1.

COMPANY PROFILE
A SHORT CHRONOLOGICAL HISTORY OF THE COMPANY Year 1774 1815-1820 1835 1843 Event Warren Hastings initiates commercial coal mining at Raniganj (West Bengal) First Shaft Mine opened at Ranigunj Carr, Tagore & Company takes over the Ranigunj Coal Mines Bengal Coal Company takes over Ranigunj Coal Mines and others; is first Joint Stock Coal Company in India. Minimal development; River transportation used to transport coal to Calcutta; railway lines at Calcutta leads to expansion of Coal Production

Up to 1900

Early 1900s Capacity at 6 million tons per annum 1955-56 1956 Focus on Coal Industry; capacity up to 38.4 Million tones. National Coal Development Corporation (NCDC) formed to explore and expand coal mining in Public Sector Coking Coal Industry Nationalized, Bharat Coking Coal Limited formed to manage operations of all Coking Coal mines in Jharia Coalfield. Non-coking coal nationalized; Coal Mine Authority Limited set up to manage these mines; NCDC operations bought under the ambit of CMAL. Coal India Limited formed as holding Company with 5 subsidiaries viz. 1975 Bharat Coking Coal Limited (BCCL), Central Coalfields Limited (CCL), Western Coalfields Limited (WCL), Eastern Coalfields Limited (ECL) and Central Mine Planning and Design Institute Limited (CMPDIL).

1972

1973

1985 2000

Northern Coalfields Limited (NCL) and South Eastern Coalfields Limited (SECL) carved out of CCL and WCL Deregulation of coal pricing and distribution of coal

Coal India Limited has been incorporated under the companies Act 1956 on 21.10.1975 and is wholly owned by the Government of India. The company is chiefly in to the business of coal mining, coal based products and mining consultancy. The wholly owned subsidiaries of the company are as follows: 1. Eastern Coalfields Limited. 2. Bharat Coking Coal Limited 3. Central Coalfields Limited 4. Northern Coalfields Limited 5. Western Coalfields Limited 6. Southeastern Coalfields Limited 7. Mahanadi Coalfields Limited. 8. Central Mine Planning and Design Institute Limited.

North Eastern Coalfields is directly under control of Coal India Limited. Registered office of the Company is Coal Bhawan, 10 Netaji Subhas Road, Kolkata 700 001, West Bengal, India. India is the 3rd largest coal producing country in the world and Coal India Limited produces 85% of total coal production in India. It is the largest company in the world in terms of coal production. It employs around 404744 people and is the largest corporate employer in the country.

The objectives of the company are as follows:

1) To promote the development and utilization of the coal reserves in the country for meeting the present and likely future requirement of the nation with due regard to need for conservation of non-renewable resources and safety of mine workers. 2) To raise the productivity of coal mining and related activities through introduction of improved technology, streamlining of organization, management and improving the skills, motivation of the work-forces. 3) Efficiency of operations and adopting appropriate cost reduction and cost control methods. 4) To make efficient arrangements for marketing and supply of coal so that coal, coke and other similar derivatives are available to consumers throughout the country conveniently and at reasonable prices. 5) To promote research and development activities on a continuing basis in the areas of coal mining, beneficiation development of new coal based products or by-products, fuel technology or any other area having a bearing on conservation, development for utilization of the coal reserves of the country.

2. EVOLUTION OF CIL
Coal the mainstay of Indias Energy Security.

Strategic Role of Coal in Indias Economy

Coal the dominant energy source in India meets 55% of countrys primary commercial energy supply. In India, 84% of hard coal is produced by Coal India Limited (CIL), a Maharatna Coal Mining PSU and 7% by Singareni Collieries Company Limited (SCCL)-under Ministry of Coal.

 Coal prices in India are deeply discounted compared to international prices even in the face of Global Economic meltdown. Coal Sector in India thus plays an extremely important strategic role in making the end user industry globally competitive. The benefit granted without creating any burden on Government of India or on the producing company. CIL contributes more than Rs 5000 Crores to per annum to the exchequer on account of Dividend and corporate taxes alone and meets its investment requirement entirely from internally generated funds.

3. COAL RESERVES IN INDIA

As a result of exploration carried out up to the depth of 1200m by the GSI, CMPDI and MECL, a cumulative total of 267.21 Billion tonnes of Geological Resources of Coal have so far been estimated in the country as on 1.4.2009. The state-wise distribution of coal resources and its categorisation are as follows:

Geological Resources of Coal State Proved Indicated Inferred Andhra Pradesh Arunachal Pradesh 9194 31 6748 40 2985 19 Total 18927 90

Assam Bihar Chhattisgarh Jharkhand Madhya Pradesh Maharashtra Meghalaya Nagaland Orissa Sikkim Uttar Pradesh West Bengal Total

348 0 10910 39480 8041 5255 89 9 19944 0 866 11653 105820

36 0 29192 30894 10295 2907 17 0 31484 58 196 11603 123470

3 160 4381 6338 2645 1992 471 13 13799 43 0 5071 37920

387 160 44483 76712 20981 10154 577 22 65227 101 1062 28327 267210

4. FINANCIAL HIGHLIGHTS

FINANCIAL POSITION
2009-10 2008-09 13964.93 5744.1 8738.46 8602.47 100000 4894.05 4679.12 3132.79 2039.98 0 20000 40000 60000 80000 100000 120000

Rs in crores

Y E A R

2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

5. CORPORATE STRUCTURE

6. VIEW OF THE COMPANY AT A GLANCE

Gross Profit (Crs in INR)

20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0

2010200911 10 Gross Profit 18196.67 15355.88

200809 7407.03

200708 10268.41

200607 9914.1

200506 10103.9

Net Profit (Crs in INR)

12000 10000 Axis Title 8000 6000 4000 2000 2010200911 10 Net Profit (Crs in INR) 10891.03 9632.78 0 200809 2073.29 200708 4916.64 200607 5636.58 200506 5852.81

Gross Sales (Crs in INR)

70000 60000 50000 Axis Title 40000 30000 20000 10000 0 2010-11 2009-10 2008-09 2007-08 2006-05 2005-06 Axis Title Gross Sales (Crs in INR), 33997.19

Net Sales (Crs in INR)

60000 50000 40000 30000 20000 10000 0 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 Net Sales (Crs in INR)

Net Worth (Crs in INR)

35000 30000 25000 20000 Net Worth (Crs in INR) 15000 10000 5000 0 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06

Debtors Position (Crs in INR)

3500 3000 2500 2000 1500 1000 500 0 Debtors Position (Crs in INR)

7. AIM AND OBJECTIVE OF STUDY

WORKING CAPITAL MANAGEMENT:
The financial statement is the depiction of companies growth and establishing its available resources. The statements are prepared for a particular period. The financial statements by nature are summaries of items recorded in the business and these statements are prepared periodically. They are prepared for the purpose of presenting a periodical review of reports on progress by the management and deal with the status of investment in the business and the results achieved during the period under review. Two types of capital are needed in an enterprise Fixed Capital and Working Capital. Business operations demand few assets to be used in the business for a longer period which are known as fixed assets. And capital invested in acquisition of such assets is known as Fixed Capital. Capital is also needed for short-term purpose, i.e., for the meeting of the day-to-day operations. Capital invested for this purpose is known as Current Capital or Working Capital. Thus, Working Capital refers to concerns investment in short-term assets like cash, short-term securities, debtors and investors of all types. It can also be regarded as the position of companys total capital which is employed in short-term operations. In other words, Working Capital is the investment needed for carrying out day-today operations of the business smoothly. Working capital is the amount of funds necessary to cover the cost of operating the enterprise. -Shubin Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivables into cash. Genestenberg

8. CONCEPT OF WORKING CAPITAL

There are two major concepts of working capital1. Balance sheet concept 2. Operating cycle concept
An Over view on Balance sheet Concept:-

Gross Working Capital: The capital which is needed for conducting

the day-to-day expenditures of the business is called Working Capital.

As the day-to-day expenditures of the business are met by the current assets, economists like Mead, Malott, Baker, Field etc. consider that the sum total of current assets employed in the business is the Gross Working Capital. According to this concept, the amount of working capital increases as the amount of current assets increases and vice-versa. Current assets refer to those assets which are needed in the ordinary course of business and can be converted into cash within a short period (generally, within one year) without disrupting the operations of the business. Stock-in-trade, Sundry Debtors, Bills Receivable, Marketable securities, prepaid expenses, Accrued income, Cash in hand; Cash at bank etc. are the different components of current assets.

Gross Working Capital = Current Assets

Net Working Capital:

It refers to the difference between current

assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and an outstanding expenses.

Net Working Capital = Current Assets - Current Liabilities

We can make the following three views about the Net Working Capital from this equation:

Firstly, if the value of total current assets is equal to the value of total current
liabilities, then the amount of working capital is zero i.e., if Current Assets = Current Liabilities, Working Capital = Current Assets - Current Liabilities = 0.

