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“A STUDY ON WORKING CAPITAL MANAGEMENT OF

ITC LTD”

Project report submitted to

CHRIST COLLEGE (AUTONOMOUS), IRINJALAKUDA

In partial fulfillment of the requirements for the award of degree of

BACHELOR OF COMMERCE

Submitted by

MALAVIKA M M

(Reg. No:CCATBCM062)

Under the guidance of

Prof. MUVISH K M

POST GRADUATE & RESEARCH DEPARTMENT OF

COMMERCE CHRIST COLLEGE (AUTONOMOUS),

IRINJALAKUDA

UNIVERSITY OF CALICUT

MARCH 2022
CERTIFICATE

This is to certify that the project entitled “A STUDY ON WORKING CAPITAL


MANAGEMENT OF ITC LTD” is a bonafide record of project done by MALAVIKA M M,
Reg. No CCATBCM062, under my guidance and super vision in partial fulfillment of the
requirement for the award of the degree of BACHELOR OF COMMERCE and it has not
previously formed the basis of any Degree, Diploma, and Associateship or Fellowship.

Dr. Josheena Jose Prof. Muvish K M

(Head of the department) (Project guide)


DECLARATION

I, MALAVIKA M M, here by declare that the project work entitled” A STUDY ON WORKING
CAPITAL MANAGEMENT OF ITC LTD” is a record of independent and bonafide project
work carried out by me under the supervision and guidance of Prof. MUVISH K M, Asst.
Professor, Research Department of Commerce, Christ College, Irinjalakuda.

The information and data given in this report is authentic to the best of my knowledge. The
report has not been previously submitted for the award of any Degree, Diploma, Associateship or
other familiar title of any other university or institute.

PLACE: IRINJALAKUDA MALAVIKA M M

DATE: 24/03/2022 CCATBCM062


ACKNOWLEDGEMENT

I would like to take the opportunity to express my preferred thanks and gratitude to all people
who have helped me with sound advice and able guidance. Above all, I express my eternal
gratitude to the lord Almighty under whose divine guidance; I have been able to complete this
work successfully.

I would like to express my sincere obligation to Rev.Dr. Jolly Andrews, College Principal for
providing various facilities. I am thankful to Dr. Josheena Jose, Head of the Department, for
providing proper help and encouragement in the preparation of this report.

I express my sincere gratitude to Prof. Muvish K M, whose guidance and support throughout the
training period helped me to complete this work successfully.

I would like to express my preferred gratitude to all the faculties of the department for their
interest and cooperation in this regard.

I extent my hearty gratitude to the librarian and other library staff of my college for their
wholehearted cooperation.

I express my sincere thanks to my friends and family for their support in completing this report
successfully.

PLACE: IRINJALAKUDA MALAVIKA M

M DATE: 24/03/2022 CCATBCM062


TABLE OF CONTENTS

SL NO. TITLE PAGE NO.

1. LIST OF TABLES

2. LIST OF DIAGRAMS

3. CHAPTER 1-INTRODUCTION 1-6

4. CHAPTER 2-REVIEW OF LITERATURE 7-14

5. CHAPTER 3-THEORETICAL FRAMEWORK 15-26

CHAPTER 4-DATA ANALYSIS AND


6. 27-42
INTERPRETATION

CHAPTER 5-FINDINGS,SUGGESTIONS AND


7. 43-45
CONLUSIONS

8. BIBLIOGRAPHY 46-47

9. APPENDIX 48-50
LIST OF TABLES

TABLE NO. TITLE PAGE NO.

4.1 Components of Current Assets 28

4.2 Current ratio 29

4.3 Quick Ratio 30

4.4 Absolute Liquid Ratio 31

4.5 Gross Profit Ratio 32

4.6 Operating Profit Ratio 33

4.7 Operating Ratio 34

4.8 Net Profit Ratio 35

4.9 Return on Investments 36

4.10 Return on Total Assets 37

4.11 Return on Shareholders Fund 38

4.12 Inventory Turnover Ratio 39

Working Capital Turnover


4.13 40
Ratio

4.14 Cash Flow Statement 41

4.15 Trend analysis 42


LIST OF DIAGRAMS

DIAGRAM NO. TITLE PAGE NO.

Components of Current
4.1 28
Assets

4.2 Current ratio 29

4.3 Quick Ratio 30

4.4 Absolute Liquid Ratio 31

4.5 Gross Profit Ratio 32

4.6 Operating Profit Ratio 33

4.7 Operating Ratio 34

4.8 Net Profit Ratio 35

4.9 Return on Investments 36

4.10 Return on Total Assets 37

Return on Shareholders
4.11 38
Fund

4.12 Inventory Turnover Ratio 39

Working Capital Turnover


4.13 40
Ratio

4.14 Trend Analysis 42


CHAPTER 1

INTRODUCTION

1
INTRODUCTION

The primary area of a business is Finance. It is one of the most important functional areas
because finance is essentially the lifeblood of businesses. It is the key factor in the establishment
and success of any concern. Every business need funds for two purposes -for its establishment
and to carry out its day-to-day operations. The most effective utilization of capital requires the
establishment of sound and stable management policies.

Capital required for a concern can be classified in two, fixed capital and working capital. Fixed
capital enables production capacity. Funds that are invested in current assets are known as
working capital. Working capital is necessary to carry on the smooth running of business.
Working capital refers to that part of the firm capital, which is required for financing short term
or current assets such as cash, receivables and inventories. The need for working capital arises
due to the time gap between production and realization of cash from sales. Working capital
management is concerned with management of current assets. One aspect of the working capital
management is the trade-off between profitability and risk. If the firm does not have adequate
working capital, it may become illiquid and constantly may not have the ability to meet its
current obligations. Current assets and current liabilities are adversely affected in the
profitability. Ensure a trade-off between profitability and liquidity is one of the major
dimensions of working capital management. Adequate and appropriate working capital financing
ensures that the firm has sufficient cash flows to pay its bills, as if a wait the full collection of
revenue. Every business concern is needed adequate working capital to run its business.
Adequate working capital is maintained the solvency and creating the goodwill of the company.
It creates the environment security, confidence, and high morale and overall efficiency of the
business. Working capital management of a firm has a great effect in its profitability, liquidity
and structural health of the organization. Proper management of working capital is essential for
every business.

Based on this reasoning, this study is a keen attempt to analyse working capital management of
ITC Ltd. The study of working capital management will be helpful for the organization to know
its liquidity position.

2
INDUSTRY AND COMPANY PROFILE

Industry profile

A conglomerate is a multi-industry company. It is a combination of multiple business entities


operating in entirely different industries under one corporate group, usually involving parent
company and many subsidiaries. Conglomerates are often large and multinational.

The conglomerate fad of the 1960s : During the 1960s, the United States was caught up in a
“conglomerate fad which turned out to be a form of speculative mania. Due to a combination of
low interest rates and a repeating bear-bill- market, conglomerates were able to buy smaller
companies in leveraged buyouts (sometimes at temporarily deflated values). Famous examples
from the 1960s include Ling-Temco-V, ITT Corporation, Litton Industries, Textron, and
Teledyne. In 1968, the peak year of the conglomerate fad, U.S. corporations completed a record
number of mergers: approximately 4,500. In that year, at least 26 of the country’s 500 largest
corporations were acquired, of which 12 had assets in excess of $250 million.

