WORKING CAPITAL

MEANING OF WORKING CAPITAL:
Capital required for a business can be classifies under two main categories:  

Fixed Capital Working Capital

Every business needs funds for two purposes for its establishments and to carry out day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land and building, furniture etc. Investments in these assets are representing that part of firm’s capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short term purposes for the purchasing of raw materials, payments of wages and other day to day expenses etc. These funds are known as working capital. In simple words, Working capital refers to that part of the firm’s capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories.

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital:  

Balance Sheet concepts Operating Cycle or circular flow concept

BALANCE SHEET CONCEPT:
There are two interpretation of working capital under the balance sheet concept:  

Gross Working Capital Net Working Capital

[1]

The term working capital refers to the Gross working capital and represents the amount of funds invested in current assets . Thus, the gross working capital is the capital invested in total current assets of the enterprises. Current assets are those assets which are converted into cash within short periods of normally one accounting year. Example of current assets is:

Constituents of Current Assets:     

Cash in hand and Bank balance Bills Receivable Sundry Debtors Short term Loans and Advances Inventories of Stock as:     Raw Materials Work in Process Stores and Spaces Finished Goods

  

Temporary Investments of Surplus Funds Prepaid Expenses Accrued Incomes

The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say:

Net Working Capital = Current Assets – Current Liabilities.

NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:
When the current assets exceed the current liabilities, the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year of the current assets or the income of the business. Examples of current liabilities are:

[2]

CONSTITUENTS OF CURRENT LIBILITIES:
      

Bills Payable Sundry Creditors or Account Payable Accrued or Outstanding Expenses Short term Loans, Advances and Deposits Dividends Payable Bank Overdraft Provision for Taxation, If does not amount to appropriation of profits

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital.

OPERATING CYCLE OR CIRCULATING CASH FORMAT:
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. Funds thus invested in current assets keep revolving fast and being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence it is also known as revolving or circulating capital. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm. The cycle starts with the purchase of raw material and other resources .

And ends with the realization of cash from the sale of finished goods. It involves purchase of raw material and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stocks into sales, debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. The speed/ time of duration required to complete one cycle determines the requirements of working capital longer the period of cycle, larger is the requirement of working capital.

[3]

Receivable conversion period (RCP)

Cash received form debtors and paid to suppliers of raw materials

Raw material storage conversion period (RMSCP)

Sales of finished goods

Raw materials introduced into process

Finished goods conversion Period (FGCP)

Finished goods produced

Work in process Conversion period (WIPCP)

The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods. Thus,

Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP
Where, RMCP = Raw Material Conversion Period WIPCP = Work –in- Process Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period However, a firm may acquire some resources on credit and thus defer payments for certain period. In that case, net operating cycle period can be calculated as below:

Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period

[4]

On the basis of time.Further.   Gross working capital Net working capital The classification is important from the point of view of the financial manager. [5] .  Raw Material Conversion Period = Average Stock of Raw Material. Raw Material Consumption per day  Work in process Conversion Period = Average Stock of Work-in-Progress Total Cost of Production per day  Finished Goods Conversion Period = Average Stock of Finished Goods Total Cost of Goods sold per day  Receivables Conversion Period = Average Accounts Receivables Net Credit Sales per day  Payable Deferral Period = Average Payable Net Credit Purchase per day CLASSIFICATION OR KIND OF WORKING CAPITAL: Working capital may be classified in two ways:  On the basis of concept  On the basis of time On the basis of concept. following formula can be used to determine the conversion periods. working capital is classified as. working capital may be classified as:   Permanent or Fixed working capital Temporary or Variable working capital.

[6] .

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 Reserve Working Capital Regular Working Capital Seasonal Working Capital Special Working Capital [7] .

TEMPRORAY OR VARIABLE WORKING CAPITAL: Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. 2. The main advantages of maintaining adequate amount of working capital are as follows:          Solvency of the Business Goodwill Easy Loans Cash discounts Regular supply of Raw Materials Regular payments of salaries. PERMANENT OR FIXED WORKING CAPITAL: Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets.Varibles working capital can be further classified as second working capital and special working capital. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations. working capital is very essential to maintain the smooth running of a business. Exploitation of favorable market conditions Ability of crisis Quick and regular return on investments [8] . Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business. The capital required to meet the seasonal needs of the enterprises is called the seasonal working capital. wages & other day to day commitments. No business can run successfully without an adequate amount of working capital. IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL: Working capital is the life blood and nerve centre of a business .1. just a circulation of a blood is essential in the human body for maintaining life.