Secondly, if the value of total current assets is more than the value of total
current liabilities i.e., if Current Assets > Current Liabilities, then the net working capital is positive.

Thirdly, if the value of total current assets is less than the value of total current
liabilities, i.e., if Current Assets < Current Liabilities, then the net working capital is negative.

9. DIFFERENT TYPES OF WORKING CAPITAL

Kinds of Working Capital

On the Basis of Concept

On the Basis of Time

Gross Working Capital

Net Working Capital

Permanent or Fixed Working Capital

Temporary or Variable Working Capital

Regular Working
Reserve Working

Seasonal Working Capital Special Working

10. TIME BASE WORKING CAPITAL:

Gerstenberg has conveniently classified the working capital into; Regular or permanent working capital Temporary or variable working capital

The variable working capital is again bifurcated in seasonal and special working capital.

Regular or permanent working capital: it is the minimum investment kept in the form of: Inventory of raw materials Work in process Finished goods Stores and spares & Book debt

to facilitate uninterrupted operation in a firm. Though this investment is stable in short run, it certainly varies in long run depending upon the expansion programs undertaken by a firm. It may increase or decrease over a period of time. The minimum level of current assets maintained in a firm is usually known as permanent or regular working capital.

Temporary Working Capital: A firm is required to maintain an additional current asset temporarily over and above permanent working capital to satisfy cyclical demands. Any additional working capital apart from permanent working capital required to support the changing production and sales activities is refer to as temporary or variable working capital. At times, additional working capital is required to meet the unforeseen events like floods, strikes, fire & price hike tendencies and contingencies.

11. COMPONENTS OF WORKING CAPITAL

According to the gross working capital concept, all the current assets are the components of the working capital. On the other hand, according to the net

working capital concept, all the current assets and the current liabilities are the components of the working. These components are discussed below:

1. CURRENT ASSETS: Current assets refer to those assets which in the ordinary course of business can be converted into cash within a short period (generally, within one year) without disrupting the operations of the business. E.g. Sundry Debtors, Stock-in-trade, Bills Receivable, short-term loan and advance, short term investment, prepaid expenses, accrued income, cash in hand, cash at bank etc.

2. CURRENT LIABILITIES: Current liabilities refer to those liabilities which are repaid, generally, within one year by using the current assets or earnings of the business. E.g. Sundry creditors, Bills Payable, Short-term loan, Outstanding expenses, Provision for taxation, Proposed dividend, Bank overdraft etc. are the current liabilities.

12. IMPORTANCE OF WORKING CAPITAL

Importance of working capital in any type1 of business is unlimited. The day-today activities of the business are conducted with the help of this working capital. So, the working capital is called life-blood and controlling nerve center of the business. The importance of working capital is discussed below:

Solvency: The short term solvency of the business depends on the amount
of working capital. If there is sufficient amount of working capital in the business, then it is possible to repay the claims of the creditors on demand. On the other hand, the shortage of working capital indicates incapability of

repayment of short-term liabilities. So, every business should have sufficient amount of working capital in order to maintain the short-term solvency.

Maintenance of Goodwill: It is possible to repay the claim of creditors in

time, then the credibility of the concern increases and as a result of it, the goodwill of the business increases. If there is sufficient amount of working capital in the business, then only it is possible to repay the claim of the creditors in time. So, every business should have sufficient amount of working capital so that the goodwill of the firm remains intact.

Possibility of getting loans: Sufficient amount of working capital

expresses solvency of the business and indicates satisfactory debtsettlement capacity. So, the concerns which have sufficient amount of working capital can easily get loan from the market at favorable terms.

Regular supply of raw materials: It is possible to repay the claim of

suppliers of raw materials in time if there remains sufficient amount of working capital in the business. As a result of it, the raw materials are available from the suppliers on demand. Besides this, for smooth supply of raw material throughout the year in case of seasonal industry, sufficient amount of working capital is needed for storing of raw material at the season.

Regular payment of day-to-day expenditure: It is possible for the

concerns, which have sufficient amount of working capital, to pay wages to the workers and to meet day-to-day overheads regularly. Thus, the reliability of the workers increases and also the amount of cost reduces as wastages are reduced. As a result of it, the amount of profit also increases with increasing in quality and quantity of the product.

Credit sales: It is possible to sale goods on credit if there is sufficient

working capital in the business. As a result of it, the amount of sales as well as the amount of profits increases.

Increase in profitability: Wastages are reduced to minimum, production

and sales are increased and opportunity of cash discount can be taken as a

result of quick turnover and efficient management of working capital. As a result of this, the profit earnings capacity of the business increases.

13. FACTORS DETERMINING WORKING CAPITAL

Whatever be the size of the business, every business requires working capital. Because, it is not possible to conduct a business without working capital. But if the amount of working capital is more than the actual need, then capital remains blocked unnecessarily. As a result of it, the rate of profit reduces. Again, if the amount of working capital is less than the actual need, the production is hampered and hindrance takes place in the normal activities of the business. So, every business should have needed appropriate amount of working capital. They are discussed below: Nature of business: The requirement of working capital of a business primarily depends on the nature of that business. Public utility concerns, such as, water, electricity, gas etc. supply concerns generally render services in cash and working capital of these concerns never blocked on account of unsold stock or trade debtors. So, they do not require a very large amount of working capital as their liquid cash is rotated very rapidly. On the other hand, the working capital remains blocked in various stages of production and buying and selling in the manufacturing and trading concerns. So, they need large amount of working capital. Size of the business: The amount of working capital of a business directly depends on the size of the business. For instance, the large scale businesses require a large amount of working capital because the amount of production and buying and selling of them is very large. On the other hand, the small scale businesses require comparatively less amount of working capital.

 Production process: The stages through which the production of a product is completed are called production process. The industrial undertakings which have a numbers of production process, requires much time to complete finished goods and need large amount of working capital. As for instance, Oil refinery, or Chemical industries requirehuge amount of working capital for having long production process. On the other hand the production process of making bread or biscuit can be completed within a short period. So, not much amount of working capital is required for their production. Seasonal variation: There are certain products, the demand for which is seasonal in nature. There are on seasons (when the demand is very high) and off seasons (when the demand is very less). During the on-seasons the demand will be high and the production level has also required to be high to meet this high demand level and thus the working capital requirement would be more. Business cycle: The requirement of working capital is also affected by the rise and fall of the business cycle. When there is boom in the market, the amount of sales increases. Price of goods increases and the way of expansion of the business is easily accessible. So, a huge amount of working capital is needed at that time. On the other hand, the amount of investment in current assets is less at the time of depression as the amount of production and sales reduces due to decrease in demand at that time. Credit policy: The requirement of working capital of a firm also depends on its credit policy. For instance, the less the period of credit allowed to debtors and the more the period of credit allowed by creditors, the less will be the requirement of the working capital. Expansion and growth: If the expansion and growth takes place in a business, then the amount of working capital is required to be increased in order to keep the production process unhindered. Though it is very difficult to determine the relationship between the growth in the volume of business and the growth of its working capital, but it can be said

undoubtedly that if a firm does not make proper arrangement for required working capital for expansion and new project, then investment in fixed assets does not become effective due to lack of working capital. Change in price level: The requirement of working capital changes along with the change in price level. For instance, if price level raises upward, then more amount of working capital is needed for maintaining the previous level of activity due to increase in price of raw materials and other factors.

14. OBJECTIVES OF WORKING CAPITAL MANAGEMENT

The objectives of working capital management could be stated as: To ensure optimum investment in current assets. To strike a balance between the twin objectives of liquidity and profitability in the use of funds. To ensure adequate flow of funds for current operations. To speed up the flow of funds or to minimize the stagnation of funds.

15. MANAGEMENT OF WORKING CAPITAL:

Management will use a combination of policy and techniques for the management of working capital. These require managing the current assets generally cash and cash equivalents, inventories and debtors. There are also varieties of short term financing options which are considered. The various steps in the management of working capital involve:

 CASH MANAGEMENT- To identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding cost. INVENTORY MANAGEMENT- To identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and hence increases cash flow; the techniques like JUST IN TIME (JIT) and ECONOMIC ORDER QUANTITY (EOQ) are used for this. DEBTORS MANAGEMENT- To identify the appropriate credit policy, i.e., credit terms which will attract customers, such that any impact on cash flow and the cash conversion cycle will be offset by increased revenue and hence return on capital (or vice-versa). The TOOLS like DISCOUNTS and ALLOWENCES are used for this. SHORT TERM FINANCING- Inventory is ideally financed by credit granted by the supplier; dependent on the cash conversion cycle, it may however, be necessary to utilize a bank loan (or overdraft), or to convert debtors to cash through factoring in order to finance working capital requirements.

