A REPORT

ON

ANALYSIS OF WORKING CAPITAL MANAGEMENT AND

FINANCIAL PERFORMANCE

BY
K.SAI BHARGAV
14BSPHH011223

TECHNOCHEM ENGINEERS PVT. LTD.

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A REPORT
ON
ANALYSIS OF WORKING CAPITAL MANAGEMENT AND
FINANCIAL PERFORMANCE
TECHNOCHEM ENGINEERS PVT. LTD.
BY
K. SAI BHARGAV
14BSPHH011223

A report submitted in partial fulfilment of the requirements of MBA Program

of IBS Hyderabad
Distribution List
Company Guide

Faculty Guide

Sudhakar Dasari

Prof. Nikhat

Director
Technochem Engineers Pvt. Ltd.
Date of submission: 08/05/2015

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IBS Hyderabad

AUTHORISATION
This is to certify that this project is the original work of K.Sai Bhargav and is being submitted
as a partial fulfilment of MBA program of IBS Hyderabad.
No project, on the same line, has been submitted prior to this to any other college or institution.
This project deals with the working capital management, Ratio analysis and finding the
relationship between the liquidity and profitability by using SAS software.
The project has been done under the guidance and supervision of
1.
2.
3.
4.

Mr. Sudhakar Dasari (Director, Company Guide)

Mrs. Nikhat (Faculty Guide)
Mr. Santosh (Manager)
Mr. Sarma (Accountant)

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ACKNOWLEDGEMENT
On successful completion of the Project, I would like to take pleasure to thank Mr. Santosh for
lending his precious support throughout the term without whom it would have been difficult to
come up with the work I have done.

I would also like to express my sincere thanks to Mr. Bharath Supra for expert guidance on
critical areas and helping me. It is with their constant support and guidance I have been able to
complete my internship project.

I would also like to thank Director Mr. Sudhakar Dasari for the support and motivation time to
time.

I would also like to thank Mrs. Nikhat Afshan for constant guidance and support.

I would like to thank my friend Shrikanth for helping me time to time and providing enough
support to complete my project.

I would like to express my deepest gratitude towards all who have helped me in any way during
the tenure of my internship.

Thanking You
K.Sai Bhargav

TABLE OF CONTENTS
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Sr. No.

1
1.1
1.2
1.3
1.4
1.5
1.6
2
2.1
2.2
3
3.1
4
4.1
4.2
5
5.1
5.2

5.3
5.4
5
6
7
8

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Topic
Authorization
Acknowledgement
Executive Summary
INTRODUCTION
Objective of the study
Limitations
Methodology
Introduction to TEPL
Industry Profile
SWOT Analysis
WORKING CAPITAL MANAGEMENT
On the basis of B/S concept
On the basis of time
RATIO ANALYSIS
Introduction to Ratio Analysis
LIQUIDITY AND PROFITABILITY TRADEOFF
Introduction
Multiple Regression Introduction
DATA ANALYSIS
Analysis of Working Capital Management ratios
Ratio Analysis
Liquidity Ratios
Leverage Ratios
Profitability Ratios
Turnover Ratios
Analysis of Liquidity and Profitability Tradeoff
Multiple Regression Analysis
FINDINGS
CONCLUSION
RECOMMENDATIONS
REFERENCES

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EXECUTIVE SUMMARY
Analysis of current performance of the company by calculating financial ratios as these ratios
can used to identify areas where performance has improved or deteriorated over the time period.
Working capital management, tradeoff between Profitability and Liquidity which can be used to
find that portion of a companys capital, which is required for minimum stock of raw material to
maintain continuity in production, minimum stock of finished goods to fulfill future demand,
payment of wages and salaries of labors and employees, the working capital needs for the
company by analyzing conversion cycles, debts standing in the balance sheets with respect to the
payment period, tendency of bad debts and advising regarding credit period and receivables. And
also finding the relation between the profitability and liquidity by using Multiple Regression of
Technochem Engineers Private Limited.
I K.Sai Bhargav got an opportunity to work for Technochem Engineers Private Limited at
Hyderabad during my summer internship program and took a project on Analysis of
Working Capital Management and Financial Performance.
Technchem Enigineers Pvt. Ltd. (TEPL) is a manufacturing company. The main activity of the
company is to supply turnkey projects & manufacturing of continuous solvent extraction plants,
vegetable oil refineries, physical distillation units, oil derivatives, material handling equipments,
aqua / cattle feed equipments, oil expelling units, vanaspathi units, bio diesel plants and also
consultants for the same.
Objectives of the project were:

To study the present financial system at TEPL.

To determine the Profitability, Liquidity, Leverage Ratios.
To analyze the capital structure of the company with the help of Leverage ratio.
To analyze various aspects of working capital by calculating net and gross operating
cycles.
To offer appropriate suggestions for the better performance of the organization.
To find out the Liquidity and Profitability Trade off by using Multiple Regression.

Background:
Oil is the major consumption of all the people in the world. Oil Extraction manufacturing
industries is one of the leading businesses in India. The Solvent Extractors' Association of India
was formed in 1963 to help and foster the development and growth of Solvent Extraction
Industry in India. At present the Association is having 875 members including about 350
working solvent extraction plants having combined oilcake/oilseed processing annual capacity of
about 30 million tons.
Methodology:
The project has the analytical approach, entailing within the various concepts of Finance and
marketing with emphasis on Ratio Analysis, Working capital management and finding the

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relation or tradeoff between profitability and liquidity through secondary data such as financial
statements provided by the company.

INTRODUCTION

Objectives, Limitation and Methodology:

Objectives:

To study the present financial system at TEPL.

To determine the Profitability, Liquidity, Leverage Ratios.
To analyze the capital structure of the company with the help of Leverage ratio.
To analyze various aspects of working capital by calculating net and gross operating
cycles.
To offer appropriate suggestions for the better performance of the organization.
To find out the Liquidity and Profitability Trade off by using Multiple Regression.

Limitations:

The study provides an insight into the financial aspects of TEPL. Every study will be
bound with certain limitations.
Since TEPL is not a listed company the analysis is made based on 9 years.
One of the factors of the study was lack of availability of ample information. Most of the
information has been kept confidential as per the policy of company.
Providing data only of Technochem Engineers Pvt. Ltd. and no other companies. So it is
a drawback for me as I cannot diversify myself and bring out analysis only of one
company and cannot compare it.

