Analysis of Current Asset Composition
Rohan Kumar Sinha BBA-MBA Lovely School of Management


Page - 1 - of 17

1. Acknowledgement 4

2. Introduction to the topic


3. Analysis of Current Asset Composition


4. My Work


5. Company Profile & History A. ITC B. Trident C. Samsung 10 11 12

6. Analysis of Interpretation of Financial Data A. ITC B. Trident C. Samsung 12 14 15

7. Conclusion


8. Bibliography


Page - 2 -

The satisfaction and delight that accompanies the completion of any task would be incomplete without mentioning the people who made it possible with their constant guidance and encouragement which put the finishing touch to all the efforts with success. I Rohan Kumar Sinha extend my intense gratitude and respect to my course tutor for providing a learning platform. I express my deep sense of gratitude and sincere thanks to her for her valuable guidance. I would like to thanks my seniors, who helped me thoroughly for shaping out things well in order.

Rohan Kumar Sinha

Page - 3 -

Introduction to the Topic
Working Capital:
Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.

Concept of working capital
1. Balance Sheet Concept- There are two interpretations of working capital under the balance
sheet concept. A. Excess of current assets over current liabilities also termed as the net working capital or net current assets. B. Gross or total current assets.

2. Operating cycle concept- A company’s operating cycle typically consists of three primary

Page - 4 -


Phase 1

In Phase 1, Cash gets converted into Inventory. This includes purchase of Raw Material, Conversion of Raw Material into Work-in-Progress, Finished Goods and finally the transfer of goods to stock at the end of the manufacturing process. In the case of Trading Companies, this phase is shorter as there would be no manufacturing activity and cash is directly converted into Inventory. This Phase is of course totally absent in the case of Service Organizations. 2. Phase 2

In Phase 2 of the cycle, the Inventory is converted into Receivables as Credit Sales are made to customers. Firms which do not sell on Credit obviously don't have the Phase 2 of the operating Cycle. 3. Phase 3

The Last Phase i.e. Phase 3 of the Operating Cycle, represents the stage when Receivables are collected. This phase completes the operating cycle. Thus, the firm has moved from cash to inventory, to receivables and to cash again.

Need of Working Capital
   

The firm has to maintain cash balance to pay the bills as they come due. In addition, the company must invest in inventories to fill customer orders promptly. And finally, the company invests in accounts receivable to extend credit to customers. Operating cycle is equal to the length of inventory and receivable conversion periods.

Types of working capital

1. On the basis of concept 2. On the basis of time 3. Gross working capital 4. Net working capital

Page - 5 -

5. Permanent / fixed working capital 6. Temporary / variable working capital 7. Regular working capital 8. Reserve working capital 9. Special working capital 10. Seasonal working capital

Factors affecting the composition of working capital
The factors affecting the Composition of Working Capital are:-

1. Nature of Business
Different companies operating in different Industries have different Working Capital requirements. A purely Trading Organization will basically have finished goods Inventory, Accounts Receivable and Cash as Current Assets and Accounts Payable as Current Liability. On the other hand, Capital Goods manufacturing and Trading Companies will have a high proportion of Current Assets in the form of inventory of Raw Materials and Work-in-Progress. Thus, the nature of Business is directly linked to the requirement of Working Capital.

2. Nature of Raw Material Used
The nature of Raw Material used in the manufacture of finished goods greatly influences the quantum of Raw Material Inventory. For example, if the raw Material is an agricultural product whose availability is pronouncedly seasonal in character, the proportion of Raw Material Inventory to Finished Goods Inventory will be quite high. Similarly companies using Imported Raw Materials with long lead time tend to have a high proportion of Raw Material Inventory. In the case of Capital Goods Manufacturing Company the

Page - 6 -

demand for whose product is growing over time, the tendency will be to have high Inventory of Raw Material and Components.

3. Process Technology Used
In case the Raw Material has to go through several stages during the process of production, the Work-in-Progress Inventory is likely to be much higher than any other item of the Current Assets thereby increasing the need of Working Capital.

4. Nature of Finished Goods
The nature of Finished Goods greatly affects the amount of finished goods inventory. For example, if the finished goods have a short span of 'shelf-life' as in the case of cigarettes the finished goods inventory will constitute a very low percentage of current assets. In the case of companies the demand for whose finished goods is seasonal in nature, as in the case of fans, the inventory of finished goods will constitute a high percentage of total current assets. This is mainly because from the point of view of the fixed costs to be incurred by the company it would be more economical to maintain an optimum level of production throughout the year than by stepping up production operations during the busy season.

5. Degree of Competition in the Market
When the Degree of Competition in the market for finished goods in an industry is high, then companies belonging to the Industry may have to resort to an increased credit period to its customers, partially lowering credit standards and similar other practices to push their products. These practices are likely to result in a high proportion for Accounts Receivables thereby increasing the need for Working Capital.