A conglomerate creates an internal capital market if the external one is not developed enough.
Through the internal market, different parts of conglomerate allocate capital more effectively. A
conglomerate can show earnings growth, by acquiring companies whose shares are more
discounted than its own. In fact, Teledyne, GE, and Berkshire Hathaway have delivered high
earnings growth for a time.

The era of License Raj (1947-1990) in India created some of Asia’s largest conglomerates, such
as the Tata Group, Kirloskar Group, Larsen & Toubro, Mahindra Group, Sahara India, ITC
Limited, Essar Group, Reliance ADA Group, Reliance Industries, Aditya Birla Groupvand the
Bharti Enterprises.

Company profile

ITC Limited is an Indian conglomerate company headquartered in Kolkata, West Bengal. It was
established in 24 August, 1910 at Kolkata, India. ITC has a diversified presence across
industries. Its four primary interests are Fast Moving Consumer Goods (cigarettes and cigars,
food, and personal care products); Luxury Hotels; Paperboard, Paper, and Packaging; and Agri
Business (leaf tobacco, commodities, spices). Its major brands include Classic, Gold Flake,
American Club, Navy Cut (cigarettes), Sunfeast, and Paperkraft (food and supplies); Dermafique
and Fiama (personal care). It’s also parent to one of India’s biggest technology businesses, ITC
Infotech. In 2010, ITC launched its hand-rolled cigars, Armenteros, in the Indian market. The
company is acknowledged as one of the India's most valuable business corporations with a Gross
3
sales value Rs.76,091.31 crore and net profit of RS.15,136.05 crores. ITC has ranked as India's
most admired company, according to survey conducted by Fortune India.

Vision

Indian tobacco company Limited vision is that India’s most valuable corporations through world
class performance, creating growing value for the Indian economy and the company’s
stakeholders.

Mission

ITC Limited mission is to enhance the wealth generating capability of the enterprise in a
globalising environment, delivering superior and sustainable stakeholder value.

Values

Indian tobacco company Limited values are as follows:

 Innovation
 Trusteeship
 Respect for people
 Nation orientation
 Customer focus
 Excellence

Objectives of the ITC Company

 Producing high quality products.


 Serving customer in a better and proper way.
 Introducing high advanced products.
 Widening the scope of products in all areas.

STATEMENT OF PROBLEM

Today financial soundness and profitability of businesses is based on their working capital
management. If there is insufficiency in working capital there will not be any funds for meeting
the company’s day to day requirements. If there is oversufficiency in working capital company’s
profit will be locked up in that. So, it is necessary to identify whether the company is managing
the working capital efficiently. This study is to analyse whether ITC Ltd is managing the
working capital efficiently.

4
OBJECTIVES OF THE STUDY

1. To study the structure of working capital.


2. To analyse the working capital management of ITC Limited.
3. To give suggestions to improve the performance of working capital management of ITC
Limited.

SCOPE OF THE STUDY

The present study is restricted to ITC Ltd. The study focuses on the working capital management
of ITC Ltd. The study is mainly based on secondary data.

RELEVANCE OF THE STUDY

The findings of the study will be useful to the authorities for improving the efficiency of
working capital management because working capital is an important area of financial
management.

RESEARCH METHODOLOGY

The study is based on secondary data collected from annual report of the company. The study is
partly descriptive and partly analytical in nature as efforts are taken to describe the various areas
of working capital management in ITC Ltd.

PERIOD OF STUDY

The study is confined to a period of five years from 2016-2017 to 2020-2021.

DATA COLLECTION

The secondary data is collected from the published annual documents and the website of ITC
Ltd.

TOOLS FOR ANALYSIS

 Ratio analysis
 Cash flow statement
5
 Trend analysis

6
 Tables and graphs are also used as presentation

tools ANALYSIS OF DATA

The study is quantitative in nature with secondary data. Here the ratio analysis is used for
analysing the data. Bar graphs and pie charts are used to make data more understandable to the
reader.

Chapterisation

The study of working capital management of ITC Ltd is described in five

chapters.

Chapter 1: Introduction

It deals with introduction, organisation profile, research problem, objectives of the

study, research methodology, chapterisation and limitations of the study.

Chapter 2: Review of Literature

Chapter 3: Theoretical Framework

Chapter 4: Data Analysis

Chapter 5: Findings Suggestions and Conclusions

LIMITATIONS OF THE STUDY

1. Due to the time constraints an in-depth study was not possible.


2. The data collected has been restricted to past five years.
3. The information collected for the study is entirely secondary in nature.

7
CHAPTER 2

REVIEW OF

LITERATURE

8
2.1 REVIEW OF LITERATURE

Review of literature is the broad analysis of all the information's available on this specific topic
till date.

1.Nufaz il Altaf and Farooq Ahmad (2019)1

In this study they give an overview of impact of financial constraints on the relationship between
working capital financing and firm performance in India. The study is based on secondary
financial data of 437 non-financial Indian companies. The findings of the study confirm the
inverted U-shape relationship between working capital financing and firm performance.

2.A.K Sharma and Satish Kumar (2010)2

The main aim of this study is to examine the effect of working capital on profitability of Indian
firms. The study further discloses that inventory of number of days accounts payable are
negatively correlated with a firm’s profitability, whereas number of days accounts receivables
and cash conversion period exhibit a positive relationship with corporate profitability.

3. Bhaskar Bagchi, Jayanta Chikrabarti and Piyal Basu Roy (2012)3

They explicit to explore the effects of components of working capital management like Cash
Conversion Cycle (CCC), Age of Inventory (AI), Age of Debtors (AD), Age of Creditors (AC),
Debt of Total Assets (DTA) and Debt Equity Ratio (DER) on profitability of FMCG firms. The
results of their study also show the better explanatory power of fixed effect LSDV model than
that of pooled OLS model.

4. Ahmad Aref Almazari (2013)4

He examined the relationship between the working capital management (WCM) and the firm's
profitability for the Saudi cement manufacturing companies. His study showed that, Saudi
cement industry current ratio is the most important liquidity measure which effected profitability.
It was also notice as the size of a firm increases, profitability increased.

5. David M. Mathuva (2010)5

This study observed the influence of working capital management components on corporate
profitability. In this study they also disclose that firms which maintain sufficiently high
inventory levels reduce costs of possible interruptions in the production process and loss of
business due to scarcity of products. This implies that the longer a firm takes to pay its creditors,
the more profitable it is.

9
6. Pinku Paul and Paroma Mitra (2018)6

In this study they reveal that a firm has to plan the effective utilisation of its working capital in
order to maintain equilibrium between liquidity and profitability of a business. Therefore, this
article tries to examine the impact of working capital management on profitability of the firms of
Indian steel industry. The result of the study indicates that the impact of working capital
management on profitability of the firms of Indian steel industry has been significant.

7. David K. Chalmers, Luca Sensini and Amit Shan (2020)7

It is the study that deals with the relationship between working capital and company
performance, deepening this relationship for each of the elements that make up working capital.
Two criteria were used to select companies to be analysed. Firstly, the companies had to have all
the information needed for this study during the reporting period. Secondly, the companies were
not part of a group. Based on these criteria, 42 SMEs were analysed. The results of the study
enrich the existing literature, providing further empirical evidence related to the specific context
analysed.

