CHAPTER 1 EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

Working capital management refers to the administration of all aspects of current assets, namely cash, marketable securities, debtors and stock (inventories) and current liabilities. The financial manager must determine levels and composition of current assets. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time. There are many aspects of working capital management, which make it an important function of the financial manager: Time: working capital management requires much of the financial managers time. Investment: working capital represents a large portion of the total investments in assets. Significance: working capital management has great significance for all firms but it is very critical for small firms. Growth: The need for working capital is directly related to the firms growth.

Investment in current assets represents a very significant portion of the total investment in assets. Working capital management is critical for all firms. A small firm may not have much investment in fixed assets, but it has to invest to in current assets. Small firms in India face a severe problem of collecting their debtors. Banks have their own policies to assess the working capital of the firm to finance them with the shortage. J&K Bank adopts certain method for financing their customers working capital requirements. There are certain recommendations from the committees for the banks to finance the working capital needs of their clients. It may, thus, be concluded that all precautions should be taken for the effective and efficient management of working capital. The finance manager should pay regular attention to the levels of current assets and the financing of current assets.
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CHAPTER 2 INTRODUCTION

INTRODUCTION TO STUDY

Working capital management is a significant fact of financial management due to the fact that it plays a pivotal role in keeping wheels of business enterprise running. Shortage of funds for working capital has caused many businesses to fail and in many cases, has recorded poor growth. Lack of efficient and effective utilization of working capital leads to earn low rate of return on capital employed or even compels to sustain losses. Working capital is the flow of ready funds necessary working of the enterprise. It consists of funds invested in current assets or those assets which in the ordinary course of business can be turned into cash within a brief period without undergoing diminution in value and without disruption of the organization. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the balance sheet and the profit and loss account. It refers to an assessment of the viability, stability and profitability of a business, sub-business or project. The future plans of the firm should be laid down in view of the firms financial strengths and weaknesses. Thus, financial analysis is the starting point for making plans, before using any sophisticated forecasting and planning procedures. Understanding the past is a prerequisite for anticipating the future.

2.1 OBJECTVES OF THE STUDY

Working capital is the life blood of the business and hence it is an important point to study and so the objective of the study is: To study the working capital required for the company. To study the factor involved in determining the working capital requirement. To study the working capital management of the company for last five years. To study the bank regulation for providing the working capital. To study factor affecting working capital requirement. To evaluation of companys performance relating to Management of working capital on the basis of Ratio Analysis.

2.2 SCOPE OF THE PROJECT

The scope of the project is identified during the project is conducted. The study of working capital is based on tools like Trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. The study of working capital helps us to know the current assets and current liability of an organization. If working capital is excess then the excess amount of working capital is idle. If the working capital is not sufficient for meeting the daily expenses then it creates a problem. So it is necessary to maintain exact working capital according to the expenses for the organization. In this project, the study of working capital analysis is done through working capital budget and ratio analysis, which are wide spread and some ratios creates relations with whole casting industry, but it is very essential to note that this study is limited to only to J&K Bank. In any analysis of working capital, a distinction is made between temporary and permanent working capital requirements. The efficiency of the planning and management is subject to the correct estimates of the working capital requirement. The fixed assets which usually require a large chunk of total funds, can be used at and optimum level only if supported by sufficient working capital If working capital level is not properly maintained and managed, then it may result in unnecessary blocking of scarce resources of the firm.

2.3 LIMITATION OF STUDY

During the study of this project, some limitation I have found which are as below.

1.

This research is based on the secondary data and during the study of working capital there are so many data required from various departments which were not disclosed by the respective department because of confidentiality of the company e.g. budget of the current financial year.

2.

Some approx data were collected from the various departments for the calculation purpose.

3.

This project is based on five-year financial reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company.

4.

Also it was difficult to collect the data regarding the competitors and their financial information Industry figures were also difficult to get.

CHAPTER 3 COMPANY PROFILE

3.1 ABOUT J & K BANK

The Jammu & Kashmir Bank was founded on October 1, 1938 under letters patent issued by the Maharaja of Jammu and Kashmir, Hari Singh. The Maharaja invited eminent Kashmiri investors to become founding directors and shareholders of the bank, the most notable of which were Abdul Aziz Mantoo, Pesten Gee and the Bhaghat Family, all of whom acquired major shareholdings. The Bank commenced business on July 4, 1939 and was considered the first of its nature and composition as a State owned bank in the country. The Bank was established as a semi-State Bank with participation in capital by State and the public under the control of State Government.

COMPANY PROFILE

Company name Year of Establishment Chairman Industry Website

JAMMU AND KASHMIR BANK July 4, 1939 Mr. Mushtaq Ahmad JAMMU AND KASHMIR BANK

www.jkbank.net

Production Capacity Annual Generation

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3.2. BRIEF PROFILE

Jammu & Kashmir Bank is the only Bank in the country with majority ownership vested with a state government the Government of Jammu & Kashmir. It is also the only private sector bank designated as RBIs agent for banking business, and carries out the banking business of the Central Government, besides collecting central taxes for CBDT. J&K Bank follows a two-legged business model whereby it seeks to increase lending in its home state which results in higher margins despite modest volumes, and at the same time, seeks to capture niche lending opportunities on a pan-India basis to build volumes and improve margins. J&K Bank operates on the principle of socially empowering banking and seeks to deliver innovative financial solutions for household, small and medium enterprises. The Bank is listed on the NSE and the BSE. It has a track record of uninterrupted profits and dividends for four decades. The J&K Bank is rated P1+, indicating the highest degree of safety by Standard & Poor and CRISIL

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3.3 VISION

To catalyze economic transformation and capitalize on growth. The vision is to engender and catalyze economic transformation of Jammu and Kashmir and capitalize from the growth induced financial prosperity thus engineered. The Bank aspires to make Jammu and Kashmir the most prosperous state in the country, by helping create a new financial architecture for the J&K economy, at the center of which will be the J&K Bank.

MISSION

The mission is two-fold: To provide the people of J&K international quality financial service and solutions and to be a super-specialist bank in the rest of the country. The two together will make us the most profitable Bank in the country.

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3.4. AWARDS & ACHIEVEMENTS

J&K Banks Annual Report 2008-09 has won three awards at the prestigious LACP 2009 Vision Awards the worlds largest award program for Annual Reports, organized by California-based League of American Communications Professionals (LACP), USA. The LACP is a forum within the public relations industry that facilitates discussion of best-in-class practices in public relations and recognizes exemplary communication capabilities at a global level. The awards received include Rank 73 on the top hundred list of annual reports from around the world, Platinum Award in the Commercial Banks Up to $10billon annual revenue from the Asia Pacific Region and Silver Award for Most Creative Report across all sectors from the Asia Pacific Region.

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CHAPTER 4 LITERATURE REVIEW

13

Review of Literature

1. Weinraub Herbert, Visscher Sue (1998) studies that this study looked at ten diverse industry groups over an extended time period to examine the relative relationship between aggressive and conservative working capital practices. Results strongly show that the industries had significantly different current asset management policies. Additionally, the relative industry ranking of the aggressive/conservative asset policies exhibited remarkable stability over time. Industry policies concerning relative aggressive/conservative liability management were also significantly different. Interestingly, it is evident there is a high and significant negative

correlation between industry asset and liability policies. Relatively aggressive working capital asset management seems balanced by relatively conservative working capital financial management.

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2. Mills Geofrey (1996) analysis that the impact of inflation on the capital budgeting process. It has shown that it is reasonable to expect that the cost of capital will increase at the same rate as the rate of inflation on an ex ante basis, and that this increase will be a multiplicative relationship. In addition, the paper has shown that the capital budgeting process is not neutral with respect to inflation, even if output prices rise at the same rate as costs. Of critical importance is the degree of net working capital as a proportion of the overall financing required, the higher the net working capital the greater being the impact of inflation on capital spending. Finally, it would appear that corporate financial behavior is influenced by inflation. Inflation will cause the firm to reduce its capital budget, to attempt to reduce net working capital, and to alter the debt/asset ratio using short-term debt, thus driving up shortterm rates relative to long-term rates.

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CHAPTER 5

RESEARCH METHODOLOGY

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RESEARCH METHODOLOGY

Research comprises of defining & redefining problems, formulating hypothesis or suggested solutions, collecting, organizing & evaluating data, making deductions & reaching conclusions. In research design we decide about: Type of data From whom to get data How to analyze data How to make report

DATA TYPE Data collected was both Primary and Secondary in nature RESEARCH DESIGN STEP 1 - To study the Financial Statement of JAMMU AND KASHMIR BANK. STEP 2 Data Analysis of working capital through Estimation of Working Capital. STEP 3 Analysis of Inventory Management of JAMMU AND KASHMIR BANK DATA COLLECTION The information is collected through the PRIMARY SOURCES like:
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 Interviewing the employees of the department. Getting information from advanced department. Discussion with the head of the department .

Data was collected from following SECONDARY SOURCES like 1. Corporate department a) Finance department 2. Accounting Department 3. MIS Department The collected information was edited & tabulated for the purpose of analysis. TOOLS USED FOR PROJECT While making the project file various tools were used. These tools helped in doing the work. These are: Microsoft Excel Microsoft Word Various analysis tools like Bar Graphs, Pie Graphs, tables

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CHAPTER 6 WORKING CAPITAL MANAGEMENT

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WORKING CAPITAL

Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Its a measure of both a company's efficiency and its short-term financial health. It 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. It is a derivation of working capital that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. Net Working Capital = Current Assets Current Liabilities Through this formula, a working capital amount can be determined to be either positive or negative. Naturally, this will rely largely on the amount of debt owed by the company. A positive change in a companys working capital will generally indicate one of two developments. Either the company has increased its current assets by receiving cash (or some other form of assets), or it has minimized its liabilities often by paying off a short-term creditor. On the other hand, companies that are operating with negative working capital may not have the financial support or flexibility to grow and/or improve, even when such developments would be indicated. Hence, working capital can be an indicator of the overall strength of a company. There are three main indicators used in calculating working capital. Elements of the current assets side of the equation will include accounts receivable, as well as any inventory of goods on-hand. Current liabilities will include accounts payable. If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a
20

result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. The better a company manages its working capital, the less the company needs to borrow. Even companies with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors.

