) Business Potentiality of Computer Engineering Industry
Computer engineering industry encompasses a wide range of technological services from
development of microprocessors to the development of system software’s. This is because of
these wide ranges of activities, this industry has established itself as the most potential
business sector in the world and almost all types of computer business, starting from
computer hardware manufacturing to services are growing steadily.
(c) Some Instances of Market Growth in Computer Engineering Industry
Market analysis report reveals that about 40 percent of the computer market in the Asia-
Pacific region is controlled by five major companies, like Hewlett-Packard, IBM, Compaq,
Dell and Samsung.
Environmental Engineering Industry:
Essentially deals with the activities of managing environmental resources. This industry is
specifically concerned with environmental activities like recycling, reprocessing, water
testing, soil and air testing etc. In this modern era, due to the development of modern
industries, environment is going to be a major issue and consequently this environmental
engineering industry is growing rapidly, specifically in continents like Asia, South America,
Eastern Europe and Africa.
(a) Application Fields of Environmental Engineering Industry
Some of the common fields of environmental engineering industry are water supply,
wastewater disposal, air-quality control, solid-waste management, and hazardous-waste
management, air sample testing, water testing, soil testing etc. The other specific fields
include noise control, industrial hygiene, radiology etc.
(b) Market Growth Rate of Environmental Engineering Industry
Market analysis reveals the fact that the market growth rate of environmental engineering
industry is maximum (2% to 4%) in Eastern Europe, Latin America, Asia, and Africa.
Environmental engineering industry growth rate in U.S. was 2% to 3%.
5
1.2 Company profile
Nile is a Public Limited Company Commenced manufacture of Glass Lined Equipment in
the year 1987 and its shares are listed on the Bombay Stock Exchange Limited (BSE). Nile is
an ISO 9001 certified Company manufacturing world class Glass Lined Equipment, Pressure
Vessels, Lead and Lead Alloys. Nile has emerged as a leader in achieving customer
satisfaction by delivering quality products, with a fervent desire to convert every customer
relationship into a prospective partnership.
Infrastructure:
Nile's Glass Lining and pressure vessel division is located at Nacharam Industrial estate,
Hyderabad, with a covered area of 8700 sq.m. The totally integrated fabrication, machining
and glass lining facilities ensure timely delivery of quality products. Nile's two Non-Ferrous
plants are located near Hyderabad, and near Tirupati. The combined capacity of these two
plants is 32000 tons per annum. Nile's 2 MW Wind Farm is located at Ramagiri, Ananthapur
district.
Design and Engineering: [
The state-of-the-art CAD facilities and experienced engineers not only automate the day-to-
day engineering drawing requirements, but also innovate and improve the versatility of the
product. In addition to standard equipment, Nile designs and manufactures equipment for
specific customer applications or process performance improvement.
Quality Assurance:
Nile’s Products are:
At the forefront of technology
Reliable and safe
Backed by prompt service
Quality Policy:
We are committed to achieving customer satisfaction by providing products and services that
fully meet customers' needs. We will strive for growth and profitability by continual
6
improvement of our processes, products and systems with the active involvement of all
employees.
Testing:
Every component is tested to confirm adherence to stringent internal quality standards. All
equipment is subjected to comprehensive inspection before dispatch.
Customer Service:
Nile’s well trained marketing team, comprising qualified engineers, liaises with customers to
understand their needs, and ensure that the end product meets the specific requirement of
each customer. These, coupled with Nile’s prompt after sales service, make it the industry
leader.
Synchronizing with Change: [
Nile is a growing company that continues to build on its strengths to excel globally. Efforts
are made on all fronts to keep in tune with the evolving trends in technology and meet the
changing needs of its partners.
Mile Stones:
1987 Commenced manufacture of Glass Lined Equipment.
1995 Started manufacture of Pressure Vessels.
Started manufacture of Stainless Steel Glass Lined Equipment.
Non-Conventional Energy - Installed 2 MW capacity Wind farm at Ramagiri, A.P
to generate power.
1996 Started manufacture of Glass lined Bend Leaf Agitators.
Started manufacture of Glass Lined Conical dryers.
1997 Quality System approved to be in accordance with ISO 9001.
Received technology for design & manufacture of Glass Lined Agitated Nutsche.
7
1998 Exported Glass Lined components to Malaysia.
Exported Pressure Vessels to Singapore and China.
1999 Established Non-Ferrous division.
2001 Commenced Export of Glass Lined equipment.
Introduced equipment with components to facilitate approval by US-FDA.
2004 Implemented major expansion of Fabrication and Glass Lining facilities
2005 The capacity of the 3000 TPA Lead recycling plant at Choutuppal doubled to 6000
TPA with state of the art facilities.
2009 A second plant, with a capacity of 20000 TPA, commenced commercial production
near Tirupati. The capacity of lead recycling plant at Choutuppal has been doubled to
12000 TPA.
Products:
Glass Lining Equipment
(a)Properties of Glass:
Performance and life of glass lined equipment depend mainly on the quality and
characteristics of glass. Nile has obtained technology of Versa Glass from Hakko Sangyo
Company Limited, Japan.
Glass used in glass lined equipment contains predominantly Borosilicate, with other
inorganic constituents, to give desired chemical and physical properties. Quality of Nile’s
Versa Glass conforms to parameters specified in Japanese Industrial Standards. The
following pages give details of physical properties, heat transfer data, and chemical
resistance of Versa Glass.
8
(b) Selection of Glass:
Various types of glass are used by manufacturers of glass lined equipment. Their properties
can be compared with the help of chemical resistance charts. Chemical resistance of Versa
Glass in some typical applications is given in the following pages.
Corrosion rate varies with temperature and concentration of chemicals. At higher
temperatures, the corrosion rate increases. For a specified concentration, superior quality
glass has a lower corrosion rate at a given temperature, or has a higher operating temperature
for a given corrosion rate. Versa Glass is comparable with the best glass available in the
international market.
(c) Grades of Versa Glass:
Versa Glass SG: Standard Glass in dark blue for most chemical reactions.
Versa Glass WG: White Glass for dark colored liquids
Versa Glass PG: Pharma Glass in light blue for Pharmaceutical applications.
This glass also has better abrasion resistance
The above glass compositions are available in CS / SS construction depending on the
operating temperatures. Nile manufactures glass lined equipment up to a capacity of 20000
liters (working volume) with dimensions as per JIS/DIN standards.
Pressure Vessels
(a) Product Range:
Pressure Vessels, Heat Exchangers, Columns, Reactors, Cladded Equipment, Equipment For
Low Temperature Service. Maximum size Ø 4500 mm, 16 M long, 40 mm thick. Equipment
of larger diameter and/or length is shipped in separate parts and assembled at site.
Design & Manufacture Codes ASME Sec.VIII, BS 5500, IS 2825, TEMA etc.
Association with Third Party Inspection Agencies we have worked with
Lloyds Register Industrial Services
Bureau Verities
TUV
Tata Projects
9
Engineers India
Kvaerner Powergas
Uhde India
Chempro
SPIC - SMO
(b) Quality Assurance:
Quality is the underlying strength of Nile’s reputation and competitiveness. Comprehensive
testing is performed at all stages of manufacture to ensure the product’s conformity to
international standards.
All equipment are assembled and tested as per quality plans before being securely packed
and dispatched. Such tests are documented in the quality records as given in the dossier.
Our quality system has been assessed and approved to be in accordance with requirements of
ISO 9001 for Design, Manufacture and Supply of Pressure Vessels and Glass Lined
Equipment. We can supply equipment with "CE" marking. Third Party Inspection Agencies /
Consultants we have been associated with.