8. Arvind Shrivastava, Nitin Kumar and Purnendu Kumar (2017)8

Their study found that longer cash conversion period has detrimental influence on profitability.
The purpose of this paper is to examine impact of working capital on profitability for Indian
corporate entities. Larger firms seem to be more profitable and significant as per Bayesian
approach has led to considerable gain in estimation fit.

9. Debabrata Jana (2018)9

He reveals that working capital management plays a vital role in the success of businesses
because of its effect on profitability and liquidity. The purpose of this study is to examine the
relationship and the efficiency of the working capital management strategies of FMCG company
in India. Using panel data analysis, this study finds a significantly positive and negative
relationship between profitability and working capital management.

10. Shikha Bhatia, Aman Srivastava (2016)10

This article focuses to investigate the relationship between working capital management and firm
performance in an emerging market. This study based on India finds a negative relationship
between the working capital management and firm performance, necessitating the need to
efficiently manage the working capital for enhanced profitability.

10
11. Kien Xuan PHAM, Quang Ngqc NGUYEN, Cong Van NGUYEN (2020)11

This study examines the influence of working capital management (WCM) factors on the
profitability of steel companies listed on the Stock Exchange of Vietnam. Research results from
companies in the steel industry in Vietnam during this period indicate that WCM has a strong
impact on the profitability of business. This conclusion is almost in contrast to many previously
published studies due to the specifics of the industry as well as the different stages of economic
management policies of the state.

12. Manoj Anand and Keshav Malhotra (2007)12

This paper attempts to develop quantitative benchmarks at the firm and the industry level, so as
to evaluate the working capital management performance of Corporate India from time to time.
The study employs the methodology developed by Anand and Gupta(2003) and provides
estimates by using the data of 339 S&P CNX 500 nonfinancial companies with at least three
years of publicly available records over the period 2001-02 to 2003-04 for each company and
industry. The findings of the paper capture the dynamics of risk-return trade-off, which will help
the performance evaluation of working capital management of Corporate India.

13. Barot Haresh (201 2)13

This study aims to provide empirical evidence about the effects of working capital management
on profitability performance of CNX pharmaceutical companies listed on National Stock
Exchange of India. This study uses different working capital measurements for a sample
population of Indian firms.

14. Dr. Santanu Kr. Ghosh and Santi Gopal Maji (2004)14

In this study makes an attempt to examine the efficiency of working capital management of the
Indian cement companies during 1992-93 to 2001-2002. For measuring the efficiency of working
capital management three index values – performance index, utilisation index and overall
efficiency index are calculated. Finding of the study indicates that the Indian Cement Industry as
a whole did not perform remarkably well during this period.

15. Luca Sensini and Maria Vazquez (2021)15

The main impartial of this study was to evaluate the influence of working capital management
policies on Argentine agro-industrial firms’ profitability. The data was collected through a
structured questionnaire. The results of the variables (DSI, DPO and CCC) be seen a negative
relationship with firms’ profitability, revealing that investing in inventory and requesting greater
extensions from suppliers leads to additional costs that cannot offset the resulting benefits. The
11
results of this study help entrepreneurs and managers of agro-industrial SMEs define and
implement their working capital management policies.

16. Yarong Chen , Enrique Diaz, Luca Sensini, and Maria Vazquez (2020)16

In this study aimed to look into the impact of quality management systems on working capital
management of manufacturing SMEs. The findings of this study be relieved that companies
using quality management systems have more efficient management of working capital, collect
credits faster and pay debts faster. The results of this study give to the literature, providing
empirical evidence of the positive impact that quality management systems have on working
capital management in the context of an emerging economy.

17. Navena Nesa Kumari and Victor Louise Anthuvan (2017)17

This study aims to analyse whether the working capital management affect the company
profitability of 15 manufacturing sector in India or not. The purpose of this article is to focus out
which of the working capital management drivers and metrics affect the profitability and to
address and verify the industries that are affected the most among the selected sectors.

18. Thiago Alvarez, Luca Sensini, Maria Vazquez (2020)18

This study reveals that “ the impact of working capital management on the profitability of
Argentine manufacturing firms, using the main theoretical framework suggested by the
literature”. The companies in this study were selected using a stratified sampling technique based
on an economic criterion. The results gives a positive and statistically significant relationship
between all components of working capital and profitability, put forward that an increase in each
variable considered determines an improvement in performance in terms of ROA and ROE.

19. Harsh Pratab Singh, Satish Kumar and Sisira Colombage (2017)19

The aim of this study is to quantitatively aggregate the findings of prior literature on the effect of
working capital management (WCM) on corporate profitability using the meta-analysis
technique developed by Hunter et al. (1982). The results of this study confirm that WCM is
negatively associated with profitability, which means an aggressive WCM policy leads to higher
profitability. For this study a set of 46 research articles that directly studied the relationship
between WCM, and profitability was analyzed for this purpose.

12
20. Santiago Hernandez, Davide Migliaro, Pablo Suarezm, Arnaldo Arnaldi (2021)20

This study focuses to examine the relationship between working capital and profitability in the
context of an emerging economy, such as the Chilean one. For this analysis, they collected and
analyzed data from a sample of manufacturing companies in the Santiago metropolitan region.
The results of this study be seen that the relationship between the single determinants of working
capital and profitability is not linear, suggesting that, until the optimal size is reached, the
relationship between working capital and profitability is positive.

13
REFERENCE

1. Ahmad, N. A. (2019). Working capital financing, firm performance and financial


constraints: Empirical evidence from India. International Journal for Managerial
Finance , 15 (4), 464-477.
2. A.K Sharma, S. K. (2010). Effect of Working Capital Management on Firm
Profitability: Empirical Evidence from India. Global Business Review , 12 (1), 159-173.
3. Bhaskar Bagchi, J. C. (2012). Influence of Working Capital Management on Profitability:
A Study on Indian FMCG Companies. International Journal of Business and
Management, 7.
4. Almazari, A. A. (2013). The Relationship between Working Capital Management and
Profitability: Evidence from Saudi Cement Companies. British Journal of Economics,
Management & Trade , 4 (1), 146-157.
5. Mathuva, D. M. (2010). The Influence of Working Capital Management Components on
Corporate Profitability: A Survey on Kenyan Listed Firms. Research Journal of Business
Management , 4 (1), 1-11.
6. Pinku Paul, P. M. (2018). Analysis of the Effect of Working Capital Management on
Profitability of the Firm: Evidence from Indian Steel Industry. Asia-Pacific Journal of
Management Research and Innovation , 14 (1-2), 32-38.
7. David K. Chalmers, L. S. (2020). Working Capital Management (WCM) and
Performance of SMEs:Evidence from India. International Journal of Business and Social
Science , 11, 57-63.
8. Arvind Shrivastava, N. K. (2017). Bayesian analysis of working capital management on
corporate profitability: evidence from India. Journal of Economic Studies , 44 (4), 568-
584.
9. Jana, D. (2018). Impact of Working Capital Management on Profitability of the Selected
Listed FMCG Companies in India. International Research Journal of Business Studies ,
11 (1), 21-30.
10. Shikha Bhatia, A. S. (2016). Working Capital Management and Firm Performance in
Emerging Economies: Evidence from India. Management and Labour Studies , 41 (2), 1-
17.
11. Kien Xuan PHAM, Q. N. (2020). Effect of Working Capital Management on the
Profitability of Steel Companies on Vietnam Stock Exchanges. Journal of Asian Finance,
Economics and Business , 7, 741-750.