6. Growth and Expansion

Page - 7 -

As the company grows, it is logical to expect that a larger amount of working capital is required. It is, of course, difficult to determine precisely the relationship between the growth in volume of business of a company and the increase in the working capital. The composition of working capital also shifts with economic circumstances and corporate practices. Other things being equal, growth Industries require more working capital than those that are static. The Critical fact however, is that the need for increased working capital funds does not follow the growth in business activities but precedes it. Advance planning of working capital, is therefore a continuing necessity for a growing concern.

Analysis of Current Asset Composition
Understanding factors that have caused changes in the amount of a firm's current asset from one period to another in no way diminishes the need to know the changes that have occurred in current asset composition. The adequacy of any company's current asset composition depends on the proportion of current assets to current liabilities-not on the dollar amount of current asset composition.

To discover changes in composition, credit analysts must consider the balance sheet and try to answer such questions as the following:

To what extent has any increase in receivables or inventories been financed by growth of working capital and to what extent by growth of current debt?

   

What has been the form of any important increases in current debt? Accounts payable? Notes payable to the bank? What about current maturity on long-term debt? Has any decrease in receivables and inventories been accompanied by a like decrease in current debts and by a growth of the cash balance?

Has any decrease in receivables and inventories been accompanied by continued heavy current debt and by shrinkage in working capital?

Page - 8 -

My Work:
“In my term paper of Financial Management, I am going to analyse the current asset composition of three companies from different industries, which are ITC from Food Industry, Trident Group of Companies from Manufacturing Industry and Samsung India from Software Industry. I am also going to analyse and interpret the difference between current assets of these companies at the bottom of each graph.”

Company Profile & History

ITC is one of India's foremost private sector companies with a market capitalisation of nearly US $ 19 billion and a turnover of over US $ 5 billion. ITC is rated among the World's Best Big Companies, Asia's 'February 50' and the World's Most Reputable Companies by Forbes magazine, among India's Most Respected Companies by Business World and among India's Most Valuable Companies by Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in a study conducted by Brand Finance and published by the Economic Times. ITC also ranks among Asia's 50 best performing companies compiled by Business Week. ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and AgriExports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery. ITC employs over 26,000 people at more than 60 locations across India. The Company continuously endeavours to enhance its wealth generating capabilities in a globalising environment to consistently reward more than 3, 50,000 shareholders, fulfil the aspirations of its stakeholders and meet societal expectations. This over-arching vision of the company is expressively captured in its corporate positioning statement: "Enduring Value, for the nation, For the Shareholder".

Page - 9 -

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India Limited. As the Company's ownership progressively Indianised, the name of the Company was changed from Imperial Tobacco Company of India Limited to India Tobacco Company Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the Company's multi business portfolio encompassing a wide range of businesses - Cigarettes & Tobacco, Hotels, Information Technology, Packaging, Paperboards & Specialty Papers, Agri-business, Foods, Lifestyle Retailing, Education & Stationery and Personal Care - the full stops in the Company's name were removed effective September 18, 2001. The Company now stands rechristened 'ITC Limited'.

Trident Group is a dynamic and continuously growing group of companies creating a buoyant economic climate. The group is focused on generating economic prosperity for the stakeholders, while growing harmoniously with the community and environment. Leveraging business from an expanding product portfolio, Abhishek Industries Limited, the flagship company of the group, is one among the top 5 global terry towel giants of the world. What's more, the company is one of the world's largest agro-based paper manufacturers and one of the largest yarn producers in India. Strong business ethics, excellence in business, productive work environment, continuous improvement through sound corporate governance and dynamic employee engagement have been at the foundation of the continuous success of the group. Making way in Punjab as an agro-based manufacturer in 1990, the group has diversified and expanded manifold, giving way to businesses based on sustainable growth. Under the dynamic leadership of Mr. Rajinder Gupta, the CEO and MD of the group, Trident continues to grow embracing new challenges, expanding boundaries and creating new opportunities. With businesses spanning across 65 countries, Trident Group today is a Rs. 25 billion enterprise with an employee headcount of more than 10,000, and providing indirect employment to 20,000 people. Therefore, Trident is a pioneer at implementing sound Corporate Governance as the basic management principle. Apart from being the proud recipient of ICSI National Award for Excellence in Corporate Governance in 2006, Abhishek Industries Limited has been continuously lauded with the prestigious 'International Supplier of the Year' award for 2001, 2003, 2005 and 2006 by Wal-Mart, USA, 'Supplier of the Year Award' for 2006 by JC Penney Corporation and IKEA TASA 'Best

Page - 10 -

Supplier of the year' Quality Award. Today with a Compound Annual Growth Rate (CAGR) of more than 30%, we are one of the fastest growing groups of companies of India. And at the core of this progress is our motto - Inspired by challenge.