Lead and Lead Alloys
Nile established its Non-Ferrous division with facilities for manufacturing Lead and Lead
Alloys from used lead acid batteries and other Lead bearing scrap. The first lead recycling
plant, with an annual capacity of 12000 TPA, is located 60 km from Hyderabad, and is
equipped with state of the art recycling and testing facilities to ensure product quality. A
second, larger, unit with an installed capacity of 20000 TPA has been established near
Tirupati.
(a) Environmental Regulations:
The units have the following regulatory consents:
Air and Water consent from the State Pollution Control Board
Hazardous Waste Management Clearance from the State Pollution Control Board
Environmentally Sound Management Practice from Ministry of Forest &
Environment.
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Nile has been able to establish a quality conscious clientele consisting of Lead Acid
battery manufacturers as well as PVC stabilizers and Lead Oxide manufacturers.
(b) Partial list of customers:
Domestic International
Amara Raja Batteries Limited (ARBL) Middle East Battery Company, Saudi Arabia
Exide Industries Limited PT Trimitra Baterai Prakasa, Indonesia
Tractors and Farm Equipment Limited
(TAFE)
Joong-il Metals, South Korea
Vinyl Chemicals Kailesh Metachem Pvt. Ltd., Sri Lanka
Kedar Metals
Baschem Pharma Limited
Nile established its Non-Ferrous division with facilities for manufacturing Lead and Lead
Alloys from used lead acid batteries and other Lead bearing scrap. The first lead recycling
plant, with an annual capacity of 12000 TPA, is located 60 km from Hyderabad, and is
equipped with state of the art recycling and testing facilities to ensure product quality. A
second, larger, unit with an installed capacity of 20000 TPA has been established near
Tirupati.
(c) Product Range
Pure Lead 99.97% purity
Lead Antimonies alloys
Lead Selenium alloys
Lead Calcium alloys
Lead Tin alloys
All products are customized to meet specific composition requirements
(d) Quality Control
11
A strict quality check is carried out at all stages of production from incoming raw materials
to the finished product. State-of-the-art Optical Emission Spectrometers from Spectrolab
Germany provide instantaneous assay for controlling the process and maintaining finished
product quality.
Board of Directors
Sri T. panduranga Rao
Sri v. ramesh
Dr. M.R. Naidu
Sri S.V. Narasimha Rao
Sri V. Ashok
Sri Ramanan Ramamurti
Sri. Satish Malladi
Senior Management:
Sri V. Sridharan
Sri K.V. Ramana
Auditors:
M/S. SARATHY & Balu
Chartered Accountants,
Internal Auditors:
M/s. Manohar Chowdhry & Associates
Bankers:
Andhra Bank
12
Organization Chart
MANAGING DIRECTOR
DIRECTOR
GENERAL MANAGER
ASST GENERAL MANAGER
Accounting Management Marketing Designing Manufacturing
Dept Dept Dept Dept Dept
Asst Accounted
Human Resource office
Administrative Sales Product design
Dept Dept
Purchase Production Distribution Accounting Personnel
CHAPTER – 2
13
RESEARCH METHODOLOGY
2.1 Objectives
To find out the short term liquidity and long term solvency position of Nile Ltd
during 2004-09.
To find out the activity and profitability position of Nile Ltd during 2004-09.
To find out the liquidity position of the company and rank them according to degree
of liquidity of Nile Ltd during 2004-09.
To find out the proportion of various items of current assets and current liabilities of
Nile Ltd during 2004-09.
To find out the factors which influence the requirement of working capital of Nile
Ltd. during 2004-09
2.2 Need and Scope for the Study
Working capital is the life blood and nerve centre of a business. Just as circulation of
blood is essential in the human body for maintaining life, working capital is very essential to
maintain the smooth running of a business. No business can run successfully with out an
adequate amount of working capital. Working capital refers to that part of firm’s capital
which is required for financing short term or current assets such as cash, marketable
securities, debtors, and inventories. In other words working capital is the amount of funds
necessary to cover the cost of operating the enterprise. The Scope of study is limited to the
extent of finding the Impact of determinants of working capital on liquidity and profitability
of company during 2004-09. This only gives an idea about liquidity, profitability, turnover
and solvency of the company but not the reasons behind them.
2.3 Period of the Study
The study has been conducted for a period of four months from March 2010 to June 2010.
This includes data collection, analysis of data, interpretation and report presentation.
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2.4 Tools Applied In the Study
To study and analyse the Determinants of working capital and their impact on
profitability and liquidity position at Nile Ltd for the period of five years during 2004-2009,
the tools for financial analysis like Ratio Analysis, Mootals Comprehensive Test, and Item
wise Analysis has been used.
2.5 Methodology
Firstly to analyze liquidity and solvency position of the company during 2004-09, the
important ratios like current ratio, quick ratio, cash ratio and interval measure ratio, debt to
equity ratio, net assets to net worth ratio, interest coverage ratio have been used. secondly, to
analyze activity and profitability position of the company during 2004-09, ratios like debtors
turnover ratio, net assets turnover ratio, fixed assets turnover ratio, current assets turnover
ratio, working capital turnover ratio, gross profit ratio, net profit ratio, operating expense
ratio, return on equity ratio, earning per share have been used. Thirdly to rank the liquidity
position of the company during 2004-09 four factors namely net working capital to current
asset ratio, inventory to current asset ratio, liquidity assets to current assets ratio and loans
and advances to current asset ratio have been combined in a points score. Fourthly, to find
out the level of investment in current assets and current liabilities have been done. Fifthly, an
analysis of various determinants of working capital has been done to find out the working
capital requirement during 2004-09.
2.6 Limitations
Time has been one of the limiting factors because the period of the study was limited
to three months.
Financial Statements are prepared on the basis of certain accounting concepts and
conventions. Any change in methods or procedures of accounting, limits the utility of
financial statements.
The reliability and correctness of calculations and findings depend upon the
information obtained through secondary data.
15
CHAPTER-3
DATA ANALYSIS AND INTERPRETATION
3.1 Liquidity Ratios:
Liquidity refers to the ability of a firm to meet its obligation in the short run, usually one
year. Liquidity ratios are generally based on the relationship between current assets (the
sources for meeting short term obligations) and current liabilities.
3.1.1a Current Ratio: The current ratio is calculated by dividing current assets by
current liabilities Current assets mean all those assets which are convertible into cash with in
a year, such as marketable securities, debtors, stock, and cash at bank, cash in hand and
prepaid expenses. Current liabilities included the obligations which mature in a year like
creditors, bills payable, outstanding expenses, bank overdraft and income tax liability. The
current ratio is thus a measure of firm’s short term solvency. It indicates the availability of
current assets in rupees for every one rupee of current liability. A ratio greater than one
means that the firm has more current assets than current claims against it. The ideal current
ratio is 2:1 in normal condition.
Current Ratio = [Current Assets/Current Liabilities]
3.1.1b Quick Ratio: Quick ratio is also known as acid test or liquid ratio. It is a more
rigorous test to liquidity than the current ratio. The term liquidity refers to the ability of firm
to pay its short term obligation as and when they become due. The two determinants of
current ratio as a measure of liquidity are current assets and current liabilities. Current assets
excluded inventories and prepaid expenses which are not easily convertible into cash with in
a short period. Quick ratio may be defined as the relationship between quick/current assets
and current or liquid liabilities. An asset is said to be liquid assets if it can be converted into
cash with in a short period with out loss of value. In that sense cash in hand and cash at bank
are the most liquid assets. The ideal quick ratio is 1:1.
Quick Ratio = [Quick Assets/ Quick Liabilities]
3.1.1c Cash Ratio: Cash is the most liquid asset. A financial analyst may examine cash
ratio and its equivalent to current liabilities. This is very stringent measure of liquidity.