14
12. Malhotra, M. A. (2007). Working Capital Performance of Corporate India: An Empirical
Study. ICFAI Journal of Applied Finance , 13 (1), 46-81.
13. Haresh, B. (2012). Working Capital Management and Profitability: Evidence from India:
An Empirical Study. Ganpat University- Faculty of Management Studies Journal of
Management and Research , 5, 79-88.
14. Maji, D. S. (2004). Working Capital Management Efficiency: A study on the Indian
cement Industry. ACADEMIA , 10.
15. Vazquez, L. S. (2021). Effect of Working Capital Management on SME Profitability:
Evidence from an Emerging Economy. International Journal of Business and
Management , 16 (4), 85-95.
16. Yarong Chen, E. D. (2020). Working Capital Management and Quality Management
Systems: evidence from an emerging economy. International Journal for Business
Management and Economic Research , 11 (4), 1861-1868.
17. Anthuvan, N. N. (2017). A Study on the Impact of the Working Capital Management on
the Profitability of the Leading Listed Manufacturing Companies of Chennai(2006-
2012). International Journal of Research in Management,Economics and Commerce , 7
(8), 68-87.
18. Thiago Alvarez, L. S. (2021). Working Capital Management of Profitability: Evidence
from an Emergent Economy. International Journal of Advances in Management and
Economics , 11 (1), 32-39.
19. Harsh Pratab Singh, S. K. (2017). Working Capital Management and firm profitability:
meta-analysis. Qualitative Research in Financial Markets , 9 (1), 34-47.
20. Santiago Hernandez, D. M. (2021). Working Capital Determinants and Profitability:
Empirical Evidence from an Emergent Economy. IAR Journal of Business Management ,
2 (2), 40-46.

15
CHAPTER 3

THEORITICAL FRAMEWORK

16
Meaning and Definition of Working Capital

Working capital may be regarded as the lifeblood of a business. Its effective provision can do
much to ensure the success of a business. Its inefficient management can lead not only to loss of
profits but also to the downfall of a business. A study of working capital is of major importance
to internal and external analysis because of its close relationship with the current day-to-day
operations of a business. Every business needs funds for two purposes. Long term funds are
required to create production facilities through purchase a fixed assets, such as, plants,
machineries, land, buildings etc. Investments in these assets represent that part of firm's capital
which is blocked on a permanent door fixed basis and is called fixed capital. Funds are also
needed for short term purposes for the purchase of raw materials, payment of wages and other
day-to-day expenses etc. These ones are known as Working Capital. In other words, Working
Capital refers to that part of firm's capital which is required for financing short-term or current
assets, such as, cash, marketable securities, debtors, inventories, Bills Receivable etc. The assets
of this type are relatively temporary in nature. Unfortunately, there is much disagreement among
financiers, accountants, economists and businessmen as to the exact meaning of the term
“Working Capital”. However, Working Capital is also known as revolving or circulating capital
or short-term capital.

Working Capital is defined as, “the excess of current assets over current liabilities and
provisions”. In the words of Shubin, “Working capital is the amount of funds necessary to cover
the cost of operating the enterprise”. Working Capital has been described as the “Life blood of
any business which is applicable because it constitutes a cyclically flowing stream through the
Business”.

Concept of working capital

There are two concepts of working capital

a) Gross working capital

b) Net Working capital

Gross Working Capital

Gross working capital represents the amount of funds invested in current assets. The Working
Capital as per gross concept is called Gross Working Capital. This concept is used by
management to assess the current working capital position and to ensure the ideal investment in
individual current asset. Gross concept is a quantitative concept.

17
The Gross Working capital concept has the following advantages:

 It helps in planning and control of individual current assets.


 It helps to enhance the return on investment.
 This concept helps in determining the current amount of working
 capital at the right time.
 It helps in fixation of financial responsibility.

Net Working Capital

Net working capital is the excess of current assets over current liabilities. Net working capital is
equal to total current asset minus total current liabilities. Thus, working capital refers to net
current asset. The working capital as per net concept is called Net working capital. The net
concept is a quantitative concept because it creates a relationship between current assets and
current liabilities. There is another definition of net working capital. According to this, the
networking is that portion of firm’s current asset which is financed with long term funds. Net
working capital can be positive or negative. When current assets exceed current liabilities, it is
called positive working capital. When current liabilities exceed current assets, it is called
negative working capital.

Net Working Capital has the following advantages:

 It indicates the extent to which working capital can be financed with long term fund.
 It is an indicator of financial soundness of an enterprise.
 It measures the firm’s liquidity.
 It enables the creditors and investors to assess the short-term solvency of the firm.

Kinds of Working Capital

The changes in current assets, in short and long terms, have led to the classification of working
capital into two components.

A. Permanent or Fixed Working Capital

This component represents the value of the current assets required on a continuing basis over the
end their year, and for several years. Permanent working capital is the minimum amount of
current assets which is needed to conduct a business even during the dullest season of the year.
This minimum level of current assets is called Permanent or Fixed Working Capital as this part
of capital is permanently blocked-in current assets. This amount varies from year to year,
depending upon the growth of a company and the stage of the business cycle in which it

18
operates. It is the amount of funds required to produce the goods and services which are
necessary to satisfy demand at a particular point. It represents the current assets which are
required on a continuing basis over the entire year. It is maintained as the medium to carry on
operations at any time.

B. Temporary or Variable Working Capital

This component represents a certain amount of fluctuations in current assets during a short
period. These fluctuations are increases or decreases and are generally cyclical in nature.
Additional current assets are required at different times during the operating year. Variable
working capital is the amount of additional current asset required for a short period. It refers to
that part of total working capital which is required by a business over and above permanent
working capital.

Determinants of Working Capital

1. Nature of Business: Nature of business influence the working capital requirements.


Manufacturing or trading firms need large amount of working capital since they have to hold
huge inventories and debtors, normally. But in a restaurant business, most of the sales are in
cash, and require lesser amount of working capital.

2. Size of Business: Generally, bigger the size, greater will be the working capital requirement
and vice versa. A business doing sanitary, electrical and paints under one roof needs more
working capital than a business doing electrical items only.

3. Operating efficiency: A company with higher operating efficiency and maximum production
capacity utilization can remove wastages, and can use its resources effectively and efficiently
thereby reducing its working capital requirement very much.

4. Rapidity of turnover: High degree of correlation exists between rapidity of turnover and the
amount of working capital. Rapidity of turnover means the speed with which sales are done.
Higher rate of turnover needs lower amount of working capital.

5. Growth and expansion of business: Along with growth and expansion working capital
requirement also increases. A company diversifying in different products and different business
line requires more working capital than a company staying in one product only.

6. Length of the operating cycle: This influences the amount of working capital. Usually, the
longer the operating cycle, greater will be the requirements of working capital. A manufacturing
company, whose operating cycle is longer, requires more working capital than a trading
company whose operating cycle is less.
19
7. Seasonal fluctuations in supplies: Certain raw materials are available during certain seasons
only. Such materials must be procured and stored in good quantity to provide for off seasons.
Naturally working capital will be more during the periods of availability of raw materials.

8. Dividend policy: Dividend policy has a dominant influence on the working capital position of
an enterprise. If a conservative dividend policy is followed by the management, the need for
working capital can be met with the retained earnings. When once dividend is declared and the
same has to be paid in cash, it consequently drains off large amounts from the pool of working
capital.