16. CONSTRAINTS OF WORKING CAPITAL MANAGEMENT:

Non-realization of the importance of working capital. Continuous inflation in the economy The existence of sellers market or monopoly conditions; and High profitability

17. ASPECTS OF WORKING CAPITAL MANAGEMENT:

There are many aspects of working capital management which makes it important function of financial management. TIME: working capital management requires much of the finance managers time. INVESTMENT: working capital represents a large portion of the total investment in assets. CREDIBILITY: working capital management has great significance for all firms but it is very critical for small firms. GROWTH: the need for working capital is directly related to the firms growth. It is advisable that the finance manager should take precautionary measures for effective and efficient management of working capital.

18. DEDUCE FROM BALANCE SHEET HOW WORKING CAPITAL MOVES

WORKING CAPITAL POSITION AND ANALYSIS OF INFORMATION RELATED TO CURRENT ASSETS AND CURRENT LIABILITIES OF COAL INDIA LIMITED.

(Rs. in Crores) Year ending 31st March (A) Current Assets (A) (B) (1) (i) Inventory of (C) (D) (E) (F) (G) (H) (I) (J) (K) (2) Sundry Debtors (L) (3) Cash & Bank Balances 45862.28 39077.76 29695.01 20961.48 15929.27 13427.24 7986.95 3025.86 2168.65 1826.14 1657.06 1586.41 1804.47 2072.14 (iii) Other Inventories 106.85 127.74 112.39 93.36 82.76 90.40 95.71 (ii) Inventory of Stores & Spares etc. 1038.97 1087.54 1055.51 909.36 900.67 921.92 915.75 Coal, Coke etc. 4439.82 3186.49 2514.98 2381.24 2137.04 1889.50 1405.72

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

(4) Loans & Advances & Spares etc.

9922.84

8676.20 11244.51

10304.29

8191.88

6278.10

5059.72

Total Current Assets (A)

64396.02

54324.38

46448.54

36306.79

28828.03

24411.63

17535.99

Less: Current Liabilities & Provision (B)

46493.9

42909.08

40505.81

29695.18

22820.97

21741.25

18341.40

NET WORKING CAPITAL (A B)

17902.12

11415.30 5942.74

6611.61

6007.06

2670.38

-- 805.41

The above table highlights the improved growth of Working Capital from its negative trend to positive trend as depicted in Graph.

Working Capital
70000 60000 50000 Values in INR Crs 40000 30000 20000 10000 0 -10000 2010-11 64396.02 46493.9 2009-10 11415.3 54324.38 42909.08 2008-09 5942.74 46448.54 40505.8 2007-08 6611.61 36306.79 29695.18 2006-07 6007.06 28828.03 22820.97 2005-06 2670.38 24411.63 21741.25 2004-05 -805.41 17535.99 18341.4

Net Working Capital 17902.12 Current Assets Current Liabilities

19. ANALYZING THE EFFICIENCY OF WORKING CAPITAL THROUGH VARIOUS RATIOS

1. Working Capital Turnover ratio = Total Net Sales/ Average Net Working Capital

The ratio indicated the rate of working capital utilization in the firm.

Year ending 31st March TOTAL NET SALES WORKING CAPITAL WORKING CAPITAL TURNOVER RATIO

2010-2011

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

50233.59

44615.25 11415.30

39123.48

32633.86

29602.19

28701.83

25862.86

17902.92

5942.74

6611.61

6007.06

2670.38

-805.41

2.81

3.91

6.58

4.94

4.93

10.75

-32.11

From the above table we can see that the ratio has increased from 2004-05 to 2005-06. But it has further decreased recently. It is therefore will not be proper to conclude anything from this ratio.

Working Capital Turnover Ratios

12 10 8 Times 6 4 2 0 Working Capital Turnover Ratios 2010-11 2.8 2009-10 3.91 2008-09 6.58 2007-08 4.94 2006-07 4.93 2005-06 10.74

2. Current Asset Turnover Ratio = Total Net Sales / Average Current Asset

Year ending 31st March TOTAL NET SALES CURRENT ASSETS CURRENT ASSETS TURNOVER RATIO

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

50233.59

44615.25

39123.48

32633.86

29602.19

28701.83

25862.86

64396.02

54324.38

46448.54

36306.79

28828.03

24411.63

17535.99

0.78

0.82

0.84

0.90

1.03

1.18

1.47

Current Aseets Turnover Ratio

1.6 1.4 1.2 1 Times 0.8 0.6 0.4 0.2 0 201011 0.78 200910 0.82 200809 0.84 200708 0.9 200607 1.03 200506 1.18 200405 1.47

Current Aseets Turnover Ratio

20. AN OVERVIEW ON OPERATING CYCLE CONCEPT OF WORKING CAPITAL

According to this concept, the sum total of the expenditures which are incurred in order to perform the operational activities is the working capital. Operational costs refer to the cost of raw materials, labor costs and overheads. Raw materials are purchased out of cash which is invested at the initial stage of the business; finished goods are produced by converting the raw materials with the help of labor and overheads. Debtors are created through the sale of finished goods on credit and again cash is generated when debts are realized from debtors. The process is rotated repeatedly. Thus the sum total of the operating costs which are required to be incurred in order to perform an operating cycle is the working capital. An operating cycle is shown in the following diagram:

In the form of an equation, the operating cycle process can be expressed as follows: OPERATING CYCLE= R+W+F+D-C WHERE, R= RAW MATERIAL CONVERSION PERIOD W= WORK- IN- PROGRESS CONVERSION PERIOD F= FINISHED GOOD CONVERSION PERIOD D= DEBTORS COLLECTION PERIOD C= CREDIT DEFERRAL PERIOD

WORKING CAPITAL BASED ON OPERATING CYCLE:

One of the methods for forecasting working capital requirement is based on the concept of operating cycle. The calculation of operating cycle and the formula for estimating working capital on its basis has been demonstrated with the help of following illustration. ILLUSTRATION: From the following information of XYZ ltd., you are required to calculate: Gross Operating Cycle Net Operating Cycle

(Figures in Rs. Lakhs)

PARTICULARS
1. Raw materials purchased 2. Opening Raw material Inventory 3. Closing Raw material Inventory 4. Raw materials consumed 5. Depreciation 6. Other Manufacturing Expenses 7. Direct Labor 8. Total Works Cost 9. Opening W.I.P. Inventory 10. Closing W.I.P. Inventory 11. Cost of Production 12. Opening Finished Goods Inventory 13. Closing Finished Goods Inventory

2010
4653 523 827 4349 82 553 368 5352 185 325 5212 317 526

2011
6091 827 986 5932 90 704 498 7224 325 498 7051 526 995

14. Cost Of Goods Sold 15. Selling Expenses 16. Cost of Sales 17. Sales 18. Debtors (closing) 19. Creditors (closing)

5003 304 5307 6087 735 454

6582 457 7039 8007 1004 642

SOLUTION:

OPERATING CYCLE CALCULATION

PARTICULARS A. Raw Material Conversion Period (i) (ii) Raw material consumption Raw material consumption per day = [ Raw material consumption / 360] (iii) (iv) Raw material Inventory (closing) Raw material Inventory Holding (Days) = [ Raw material Inventory / Raw material consumption per day] B. W.I.P. Conversion Period (i) (ii) Cost of Production Cost of Production per Day

2010

2011

4349 12.1 827

5932 16.5 986

68

60

5212 14.5

7051 19.6

= [ Cost of Production / 360] (iii) (iv) W.I.P. Inventory (closing) W.I.P. Inventory Holding (Days) = [ W.I.P. Inventory / Cost of Production per day] C. Finished Goods Conversion Period (i) (ii) Cost Of Goods Sold Cost Of Goods Sold per Day = [ Cost Of Goods Sold / 360] (iii) (iv) Finished Goods Inventory (closing) Finished Goods Inventory Holding (Days) =[Finished Goods Inventory / COGS per day] D. Debtors Collection Period (i) (ii) Credit Sales Credit Sales per Day = [ Credit Sales / 360] (iii) (iv) Debtors (closing) Debtors Outstanding (Days) = [ Debtors / Credit Sales per day] E. Creditors Deferral Period (i) (ii) Credit Purchases Credit Purchase per day = [ Credit Purchases / 360] (iii) (iv) Creditors (closing) Creditors Outstanding (Days) = [ Creditors / Credit Purchase per day] 35 38 4653 12.9 454 6091 16.9 642 6087 16.9 735 43 8007 22.2 1004 45 38 54 5003 13.9 526 6582 18.3 995 22 25 325 498

Therefore; GROSS OPERATING CYCLE (for 2009) = (68+ 22+ 38+ 43) = 171 Days (for2010) = (60+ 25+ 54+ 45) = 184 Days

NET OPERATING CYCLE (for 2009) = (68+ 22+ 38+ 43- 35) = 136 Days (for2010) = (60+ 25+ 54+ 45- 38) = 146 Days

20.