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Indeed lack of immediate cash may not matter if the firm can stretch its payments or borrow
money at short notice.
Cash Ratio = [(Cash + Marketable securities)/Current liabilities]
3.1.1d Interval measure Ratio: A calculation to measure the approximate number of
days a company could operate simply on the cash if currently has on hand. And the value it
returns in the average number of days that company could use those assets to meet all its
expenses. The interval measure is similar to both the current ratio and quick ratio. In that it
gives an idea of how easily a company could fulfill its obligations. The interval measure is
sometimes preferred to the other ratios, because it returns an approximation of the actual
number of days, as opposed to the other ratios, which just return value that indicates the ease
of making the payments.
IMR= [Quick assets/Daily operating expenses]
3.1.2 Leverage Ratios:
Financial leverage refers to the use of debt finance. While debt capital is a cheaper source of
finance it is also a riskier source of finance. Leverage ratios help in assessing the risk rising
from the use of debt capital
3.1.2a Debt equity Ratio: Debt equity ratio is calculated to measure the relative claims
of outsider’s and the owner’s wait of the firm’s assets. It reflects the relative claims of
creditors and shareholders against the assets of the business. Debt usually refers to long term
liabilities. Equity includes equity and preference share capital and reserves. Ideal ratio is 2:1.
A firm with a debt equity ratio of 2 or less exposes its creditors to relatively lesser risks. A
firm with a high debt equity ratio exposes its creditors to greater risk.
DER= [Outsiders funds/Share holders funds]
3.1.2b Net asset to net worth Ratio: This ratio indicates the extent to which the
owner’s cash is frozen in the form of brick, motor and machinery, and the extent to which
funds are available for the firms operations. A ratio higher than 0.75 indicates that the firm is
vulnerable to unexpected events and changes in the business climate.
NA to NW ratio = [Net fixed assets/Net worth]
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3.1.2c Interest coverage Ratio: This ratio indicates weather a business is earning
sufficient profits to pay the interest charges. A debt service ratio of around six is normally
considered as ideal. The higher the ratio the better it is, as it indicates a greater margin of
safety to the lenders of long term debt.
Interest coverage ratio = [PBIT/Fixed interest charges]
3.1.3 Activity Ratios:
Measures how efficiently the assets are employed by a firm, these ratios are based on the
relationship between the level of activity, represented by sales or cost of goods sold and
levels of various assets. Activity ratios measure the efficiency and effectiveness with which a
firm manages its resources or assets. These ratios are called turnover ratios because they
indicate the speed with which assets are converted or turned over into sales.
3.1.3a Inventory turn over Ratio: Every firm has to maintain, certain level of
inventory of finished goods. A high inventory turn over indicates efficient management of
inventory. A high inventory turn over may be caused by a low level of inventory which may
result in frequent stock outs and loss of sales and customer good will.
ITR = [Cost of goods sold /Average inventory]
3.1.3b Debtor Turnover Ratio: A firm sells goods for cash and credit. Debtors are
convertible into cash over a short period. Net credit sales imply credit sales after adjusting for
sales returns. In case information on credit sales is not available, sales can be taken on the
numerator. The higher the debtors turn over the greater the efficiency of credit management.
DTR = [Net credit sales/Average debtors]
3.1.3c Net asset Turnover Ratio: A measurement of the availability of management to
use firm’s net assets to generate sales revenue. To high a number may indicate too little
investment which too low a ratio (relative to comparable firms). Suggests inefficient
management.
NATR = [Sales/Net assets]
3.1.3d Current assets turn over Ratio: Current assets turn over ratio shows the
productivity of the company’s current assets. The reciprocal of the ratio one may say that for
generating a sale of one rupee, the company needs 0.05 investments in current asset.
CATR = [Sales / Net current assets]
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3.1.3e Working capital Turnover Ratio: A firm may also like to relate net current
assets (or net working capital gaps) to sales. It may thus compute net working capital turn
over by dividing sales by net working capital. A high working capital turnover ratio indicates
efficient utilization of firm’s funds. The reciprocal of the ratio is 0.31. Thus it is indicated
that for one rupee of sales the company needs Rs 0.31 of net current assets. This gap will be
met from bank borrowings and long term sources of funds.
WCTR = [Sales / Net working capital]
3.1.4 Profitability Ratios:
Profitability reflects the final result of business operations. Profitability ratios are calculated
to measure the overall efficiency of the business. Profit is the engine that drives the business
enterprise. Profit is the ultimate output of a company, and it will have no future if it fails to
make sufficient profits.
3.1.4a Gross profit Ratio: Gross profit Ratio is one of the most commonly used ratios.
It reveals the result of trading operation of business. In other words it indicates to us the
profitability of the core activity of the business. There is no ideal or standard gross profit
ratio. The higher the ratio the better will be performance of the business. How ever gross
profit ratio of the current year must be compared with that of previous years to know the
change in performance.
GPR = [Gross profit/Net sales*100]
3.1.4b Net profit Ratio: It indicates the result of overall operations of the firm while the
gross profit ratio indicates the extent of profitability of core operations. Net profit ratio tells
us about overall profitability. The higher the ratio the more profitable is the business.
However one must look at the factors contributing to the net profit. This ratio shows the
earnings left for share holders (equity and preferences) as a percentage of net sales. It
measures the overall efficiency of production, administration, selling, financing, pricing and
tax management. Net profit ratio provide valuable understanding of the cost and profit
structure of the firm and enable the analyst to identify the sources of business efficiency or
inefficiency.
NPR = [Net profit / Net sales * 100]
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3.1.4c Operating expenses ratio: The operating expense ratio is usually viewed as a
measurement of management efficiency. Operating ratio establishes the relationship between
cost of goods sold and other operating expenses on the one hand and the sales on the other. It
measures the cost of operations per rupee of sales. Operating ratio is considered to be
yardstick of operating efficiency.
OER = [Operating expenses / Net sales]
3.1.4d Return on equity capital: It expresses the return earned by the owners of the
business after adjusting for debt and preference capital. Equity share holders take the
maximum risk on their investment as they are the owners of the business and have to bear all
the losses incurred by the business. They also have the right to enjoy all the profit earned by
the business. This ratio captures the return earned for taking the risk of ownership. The
equity share holders must decide as to weather the return earned is in worth taking the risks.
The higher the ratio the better it is. Inter firm and intra firm comparison must be made to
understand the ratio with its full implications.
ROEC = [(PAT – Preference dividend)/Equity share holder’s funds]
3.1.4e Earning per share: Earning per share is a small variation of return on equity
capital. Earning per share is a good measure of profitability and when compared with earning
per share of similar other companies, it gives a view of the comparative earnings or earnings
power of a firm
EPS = [(PAT – Preference dividend)/ Number of equity shares]
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3.1.1a Current Ratio
Table No. 3.1.1a
Current Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
CA 289264288 328384666 484578674 508509042 489044300
CL 114512097 98484122 149519334 163735596 148675043
Ratio(Times) 2.53 3.33 3.24 3.10 3.28
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Current ratio of Nile Ltd during 2004-09
2.53
3.33 3.283.13.24
0
0.5
1
1.5
2
2.5
3
3.5
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Cu
rren
t R
atio
(tim
es)
Interpretation
During 2004-2009, the current ratio of Nile Ltd is 2.53, 3.33, 3.24, 3.10 and 3.28 times. This
indicates the availability of current assets for every rupee of current liability. On an average it
has 3 rupees of current assets for every rupee of current liability. For all the years, current
ratio is more than the standard ratio of 2:1. It is highest during 2005-06. This is because of
increasing levels of sundry debtors.
