INDIAN JOURNAL OF MANAGEMENT SCIENCE (IJMS) EISSN 2231-279X – ISSN 2249-0280 92

WORKING CAPITAL MANAGEMENT IN TEXTILE INDUSTRIES

Rekha Swarnkar
Associate Lecturer,
Dept. of Management, Mewar University, India.
Yogesh Soni Deepti Gulati
Manager, RSWM, Mélange, India. Assistant Professor
Dept. of Management, Mewar University, India.

ABSTRACT

Working capital management is a very important component of corporate finance because it directly
affects the liquidity and profitability of the company. This paper makes an attempt to examine the
efficiency of working capital management of textile companies for the period of 5 years. The study is
based on secondary data collected for listed firms for the period of 2008-2012 to investigate liquidity
and credibility position of the companies as sufficient liquidity is necessary and must be achieved and
maintained to provide the fund to pay off obligations. For measuring the efficiency of working capital
management & liquidity management, ratio analysis is used as a tool.

Keywords: Working capital, liquidity, credibility, ratio analysis, textile industry.

Introduction:
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Background and Literature Review:

Working capital is a financial metric which represents operating liquidity available to a business, organization or
other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is
considered a part of operating capital. The familiarity and understanding of efficient Working Capital Management
(WCM) performances of textile industry is currently not sufficient and numerous firms have gone into insolvency
over the years as a consequence of running a shortfall cash flow from operations. Proficient management of
Working Capital (WC) refers to the supervision of different instrument of WC in a manner that sufficient level of
operational capital is retained for fluent continuing of process of a business. Firms should try to achieve
optimization of working capital balance i.e. minimizing the working capital requirements and realizing maximum
possible revenues. Efficient working capital management involves planning and controlling current assets and
current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand
and avoid excessive investment in these assets on the other hand. Indian textile industry is the second largest
industry in the world after China. It generates employment for more than 35 million people and excise collections
nearly 9 percent and it contributes to 16 percent share of the country’s export. About 27 percent of the country’s
foreign exchange comes from the textile exports. It contributes to nearly 14 percentage of the total industrial
production of the country. Liquidity management helps to avoid the probability of insolvency. It means proper
sources of finance bearing in mind costs and benefits. The essence of liquidity management has been set out as
safety, liquidity and profitability to which can now be added the management of risk.
Working capital management is important for textile industries and that is the reason researchers undertaken various
studies to know the liquidity position of companies like Nusrat and Assocham (2008) analyzed the performance of
sector analysis on 28 textile companies from Mumbai Stock Exchange with the attributes of net sales, net profit,
interest cost, raw material, power and fuel cost. Swaran and Bansal (2010) evaluated on co-operative sector
comparative study and performed working capital management and used ratio analysis, t-test and operating cycle
analysis etc. it concluded with both sector should concentrate on their liquidity and current assets utilization and
concentrates working capital management techniques, implementation, profitability measures etc.Kamran Ahmed
examines the working capital management efficiency of the textile companies of Pakistan for the period of 2004 to
2009 study also tests the pace of accomplishing that target level of efficiency by an individual firm during the
period of study. Finding of the study suggests that overall performance of textile industry was satisfactory, but
contrary to this the performance of individual firms fluctuated very much during the considered time span. Rakesh
and Kulkarni (2012).22 analyzed the Gujarat textile industry working capital evaluation on selected five company
for the eleven years and performed ratio analysis, descriptive statistics etc. The study concluded with all the
company financial performance with sound effective as well as current and quick ratio, current asset on total asset,
sales, turnover etc. are analyzed with the help of hypothesis and used ANOVA. In this research also researcher
followed this attributes. Zahid and nanik (2011).23 concludes the overall performance of the textile sector was
adversely affected by crisis through analysis of income statement, debt payment ability, management and inventory
sales, receivables, productivity, fixed assets, etc. Virambhai (2010).24 textile industry productivity and financial
efficiency focused on industry’s current position and its performance. It concluded the company/management
should try to increase the production, minimize the cost and operating expenses, exercise proper control on liquidity
position, reduction of power, fuel, borrowing funds, overheads, interest burden, etc. Ajay Kumar (2011)25
discussed on Indian textile industry analysis with inflation, textile production, sales, Income, PAT, Income, etc. and
found the export and import performance in the crisis period. Shruti Jhawar (2009).26 prescribed the Indian textile
industry mission, vision, history of textile industry in addition; it discussed the case study of textile industry
performance evaluation etc.
Research Methodology:
Objectives of the paper:
To analyze and interpret, the liquidity position and creditability of selected textile companies using the ratio analysis.
Data Collection:
Nature and Source of data: The present study is of analytical nature and makes use of secondary data. Five textile
companies have been selected on the basis of highly engaged net worth in the year 2011 from the listed company.
The relevant secondary data are collected from finance section of moneycontrol.com.

