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INTERPRETATION
Net W.C
60.30 155.14 74.26
To calculate the operating cycle of JISL used last five year data.
Operating cycle of the LGCL vary year to year as changes in policy
of management about credit policy and operating control
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another.
The technique of ratio analysis can be employed for measuring
short-term liquidity or working capital position of a firm. The
following ratios can be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
2. FUND FLOW ANALYSIS
Fund flow analysis is a technical device designated to the study the
source from which additional funds were derived and the use to
which these sources were put. The fund flow analysis consists of:
1. Liquidity ratios.
2. Current assets movements ‘ratios.
1) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations
as and when these become due. The short-term obligations are met
by realizing amounts from current, floating or circulating assts. The
current assets should either be liquid or near about liquidity. These
should be convertible in cash for paying obligations of short-term
nature. The sufficiency or insufficiency of current assets should be
assessed by comparing them with short-term liabilities. If current
assets can pay off the current liabilities then the liquidity position is
satisfactory. On the other hand, if the current liabilities cannot be
met out of the current assets then the liquidity position is bad. To
measure the liquidity of a firm, the following ratios can be
calculated:
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of
general liquidity and its most widely used to make the analysis of
short-term financial position or liquidity of a firm. It is defined as
the relation between current assets and current liabilities. Thus,
Interpretation:-
As we know that ideal current ratio for any firm is 2:1. If we see
the current ratio of the company for last three years it has
increased from 2008 to 2010. The current ratio of company is more
than the ideal ratio. This depicts that company’s liquidity position is
sound. Its current assets are more than its current liabilities.
2. QUICK RATIO
(Rupees in Crores)
Year 2008 2009 2010 (Proj.)
Quick Assets
Securities 00.1 00.1 00.1
Cash & Bank 04.20 70.15 52.50
Debtors 03.14 09.56 16.16
Current Liabilities 05.48 21.42 02.75
Quick Ratio 1.36:1 3.72:1 25:1
Interpretation :
A quick ratio is an indication that the firm is liquid and has the
ability to meet its current liabilities in time. The ideal quick ratio is
1:1. Company’s quick ratio is more than ideal ratio. This shows
company has no liquidity problem.
Interpretation :
These ratio shows that company carries a small amount of cash
during first year of its operation and it is projected to be 19:1 for
the year 2010-11. But there is nothing to be worried about the lack
of cash because company has reserve, borrowing power & long
term investment. In India, firms have credit limits sanctioned from
banks and can easily draw cash.
The current ratio and quick ratio give misleading results if current
assets include high amount of debtors due to slow credit collections
and moreover if the assets include high amount of slow moving
inventories. As both the ratios ignore the movement of current
assets, it is important to calculate the turnover ratio.
1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO :
Every firm has to maintain a certain amount of inventory of finished
goods so as to meet the requirements of the business. But the level
of inventory should neither be too high nor too low. Because it is
harmful to hold more inventory as some amount of capital is
blocked in it and some cost is involved in it. It will therefore be
advisable to dispose the inventory as soon as possible.
Interpretation :
Inventory conversion period shows that how many days inventories
takes to convert from raw material to finished goods. In the
company inventory conversion period is decreasing. This shows the
efficiency of management to convert the inventory into cash.
Interpretation :
This ratio indicates the speed with which debtors are being
converted or turnover into sales. The higher the values or turnover
into sales. The higher the values of debtors turnover, the more
efficient is the management of credit. But in the company the
debtor turnover ratio is decreasing year to year. This shows that
company is not utilizing its debtors efficiency. Now their credit
policy become liberal as compare to previous year. As the
company’s reputation rose high, the inflow of customers has also
increased and as a result, the debtor turnover ratio is in decreasing
trend.
Interpretation :
The average collection period measures the quality of debtors and it
helps in analyzing the efficiency of collection efforts. It also helps to
analysis the credit policy adopted by company. In the firm average
collection period increasing year to year. It shows that the firm has
reasonably good Liberal Credit policy in the sense that payment to
the extent of 10 to 15% is paid in advance and the balance is paid
through loans on progress of the project. These changes in policy
are due to competitor’s credit policy. In real estate business, actuall
the collection period is less, once the products
(villas/houses/apartments) are booked by the customers and when
it is tied with bank finance.
Interpretation
This ratio indicates low much net working capital requires for sales.
In 2008-9, the reciprocal of this ratio (1/0.96) shows that for sales
of Rs. 1 the company requires 96 paisa as working capital. Thus
this ratio is helpful to forecast the working capital requirement on
the basis of sale.
INVENTORIES (Rs. in Crorees)
Year 2008- 2009- 2010-11
2009 2010 (PR)
Inventories 47.18 53.67 02.50
]Interpretation :
Inventories is a major part of current assets. If any company wants
to manage its working capital efficiency, it has to manage its
inventories efficiently. The company should try to reduce the
inventory upto 10% or 20% of current assets.
Interpretation :
Interpretation :
Debtors constitute a substantial portion of total current assets. In
India it constitute one third of current assets. The above graph is
depict that there is increase in debtors. It represents an extension
of credit to customers. The reason for increasing credit is
competition and company liberal credit policy.
Interpretation :
Interpretation :
Current liabilities shows company short term debts pay to outsiders.
In 2009-10 the current liabilities of the company increased. But still
increase in current assets are more than its current liabilities.
Interpretation :
Working capital is required to finance day to day operations of a
firm. There should be an optimum level of working capital. It should
not be too less or not too excess. In the company there is increase
in working capital. The increase in working capital arises because
the company has expanded its business.
7.0 FINDINGS AND SUMMARY
10. Company should raise funds through short term sources for
short term requirement of funds, which comparatively economical
as compare to long term funds.
Websites
ezinearticles.com/?Working-Capital-Management
www.investopedia.com › Dictionary - Cached
www.studyfinance.com/lessons/workcap/
www.planware.org/workingcapital.htm -