Methodology:
DATA COLLECTION METHOD
To fulfil the objectives of my study, I have taken both into considerations via primary and
secondary data.
Primary data:
Primary data has been collected through direct contact with the employees.
Secondary data:
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The data is collected from the financial statements and Literature reviews. The various sources
that were used for the collection of secondary data are internal files & materials.

Introduction to Technochem Engineers Private Limited:

Technchem Enigineers Pvt. Ltd. (TEPL) is a manufacturing company. The company main
activity is to supply turnkey projects & manufacturing of continuous solvent extraction plants,
vegetable oil refineries, physical distillation units, oil derivatives, material handling equipments,
aqua / cattle feed equipments, oil expelling units, vanaspathi units, bio diesel plants and also
consultants for the same.
Having good experience in the production & projects execution for the past 22 years incepted
their own workshop with all fabrication / machining facilities by all the three directors
technically qualified specialized in oil technology & practically experienced, started this firm in
1992 and executed more than 150 projects. TEPL come up with the latest modified developments
so as to achieve better results where the consumption of utilities can be saved. Recently
developed physical distillation section suitable for palm oil as well as high free fatty acid rice
bran oil is being a success by its quality output with better efficiency
Established in the year 1992, Technochem Engineers Private Limited, are the celebrated
manufacturer, supplier, and exporter of a vast line of solvent extraction plants and vegetable oil
renery. In addition to this ecient product range, provide installation, up gradation, technical
services, and engineering solution services. Company product collection consists of Solvent
extraction Plants, Oil Milling Plants, and Vegetable Oil rening Plants. Since their inception,
they have focused on providing the exact requirements of their valued customers by using the
best possible raw materials, and following the industry standards and procedures. Our spacious
infrastructure has supported them in coming up with a broad product range that is used in
different industries. TEPL have equipped infrastructure with dierent machinery and equipment
that provide them with small and large scale plants that produces supreme quality results.
It hired a team of professionals who are experienced and well trained to collect the basic
requirements of their customers and to oer them the exact solutions of the problems. Their
entire team is upgraded with information on the latest market trends by the several knowledge
enhancing programs that we conduct from time to time. They never compromise with the quality
that they provide and wish to continue fullling the diverse demands of their customers in the
manner that they have been following from the very beginning of their establishment, a private
Limited Company under the able mentorship of Mr. Srinivas Vay whose magnicent industry
knowledge has helped them to achieve new heights in the industry. TEPL is a reputed name
among customers and aim to be their topmost priority in the future too.

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Solvent Extraction Industry Profile:

History:
From ancient time, vegetable oils were obtained by crushing oilseeds in village ghanis / kolhus /
chekkus in the country. At the beginning of the 20th century the vegetable oils industry was
based on some 500,000 bullock-driven ghanis producing about 800,000 tons of oils. Slowly, in
addition to these ghanis, power driven ghanis (rotary ghanis made indigenously) imported
expeller and imported hydraulic press plants started crushing oilseeds. Around this time many
European countries and United States of America had established huge solvent extraction plants
for recovering directly almost all the available oil in the oilseeds like Cottonseed and Soybean.
On this background, just 2 years before independence, in 1945, a lone small Solvent Extraction
Plant commenced operation in Bhavnagar for extracting oil from oilseed cakes and oilseeds. And
gradually such units increased. They faced common problems, which brought them together to
form Association with all the 40 units operating at that time, in 1963.
Association:
The Solvent Extractors' Association of India was formed in 1963 to help and foster the
development and growth of Solvent Extraction Industry in India. At present the Association is
having 875 members including about 350 working solvent extraction plants having combined
oilcake/oilseed processing annual capacity of about 30 million tons. The Association is an all
India body to solvent extractions industry and premier vegetable oil Association in the country
having wide representative membership consisting of processors of Rice bran, Oilcakes, Minor
Oilseeds and Soybean. Associate Membership of the Association includes apart from processors,
also merchant exporters, oil millers, refiners, Vanaspati manufacturers, importers of edible oils,
brokers, traders, plant & machinery manufacturers, clearing & forwarding agents, surveyors,
regional associations etc. With such wide cross section of membership, SEA is a broad based, all
India apex body of solvent extraction industry and at present practically all working solvent
extraction units are its members. The affairs of the Association are being managed by the
Managing Committee, headed by the President. The Association continuously gives feedback to
the members about development taking place in the country and world over by various circulars.
Monthly New circulars, E-Mail & through periodical zonal meetings. SEA was the first
Association in India successfully to launch Website http://www.seaofindia.com to provide up to
date information on trade & industry and statistical data backed by its exhaustive data bank. SEA
is financially autonomous and functions entirely as private sector body.
SEA is the first Association in Vegetable Oil & Oilseed sector and may be one of the few
Associations / Chambers in India to receive quality standard ISO 9001:2000 registration. The
Certification was issued by M/s. Orion Registrar Inc. USA with ANSI-RAB, USA as well as
Russia and Netherlands accreditation.
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Objectives of the Association:

To promote and protect the trade, commerce, manufacturing and exporting, trading and
other activities of the solvent extraction industry.
To encourage and promote the use of solvent extracted oil and their byproducts in India
and abroad and with that aim to publicize, propagate and advocate their uses through
various publicity media including organizing seminars/conventions.
To represent and make known members point of view and the interests of the solvent
extraction industry as a whole before governmental and quasi-governmental authorities
trade or industrial bodies, chambers of commerce, foreign trade and industrial interest
and other organizations.
To establish, promote, operate, maintain, increase and encourage directly or indirect
steady and stable expansion of the export of deoiled cakes/meals and for that purpose to
carry on such activities and implement such schemes by such methods as may be
necessary.
The main purpose of the Association is to foster the development and growth of the
solvent extraction industry in particular and overall development of Veg. oil industry in
the country in order to increase vegetable oil availability in the country, to make the
country self-reliance in vegetable oils to meet the growing demands of the large
population, with scientific outlook.

