This action might not be possible to undo. Are you sure you want to continue?
The data of Apollo tyres Ltd. for the year 2007 to 2011 used in this study has been taken from the annual report of the company as well as the website. Editing, classification, tabulation of the financial data which are collected from the above mentioned source have been done as per the requirement of the study. For assessing the financial performance of the working capital position of the study, the technique of ratio analysis has been used. The collected data have been analyzed through different tools such as: A- Ratio Analysis B- Schedule of changes in Working Capital
A- Ratio Analysis: Ratio Analysis means the calculation and comparison of ratios which are obtained from the information in a company’s financial statements. The following ratios indicate the short term solvency of the firm and also indicate how efficiently the firm is managing its working capital. 1. Current Ratio:Current ratio is a ratio between current assets and current liabilities of a firm for a particular period. This ratio establishes a relationship between current assets and current liabilities. The objective of computing this ratio is to measure the ability of the firm to meet its short term liability. It compares the current assets and current liabilities of the firm. This ratio is calculated as under: Current ratio = Current assets Current liabilities Current assets are those assets which can be converted into cash within a short period i.e. not exceeding one year. It includes cash in hand, cash at bank, bills receivables, short term investment, sundry debtors, stock, prepaid expenses. Current liabilities are those liabilities which are expected to be paid within a year. It includes Bills payables, Sundry creditors, bank overdraft, provision for tax, outstanding expenses.
2. Quick Ratio:Quick ratio is also known as Acid test or Liquid ratio. It is another ratio to test the liability of the concern. This ratio establishes a relationship between quick assets and current liabilities. This ratio measures the ability of the firm to pay its current liabilities. The main purpose of this ratio is to measure the ability of the firm to pay its current liabilities. For the purpose of calculating this ratio, stock and prepaid expenses are not taken into account as these may not be converted into cash in a very short period. This ratio is calculated as under:
16 | P a g e
Stock Turnover Ratio:Stock turnover ratio is a ratio between cost of goods sold and the average stock or inventory. Inventory to working capital ratio:It is defined as a method to show what portion of a company’s inventories is financed from its available cash. Every firm has to maintain a certain level of inventory of finished goods. It evaluates the efficiency with which a firm is able to manage its inventory. Inventory to working capital ratio = Inventory Working Capital 5. Cost of goods sold = Opening stock + Purchases + Direct expenses – Closing stock OR Cost of goods sold = Sales – Gross Profit Average stock = Opening stock + Closing stock 2 17 | P a g e . Net working Capital:Net working capital is nothing but the difference between current assets and current liabilities. But the level of inventory should neither be too high nor too low. liquid assets = current assets – (stock + prepaid expenses) 3. This ratio establishes relationship between cost of sold goods and average stock. Net Working capital= Current Assets . Stock turnover ratio = Cost of goods sold Average Stock Where. is essential to business which hold inventory and survive on cash suppliers. A high working capital is not good for a company because it deficits the excessive blocking up of capital in inventories and debtors.Current Liabilities 4. When current liabilities increase the working capital decreases.Liquid Ratio= Liquid or Quick Asset Current liabilities Where.
This period may be calculated as under: Debt collection period = Average Trade Debtors Average Net credit sales period OR Debt collection period = 12months/ 52 weeks/ 365days Debtor’s turnover ratio 7. Debtors Turnover Ratio:This ratio establishes a relationship between net credit sales and average account receivables i. Inventory or Stock conversion period = 365 Stock turnover ratio 6. a firm has to make credit purchases. average trade debtors and bill receivables. This ratio is also known as Ratio of Net Sales to average receivables. figure of net credit sale is not available then it is calculated as if sales are credit sales: Average Debtors = Opening Debtors + Closing Debtors 2 Note: If opening debtors are not available then closing debtors and bills receivables are taken as average debtors. This period is calculated by dividing the number of days by inventory turnover.e. Thus a supplier of goods will be interested in finding out how much time the firm is likely to take in repaying the trade creditors. The objective of computing this ratio is to determine the efficiency with which the trade debtors are managed. Creditors Turnover Ratio: It is a ratio between net credit purchases and average account payables (i. In the course of business operations.e. This can be possible by calculating inventory conversion period. Quality of debtors means payment made by debtors within the permissible credit period. It indicates the rapidity at which the money is collected from debtors.Inventory or stock conversion period:It may also be of interest to see average time taken for clearing the stocks. Debt collection period: This period refers to an average period for which the credit sales remain unpaid and measures the quality of debtors. creditors and bill payables). This ratio helps in finding out the exact time a firm is likely to take 18 | P a g e . It is calculates as under: Debtors Turnover ratio = Net credit annual sales Average debtors In case.