COMPONENTS OF THE WORKING CAPITAL

The various components as given in the Performa above are now discussed in detail as:

1. Raw Material Requirements:

Every business unit would like to have some minimum stock of the raw material in hands so that production goes on smoothly and it is not generally feasible to make purchase on daily basis. As bankers, we have to find out how many a days consumption of raw material shall be required by the borrower unit. The storage period differ from industry to industry but the factors like nature of material, price level, storage facilities, availability of the material, sources of raw material, time involved etc. broadly affect the level of holding.

In case of an existing unit, the following formula shall reveal the storage period of raw materials: Average Stock of Raw Materials (i.e., Opening Stock + Closing Stock/2) Average daily consumption of raw materials (i.e., opening Stock + Raw Material Consumption during the year Closing Stock/number of days in the year)
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2. Stores and Spares requirements:

In case of existing units, the storage period can be judged in the same way as above i.e.,

Average Stocks of Stores/Spares (i.e., Opening Stock + Closing Stock/2) Average daily consumption of Stores/Spares (i.e., Opening Stock + Purchases during the year-Closing Stock/number of days in the year)

3. Stock/ Work in progress.

In case of existing units, the storage/ holdings period can be judged in the above 1 and 2 by employing the following formula:

same ways in

Average work in progress [Opening Stock in process+ Closing Stock in Process/21 Daily cost of finished goods during the year.

[Opening Stock in Process+ Purchases of raw material- Closing Stock in process/ number of days in the year or Cost of Production/ Number of days in the year]

4. Finished Goods:

Generally, some stock of finished goods remained with the unit as it is difficult to sell all finished goods on the very next day of production. In fact, a very high storage of finished goods is not a healthy feature as it indicates a poor stability unless otherwise explained by the borrower client. Further factors like nature of markets, availability of infra structure, types of order etc have a great bearing on stock holding of finished goods.

In case of existing units, the formula for computation of holding of finished goods is:

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Average Stock of Finished Goods (Opening Stock + Closing Stock/2 Cost of Production or Sales Gross profit / number of days in the year

5. Bills Receivables / Debtors:

In this case of existing units, the formula for determining the average credit period allowed shall be as:

Average (Debtors + Receivables) i.e., Opening Stock + Closing Stock/2 Average credit sales / number of days in the year

In case no separate figures are available for credit sales, consider entire sales figure for the calculations. 6. One months manufacturing / administrative expenses: As a matter of policy and cushion, the bankers usually add one months operative expenses to the working capital requirements of the borrower clients. If we add the amounts derived above, we get the gross working requirements of the client. We have to deduct the following to arrive at net working capital requirements:

1. Credit available on purchase: To the extent credit is available to the business unit, the requirements for working capital will come down to that extent. In case of existing units, the period of credit enjoyed can be calculated as: Average (Creditors + Bills Payable) i.e., Opening Stock + Closing Stock/2 Average daily credit purchases i.e., (Opening Stock + purchases during the year Closing Stock / number of days in the year)

2. Advance: If received, also reduces the working capital requirements of the borrower unit.
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After deducting these two from the gross working capital, we proceed to get the NWC requirements of the unit and the extent to which a Bank shall finance this NWC is called permissible finance. This depends on many factors like security available, standing of the unit and of course, on the credit policy of the bank. Generally, bankers insist on 25% margin requirements but may proceed to accept less or more margin as per the circumstances of the case. As we might have observed the above calculation is for existing units only a few units would not be having any past financial data or statements and the banker cannot compare the projections with the past performance of the unit. This makes financial analysis more complicated and may not prove very clear and precise. The only way available to bankers in this respect is to make an inter-firm or industry comparisons.

TYPES OF WORKING CAPITAL

Working capital can be categorized into following types: Gross Working Capital: It is used for all the current assets. Total value of current assets will equal to gross working capital. In simple words, it is total cash and cash equivalent on hand also, we do not account of current liabilities in gross working capital. Net Working Capital: Net working capital is the excess of current assets over current liabilities. Net Working Capital = Total Current Assets Total Current Liabilities This amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long term debts at any time. Its also a measure of both a company's efficiency and its short-term financial health. Permanent Working Capital: It is that amount of capital which must be in cash or current assets for continuing the activities of business. It also shows the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. This is the reason why current ratio has to be substantially more than 1.

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Temporary Working Capital: Sometime, it may be possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, and then this excess amount will be temporary working capital. It represents the additional current assets required at different times during the operating year.

FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS

All firms do not have the same working capital needs. The following are the factors that affect the WC needs: 1) Nature and size of business: The WC requirement of a firm is closely related to the nature of the business. We can say that trading and financial firms have very less investment in fixed assets but require a large sum of money to be invested in WC. On the other hand Retail stores, for example, have to carry large stock of variety of goods hence large investments in the fixed assets. Also a firm with a large scale of operations will obviously require more WC than the smaller firm. The following table shows the relative proportion of investment in current assets and fixed assets for certain industries:

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2) Manufacturing cycle: It starts with the purchase and use of raw materials and completes with the production of finished goods. Longer the manufacturing cycle larger will be the WC requirement; this is seen mostly in the industrial products. 3) Business fluctuation: When there is an upward swing in the economy, sales will increase also the firms investment in inventories and book debts will also increase, thus it will increase the WC requirement of the firm and vice-versa. 4) Production policy: To maintain an efficient level of production the firms may resort to normal production even during the slack season. This will lead to excess production and hence the funds will be blocked in form of inventories for a long time, hence provisions should be made accordingly. Since the cost and risk of maintaining a constant production is high during the slack season some firms may resort to producing various products to solve their capital problems. If they do not, then they require high WC. 5) Firms Credit Policy: If the firm has a liberal credit policy its funds will remain blocked for a long time in form of debtors and vice-versa. Normally industrial goods manufacturing will have a liberal credit policy, whereas dealers of consumer goods will a tight credit policy. 6) Availability of Credit: If the firm gets credit on liberal terms it will require less WC since it can always pay its creditors later and vice-versa.
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7) Growth and Expansion Activities: It is difficult precisely to determine the relationship between volume of sales and need for WC. The need for WC does not follow the growth but precedes it. Hence, if the firm is planning to increase its business activities, it needs to plan its WC requirements during the growth period. 8) Conditions of Supply of Raw Material: If the supply of RM is scarce the firm may need to stock it in advance and hence need more WC and vice-versa. 9) Profit Margin and Profit Appropriation: A high net profit margin contributes towards the WC pool. Also, tax liability is unavoidable and hence provision for its payment must be made in the WC plan, otherwise it may impose a strain on the WC. Also if the firms policy is to retain the profits it will increase their WC, and if they decide to pay their dividends it will weaken their WC position, as the cash will flow out. However this can be avoided by declaring bonus shares out of past profits. This will help the firm to maintain a good image and also not part with the money immediately, thus not affecting the WC position.

WORKING CAPITAL CYCLE

The working capital cycle can be defined as: The period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer. Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks.
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There are two elements in the business cycle that absorb cash - Inventory (stocks and work-inprogress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

The working capital cycle is a diagram rather than a mathematical calculation. The cycle shows all the cash coming in to the business, what it is used for, and how it leaves the business (i.e., what it is spent on).

IMPORTANCE:
A good working capital cycle balances incoming and outgoing payments to maximize working capital. Simply put, you need to know you can afford to research, produce, and sell your product. A short WC cycle suggests a business has good cash flow. For example, a company that pays contractors in 7 days but takes 30 days to collect payments has 23 days of working capital to fundalso known as having a working capital cycle of 23 days. For a business to grow, it needs
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access to cashand being able to free up cash from the working capital cycle is cheaper than other sources of finance, such as loans.

WORKING CAPITAL MANAGEMENT

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The two main aspects of working capital management are ratio analysis and management of individual components of working capital. A few key performance ratios of a working capital management system are the working capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management.

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Working Capital Financing

Working capital financing comes in many forms, each of which has unique terms and offers certain advantages and disadvantages to the borrower. These are as following: Line of Credit Accounts Receivable Financing Factoring Inventory Financing Term Loan

Explaining Line of Credit and Term Loan in brief:

Line of Credit
A line of credit is an open-ended loan with a borrowing limit that the business can draw against or repay at any time during the loan period. This arrangement allows a company flexibility to borrow funds when the need arises for the exact amount required. Interest is paid only on the amount borrowed, typically on a monthly basis. A line of credit can be either unsecured, if no specific collateral is pledged for repayment, or secured by specific assets such as accounts receivable or inventory. The standard term for a line of credit is 1 year with renewal subject to the lenders annual review and approval. Since a line of credit is designed to address cyclical working capital needs and not to finance long-term assets, lenders usually require full repayment of the line of credit during the annual loan period and prior to its renewal. This repayment is sometimes referred to as the annual cleanup.

The advantages of a line of credit are twofold. First, it allows a company to minimize the principal borrowed and the resulting interest payments. Second, it is simpler to establish and
30

entails fewer transaction and legal costs, particularly when it is unsecured. The disadvantages of a line of credit include the potential for higher borrowing costs when a large compensating balance is required and its limitation to financing cyclical working capital needs. With full repayment required each year and annual extensions subject to lender approval, a line of credit cannot finance medium-term or long-term working capital investments.

Term Loan
Term loans are used to finance medium-term noncyclical working capital. A term loan is a form of medium-term debt in which principal is repaid over several years, typically in 3 to 7 years. Since lenders prefer not to bear interest rate risk, term loans usually have a floating interest rate. Sometimes, a bank will agree to an interest rate cap or fixed rate loan, but it usually charges a fee or higher interest rate for these features.