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3.1.1b Quick Ratio
Table No. 3.1.1b
Quick Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
QA 75366873 118427930 18328115 158807228 114394123
QL 114512097 98484122 149519334 163735596 148675043
Ratio(Times) 0.65 1.20 1.22 0.96 0.77
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Qucik Ratio of Nile Ltd during 2004-09
0.770.96
1.22
0.65
1.2
0
0.20.4
0.60.8
11.2
1.4
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Qu
ick
Rat
io(t
imes
)
Interpretation
During 2004-2009, the quick ratio is 0.65, 1.20, 1.22, 0.96 and 0.77 times of current
liabilities. This indicates that, company’s liquidity position is satisfactory except during
2004-05 and 2007-09. For all the remaining years of analysis this ratio is meeting the
standard ratio of 1:1. On an average it has less than one rupee of Quick assets for every rupee
of current liability. This is a symbol of weakness of short term liquidity position. This is due
to decreasing levels of sundry debtors.
22
3.1.1c Cash Ratio
Table No. 3.1.1c
Cash Ratio of Nile Ltd. during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Cash 10915456 8519749 12624952 18351373 15531285
CL 114512097 98484122 149519334 163735596 148675043
Ratio(times) 0.095 0.086 0.084 0.112 0.10
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Cash Ratio of Nile Ltd during 2004-09
0.10.112
0.0840.0860.095
0
0.02
0.04
0.06
0.08
0.1
0.12
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Cas
h R
atio
(tim
es)
Interpretation
During 2004-2009 the cash ratio of NILE Ltd was 0.095, 0.086, 0.084, 0.112 and 0.10 times.
This ratio indicates the availability of cash and bank balances with it to meet its current
obligations. During 2004-07, it has shown decreasing trend while it has increased during
2007-08. This is due to low levels of cash and bank balances during 2004-07.
23
3.1.1d Interval Measure
Table No. 3.1.1d
Interval Measure Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Quick assets 75366873 118427930 183281115 158807228 114394123
Avg daily opert exps
1315595 1658751 2333398 3260553 2814793
Ratio(Days) 57 71 79 49 41
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Interval Measure Ratio Of Nile Ltd during 2004-09
4149
79
5771
0
20
40
60
80
100
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Inte
rval
Mea
sure
R
atio
(day
s)
Interpretation
During 2004-09 the Interval Measure of Nile Ltd is 57, 71, 79, 49 and 41 days. The average
interval measure for this company is 59 days. This indicates that, it can operate its daily
business activities without cash reserves for 59 days. During 2004-07, it was in comfortable
position, because it can run its business activities without cash for 69 days. While this level
of comfortable has decreased during 2007-09 because of decreasing level of Quick assets.
24
3.1.2a Debt to Equity Ratio
Table No. 3.1.2a
Debt to Equity Ratio of Nile Ltd. during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Long term debt 105400656 159734276 242830637 210044567 357545629
SHF 193205832 206242664 227666046 275500012 251879315
Ratio(Times) 0.545 0.77 1.06 0.76 1.41
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Debt to Equity Ratio of Nile Ltd during 2004-09
0.5450.77
1.06
0.76
1.41
0
0.5
1
1.5
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Deb
t to
Eq
uit
y R
atio
(tim
es)
Interpretation
During 2004 -2009 the Debt equity ratio of Nile Ltd. is 0.54, 0.77, 1.06, 0.83 and 1.29 times.
This ratio indicates the lenders contribution for each rupee of the owner’s contribution.
During this period, this ratio is less than the conventional rule of 1:1. This signifies that, the
claims of creditor’s is less than the owners during 2004-06 and greater than the owner’s fund
during 2006-07 and 2008-09.
25
3.1.2b Net Assets to Net worth Ratio
Table No. 3.1.2b
Net Assets to Net worth Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Net Assets 311094385 380969506 487037309 492183639 485765617
Net worth 193205832 206242664 227666046 275500012 251879315
Ratio(Times) 1.61 1.84 2.14 1.79 1.93
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Net Assets to Net Worth Ratio of Nile Ltd during 2004-09
1.931.79
2.141.84
1.61
0
0.5
1
1.5
2
2.5
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Net
Ass
ets
To
Net
Wo
rth
Ra
tio
(tim
es)
Interpretation
During 2004 - 2009, the Net asset to Net worth ratio of Nile Ltd is 1.61, 1.84, 2.14, 1.79 and
1.93 times. The ratio is high during 2006-07. This is showing increasing trend from 2004-09.
Due to increase in net worth (Reserves and Surplus).
26
3.1.2c Interest Coverage Ratio
Table No. 3.1.2c
Interest Coverage Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
EBIT 33990873 45652475 67201012 123239242 -8617669
Interest 9001989 14289189 18387511 25682272 31261403
Ratio(Times) 3.78 3.19 3.65 4.79 -0.28
SOURCE: Compiled from annual reports of NILE LTD from 2004-2009
Interest Coverage Ratio of Nile Ltd during 2004-09
-0.28
4.79
3.653.19
3.78
-1
0
1
2
3
4
5
6
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Inte
rest
cov
erag
e ra
tio(
tim
es)
Interpretation
During 2004-2009, the Interest coverage ratio of Nile Ltd is 3.78, 3.65, 4.79 and 0.28 times.
This ratio indicates the number of times the interest charges are covered by funds that are
ordinarily available for their payment. The debt serving capacity of this Company is very low
(-0.28) during 2008-09. But it has shown an increasing trend during 2005-08. During 2007-
08 it has reduced by 4.56%. This is due to inefficient operations and low profits.
27
3.1.3a Inventory turnover Ratio
Table No. 3.1.3a
Inventory Turnover Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
COGS 480192011 605444004 851690327 1190101642 1027399323
AI 208821291 211927076 255627148 325499687 362175996
Ratio(Times) 2.29 2.85 3.33 3.66 2.8
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Inventory Turnover Ratio of Nile Ltd during 2004-09
2.8
3.663.33
2.85
2.29
0
1
2
3
4
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Inve
nto
ry T
urn
over
R
atio
(tim
es)
Interpretation
During 2004 – 2009, the stock’s turnover ratio is 2.85, 3.33, 3.66 and 2.8 times. The velocity
of stock conversion into sales was highest during 2007-08. The ratio has increased during
2005-08 shows fast moving of the stock, indicating satisfactory, working capital position
during the period.
28
3.1.3b Debtor’s Turnover Ratio
Table No. 3.1.3b
Debtors Turnover Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Credit Sales 514182884 651096479 918891339 1313340884 1063068790
Avg Debtors 38109577 66043790 110001221 114375787 67211901
Ratio(Times) 13.49 9.86 8.35 11.5 15.8
ACP(days) 27 37 43 31 23
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Debtors Turnover Ratio of Nile Ltd during 2004-09
15.8
11.5
8.359.86
13.49
0
5
10
15
20
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Deb
tors
Tu
rnov
er
Rat
io(t
imes
)
Interpretation
During 2004 -2009, the Debtor’s Turnover Ratio is 9.86, 8.35, 11.5 and 15.8 times. On an
average, this company is able to convert its debtors in to cash 11 times a year. But year to
year analysis of this ratio indicates that, its ability in converting debtors in to cash has
increased. This is a clear indication of efficient credit policy.
29
3.1.3c Net assets Turnover Ratio
Table No. 3.1.3c
Net Assets Turnover Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Sales 514182884 651096479 918891339 1313340884 1063068790
Net assets 311094385 380969506 487037309 492183639 485765617
Ratio(Times) 1.65 1.70 1.88 2.66 2.18
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Net Assets Turnover Ratio of Nile Ltd during 2004-09
2.18
2.66
1.881.71.65
0
0.5
1
1.5
2
2.5
3
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Net
Ass
ets
Tu
rnov
er
Rat
io(t
imes
)
Interpretation
During 2004-09, the Net assets turnover ratio is 1.65, 1.70, 1.88, 2.66 and 2.18 times. This
ratio indicates the efficiency of company in utilizing its Net assets. It has shown an
increasing trend during 2004-08.