Growth of the Association:

With the development of Rice bran and Rice bran oil industry in Japan, the Association had a big
role in raising India's Rice bran availability and its extraction facilities. As expelling of Rice bran
was not at all viable, the solvent extraction industry grew very fast scattering all over the country.
And today, the number of units in the country has grown to 600 with varying installed capacities
totaling to 30 million tons. During this period, the shortage of edible oils in the country, led the
Association to explore minor oils for industrial uses to release edible oils for edible purposes.
The amount of oils in these seeds was so low that only solvent extraction process could extract
these oils from such materials. And in the process some minor edible oils like Sal, Mango kernel,
having Cocoa butter like properties, were also made available to the world.
The primary aim was to recover maximum amount of oils from the oil bearing materials.
However, huge stocks of byproduct namely extractions needed to be gainfully disposed of, very
good quality edible materials rich in proteins were made available for human consumption. The
edible extractions not so good for human consumption found the way to animal and poultry feed.
Some were given special detoxification treatments. But our requirements for animal feed is
mainly for milk cattle's, while there is a huge market for animal feed in world over where mutton
consumption is high. This led to opening of export market for our extractions. The solvent
extraction industry has to fulfill the mission to provide sufficient oil and protein for the growing
population and to raise the per capita availability of the oils and proteins from whatever
cultivated vegetable oil seeds and tree borne seeds in the forest. Over the year per capita
consumptions of oils and fats has grown from 4.9 kg in 1960 to 16.5 kg in 2004. The Association
was the canalizing body for export of deoiled Rice bran from 1970-71 to 1983-1984 and has
been a registering authority thereafter until April 1995 for the Ministry of Commerce for exports
of various meals, Rice bran and other extractions, compound cattle feed and poultry feed and
minor oils of tree and forest origin.
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SWOT ANALYSIS
Strengths

Good relationships with the suppliers.

Economies of scale through complete integration.

Customization.

Wide geographical presence.

Weakness

Less productive machines in process.

There are no efforts to improve advertising effectiveness of the company.

No up gradation of Techniques that are used

Lack of CRM.
Opportunities

Changing oil extraction scenario

Global demand of oil extraction machineries.

Price Competitiveness

Cheap Labour

Product Diversification
Threats

Competition from global player

Decline in exports

Cheap import from china ,Bangladesh, Thailand

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Rise in raw material price

WORKING CAPITAL MANAGEMENT

Introduction:
The primary objective of working capital management is to ensure that sufficient cash is
available to:

Meet day-to-day cash flow needs;

Pay wages and salaries when they fall due;
Pay creditors to ensure continued supplies of goods and services;
Pay government taxation and providers of capital as dividends; and
Ensure the long term survival of the business entity.

A company invests its funds for long term purposes and short term operations. That portion of a
companys capital, which is required for minimum stock of raw material to maintain continuity
in production, minimum stock of finished goods to fulfill future demand, payment of wages and
salaries of labors and employees is called Working Capital. In other words, working capital is
that part of the firms capital which is required for financing short term or current assets such as
debtors, inventories, marketable securities and cash.
There are numerous concepts of working capital as given by various accountants, financial
experts, entrepreneurs and economists. Important among them are

Balance Sheet or Traditional Concept

Operating Cycle Concept

ON THE BASIS OF B/S CONCEPT

According to this concept, working capital is calculated on the basis of the balance sheet
prepared at a specific date. It is further classified it two forms- gross and networking capital.

GROSS WORKING CAPITAL

The gross working capital refers to the firms investment in current assets. The sum of current
assets is a quantitative aspect of working capital which emphasizes more on quantity than its
qualities.

NET WORKING CAPITAL

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Net working capital is the difference between the current assets and the current liabilities or the
excess of total current assets over total current liabilities. Net working capital may also be
defined as, that part of a firms current assets which is financed with long term funds.
The net working capital may either be positive or negative. When current assets exceed current
liabilities, working capital is positive and negative when current liabilities exceed current assets.
ON THE BASIS OF TIME
Working capital is the amount required in different forms at successive stages of operation during
the net operating cycle period of an enterprise. The duration or time required to complete the
sequence of events right from purchase of raw materials/goods for cash to the realization of sales
in cash is called the operating cycle or working capital cycle. On the basis of time working
capital may be classified as
o Permanent or regular working capital
o Variable or temporary working capital.

PERMANENT OR REGUALR WORKING CAPITAL

It represents the irreducible minimum amount that is permanently blocked in the business and
cannot be converted into cash in the normal course of business. It has following characteristics

It keeps on changing its form from one current asset to another

The size of working capital grows with the growth of the business
As long as the firm is a going concern, this part of working capital cannot substantially be
reduced.

VARIABLE OR TEMPORARY WORKING CAPITAL

Any amount over and above the permanent working capital is variable or temporary working
capital. It fluctuates as per the change in the production and sale activities.

COMPONENTS OF CURRENT ASSETS AND CURRENT LIABILITIES

CURRENT ASSETS
A. Inventories
Raw Materials
Work In Progress
Value of Incomplete Job
B. Sundry debtors
C. Cash and Bank balance
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D. Loans and Advances

E. other current assets
Total current asset = A+B+C+D+E

CURRENT LIABILITIES AND PROVISIONS

A. Current liabilities
B. Provisions
Total current liability = A+B
Working capital = Current Assets Current Liabilities

CURRENT ASSETS
Current assets are those assets of the company which are either held in the form of cash or can be
easily converted into cash within one accounting period, usually a year. Examples of Current
Assets are:

Cash
Short term investments
Sundry Debtors
Stock
Loans Advances etc.

Valuation of Inventories
Stores and spare parts, loose tools, goods in transit, raw materials and work in progress
are valued at cost
The finished goods including those manufactured by the company are valued at cost of
estimated market value, whichever is lower.
Incomplete job contracts are valued at direct cost incurred on such contracts.
For an individual the current asset are the asset held in form

Cash
Short Term Investments

CURRENT LIABILITIES
Current Liabilities are the liabilities of the company which have to be paid within one accounting
period, usually a year. Examples of Current Liabilities are:

Sundry Creditors

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Bills Payable
Outstanding Expenses
Short Term Loans etc.

For an individual the current liabilities are:

Expenses, loans etc.

Working Capital Management Strategies:

At the time of adopting working capital strategy of a firm, the financial manager should
emphasis on the following two important dimensions of working capital management.