Term loans have a fixed repayment schedule that can take several forms. In this case, the company pays the same principal amount each month plus interest on the outstanding loan balance. A second option is a level loan payment in which the total payment amount is the same every month but the share allocated to interest and principle varies with each payment. Term loans can be either unsecured or secured; a business with a strong balance sheet and a good profit and cash flow history might obtain an unsecured term loan, but many small firms will be required to pledge assets. Moreover, since loan repayment extends over several years, lenders include financial covenants in their loan agreements to guard against deterioration in the firms financial position over the loan term. Typical financial covenants include minimum net worth, minimum net working capital (or current ratio), and maximum debt-to-equity ratios. Finally, lenders often require the borrower to maintain a compensating balance account equal to 10% to 20% of the loan amount.

The major advantage of term loans is their ability to fund long-term working capital needs. Term loans provide the medium-term financing to invest in the cash, accounts receivable, and inventory balances needed to create excess working capital. They also are well suited to finance the expanded working capital needed for sales growth. Furthermore, a term loan is repaid over
31

several years, which reduces the cash flow needed to service the debt. However, the benefits of longer term financing do not come without costs, most notably higher interest rates and less financial flexibility. Since a longer repayment period poses more risk to lenders, term loans carry a higher interest rate than short-term loans. When provided with a floating interest rate, term loans expose firms to greater interest rate risk since the chances of a spike in interest rates increase for a longer repayment period. SUPPLIERS CREDIT: At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc.

BANK LOAN FOR WORKING CAPITAL: This is a major source for raising short-term funds. Banks extend loans to businesses to help them create necessary current assets so as to achieve the required business level. The loans are available for creating the following current assets: Stock of Raw Materials Stock of Work in Process Stock of Finished Goods Debtors

Banks give short-term loans against these assets, keeping some security margin. The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities. iii. Promoters Fund:

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It is advisable to finance a portion of current assets from the promoters funds. They are long term funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business.

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Sources of Working Capital Finance

34

METHODS OF FINANCING

As per the extent RBI Guidelines banks have been given freedom to adopt any method for assessing working capital requirements of their borrower. The sales figure is the focal point for consideration since the requirement of the Working Capital will depend on the level of sales the borrower expects to achieve, in the next year.

To make a realistic assessment of sales projected for the next year; the trend in sales during previous year, the potential for growth, the production capacity, demand for projects, expertise for entrepreneur in locating markets, export potential, type of product, quality of product etc. will have to be taken into account. However, ultimately, it is the judgement of the credit appraiser which is vital for making a reasonable estimate of sales. Currently banks are following the under mentioned methods for appraising working capital limits for various classes of borrowers. 1. Turnover method As per RBI guidelines banks have to mandatory apply the turnover method for assessing working capital limit up to 5 crores for SSI borrowers. RBI guidelines stipulate that for the class of borrower banks will assess limits both on the turnover method or traditional method and sanction whichever is higher. However many banks, as per their policy apply the turnover method even for non-SSI borrowers up to specified cut off limits. 2. Traditional or Operating Cycle method 3. Permissible Bank Finance method 4. Cash Budget Method

All these four methods are detailed below:

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A.) TURNOVER METHOD OF ASSESSMENT

As per the guidelines issued by the Reserve Bank, such units may be provided working capital by banks on the basis of a minimum of 20 per cent of their projected annual turnover for new as well as existing units. Borrowers would be required to bring in 5 per cent of their annual turnover as margin money. In other words, 25 per cent of the output value should be computed as working capital requirement of which at least 1/5th (5 per cent of projected turnover) should be contributed by the borrowers towards margin for the working capital. This can be explained by the following illustration:-

1. Projected turnover 2. Working capital requirement (25 % of projected turnover) 3. Bank finance for working capital (20 % of projected turn-over i.e. 4. Margin money for working capital from long term sources (5 % of project turnover i.e. 1/5th of working Capital)

300 lakhs 300 X 25% = 75 lakhs

300 X 20% 75 X 4/5

300 X 5 % = 15 lakhs

75 X 1/5

So, the working capital limit to be sanctioned would be Rs. 60 lakhs subject to the borrower bringing in Rs 15 lakhs as his margin from his long-term sources.

B.) TRADITIONAL OR OPERATING CYCLE METHOD

Under the traditional method once the projected sales has been accepted then the next step is to ascertain as to what should be the optimum level of holding current assets so that the projected sales is achieved.

36

The level of holding of inventory and Receivables will depend on the period of holding inventory and receivables. Hence, thorough appraisal will have to find out as to what should be the reasonable period of holding of inventory and receivable.

Once the period of holding is scientifically ascertained, based on a) past trends, b) industry trends, c) laid down norms of the bank if any, the investment in C.A(i.e. W.C.) can be calculated on the basis of the following:R.M.Holding calculated on the basis of so many months of Raw Material consumed. SFG holding calculated on the basis of so many months cost of production. F.G. holding calculated on the basis of so many months cost of sales. Receivables holding calculated on the basis of so many months of gross sales.

I. II. III. IV.

After, the total requirement of C.A. is ascertained; the next step is to explore the alternate financing sources available, other than bank finance. In fact, the sources of financing C.A. are three and listed belowa) Sources like sundry creditors, advance payment from customers etc. b) Bank finance, and c) NWC, which is contributed from Long Term Sources.

Margin per cent age may differ with different borrowers and different items of inventory. Normally, a margin of 20-25% is levied on raw materials, stock in progress, and finished goods, and 35-50% on receivables. Some banks levy a higher margin of 30-35% on stocks in progress.

Example of traditional or operating cycle method: After proper verification of projected production, sales and estimated stocking level of current

37

assets and current liabilities based on past trends as well as industry trends it is assumed that company XYZ propose to achieve/hold the following levels of sales and inventory. Projected for 12 months 1. 2. 3. 4. 5. Net Sales Raw Material Consumption Consumption of stores/spares Cost of Production (COP)* Cost of Goods Sold (COGS)** 200 120 10 170 160

*COP = Manufacturing costs + Opening stock of stocks in progress closing stock of stock in progress. **COGS = COP + Opening Stock of Finished Goods.

Proposed inventory holding 1. 2. 3. 4. 5. 6. Raw Material (including consumable stores) Stores/Spares Stock-progress Finished goods Book debts/receivables Cash overheads (others)* 1 month (consumption) 1 month 1 week 15 days 45 days 1 month

*others represent the cash in hand that the company will have to keep to meet various cash expense like wages, salaries, power etc. The company also expects to avail of trade credit for purchase of raw materials of 15 days. (ooos omitted)

Assessment CURRENT ASSSETS Period of holding Value Margin

Rs Value of Margin

Advance Value 6.00

1.

Current Assets

1 month
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10

25%

4.00

(consumption) 2. Stores/Spares 1 month (consumption) 3. 4. 5. Stocks in progress Finished Goods Book debts/receivables 6. Cash overheads 1 week of COS 15 days of COS 45 days of Gross Sales 1 month cash expenses TOTAL Peak Working Capital requirement (A) Less : Trade Creditor of 15 days* - (B) Less : Minimum margin to be brought in by borrower as per column 5 or actual margin he has whichever is higher (C) Residual gap to be financed from bank credit [A-(B+C)] 26.30 51 18.70 31.30 5 100% 5.00 5.00 3 7 25 40% 25% 50% 1.20 1.75 12.50 1.80 5.25 12.50 1 25% 0.25 0.75

51.00 6.00 18.70

*assuming purchase of Rs, 12,000/- per month. Where purchases figures are not available it is customary to equate purchases with consumption figures.

C.) PERMISSIBLE BANK FINANCE METHOD

Under this method after estimating the reasonable level of production, sales and current assets (inventory, receivable, etc) required for the operation of a unit, sources of financing the same are decided i.e. entire current assets and liabilities are projected. A part of the total current assets can be financed by credit for purchases and other current liabilities. Funds require to carry the remaining current asset may be called the working capital gap which can be bridged partly from the borrowers owned funds and long term borrowings and partly by bank borrowings.
39

In the context of the above approach, banks follow the undernoted two alternatives for working out the maximum permissible level of bank finance as suggested by the Tendon Study Group suitably modified to suit individual Banks requirements.

Banks work out the working capital gap i.e. total current assets less current liabilities other than bank borrowings and finance a maximum of 75 per cent of the gap i.e. the borrower is to bring in 25% of the working capital gap out of long term funds i.e. owned funds and term borrowings as his margin. Second method of Lending Under this method borrower should provide for a minimum of 25 per cent of the total current assets (as against 25% of working capital gap under the first method) as his margin out of long term funds, i.e. owned funds and term borrowings. A certain level of credit for purchases and other current liabilities will be available to finance a part of the remaining amount and the bank borrowings will not exceed 75 % of current assets. It may be observed from the above that borrowers contribution from long-term funds would be 25% of working capital gap (total current assets minus current liabilities other than bank borrowings) under the First Method of lending and 25% of the total current assets under the Second Method of lending. The above minimum contribution of long-term funds is called minimum stipulated Net Working Capital (NWC), which comes from owned funds and term borrowings. The above two methods of lending may be illustrated by taking the following example of a borrowers financial position, projected as at the end of next year.

Current Liabilities

Current Assets

Creditors for purchasing Other Current Liabilities

200 100

Raw Material Stocks-in-progress Finished Goods Receivables, including bills Discounted with bankers

380 40 180

110

40

Banks borrowings, including bills discounted with bankers 30 700 First Method Total Current Assets Less: Current Liabilities, other than bank borrowing 185 Working Capital Gap 25% of above from long term sources 300 Maximum permissible bank Finance 255 Excess bank borrowings Current Ratio 70 1.17:1 Excess bank borrowings Current Ratio 145 1.33:1 330 Maximum permissible bank finance 110 440 Less: Current Liabilities other than bank borrowings 300 740 Second Method Total Current Assets 25% of above from long term sources 740 740 400 Other current assets

It may be observed from the above that in the First Method, the borrower has to provide a minimum of 25% of working capital gap from long-term funds (owned funds and term borrowings) and it gives a minimum current ratio of 1:17. In the Second Method, the borrower has to provide a minimum of 25% total current assets from long term funds (owned funds and terms borrowings) and gives a minimum current ratio of 1.33:1. Under extent guidelines individual banks may vary the minimum NWC requirement (as per cent age) to be brought in by the borrower, and bank limits will be calculated accordingly.