While a manufacturing industry has a long cycle of operation of the working capital. The need of working capital arises due to the time gap between production and realization of cash from sales.progress. The amount required also varies as per the nature. the characteristics of their operations.  To meet the selling costs as packing. the rate of stock turnover and the state of economic situation. components and spaces  To pay wages and salaries  To incur day to day expenses and overhead costs such as fuel. the length of production cycle . However the following are the important factors generally influencing the working capital requirements. stores and spares and finished stock. power and office expenses etc. [9] .  MANAFACTURE PRODUCTION POLICY: Each enterprises in the manufacturing sector has its own production policy. There is an operating cycle involved in the sales and realization of cash. some follow the policy of uniform production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular phase of time. Every business needs some amount of working capital. thus .  To provide credit facilities to the customers. And sales. and realization of cash.THE NEED OR OBJECTS OF WORKING CAPITAL: The need for working capital cannot be emphasized. the same would be short in an enterprises involve in providing services. FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT: The working capital requirements of a concern depend upon a large number of factors such as nature and size of the business. advertising etc. an enterprises involved in production would required more working capital then a service sector enterprise. working capital is needed for the following purposes:  For the purchase of raw materials .  NATURE OR CHARACTERSTICS OF A BUSINESS: The nature and the working capital requirement of enterprises are interlinked. work –in. Accordingly the working capital requirements vary for both of them. production and sales. There are time gaps in purchase of raw materials and production.  To maintain the inventories of raw materials.

The assessment of the working capital requirement is made keeping this factor in view. there by calling for substantial investment in the same. The basis for assigning value to each component is given below: [10] . With increasing prices. As business growth and expands it needs a larger amount of the working capital. So for correct assessment of the working capital requirement the duration at various stages of the working capital cycle is estimated.  MARKET CONDITION: If there is a high competition in the chosen project category then one shall need to offer sops like credit.  MANAFACTURING CYCLE: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. immediate delivery of goods etc for which the working capital requirement will be high. Thereafter proper value is assigned to the respective current assets. depending on its level of completion. The factors discussed above influence the quantum of working capital in the business. Each constituents of the working capital retains it form for a certain period and that holding period is determined by the factors discussed above. OPERATIONS: The requirement of working capital fluctuates for seasonal business. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low. If the manufacturing cycle involves a longer period the need for working capital would be more. The working capital needs of such business may increase considerably during the busy season and decrease during the dull season. At time business needs to estimate the requirement of working capital in advance for proper control and management.  GROWTH AND EXAPNSION: Growth and Expansions in the volume of business result in enhancement of the working capital requirements. the same levels of current assets needs enhanced investments. Normally the needs for increased working capital funds processed growth in business activities. On other hand if raw material is not readily available then a large inventory stocks need to be maintained.  PRICE LEVEL CHANGES : Generally raising price level require a higher investment in the working capital.  AVABILITY OF RAW MATERIAL: If raw material is readily available then one need not maintain a large stock of the same thereby reducing the working capital investment in the raw material stock .

COMPONENTS OF WORKING CAPITAL Stock of Raw Material Stock of Work -in. The total of all such valuation becomes the total estimated working capital requirement. can affect the day-to-day operations severely. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. It may lead to cash crisis and ultimately to liquidation. Negligence in proper assessment of the working capital. PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY: The following are the general principles of a sound working capital management policy: PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY PRINCIPLES OF RISK VARIATIONS PRINCIPLES OF COST OF CAPITAL PRINCIPLES OF EQUITY PRINCIPLES PRINCIPLES OF MATURITY OF PAYMENTS [11] . We know that working capital has a very close relationship with day-to-day operations of a business. An inaccurate assessment of the working capital may cause either underassessment or over-assessment of the working capital and both of them are dangerous.Process Stock of finished Goods Debtors Cah BASIS OF VALUATION Purchase of Raw Material At cost of Market value which is lower Cost of Production Cost of Sales or Sales Value Working Expenses Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. therefore.