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Sample size: Collected five years data of five textile companies (RSWM, SANGAM, ALOK, SIYARAM,
VARDAMAN) data includes liquidity ratio, solvency ratios and balance sheet of companies.

Tool Used For Analysis:

Current Ratio: is a liquidity ratio that measures company's ability to pay its debt over the next 12 months or its
business cycle. Current Ratio formula is:

Current ratio is a financial ratio that measures whether or not a company has enough resources to pay its debt over
the next business cycle (usually 12 months) by comparing firm's current assets to its current liabilities. Acceptable
current ratio values vary from industry to industry. Generally, a current ratio of 2:1 is considered to be acceptable.
The higher the current ratio is, the more capable the company is to pay its obligations. Current ratio is also affected
by seasonality.
If current ratio is bellow 1 (current liabilities exceed current assets), then the company may have problems paying
its bills on time. However, low values do not indicate a critical problem but should concern the management.
Current ratio gives an idea of company's operating efficiency. A high ratio indicates "safe" liquidity, but also it can
be a signal that the company has problems getting paid on its receivable or have long inventory turnover, both
symptoms that the company may not be efficiently using its current assets.

Quick Ratio: is an indicator of company's short-term liquidity. It measures the ability to use its quick assets (cash
and cash equivalents, marketable securities and accounts receivable) to pay its current liabilities. Quick ratio
formula is:

Quick ratio specifies whether the assets that can be quickly converted into cash are sufficient to cover current
liabilities. Ideally, quick ratio should be 1:1.
If quick ratio is higher, company may keep too much cash on hand or have a problem collecting its accounts
receivable. Higher quick ratio is needed when the company has difficulty borrowing on short-term notes. A quick
ratio higher than 1:1 indicates that the business can meet its current financial obligations with the available quick
funds on hand. Quick ratio lower than 1:1 may indicate that the company relies too much on inventory or other
assets to pay its short-term liabilities. Many lenders are interested in this ratio because it does not include inventory,
which may or may not be easily converted into cash.

Debt-to-Equity ratio (D/E): is a financial ratio indicating the relative proportion of entity's equity and debt used to
finance an entity's assets. This ratio is also known as financial leverage.
Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's financial standing. It
is also a measure of a company's ability to repay its obligations. When examining the health of a company, it is
critical to pay attention to the debt/equity ratio. If the ratio is increasing, the company is being financed by creditors
rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer
low debt-to-equity ratios because their interests are better protected in the event of a business decline. Thus,
companies with high debt-to-equity ratios may not be able to attract additional lending capital.
Optimal debt-to-equity ratio is considered to be about 1, i.e. liabilities = equity but for most companies the
maximum acceptable debt-to-equity ratio is 1.5-2 and less. For large public companies the debt-to-equity ratio may
be much more than 2, but for most small and medium companies it is not acceptable.
A debt-to-equity ratio is calculated by taking the total liabilities and dividing it by the shareholders' equity:
Debt-to-equity ratio = Liabilities / Equity
Long-Term Debt to Equity: expresses the relationship between long-term capital contributions of creditors as
related to that contributed by owners (investors). As opposed to Debt to Equity, Long-Term Debt to Equity
expresses the degree of protection provided by the owners for the long-term creditors. A company with a high long-
term debt to equity is considered to be highly leveraged. But, generally, companies are considered to carry
comfortable amounts of debt at ratios of 0.35 to 0.50, or $0.35 to $0.50 of debt to every $1.00 of book value
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(shareholders equity). These could be considered to be well-managed companies with a low debt exposure. It is best
to compare the ratio with industry averages. Formula: Total Long-Term Liabilities / Stockholders Equity

Company Profile:
RSWM Industry:
RSWM is a professionally managed, progressive and growth oriented company with business interests in Yarn,
Fabrics, Garments and Denim. It is one of the largest producers and exporters of polyester viscose blended yarn in
the country. The company operates around 5, 01, 000 lacs spindles and produces 1,45, 000 MT of yarn
manufacturing per year.

Vardhman Group:
Vardhman Group is a leading textile conglomerate in India having a turnover of $700 mn. Spanning over 24
manufacturing facilities in five states across India, the Group business portfolio includes Yarn, Greige and
Processed Fabric, Sewing Thread, Acrylic Fibre and Alloy Steel.