41

D.) CASH BUDGETING METHOD

This method which is currently in use only for highly seasonally industry like jute, rubber, sugar etc. is based on the total income and expenditure of a unit as against total build up of current assets and current liabilities in other three methods. Under this method total cash inflow and outflow for a particularly period are projected at given intervals (say quarterly, monthly etc) and the peak cash deficit in any quarter is treated as the working capital requirement. Delivery of Working Capital Limit Once the limit is assessed as above, it is made available to the borrower in any of the undernoted forms: Cash Credit (Pledge) This form of credit is no longer popular, Cash Finance (Hypothecation), Finance against bills bills purchased / discounted, Demand loans, and Overdraft

42

SHARE HOLDING PATTERN

AS on 31-03-2010

Percentage of share holding

Govt. of Jammu & Kashmirry 1 0.45%

7% 12%

4% 1% 0.19%

Foreign institutional investors

General Public 53%

Other Companies N Banks Mutual Funds

23%

Foreign NRIs
Financial Institutions

Others

43

TYPES OF BORROWERS

A banks business is borrowing and lending money. So, a banks financial statements, if we tried to organize them the way an ordinary companys statements are organized, would be all out of proportion. Little plant and equipment, No inventory, Huge accounts receivable but much of it not for years (auto loans etc.). Now, the accepted definition of working capital is all assets likely to turn within one year less all liabilities due within one year. This cannot be applied to banking. Some of the amounts due on a single loan are coming within this year and some arent. So the accounts have to be divided in the accounts of short term and long term. Similarly, some deposits will be drawn out within one year and some will not. So, it can be said that the concept of working capital for a bank does not apply but a Bank manages and creates Working Capital to different customers by issuing Working Capital Loans. These customers are called as borrowers and can be classified as below: Property Developers: They require money to construct residential or commercial developments. Developers sell apartments, shops & office space to individual buyers. The finance property. Owners: They are the owners of existing developed property & they require finance for other purposes. This can be raised against the property by mortgage or lease, in which borrower may or may not occupy the property. Interest has to be paid regularly and capital is repaid at the end of mortgage or lease term. Individuals: They need money to purchase residential or commercial areas. Finance is repaid in installments over long term. Firms: They need funds to purchase a finished development or purchase an undeveloped land and construct residential, commercial or industrial development or renovate/redevelop an existing development. Owners either occupy the property or let/lease it to a tenant. Finance is repaid in installments over long term.
44

has

to

be

fully

repaid

upon

sale

of

 Government: Government requires finance for developments. Residential, commercial,

industrial developments of government are either held by public sector organizations or sold to individual buyers. Public developments such as roads and bridges are usually owned by the government, and sometimes tolls are collected from users.

Purpose of Financial Statements

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position. Users may use financial statements for different purposes: Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals, thus providing them with the basis for making investment decisions. Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures. Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.

45

The System of Financial Statement

Financial statements paint a picture of the transactions that flow through a business. Each transaction or exchange - for example, the sale of a product or the use of a rented a building block - contributes to the whole picture.

Let us approach the financial statements by following a flow of cash-based transactions. In the illustration below, we have numbered four major steps:

46

The Income Statement

An income statement, also known as a Profit and Loss Statement, is a summary of a companys profit or loss during any one given period of time, such as a month, three months, or one year. The income statement records all revenues for a business during this given period, as well as the operating expenses for the business.

An income statement is used to track revenues and expenses so that you can determine the operating performance of your business over a period of time. Small business owners use these statements to find out what areas of their business are over budget or under budget. Specific items that are causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales. They also can be used to determine income tax liability. Income statements, along with balance sheets, are the most basic elements required by potential lenders, such as banks, investors, and vendors. They will use the financial reporting contained therein to determine credit limits.

Items of Income Statement

1. Sales The sales figure represents the amount of revenue generated by the business. The amount recorded here is the total sales, less any product returns or sales discounts. 2. Cost of goods sold This number represents the costs directly associated with making or acquiring your products. Costs include materials purchased from outside suppliers used in the manufacture of your product, as well as any internal expenses directly expended in the manufacturing process.
47

o Gross profit

3. Operating expenses These are the daily expenses incurred in the operation of your business. In this sample, they are divided into two categories: selling, and general and administrative expenses. Sales Salaries Collateral and promotions Advertising Other sales costs Office salaries Rent Utilities Depreciation Other overhead costs

4. Total expenses This is a tabulation of all expenses incurred in running your business, exclusive of taxes or interest expense on interest income, if any. 5. Net income before taxes This number represents the amount of income earned by a business prior to paying income taxes. This figure is arrived at by subtracting total operating expenses from gross profit. 6. Taxes This is the amount of income taxes you owe to the federal government and, if applicable, state and local government taxes. 7. Net income This is the amount of money the business has earned after paying income taxes.

48

BALANCE SHEET
A balance sheet, also known as a "statement of financial position", reveals a company's assets, liabilities and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements.

How the Balance Sheet Works

The balance sheet is divided into two parts that, based on the following equation, must equal each other, or balance each other out. The main formula behind balance sheets is: Assets = Liabilities + Shareholders' Equity

This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.

Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. Owners' equity, referred to as shareholders' equity in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and it represents a source of funding for the business.

As Banks provide Working Capital facilities/loans to other companies or organizations and in order to provide loans Balance Sheet of that company has to be fully examined. So let us start by analyzing Balance Sheet. If a balance sheet is taken, it is divided into two parts: Liabilities, and
49

Assets

These two parts comprise of seven components i.e., Liabilities into three components and Assets into four components.

A. LIABILITIES: 1. Net worth Capital Reserves and Surplus In case of a business that is proprietorship or partnership only Capital is considered as Net worth of that business, while as in case of a Company both Capital and Reserve and Surplus is considered as Net worth of the company. 2. Term Liabilities Term loans Unsecured loans In case of term liabilities payback period is greater than one year. 3. Current Liabilities Working Capital liabilities Advance from customers Other Current liabilities In case of Current Liabilities, payback period is less than one year. B. ASSETS: 1. Fixed assets These Fixed Assets such as Land & Building and Plant & Machinery are also known as NonCurrent Assets and are long term investments.
50

2. Current Asset Sundry Debtors Stocks Advances to other customers Other Current Assets These current assets can either be converted to cash or used to pay cash liabilities within one year.

3. Other non Current Assets Investment Other security deposits These are those Assets, which are not fixed in nature and at the same time are not current in nature. 4. Fictitious Assets Goodwill Trademarks & Patents Copyright These are long-lived assets that are useful to a business but have no physical substance. After having a look at the components of the Balance Sheet we have seen that the Working Capital Facility is a current liability for the organizations and are to be paid back within one year of time. So, the most important concern is to examine the Current Liabilities in order to provide Working Capital Facilities to an organization.

51

Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital utilization. Ratio Stock Turnover (in days) Formulae Average Stock * 365/ Cost of Goods Sold Result =x days Interpretation On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. Receivables Ratio (in days) Debtors * 365/ Sales =x days It take you on average x days to collect monies due to you. If your official credit terms are 45 day and it takes you 65 days... why ? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. Payables Ratio (in days) Creditors * 365/ Cost of Sales (or Purchases) =x days On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Ratio Total Current Assets/ Total Current Liabilities =x times Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have
52

liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. Quick Ratio (Total Current Assets Inventory)/ Total Current Liabilities Working Capital Ratio (Inventory + Receivables Payables)/ Sales As % Sales A high percentage means that working capital needs are high relative to your sales. =x times Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Types of Working Capital Finance

FUND BASED SERVICES

Fund-based services are provided to the borrower for meeting their working capital needs which include cash credit, overdraft, bill discounting, short-term loans, etc.

1.) Bank Credit Loans: A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each
53

installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan is termed as bank credit. A house or other property may be used as collateral for the loan. Some lenders will allow a business owner to put up the cash value of a life insurance policy or investments like stocks and bonds for this purpose. Since many of the loans offered by banks are unsecured, which means that there is no collateral offered by the borrower, banks receive little recompense when a borrower defaults on a loan. For that reason, a bank must manage bank credit risk to protect against the severe complications that can arise from multiple defaults. Types of Bank Loans Although increased competition is forcing Banks to design new and innovative products, the traditional products like loans- short term and long term- revolving credit facility, continue to be the mainstay of banks. The credit facilities sanctioned by a bank to its clients can be broadly classified into two categories: Working Capital Loans that are provided for meeting day-to-day expenses like purchasing of raw materials consumable stores/spares, fuel and other essential needs. They are of continuous nature and are renewed every year. Working Capital Facilities have a payback period of less than 1 year. Term Loans that are sanctioned for acquiring block or fixed asset like land, building, plant and machinery and to meet long-term working capital or NWC (net working capital). Term Loans can be Long term, Short term, and Medium term. Long term loans are payable for a period of time, i.e. greater than 5years, Medium term loans are payable for a period of time, i.e. 3-5 years, and the Short term loans are payable for a period of time, i.e. less than 3 years. Short term loans are also granted to meet temporary cash flow mis-matches.

54

2.) Bill Discounting: This product enables corporate to fund their operating cycle right from the stage of procurement to sale. Banks extend Bill Financing to its clients at competitive rates. Letter of credit backed bill discounting and clean bill discounting are the convenient mode of financing for domestic trade transactions. 3.) Buyers Credit / Suppliers Credit: This facility provides total flexibility to corporate to utilize the line (sanctioned limit) of credit. The terms of the line of credit are either predetermined or negotiated at the time of a ailment. This facility is used as and when the client has a requirement

4.) Term Lending Banks offer term loans to both Industrial as well as Infrastructure sectors promoted by strong business houses. These loans are for a period of 3-5 years with a moratorium period. Interest rates could be fixed or floating.