Relative Asset Liquidity (or level of CA) - It is measured by Current Assets to Total Assets ratio.
The greater the ratio the less risky as well as less profitable will be the firm and vice-versa
Relative Financing Liquidity [or level of short term financing (STF)] - It is measured by the short
term financing to total financing ratio. The lower this ratio the less risky as well as less profitable
will be the firm and vice-versa.
In connection with the tradeoff between liquidity, risk and profitability a company may adopt
three types of working capital strategies viz.: (a) conservative strategy, (b) aggressive strategy
and (c) moderate strategy.
The firm following conservative working capital strategy combines a high level of current assets
in relation to sales with a low level of short term financing. Excess amount of current assets
enable the firm to absorb sudden fluctuations in sales, production plans and procurement time
without disturbing the continuity in production. The higher level of current assets reduces the
risk of insolvency. But at the same time lower risk translates into lower profit.
The firm following aggressive working capital strategies, on the other hand, would combine low
level of current assets with a high level of short term financing. This firm will have high
profitability and greater risk of insolvency.
The moderate firm would like to combine moderate level of current assets in relation to sales
with moderate level of short term financing to maintain a fine balance between the risk of
insolvency and profitability.
Thus, the considerations of assets and financial mixes are very much crucial to the working
capital management of a firm.

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RATIO ANALYSIS
INTRODUCTION:
FINANCIAL ANALYSIS
Financial analysis is the process of identifying the financial strengths and weaknesses of the firm
and establishing relationship between the items of the balance sheet and profit & loss account.
Financial ratio analysis is the calculation and comparison of ratios, which are derived from the
information in a companys financial statements. The level and historical trends of these ratios
can be used to make inferences about a companys financial condition, its operations and
attractiveness as an investment. The information in the statements is used by

Trade creditors, to identify the firms ability to meet their claims i.e. liquidity position of
the company.
Investors, to know about the present and future profitability of the company and its
financial structure.
Management, in every aspect of the financial analysis. It is the responsibility of the
management to maintain sound financial condition in the company.

RATIO ANALYSIS
The term Ratio refers to the numerical and quantitative relationship between two items or
variables. This relationship can be exposed as

Percentages
Fractions
Proportion of numbers

Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements. So
that the strengths and weaknesses of a firm, as well as its historical performance and current
financial condition can be determined. Ratio reflects a quantitative relationship helps to form a
quantitative judgment.
STEPS IN RATIO ANALYSIS

The first task of the financial analysis is to select the information relevant to the decision
under consideration from the statements and calculates appropriate ratios.
To compare the calculated ratios with the ratios of the same firm relating to the pas6t or
with the industry ratios. It facilitates in assessing success or failure of the firm.

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Third step is to interpretation, drawing of inferences and report writing conclusions are
drawn after comparison in the shape of report or recommended courses of action.

BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between variables. They enable analyst to draw
conclusions regarding financial operations. The use of ratios as a tool of financial analysis
involves the comparison with related facts. This is the basis of ratio analysis. The basis of ratio
analysis is of four types.

Past ratios, calculated from past financial statements of the firm.

Competitors ratio, of the some most progressive and successful competitor firm at the
same point of time.
Industry ratio, the industry ratios to which the firm belongs to
Projected ratios, ratios of the future developed from the projected or pro forma financial
statements

NATURE OF RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements. It is the
process of establishing and interpreting various ratios for helping in making certain decisions. It
is only a means of understanding of financial strengths and weaknesses of a firm. There are a
number of ratios which can be calculated from the information given in the financial statements,
but the analyst has to select the appropriate data and calculate only a few appropriate ratios. The
following are the four steps involved in the ratio analysis.

Selection of relevant data from the financial statements depending upon the objective of
the analysis.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios with the ratios of the same firm in the past, or the
ratios developed from projected financial statements or the ratios of some other firms or
the comparison with ratios of the industry to which the firm belongs.

INTERPRETATION OF THE RATIOS

The interpretation of ratios is an important factor. The inherent limitations of ratio analysis
should be kept in mind while interpreting them. The impact of factors such as price level
changes, change in accounting policies, window dressing etc., should also be kept in mind when
attempting to interpret ratios. The interpretation of ratios can be made in the following ways.

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Single absolute ratio

Group of ratios

Historical comparison
Projected ratios
Inter-firm comparison

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS

The calculation of ratios may not be a difficult task but their use is not easy. Following
guidelines or factors may be kept in mind while interpreting various ratios are

Accuracy of financial statements

Objective or purpose of analysis
Selection of ratios
Use of standards

IMPORTANCE OF RATIO ANALYSIS

Aid to measure general efficiency

Aid to measure financial solvency
Aid in forecasting and planning
Facilitate decision making
Aid in corrective action
Aid in intra-firm comparison
Act as a good communication
Evaluation of efficiency
Effective tool

LIMITATIONS OF RATIO ANALYSIS

Differences in definitions
Limitations of accounting records
Lack of proper standards
No allowances for price level changes
Changes in accounting procedures
Quantitative factors are ignored
Limited use of single ratio
Background is over looked
Limited use
Personal bias

CLASSIFICATIONS OF RATIOS
The use of ratio analysis is not confined to financial manager only. There are different parties
interested in the ratio analysis for knowing the financial position of a firm for different purposes.
Various accounting ratios can be classified as follows:

Traditional Classification
Functional Classification

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Significance ratios

Traditional Classification

Balance sheet (or) position statement ratio: They deal with the relationship between two
balance sheet items, e.g. the ratio of current assets to current liabilities etc., both the items
must, however, pertain to the same balance sheet.
Profit & loss account (or) revenue statement ratios: These ratios deal with the relationship
between two profit & loss account items, e.g. the ratio of gross profit to sales etc.,
Composite (or) inter statement ratios: These ratios exhibit the relation between a profit &
loss account or income statement item and a balance sheet items, e.g. stock turnover ratio,
or the ratio of total assets to sales.