reduces risk and thereby decreases the opportunity for gain or loss. [12] . a firm should make every effort to relate maturities of payment to its flow of internally generated funds. In other words there is a definite inverse relationship between the degree of risk and profitability.PRINCIPLE OF EQUITY POSITION: The principle is concerned with planning the total investments in current assets. Current assets as a percentage of total sales While deciding about the composition of current assets. In other words. higher and risk however the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two. 4. Larger investment in current Assets with less dependence on short term borrowings. On the other hand less investments in current assets with greater dependence on short term borrowings. Current assets as a percentage of total assets and 2. 2.1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY): Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. increase liquidity. Generally. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. the goal of management should be to establish a suitable trade off between profitability and risk. the financial manager may consider the relevant industrial averages. reduces liquidity and increase profitability. Every rupee invested in current assets should contribute to the net worth of the firm. According to the principles. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management assumes greater risk by reducing working capital. PRINCIPLES OF COST OF CAPITAL: The various source of raising working capital finance have different cost of capital and the degree of risk involved. According to this principle. there is a definite inverse relationship between the risk and profitability. 3. the amount of working capital invested in each component should be adequately justified by a firm’s equity position. The level of current assets may be measured with the help of two ratios: 1. However. PRINCIPLES OF MATURITY OF PAYMENT: The principle is concerned with planning the source of finance for working capital.

In the process it may end up with increasing cost of purchase and reducing selling price by offering discounts .  It may make management complacent leading to its inefficiency.  It may lead to offer too liberal credit terms to buyers and very poor recovery system & cash management. CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:  Growth may be stunted. Each of the components of working capital needs proper management to optimize profit. CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL:  Excess of working capital may result in un necessary accumulation of inventories. both the situation would affect profitable adversely. Now avaibility of stocks due to non availability of funds may result in production stoppage. [13] . The business may fail to honour its commitment in time thereby adversely affecting its creditability. the greater the inability to meet its obligations in time. This situation may lead to business closure. The business may be compelled to by raw materials on credit and sell finished goods on cash.  Implementations of operating plans may brome difficult and consequently the profit goals may not be achieved.Generally shorter the maturity schedule of current liabilities in relation to expected cash inflows.  Cash crisis may emerge due to paucity of working funds. While underassessment of working capital has disastrous implications on business overassesments of working capital also has its own dangerous. It may become difficult for the enterprises to undertake profitable projects due to non availability of working capital.  Over investment in working capital makes capital less productive and may reduce return on investment. Working Capital is very essential for success of business & therefore needs efficient management and control.  Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital.

prevailing market conditions etc. due to factors like trade policies . Simultaneously stock out costs should be minimized. From this it would be possible to find out the average credit days using the above given formula. which influence the working capital requirement. A business should continuously try to monitor the credit days and see that the average. every business would prefer selling its produce on cash basis. RECEIVABLE MANAGEMENT: Given a choice. However. Business are compelled to sells their goods on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Investment in the type of current assets needs proper and effective management as. This may lead to cash crisis. inventory needs to be managed effectively. An effective control of receivables Help a great deal in properly managing it.INVENTORY MANAGEMNT: Inventory includes all type of stocks. Business therefore should fix the minimum safety stock level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient. Each business should therefore try to find out coverage credit extends to its clients using the below given formula: Average Credit = (Extend in days) Total amount of receivable Average credit sale per day Each business should project expected sales and expected investments in receivable based on various factor. The level of inventory should be such that the total cost of ordering and holding inventory is the least. it gives rise to costs such as :  Cost of carrying receivables  Cost of bad debts losses Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more then the costs incurred for the receivables and the gap between benefit and costs increased resulting in increase profits. Extending credit means creating current assets in the form of debtors or account receivables. Credit offer to clients is not crossing the budgeted period otherwise the requirement of investment in the working capital would increase and as a result. [14] . For effective working capital management. activities may get squeezed.

Cash inflows 2. Cash received from debtors 3.CASH BUDGET: Cash budget basically incorporates estimates of future inflow and outflows of cash cover a projected short period of time which may usually be a year. Cash payment for assets creation 5. weeks or even a daily basis. effective cash management is facilated if the cash budget is further broken down into months. 6. a half or a quarter year . 4. deposits etc. Cash Sales 2. Cash payments for withdrawals. CASH OUTFLOWS: 1. Cash received from Loans. taxes. Cash receipts other revenue income 5. [15] . Cash Purchase 2. Cash received from sale of investment or assets. There are two components of cash budget are: 1. Cash payments to Creditors 3. Cash outflows The main source for thses flows are given here under: 1. Repayments of Loan etc. Cash payment for other revenue expenditure 4.

[16] .

[17] .

[18] .

Table No. 1 [19] .

Chart No.1 PROPORTION OF EACH CURRENT ASSET IN GROSS WORKING CAPITAL Advances 1% Investments 0% Others 7% Inventory 9% Debtors 14% Cash 69% [20] .