5.) Short Term Finance The Bank offers short-term loans for a period ranging from 3 months to 12 months to sound corporate for meeting their specific short-term working capital requirements.

NON-FUND SERVICES
Banks also provide non-fund based facilities to the customers. Such facilities include:

Letter of Credit Bank Guarantee

55

Under these facilities, banks do not immediately provide credit to the customers, but take upon themselves the liability to make payment in case the borrower defaults in making payment or performing the promise undertaken by him.

LETTER OF CREDIT

A letter of Credit (L/C) is a written undertaking given by a bank on behalf of its customer, who is a buyer , to the seller of goods, promising to pay a certain sum of money provided the seller complies with the terms and conditions given in the L/C. A Letter of Credit is generally required when the seller of goods and services deals with unknown parties or otherwise feels the necessity to safeguard his interest. Under such circumstances, he asks the buyer to arrange a letter of credit from his banker. The banker issuing the L/C commits to make payment of the amount mentioned therein to the seller of the goods provided the latter supplies the specified goods within the specified period and comply with other terms and conditions.

Thus by issuing Letter of Credit on behalf of their customers, banks help them in buying goods on credit from sellers who are quite unknown to them. The banker issuing L/C undertakes an unconditional obligation upon himself, and charge a fee for the same. L/Cs may be revocable or irrevocable. In the latter case, the undertaking given by the banker cannot be revoked or withdrawn.

BANK GUARANTEE

Banks issue guarantees to third parties on behalf of their customers. These guarantees are classified into: (i) (ii) Financial guarantee, and Performance guarantee.

In case of the financial guarantees, the banker guarantees the repayment of money on default by the customer or the payment of money when the customer purchases the capital goods on
56

deferred payment basis. A bank guarantee which guarantees the satisfactory performance of an act, say completion of a construction work undertaken by the customer, failing which the bank will make good the loss suffered by the beneficiary is known as a performance guarantee.

57

ASSESSMENT OF WORKING CAPITAL FINANCE

Under traditional method of lending in management accounting, the assessment of working capital requirement is an exercise in knowing the money required by a firm/industrial unit to finance the various components of the operating cycle so that need based requirements are determined. Broadly speaking, the working capital should be adequate to meet the operating expenses like raw material, labour, factory and other overhead expenses in the process of the operating cycle which can be easily calculated from the final accounts of the business of the last year or years and adjusting the same through ratio analysis to the future expectations with regards to sale, purchase, debtors, creditors, other overhead charges and price level changes. Thus, the projections submitted have to be critically examined in relation to past performance of the borrower unit, future expectations regarding markets, production capacity and the general rate of inflation. But the business unit does not require working capital equal to the level of operating expenses and it is really here that the concept of the operating cycle reveals its effectiveness. Thus, for example, if the operating cycle of a business unit is four months, it would just need working capital equal to 1/3rd of the operating expenses of the whole year. The total working capital requirements can be calculated as: Total operating expenses in a year Number of operating cycles in a year

However, this simple way of calculating the working capital requirements is invariably followed by banks subjected to: A. That banks do not finance the total working capital requirement of its borrow units because of the fact that some part of the working capital finance must come from longterm sources of the unit. Thus, every borrower unit has to arrange some portion of the working capital requirements from its long term resources and this portion is commonly known as Margin. As such, we have to deduct the margin amount from the total
58

working capital requirements computed as above to arrive at a permissible limit for a borrower client. B. That it must be born in the mind that bankers use the method for getting only a rough idea of the total requirements since the bankers usually do need the classification of the requirements of each level of the operating cycle so as to fix-up sub-limits. Further, banks sanction working capital limits on yearly basis for many reasons. Being not useful, the bankers have adopted the following Performa in one way or the other as devised by RBI in 70s which gives a scientific and methodical way of assessment of the working capital requirements of its borrower clients.

59

CHAPTER 7 DATA ANALYSIS AND INTERPRETATION

60

RATIO ANALYSIS Jammu and Kashmir Bank Ltd.

Financial ratios are one of the most common tools of managerial decision-making. Financial ratios involve the comparison of various figures from the financial statements in order to gain information about a company's performance. It is the interpretation, rather than the calculation, that makes financial ratios a useful tool for business managers. Ratios may serve as indicators, clues, or red flags regarding noteworthy relationships between variables used to measure the firm's performance in terms of profitability, asset utilization, liquidity, leverage, or market valuation. There are basically two uses of financial ratio analysis: o To track individual firm performance over time, and o To make comparative judgments regarding firm performance. Firms performance is evaluated using trend analysiscalculating individual ratios on a perperiod basis, and tracking their values over time. This analysis can be used to spot trends that may be cause for concern, such as an increasing average collection period for outstanding receivables or a decline in the firm's liquidity status. In this role, ratios serve as red flags for troublesome issues, or as benchmarks for performance measurement. Another common usage of ratios is to make relative performance comparisons. For example, comparing a firm's profitability to that of a major competitor or observing how the firm stacks up versus industry averages enables the user to form judgments concerning key areas such as profitability or management effectiveness. Users of financial ratios include parties both internal and external to the firm. External users include security analysts, current and potential investors, creditors, competitors, and other industry observers. Internally, managers use ratio analysis to monitor performance and pinpoint strengths and weaknesses from which specific goals, objectives, and policy initiatives may be formed.

61

5.1.1.

Liquidity Ratio: Liquidity refers to the ability of a firm to meet its short-term

financial obligations when and as they fall due. The main concern of liquidity ratio is to measure the ability of the firms to meet their short-term maturing obligations. Failure to do this will result in the total failure of the business, as it would be forced into liquidation. Liquidity Ratios are ratios that come off the Balance Sheet and hence measure the liquidity of the company as on a particular day i.e. the day that the Balance Sheet was prepared. Current Ratio: The Current Ratio expresses the relationship between the firms current assets and its current liabilities. Current assets normally include cash, marketable securities, accounts receivable and inventories. Current liabilities consist of accounts payable, short term notes payable, short-term loans, current maturities of long term debt, accrued income taxes and other accrued expenses (wages). This ratio is a rough indication of a firm's ability to serve its current obligations. The number of times that short-term assets can cover short-term debts. Generally, higher the current ratio, greater is the "cushion" between current obligations and the firm's ability to pay them. The stronger ratio reflects a numerical superiority of current assets over current liabilities. However, the composition and quality of current assets is a critical factor in the analysis of a firm's liquidity. If the ratio is too high then it indicates inefficient use of capital as current assets generally have the lowest return. A current ratio of 2:1 or more is considered satisfactory. FY 06 Inventories (Rs. Crore) Sundry Debtors (Rs. Crore) Cash & Bank balances (Rs. Crore) Other Current Assets (Rs. Crore) Loans & Advances 552.67
62

FY 07 442.26

FY 08 396.42

FY 09 473.61

FY 10 644.14

297.03 693.21

1058.23 1478.22 1414.52 1587.97

979.6

990.55

1367.72

28.7

45.5

12.87

18.06

29.03

59.36

48.53

463.94

770.4

1899.32

2355

(Rs. Crore) Total Current Assets (Rs. Crore) Total Current Liabilities (Rs. Crore) Current Ratio (times) 3.59 4.06 3.59 3.09 3.3 706.87 731.81 1125.72 1253.87 1419.33 2535.38 2973.04 4041.79 3875.51 4681.14

The formula: Current Ratio = Total Current Assets/ Total Current Liabilities Table No 7.1.1. CURRENT RATIO
CURRENT RATIO

4.5
4 3.5 3

4.06

3.59

3.59
3.3

3.09

2.5 2
1.5 1 0.5

0 FY-06 FY-07 FY-08 FY-09 FY-10

Interpretation Current ratio of J&K is well above the generally accepted thumb rule of 2:1 for all the Financial Years considered here. The company is in strong position as far as liquidity is considered to meet its short-term obligations. In 2008, J&K Company Limited shows increase in current liabilities by 53.83% because
63

a) Increase in sundry creditors by 58.09% b) Sundry deposits increased by126% in 2008 c) Advance and progress payment increased by 126% as compared to 2007 d) In current assets the Term deposits with schedule banks as well as deposits under Escrow agreement with credit Suisse became nil in 2009 e) Margin Money deposit with a scheduled bank also became nil in 2009.

In current assets, JAMMU AND KASHMIR BANK has blocked high part of funds (i.e. 13% of sales) in sundry debtors because collection period of that company is longer. Whereas in NTPC has less debtors because of they have good credit policy (their collection period is short).