Functional Classification
These include liquidity ratios, long term solvency and leverage ratios, activity ratios and
profitability ratios.
Significance ratios
Some ratios are important than others and the firm may classify them as primary and secondary
ratios. The primary ratio is one, which is of the prime importance to a concern. The other ratios
that support the primary ratio are called secondary ratios.
In the view of functional classification the ratios are,
1. Liquidity ratio
2. Leverage ratio
3. Activity ratio
4. Profitability ratio

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LIQUIDITY AND PROFITABILITY TRADEOFF:

Liquidity and profitability-risk trade-off may be discussed in the light of firm's net working
capital position. The level of net working capital of a firm has a bearing on its liquidity,
profitability as well as non-insurable risk and uncertainty.
Liquidity is a two-dimensional concept time and risk. Time dimension of liquidity is
concerned with the speed of convertibility of different current assets (other than cash) into cash.
Risk dimension of liquidity indicates the degree of certainty about the conversion of current
assets into cash without suffering any loss or with as little sacrifice in price as possible.
The term 'Profitability' used in this context is measured by profit after expenses. It is expressed
as the ratio of profit after expenses to the invested capital (i.e. Fixed Asset + Net Working
Capital). In the light of profitability of a firm the risk may be understood as the probability of
technical insolvency.
Technical insolvency occurs whenever a firm is unable to meet its cash obligations when they
become due for payment. This risk of becoming technically insolvent is measured by detailed
analysis of any change in the level of current assets and current liabilities (i.e. the change in the
Net Working Capital).
Any change in Net Working Capital brings about a considerable change in the quantum of profit
after expenses of the firm. The evaluation of profitability-risk trade off in relation to NWC is
based on the following three assumptions:
1. The firm under consideration is a manufacturing firm;
2. Current assets of the firm are less profitable than non-current assets; and
3. Short term financing is less costly than the long term financing.
Under these assumptions, the tradeoff can be identified by using the ratio of current assets to
total assets (CATA) which indicates the percentage of current assets in total assets. The higher
the ratio of CATA the lower will be the profitability and risk and vice-versa. This trade off can
also be demonstrated by using the ratio of current liabilities to total assets (CLTA). This ratio
reflects the percentage of total assets financed by current liabilities. The higher the ratio of
CLTA, the higher will be the profitability and risk and vice-versa. The combined effect of these
two ratios reflects the true profitability-risk trade off of a firm.

Multiple Regression Analysis:

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Multiple regression is used to find out the relationship between one dependent variable which is
model and number of Independent variables known as parameter estimates. It statistical
technique that uses several explanatory variables to predict the outcome of a response variable.
The goal of multiple linear regression (MLR) is to model the relationship between the
explanatory and response variables.
The model for MLR, given n observations, is:
yi = B0 + B1xi1 + B2xi2 + ... + Bpxip + Ei where i = 1,2... n
MLR takes a group of random variables and tries to find a mathematical relationship between
them. The model creates a relationship in the form of a straight line (linear) that best
approximates all the individual data points.
MLR is often used to determine how many specific factors such as the price of a commodity,
interest rates, and particular industries or sectors, influence the price movement of an asset. For
example, the current price of oil, lending rates, and the price movement of oil futures, can all
have an effect on the price of an oil company's stock price. MLR could be used to model the
impact that each of these variables has on stock's price.
In this study Multiple Regression is used to find out the tradeoff between Profitability and
Liquidity in SAS 9.2.

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DATA ANALYSIS:
WORKING CAPITAL MANAGEMENT
YEAR
ICP
DCP
GOC
CCP
NOC

200
6
159
142
302
250
52

200
7
120
208
328
256
72

2008

2009

2010

2011

2012

2013

2014

63
135
199
144
55

78
155
233
168
65

20
61
82
62
20

11
71
82
98
-16

98
211
309
293
17

100
58
159
111
48

117
46
163
119
44

Inventory Conversion Period (ICP): It is the average time to convert raw materials into
finished goods. It is calculated by dividing average inventory opening stock of the current year
and closing stock of the by total expenses/365. There was increase and decrease in the inventory
Conversion Periods. Since TEPL is a manufacturing company they have to customize the
products and make the products according to the client requirements and it also depends on
which type of project they have undertaken.
Debtor Conversion Period (DCP): It is the total time taken to sell a product and receive the
amount. Most of the companies sell their product on credit. In TEPL assuming 100% credit sales
the debtor conversion period is calculated. DCP is calculated by dividing average debtors of
current and last year by total credit sales/365. The DCP was very much high in the year 2012,
2009, 2007, 2006 because of the average debtors of those years were very much higher
compared to other years and the company does not follow any strict credit policy.
Gross Operating Cycle (GOC): It is the total time taken to convert raw materials into finished
goods and sell the product and receive the amount. It is the addition of Inventory conversion
period and Debtors conversion period.
Creditor Conversion Period (CCP): It is the average time taken to pay your purchasers. It is
calculated by dividing average creditors of current and last year by total credit purchases/365. In
TEPL the CCP was highest in the year 2012, 2006 and 2007 due to increase in the average credit
purchases in the year 2011.The company used to pay the creditors first and then receive the
amount from debtors.

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Net Operating Cycle (NOC): It is the difference between Gross Operating Cycle and Creditors
Conversion Period that is the average time taken to convert raw materials into finished goods and
sell the goods, receive the amount minus the average time taken to pay the creditors. In TEPL the
NOC is positive all the years that means the company is paying creditors first and then receiving
the amount from
Year
Current Ratio
debtors which can
2006
1.08
affect the liquidity
2007
1.19
of the company. In
2008
1.13
the year 2011 the
2009
1.26
NOC was negative
2010
1.12
which means the
company received
2011
1.11
the amounts from
2012
1.63
debtors first and
2013
1.27
then paid to the
2014
1.39
creditors which is
good for the company. The company has to borrow short term loans in order to protect the
liquidity till the payment of the debtors are made

RATIO ANALYSIS:
LIQUIDITY RATIOS:

Current Ratio: It is calculated by dividing current assets to the current liabilities

Interpretation

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As a rule, the current ratio with 2:1 (or) more is considered as satisfactory position of the firm.
There is an increase in the current ratio due to increase in the inventories and trade receivables in
the current asset and decrease in the other current liabilities for tax from 2006 to 2009. The
sundry debtors have increased compared to the year 2006. The increase in sundry debtors
resulted an increase in the ratio and decrease of the ratio in 2010 and 2011 is due to increase in
current liabilities. The ratio is still below the bench mark of 2:1 which shows the company is less
liquid.

