CHAPTER II

REVIEW OF LITERATURE

The research done by Pass C.L., Pike R.H., and corporate financing (2005)1

describes developments have occurred in the areas of longer-term investment and financial

decision making. Many of these new concepts and the related techniques are now being

employed successfully in industrial practice. By contrast, far less attention has been paid to

the area of short-term finance, in particular that of working capital management. Such neglect

might be acceptable were working capital considerations of relatively little importance to the

firm, but effective working capital management has a crucial role to play in enhancing the

profitability and growth of the firm.

The research done by Herrfeldt B(2007)2, “How to describes that is“ Cash king”—so

say the money managers who share the responsibility of running this country's businesses.

And with banks demanding more from their prospective borrowers, greater emphasis has been

placed on those accountable for so-called working capital management. Working capital

management refers to the management of current or short-term assets and short-term

liabilities. In essence, the purpose of that function is to make certain that the company has

enough assets to operate its business. Here are things you should know about working capital

management.

The research done by Samiloglu F. and Demirgunes K. (2009)3, “The Effect of

Working Capital Management on Firm Profitability” analyzes the evidence of working capital

management on firm profitability. In accordance with this aim, to consider statistically

significant relationships between firm profitability and the components of cash conversion

cycle at length
 A sample consisting of Istanbul Stock Exchange (ISE)4 listed manufacturing firms

for the period of 1998-2007 has been analyzed under a multiple regression model. Empirical

findings of the study show that accounts receivables period, inventory period and leverage

affect firm profitability negatively; while growth (in sales) affects firm profitability positively.

Dr.P.K.Bhattacharya (2010)5 – analyzed “working capital and profitability of central

public sector undertakings”. According to him, governments, liberal policy of granting loan to

electronics companies put a heavy interest burden on such enterprise which severely curtailed

their profitability. He suggested the enlargement of equity base and improvement of

profitability of such enterprise.

B.Banerjee (2010)6 made a study on “An analysis of the trend of working capital in

the watch companies in India”. The study reveals that in the medium and large public

limited companies he average the debt-equity ratio for the 18 industry group is always above

2:1 where in the other case it ranges from 1, 39:1 to 1.81. The papers in this literature explore

factors that move firms away from their target working capitals as well as the extent to which

future financing choices move firms back toward their targets”.

Christopher parsons and Sheridan titman (2011)7 - "Empirical Working capital:

A Review", Foundations and Trends in Finance: Vol. 3: No 1, pp 1-93. “This survey

provides a synthesis of the empirical working capital literature about textile companies. The

synthesis is divided into three parts. The first part examines the evidence that relates to the

cross-sectional determinants of working capital. This literature identifies and discusses the

characteristics of firms that tend to be associated with different debt ratios. In the second part,

they review the literature that examines changes in working capital.

 Parkar (2004)8- studied the size of the working capital analysis is and its components

and management in factoring companies. They also studied the correlation between and

profitability of factoring companies. They concluded that the sundry debtors amount due to

creditors are the major component of current assets current liability respectively in

determining the size of the financial analysis.

Bender and Ward (2011)9 - Working capital Life Stage Theory: Some theorists

have approached the problem of how organizational life stage of textile companies relates to

working capital. Bender and Ward (1993) focused on the trade-off between business risk and

financial risk, positing that business risk reduces over the life stagesof a firm, allowing

financial risk to increase.

M.Radha (2012)10 – made a comparative study on “The working capital and

profitability of India textile companies and trading”. She found that return on capital

employed, liquidity and turnover were positively associated with debt equity ratio. She

suggested that both the corporations should try to use less interest bearing loans.

Bradley, Jarrell & Kim (2012)11, - ‘One of the most contentious issues in the

theory of finance about textilees and its production during the past quarter century has

been the theory of working capital’.“Even Stewart Myers, one of the foremost researchers in

the field, concluded, as recently as 2001, that ‘there is no universal theory of the debt-equity

choice, and no reason to expect one’ (Myers, 2001: 81)”.

Peddina, Mohana Rao (2013)12 had studied “The impact of debt – equity ratio on

profitability in electronics companies in India”. The study revealed that profitability had

negative association to debt-equity ratio. In case of high debt equity ratio, profitability

decreased due to large interest payment and in the case of low debt-equity ratio, profitability

increased because of low-interest payment.