30
3.1.3d Fixed Assets Turnover Ratio
Table No. 3.1.3d
Fixed Assets Turnover Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Sales 514182884 651096479 918891339 1313340884 1063068790
NFA 136342194 151068962 151977969 147410193 145396360
Ratio(Times) 3.77 4.30 6.04 8.9 7.31
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Fixed Assets Turnover Ratio of Nile Ltd during 2004-09
7.318.9
6.04
4.33.77
0
2
4
6
8
10
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Fix
ed A
sset
s T
urn
over
R
atio
(tim
es)
Interpretation
During 2004-09, the Fixed Assets Turnover Ratio of Nile Ltd is 3.77, 4.30, 6.04, 8.9 and 7.31
times. This Ratio indicates the efficiency of company in utilizing its fixed assets. It is the
lowest 3.77 times during 2004-05. While highest 8.9 times during 2007-08.
31
3.1.3e Current Assets Turnover Ratio
Table No. 3.1.3e
Current Assets Turnover Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Sales 514182884 651096479 918891339 1313340884 1063068790
NCA’s 174752191 229900544 335059340 344773446 340369257
Ratio(Times)
2.9 2.8 2.7 3.8 3.12
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Current Assets Turnover Ratio of Nile Ltd during 2004-09
3.123.8
2.72.82.9
0
1
2
3
4
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Cu
rren
t A
sset
s T
urn
over
Rat
io(t
imes
)
Interpretation
During 2004-09, the Current Assets Turnover Ratio of Nile Ltd is 2.9, 2.8, 2.7, 3.8 and 3.12
times. This ratio indicates the efficiency of company in utilizing its Current assets. It has
shown an increasing trend during 2004-09, due to increase in inventories and receivables.
32
3.1.3f Working Capital Turnover Ratio
Table No. 3.1.3f
Working Capital Turnover Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Sales 514182884 651096479 918891339 1313340884 1063068790
NWC 1747521911 229900544 335059340 3444773446 340369257
Ratio(Times) 2.9 2.8 2.7 3.8 3.12
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Working Capital Turnover Ratio of Nile Ltd during 2004-09
3.12
3.8
2.72.82.9
0
1
2
3
4
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Wor
kin
g C
apit
al
Tu
rnov
er R
atio
(tim
es)
Interpretation
During 2004-09, the Working Capital Turnover Ratio of Nile Ltd is 2.9, 2.8, 2.7, 3.8 and
3.12 times. This ratio shows relationship between sales and requirement of Net current assets.
The average working capital turnover ratio is 3.06 times, this indicates that, for one rupee of
sales, company needs 0.30 Rs of net current asset. This gap has shown an increasing trend
during 2007-09.
33
3.1.4a Gross Profit Ratio
Table No. 3.1.4a
Gross Profit Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Gross profit 33990873 45652475 67201012 123239242 35669467
Sales 514182884 651096479 918891339 1313340884 1063068790
Ratio(%) 6.61 7.01 7.31 9.38 3.35
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Gross Profit Ratio of Nile Ltd during 2004-09
3.35
9.38
7.317.016.61
0
2
4
6
8
10
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Gro
ss P
rofi
t R
atio
(%)
Interpretation
During the period 2004-09 the Gross Profit Ratio of Nile Ltd is 6.61%, 7.01%, 7.31%, 9.38%
and 3.35%. This ratio indicates the average spread between cost of goods sold and the sales
revenue. It is low [3.35%] during 2008-09 and the highest [9.38%] during 2006-07. It has
shown an increasing trend during 2004-08, while a decreasing trend during 2008-09.
34
3.1.4b Net profit Ratio
Table No. 3.1.4b
Net Profit Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Net profit 19487308 26123242 34104145 70956143 -22265596
Sales 514182884 651096479 918891339 1313340884 1063068790
Ratio (%) 3.78 4.01 3.71 5.40 -2.09
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Net Profit Ratio Of Nile Ltd during 2004-09
3.78 4.01 3.71
5.4
-2.09-4
-2
0
2
4
6
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Net
Pro
fit
Rat
io(%
)
Interpretation
During 2004-09, the Net Profit Ratio of Nile Ltd is 3.78%, 4.01%, 3.71%, 5.40% and -
2.09%. This ratio indicates the company’s efficiency in manufacturing, administrating and
selling the products. It is very low (-2.09) during 2008-09 and highest (5.40%) during 2007-
08, due to expansion of production capacity expenses has increased.
35
3.1.4c Operating Expense Ratio
Table No. 3.1.4c
Operating Expenses Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Operating exp 446201138 559791529 784489315 1066862400 991729856
Sales 514182884 651096479 918891339 1313340884 1063068790
Ratio (%) 0.867 0.859 0.85 0.812 0.93
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Operating Expense Ratio of Nile Ltd during 2004-09
0.93
0.812
0.850.8590.867
0.75
0.8
0.85
0.9
0.95
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Op
erat
ing
Exp
ense
s R
atio
(%)
Interpretation
During 2004-09, the Operating Expenses Ratio of Nile Ltd is 0.867, 0.859, 0.85, 0.81 and
0.93 percentages. This ratio has increased from 0.812 to 0.93 during 2007-09, due to increase
in sales and decrease in operating expenses.
36
3.1.4d Return on Equity RatioTable No. 3.1.4d
Return on Equity Ratio of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
PAT 19487308 26123242 34104145 10956143 -22265596
Net worth 193205832 206242664 227666046 275500012 251879315
Ratio (%) 0.100 0.12 0.14 0.25 -0.08
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Return on Equity Of Nile Ltd during 2004-09
-0.08
0.25
0.140.120.1
-0.1
0
0.1
0.2
0.3
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Ret
urn
on
Eq
uit
y (%
)
Interpretation
During 2004-09 Return on Equity Ratio of Nile Ltd is 0.100, 0.12, 0.14, 0.25 and -0.08. This
ratio reveals how well the resources of company are being used. It has increased from 0.100
to 0.25 during 2004-08. Later in 2008-09 is show -0.08. This is due to decrease in profits and
increase in expenses.
37
3.1.4e Earning Per Share (Rs)
Table No. 3.1.4e
Earning per share of Nile Ltd during 2004-2009
YearParticulars
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
PAT 19487308 26123242 3414145 70956143 -22265596
No. of shares 3001900 3001900 3001900 3001900 3001900
EPS 6.49 8.702 11.36 23.63 -7.41
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Earning Per Share Of Nile Ltd during 2004-09
-7.41
23.63
11.368.702
6.49
-10
-5
0
5
10
15
20
25
30
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Ear
nin
g P
er S
har
e(R
s)
Interpretation
During 2004-09 Earnings Per Share of Nile Ltd is 6.49, 8.702, 11.36, 23.63 and -7.41. This
ratio indicates the power of a firm. It is very low (-7.41) during 2008-09 due to decrease in
profits.
38
3.2 Mootals Comprehensive test
A liquidity position of a firm is largely effected by a composition of working capital in a as
much as any considerable shifts from the relatively more current assets to relatively less
Current assets (or) vice-verse, will materially affect firms ability to pay its current debts
promptly, therefore to determine the liquidity position of the company, more precisely a
comprehensive test has been done.