GRAPHICAL REPRESENTATION:

Quick Ratio:
It is calculated by dividing (current assets-Inventories) with current liabilities. It shows that how
the current assets other than inventories are able to meet current liabilities, since inventories take
longer time to convert into cash.

Year
2006
2007
2008
2009
2010
2011
2012
2013
2014

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Quick Ratio
0.68
0.97
0.83
0.98
1.03
1.04
1.06
0.88
0.76

Interpretation: Quick assets are those assets which can be converted into cash within a short
period of time, say to six months. So, here the inventories which are with the long period does
not include in the quick assets.
The Ratio increased from 2006 to 2011 due to less current liabilities and inventories compared to
other years. The Quick ratio is decreased from 2012 to 2014 because the inventories which
cannot be readily converted into cash has been increased.
GRAPHICAL REPRESENTATION:

Quick ratio
1.06
0.88
0.76

1.04

1.03

0.98

0.97
0.83
0.68
0.51

Net working capital: It is calculated by taking the difference between the current assets and
current liabilities.

Year
2006
2007
2008
2009
2010
2011
2012
2013
2014

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Net working capital

879793
1270391
1400744
2394202
4173965
4515102
14611210
9995432
8186257

Interpretation:
The Net working capital shows whether the companys current assets are exceeding current
liabilities or not. If Net working capital is positive then the liquidity position is good.
In TEPL the Net working capital is positive all the years and it is increasing till 2012 due to
increase in current assets and decrease in current liabilities and vice versa in the years 2013 and
2014.

GRAPHICAL REPRESENTATION:

Net working capital

Interval Measure: It is calculated by dividing Quick assets (current assets-inventories) with

average daily Expenses.

Year
2006
2007
2008
2009
2010
2011
2012
2013
2014

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Interval Measure
304
253
241
245
253
163
293
236
136

Interpretation: It shows that for how many days Quick assets (current assets excluding
inventories) are able to meet average daily operating expenses. The interval Measure is high in
all the year from 2006 to 2014.

GRAPHICAL REPRESENTATION:

Interval Measure

CAPITAL STRUCTURE RATIOS:

Debt Equity ratio: It is calculated by dividing total debt with Shareholders equity.

Year
2006
2007
2008
2009
2010
2011
2012
2013
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Debt Equity Ratio

1.27
1.44
1.24
1.12
1.23
0.41
1.01
0.22

2014

2.82

Interpretation:
This ratio shows how much debt is over shareholders equity. If the ratio is greater than 1 it means
the debt is higher than the equity which effects the liquidity of the company. However in TEPL
the debt is taken from their own directors and there is no interest paid to them, so it is safe for the
company.

GRAPHICAL REPRESENTATION:

Debt equity ratio

Proprietary ratio: It is calculated by dividing Shareholders fund with the Total assets.

Year
2006
2007
2008
2009
2010
2011
2012
2013
2014
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Proprietary ratio
0.06
0.09
0.08
0.13
0.06
0.11
0.22
0.21
0.09

Interpretation
The proprietary ratio establishes the relationship between shareholders funds to total assets. It
determines the long-term solvency of the firm. This ratio indicates the extent to which the assets
of the company can be last without affecting the interest of the company.
There is no increase in the shareholders capital from the year 2006. The shareholders funds
include capital and reserves and surplus. The reserves and surplus is decreased due to the
decrease in balance in profit and loss account, which is caused by the decrease of income from
services from 2009 to 2011 and increase of ratio from 2011 to 2012 is because of increase in
current assets (trade receivables).
Total assets, includes fixed and current assets. The fixed assets are reduced because of the
depreciation and there are no major increments in the fixed assets. The current assets are
decreased from 2013 to 2014 due to which the total assets have been decreased because of
decrease in trade receivables which resulted a decrease in the ratio than older.
GRAPHICAL REPRESENTATION:

Propriety ratio

Fixed Asset Ratio: It is calculated by dividing Fixed Assets to the total Capital Employed.

Year
2006
2007
2008
2009
2010
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Fixed Asset Ratio

0.48
0.35
0.44
0.28
0.27

2011
2012
2013
2014

0.29
0.10
0.03
0.03

Interpretation: This ratio indicates how much of the fixed assets are used to the total capital
employed. In TEPL the ratio is decreased from 2011 to 2014. It indicates that out of total capital
employed only a minor portion of amount is kept in fixed assets which effects the operating
Efficiency of the company.
GRAPHICAL REPRESENTATION:

Fixed asset ratio

PROFITABILITY RATIOS:
Net profit ratio: It is calculated by dividing Net profit to the Net sales.

Year
2006
2007
2008
2009
2010
2011
2012
2013
30 | P a g e

Net profit Ratio

0.004
0.01
0.02
0.03
0.02
0.03
0.1
0.03

2014

0.03

Interpretation:
The net profit ratio is the overall measure of the firms ability to turn each rupee of income from
services in net profit. If the net margin is inadequate the firm will fail to achieve return on
shareholders funds. High net profit ratio will help the firm service in the fall of income from
services, rise in cost of production or declining demand.
The net profit ratio has been increased from 2011 to 2012 due to decrease in the purchase of
stock (which is an expense) and overall profit has been increased due to decrease in expenses
which resulted in the increase of the ratio. Similarly due to increase in expenses which resulted
in the decrease of the net profit the ratio from 2012 to 2013.And also the low ratio from 2006 to
2010 is due to high expenses.

GRAPHICAL REPRESENTATION:

Net profit marigin

Earnings per Share: It is calculated by dividing net profit by total number of shares.

31 | P a g e

Year
2006
2007
2008
2009
2010
2011
2012
2013
2014

Earnings per share

4
5
31
45.52
98
296
363
127
124

Interpretation:
Earnings per share ratio are used to find out the return that the shareholders earn from their
shares. After charging depreciation and after payment of tax, the remaining amount will be
distributed by all the shareholders.
Net profit after tax is decreased due to the decrease in the net sales and huge increase in the
expenses. That is the amount which is available to the shareholders to take. There are 10000
shares of Rs.10/- each. The share capital is constant from the year 2011. Due to the increase in
net profit the earnings per share is increased from 2006 to 2012. And decrease in the Net profit
and increase in the expenses resulted in the decrease of the EPS in 2013 and 2014.
GRAPHICAL REPRESENTATION:

EPS

Return on Total Assets: It is calculated by dividing Net profit with total assets.