 Fosberg (2013)13- ‘Agency problems and debt financing in textile companies:

leadership structure effects’, Corporate Governance, 4(1):31-38. “Found that the debt

ratio decreases as agency costs decrease because of an increasing proportion of ownership by

management, and that those firms with fewer shareholders have more debt than firms with

many shareholders.

The link between fewer shareholders and more debt suggests that shareholders, who

are able to influence working capital in their favors, do so in a way that increases the level of

debt”.

Mahes chand garg (2014)14 he made a study on “determinants of working capital

in textile companies, India” in selected cotton, chemical, engg,. The conclusion is that assets

composition collateral value life corporate sizes are most significant factors in deciding

working capital of these industries.

S. Dissanayake (April 22, 2014)15 - working capital, efficient market hypothesis in

textile companies. “This paper derives a literature review of the working capital in large scale

companies and the notion of efficient market hypothesis in finance. Sources of finance are one

of the dominant factors which need to be assessed in financing decisions for companies.

Graham (2016)16 - ‘How big are the tax benefits of debt?’ The Journal of Finance,

“found that firms with unique products, low asset collateral or large future growth

opportunities – in other words, firms at early stages of development (infancy to adolescence) –

tend to have lower levels of debt than firms in the stable or aristocracy life stages. They made

a study on “capital structure in the corporate sector in India”( 2016). The study reveals

that in the medium and large public limited companies he average the debt-equity ratio for the

18 industry group is always above 2:1 where in the other case it ranges from 1, 39:1 to 1.81.
 Fosberg (2016)17 - ‘Agency problems and debt financing: leadership structure

effects’, Corporate Governance, 4(1):31-38. “Found that the debt ratio decreases as agency

costs decrease because of an increasing proportion of ownership by management, and that

those firms with fewer shareholders have more debt than firms with many shareholders.

C. Lamprinoudakis, Ph.D candidate (2017)18 – “Department of Banking and

Financial Management” The leading theories of capital structure attempt to explain the

proportions of financial instruments observed on the right-hand side of corporations’ balance

sheets.

Dr.P.K.Bhattacharya and B.Banerjee (2017)19 – analyzed “An analysis of the

trend of capital structure and profitability of central public sector undertakings”.

According to him, governments, liberal policy of granting loan to public enterprise put a

heavy interest burden on such enterprise which severely curtailed their profitability. He

suggested the enlargement of equity base and improvement of profitability of such enterprise.

Ramkumar kakani (2017)20 conducted a study on “debt structure of large Indian

private manufacturing firm during post and pre liberalization period” and found that

liberalization, profitability capital intensity and non-debt tax shield are important determinants

of capital structure.

Gombola & Kertz (2017)21 - include cash-flow based (adjusted for all accruals and

deferrals) financial ratios in their factorization of 40 financial ratios for a sample of 119

Compustat firms for 2010-17. Contrary to the earlier studies, the cash-flow based financial

ratios load on a distinct factor. The results are not sensitive to using historical costs vs general

price-level adjusted data. Similar results on the empirical distinctiveness of cash flow ratios

are later obtained in a study that also introduces market-based ratios to the analysis.
 Laitinen (2017)22 - presents a model of the financial relationships in the firm with

attached financial ratios. The model is based on Laitinen (2015). For the most part empirical

evidence based on 43 publicly traded Finnish firms supports the structure of the model.

Bayldon, Woods, and Zafiris (2013) evaluate a pyramid scheme of financial ratios. In a case

study the pyramid scheme does not function as expected. The deductive approach to establish

relevant financial ratio categories has more or less stalled, and this approach has become

intermixed with confirmatory approach discussed later.

Christopher.j. green, victor murinde and joy suppakitjarak (2017)23 – analysed

“The financial structure of quoted and unquoted Indian non-financial companies”

“comparatively using sources, user approach and asset liability approach. According to them,

unquoted companies heavily relied on internal funds than quoted companies.

Christopher parsons and Sheridan titman (2017)24 - "Empirical Capital

Structure: A Review", Foundations and Trends in Finance: Vol. 3: No 1, pp 1-93. “This

survey provides a synthesis of the empirical capital structure literature.

Mcdonald & Morris (2018)25 - present the first extensive empirical studies of the

statistical validity of the financial ratio method. The authors use three models with two

samples, one with a single industry the other with one randomly selected firm from each

(four-digit SIC) industry branch to investigate the implications of homogeneity on

proportionality. The first model is the traditional model for replacement of financial ratios by

bivariate regression, with intercept

Y(i) = a + bX(i) + e(i).