Alok Textiles Industries Limited:

Alok Textiles Industries Limited was incorporated as a private limited company on 12th March, and the name was
changed to Alok Textile Private Ltd. on 17th November, 1992. The Company was subsequently converted into a
Public Limited Company on 11th February, 1993. It was promoted by Alok Group of Jiwrajka family, Mumbai.

Siyaram Silk Mills:

The Company manufactures synthetic fibers. The Company was incorporated on 29th June,1978 as a Private
Limited Company and was converted into a Public Limited Company on 16th April 1980. It was promoted by
Mahabir Prasad Poddar, Dhara Prasad Poddar and Purushottamdas S.Mahasaria

Sangam (India) Ltd:

Sangam (India) Ltd (SIL), Flagship Company of the SANGAM GROUP, was promoted under the name and style of
Arun Synthetics Pvt. Ltd and started operations in 1985.
The weaving capacity was gradually increased by installation of additional Weaving Machines and the merger of
two closely held profit making companies in 1995.
Tables And Analysis
RSWM INDUSTRY

Current Ratio 3.05 3.36 3.85 3.76 3.36

Quick Ratio 1.25 1.32 1.50 2.06 2.65
Debt Equity Ratio 4.16 3.67 4.53 5.62 4.13
Long Term Debt Equity Ratio 4.16 2.26 3.44 4.48 3.22

Interpretation:
• From the table above it can be analyzed that the current ratio in 2008 was 3.36 in 2009 and 2010 current ratio had
risen to 3.76 and 3.85 respectively. In 2011 current ratio has fallen to 3.36 with a subsequent decrease in ratio to
3.05 in 2012.Current ratio in all years are above 2:1 which is greater than standard current ratio therefore showing
indicating high liquidity positions.
• Quick ratio of RSWM in 2008, 2009, 2010, 2011, and 2012 was 2.65, 2.06, 1.50, 1.32, and 1.25 respectively
showing continuous decrease in quick ratio. Quick ratio of RSWM is greater than standard ratio of 1:1 indicating
very high liquidity position.
• Debt to Equity ratio was 4.13, 5.62, 4.53, 3.67 and 4.16 for the year 2008, 2009, 2010, 2011 and 2012 respectively.
Debt-Equity ratio for all the years is very high and above standard ratio i.e. 2:1 depicts that the company is being
financed by creditors rather than from its own financial sources which may be a dangerous trend.
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• Companies are considered to carry comfortable amounts of debt at ratios of 0.35 to 0.50 but from the table it can
be analyzed that long term debt to equity ratio was 3.22, 4.88, 3.44, 2.26 and 4.16 for the year 2008, 2009, 2010,
2011 and 2012 respectively for RSWM company which is very high as compared to the standard and indicating
high debt exposure.

Vardhman Group
Current ratio 2.99 3.22 2.89 2.62 2.63 2.63
Quick ratio 1.24 1.55 1.56 1.77 1.38
Debt equity ratio 1.22 1.48 1.80 1.96 2.04
Long term debt equity ratio .97 1.05 1.48 1.68 1.76

Interpretation:
• From the table above table it can be seen that the current ratio in 2008, 2009, 2010, 2011, and 2012 was 2.63,
2.62, 2.89, 3.22, and 2.99 respectively indicating liquidity positions above standard liquidity position.
• Quick ratio of Vardhman in 2008, 2009, 2010, 2011, 2012 was 1.38, 1.77, 1.56, 1.55, 1.24 was greater
than standard ratio of 1:1 indicating very high liquidity position.
• Debt to Equity ratio in 2008 was above the standard ratio of 2:1 showing the company is being financed by
creditors rather than from its own financial sources. Rather there was a continuous decrease in debt to
equity ratio in subsequent years i.e. 2009,2010, 2011, 2012 D/E ratio was 1.96, 1.80, 1.48 and 1.22
respectively depicting company preferred financing from own financial sources rather than borrowed funds.
• Companies are considered to carry comfortable amounts of debt at ratios of 0.35 to 0.50 but from the
table it can be analyzed that long term debt to equity ratio was 1.76, 1.68, 1.48, 1.05 and .97 for the year
2008, 2009, 2010, 2011 and 2012 for Vardhman which is high as compared to the standard and
indicating high debt exposure.