9. Price level changes: Rising prices necessitate the use of more funds for maintaining the
existing level of activity. For the same level of current assets, higher cash outlays are required.
Working capital requirement will be more.

10. Credit facilities enjoyed from suppliers/creditors: A firm enjoying lavish credit facilities
from its suppliers/creditors needs lesser working capital than a firm which does not get liberal
credit facilities.

Need of working capital

A firm which has sufficient working capital can finance its day-to-day commitments and hence it
will generate efficiency in the business and improve the overall profits. Adequate working
Capital will help the company to encounter the business crises during depression and the
unpredictably large number of orders or peak demand. Company with sufficient Working Capital
can take advantage of new business opportunity to expand or grow its business and thus prevent
the business from failure. A business concern is being able to offer a credit line to its customer
which can encourage them to buy more instead of purchase from the competitors. Adequacy of
working Capital eases the repayment of loans and dividends to the investors quickly. This will
increase the confidence of investors and facilitate the raising of additional funds in the Future.
The company can exploit favourable market conditions easily such as buying the materials in
bulk when prices are lower and undertake the profitable projects.

Working Capital Management

Meaning of working capital management

Working Capital Management is an integral part of overall corporate management. To a financial


manager, a working capital sphere throws a welcome challenge and opportunity. Working
capital, in general practice, refers to the excess of current assets over current liabilities.
Management of working capital, therefore, is concerned with the problems that arise in
20
attempting to manage the current assets, current liabilities and the Inter-relationship that exist
between them. Both inadequate as well as excessive working capital position are bad for a
concern. Inadequacy of working capital may lead the firm to insolvency and excessive working
capital implies ideal funds, which earn no profits for the business. The twin objectives of
working capital management are profitability and liquidity. A sound working capital
management policy is one which ensures higher profitability, proper liquidity and sound
structural health of the organisation.

Importance of working capital management

Working capital management is important in financial management because it plays an essential


role in keeping the wheel of the business running. Working capital management make sures that
the company possesses appropriate resources for its daily activities for protecting the company’s
existence and to ensure that that it can keep operating as a going concern. Scarce availability of
cash, uncontrolled commercial credit policies, or limited access to short term financing can lead
to the need for restructuring, sale of assets, and even liquidation of company. Proper working
capital management facilitate the business to operate smoothly and improves its earnings. The
ability to properly manage working capital directly correlate to the growth of a company.
Managing working capital is about more than keeping cash on hand and having a financially
solvent company. Sound working capital management means ensuring that your business
maintains an adequate cash flow on hand. This cash needs to be able to satisfy any and all
operating costs for the short term in addition to any 1819 bills or other obligations. Working
capital management is important due to following reasons:

• Improvement in the credit profile and solvency of the company: - If the company pays off debts
on time while generating revenues, then it ensures that the operating cycle of the company is
properly funded, which will likely boost the credit score of the company. Whereas if the
company is unable to repay its debts on time and still it is running the business with the low
operating costs, then the creditors will try to get back their funds, and this would lead to a
decrease in the credit score. The pre-requisite to the long-term solvency is the ability of the
company to meet its short-term obligations. The adequate management of the working capital
will help the business to pay all its short-term obligations on a timely basis like the salary
payment, payment against the purchase of raw materials, and other such operating expenses of
the company.

21
• Use the fixed assets efficiently: - Proper management of the working capital and availability of
adequate working capital all the time will enable the company to effectively and efficiently use
the fixed assets present. In case because of the unavailability of working capital, the fixed assets
of the company remain idle then in that case also the depreciation must be charged and the
interest on capital borrowed is to be paid on fixed assets. That means the company must incur the
fixed expenses on the fixed assets unnecessarily even though it is not using it. So, with the help
of working capital management fixed assets can also be managed and used in an effective
manner.

• Ability to face crisis: - In case there is proper management of the working capital, then the
business concern will be able to face crisis during the emergency period like depression.

• Expansion: - If any company is planning to expand its business, then that would require
additional capital. In case there is adequate amount of working capital, then that could lead to the
implementation of the expansion program successfully

Ratio Analysis

The ratio refers to the numerical or quantitative relationship between two variables or items. A
ratio is calculated by dividing one item of the relationship with the other. An accounting ratio
may be defined as an arithmetic expression of relationship between two figures contained in the
financial statements. The figures may be taken from the income statement, Balance sheets or
from both. A ratio indicates a coefficient measuring the number of times the numerator is larger
than denominator.

Ratio analysis is an important and age older technical of financial analysis. The data given in
financial statements, in absolute form, are dumb and are unable to communicate anything. Ratios
are relative form of financial data and very useful technique to check upon the efficiency of a
firm. Some ratios indicate the trend or progress or downfall of the firm.

Liquidity Ratios

The short-term financial position of a firm is measured by analysing the liquidity position. The
term liquidity means the ability to produce cash. A firm is said to be liquid when it is capable of
meeting its short-term obligations in time. It depends on its ability to convert current assets into
cash and maintain regular cash flows. The important liquidity ratios are current ratio and quick
ratio.

22
Current Ratio

Current ratio is the most common ratio for measuring liquidity. The current ratio is the ratio of
total current assets to total current liabilities. Being related to working capital analysis, it is also
called the working capital ratio. Current ratio measures the adequacy or inadequacy of working
capital. A high current ratio means more amount of working capital to the firm. A standard norm
of 2:1 is considered as ideal Current Ratio. It means that current assets should be at least twice of
its current liabilities.

Current Assets
Current Ratio=Current Liabilities

CURRENT ASSETS

1. Cash in hand

2. Cash at bank

3. Short term securities

4. Bills receivable

5. Sundry Debtors

6. Inventories

CURRENT LIABILITIES

1. Sundry Creditors

2. Bills payable

3. Outstanding Expenses

4. Short term advances

5. Dividend payable

6. Bank overdraft

Liquid Ratio or Quick Ratio

The term liquidity refers to the ability of a firm to pay its short- term obligations as and when
they become due. Cash in hand and cash at bank are the most liquid asset. The other assets
included in the liquid assets are bills receivable, sundry debtors, marketable and short term or
temporary investments. The liquid ratio can be calculated by dividing the total of the liquid
assets by total current liabilities. And the ideal liquid ratio is 1:1.
23
Quick Assets
Liquid ratio =
Current Liabilities

Liquid assets = Current assets – (stock + prepaid expenses)

Absolute Liquid Ratio

It is a further rigorous test of liquidity. Debtors and bills receivable are also excluded from liquid
assets in the numerator. Thus, Absolute liquid assets include cash in hand, cash at bank and
marketable securities. Bank overdraft is excluded from current liabilities or liquid liability is
taken as the denominator. The standard norm of absolute liquid ratio is 0.5:1.

Absolute Liquid Assets


Absolute Liquid ratio = Current Liabilities

Profitability Ratios

Profitability ratio measures the ability of the firm to earn an adequate return on sales, total assets
and invested capital. There are two types of profitability ratios. First profitability based on sales,
and it includes gross profit ratio, operating ratio, operating profit ratio and net profit ratio.
Second, profitability ratio based on investment, and it includes return on investment ratio, return
on shareholders fund ratio, return on equity ratio and return on total asset.