ANALYSING THE EFFICIENCY OF

WORKING CAPITAL ELEMENTS

1. Turnover Ratios - Turnover ratios also referred to as activity ratios or
asset management ratios, measure how efficiently the assets are employed by a firm. The important turnover ratios are:-

Inventory Turnover Ratio= Cost of goods sold / Average Inventory

Where, Cost of goods sold= Total Net Sales Gross Profit

Year ending 31st March Cost of goods sold Average Inventory Inventory Turnover Ratio

2010-11 33730.36 4993.71 6.75

2009-10 30650.32 4154.55 7.17

2008-09 33379.38 3761.26 9.35

2007-08 23895.4 3478.6 7.26

2006-07 20999.72 3235.04 6.91

2005-06 19913.37 2811.42 7.08

Inventory Turnover Ratio

10 9 8 7 6 5 4 3 2 1 0 Inventory Turnover Ratio

Times

2010-11 6.75

2009-10 7.17

2008-09 9.35

2007-08 7.26

2006-07 6.91

2005-06 7.08

Debtors Turnover Ratio= Net Credit Sales / Average Sundry Debtors As the figure of net credit sales is not available, one may have to take the net sales figure in place of net credit sales in the numerator.

Year ending 31st March NET SALES AVERAGE SUNDRY DEBTORS DEBTOR'S TURNOVER

2011-10 50233.59 2597.11

2009-10 44615.25 1997.4

2008-09 39123.48 1741.6

2007-08 32633.86 1669.65

2006-07 29602.19 1783.14

2005-06 28701.83 1690.93

19.34

22.34

22.46

19.55

16.60

16.97

Debtors Turnover Ratios

25 20 15 10 5 0 Debtors Turnover Ratios

Times

2010-11 19.34

2009-10 22.34

2008-09 22.46

2007-08 19.55

2006-07 16.6

2005-06 16.97

If we look at the trend of the debtors turnover ratio for the last six years we see it has increased substantially from 16. 97 to 22.34 last year and again it decreased to 19.34 in the current year, which would indicate that the organizations efficiency in handling the credit management has increased and that is a positive aspect with regard to solvency of the firms in general. To get some additional insight into the managerial aspect of receivables we may also consider Average collection period.

Year ending 31st March AVERAGE COLLECTION PERIOD

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

18.61

16.11

16.02

18.41

21.69

21.21

Average Collection Period= 360 / Debtors Turnover

Debtors Collection Period

25 20 15 Days 10 5 0 Debtors Collection Period

2010-11 18.61

2009-10 16.11

2008-09 16.02

2007-08 18.41

2006-07 21.69

2005-06 21.21

From the average collection period data for the last 6 years we find that the number of days for which receivables remain uncollected has considerably decreased from 21.21 days in 2005-06 to 18.61 days in 2010-11. It therefore indicates that the system and procedure of collection has been streamlined and improved over this period.

Next we will consider the set of ratios required to analyze Liquidity of Working Capital Elements: The liquidity of working capital is an important aspect, which needs to be analyzed by the management for maintaining proper liquid resources to meet both operational requirements as well as financing commitment of repayment of borrowed funds.
We will mainly consider two ratios like Current Ratio and Acid test ratio or Quick ratio. 1. Current Ratio= Current Assets / Current Liabilities

This ratio is known as current or working capital ratio. It gives the relationship between current assets and current liabilities of the concern. A high current ratio is considered to be sign of financial strength. Bankers in India have used a norm of 1.33. Internationally, the norm is 2.0.
2. Acid-test Ratio = (Current Assets-Loans and Advances-Inventories) /

Current Liabilities

Year ending 31st March CURRENT RATIO ACID-TEST RATIO

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

1.39 1.05

1.27 0.96

1.15 0.78

1.22 0.75

1.26 0.76

1.12 0.7

Liquidity Ratios
1.6 1.4 1.2 1 Times 0.8 0.6 0.4 0.2 0 Current Ratio Acid Test Ratio 2010-11 1.39 1.05 2009-10 1.27 0.96 2008-09 1.15 0.78 2007-08 1.22 0.75 2006-07 1.26 0.76 2005-06 1.12 0.7

First of all if we analyze the current ratio for the last 6 years it has increase from 1.12 in 2005-06 to 1.39 in 2010-11 and as we all know the industry average is 1.22 means it is satisfactorily. So if the value of current assets depreciates, the company may face difficulty to pay off its debts and loans on time. Similarly in the case of Acid-test ratio it has increased from 0.7 in 2005-06 to 1.05 in 2010-11, as the industry average is 0.69 so for Coal India Limited it is far better than the industry average.

We will state other positive features, which emerged out of studying the balance sheet, in terms of the following ratios:
Year ending 31st March a) Profitability Ratios 1) As % Net Sales Net Profit Gross Profit 32.77 32.90 31.3 31.61 14.68 15.08 26.78 27.24 29.06 29.35 30.62 30.94 20010-11 2009-10 2008-09 2007-08 2006-07 2005-06

b) Turnover Ratios Capital Turnover Ratios (Net Sales / Capital Employed) 1.63 1.9 2.31 1.91 1.82 2.25

Profitabilty Ratios
35 30 25 Axis Title 20 15 10 5 0 Gross Profit Ratio Net Profit Captal Turnover Ratio(Times)

2010-11 32.77 32.9 1.63

2009-10 31.3 31.61 1.9

2008-09 14.68 15.08 2.31

2007-08 26.78 27.24 1.91

2006-07 29.06 29.35 1.82

2005-06 30.62 30.94 2.25

We also present below other important financial ratios those would substantiate the above claims regarding the financial health of the company.
Year ending 31st March STRUCTURAL RATIOS Debt: Equity Debt: Net Worth Net Worth: Equity Net Fixed Assets: Net Worth SHAREHOLDERS INTEREST Book value of shares Dividend per share 52.74 3.90 40.84 3.50 3034.19 270.00 3062.26 270.00 2832.21 237.50 2234.64 200.00 0.24 0.05 5.27 0.39 0.26 0.06 4.08 0.47 0.31 0.10 3.03 0.58 0.27 0.09 3.06 0.54 0.29 0.10 2.83 0.57 0.33 0.15 2.23 0.72 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06

Stuctural Ratios
6 5 4 Times 3 2 1 0 Debt:Equity Debt:Net Worth Net Worth:Equity Net Fixed Assets:Net Worth

2010-11 0.24 0.05 5.27 0.39

2009-10 0.26 0.06 4.08 0.47

2008-09 0.31 0.1 3.03 0.58

2007-08 0.27 0.09 3.06 0.54

2006-07 0.29 0.1 2.83 0.57

2005-06 0.33 0.15 2.23 0.72

It is important to mention that it is a profit making PSU who regularly pays royalty and tax to Government of India and continues to generate healthy revenue earning for the Union Government.

3500 3000 2500 2000 Book Value Of Shares (INR) 1500 1000 500 0 2010-11 2009-10 2008-07 2006-07 2005-06 2004-05 Dividend Per Share (INR)

FINANCING OF WORKING CAPITAL

After determining the amount of working capital required, the next time to be taken by the FINANCE MANAGER is to arrange the funds.as discussed earlier, it is advisable that the FINANCE MANGER bifurcates the working capital requirement between the following: PERMENANT WORKING CAPITAL TEMPERORY WORKING CAPITAL

PERMANENT WORKING CAPITAL: It is always needed irrespective of sales fluctuations, hence should be financed by the LONG TERM sources such as DEBT and EQUITY

TEMPERORY WORKING CAPITAL: It is financed by the SHORT TERM sources of finance.

Broadly Speaking, The Working Capital Finance May Be Classified Between The Two Categories:

SPONTANEOUS SOURCE NEGOTIABLESOURCE

SPONTANEOUS SOURCE: the spontaneous sources of finance are those which naturally arise in the course of business operations. Trade Credit, Credit from Employees, Credit from Suppliers of Services, etc. are some of the examples which may be quoted in this respect.

NEGOTIABLE SOURCE: On the other hand the negotiated sources, as the name implies, are those which have to be specifically negotiated with lenders say, Commercial Banks, Financial Institutions, General Public etc.

The following parameters should be kept in mind while a finance manager is selecting a particular source or a combination thereof for financing of working capital:

COST FACTOR IMPACT ON CREDIT RATING FEASEBILITY

RELIABILITY RESTRICTIONS HEDGING APPROACHOR MATCHING APPROACH i.e., FINANCING OF ASSETS WITH THE SAME MATURITY AS OF ASSETS

21.

WORKING CAPITAL LOANS IN TWO

LEVELS
Working Capital is primarily financed through loans from bank and financial institution. There is therefore an element of interest associated with such loans for working capital.

It is always the Endeavour of organization to bring down the interest amount to the maximum extent possible. A common strategy adopted by organization with a view to minimize the interest burden is to take the working capital loan in two levels.

W O R K I N G

C A P I T A L

R E Q U I R E M E N T

T O T A L

W O R K I N G C A P I T A L

V A R Y I N G

L E V E L

B A S E

L E V E L

TIME

It would be evident from the above figure that the working capital requirement of an organization would vary over a period of time keeping the trend of variation in view the financing of working capital can be done in two levels.

Base Level This level of loan that is taken on a long term basis. This fund is available to the organization on a continuous basis and therefore the interest burden of this has to be borne continuously over the entire period of time.