32 | P a g e

Year
2006
2007
2008
2009
2010
2011
2012
2013
2014

Return on Total assets

0.003
0.006
0.024
0.036
0.024
0.059
0.088
0.026
0.039

Interpretation:

This is the ratio between net profit and total assets. The ratio indicates the return on total assets in
the form of profits.
The net profit is increased in the year 2011 and in 2012 due to increase in profits and decrease in
total assets due to depreciation and in 2013 there was a decrease in net profit and increase in total
assets compared to 2012. The fixed assets are reduced due to the charge of depreciation and
increments in fixed assets but the current assets are increased because of sundry debtors and that
effects an increase in the ratio compared with the last year i.e. 2011.
GRAPHICAL REPRESENTATION:

Return on assets

TURNOVER RATIOS:
Fixed assets turnover ratio (FATR): This ratio is calculated by dividing Net sales with fixed
assets.
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Year

FATR

2006

11.21

2007

13.55

2008

12.80

2009

14.97

2010

31.44

2011

45.57

2012

18.11

2013

33.75

2014

29.64

Interpretation:
Fixed assets are used in the business for producing the goods to be sold. This ratio shows the
firms ability in generating sales from all financial resources committed to total assets. The ratio
indicates the account of one rupee investment in fixed assets.
The income from services is very much higher in the year 2011 and it has reduced in the year
2012 due to decrease in the net sales.
GRAPHICAL REPRESENTATION:

Fixed asset turn over ratio

Total assets turnover ratio (TATR): It is calculated by dividing Net sales to the Total assets.
34 | P a g e

Year

TATR

2006

0.71

2007

1.06

2008

1.07

2009

1.11

2010

1.19

2011

2.04

2012

0.84

2013

1.03

2014

1.38

GRAPHICAL REPRESENTATION:

Total asset turnover ratio

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Liquidity and Profitability Analysis:

In the following table the relationship between liquidity and profitability is analyzed with the
help of rank correlation.
Source: Financial statements of TEPL (calculated values)
Year
2006

CA

TA
12240646

CE

EBIT

13064444

13064444

CATA%
100769

Rank on
CATA(x1)

Return on
CE%

93.69

Rank on
ROCE(x2
)

d2=(x1x2)2

0.5

25
1

2007

8001458

8686469

1955402

99629

92.11

2.6

2008

11629986

12561571

2506725

454536

92.58

12.5

2009

12101431

13207411

3325787

670157

91.63

13.7

36

2010

38605820

39537405

5686767

1434749

97.64

17.2

2011

46903137

50178137

50178137

4307517

93.47

5.9

2012

37681880

41436517

41436517

5307045

90.94

8.8

25

2013

46557628

49247791

49247791

1875023

94.54

2.6

16

2014

29115333

31905685

31905685

1794512

91.25

0.4

4
112

The relationship between liquidity (measured by Current assets to Total assets (CATA)) and
profitability (measured Return on Capital Employed (ROCE)) of TEPL over the period of 9 years
is presented in above table. This relationship is established by using Spearman's Rank
Correlation Coefficient.
Spearmans Rank Correlation Coefficient:
Spearmans Rank correlation coefficient is used to identify and test the strength of a relationship
between two sets of data. It is often used as a statistical method to aid with either proving or
disproving a hypothesis
The rank correlation between Current assets to Total assets (CATA) and Return on Capital
Employed (ROCE) is computed by applying the formula
r (rank) =1-(6 sigma(d2)/n(n2-1) where d=difference in rank and n = number of pairs of
observations.
Putting the respective values of d and n in rank correlation formula above we obtain r = 0.067
which indicates that there is a low positive correlation between liquidity and profitability of the
company.
To find out the significance of the above result we test the hypothesis as under:
Null Hypothesis: There is significant no direct relationship between Liquidity and Profitability
of TEPL i.e. p=0.

36 | P a g e

Alternate Hypothesis: There is significant direct relationship between Liquidity and

Profitability of TEPL i.e. p0
tp,n-2=r*under root (n-2)/under root (1-r2)
By substituting the values of n=9 and r=0.067 we get t=0.18.
Since computed value of t (0.18) is less than the table value of t (i.e. 2.365 at 5% level and 3.499
at 1% level of significance), the null hypothesis, H0: p=0 is accepted both at 5% and 1% level of
significance and thus, the alternative hypothesis, H1:p 0 is rejected both at 95% and 99% level
of confidence. Therefore, we may conclude that there is no direct significant relationship
between liquidity and profitability of the firm under study. This relationship is not statistically
significant both at 5% and 1% level.

Multiple Regression Analysis:

In order to find out the influence of liquidity ratios under consideration on profitability of the
firm the following linear multiple regression model is used where Dependent variable is y and
independent variables are (x1, x2, x3, x4, x5, x6)
y = Return on Capital Employed (ROCE),
x1= Current Ratio (CR),
x2= Quick Ratio (QR),
x3= Current assets to Total assets (CATA),
x4= Working Capital Turnover Ratio (WCTR),
x5= Inventory Turnover Ratio (ITR) and
x6= Debtors Turnover Ratio (DTR).
In this study CR, QR, CATA, WCTR, ITR and DTR have been taken as the explanatory variables
and ROCE has been used as the dependent variable.
For selecting the explanatory variables the correlation matrix is constructed giving the
correlation coefficients between the explanatory variables and the dependent variables. It
revealed that there is a strong correlation between all the variables and are used in multiple
regression analysis.

37 | P a g e

Liquidity and Profitability Analysis by Using Linear Multiple Regression.