Gross Profit Ratio

Gross Profit Ratio is the ratio of gross profit to Net sales. It indicates the gross margin available
to the company on every rupee of sales from which all indirect expenses are recovered leaving a
reasonable amount as net margin.
Gross profit
Gross = Profit Ratio
*100 Net
Sales

Operating Profit Ratio

Operating profit ratio explains the relationship between the operating profit and net sales. It
measures the operational efficiency of the firm.
Operating profit or EBIT
Operating profit ratio = *100
Net Sales

24
Operating Ratio

Operating Ratio is a cost ratio, not a profit ratio. It is the relationship between operating cost and
Net sales. It indicates the overall efficiency in operating the business. This ratio establishes the
relationship between important expenses and sales.
Operating Cost
Operating Ratio = * 100
Net Sales

Net profit Ratio

Net profit is the residual profit after considering non- operating expenses and Incomes. This ratio
is used to measure the overall profitability and hence it is very useful to proprietors. It is a true
indicator of operating efficiency. It is calculated by relating Net profit after tax to net sales.

Net profit after tax


Net profit ratio = *
Net sales

Return on investment Ratio

Return on investment ratio is the relationship between operating net profit and capital employed.
Return on investment measures the overall profitability. It is also known as accounting rate of
return or return on capital employed.
Operating profit
Return on Investment = * 100
Capital employed

Return on Total Assets

Return on Total assets is also called Return on investment or Return on Gross capital employed.
Return on total asset ratio measures the earning when compared with total assets of the firm. It
clearly shows the position of the firm. A high ratio implies better overall performance of the
business or efficient use of total assets.
Net profit after tax
Return on Total Assets = * 100
Total Assets

Return on shareholders fund

Return on shareholders fund signifies the reward for shareholders for taking the risk of investing
in the business.
Net profit after tax
Return on Shareholders Fund = * 100
Shareholders Fund

25
Activity Ratios or Tests of Turnover of Activities

This category of ratios includes those ratios, which highlight upon the activity and operational
efficiency of the business concern. Activity or turnover ratios indicate the efficiency of
management in the use of resources, both short- term and long- term. The overall performance of
a company is evaluated on the basis of its ability to make sales using minimum resources. Turn
over ratios reflect the speed at which assets are utilized in effecting sales. A higher turnover ratio
means efficient use of funds by management in generating more sales.

Inventory Turnover Ratio

The term inventory is a broader term then ‘stock’. Generally stock means stock of finished
goods. Whereas inventory includes all types of stocks, i.e., stock of raw materials, work in
progress, finished goods, consumable stores, etc. The Balance sheet of a manufacturing company
contains all these items of stock while that of a trading company contains only stock of finished
goods. Inventory Turnover Ratio indicates the rapidity of turnover or the speed at which
inventory is converted into sales. A higher turnover ratio, say,5 to 8 times indicates better
efficiency in effecting sales. Inventory turnover ratio is the relationship of cost of goods sold to
average inventory.
Cost of Goods Sold
Inventory Turnover Ratio =
Average Inventory

Cost of goods sold = Net sales - Gross profit

Opening Inventory+Clo sin g Inventory


Average inventory = 2

Working Capital Turnover Ratio

This ratio is a measure of the efficiency of the employment of the working capital. Working
Capital Turnover Ratio that measures how efficiently a company is using its working capital to
support sales and growth. Also known as net sales to working capital, working capital turnover
measures the relationship between the funds used to finance a company’s operations and the
revenues a company generates to continue operations and turn a profit.
Net Sales
Working Capital Turnover Ratio =
Net Working Capital

Net Working Capital = Current Assets – Current Liabilities

26
Cash Flow Statement

A cash flow statement also known as statement of cash flows, is a financial statement that shows
how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks
the analysis down to operating, investing and financing activities. Essentially, the cash flow
statement is concerned with the flow of cash in and out of the business. The statement captures
both the current operating results and the accompanying changes in the balance sheets. As an
analytical tool, the statement of cash flows is useful is useful in determining the short-term
viability of a company, particularly its ability to pay bills.

Trend Analysis

Trend analysis is an effective management tool for studying the changes in working capital of a
business enterprise between the beginning and ending of the financial dates. It entails analysing
general tendencies in each item of the financial statements on the basis of data from the base
year.

There are two approaches to do a trend analysis.

• Trent percentages

• Graphic method

Financial data that has been revaluated in terms of a base year is referred to as a trend
percentage. The base year will be 100 percent, and the subsequent years will be percentages that
add up to the base year.
𝐹
𝑠 𝑓𝑖𝑔𝑢𝑟𝑒
Trend percentage=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 *100
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟𝐹𝑠 𝑓𝑖𝑔𝑢𝑟𝑒

27
CHAPTER 4

DATA ANALYSIS

AND

INTERPRETATION

28
Data Analysis

This chapter deals with analysis and interpretations.

Components of Current Assets

Table 4.1 (Amount in Crores)

Particulars 2021 2020 2019 2018 2017 Average

Inventories 9470.87 8038.07 7587.24 7237.15 7863.99 8039.464

Investments 14046.71 17175.02 12506.55 9903.45 10099.78 12746.302

Trade receivables 2090.35 2092 3646.22 2357.01 2207.5 2478.616

Cash and cash


231.25 561.84 162.71 96.03 156.15 241.596
equivalents
Other Bank
3770.25 6281.43 3606.02 2498.85 2591.12 3749.534
Balances
Loans 2.77 4.87 5.02 4.15 3.37 4.036
Others 1197.15 1505.94 1360.29 1147.95 1004.91 1243.248

Other current assets 1006.07 847.74 694.91 1258.41 610.57 883.54

Total 31815.42 36506.91 29568.96 24503 24537.39 29386.336

(Source: Compiled from published annual reports of the company)

Interpretation:

From the table 4.1 it is found that major portion of current asset is in the form of investment.

Diagram 4.1

29
Liquidity Ratios

Current Ratio

Current ratio measures the firm’s short-term solvency or ability of the firm to pay off it’s current
liabilities out of current assets. Ideal current ratio is 2:1.

Table 4.2 (Amount in Crores)

Year Current Current Current


Assets Liabilities Ratio
2016-2017 24537.39 6830.07 3.59
2017-2018 24503 8856.6 2.77
2018-2019 29568.96 9621.56 3.07
2019-2020 36506.91 9089.41 4.02
2020-2021 31815.42 10174.17 3.13
Average 29386.336 8914.362 3.30

(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.1 shows the current ratio for the last five years. Current ratio for the year 2019-2020
is higher. It is 4.02 for that year. The financial year 2017-2018 has the lowest current ratio which
is 2.77. The average ratio is 3.30.

Diagram 4.2

30
Quick Ratio

It establishes the relationship between quick assets and current liabilities. It is a measure of
instant debt paying ability of the firm. The ideal quick ratio is 1:1.

Table 4.3 (Amount in crores)

Current
Year Liquid Assets Quick Ratio
Liabilities

2016-2017 16673.4 6830.07 2.44


2017-2018 17265.85 8856.6 1.95
2018-2019 21981.72 9621.56 2.28
2019-2020 28468.84 9089.41 3.13
2020-2021 22344.55 10174.17 2.20
Average 21346.872 8914.362 2.39

(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.3 shows the quick ratio for last five years. The financial year 2019-2020 has the
highest quick ratio which is 3.13. The financial year 2016-2017 has the lower quick ratio of 1.95.
The average quick ratio is 2.39.

Diagram4.3

31
Absolute Liquid Ratio

Absolute Liquid Ratio is the ratio showing the relationship between cash and cash equivalents
and current liabilities. The ideal absolute liquid ratio is 0.5:1.