Alok Textiles Industries Limited:

Current ratio 2.50 3.67 4.99 3.31 5.14
Quick ratio 1.51 2.35 3.44 2.15 3.88
Debt equity ratio 3.05 3.12 3.13 4.13 4.37
Long term equity ratio 1.92 2.67 2.82 3.69 3.93

Interpretation:
• From the table above table it can be analyzed that the current ratio in 2008 was 5.14. In 2009 current ratio
fallen to 3.31 and in 2010 it has been raised to 4.99. In 2011 and 2012 current ratio has fallen to 3.67 and
2.50 respectively. Ratio in all the years in above standard ratio of 2:1 indicating high liquidity position.
• Quick ratio of Alok textiles in 2008, 2009, 2010, 2011, 2012 was 3.88, 2.15, 3.44, 2.35, and 1.51 showing
decrease in quick ratio. But quick ratio in all the years is greater than standard ratio of 1:1 indicating very
high liquidity position.
• Debt to Equity ratio was 4.37, 4.13, 3.13, 3.12 and 3.05 for the year 2008, 2009, 2010, 2011 and 2012
respectively showing continuous decrease in subsequent years but still Debt-Equity ratio for all the years
is very high and above the standard of 2:1 depicting that the company is being financed by creditors rather
than from its own financial sources which may be a dangerous trend.
• Companies are considered to carry comfortable amounts of debt at ratios of 0.35 to 0.50 but from the table
it can be analyzed that long term debt to equity ratio was 3.93, 3.69, 2.82, 2.67 and 1.92 for the year 2008,
2009, 2010, 2011 and 2012 which is high as compared to the standard and indicating high debt exposure.

Siyaram Silk Mills:

Current ratio 2.13 2.56 1.86 2.55 3.01

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Quick ratio 1.19 1.49 1.13 1.51 1.77

Debt equity ratio 0.80 1.21 0.99 1.50 1.86
Long term equity ratio 0.30 0.44 0.59 0.87 0.84

Interpretation:
• From the table above table it can be analyzed that the current ratio in 2008, 2009, 2011 and 2012 was
3.01, 2.55, 2.56, and 2.13. In 2010 current ratio has fallen to 1.86. In 2008, 2009, 2011, 2012 current ratio
was above the above standard ratio indicating high liquidity position. Furthermore in the year 2010 current
ratio was less than the standard current ratio therefore showing low liquidity position.
• Quick ratio of Siyaram Mills in 2008, 2009, 2010, 2011, 2012 was 1.77, 1.51, 1.13, 1.49, and 1.19 which
was greater than standard ratio of 1:1 indicating high liquidity position.
• Debt to Equity ratio was 1.86, 1.50, .99, 1.21 and .80 for the year 2008, 2009, 2010, 2011 and 2012
respectively. Debt-Equity ratio is shoeing is falling trend and are below standard ratio of 2:1 showing
company preferred financing from own financial sources rather than borrowed funds.

Companies are considered to carry comfortable amounts of debt at ratios of 0.35 to 0.50.In 2008, 2009 and
2010 long term equity ratio was .84, .87 and .59 showing high debt exposure. And in year 2011 and 2012
company was in comfortable position regarding debt exposure with a ratio of .44 and .30 respectively.

Sangam (India) Ltd

Current Ratio 1.2 3.03 3.07 2.49 2.85
Quick Ratio .53 2.08 1.95 1.69 1.86
Debt Equity Ratio 2.8 3.00 3.65 3.91 3.77
Long Term Debt Equity Ratio 2.8 1.93 2.45 2.80 2.68

Interpretation:
• From the table above table it can be analyzed that the current ratio in 2008, 2009, 2010 and 2011 was
2.85, 2.49, 3.07 and 3.07 depicts liquidity position is good. But in year 2012 current ratio has been fallen
to 1.2 showing low liquidity position as it is below standard liquidity ratio.
• Quick ratio of Sangam in 2008, 2009, 2010, 2011, 2012 was 1.86, 1.69, 1.95, 2.08 and .53. In all the
years’ except 2012 quick ratio was greater than standard ratio of 1:1 indicating very high liquidity
position. In 2012 company maintained low liquidity.
• Debt to Equity ratio was 3.77, 3.91, 3.65, 3.00 and 2.8 for the year 2008, 2009, 2010, 2011 and 2012
respectively. It can seen that D/E ratio was continuously decreasing but above the standard of 2:1
depicting that the company is being financed by creditors rather than from its own financial sources
which may be a dangerous trend.
• Companies are considered to carry comfortable amounts of debt at ratios of 0.35 to 0.50 but from the table
it can be analyzed that long term debt to equity ratio was 2.68, 2.80, 2.45, 1.93 and 2.8 for the year 2008,
2009, 2010, 2011 and 2012 for Sangam ltd which is high as compared to the standard and indicating high
debt exposure.
Balance Sheet and Income Statement of Selected Textile Company (2012)
RSWM ALOK SYIARAMS SANGAM VARDAMAN
Total income 2,009.33 10,361.85 953.01 1,414.45 3,848.24
Sales 2,000.11 9,134.81 925.09 1,424.61 3,919.46
Total expense 1,848.34 7,858.37 825.47 1,254.06 3,297.56
Total liabilities 1,479.87 14,794.98 481.97 903.68 4,434.59
Current liabilities & provision 253.33 3,443.38 178.59 227.49 712.83
Total assets 1,479.87 14,794.98 481.96 903.68 4,434.60
Current assets 388.76 5,149.00 379.58 335.59 1,910.18