Quick Ratio: This ratio is obtained by dividing the 'Total Quick Assets' of a company by its 'Total Current Liabilities'. Sometimes a company could be carrying heavy inventory as part of its current assets, which might be obsolete or slow moving. Thus eliminating inventory from current assets and then doing the liquidity test is measured by this ratio. The ratio is regarded as a decisive test of liquidity for a company. It expresses the true 'working capital' relationship of its cash, accounts receivables, prepaid and notes receivables available to meet the company's current obligations. The ratio will be lower than the current ratio, but the difference between the two (the gap) will indicate the extent to which current assets consist of stock. The ratio expresses the degree to which a company's current liabilities are covered by the most liquid current assets. Generally, any value of less than one to one implies a reciprocal dependency on inventory or other current assets to liquidate short-term debt. FY 06 Sundry Debtors (Rs. Crore) Cash & Bank balances
64

FY 07

FY 08

FY 09

FY 10

693.21

1058.23 1478.22 1414.52 1587.97

979.6

990.55

1367.72

28.7

45.5

(Rs. Crore) Other Current Assets(Rs. Crore) Loans & Advances (Rs. Crore) Total Quick Assets(Rs. Crore) Total Current Liabilities (Rs. Crore) Quick Ratio (times) 3.16 3.46 3.24 2.71 2.84 706.87 731.81 1125.72 1253.87 1419.33 2238.35 2530.78 3645.37 3401.9 4037 552.67 463.94 770.4 1899.32 2355 12.87 18.06 29.03 59.36 48.53

The formula: Quick Ratio = Total Quick Assets/ Total Current Liabilities

Quick Assets = Total Current Assets (minus) Inventory Table No 7.1.2. QUICK RATIO

65

QUICK RATIO 4 3.5

3.46

3 2.5 2 1.5
1 0.5 0

3.16

3.24 2.71 2.84

FY-06

FY-07

FY-08

FY-09

FY-10

Interpretation Quick ratio of J&K Bank is well above the generally accepted thumb rule of 1:1 for all the Financial Years considered here. The company is in strong position as far as liquidity is considered to meet its short-term obligations. 1) JAMMU AND KASHMIR BANK shows increase in quick liabilities by 53.81% in 2008 because a) Increase in sundry creditors by 58.09%. b) Sundry deposits increased by 126% in 2008. c) Advance and progress payment increased by 126% as compared to 2007. d) In quick assets (under cash and bank balance) the Term deposits with schedule banks as well as deposits under Escro agreement with credit Suisse got became in 2009. Margin Money deposit with a scheduled bank also got became in 2009.

5.1.2.

Asset Management Ratio: Asset Management Ratios attempt to measure the

firm's success in managing its assets to generate sales. For example, these ratios can provide insight into the success of the firm's credit policy and inventory management.
66

These ratios are also known as Activity or Turnover Ratios. Asset utilization ratios are especially important for internal monitoring concerning performance over multiple periods, serving as warning signals or benchmarks from which meaningful conclusions may be reached on operational issues. 1 Fixed Asset Turnover: The fixed assets turnover ratio measures the efficiency with which the firm has been using its fixed assets to generate sales. Generally, high fixed assets turnovers are preferred since they indicate a better efficiency in fixed assets utilization.

FY 06 Sales (Rs. Crore) Fixed Assets (Rs. Crore) Fixed Asset Turnover (times) 0.72

FY 07

FY 08

FY 09

FY 10

3930.44 4562.79 4715.32 5915.91 7236.23

5465.84 5924.74 6229.71 6481.99 8985.86

0.77

0.76

0.91

0.81

The formula: Fixed Asset Turnover = Net Sales / Fixed Assets Table No 7.1.3. FIXED ASSEST TURNOVER

67

FIXED ASSEST TURNOVER

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 FY-06 FY-07 FY-08 FY-09 FY-10 0.72

0.91 0.77 0.81

0.76

Interpretation Fixed Asset Turnover ratio improved steadily from financial year 2006 to financial year 2009. But it declined in financial year 2010. In the situation, we see here, we will always find that whilst the business is growing, it is growing in such a way that its ratios cannot stay constant. Here we have a 22% increase in sales and a 39% increase in fixed assets, which means that the fixed asset turnover will get worse.

What this means is that whilst the business has invested heavily in new fixed assets, turnover has not increased enough to reflect the new investments.

Total Asset Turnover: This ratio offers managers a measure of how well the firm is utilizing its assets in order to generate sales revenue. An increasing Total Asset Turnover would be an indication that the firm is using its assets more productively. The asset turnover ratio simply compares the turnover with the assets that the

68

business has used to generate that turnover. In its simplest terms, we are just saying that for every Rs. 1 of assets, the turnover is Rs. X. FY 06 Sales (Rs. Crore) Total Assets (Rs. Crore) Total Asset Turnover (times) 0.42 0.47 0.41 0.46 0.45 9307.67 9631.65 11429.47 12994.43 16076.31 FY 07 FY 08 4715.32 FY 09 5915.91 FY 10 7236.23

3930.44 4562.79

The formula: Total Asset Turnover = Net Sales / Total Assets Table No 7.1.4. TOTAL ASSEST TURNOVER

0.47
0.47

0.46 0.45

TOTAL ASSEST TURNOVER

0.46 0.45 0.44 0.43

0.42 0.41 0.4 0.39 0.38 0.42 0.41

FY-06

FY-07

FY-08

FY-09

FY-10

Interpretation In the financial year 2010 the turnover increased by 22% but the Total Assets grew by 24% thus the decline is seen. In the financial year 2008 the turnover increased by 9%
69

whereas the Total assets grew by 19% because of which there was a steep fall in the ratio. In the financial year 2007 the turnover increased by 17% whereas Total assets grew by 3% which explains the steep rise. In financial year 2010 the company must have made major investments in its assets that have yet to generate their previous level of sales.

Inventory Turnover: Inventory is an important economic variable for management to monitor since capital invested in inventory have not yet resulted in any return to the firm. Inventory is an investment, and it is important for the firm to strive to maximize its inventory turnover. The inventory turnover ratio is used to measure this aspect of performance. This ratio is obtained by dividing the 'Total Sales' of a company by its 'Total Inventory'. The ratio is regarded as a test of Efficiency and indicates the rapidity with which the company is able to move its merchandise. Inventory turnover represents the average number of times per year that inventory "turns over" or that all goods are sold from inventory. A higher, more rapid turnover is generally favorable, with goods being sold more quickly. Rapid turnover may result from good inventory management, but it can be a symptom of an inventory shortage as well. A lower, less rapid turnover may indicate overstocking or the presence of obsolescent goods. Slow inventory turnover often coincides with liquidity problems, since working capital is tied up in inventory. Slow inventory turnover may also result from planned seasonal build-ups or from making a large, bulk purchase to obtain a good price.

FY 06 Sales (Rs. Crore) Inventories

FY 07

FY 08

FY 09

FY 10

3930.44 4562.79 4715.32 5915.91 7236.23 297.03 442.26

70

396.42

473.61

644.14

(Rs. Crore) Inventory Turnover (times) 13.23 10.32 11.89 12.49 11.23

The formula: Inventory Turnover = Net Sales / Inventories

Table No 7.1.5. INVENTORY TURNOVER

14 12 10 8 6 4 2 0 FY-06 FY-07 FY-08 FY-09 FY-10

INVENTORY TURNOVER 13.23 11.89 12.49 11.23

10.32

Interpretation The inventory turnover ratio is nearly consistent over the years. In the financial year 2010 the company was able to rotate its inventory in sales 11.23 times. The best ratio was achieved in fiscal year 2009 and was 12.49. The reason for decline is that though sales grew by 22% the inventory increased by 36% thus the ratio reduced as compared to previous year. 4 Days Sales Outstanding: The average collection period measures the quality of debtors since it indicates the speed of their collection. The shorter the average
71

collection period, the better the quality of debtors, as a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firms credit terms and policy to judge its credit and collection efficiency. An excessively long collection period implies a very liberal and inefficient credit and collection performance. The delay in collection of cash impairs the firms liquidity. On the other hand, too low a collection period is not necessarily favorable, rather it may indicate a very restrictive credit and collection policy, which may curtail sales and hence adversely affect profit.

FY 06 Sundry Debtors (Rs. Crore) Sales (Rs. Crore) DSO (Days) 693.21

FY 07

FY 08

FY 09

FY 10

1058.23 1478.22 1414.52 1587.97

3930.44 4562.79 4715.32 5915.91 7236.23 64 85 114 87 80

The formula: DSO = Sundry Debtors / (Sales/365)

72

Table No 7.1.6. DAYS OUTSTANDING

Interpretation For the financial year 2010 the company takes approximately 80 days to convert its accounts receivables into cash. This is an improvement over the last 2 years where it was 114 days in fiscal year 2008 and 87 days in fiscal year 2009.

Debt Management Ratio: The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Financial leverage is not always bad, however; it can increase the shareholders' return on their investment and often there is tax advantages associated with borrowing. These are extremely important for potential creditors, who are concerned with the firm's ability to generate the cash flow necessary to make interest payments on outstanding debt. Thus, analysts outside the firm to make decisions concerning the provision of new credit or the
73

extension of existing credit arrangements use these ratios extensively. It is also important for management to monitor the firm's use of debt financing. The commitment to service outstanding debt is a fixed cost to a firm, resulting in decreased flexibility and higher breakeven production rates. Therefore, the use of debt financing increases the risk associated with the firm. Managers and creditors must constantly monitor the trade-off between the additional risk that comes with borrowing money and the increased opportunities that the new capital provides. Leverage ratios provide a means of such monitoring.

Debt Equity Ratio: This ratio indicates the extent to which debt is covered by shareholders funds. It reflects the relative position of the equity holders and the lenders and indicates the companys policy on the mix of capital funds. Ratio is obtained by dividing the 'Total Liability or Debt ' of a company by its 'Owners Equity / Net Worth'. The ratio measures how the company is leveraging its debt against the capital employed by its owners. If the liabilities exceed the net worth then in that case the creditors have more stake than the shareowners.

FY 06 Secured Loans (Rs. Crore) Unsecured Loans (Rs. Crore) Debt (Rs. Crore) Share Capital (Rs. Crore) Reserves & Surplus (Rs. Crore) Special Appropriation Towards Project Cost (Rs. Crore) Capital Contribution from Consumers (Rs. Crore) 41.81
74

FY 07 946 1809 2755 197.92 4782.3

FY 08 1354.3 2279.06

FY 09

FY 10

1059.07 1800.94 2860.01 197.92 4363.13

2331.09 3931.71 706.18 1266.49 5198.2 221.44

3633.36 3037.27 197.92 220.72

5259.42 7237.51 7888.45

533.61

533.61

533.61

533.61

533.61

41.81

42.16

46.08

48.86

Equity (Rs. Crore) Debt Equity Ratio (%)

5136.47 56

5555.64 6033.11 8037.92 8692.36 50 60 38 60

The formula: Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth

Table No 7.1.7. DEBT EQUITY RATIO

70

60

50

40

30

20

10

0 DEBT EQUITY RATIO

FY-06 56

FY-07 50

FY-08 60

FY-09 38

FY-10 60

Interpretation The company has very less debt. For financial year 2010 for every Rs. 1 of shareholders equity, the company had a debt of 60 paisa. This will work in favor of company if it wishes to raise equity from market for its new projects by debt funding. Supporting to it is the excellently maintained Current ratio. 6 Debt Asset Ratio: The debt/asset ratio shows how great a proportion of a company's assets are financed through debt. If the ratio is less than one, than the majority of the company's assets is financed using equity. If the ratio is greater than one, the majority
75

of the company's assets are financed using debt. Highly leveraged companies have high debt/asset ratios and could be in danger if creditors start to demand increased payment on debt. The debt/asset ratio equals total liabilities divided by total assets.