Varying Level There might be certain points of time when the actual working capital requirement may be more than the present base level in such periods an additional loan over and above the base level is taken to bridge the gap. This amount of loan is taken only for the period of actual requirement once the requirement is over this amount of loan is repaid.

22. SOURCES OF FINANCE

Trade credit: It is a spontaneous source of finance which is normally extended to the purchaser organization by the seller or service providers. This source is more important since it contributes to about one third of the total short term requirements .It has lesser cost of finance as compared with other sources. Trade credit is guaranteed when a company acquires supplies, merchandise or materials and does not pay immediately. If a buyer is able to get the credit without completing many formalities, it is termed as open account trade credit.

Bills Payable: In this the purchaser will have to give a written promise to pay the amount of the bill / invoice either on demand or at a fixed future date to the seller or the bearer of the note.

Inter-Corporate Loans and Deposits: Sometimes, organizations having surplus funds invest for short term period with other organizations. The rate of interest will be higher than the bank rate of interest and depending on the financial soundness of the borrower company. This source of finance reduces dependence on bank financing.

Commercial Papers: Commercial Paper (CP) is an unsecured promissory note issued by a firm to raise funds for a short period. This is an instrument that enables highly rated corporate borrowers for short- term borrowings and provides an additional financial instrument to investors with a freely negotiable interest rate. The maturity period ranges from minimum 7 days to less than 1 year.

Benefits of Commercial Paper:

1. CP sold on an unsecured basis and does not contain any restrictive condition so liquidity is assured. 2. Liability on maturity can be discharged by selling new CP and thus flow of fund can be maintained. 3. Maturity of CP can be tailored to suit the requirement of the issuing firm. 4. CP can be issued as a source of fund even when money market is tight.

5. Generally, CP is preferred by the issuing firm since debt servicing is

cheaper than commercial banks.

Limitations of Commercial Paper:

1. Only hefty credit rating firms can use it. New and moderately rated firm generally are not in a position to issue CP. 2. CP can never be redeemed before maturity nor can be extended beyond maturity.

23.

WORKING CAPITAL ADVANCE BY

COMMERCIAL BANKS
Regulation of Bank Finance Traditionally industrial borrowers enjoyed a relatively easy access to bank finance for meeting their working capital needs. Further the cash-credit management the principle device through which such finance has been provided is quite advantageous from the point of view of borrowers. Ready availability of finance in a fairly convenient form led to in the opinion of many informed observers of the Indian banking scene over-borrowing by industry and deprivation of other sectors.

The Reserve Bank of India (RBI) particularly from mid 1960s onwards has been trying to bring a discipline among industrial borrowers and to redirect credit to the priority sectors of the economy. For these committees have been formed and they have provided some guidelines and directives regarding the issue of working capital financing from banks. The committees are Tandon Committee, Chore Committee, Dahejia Committee and Marathe Committee. From the mid-1970s the regulation of bank finance for working capital was based mainly on the recommendations of Tandon Committee. But after 1990s in the wake of financial liberalization the RBI has given freedom to the boards of individual banks in all matters relating to working capital requirements. Assessment of Working Capital Projected Balance Sheet Method: The working capital requirements are assessed on the basis of the projected values of assets and liabilities. Cash Budget Method: The working capital requirements are assessed on the basis of the projected cash flows. Turnover Method: The working capital requirements are assessed on the basis of the projected annual turnover. Current Ratio Norms Under the Tandon Committee the minimal current ratio of 1.33 was required. At present 1.33 is regarded only as a benchmark and depending on circumstances banks do accept a lower current ratio. Presently banks follow a more flexible approach in determining the Assessed Bank Finance.

24.

FACTORS DETERMINING CREDIT

POLICY

The bank credit will generally be in the following forms:

Cash Credit: the facility will be given by the bankers to the customers by giving certain amount of credit facility on continuous basis. The borrower will not be allowed to exceed the limit sanctioned by the bank.

Bank Overdraft: it is a short-term borrowing facility made available to the companies in case of urgent need of funds. The banks will impose limit on the amount they can lend. When the borrowed funds are no longer required they can quickly and easily be repaid. The banks issue overdrafts with a right to call them in at short notice.

Bills Discounting: the company which sells goods on credit will normally draw a bill on the buyer who will accept it and sends it to the seller of goods. The seller, in turn discounts the bill with his banker. The banker will generally earmark the discounting bills limit.

Bills Acceptance: to obtain finance under this type of arrangement a company draws a bill of exchange on bank. The bank accepts the bill thereby promising to pay out the amount of the bill at some specified future date.

Line Of Credit: line of credit is the commitment by a bank to lend a certain amount of funds on demands specifying the maximum amount.

Letter Of Credit: it is an arrangement by which the issuing bank on the instructions of a customer or on its own behalf undertakes to pay or accept or

negotiates or authorizes another bank to do so against stipulated documents subject to compliance with specified terms and condition.

Bank Guarantees: it is one of the facilities that the commercial banks extend on behalf of their clients in favor of third parties who will be beneficiaries of the guarantees.

25.

STRUCTURAL ANALYSIS OF CURRENT

ASSETS AND CURRENT LIABILITIES

Concept of Current Assets and Current Liabilities and its components and the volume variance in terms of amount shall put a major swing in the working capital management. Determination of affordable liability burden and the future avenues to discharge the debt burden is identified by liquidity analysis. Future discharge of debt burden is based on the Time Frame Analysis and available fund from Liquidity Analysis. Component wise analysis of Current Assets:1. Inventory wise Analysis both in (Quantity and Amount) locked up is a major thrush on liquidity analysis. 2. Debtors position and age wise analysis of debtors is also a major thrush in fund availability.

(Rs in crores)
COMPONENTS 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06

Inventory of Coal and Coke Inventory of Stores& Spares Other Inventories

4439.82 1038.97 106.85

3186.49 1087.54 127.74

2514.98 1055.51 112.39

2381.24 909.36 93.36

2137.04 900.67 82.76

1889.5 921.92 90.4

Sundry Debtors Cash& Bank Balances Loans& Advances& Spares TOTAL OF CURRENT ASSETS

3025.56

2168.65

1826.14 29695.01 11244.51 46448.54

1657.06 20961.48 10304.29 36306.79

1586.41 15929.27 8191.88 28828.03

1804.47 13427.24 6278.1 24411.63

45862.28 39077.76 9922.54 8676.2

64396.02 54324.38

The sample analysis given below of the accumulation of cash and bank balances as a component of current assets commencing from 2004-05 to 2009-10 shall put an adverse effect on Return on Investment.

COMPONENTS%/CA Inventory / C.A (%) Inventory, Stores & Spares/CA(%) Other Inventory / CA (%) Sundry debtors / CA (%) Cash & Bank / CA (%) Loans & Advances & Spares / CA(%) Total Current Asset

2010-11 6.89 1.61 0.17 4.7 71.21 15.42 100%

2009-10 5.86 2 0.23 3.99 71.93 15.97 100.00%

2008-09 5.41 2.27 0.24 3.93 63.93 24.22 100.00%

2007-08 6.55 2.50 0.25 4.56 57.73 28.38 100.00%

2006-07 7.41 3.12 0.28 5.50 55.25 28.41 100.00%

2005-06 7.74 3.77 0.37 7.39 55 25.72 100.00%

Trend of working capital shows improvement in load bearing capacity and its positive growth is registered from 2005-06. Chronological improvement in ratios has firmed up its liquidity strength.

Distribition of Current Assets(2005-06)

4% 26% 8% 0% Inventory Stores and Spares Other Inventory Sundry Debtors 55% Cash & Bank Loans & Advances & Spares

7%

From the Pie Chart below it is identified that accumulation of Cash & Bank Balance is the major player in CA .So the overall change in the Working Capital has registered its prime role and there is a decrease in sundry debtors from 200506. The Firm Can also Invest its Excess Cash & Bank for non-operating Incomes and Gains. Its Substantially increased in last 6 years.

Distribution of Current Assets (2010-11)

2% 0% 15% 7% 5% Inventory Stores & Spares Other Inventory Sundry Debtors 71% Cash & Bank Loans & Advances & Spares

Activity Analysis:
CURRENT ASSETS 24411.63 28828.03 36306.79 46448.54 54324.38 64396.02 CURRENT LIABILITIES 21741.25 22820.97 29695.18 40505.81 42909.08 46493.90

YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

WORKING CAPITAL 2670.38 6007.06 6611.61 5942.74 11415.3 17902.12

CA:CL 1.12 1.26 1.22 1.15 1.27 1.39

CA:CL
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 CA:CL 1.39 1.27 1.15 1.22 1.26 1.12

Improved pattern of Current Asset to Current Liability is depicted from the Ratio which indicates on the accumulation of more current assets. From the above component-wise analysis it is identified that the sole reason of such accumulation is due to cash pile up. Unutilized cash resources. More managerial skill is to be exerted for better investment plan.