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Net worth 286.90 3,655.50 267.12 252.08 1,996.02

Working capital =CA/CL*100 153.4599 149.5333 212.5426 147.5185 267.9713

Current Ratio & Quick Ratio of Textile Companies

Year Current Ratio Quick Ratio
Sang
Rswm Alok Siyaram Varman Rswm Alok Siyaram Sangam Vardman
am
Mar.2012 2.53 .77 1.05 2.15 1.30 1.25 1.51 1.19 1.26 1.24
Mar.2011 .73 1.32 .98 .83 1.20 1.32 2.35 1.49 2.08 1.55
Mar.2010 .87 1.82 .94 .75 1.48 1.50 3.44 1.13 1.95 1.56
Mar.2009 .86 1.22 .98 .75 1.41 2.06 2.15 1.51 1.69 1.77
Mar2008 .84 1.84 .90 .75 1.39 2.65 3.88 1.77 1.86 1.38
Max. 2.53 1.84 1.05 2.15 1.48 2.65 3.88 1.77 2.08 1.77
Mini. .73 .77 .90 .75 1.2 1.25 1.51 1.13 1.26 1.24

Conclusion:
For measuring the efficiency of working capital management & liquidity management ratio analysis,
liquidity ranking as well as detailed analysis of various components of working capital are being used as
important tool. The management of working capital is very crucial for company. Sufficient liquidity is
necessary and must be achieved and maintained to provide the fund to pay off obligations as they mature.
Liquidity and Debt exposure of the selected textile companies are as follows:
RSWM maintains high liquidity and prefer financed by creditors rather than own funds and carries a high
long term debt exposure.
Vardhaman maintains high liquidity position but prefer financing from own financial sources rather than
borrowed funds. It also has high long term debt exposure. To pay-off debts Vardhaman maintains high
liquidity.
Alok Textile ltd maintains very high liquidity and it is financed by creditors rather than own funds and
carries a high long term debt exposure.
Siyaram maintains good liquidity position but prefer financing from own financial sources rather than
borrowed funds. Siyaram over the years worked upon lowering down long term debt exposure.
Sangam (India) maintains very high liquidity in previous years but in 2012 current and quick ratio in
below standard ratio that should be maintained and it is financed by creditors rather than own funds and
carries a high long term debt exposure.
So it can be concluded that textile companies Vardhman and Siyaram choose financing from own funds
and maintains high liquid ratio. Sangam (India) had a high debt exposure and doesn’t maintain good
liquidity which may be a dangerous trend. Furthermore RSWM and Alok Textile also had a very high debt
exposure and adopt being financed by creditors but they maintain very high liquidity position and
liquidity maintained by these companies overcomes the threat of debt exposure.

References:
[1] Nusrat Ahmed and Assocham Research Bureau (2008), Assocham Financial Pulse Study- Quarterly
Performance Analysis of Textile Sector, ASSOCHAM.
http://www.assocham.org/arb/afp/2008/Textile_Sector_AFP_Nov_2008.pdf
[2] Swaran Singh and Bansal (2010), Management of Working Capital in IFFCO and KRIBHCO-A Comparative
Study, Indian Jorunal Finance, Vol: 4 (2), pg: 8-15.
[3] Raheman, A., Afza, T., Qayyum, A., & Bodla, M. A. (2010). Working capital management and corporate
performance of manufacturing sector in Pakistan.International Research Journal of Finance and
Economics, 47(1), 156-169.
[4] Rakesh Kumar Manjhi and Kulkarni, S.R, (2012), Working Capital Structure and Liquidity Analysis: An empirical
research on Gujarat Textiles Manufacturing Industry, Indian Journal of Finance, Vol-6 (8), pg: 25-35.

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[5] Channar, A. Z., & Ram, N. (2011). Impact of Financial Crisis on the Textile Industry of Pakistan: A case
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[6] Zala, V. S. (2010). A study of productivity and financial efficiency of textile industry of India (Doctoral
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[7] Shruti Jhawar (2009), Recommending possible solutions to revive the Indian Textile Industry, Thakur Institute
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[8] Ajay Kumar (2011), State of Indian Textile Industry, Quarter ending December-2011, Confederation of Indian
Textile Industry.

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