Process of ranking has been used to arrive at a more comprehensive measure of liquidity in
which four factors, namely inventory to current assets ratio, cash and bank to current assets
and other current assets including loans and advances to current assets ratio have been
combined in a points score. In case of debtors to current assets ratio, cash and bank to current
assets and other current assets including loans and advances to current assets ratio, a high
value indicates relatively favorable position and ranking has been done in that order. On the
other hand, a low inventory to current assets ratio shows a more favorable position and hence
ranking has been done in that order. Ultimate ranking has been done on the principle that the
lower points scored, the more favorable is the liquidity position.
Each and every management of the company faces difficulties it may be with suppliers,
distributors or employees. Since, uncertainty faced by the company due to internal as well as
external environment. To eradicate this problem, company should be in a liquidity position. It
means company should be in a position to pay the current liabilities and this method studies
the past five years data of the company, it studies the performance of the company. In basis
of GDP, economic conditions, competitor’s.
39
40
Inv to C.A of Nile Ltd during 2004-09
77%69%
62%64%74%
0
20
40
60
80
100
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Inv
to C
.A R
atio
(%)
LA's to C.A of Nile Ltd during 2004-09
23%
31%
38%36%
26%
0
10
20
30
40
2004-05 2005-06 2006-07 2007-08 2008-09
Years
LA
's to
C.A
Rat
io(%
)
L & A to C.A of Nile Ltd during 2004-09
9.1%7.51%
6.84%
4.8%5.05%
0
2
4
6
8
10
2004-05 2005-06 2006-07 2007-08 2008-09
Years
L &
A to
C.A
Rat
io(%
)
Total Rank of Nile Ltd during 2004-09
17
108
12 13
0
5
10
15
20
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Tot
al R
anks
Ultimate Rank of Nile Ltd during 2004-09
5
2
1
3
4
0
1
2
3
4
5
6
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Ulti
mat
e R
ank
41
During 2004-09, the Net Working Capital to current assets ratio was 60%, 70%, 69%, 67%
and 70%. This indicates that, the excess of current assets over current liabilities is more than
50% of current assets for all the five years. The greater the percentage of net working capital
in current assets, the better the liquidity position of the company. This shows that, during
2005-06, the degree of liquidity is high (70%) and it has been ranked accordingly. While
2008-09 stands second, 2006-07 stands third, 2007-08 stands fourth and 2004-05 stands fifth
in terms of their degree of liquidity during 2004-09.
During 2004-09, the inventory to current assets ratio was 74%, 64%, 62%, 69% and 77%.
This specifies the percentage of inventory in current assets. Lesser the percentage of
inventories in current assets, the more is the funds available in the form of working capital.
So, therefore lesser the percentage of inventories in current assets, the better the liquidity
position of the company. During 2006-07, inventories are 62% of current assets which is the
lowest among five years, so, it has ranked first, similarly 2005-06 stands second, 2007-08
stands third, 2004-05 fourth, and 2008-09 ass fifth.
During 2004-09, the liquid assets to current asset ratio were 26%, 36%, 38%, 31% and 23%.
This specifies the percentage of liquid assets in current assets. More the percentage of liquid
assets in current assets, more are the funds available in the form of working capital. So,
therefore more the percentage of liquid assets in current assets, the better the liquidity
position of the company. During 2006-07 liquid assets are 38% of current assets, which is the
highest among five years, so, it has been ranked first, similarly 2005-06 stands’ second,
2007-08 stand’s third, 2004-05 fourth, and 2008-09 fifth.
During 2004-09, the loans and advances to current assets ratio is 5.05%, 4.8%, 6.84%, 7.51%
and 9.1%. This specifies the percentage of loan’s and advances in current assets. The greater
percentage of loan’s and advances in current assets indicates that loan’s and advances have
been given to employees and lesser the amount of working capital is needed to manage
business activities. During 2008-09 loan’s and advances given to employees is the higher and
42
it has been ranked first in terms of liquidity while 2007-08 ranked second, 2006-07 ranked
third, 2004-05 fourth, and 2005-06 fifth.
During 2004-09, the total rank of net working capital to current assets, inventory to current
assets ratio, liquid assets to current assets ratio and loan’s and advances to current assets ratio
is 17, 10, 8, 12 and 13. In the year 2004-05 the total rank is 17 which are highest to that of all
the years, which indicates company has maintained. Low level of net working capital,
inventory, liquid assets and loans and advances, while during 2006-07 the total rank is 8
which is lowest to that of all the years this indicates company has sufficient current assets.
Liquidity position is good during 2006-07.
During 2004-09, the ultimate rank is 5,2,1,3 and 4 in the year 2004-05 it has ranked highest
by 5. This indicates low level of net working capital, inventory, liquid assets and loans and
advances. Where as in the year 2006-07 it has ranked first. This indicates the better liquidity
position when compared to that of all years of analysis.
43
3.3 Item Wise Analysis of Elements of CA’s and CL’s
An important Working capital policy decision is concerned with the level of investment in
current assets. Under a flexible policy, the investment in current assets is high. This means
that the company maintains a huge balance of cash and marketable securities carries large
amount of investors and grant generous terms of credits to customers, which leads to high
levels of debtors. Under restrictive policy, the investment in current assets is low, this means
that firm keeps a small balance of cash and marketable securities, manages with small
amounts of inventories and offers term of credit which leads to low level of debtors
What are the consequences of flexible and restrictive policy very broadly a flexible policy
results in fewer production stoppages, ensures quick deliveries to customers and stimulates
sale because liberal credit is granted to consumer; of course these benefits come at the cost of
higher investment in current assets policy. On the other hand it may lead to frequent
production stoppages, delayed deliveries to customer and loss of sale.
An item wise analysis of gross working capital enables one to examine in which elements,
the gross working capital funds are locked up and to find out the factors responsible for the
significant changes in working capital of different years. To make item wise analysis, the
share of each of the years under study and average percentage for all the years has been
calculated. The working capital management or short-term financial management, which is
concerned with decisions relating to current assets and current liabilities. The constituents of
current assets are in which Inventories, Work in progress, finished goods, Trade debtors,
Loans & advances and Cash & bank balances and Current liabilities are Sundry creditors,
Trade advances, Borrowings (short term), Commercial banks and Provisions. Characteristics
of current assets like short span and swift transmission into other asset forms are taken into
consideration while managing working capital.
Current assets have a short life span. Cash balance may be held idle for a week or two.
Accounts receivables may have a lifespan of 30 to 60days, and inventories may be held for 1
to 60 days. The lifespan of current assets depends upon the time required in the activities of
procurement, production, sales, and collection and the degree of synchronization among
them. An element-wise analysis of gross working capital enables one to examine in which
element the gross working capital funds are locked up and to find out the factors responsible
for the significant changes in working capital of different years.
44
Table No. 3.3.1
Analysis of Current Assets of Nile Ltd during 2004-2009
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Current Assets % % % % %
Inventories 73.95 63.9 62.2 68.8 76.6
Sundry debtors 15.24 26.8 27.2 19.01 7.7
Cash and bank 3.8 2.59 2.6 3.6 3.2
Other Current Assets 1.9 1.9 1.13 1.08 3.4
Loans and Advances 5.05 4.8 6.8 7.5 9.1
Total 100 100 100 100 100
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Analysis of Current Assets of Nile Ltd during 2004-09
73.95% 76.6%
68.8%
62.2%63.9%
7.7%15.24% 19.01%
27.2%26.8%
3.6%2.6%2.59%3.8%3.2%1.08%1.13%1.9%1.9%
3.4%
7.5%6.8%4.8%5.05% 9.1%
0
10
20
30
40
50
60
70
80
90
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Cu
rren
t A
sset
s(%
)
Inventories
Sundry debtors
Cash and bank
Other Current Assets
Loans and Advances
45
During 2004-09, the proportion of inventories in its current assets is 73.97%, 63.9%, 62.2%,
68.8% and 76.6%. This shows that the level of inventory has increased during 2006-09. This
indicates that, the amount of funds blocked in the form of inventory are increased, as a result,
the liquidity position has reduced.