[21] .

[22] .5. security deposit and dividend not paid. advances. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent source of funds. Net working capital is a qualitative concept. Current liability includes sundry creditor’s unclaimed dividend. cash and bank balance and loans and advances. Net working capital can be negative or positive. sundry debtors. Net working capital = Current asset – Current liability Current asset includes inventories.1 CALCULATION OF WORKING CAPITAL Net working capital refers to the difference between current assets and current liabilities. A negative working capital means a negative liquidity and may be harmful for the company’s reputation.

09 5245.37 6437.65 4991.85 484.80 9681.06 7151.49 5732. 2 Calculation of working capital Current Assets (Rs.32 937. In Lakhs) 2007 2008 2009 2010 2011 Average 5283. In Lakhs) Year Current Liabilities (Rs.17 2490.07 8209. In Lakhs) Net Working Capital (Rs.96 1410.05 6656.70 1772.57 1419.14 [23] .97 5929.63 7190.Table No.99 4799.

2 Net Working Capital 3000 2500 2000 1500 Net Working Capital 1000 500 0 2007 2008 2009 2010 2011 INFERENCE The working capital indicated the liquidity position of the firm. The net working capital of the company is showing a positive trend over the period from 2007 to 2011.57 (in lakhs). In the year 2010 – 2011.Chart No. A negative liquidity may cause harm to the company’s reputation. [24] . The average working capital of the firm from 2007 to 2011 is 1419.14 lakhs. the company had a net working capital of 2490.

A relatively higher ratio is an indication that the firm is liquid and has the ability to pay its current obligations on time. WORKING CAPITAL RATIO (CURRENT RATIO) Current ratio is defined as the relationship between current assets and current liabilities. It indicates the availability of current assets in rupees for every one rupee of current liability. It is also called working capital ratio. Current ratio is the ratio of current assets to current liabilities. Working capital ratio = Current assets/ Current liabilities [25] .5. In a sound business current ratio of 2:1 considered as ideal one. It is a measure of general liquidity & is most widely used to make the analysis of short term financial position of a firm. On the other hand a low current ratio indicates that the liquidity position of the firm is not good and shall not be able to pay its current liabilities in time. The current ratio is a measure of the firm’s short-term solvency. LIQUIDITY RATIOS Liquidity ratio measures the ability of the firm to meet its obligations.2 RATIO ANALYSIS Ratio analysis is widely used tool for financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weakness of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items.

In Lakhs) Current Liabilities (Rs.85 1.49 5732.99 4799.80 9681.27 1.63 7190.24 [26] .10 1.06 7151.19 1.35 1.28 1.Table No.05 6656. In Lakhs) Current Ratio (Times) 2007 2008 2009 2010 2011 Average 5283.37 6437.07 8209.09 5245.97 5929.65 4991.3 Current ratios Year Current Assets (Rs.

Chart No.24.80 0. the ratios are near to the ideal level.3 Current Ratio 1. The company has not achieved the standard ratio of 2:1 in any of the years but the firm was able to maintain its current ratio above 1 for the past five years.20 1.2007 (1. The average current ratio is 1. The ratio is highest in the year 2010 .60 1.20 0.10). The company has also shown a positive trend in maintaining the current ratio. [27] .00 0. Though this company records a fluctuating trend in its current ratio.35) and lowest in the year 2006 .3 deals with current ratio.60 0.40 1.2011 (1. The standard current ratio for a firm is 2:1.00 2007 2008 2009 2010 2011 Current Ratio INFERENCE The above table no.40 0.

An acid test ratio of 1:1 is considered satisfactory. Liquid liabilities mean all liabilities excluding bank overdraft. Liquid assets include all the current assets excluding inventories & prepaid expenses. Quick ratio may be defined as ration of quick assets to quick liabilities.3ACID TEST RATIO (QUICK RATIO) Quick ratio or liquid ratio is a more rigorous test of liquidity than the current ratio. Inventories & prepaid expenses are not termed as liquid assets because they cannot be converted into cash immediately without a loss of value. The term liquidity refers to the ability of the firm to pay short term obligations as and when they become due. Quick Ratio = Quick asset / Current liability Quick Assets=Current Assets-Stock [28] .5.