Samsung India is the hub for Samsung's South West Asia Regional operations. The South West Asia Headquarters, under the leadership of Mr. J S Shin, President, & CEO, looks after the Samsung business in Nepal, Sri Lanka, Bangladesh, Maldives and Bhutan besides India. Samsung India which commenced its operations in India in December 1995 enjoys a sales turnover of over US$ 1Bn in just a decade of operations in the country. Headquartered in New Delhi, Samsung India has widespread network of sales offices all over the country. The Samsung manufacturing complex housing manufacturing facilities for Colour Televisions, Mobile phones, Refrigerators and Washing Machines are located at Noida, near Delhi. Samsung 'Made in India' products like Colour Televisions, Mobile phones and Refrigerators are being exported to Middle East, CIS and SAARC countries from its Noida manufacturing complex. In November 2007, Samsung commenced the manufacture of Colour televisions and LCD televisions at its state–of-the-art manufacturing facility at Sriperumbudur, Tamil Nadu. The Company is also manufacturing fully automatic front loading washing machines at its Sriperumbudur facility.

From its inception as a small export business in Taegu, Korea, Samsung has grown to become one of the world’s leading electronic companies, specialising in digital appliances and media, semiconductors, memory, and system integration. Today Samsung’s innovative and top quality products and processes are world recognised.

Analysis of Financial Data

1. (A) Current Asset of ITC Limited

Page - 11 -

Particulars Inventories Sundry Debtors Cash and Bank Balance Total Current Assets

Mar 2005 2,002.99 527.76 52.45 2,583.20

Mar 2006 2,636.29 547.96 67.47 3,251.72

Mar 2007 3,354.03 636.69 103.54 4,094.26

Mar 2008 4,050.52 736.93 153.34 4,940.79

Mar 2009 4,599.72 668.67 68.73 5,337.12

Finding- As ITC is mainly deal in Tobacco and FMCG products, so they have to manage
maximum amount of inventories than liquid cash and their debtors.

(B) Current Asset with Current Liablities
Total Current Assets Current Liabilities Mar '05 2,583.20 2,499.10 Mar '06 3,251.72 2,736.95 Mar '07 4,094.26 3,113.01 Mar '08 4,940.79 3,619.76 Mar '09 5,337.12 4,121.59

Page - 12 -

Finding- As it is clearly observed that in the beginning of its financial year 2005 the current
asset is nealy equal to their current liablities but as the time passed and the production is increased, the ITC company rely more on the current asset rather than to increase current liablities.

2. (A) Current Asset of Trident Group
Particulars Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Mar 2005 177.81 28.94 1.27 208.02 Mar 2006 197.76 36 1.91 235.67 Mar 2007 234.19 29.9 6.18 270.27 Mar 2008 225.21 38.66 4.57 268.44 Mar 2009 211 60.21 6.41 277.62

Finding- Over the span of five years, we can observe that the total current asset is increased
at a constant rate but around jan 2008, current asset of the company increased slightly more than average, it is because the manufacturing companies were at boom at that time.

(B) Current Asset with Current Liablities

Page - 13 -

Particulars Total Current Assets Current Liabilities

Mar-05 208.02 86.19

Mar-06 235.67 105.82

Mar-07 270.27 152.19

Mar-08 268.44 241.54

Mar-09 277.62 343.6

Finding- In the beginning of the year 2005 the difference between current asset and current
liablities was near about 100 crores and as the time passed the current asset and current liablities intersected and current liablities crossed the current asset in mar 2008. It cleasly showed that Trident company rely on getting creditors than to cash investment.

3. (A) Current Asset of Samsung
Particulars Inventories Sundry Debtors Cash and Bank Balance Total Current Asset Mar-05 5,865 16,432 8,144 30, 441 Mar-06 6,753 14,477 7,726 28, 956 Mar-07 7,969 14,514 10,894 33, 377 Mar-08 9,493 17,455 12,406 39, 354

Page - 14 -

Finding- As we can observe in this chart that the cash in hand/bank is more than inventories
of the Samsung Company, it can be due to the nature of indutry in Samsung is dealing with.

(B) Current Asset with Current Liablities
Particulars Total Current Asset Liabilities Mar-05 30441 32,854 Mar-06 28956 33,426 Mar-07 33377 37,403 Mar-08 39354 42,377

Finding- The current asset and the current liablities of this company is moving at a constant rate excluding a slighter change in Jan 2006.

Page - 15 -

Comparison of Current Asset between these three companies:
Particulars ITC Trident Samsung Mar-05 2,583.20 2080.2 3044 Mar-06 3,251.72 2356.7 2895 Mar-07 4,094.26 2702.7 3337 Mar-08 4,940.79 2684.4 3935

Finding- We can see that the current asset of ITC is increasing at a constant rate whereas
the Trident is showing slowdown after Jan 2007. And the Current asset of the trident Company increased after Jan 2006. It is all because the nature and type of industry for these three companies are different. As well the area of operation and number of business tiers also differentiate these companies from each other.

I am very thankful to my faculty because she gave me a chance to analyse the current asset of different companies from different sectors. After doing this term paper, I can easily interpret that why the companies from different sectors have different composition of current asset. The company from food industry has more current asset than a manufacturing industry’s company or software industry’s company. But the financial management helps in managing the optimum level of current asset in a company. Thanking You

Page - 16 -


Page - 17 -

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.