FY 06 Secured Loans (Rs. Crore) Unsecured Loans (Rs. Crore) Debt (Rs. Crore) Total Assets (Rs. Crore) Debt Asset Ratio (%) 30 2860.01 1800.94 1059.07

FY 07

FY 08

FY 09

FY 10

946

1354.3

2331.09

3931.71

1809

2279.06

706.18

1266.49

2755

3633.36

3037.27

5198.2

9307.67 9631.65 11429.47 12994.43 16076.31

29

32

23

32

Debt Asset Ratio = Total Liabilities / Total Assets

76

Table No 7.1.8. DEBT ASSET RATIO

35
30 25

Axis Title

20 15

10
5 0

FY-06

FY-07

FY-08

FY-09

FY-10

DEBT ASSET RATIO

30

29

32

23

32

For the past five years, the debt asset ratio has been consistently below 1 which indicates that the majority of the company's assets are financed using equity. 7 Times Interest Earned:

The times-interest-earned (TIE) ratio, also known as the EBIT coverage ratio, provides a measure of the firm's ability to meet its interest expenses with operating profits. The higher this ratio, the more financially stable the firm and the greater the safety margin in the case of fluctuations in sales and operating expenses. This ratio is particularly important for lenders of short-term debt to the firm, since short-term debt is usually paid out of current operating revenue. The formula: Times Interest Earned = EBIT / Interest Charges

77

Table No 7.1.9. TIME INTEREST EARNED FY 06 PBIT (Rs. Crore) Interest (Rs. Crore) TIE (times) 952.72 191.44 4.98 FY 07 835.46 165.28 5.05 FY 08 723.44 189.5 3.81 FY 09 936.64 141.86 6.6 FY 10 1140.94 327.76 3.48

TIME INTEREST EARNED 6.6

4.98

5.05 3.81

3.48

FY-06

FY-07

FY-08

FY-09

FY-10

Indicates how many times a company can cover its interest charges on a pre-tax basis. Company has very sound TIE ratio over the five years considered. Profitability Ratio: Profitability Ratios show how successful a company is in terms of generating returns or profits on the Investment that it has made in the business. If a business is liquid and efficient, it should also be Profitable. A company should earn profits to survive and grow over a long period. The profitability ratios show the combined effects of liquidity, asset management (activity) and debt management (gearing) on operating results. The overall
78

measure of success of a business is the profitability which results from the effective use of its resources.

Operating Profit Margin: Operating profit for a certain period divided by revenues for that period. Operating profit margin indicates how effective a company is at controlling the costs and expenses associated with their normal business operations. A business that has a higher operating margin than its industrys average tends to have lower fixed costs and a better gross margin, which gives management more flexibility in determining prices. This pricing flexibility provides an added measure of safety during tough economic times.

FY 06 PBIT (Rs. Crore) Sales (Rs. Crore) Operating Profit Margin (%) 24 952.72

FY 07 835.46

FY 08 723.44

FY 09 936.64

FY 10 1140.94

3930.44 4562.79 4715.32 5915.91 7236.23

18

15

15.8

15.7

The formula: Operating Profit Margin = Operating Profit / Sales

79

Table No 7.1.9. OPERATING PROFIT

25
20 15 10 5

0
FY-06 FY-07 OPERATING PROFIT

FY-08

FY-09

FY-10

FY-06 OPERATING PROFIT 24

FY-07 18

FY-08 15

FY-09 15.8

FY-10 15.7

Net Profit Margin: The net profit margin ratio tells us the amount of net profit per Rs.1 of turnover a business has earned. That is, after taking account of the cost of sales, the administration costs, the selling and distributions costs and all other costs, the net profit is the profit that is left, out of which they will pay interest, tax, dividends and so on.

FY 06 PAT (Rs. Crore) Sales (Rs. Crore) Profit Margin (%) 551.36

FY 07 610.54

FY 08 696.8

FY 09 869.9

FY 10 922.2

3930.44 4562.79 4715.32 5915.91 7236.23 14 13

80

15

15

13

The formula: Net Profit Margin = PAT / Sales Table No 7.1.10.

PROFIT MARGIN

PROFIT MARGIN

15

15

14

13

13

FY-06

FY-07

FY-08

FY-09

FY-10

Interpretation Over the years, the Profit Margin ratio has shown a consistent trend, which indicates that, the company has managed to keep its cost of sales, the administration costs, the selling and distributions costs and all other costs to minimum.

10 Return on Assets: Return on assets (ROA) measures how effectively the firm's assets are used to generate profits net of expenses. This is an extremely useful measure of comparison among firms competitive performance, for it is the job of managers to utilize the assets of the firm to produce profits. Return on assets comes from net profit after taxes divided by total assets. This ratio is the key indicator of profitability for a firm. It matches operating profits with the assets available to earn a

81

return. Companies efficiently using their assets will have a relatively high return while less well-run businesses will be relatively low. The ratio measures the percentage of profits earned per Rupee of Asset and thus is a measure of efficiency of the company in generating profits on its assets. FY 06 PAT (Rs. Crore) Total Assets (Rs. Crore) ROA (%) 9307.67 9631.65 11429.47 12994.43 16076.31 6 6.3 6 6.7 5.7 551.36 FY 07 610.54 FY 08 696.8 FY 09 869.9 FY 10 922.2

The formula: Return on Assets = PAT / Total Assets

Table No 7.1.11.
RETURN ON ASSETS
6.8

6.7
6.6 6.4 6.3 6.2

6
5.8

RETURN ON ASSETS

5.7 5.6

5.4
5.2 FY-06 FY-07 FY-08 FY-09 FY-10

82

ROA must improve. Old and obsolete assets must be replaced with new assets. Regular maintenance of assets should be undertaken. 11 Return on Equity: Return on net worth (return on equity) is obtained by dividing net profit after tax by net worth. This ratio is used to analyze the ability of the firms management to realize an adequate return on the capital invested by the owners of the firm. Tendency is to look increasingly to this ratio as a final criterion of profitability. Generally, a relationship of at least 10 percent is regarded as a desirable objective for providing dividends plus funds for future growth. FY 06 PAT (Rs. Crore) Equity (Rs. Crore) ROE (%) 551.36 FY 07 610.54 FY 08 696.8 FY 09 869.9 FY 10 922.2

5136.47 5555.64 6033.11 8037.92 8692.36 10.7 10.9 11.5 10.8 10.6

The formula: Return on Equity = PAT / Equity In the past five financial years, the company has obtained more than 10% returns on the capital invested. J&K Bank being a Generation company and is bound to MERC regulation, under MERC regulation the ROE is capped to 14%. Market Value Ratio: Market Value Ratios relate an observable market value, the stock price, to book values obtained from the firm's financial statements. 12 Earnings per Share: Earnings Per Share is the Net Income (profit) of a company divided by the number of outstanding shares. Earnings per Share are the single most popular variable in dictating a share's price. EPS indicates the profitability of a company. Earnings per share (EPS) tells an investor how much of the company's profit belongs to each share of stock. The figure is important because it allows analysts to value the stock based on the price to earnings ratio (or P/E ratio for short).

83

FY 06

FY 07

FY 08

FY 09

FY 10

PAT (Distributable) (Rs. Crore) Average Outstanding Shares EPS (Rs.) 198128172 28.02 198128172 29.03 198128172 209945538 221427866 34.02 38.64 43.69 555.09 575.25 673.97 811.31 967.5

Table No 7.1.12. E.P.S

EPS
70 60

50

Axis Title

40
30 20 10

0
EPS

FY-06 28.2

FY-07 29.03

FY-08 34.2

FY-09 38.64

FY-10 64.69

EPS has been steadily rising from 2005 to till date which indicates that the company is making fairly good amount of profits.

84

CHAPTER 8 SUGGESTIONS AND CONCLUSIONS

85

SUGGESTIONS

From the view point of ratios and working capital, following points has been suggested to the company 1. As J&K Bank has higher current and quick ratio, company should utilize its current assets effectively. Company can go for investment of excess cash to get addition returns. 2. Considering lower debtor and creditor ratio, it is advisable to company to go for quicker recovery of sales to improve the business cycle. 3. The company must attempt to maintain cordially assisting relations with the banks that will result into lesser cost of bank finance, easy availability as well as lesser or no security to be pledged for obtaining the funds to finance the working capital. 4. Company has to take control on cash balance because cash is non-earning assets and increasing cost of funds. 5. Company should reduce the inventory-holding period with use of zero inventory concepts.

Over all company has good liquidity position and sufficient funds to repayment of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets balance. Company is increasing sales volume per year which supported to company for sustain in market.

86

CONCLUSION

Over the years, it has been noticed that the cash Credit facility was formulated with the best intentions, as it provides borrower the advantage that he may operate the account within the stipulated limit as and when required. It is the source of advance where the borrower can save interest by reducing the debit balance whenever he is in position to do so. It runs like a current account except that the Money can be withdrawn from this account it is not restricted to the amount deposited in the account. Cash credit facility helps the party to improve their business, which in turn helps economy to grow.