Table 4.4 (Amount in crores)

Absolute Current Absolute


Year
Liquid Liabilities Liquid Ratio
Assets
2016-2017 156.15 6830.07 0.023
2017-2018 96.03 8856.6 0.011
2018-2019 162.71 9621.56 0.017
2019-2020 561.84 9089.41 0.062
2020-2021 231.25 10174.17 0.023

(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.4 shows the absolute liquid ratio for the last five financial years. The highest absolute
liquid ratio is for the year 2019-2020 which is 0.062 and the lowest is for the year 2017-2018
which is 0.011. The average absolute liquid ratio is 0.027.

Diagram 4.4

32
Profitability Ratios

Gross Profit Ratio

It is the ratio of gross profit to sales expressed as percentage. It is also known as gross margin.

Table 4.5 (Amount in Crores)

Gross Profit
Year Gross Profit Net Sales
Ratio

2016-2017 16541 40088.86 41.26


2017-2018 17997.07 40627.54 44.30
2018-2019 19755.86 44995.65 43.91
2019-2020 20730.08 45619.7 45.44
2020-2021 18725.98 45485.11 41.17
Average 18749.998 43363.372 43.24
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.5 shows the gross profit ratio for the last five financial years. The higher gross profit
ratio is for the year 2019-2020 which is 45.44% and the lowest ratio is for the year 2020-2021
which is 41.17%. The average gross profit ratio is 43.24.

Diagram 4.5

33
Operating Profit Ratio

Operating profit ratio shows the relationship between operating profit and net sales. It
measures the operational efficiency of the firm.

Table 4.6 (Amount in Crores)

Operating Operating Profit


Year Net Sales
Profit Ratio

2016-2017 16586.33 40088.86 41.37


2017-2018 18106.67 40627.54 44.57
2018-2019 19813.9 44995.65 44.04
2019-2020 20810.52 45619.7 45.62
2020-2021 18784.92 45485.11 41.30
Average 18820.468 43363.372 43.40
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.6 shows the operating profit ratio for the last five financial years. The highest
operating profit ratio is for the year 2019-2020 which is 45.62% and the lowest ratio is 41.30 for
the year 2020-2021. The average operating profit ratio is 43.40%.

Diagram 4.6

34
Operating Ratio

Operating ratio express the relationship between operating cost and sales. It indicates the overall
efficiency in operating the business.

Table 4.7 (Amount in Crores)

Operating
Year Operating Cost Net Sales
Ratio

2016-2017 22.95 40088.86 0.06


2017-2018 86.65 40627.54 0.21
2018-2019 34.19 44995.65 0.08
2019-2020 55.72 45619.7 0.12
2020-2021 47.47 45485.11 0.10
Average 49.396 43363.372 0.11
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.7 shows the operating ratio for the last five financial years. Highest ratio is for the
financial year 2017-2018 which is 0.21%. lowest ratio is 0.06% for the financial year 2016-2017.
The average ratio is 0.11%.

Diagram 4.7

35
Net Profit Ratio

Net profit Ratio shows the relationship between net profit and net sales. It measures the overall
profitability as well as efficiency of the business.

Table 4.8 (Amount in Crores)

Year Net Profit Net Sales Net Profit Ratio

2016-2017 10200.9 40088.86 25.45


2017-2018 11223.25 40627.54 27.62
2018-2019 12464.32 44995.65 27.70
2019-2020 15136.05 45619.7 33.18
2020-2021 13031.64 45485.11 28.65
Average 12411.232 43363.372 28.62
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.8 shows the net profit ratio for the last five financial years. Highest ratio is 33.18%
for the year 2019-2020 and the lowest ratio is 25.45% for the financial year 2016-2017. The
average ratio is 28.62%.

Diagram 4.8

36
Return on Investment

It is also known as return on capital employed. It shows the relationship between profit before
interest and tax and capital employed.

Table 4.9 (Amount in Crores)

Operating Capital Return on


Year
Profit Employed Investment

2016-2017 16586.33 47385.88 35.00


2017-2018 18106.67 53524.71 33.83
2018-2019 19813.9 60176.36 32.93
2019-2020 20810.52 66145.95 31.46
2020-2021 18784.92 61406.37 30.59
Average 18820.468 57727.854 32.60
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.9 shows the return on investment for the last five financial year. The highest ratio is
35.00% for the financial year 2016-2017 and the lowest ratio is 30.59% for the year 2020-2021.
The average ratio is 32.60%.

Diagram 4.9

37
Return on Total Asset

Return on total assets measures the earning when compared with total assets of the firm. It shows
the relationship between net profit and total assets.

Table 4.10 (Amount in Crores)

Return on
Year Net Profit Total Assets
Total Assets

2016-2017 10200.9 54215.95 18.82


2017-2018 11223.25 62381.31 17.99
2018-2019 12464.32 69797.92 17.86
2019-2020 15136.05 75235.36 20.12
2020-2021 13031.64 71580.54 18.21
Average 12411.232 66642.216 18.62
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.10 shows the Return on Total asset for the last five financial year. The highest ratio
is 20.12% for the year 2019-2020 and the lowest is 17.86% for the year 2018-2019. The average
return on total asset is 18.62%.

Diagram 4.10

38
Return on Shareholders Fund

Return on shareholders fund shows the relationship between net profit and shareholders' fund. It
measures the profitability from shareholders point of view.

Table 4.11 (Amount in Crores)

Return on
Share Holders
Year Net Profit Share
Fund
Holders Fund

2016-2017 10200.9 45340.96 22.5


2017-2018 11223.25 51400.07 21.8
2018-2019 12464.32 57949.79 21.5
2019-2020 15136.05 64029.16 23.6
2020-2021 13031.64 59004.58 22.1
Average 12411.232 55544.912 22.3
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.11 shows the Return on Shareholders fund for the last five financial years. The
highest ratio is 23.6% for the year 2019-2020 and the lowest ratio is 21.5% for the year 2018-
2019. The average return on shareholders fund is 22.30%.

Diagram 4.11

39
Activity Ratios

Inventory Turnover Ratio

Inventory turnover ratio shows the relationship between cost of goods sold and average
inventory. It shows how frequently the inventory is converted to sales. Standard inventory
turnover ratio is 8 times.

Table 4.12 (Amount in Crores)

Inventory
Cost of Average
Year Turnover
Goods Inventory
Ratio
Sold
2016-2017 23547.86 8191.905 2.87
2017-2018 22630.47 7550.57 3.00
2018-2019 25239.79 7412.195 3.41
2019-2020 24889.62 7812.655 3.19
2020-2021 26759.13 8754.47 3.06
Average 24613.37 7944.36 3.10
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.12 shows the inventory turnover ratio for the last five financial years. The highest
ratio is 3.41 for the year 2018-2019 and the lowest ratio is 2.87 for the year 2016-2017. The
average ratio is 3.10.

Diagram 4.12

40
Working Capital Turnover Ratio

Working capital turnover ratio shows the relationship between net sales and net working capital.
The standard or ideal working capital turnover ratio is 7 or 8 times.