The above model is central in this area. It is characteristic that the testing for

proportionality is considered in terms of testing the hypothesis H0: a = 0.

 Barnes (2018)26 points out for statistical testing that the residual is typically

heteroscedastic. For a discussion also see Garcia-Ayuso (2015). The second model in

McDonald and Morris is

Y(i) = b'X(i) + e'(i)

that is without the intercept to tackle heteroscedasticity. Dropping the intercept from

the model is not always enough to treat the heteroscedasticity (see Berry and Nix, 1991). The

third model applies a (Box-Cox) transformation on the first model to tackle non-linearities.

While they find support for financial ratio analysis for comparisons within industry branches,

in inter-industry comparisons proportionality of financial ratios is not supported.

Buijink & Jegers (2018)27 - studies the financial ratio distributions from year to year

from 1977 to 1981 for 11 ratios in Belgian firms corroborating the results of the earlier papers

in the field. Refined industry classification brings less extreme deviation from normality.

They also point to the need of studying the temporal persistence of cross-sectional financial

ratio distributions and suggest a symmetry index for measuring it.

V. Gopal (2018)28 – examined “The issue debt to equity ratios in public enterprises”.

The public enterprises were divided into four categories; oil companies, other profit making

companies, accounting loss making companies, regression analysis was done to find out the

significant variables which explain the variation in debt equity

Kennedy and Muller (2018)29, from his study it is concluded that “The analysis and

interpretation of financial statements are an attempt to determine the significance and

meaning of financial statements data so that the forecast may be made of the prospects for

future earnings, ability to pay interest and debt maturines (both current and long term) and

profitability and sound dividend policy.”

 Jae K.Shim & Joel G.Siegel (2018)30, had explained that the financial statement of

an enterprise present the raw data of its assets, liabilities and equities in the balance sheet and

its revenue and expenses in the income statement. Without subjecting these to data analysis,

many fallacious conclusions might be drawn concerning the financial condition of the

enterprise.

Peeler J. Patsula (2018)31, he define that a sound business analysis tells others a lot

about good sense and understanding of the difficulties that a company will face. We have to

make sure that people know exactly how we arrived to the final financial positions. We have

to show the calculation but we have to avoid anything that is too mathematical. A business

performance analysis indicates the further growth and the expansion.

Chidambaram Rameshkumar & Dr. N. Anbumani (2018)32, he argue that Ratio

Analysis enables the business owner/manager to spot trends in a business and to compare its

performance and condition with the average performance of similar businesses in the same

industry.

Ezzamel, Brodie & Mar-Molinero (2018)33 -detect instability in the factors of

financial ratios for a sample of UK firms.

Salmi, T. and T. Martikainen (2019)34, in his "A review of the theoretical and

empirical basis of financial ratio analysis", has suggested that A systematic framework of

financial statement analysis along with the observed separate research trends might be useful

for furthering the development of research. If the research results in financial ratio analysis

are to be useful for the decision makers, the results must be theoretically consistent and

empirically generalizable.
 John J.Wild, K.R.Subramanyam & Robert F.Halsey (2019)35, have said that the

financial statement analysis is the application of analytical tools and techniques to general-

purpose financial statements and related data to derive estimates and inferences useful in

business analysis. Financial statement analysis reduces reliance on hunches, guesses, and

intuition for business decisions. It decreases the uncertainty of business analysis.

I.M.Pandey (2019)36, had stated that the financial statements contain information

about the financial consequences and sources and uses of financial resources, one should be

able to say whether the financial condition of a firm is good or bad; whether it is improving

or deteriorating.
 CHAPTER II

RESEARCH METHODOLOGY

RESEARCH DESIGN

Descriptive research design has been used for the study.

SOURCES OF DATA

Primary data is gathered through discussions with the individuals of the company.

Secondary data was the important source of information for this study that includes Annual

Reports, journals and contents gathered from internet.

TOOLS USED FOR ANALYSIS

To have a meaningful analysis and interpretation of various data’s collected; the

following tools were used for the study.

 Ratio analysis

 Net working capital analysis

 Comparative balance sheet

PERIOD OF STUDY

The period of the study covers the period from 2015 to 2019.