bill receivables. A higher ratio indicates efficient utilization of working capital and a low ratio indicates the working capital is not properly utilized. etc. It is the velocity of working capital ratio that indicates the number of times the working capital is turned over in the course of a year. cash. The current assets like debtors. This ratio can be calculates as Working capital Turnover ratio = Annualized Net Sales Working Capital Average Working Capital = Opening working capital + working capital at the end 2 If the figure of cost of sales is not given. change with the increase or decrease in sales. then the figure of sales can be used. Sales to Current Assets ratio:A sale to current assets ratio is useful for determining whether there is a liquidity problem. On the other hand if opening working capital is not discussed then working capital at the yearend will be used 9. stock.in repaying to its trade creditors. If a company is forced to use such financing technique as accounts receivable factoring to pay for its 19 | P a g e . This ratio measures the efficiency at which the working capital is being used by a firm. Working capital Turnover Ratio: Working capital of a concern is directly related to sales. This ratio establishes a relationship between credit purchases and average trade creditors and bill payables and is calculated as under: Creditors turnover ratio = Net credit purchases Average trade creditors and/ or average bill payables Average creditors = Creditors in the beginning + creditors at the end 2 Debt payment period: This period shows an average period for which the credit purchases remain unpaid or the average credit period actually availed of: Debt payment period = Average trade creditors Average Net credit purchases per day OR Debt payment period = 12months/ 52weeks/ 365days Creditors Turnover Ratio 8. Working Capital = Current assets – Current liabilities Working capital turnover ratio indicates the speed at which the working capital is utilized for business operations.
no matter what the exact ratio measurement may be. this financial ratio now is a bit outworn and is not very meaningful for most of the companies that use cash in their day-to-day operations when cash is a part of working capital. but it also may go out of business suddenly if it cannot cover its short term accounts payable. Fixed assets turnover ratio = Net Sales Fixed Assets 12. Fixed assets turnover ratio:Fixed assets turnover ratio measures the ability of company management to generate sales volume form the company’s fixed asset base. Cash turnover Ratio:Cash turnover ratio compares company’s sales to its cash and measures how effectively company is using cash assets. since the elimination of all working capital makes it impossible to run a business and will likely lead to its dissolution. Working capital to debt ratio = Cash + Account receivables + Inventory – Account payable Debt 11. a company is likely to not only have trouble filling orders (since it has an adequate inventory). However. Cash turnover ratio = Sales Cash 20 | P a g e . This measure is used only in cases where debt must paid off at once. Sales to current assets ratio = Sales Current Assets 10. indicating the presence of few assets to support sales. then the amount of its current assets will be very low. Working capital to debt ratio:Working capital to debt ratio is used to see if a company could pay off its debt by liquidating its working capital.ongoing operations. This ratio indicates whether or not the company is overinvesting in assets in order to generate sales. if the ratio is extremely high. and the level of productivity of these assets. The size of the ratio will vary considerably from industry to industry. so a better sign of problems is a steady increase in the ratio over time. Consequently.
or to reduce trade creditors. discussions were conducted with finance manager and staffs of various departments of the company. The two columns showing the changes in current assets and current liabilities are balanced. debtors. This schedule is prepared with the help of only current assets and current liabilities. Increase in Current Assets and Decrease in Current Liabilities: The acquisition of current assets and repayment of current liabilities will result in funds out flow. stock or debtors balance will result in release of funds to be applied elsewhere. Similarly. means that these sources have more at the end of the year than at the beginning. etc. 2012 21 | P a g e . Period of Study The study covers evaluation of working capital management of Apollo Tyres Ltd. with that in the current year. bank overdraft and tax dues. Short term funds rose during the period by any increase in the current liabilities like trade creditors. bills payable etc. The fund may be applied to finance an increase in stock. It is necessary to prepare this schedule. 2012 to 21st August. from 1st August. It must remembered that schedule of changes in working capital is prepared only from accounts appearing in the Balance Sheet.Schedule of changes in Working Capital:It is prepared in order to measure the increase/decrease in the working capital over a period of time. The balancing figures represent either an increase or decrease in working capital. Source of Data/ Method of Data Collection Primary and secondary data have been used for the study In order to collect the primary data. annual reports and also from various websites. journals. Compare each current asset in previous year. This process will be repeated till all accounts relating to all current assets and current liabilities in two Balance Sheets are gone through and differences are properly recorded. The secondary data was collected from the company records. with that in current year.B. compare each current liability in the previous year.g. The difference is recorded for each individual current asset and current liability. Decrease in Current Assets and Increase in Current Liabilities: The reduction in current assets e. bank overdraft.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.