26. ROI-ROE ANALYSIS

For e.g. a firm, AGE Limited, which requires an investment outlay of Rs 100 million, is considering two capital structures:
Capital Structure A (Rs Millions) Equity Debt 100 0 Capital Structure B (Rs Millions) 50 50

While the average cost of the debt is fixed at 10%, the ROI may vary widely. The tax rate of the firm is 50%. Based on the above information, the relationship between ROI-ROE under the two capital structures A and B would be as shown below.
Capital Structure A ROI EBIT Interest PBT Tax PAT ROE 5% 5 0 5 2.5 2.5 10% 10 0 10 5 5 15% 15 0 15 7.5 7.5 7.5% 20% 20 0 20 10 10 10% 25% 25 0 25 12.5 12.5 12.5% 5% 5 5 0 0 0 0% Capital Structure B 10% 10 5 5 2.5 2.5 5% 15% 15 5 10 5 5 10% 20% 20 5 15 7.5 7.5 15% 25% 25 5 20 10 10 20%

2.5% 5%

ROI-ROE Analysis
70 60 Percentage(%) 50 40 30 20 10 0 ROE of Capital Structure B ROE of Capital Structure A ROI 1 0 2.5 5 2 5 5 10 3 10 7.5 15 4 15 10 20 5 20 12.5 25

Looking at the above figure, the relationship between ROI-ROE we find that: The ROE under capital structure A is higher than the ROE under capital structure B when ROI is less than the cost of debt. The ROE under the two capital structures is the same when ROI is equal to the cost of debt. The ROE under capital structure B is higher than the ROE under capital structure A when ROI is more than the cost of debt.

27. ROI-ROE ANALYSIS OF COAL INDIA LIMITED

YEARS 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 EBIT 8788.46 8602.47 8738.46 5744.1 13964.93 16463.23 TOTAL ASSETS 38916.87 42879.35 51152.7 62693.03 70814.75 81397.28 ROI (%) 22.58 20.06 17.08 9.16 19.72 20.21 PAT 5891.52 5708.73 5243.27 2078.69 9622.45 10867.35 NET WORTH 14114.82 17889.3 19342.36 19165.04 25793.68 33313.82 ROE (%) 41.74 31.91 27.11 10.85 37.31 32.62

ROI-ROE Analysis of CIL

70 60 Percentage(%) 50 40 30 20 10 0 ROE(%) ROI(%) 2010-11 32.62 20.21 2009-10 37.31 19.72 2008-09 10.85 9.16 2007-08 27.11 17.08 2006-07 31.91 20.06 2005-06 41.74 22.58

Looking at the above figure, the relationship between ROI-ROE we find that: ROI and ROE has gradually decreased from 2005-06 to 2008-09 and again

its vastly increased in the last 2 financial years.

Both ROI and ROE were maximum during 2005-06 and it was minimum

during 2008-09.

28. ASSOCIATION OF LEVERAGE WITH WORKING CAPITAL MANAGEMENT

LEVERAGE is the most important mathematical tool to identify the extent of fixed cost in an attempt to increase the level of profitability. To run the operation at every level some parts of working capital is engaged. Therefore, it is essential to compute the leverage gain (if any) so that fixed cost can be minimized and no amount of working capital is being misused.

29. LEVERAGE
Leverage means that a percentage change in one amount causes a relatively larger percentage change in other amounts. This phenomenon is a result of certain

expenses being fixed in nature. it means either fixed cost is incorporated in the operating cost structure of a firm and / or financial expenses i.e., fixed interest bearing capital is incorporated in the capital structure of the firm. According to VAN HORN- Leverage refers to the use of fixed costs in an attempt to increase (or, Lever up) profitability. According to EZRA SOLOMAN Leverage is the ratio of net returns on share holders equity and the net rate of return on the total capitalization. According to S.C. KUCHHAL- The term leverage is used to describe a firms ability to use fixed cost assets or funds to magnify the return to its owners.

On the basis of the above definitions, it can be said that the process of increasing the earning per share to the equity shareholders by charging the fixed operating cost and fixed financial cost with respect to change in sales is called LEVERAGE.

Leverages are of three types:

Financial Leverage Operating Leverage Combined Leverage

29A. FINANCIAL LEVERAGE

Definition: The process of increasing the earning per share to the equity shareholders by increasing the amount of debt capital is called Financial Leverage. The financial leverage may be of two Positive or Favorable Financial Leverage OR Negative Unfavorable Financial Leverage

When there is greater dependence on debt capital and as a result the earning per share to the equity shareholders is increased at a faster rate, it is called Positive or Favourable Financial Leverage. On the other hand, when there is low dependence on the debt capital and as a result it is quite impossible to increase the rate of earning per share to the equity shareholders, it is called Negative or Unfavourable Financial Leverage.

POSITIVE or FAVOURABLE FINANCIAL LEVERAGE

ILLUSTRATION: Capital Structure Firm B Firm A

Equity Share Capital 10,00,000 (Rs. 10 per share) 9% Debentures NIL 4,00,000

6,00,000

-----------------------------------Total Capital Employed 10,00,000 10,00,000

-----------------------------------Earnings Before Interest and Tax (EBIT) 20% of Capital Employed Employed Income Tax Rate 40% 40% 20% of Capital

SOLUTION: PARTICULARS Firm B (Rs) EBIT 2,00,000 Less: Interest NIL ---------------------------------------Earnings Before Tax (EBT) 2,00,000 Less: Income Tax @ 40% (80,000) ---------------------------------------Earnings After Tax (EAT) 1,20,000 Less: Preference Dividend NIL ---------------------------------------NIL 98,400 (65,600) 1,64,000 (36,000) 2,00,000 (Rs) Firm A

Earnings Available for Equity Share Holders 1,20,000

98,400

---------------------------------------Number of Shares 1,00,000 60,000

Earning per Share (EPS) 1.2 = Earnings Available to Equity Shareholders/ Number of Shares

1.64

It would be evident from the above figures that the debt proportion in the overall capital structure is higher in Firm A as compared to Firm B and as such the EPS of Firm A (Rs 1.64) Is greater than that of Firm B (Rs 1.2) this is Favourable Financial Leverage. Financial Leverage is concerned with the effect of changes in the EBIT on EPS. It may be defined as the ability of a fir to use fixed financial charges to magnify the effect of changes in EBIT on EPS.

NEGATIVE or UNFAVOURABLE FINANCIAL LEVERAGE

ILLUSTRATION:

Capital Structure Firm B (Rs) (Rs)

Firm A

Equity Share Capital 10,00,000 (Rs 10 per Share)

6,00,000

9% Debentures NIL Total Capital Employed 10,00,000

4,00,000

10,00,000

EBIT 6% of Capital

6% of Capital

Employed Employed Income Tax Rate 40% 40%

SOLUTION:

PARTICULARS Firm B

Firm

EBIT 60,000 Less: Interest NIL

60,000

(36,000)

---------------------------------------EBT 60,000 Less: Income Tax @ 40% (24,000) ---------------------------------------EAT 36,000 14,400 (9,600) 24,000

Less: Preference Dividend NIL

NIL

---------------------------------------Earnings Available for Equity Shareholders 36,000 ---------------------------------------Number of Equity Shares 1,00,000 60,000 14,400

EPS 0.36

0.24

It would be evident from the above figures that Firm A with a higher debt proportion has a lower EPS (0.24) compared to the Firm B which has a lower debt proportion (0.36) this is Negative or Unfavourable Financial Leverage . It may be noted in this context that a Firm will have a favourable financial leverage as long as its ROI is greater than the rate of interest. In a situation where the ROI falls below the rate of interest the financial leverage would be negative.

DEGREE OF FINANCIAL LEVERAGE (DFL):

The percentage change in earning per share (EPS) due to one percent change in earnings before interest and tax (EBIT), is called Degree of Financial Leverage (DFL).

DFL can be calculated in the following ways: DFL = % Change in EPS /% Change in EBIT

If there is no preference share capital in the Capital Structure: DFL = EBIT / EBT

If there is preference share capital in the capital structure in the capital structure: DFL = EBIT / EBT Pd / (1-t)

Where EPS = Earnings per share EBIT = Earnings before interest and tax Pd = Preference Dividend t = Tax Rate

ILLUSTRATION: (i) Calculate DFL from the given information. (ii) Calculate EPS when EBIT is increased by 30%.

Capital Structure

Rs.