Year
2006
2007
2008
2009
2010
2011
2012
2013
2014

Retur
n on
CR(x1 QR(x ROTA(X WCTR(x ITR(x DCR(x
CE(y) )
2)
3)
4)
5)
6)
0.005
0
1.8
0.68
0.003
10.49
2.13
2.39
0.026
0
1.19
0.97
0.006
7.35
3.06
1.75
0.125
0
1.13
0.83
0.024
10.11
6.03
2.69
0.137
0
1.26
0.98
0.036
5.82
4.85
2.353
0.172
0
1.12
1.03
0.024
11.39 16.75
5.93
0.059
0
1.11
1.04
0.059
22.62 32.21
5.13
0.088
0
1.63
1.06
0.088
2.38
4.25
1.72
0.026
0
1.27
0.88
0.026
5.07
3.67
6.24
0.004
0
1.39
0.76
0.039
5.39
3.22
7.85

The multiple regression equation is

Y=b0+b1x+b2x2+b3x3+b4x4+b5x5+b6x6 where b1, b2, b3, b4, b5, b6 are the coefficients of x1,
x2,x3,x4,x5,x6 respectively
The Multiple Regression is performed by using SAS 9.2 version and by writing the code
The code used was:
(Proc reg data= work. Analysis;
Model ROCE=CR QR CATA WCTR ITR DCR;
run;
quit;)
Here Analysis is the Input Data set and Work is the Temporary Location of storing Data
files and when the regression was performed the output was as follows

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From the output, the multiple regression equation is

Y=3.43-0.26x1-2.32x2-4.23x3-0.13x4+0.09x5-0.09x6
R-squared: It is a statistical measure of how close the data are to the fitted regression line. It is
also known as the coefficient of determination, or the coefficient of multiple determination for
multiple regression.
The definition of R-squared is fairly straight-forward; it is the percentage of the response
variable variation that is explained by a linear model. Or:
R-squared = Explained variation / Total variation
R-squared is always between 0 and 100%:

0% indicates that the model explains none of the variability of the response data
around its mean.
100% indicates that the model explains all the variability of the response data around
its mean.

R2 in this model is 98.16% which indicates that 98.16% of variation in dependent variable Return
on Capital Employed is explained by the six Independent variables (Current Ratio (CR), Quick
39 | P a g e

Ratio (QR), Return on Total Assets (ROTA), Working capital Turnover Ratio (WCTR), Inventory
Turnover Ratio (ITR) and Debtors Conversion Ratio (DCR))
You can calculate a regression equation by using the same number of data points as you have
equation coefficients. However, the regression equation will not be as universal as a regression
equation calculated using three times the number of data points as equation coefficients.
Adjusted R2: To correct the R2 for such situations, an adjusted R2 takes into account the degrees
of freedom of an equation. When you suspect that an R2 is higher than it should be, calculate the
R2 and adjusted R2. If the R2 and the adjusted R2 are close, then the R2 is probably accurate. If
R2 is much higher than the adjusted R2, then probably model do not have enough data points to
calculate the regression accurately.
The formula for adjusted R2:
Adjusted R2 = 1-(1-R2) ((n-1)/(n-m-1))
Where n is the number of data points and m is the number of independent variables.
Then in the output the t value for all the independent variables or Parameter estimates is greater
than 1.96 at 95% Level of Significance. It indicates that all the independent variables are
significantly contributing in explaining the dependent variable.
The multiple correlation coefficient of ROCE on CR, QR, CATA, WBTR, ITR and DTR is 0.98
which reveals that the profitability of the firm was highly influenced by those explanatory
variables. The value of R2 indicates that the explanatory variables taken together contributed
about 98% of the variations in the profitability of the company. The regression analysis results
also show that goodness of fit of the regression equation is statistically significant at 5% level.

40 | P a g e

FINDINGS AND CONCLUSIONS FROM THE STUDY

The working capital management of the company is analyzed and found that the
company does not follow any strict credit policies and all the products are customized.
The Gross operating cycle and Net operating cycles depend on the type of project they
have undertaken.

From the Liquidity ratios it is found that the company is less liquid maintaining current
ratio less than 2 and Quick ratio less than 1 which will affect the solvency of the company
in long term.

From the financial statements it is found that debt is provided by the company directors
without charging an Interest.

From the Profitability ratios it was found that the companys profit is fluctuated based on
the demand for the products and the profit was increasing from 2006 and there was a
tremendous increase in the EPS of the company.

Then the relation between Liquidity and Profitability of TEPL by using Spearmans Rank
Correlation Coefficient and by t- test it was found that there was no significant direct
relationship between liquidity variable (Current assets to the Total assets) and
Profitability variable (Return on Capital Employed).

Then by forming multiple regression between profitability variable (Return on Capital

Employed) and the six Independent liquidity variables (Current Ratio (CR), Quick Ratio
(QR), Return on Total Assets (ROTA), Working capital Turnover Ratio (WCTR),
Inventory Turnover Ratio (ITR) and Debtors Conversion Ratio (DCR)) and found that the
multiple correlation coefficient of ROCE on CR, QR, CATA, WBTR, ITR and DTR is
0.98 which reveals that the profitability of the firm was highly influenced by those
explanatory variables.

41 | P a g e

RECOMMENDATIONS:
The company should keep on revising its Credit Policy which will help companys effort
to correct the course of the policies and it should tighten its credit policies to the
customers.
The top management should make modifications to the procedural guidelines required for
implementation of the Credit Policy as they may become necessary from time to time on
account of organizational needs.
The company has to invest more in the fixed assets in order to increase their operational
efficiency.
The company should spend in advertisements effectiveness
The company need to increase their workforce especially in sales to acquire bigger chunk
of the market.
The company need to invest and update its IT infrastructure for speedy process.
The company should implement Customer Relationship Management (CRM) as they
have to provide after sales service.
Automated Inventory Management techniques should be updated for easy management of
inventory.
The optimum level of current assets must be maintained in order to minimize the risk of
ideal cash and at the same time protecting its long term solvency.
A separate department for the management of receivables should be established.

REFERENCES:
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BOOKS
1. Financial management , I M Pandey
2. Financial Management, Prasanna Chandra
3. Corporate Finance, Ivo Welch

PUBLISHED PAPERS/REPORTS
1. A Liquidity Profitability model for Working Capital Management , Mihir Das and Rani
Hanuman
2. Linear Goal Programming and its solutions
3. Liquidity Management and Profitability of listed Manufacturing Companies
4. Concepts and Approaches of Working Capital Management
5. Annual Reports of the company
6. http://www.greatlakes.edu.in/pdf/Herald/Vol4/Impactofworkingcapitalmanagementonliquidityprofitability
andnon-insurableriskanduncertaintybearing.pdf

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