During 2004-09, the proportion of sundry debtors in its current assets are 15.24%, 26.8%,
27.2%, 19.01% and 7.7%, This shows that the level of sundry debtors is low during 2008-09,
and a decreasing trend during 2006-09. This indicates a decrease in credit sales of the
company.
During 2004-09, the proportion of cash and bank balances in its current assets are 3.8%,
2.59%, 2.6%, 3.6% and 3.2%. This shows that, the level of cash and bank balances have
increased during 2005-09. It has shown an increasing trend during 2005-09.
During 2004-09, the proportion of other current assets in its current assets is 1.9%, 1.9%,
1.13%, 1.08%, 3.4%. This shows that, the level of other current assets have increased during
2008-09.
During 2004-09, the proportion of loans and advances in its current assets is 5.05%, 4.8%,
6.8%, 7.5%, and 9.1%. This shows that the level of loans and advances have increased during
2004-09. it has shown an increasing trend.
46
Table No. 3.3.2
Analysis of Current Liabilities of Nile Ltd during 2004-2009
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Current Liabilities % % % % %
Liabilities 89 79.6 93 86.03 97.36
Provisions 10.9 20.4 6.99 13.97 2.64
Total 100 100 100 100 100
SOURCE: Compiled from annual reports of NILE LTD during 2004-2009
Analysis of Current Liabilities of Nile Ltd during 2004-09
97.36%86.03%93%
79.6%89%
2.64%13.97%6.99%20.4%
10.9%
0
20
40
60
80
100
120
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Cu
rren
t L
iab
iliti
es(%
)
Liabilities
Provisions
During 2004-09 current liabilities of Nile Ltd were 89%, 79.6%, 93%, 86.03%& 97.36%. For
all years current liabilities were high and have shown a fluctuating trend. Provisions made by
Nile Ltd during 2004-09 are 10.9%, 20.4%, 6.99%, 13.97% & 2.64%. This company has
more provisions (20.4%) during 2004-05 while lowest provisions (2.64%) during 2008-09.
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3.4 Determinants of Working Capital
3.4.1 Business Cycle
The working capital requirements are also determined by the natures of the business cycle.
Business fluctuations lead to cyclical and seasonal changes requirements. The variations in
business conditions may be in two directions:
Upward phase when boom conditions prevail, and
Downswing phase when economic activity is marked by a decline.
During the upswing of business activity, the need for working capital is likely to grow to
cover the lag between increased sales and receipt of cash as well as to finance purchase of
additional material to cater to the expansion of the level of activity. So the need for working
capital of Nile Ltd. in recessionary conditions is bound to decline. Business fluctuations
influence the size of working capital mainly through the effect on inventories. During the
period of years 2004-09, this company’s business activity is in booming conditions during
2004-07 and under recessionary condition during 2007-09. During the period of economic
boom, it has a requirement of working capital of Rs 739712075 (51%) and the cost of the
same was 14%. While under recessionary economic condition, its working capital has
decreased to Rs 685142703 (4.8%) and the cost of the same is 14.8%.
3.4.2 Credit Policy
The credit policy relating to sales and purchases also affects the working capital. The credit
policy influences the requirement of working capital in two ways
credit terms granted by the firm to its customers
credit terms available to the firm from its creditors
The credit terms granted to customers have a bearing on the magnitude of working capital by
determining the level of book debts. Higher credit sales result in higher book debts. If liberal
credit terms are available from the suppliers of goods, the need for working capital is less.
During 2004-09 the percentage of sundry debtor’s in current assets is 15.24, 26.8, 27.2, 19.01
and 7.7. During five years credit sales has showed decaling trend. During 2004-07 credit
sales has increased from 15.24% to 27.2%. It indicates the requirement of working capital is
more during this period. During 2007-08 credit sales has decreased from 19.01% to 7.7%. Its
signifies low requirement of working capital.
48
3.4.4 Growth and Expansion
As a company grows it is logical to expect that a larger amount of working capital is
required. it is of course, difficult to determine precisely the relationship between the growth
in the volume of business of a company and the increase in its working capital. Other things
being equal, growth industries require more working capital than those that are static. Nile
Ltd. in 2004-05 implemented major expansion of fabrication and glass lining facilities. In
2005-06 the company’s total production capacity of the 3000 TPA lead recycling plant at
Choutuppal has doubted to 6000 TPA with state of the art facilities. In 2008 A second plant
with a capacity of 20000 TPA commence commercial production near Tirupati. The capacity
of lead recycling plant at Choutuppal has been doubled to 12000TPA. Due to expansion of
total production capacity from 6000 TPA to 12000 TPA requirement of working capital has
increased from Rs 229900544 to Rs 344773446. This shows increase of 85% of working
capital from 6000 TPA to 12000 TPA.
3.4.5 Profit level
The level of profits earned differs from enterprise to enterprise. In general, the nature of the
product, hold on the market, quality of management and monopoly power would by and large
determine the profit earned by a firm. Higher profit margin would improve the prospects of
generating more internal funds thereby contributing to the working capital pool. The net
profit is a source of working capital to the extent that it has been earned in cash. The
availability of internal funds for working capital requirements is determined not merely by
the profit margin but also by the manner of appropriating profits. The availability of such
funds would depend upon the profit appropriations for taxation, dividends, reserves and
depreciations. Profits levels during 2004-07 are 3.78, 4.01, 3.71, 5.4 and -2.09. It is showing
declining trend. This declining trend of profits signifies the requirement of working capital.
3.4.7 Dividend Policy
Another appropriation of profits which has a bearing on working capital is dividend payment.
The payment dividend consumes cash resources and thereby affects working capital to that
extent. Conversely if the firm does not pay dividend but retains the profits working capital
increases. In planning working capital requirements, therefore, a basic question to be decided
49
is whether profits will be retained or paid out to shareholders. In theory, a firm should retain
profits to preserve cash resources and, at the same time, it must pay dividends to satisfy the
expectations of inventors. When profits are relatively small, the choice is between retention
and payment. The choice must be made after taking into account all the relevant factors.
Payment of dividends plays an important role in determining the requirement of working
capital. During 2004-08 dividends has paid according to profit levels. Due to decrease in
profits during 2008-09 company has skipped payment of dividend, which in turn helps in
increasing the working capital.
3.4.8 Depreciation policy
Also exerts an influence on the quantum of working capital. Depreciation charges do not
involve any cash outflows. The effect of depreciation policy on working capital is, therefore,
indirect. In the first place, depreciation affects the tax liability and retention of profits.
Depreciation is allowable expenditure in calculating net profits. Enhanced rates of
depreciation lower the profits and, therefore, the tax liability and, therefore, a smaller
dividend payment. Thus, cash is preserved. In the second place, the selection of the method
of depreciation has important financial implications. If current capital; expenditure falls short
of the depreciation provision, the working capital position is strengthened and there may be
no need for short-term borrowing. If, on the other hand, the current capital expenditure
exceeds the depreciation provision, either outside borrowing will have to be resorted to or a
restriction on dividend payment coupled with retention of profits will have to be adopted to
prevent the working capital position from being adversely affected. It is in these ways that
depreciation policy is relevant to the planning of working capital. Depreciation charges help
the company in lowering its tax liability rates. Nile Ltd is following straight line depreciation
policy.