10% Debentures 12% Preference Share Equity Share capital (Rs. 10 per share)

5,00,000 1,00,000 4,00,000 --------------10,00,000 ---------------

EBIT Income Tax Rate = 50%

1,60,000

SOLUTION:

PARTICULARS (Increased by 30%) Rs. EBIT 2,08,000 Less: Interest (50,000) ---------------------------------------EBT 1,58,000 Less: Income Tax @ 50% (79,000) ---------------------------------------EAT 79,000 55,000 (55,000) 1,10,000 (50,000) Rs. 1,60,000

Less: Preference Dividend (12,000)

(12,000)

-----------------------------------------Earnings for Equity Shareholders 67,000 43,000

-----------------------------------------EPS 1.675 Earnings available for Equity Shareholders = ----------------------------------------------------Number of Equity Shares DFL = EBIT / EBT - [Pd / 1-t)] 1.55 1.86 1.075

OR

DFL = % Change in EPS / % Change in EBIT Where; % increase in EPS from 1.075 to 1.675 = 1.675 1.075 / 1.075 * 100 = 55.81% % change in EBIT = 30% So, DFL = 55.81 / 30 = 1.86

MEASURES OF FINANCIAL LEVERAGE

The most commonly used measures of financial leverage are:

1. DEBT RATIO: The ratio of debt to capital, i.e., L1 = D / D+E = D / V Where; D = Value of debt; E = Value of shareholders equity;

V = Value of total Capital

2. DEBT-EQUITY RQTIO: The ratio of debt to equity, i.e., L2 = D / E

3. INTEREST COVERAGE RATIO: The ratio of net operating income (or EBIT) to interest charges, i.e., L3 = EBIT / INTEREST

NOTE: There is no difference between the first two measures of financial leverage in operational terms. They are related to each other in the following manner.

L1 = L2 / 1+L2 = D/E / 1+D/E = D / V L2 = L1 / 1-L1 = D/V / 1-D/V = D / E

Both the measures will rank the companies in the same order. However, the first measure (D / V) is more specific as its value will range between zero to one. The value of the second measure (D / E) may vary from zero to any large number.

The first two measures of financial leverage are also measures of capital gearing. They are static in nature as they show the borrowing position of the company at a point of time. These measures, thus, fail to reflect the level of financial risk, which is inherent in the possible failure of the company to pay interest and repay debt.

The third measure of financial leverage, commonly known as coverage ratio, indicates the capacity of the company to meet the fixed financial charges.

29B. OPERATING LEVERAGE

Definition: The tendency of disproportionately changes in operating profit with a change in sales is called Operating Leverage. Every firm has to bear fixed cost whatever may be its productions or sales. The operating leverage takes place only at the time when a firm has to bear fixed cost. As every firm has to bear fixed cost compulsorily, the percentage change in operating profit accompanying a change in sales is greater than the percentage change in sales. So, in the definition of the operating leverage, disproportionate change of the sales and operating profit has been mentioned.

DEGREE OF OPERATING LEVERAGE (DOL):

The degree of operating leverage is defined as the percentage change in the earnings before interest and taxes relative to a given percentage change is sales.

DOL can be calculated in the following ways: DOL = % change in EBIT / % change in Sales DOL = Contribution / EBIT

ILLUSTRATION:

(i) Calculate DOL from the following information (ii) Calculate EBIT when Sales is increased by 20%

PARTICULARS Sales Fixed Cost Variable Cost Sales

Rs. 3,00,000 1,50,000 25% of

SOLUTION:

PARTICULARS (Increased by 20%) Rs. Rs. Sales 3,60,000 Less: Variable Cost (90,000) --------------------------------------------Contribution 2,70,000 Less: Fixed Cost (1,50,000) --------------------------------------------EBIT 1,20,000 --------------------------------------------75,000 (1,50,000) 2,25,000 (75,000) 3,00,000

DOL = Contribution / EBIT 2.25

OR

DOL = % Change in EBIT / % Change in Sales Where; % Change in EBIT = 1,20,000 75,000 / 75,000 * 100 = 60% % Change in Sales = 20% So, DOL = 60% / 20% =3

FINANCIAL BREAK EVEN POINT

Definition: Operating break-even point or Financial break-even point is the volume of sales at which the company neither earns any profit nor incurs any loss i.e. , it is the volume of sales at which operating profit is nil. At the Operating BEP, total contribution is just equal to operating fixed costs. Total contribution = Fixed Costs Units Sold = Fixed Costs / Contribution per unit BEP (Units) = Fixed Costs / Contribution per unit At the Operating BEP, DOL = Contribution / EBIT OR, DOL = Contribution / Nil = (infinity)

MARGIN OF SAFETY
Definition: Margin Of Safety is the difference between actual sales value and break-even sales value i.e., it is the sales value over and above the break-even volume of sales . It indicates the financial soundness of the company. If the Margin of Safety increases, the amount of profit increases and viceversa. Mathematically, M/S = Actual Sales Break-even Sales Or, M/S = S - BES

29C. COMBINED LEVERAGE

Definition: The combined effect of Operating and Financial Leverage is called Combined Leverage. The leverage by which the percentage change in earning per equity share due to one percent change in sales is measured is called Combined Leverage. For example, a combined leverage of 10 means that the earning per share will be changed by 10% due to one percent change in sales.

DEGREE OF COMBINED LEVERAGE: The percentage change in earnings per equity share (EPS) due to one percent change in sales (Q), is called Degree of Combined leverage (DCL).

The degree of combined leverage is calculated as follows: If there is no preference share in the Capital Structure: DCL = Contribution / EBIT

If there is preference share in the Capital Structure: DCL = Contribution / EBT - Pd / (1-t)

DCL = DFL * DOL

ILLUSTRATION: (a) Calculate DOL, DFL and DCL from the following data under financial plan A and B. Installed capacity 45,000 units Actual production and sales 80% of the capacity

Selling price Variable cost Fixed cost Tax rate

Rs. 25 per unit Rs. 15 per unit Rs. 1,60,000 50%

Capital Structure Plan B

Financial Plan A

Financial

(Rs)

(Rs)

Equity Share Capital of Rs. 10 each 2,50,000 10% Preference Share Capital of Rs. 100 each 2,00,000 Debt 2,50,000 Cost of Debt Up to Rs. 1,00,000 Above Rs. 1,00,000 Above Rs. 2,00,000 = = = 10% 12% 16% 2,00,000

5,00,00

NIL

(b) Verify whether DCL = DOL * DFL or not. (c) What conclusion do you draw from the computed value of DCL? (d) Calculate EPS.

SOLUTION: (a) Statement showing computation of DOL, DFL, DCL and interpret the results:

Particulars B

Plan - A

Plan

(Rs) (Rs) Effective Production and Sales 36000 units (45,000 * 80 / 100) 36,000 units

Sales (Rs. 25 * 36,000) 9,00,000

9,00,000

Less: Variable cost 5,40,000 (Rs 15 * 36,000 units)

5,40,000

-------------------------------------------------Contribution 3,60,000 3,60,000

Less: Fixed cost 1,60,000

1,60,000

------------------------------------------------EBIT 2,00,000 2,00,000

Less: Interest (W.Note-1) 30,000

22,000

-----------------------------------------------1,70,000 EBT 1,78,000

Less: Tax @ 50% 85,000

89,000

------------------------------------------------ EAT 85,000 89,000

Less: Preference dividend 20,000

NIL

----------------------------------------------Earnings available to equity 65,000 Shareholders -----------------------------------------------89,000

DOL = (Contribution / EBIT) 3,60,000/ 2,00,000 = = 1.80

3,60,000 / 2,00,000

1.80

DFL = (EBIT / EBT) --

2,00,000 / 1,78,000

= 1.1236 = [EBIT / EBT Pd / (1-t)] 2,00,000 -----------------------------1,70,00020,000/(1-0.50)

--

= 1.5385

DCL = (Contribution / EBT) --

3,60,000

1,78,000

= 2.0225

= [Contribution / EBT- Pd / (1-t) 3,60,000

--

------------------------------1,70,000-20,000/(10.50)

= 2.7692 Interpretation of the results of Plan A:

(i)

DOL = 1.80. This means, if sales revenue changes by 1%, the EBIT will change by 1.80%.

(ii)

DFL = 1.1236. This means, if EBIT changes by 1%, the EPS will change by 1.1236.

(iii) will change

DCL = 2.0225. This means, if the volume of sales changes by 1%, the EPS

by 2.0225%.

Interpretation of the results of Plan B:

(i)

DOL = 1.80. This means, if sales revenue changes by 1%, the EBIT will change by 1.80%.

(ii)

DFL = 1.5385. This means, if EBIT changes by 1%, the EPS will change by 1.5385.

(iii)

DCL = 2.7692. This means, if the volume of sales changes by 1%, the EPS will change by 2.7692%.