87

CHAPTER 9 BIBLOGRAPHY

88

BIBLIOGRAPHY

WEBSITES
www.netbank.org www.rushabhinfosoft.com www.advancedbusinesscapital.com
en.wikipedia.org

www.jkbanknet www.allbusiness.com www.moneycontrol.com www.capitalmarket.com

BOOKS
Corporate Finance: Theory and Practice by S. R. Vishwanath Corporate Credit Management and Business Risk Management by Ashok Choubey Financial Management by I.M.Panday Financial Management by N.M. Vechalekar Brigham and Houston Financial management Prasanna Chandra Financial Management

89

CHAPTER 10 APPENDIX

90

APPENDIX
Excel Sheet Calculations for Company Comparison Liquidity Ratios Current Ratio TPC FY 05 (Rs. crores) Inventories Sundry Debtors Cash & Bank balances Other Current Assets Loans & Advances Total Current Assets Total Current Liabilities Current Ratio 3.59 4.06 3.59 3.09 297.03 693.21 979.6 12.87 552.67 2535.38 706.87 FY 06 (Rs. crores) 442.26 1058.23 990.55 18.06 463.94 2973.04 731.81 FY 07 (Rs. crores) 396.42 1478.22 1367.72 29.03 770.4 4041.79 1125.72 FY 08 (Rs. crores) 473.61 1414.52 28.7 59.36 1899.32 3875.51 1253.87

NTPC

FY 05 (Rs. crores)

FY 06 (Rs. crores) 2340.5 867.8 8471.4 1016.1 3028.7 15724.5 4910.2

FY 07 (Rs. crores) 2510.2 1252.3 13314.6 1058.0 4047.6 22182.7 5323.5

FY 08 (Rs. crores) 2675.7 2982.7 14933.2 921.8 4035.4 25548.8 5548.3

Inventories Sundry Debtors Cash & Bank balances Other Current Assets Loans & Advances Total Current Assets Total Current Liabilities

1781.9 1374.7 6078.3 976.4 2699.3 12910.6 5230.6

91

Current Ratio Quick Ratio TPC

2.47

3.2

4.17

4.6

FY 05 (Rs. crores)

FY 06 (Rs. crores) 1058.23 990.55 18.06 463.94 2530.78 731.81

FY 07 (Rs. crores) 1478.22 1367.72 29.03 770.4 3645.37 1125.72

FY 08 (Rs. crores) 1414.52 28.7 59.36 1899.32 3401.9 1253.87

Sundry Debtors Cash & Bank balances Other Current Assets Loans & Advances Total Quick Assets Total Current Liabilities Quick Ratio

693.21 979.6 12.87 552.67 2238.35 706.87

3.16

3.46

3.24

2.71

NTPC

FY 05 (Rs. crores)

FY 06 (Rs. crores) 867.8 8471.4 1016.1 3028.7 13384 4910.2

FY 07 (Rs. crores) 1252.3 13314.6 1058.0 4047.6 19672.5 5323.5

FY 08 (Rs. crores) 2982.7 14933.2 921.8 4035.4 22873.1 5548.3

Sundry Debtors Cash & Bank balances Other Current Assets Loans & Advances Total Quick Assets Total Current Liabilities Quick Ratio

1374.7 6078.3 976.4 2699.3 11128.7 5230.6

2.13

2.73

3.01

4.12

Asset Management Ratios Inventory Turnover FY 05 TPC (Rs. crores) FY 06 (Rs. crores)
92

FY 07 (Rs. crores)

FY 08 (Rs. crores)

Sales Inventories Inventory Turnover

3930.44 297.03 13.23

4562.79 442.26 10.32

4715.32 396.42 11.89

5915.91 473.61 12.49

FY 05 NTPC Sales Inventories Inventory Turnover (Rs. crores) 23188.5 1781.9 13.01

FY 06 (Rs. crores) 26145.2 2340.5 11.17

FY 07 (Rs. crores) 32635.8 2510.2 13

FY 08 (Rs. crores) 37097.4 2675.7 13.86

Days Sales Outstanding FY 05 TPC Sundry Debtors Sales DSO (Days) (Rs. crores) 693.21 3930.44 64 FY 06 (Rs. crores) 1058.23 4562.79 85 FY 07 (Rs. crores) 1478.22 4715.32 114 FY 08 (Rs. crores) 1414.52 5915.91 87

FY 05 NTPC Sundry Debtors Sales DSO (Days) (Rs. crores) 1374.7 23188.5 22

FY 06 (Rs. crores) 867.8 26145.2 12

FY 07 (Rs. crores) 1252.3 32635.8 14

FY 08 (Rs. crores) 2982.7 37097.4 29

Profitability Ratios Operating Profit Margin TPC FY 05

93

FY 06

FY 07

FY 08

(Rs. crores) PBIT Sales Operating Profit Margin (%) 24 952.72 3930.44

(Rs. crores) 835.46 4562.79

(Rs. crores) 723.44 4715.32

(Rs. crores) 936.64 5915.91

18

15

15.8

FY 05 NTPC PBIT Sales Operating Profit Margin (%) (Rs. crores) 7376.5 23188.5 31.8

FY 06 (Rs. crores) 7510 26145.2 28.7

FY 07 (Rs. crores) 10097.8 32635.8 30.9

FY 08 (Rs. crores) 11552.8 37097.4 31.1

Net Profit Margin FY 05 TPC PAT Sales Profit Margin (%) (Rs. crores) 551.36 3930.44 14 FY 06 (Rs. crores) 610.54 4562.79 13 FY 07 (Rs. crores) 696.8 4715.32 15 FY 08 (Rs. crores) 869.9 5915.91 15

FY 05 NTPC PAT Sales Profit Margin (%) (Rs. crores) 5807 23188.5 25

FY 06 (Rs. crores) 5820.2 26145.2 22

FY 07 (Rs. crores) 6864.7 32635.8 21

FY 08 (Rs. crores) 7414.8 37097.4 20

94

Return on Assets FY 05 TPC PAT Total Assets ROA (%) (Rs. crores) 551.36 9307.67 6 FY 06 (Rs. crores) 610.54 9631.65 6.3 FY 07 (Rs. crores) 696.8 11429.47 6 FY 08 (Rs. crores) 869.9 12994.43 6.7

FY 05 NTPC PAT Total Assets ROA (%) (Rs. crores) 5807 65948.3 8.8

FY 06 (Rs. crores) 5820.2 71737.1 8.1

FY 07 (Rs. crores) 6864.7 80768.8 8.5

FY 08 (Rs. crores) 7414.8 89388.0 8

Return on Equity FY 05 TPC PAT Equity ROE (%) (Rs. crores) 551.36 5136.47 10.7 FY 06 (Rs. crores) 610.54 5555.64 10.9 FY 07 (Rs. crores) 696.8 6033.11 11.5 FY 08 (Rs. crores) 869.9 8037.92 10.8

FY 05 NTPC PAT Equity ROE (%) (Rs. crores) 5807 41776.1 13.9

FY 06 (Rs. crores) 5820.2 44958.7 12.9

FY 07 (Rs. crores) 6864.7 48596.8 14.1

FY 08 (Rs. crores) 7414.8 52638.6 14.1

95

Debt Management Ratios Debt Equity Ratio FY 05 TPC Secured Loans Unsecured Loans Debt Share Capital Reserves & Surplus Special Appropriation Towards Project Cost Capital Contribution from Consumers Equity Debt Equity Ratio (%) 41.81 5136.47 56 41.81 5555.64 50 42.16 6033.11 60 46.08 8037.92 38 533.61 533.61 533.61 533.61 (Rs. crores) 1059.07 1800.94 2860.01 197.92 4363.13 FY 06 (Rs. crores) 946 1809 2755 197.92 4782.3 FY 07 (Rs. crores) 1354.3 2279.06 3633.36 197.92 5259.42 FY 08 (Rs. crores) 2331.09 706.18 3037.27 220.72 7237.51

FY 05 NTPC Secured Loans Unsecured Loans Debt Share Capital Reserves & Surplus Equity Debt Equity Ratio (%) (Rs. crores) 4440.7 12647.1 17087.8 8245.5 33530.8 41776.3 41

FY 06 (Rs. crores) 5732.7 14464.6 20197.3 8245.5 36713.2 44958.7 45

FY 07 (Rs. crores) 6822.9 17661.5 24484.4 8245.5 40351.3 48596.8 50

FY 08 (Rs. crores) 7314.7 19875.9 27190.6 8245.5 44393.1 52638.6 52

96

Times Interest Earned FY 05 TPC PBIT Interest TIE (Rs. crores) 952.72 191.44 4.98 FY 06 (Rs. crores) 835.46 165.28 5.05 FY 07 (Rs. crores) 723.44 189.5 3.81 FY 08 (Rs. crores) 936.64 141.86 6.6

FY 05 NTPC PBIT Interest TIE (Rs. crores) 7376.5 1695.5 4.35

FY 06 (Rs. crores) 7510 1763.2 4.26

FY 07 (Rs. crores) 10097.8 1859.4 5.43

FY 08 (Rs. crores) 11552.8 1798.1 6.43

Debt Asset Ratio FY 05 TPC Secured Loans Unsecured Loans Debt Total Assets Debt Asset Ratio (%) (Rs. crores) 1059.07 1800.94 2860.01 9307.67 0.3 FY 06 (Rs. crores) 946 1809 2755 9631.65 0.29 FY 07 (Rs. crores) 1354.3 2279.06 3633.36 11429.47 0.32 FY 08 (Rs. crores) 2331.09 706.18 3037.27 12994.43 0.23

FY 05 NTPC Secured Loans Unsecured Loans (Rs. crores) 4440.7 12647.1

FY 06 (Rs. crores) 5732.7 14464.6

97

FY 07 (Rs. crores) 6822.9 17661.5

FY 08 (Rs. crores) 7314.7 19875.9

Debt Total Assets Debt Asset Ratio (%)

17087.8 65948.3 0.26

20197.3 71737.1 0.28

24484.4 80768.8 0.30

27190.6 89388.0 0.30

98