09 1.37 6437.80 9681.23 5424.99 564.07 904.97 4554.97 5929.Table No.99 266.81 9414.41 416.05 6656. In Lakhs) (Rs.85 1.44 6587.31 Average 7151.21 1.10 1. In Lakhs) (Rs.13 [29] .95 1.06 729.09 5245.55 5732.49 0.09 4799.65 4991.66 7792. In Lakhs) (Times) Year 2007 2008 2009 2010 2011 5283.98 5751. In Lakhs) (Rs.63 7190.4 Quick Ratios Current Stock Quick Current Quick Assets Asset Liabilities Ratio (Rs.07 8209.74 504.

the trend of ratio is increasing year by year.6 0.2 1 0. If this condition is continued company should face serious liquidity crisis.The firm has not achieved the industry standard of 1:1 in of the years.48.42 but in 2006-2007 it is reduced by In 2006-2007 quick ratio is 0. From the figure we can see that in 2004-2005 it is 0.51 indicating company’s liquidity position is not satisfactory. The average quick ratio is 0.2 0 2007 2008 2009 2010 2011 INFERENCE For Quick ratio.8 Quick Ratio 0.Chart No.4 0.4 1.4 Quick Ratio 1. [30] . 1:1 is considered as satisfactory From the table depicting the Quick ratio of the firm shows that.

Table No.49 5732.79 4604. In Lakhs) Current Liabilities (Rs.5. so examination of cash ratio and its equivalent to current liabilities is very important.84 0.65 4991.76 0.86 .5 Cash Ratios Year 2007 2008 2009 2010 2011 Average Cash (Rs. Analysis of cash with current liability shows that whether the company has the ability to pay its current liability on due date.63 7190.37 6437.26 4958. In Lakhs) Cash Ratio (Times) 3669.95 0. Cash Ratio = (Cash + Marketable Securities)/ Current liability.88 0.846 0.4 CASH RATIO Since Cash is the most liquid form of asset.74 [31] 4799.86 0.85 4285.09 5245.89 5380.91 6852.

5 Cash Ratio 1 0.Chart No.4 0.5 0.6 0.8 0.3 0.9 0.7 0.1 0 2007 2008 2009 2010 2011 Cash Ratio [32] .2 0.

Activity ratio involves a relationship between sales and assets.5. Debtors turnover ratio = Sales/Debtors Average collection period = 360/Debtors turnover ratio [33] .6 DEBTORS TURNOVER RATIO It is also called receivables turnover ratio. Higher the ratio lowers the average debtors to the lower credit sales. The purpose of this ratio is to discuss the credit collection period and policy of the firm. Their ratio indicates the speed with which assets are converted in to sales.5 TURNOVER RATIO OR EFFICIENCY RATIO Turnover ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. It indicates the number of time debtor’s turnover each year. It also measures the liquidity of the company. 5.

10 51.93 548.02 10.67 478.41 6453.40 654.23 9.77 12.04 8005.Table No.85 37.726 36. In Lakhs) Debtors Average Turnover collection Ratio period (Times) 10.97 37.84 7.49 31. In Lakhs) Year 2007 2008 2009 2010 2011 Average Debtors (Rs.54 13744.00 11.01 1096.02 29.17 (Days) 4790.29 [34] .6 Debtors turnover Ratios Sales (Rs.88 10228.57 1957.72 1844.48 18149.

6 Debtors Turnover Ratio 14 12 10 8 Debtors Turnover Ratio 6 4 2 0 2007 2008 2009 2010 2011 [35] .Chart No.

7 Avg collection period 60 50 40 30 Avg collection period 20 10 0 2007 2008 2009 2010 2011 [36] .Chart No.

48 18149.30 11. In Lakhs) Year 2007 2008 2009 2010 2011 Average Fixed Assets (Rs.26 13. A higher fixed asset turnover ratio shows that the company has been more effective in using the investment in fixed asset to generate revenues. In Lakhs) Fixed Asset Turnover Ratio (Times) 4790.97 26.78 695. Fixed Asset Turnover Ratio = Sales/Fixed Assets Table No.56 .41 6453.74 752.Fixed Asset Turnover Ratio Fixed asset turnover ratio is the ratio of Sales to Fixed assets.88 10228.7 Fixed Asset Turnover Ratio Sales (Rs.79 668.46 8.04 8005.54 13744.63 754.67 [37] 878.60 5.09 18.05 777. It indicates how well the business is using its fixed assets to generate sales.

[38] .