(b) DCL of Plan A = DOL of Plan-A * DFL of Plan - B = 1.80 * 1.1236 = 2.0225 DCL of Plan B = DOL of Plan A * DFL of Plan B = 1.80 * 1.5385 = 2.769 Hence, DCL = DOL * DFL (Proved) (c) DCL of Plan A is 2.0225. This means if the volume of sales is changed by 1%, the EPS will change by 2.0225%. Again, DCL of Plan B is 2.7692. So, if the volume of sale is increased by 1 %, the EPS will change by 2.7692%. (d) EPS of Plan A = Earnings available to Equity shareholders / No. of Equity shares = Rs. (89,000 / 50,000) = Rs. 1.78 EPS of Plan B = Rs. (65,000 / 25,000) = Rs. 2.60

30. CONCLUDING REMARKS ON WORKING CAPITAL MANAGEMENT

Highlights of Working Capital Working Capital is an important issue that needs to be managed properly by the financial managers of the company. The progress and growth of the company depends to a large extent on full and prompt use of working capital. So the company needs to keep working capital according to its requirement and the requirement can always vary from company to company. From the study of the annual report of Coal India Limited, we come across certain peculiar features, which do not adhere to the theoretical norms of managing working capital. First from the efficiency analysis of the working capital we are able to say that the general trend of the ratios suggest that efficiency in working capital management cannot be ascertained and the trend in the current asset turnover ratio has to change or become higher to mark better efficiency in working capital management. During 2004-05 the working capital showed negative results amounting to Rs 805.41 Crs. But from 2005-10 it gradually increases from Rs (2670.38 to 11415.30).So we can say that the working capital of Coal India Limited is good. Moreover, the CA:CL ratio of CIL is 1.27 which is more from the industry average i.e. 1.26. A positive W/C is, therefore, recommended and likely to be maintained to help the organization grow in healthy liquidity position.

Hence this study recommends that in the long run the company has to conform to the maintenance of a positive working capital to allow growth in healthy liquidity position although the current W/C position poses no threat to fund managers of the organization in running day-to-day business. The profitability position of the organization on the whole for last 6 years, as has been depicted before, is following a healthy and rising trend because of improved productivity, increased turnover and containing cost within single digit inflation.

31. A CASE STUD THE STORY OF REVIVAL OF A SICK COMPANY (BCCL)

BHARAT COKING COAL LIMITED Bharat coking coal limited (BCCL), the DHANBAD based coal India subsidiary, rich in coking coal reserve in the forerunner of the Indian nationalized coal sector. It was formed in 1971 through nationalization of coking coal mines and subsequently with nationalization of non-coking coal mines BCCL become a unit of Coal India Limited (CIL) on 1-11-1975 It operates 76 mines -74 arc in JHARIA COALFIELD 2 in RANIGUNJ COALFIELD It has 41 underground mines 13 opencast mines 22 mixed mines Besides, BCCL operates 6 coking coal washeries, 2 non-coking coal washeries and various other units

PERFORMANCE PARAMETRES-: Production 23.3 mts during 05-06 Registering the growth of coal production of 1 mt over last year

Profit reported during five year 05-06 Rs 205.08 cr Gross sales reported during five year 05-06- Rs 3467.04 cr Net sales reported during five year 05-06- Rs 3112.28 cr Washeries loss till (0304) It was managed to turn around in o4-05 with a profit of 58.38 cr and earned a profit of Rs 293.40 cr in 2005-06 BCCL contributed an amount of Rs 458.05 cr to government exchange in the term from Royalty, Cess, Sales tax, Stowing excise duty (SED) and Entry tax during 2005. PAST SCENARIO AND MEASURES INITIATED FOR TURN AROUND -: Owing to various reasons BCCL has been consistently incurring losses over the years. Its turn- around in 2005-06 is the result of perseverance, dedication and resolve to its employee. The company reported loss of Rs 569.85 cr and cash loss of Rs 209 cr in 03-04. The turn around in less than 2 years from a near bankruptcy Situation has been made possible through dedicated and sustained pursuit of a revival strategy focused on -: Enhancing production of high value coking and washed coal Internalizing premium on coal marketed to non-core sector through e marketing Arresting / reversing the trend of persistent decline in coal production since 19992000 Several decisive steps were taken towards the end of 03-04 and the order of priorities was re adjusted to turn around. In order to procure production holding items on a fast track and subsequent payment

Worn out machines were surveyed off. Procurement of heavy earth moving machinery (HEMM) was adjusted as a new major thrust area To supplement the drive is to improve production from departmental mines by revamping the existing capacity. Efforts were made to obtain coal from isolated patches by deployment of hired HEMM. A number of contracts were awarded in 05-06 for deployment of HEMM. In 03-04 on a production of 22.68 mts the company incurred a loss of Rs. 569.85 cr. This loss was equivalent to contribution of around 8 mts. In other words the break-even level was 30.68mts achieving increase in production of such magnitude was ruled out under the given circumstances it therefore became imperative to focus on -: -Increase in production of high value prime washed coking coal & unshakable the constraints in value realization, wherever possible. Accordingly efforts were made to reserve the steep decline in washed coal production witnessed during the earlier year. As a consequence of all the above measures, acting in Tandem. BCCL earned profit slowly from operations, for the first time in its history of 05-06. During 06-07 BCCL has also registered it performance in line with 05-06 & the estimated profit is Rs.21crore. FUTURE PLAN Revamping departmental capacity Deploying hired HEMM for coal production from isolated patches. Long wall Mechanization is Moonidihi project Developments of MANDRA Block in BARORA Area Up gradation & modernization of washeries

It is estimated that net worth will be positive by 2010-11 & production will tend to 30mts by 2011-12.

32. RESULTS AND CONCLUSION

AIM: To analyze the Financial Statement of Coal India Limited for the past six years. COMMENT on OBJECTIVES: 1. To measure the efficiency of the Organization If we go through the ratio analysis part we will see that during the analysis of liquidity ratio there is positive growth from 2005-06 onwards. The liquidity position of the company is improving significantly and the terminal year has registered its growth positively and has established that current assets has exceeded over current liabilities. There is also immense reduction of the percentage of debt during the years, which is the company has low financial risk which is beneficiary to the shareholders. If we go through the profitability ratios we will see that the company is making profit and its operating efficiency is sound. 2. To judge the profit earning capacity of the Organization The profitability position of the organization on the whole for last six years as has been depicted before is following a healthy and rising trend because of improved productivity, increased turnover and containing cost between single digit inflation. 3. To know about the financial strength of the Organization The debt burden of the company is drastically reducing, which is a good indication for the shareholders that the company is able to withstand it financial needs from its own generation and the siphoning of funds from outer sources is gradually in decreasing order.

From the information in the dissertation, it can be said that the company is financially sound and it is identified that the company including its eight subsidiaries has attained the stage of profitability and it is a remarkable achievement in the arena of Financial Management. 4. Information about activities in the Organization - In addition to above, the following jobs were also undertaken: Revision of project reports/cost estimates. Feasibility reports for coking/non-coking coal washeries. Study on improvement/modernization of existing BCCL washeries. Operational plans for large Open Cast mines. Environmental Management Plan (EMP)

33. RECOMMENDATION

From the overall analysis of financial statements and component wise cost, the company is being looked from all the dimension and finally it can be concluded that economic health is sufficiently strong with huge cash reserve which can enable the company for diversification and many other venture is being processed apart from the main business of coal mining. Cost aspect is also registering that the price increase is contained within the level of inflation in spite of many other extraneous factors. In my opinion it is a cash rich PSU and should go for diversification meeting all social commitment. In global context for its survival and growth many other conditional ties to be complied.

 Under corporate governance more transparency should be maintained and many other commitment to be achieved.

34. LIMITATIONS OF THE STUDY AND FUTURE SCOPE OF THE WORK

After reviewing all sets of financial data as well as statistical information of the company, an effort is taken to highlight the companys financial position along with sufficient comment to diagnose the financial health from time to time. It is a drive with time constraint so overall review of the company from several direction cannot be viewed which can help the management to take concrete managerial decision. Further to note that the structure of company is massive in nature with manpower of 404744 with 163 open cast mines, 273 underground mines and 35 mixed
mines (includes both open cast and underground mines) is scattered throughout whole

of India varying geo-mining condition with a different cost structure, it is not similar to any other industry to study the whole company in a single thrust. From my observation, it is identified that the company had tremendous potential for its growth and expansion. Now the facing problem of land acquisition, so further expansion is restricted, so the company should think for alternative set of business and the new venture which the company has already adopted viz. setting up of Coal Videsh, approved by the Coal India board for its formation as its separate subsidiary to pursue foreign ventures and it has formed joint-ventures with NTPC, SAIL.RINL and NMDC.

35. APPENDICES
CIL Coal India Limited CA- Current Asset CL- Current Liabilities Formulae used in Ratio Analysis 1. 2. 3. 4. 5. 6. 7. 8. 9. Current Ratio= CA/CL Quick Ratio=Quick Asset/Current Liability Net Working Capital Ratio=Net Working Capital/Net Asset Debt Ratio=Total Debt/Capital employed Debt Equity Ratio=Total Debt/Net Worth Capital Employed to Net Worth Ratio=Capital Employed/Net Worth Gross Profit Margin=Gross Profit/Sales Return on Investment=EBIT/Total Assets Return on Equity=PAT/Net Worth

EBIT=Earnings before interest and tax

36. BIBLIOGRAPHY
Reference book: Financial Management by I.M. Pandey Financial Management by Prof. Sushil Mukherjee & Pradeep Kumar Chandra Annual Reports and accounts of 2009-2010 of Coal India Limited. Non-print media www.coalindia.nic.in www.coalindialimited.com www.cil.com