50
CHAPTER-4
SUMMARY OF FINDINGS
Objective - 1
During 2004-2009, the Current Ratio of Nile Ltd is 2.53, 3.33, 3.24, 3.10 and 3.28
times. For all the years, current ratio is more than the standard ratio of 2:1.
During 2004-2009, the Quick Ratio is 0.65, 1.20, 1.22, 0.96 and 0.77 times of current
liabilities. For all the years except 2005-07 this ratio is less than the standard ratio
1:1.
During 2004-2009 the cash ratio of Nile Ltd was 0.095, 0.086, 0.084, 0.112 and 0.10
times. Thus company carries a small amount of cash and it has credit limits
sanctioned from banks and can easily draw cash.
During 2004-09 the Interval Measure of Nile Ltd is 57, 71, 79, 49 and 41 days. While
this level of comfortable cash balance has decreased during 2007-09.
During 2004 -2009 the Debt equity ratio of Nile Ltd is 0.54, 0.77, 1.06, 0.83 and 1.29
times. For all the years except 2004-06 lender’s contribution is more than the owner’s
contribution.
During 2004 - 2009, the Net asset to Net worth ratio of Nile Ltd is 1.61, 1.84, 2.14,
1.78 and 1.92 times. The ratio is high during 2006-07.
During 2004-2009, the Interest Coverage Ratio pf Nile Ltd is 3.78, 3.65, 4.79 and
0.28 times. The debt serving capacity of this Company is very low (-0.28) during
2008-09 but it has shown an increasing trend during 2004-08.
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Objective - 2
During 2004 – 2009, the Stock Turnover Ratio is 2.85, 3.33, 3.66 and 2.8 times. The
velocity of stock conversion into sales has shown an increasing trend during 2004-08.
During 2004 -2009, the Debtor’s Turnover Ratio is 9.86, 8.35, 11.5 and 15.8 times.
This indicates that, for all the years this ratio is excellent, signifying efficient
management of credit sales.
During 2004-09, the Net Assets Turnover Ratio is 1.65, 1.70, 1.88, 2.66 and 2.18
times. This indicates efficient utilization of net assets.
During 2004-09, the Fixed Assets Turnover Ratio of Nile Ltd is 3.77, 4.30, 6.04, 8.9
and 7.31 times. This indicates the efficient utilization of fixed assets.
During 2004-09, the Current Assets Turnover Ratio of Nile Ltd is 2.9, 2.8, 2.7, 3.8
and 3.12 times. The amount of investment in current assets for every one rupee of
sales has shown an increasing trend.
During 2004-09, the Working Capital Turnover Ratio of Nile Ltd is 2.9, 2.8, 2.7, 3.8
and 3.12 times. The average working capital turnover ratio is 3.06 times.
During the year 2004-09 the Gross Profit Ratio of Nile Ltd is 6.61%, 7.01%, 7.31%,
9.38% and 3.35%.
During 2004-09, the Net Profit Ratio of Nile Ltd is 3.78%, 4.01%, 3.71%, 5.40% and
-2.09%.
During 2004-09, the Operating Expenses Ratio of Nile Ltd is 0.867, 0.859, 0.85, 0.81
and 0.93 times. This ratio has increased from 0.812 to 0.93 during 2007-09.
52
During 2004-09 Return On Equity Ratio of Nile Ltd is 0.100, 0.12, 0.14, 0.25 and -
0.08. It has increased from 0.100 to 0.25 during 2004-08.
Objective – 3
During 2004-09, the Net Working Capital to current assets ratio is 60%, 70%, 69%,
68% and 70%. Working capital maintained to run daily transactions is satisfactory.
During 2004-09, the inventory to current assets ratio was 74%, 64%, 62%, 69% and
77%. Most of the current assets are blocked in the form of inventory.
During 2004-09 the liquid assets to current asset ratio was 26%, 36%, 38%, 31% and
23%. It shows the cash and bank balances maintained by the company.
During 2004-09, the loans and advances to current assets ratio is 5.05%, 4.8%,
6.84%, 7.51% and 9.1%.
Objective – 4
During 2004-09, the Inventories percentage in current assets is 73.97%, 63.9%,
62.2%, 68.8% and 76.6%. It has shown increasing trend from 2006-09.
During 2004-09, the Debtor’s percentage in current assets is 15.24%, 26.8%, 27.2%,
19.02% and 7.7%. Debtor’s percentage has decreased in 2007-09. This indicates that
credit sales have decreased.
During 2004-09, the proportion of cash and bank balances in its current assets are
3.8%, 2.59%, 2.6%, 3.6% and 3.2%.
During 2004-09, the proportion of liabilities in Current liabilities is 89%, 79.6%,
93%, 86.03%& 97.36%. It has increased its liabilities.
53
During 2004-09, the proportion of Provisions in Current liabilities is 10.9%, 20.4%,
6.99%, 13.97% & 2.64%.
Objective – 5
On the observation of companies profit and loss account and balance sheet and in
consolidation with factory manager of the company it is found that the factors like
business cycle, credit policy, growth and expansion, profit levels, dividend policy and
depreciation policy play’s a vital role in determining the requirement of working
capital during 2004-09.
54
CHAPTER -5
SUGGESTIONS AND RECOMMENDATIONS
The current ratio of the company was more then the ideal ratio of 2:1, indicating more of
current assets for every rupee of current liability. So it should try to utilize it funds in
more profitable manner.
The debtor’s turnover ratio showed an increasing trend. This indicates greater credit
sales. This results in blocking of funds in the form of sundry debtors leading to shortage
of working capital. So it should try to reduce the debt collection period.
The Cash ratio of the company during 2004-2009 was very low. These low levels of cash
may affect the liquidity position of the company. It should try to maintain 1/10 th of the
current assets as Cash & Bank balances. This helps the company to meet unforeseen
expenses.
Profits of the company have been decreased in 2008-09 due to expansion of business. So
it should try to minimize the expenditure.
The Operating expenses ratio of the company during 2004-2009 is very high i.e. 0.867,
0.859, 0.85, 0.81 and 0.93 times. With such a high level operating expenses, it will not be
able to survive in competitive world, as its net profits will be very low. So, it should try
to exercise proper control over its administrative expenses. It should try to see that its
operating expenses are not more than 0.70-0.80 every year.
55
CHAPTER – 6
CONCLUSION
From this study on “Determinants of working capital and their impact on profitability and
liquidity position at NILE Ltd. During 2004-09” It was found that the current ratio of the
company was more then the ideal ratio of 2:1, The absolute liquid ratio of the company is
more than the ideal ratio of 0.5:1, The debtor’s turnover ratio showed an increasing trend,
very low levels of net profit during 2004-2009, high proportion of debtors in its current
assets. Working capital ratio showed a fluctuating trend. All these finding have impact on
working capital management of the company. All these problems can be rectified if, the
company tries to follow and implement the suggestions and recommendations given in this
report.
56
REFERENCES
I.M.Pandey (1999) “FINANCIAL MANAGEMENT” Vikas Publications, New Delhi,
9th Revised Edition 2006. Pg 580, 581, 582, 583.
Prasanna Chandra (2002) “FINANCIAL MANAGEMENT” Tata Mc Graw Hill
Publication Company Limited, New Delhi, 3rd Reprint 2008. Pg. 569
MY KHAN PK JAIN (1992) “FINANCIAL MANAGEMENT” Tata Mc Graw Hill
Publication Company Limited, New Delhi, 3rd Edition 1992. Pg. 10.3, 10.4, 10.7, 10.21
.
Journals
Working capital management practices in some selected industries in India Dr. Arindam
Ghosh the management account Jan, 2007.
Website:
www.nilelimited.com
www.icfacijournal. Com
www.economictimes.com
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