8 Fixed Asset Turnover Ratio 30 25 20 15 10 5 0 2007 2008 2009 2010 2011 Fixed Asset Turnover Ratio [39] .Chart No.

It measures the relationship between good sold and inventory level. A right inventory turnover indicates of good inventory management. This ratio indicates the number of times inventory or stock replaced during the year. It indicates whether investment in inventory is efficiently used or not. Inventory turnover ratio = Cost of goods sold / Average inventory Cost of Goods Sold = Opening stock + Purchases + Direct expenses – Closing stock Average Inventory = (Opening stock + Closing stock)/2 Inventory holding period = 365/Inventory turnover ratio [40] .a) Inventory Turnover Ratio It is also called stock turnover ratio.

07 904.99 266. In Lakhs) Opening Stock (Rs.16 6684.74 504.41 6453.15 9132.50 Table No.69 5855.02 9616.29 729. In Lakhs) 2007 2008 2009 2010 2011 Average 4209.99 5294.26 453.98 598.12 570.07 904.8 Average Inventory Year 2007 2008 2009 2010 2011 Average Sales (Rs. In Lakhs) 607.7 607.24 12923.41 416.74 504. In Lakhs) Closing Stock 729.41 416.Table No.99 632.97 564.48 18149.53 (Rs. In Lakhs) 265.23 6631.15 335.43 457.24 660.9 10228.04 8005. In Lakhs) 4790.74 504. In Lakhs) 729.74 504.44 (Rs.515 616.07 904.97 564.7 341.47 (Rs.5 13744.29 729.65 18269. In Lakhs) (Rs.41 416.44 Average Stock 668.9 Cost of goods sold Year Direct Opening Closing Cost of Purchases Expenses Stock Stock goods sold (Rs.95 .36 [41] (Rs.56 17324.07 904.99 266.905 704.50 (Rs. In Lakhs) 4352.99 632.85 416.41 416.70 12202.

515 616.69 5855.65 668.10 Inventory Turnover ratio Inventor Cost of y goods Average Turnover Inventory holding sold stock Ratio period (Rs.24 2011 12923.66 31.49 9.51 9.02 Average 9616. In Lakhs) (In Days) Year 2007 2008 2009 4352.06 38.47 6.98 598.24 660. In Lakhs) (Rs.95 [42] .65 37.17 2010 18269.905 704.79 18. In Lakhs) (Rs.19 56.46 38.49 27.16 6684.7 341.20 9.Table No.45 13.

9 Inventory Turnover Ratio 40 35 30 25 20 15 10 5 0 2007 2008 2009 2010 2011 Inventory Turnover Ratio [43] .Chart No.

10 Inventory holding period 60 50 40 30 Inventory holding period 20 10 0 2007 2008 2009 2010 2011 [44] .Chart No.

04 8005.88 5.88 10228.17 2490.67 484.7 1772. In Lakhs) Year Sales (Rs.11 Working Capital Turnover Ratio Working capital (Rs.52 7.24 5.48 18149.96 1410.32 937. In Lakhs) Working Capital TurnoverRatio (In Times) 2007 2008 2009 2010 2011 Average 4790.64 [45] .54 13744.14 9.41 6453.89 6.67 10.Table No.57 1419.

Chart No.11 Working Capital Turnover Ratio 12 10 8 6 Working Capital Turnover Ratio 4 2 0 2007 2008 2009 2010 2011 [46] .

The important rates of return measures are: rate of return on total assets and rate in equity. It measures the overall efficiency.7 . selling.8.1NET PROFIT RATIO This ratio shows the earnings left for shareholders as a percentage of net sales i. 5.profit margin ratios and rate of return ratios. profit per rupee of sales.e. Rate of return ratio reflects the relationship between profit and investment.. Net profit ratio = (Net profit / Sales) x 100 [47] . Popular profit margin ratios are gross profit margin and net profit margin ratio. financing and pricing and tax management.5. Profit margin ratios show the relationship between profit and sales. administration. There are two types of profitability ratios. production. PROFITABILITY RATIOS Profitability reflects the final result of business operations.

77 485.88 10228.07 [48] .81 342.54 13744. In Lakhs) (Rs.06 2.31 4.04 8005.16 543.31 6.99 5.66 5.41 6453. In Lakhs) 2007 2008 2009 2010 2011 Average 4790.12 Net Profit Ratio Year Sales Net Profit Net Profit Ratio (%) (Rs.22 730.67 31.48 18149.68 0.42 426.Table No.

12 Net Profit Ratio 7 6 5 4 3 2 1 0 2007 2008 2009 2010 2011 Net Profit Ratio [49] .Chart No.

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