Table 4.13 (Amount in Crores)

Net Working Working Capital


Year Net Sales
Capital Turnover Ratio

2016-2017 40088.86 17707.32 2.26


2017-2018 40627.54 15646.40 2.60
2018-2019 44995.65 19947.40 2.26
2019-2020 45619.7 27417.50 1.66
2020-2021 45485.11 21641.25 2.10
Average 43363.372 20471.97 2.12
(Source: Compiled from published annual reports of the company)

Interpretation:

The table 4.13 shows the working capital turnover ratio for the last five financial years. The
highest ratio is 2.60 for the year 2017-2018. The lowest ratio is 1.66 for the year 2019-2020. The
average ratio is 2.12.

Diagram 4.13

41
Cash Flow Statement

Table 4.14 (Amount in


Crores)

Cash flow 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021


Net profit before tax 15502.96 16851.70 18444.16 19166.81 17164.15

Net cash flow 10002.02 12650.85 11749.05 13806.18 11493.95


from operating
activities
Net cash used in -2780.33 -6691.24 -5081.75 -5516.71 6487.89
investing activities

Net cash used in -7137.62 -6019.85 -6600.57 -7890.87 -18378.89


financing activities

Net increase or 84.07 -60.24 66.73 398.60 387.05


decrease in cash
and cash
equivalents
Cash and cash 72.19 156.26 96.02 162.75 561.35
equivalents at
beginning
Cash and cash 156.26 96.02 162.75 561.35 231.25
equivalents at the
end
(Source: Compiled from published annual reports of the company)

Interpretations:

The above table shows the cash flow position of the company for the last five years. Cash and
cash equivalents for the year 2019-2020 is the higher amount which is 561.35. Cash and cash
equivalents for the year 2017-2018 is the lowest which is 96.02. For the financial year 2016-
2017 cash and cash equivalents was 156.26. It has decreased to 96.02 in 2017-2018. But in the
year 2018-2019 it has increased to 162.75 and in the year 2019- 2020 it has again increased to
561.35. But for the financial year 2020-2021 cash and cash equivalents decreased to 231.25.

42
Trend Analysis

Trend analysis is the process of examining general trends in each item of the financial statements using
data from the previous year's financial statements. It is a useful management tool for analysing changes in
a company's working capital from the beginning to the end of the financial year.

Table 4.15

Net Trend
Year
Working Percentage
Capital
2016-2017 17707.32 100.00
2017-2018 15646.40 88.36
2018-2019 19947.40 112.65
2019-2020 27417.50 154.84
2020-2021 21641.25 122.22
(Source: Compiled from published annual reports of the company)

Interpretation:

The above table shows the trend analysis of the company for the last five years. It is clear from the table
that working capital position of the company has fluctuating from 2016-2017 to 2020-2021. While
analysing the working capital position in the year 2017-2018 it is decreased by 88.36%. The working
capital position in the year 2018-2019, it is clear that there is an increase 112.65%. The working capital
position in the year 2019-2020, it is again increased by 154.84%. Then the working capital position
decreased by 122.22%. It indicates that the working capital position of the company has fluctuating in all
years.

Diagram 4.14

43
CHAPTER 5

FINDINGS, SUGGESTIONS AND CONCLUSION

44
FINDINGS, SUGGESTIONS AND CONCLUSION

This chapter deals with findings, suggestions and conclusion of the study.

FINDINGS

The study was undertaken mainly to analyse the working capital management of ITC Ltd. The
major findings of the study are the following:

1. Most of the current assets are held in the form of investment, investment is fluctuating
over the 5 years. The company is failed to maintain optimum investment in each
component of current asset.
2. Standard Current Ratio is 2:1. For all the five years current ratio of the company is above
this standard. But for 2019-20 it was 4.0. The fund of the company was blocked in
current assets.
3. The standard Quick Ratio is 1:1. It was above this standard for all the five years.
4. Absolute liquid ratio is below the standard 0.5:1 for all the years. So absolute liquid ratio
of the company is not satisfactory.
5. Gross profit ratio is fluctuating for the last five years.
6. There is an instability in operating profit of the company.
7. The Operating Ratio was high only for the year 2017-18. Then it shows a downward
trend.
8. Every year Net Profit ratio is between 25%-35%.Net profit ratio is fluctuating.
9. Return on Investment is instable for the last five years. It is showing a decreasing ternd.
10. Return on total assets is fluctuating for the last five years.
11. There is an instability in Return on Shareholders Fund.
12. Inventory Turnover Ratio is below the standard. It is showing a downward trend for last
three years.
13. Working Capital Turnover ratio is instable for the last five years. It is below standard.
14. Cash flow position of the company is fluctuating.
15. Trend analysis shows that working capital position of the company was fluctuating.

SUGGESTIONS

a) The company has to reduce invest it’s fund in the form of short term investments.
b) In order to increase the net profit, the company should reduce the cost to the Maximum.
c) The company has to improve its profitability position.
d) Funds of the company are blocked in some current assets. So that, the company has to
take proper decisions in order to maintain a better working capital position.
45
e) Working capital turnover ratio shows a low. It indicates undertrading. So the company
should effectively utilize the working capital.

CONCLUSION

The study was conducted to evaluate the working capital management of ITC Ltd. On the basis
of secondary data collected from the annual reports of the company for five years starting from
2016-2017 to 2020-2021 data was analysed using ratio Analysis, cash flow statement and trend
analysis. Through analysing this data, it is found that working capital position of the company
was fluctuating. Some ratios are up to the ideal ratio, and also most of the ratios are fluctuating.
Hence the company needs to improve its working capital position. To conclude optimum capital
is necessary for the smooth running of the Business. The working capital management is a very
important aspect. The Management need to adopt efficient working capital policies.

46
BIBLIOGRAPHY

47
BOOKS

 Prassanna Chandra “Financial Management Theory & Practice”, 7th Edition, 2008

 Rajiv Srivastava& Anil Misra “Financial Management”, 2008

 Shashik.Gupta&Anju Gupta ”Financial Management” Kalyani Publishers, 2011

 Dr. S.P Gupta ”Management Accounting ”,SahityaBhawan Publications- AGRA,2005

 Shashi k. Gupta & R.K Sharma ”Management Accounting” Principles and


Practice”,11th Revised edition,2008

 B.S. Raman, ”Management Accounting” ,United Publishers,July2010

 A Vinod, Accounting for Management, Calicut University.

 Dr S N Maheswari, Cost and Management Accounting, New Delhi:

Sulthan Chandand Sons Publishers, fourth revised edition 1997.

WEBSITES

 https://en.wikipedia.org/wiki/ITC_Limited

 https://deshicompanies.com/company-profile/itc-limited/amp

 https://en.wikipedia.org/wiki/Conglomerate_

 https://www.itcportal.com/about-itc/shareholder-value/report-and-accounts.aspx

 https://www.capitalmarket.com/Company-Information/Financials/Profit-and-
Loss/ITC-Ltd/301

 https://www.moneycontrol.com/financials/itc/balance-sheetVI/ITC

 https://www.moneycontrol.com/financials/itc/ratiosVI/ITC

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APPENDIX

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Statement of Profit and Loss of ITC Ltd

Particulars Mar-21 Mar-20 Mar-19 Mar-18 Mar-17


Revenue from operations
Sales 45485.11 45619.70 44995.65 40627.54 40088.68
Less excise duty (3039.43) (1187.64) (788.74) (3702.23) (15359.78)
Other operating income 3012.43 1055.53 788.74 3702.23 15359.78
Other income 3250.99 3013.66 2484.54 2542.74 1985.91
Total Income 48709.10 48501.25 47480.19 43170.28 42074.59
Expenses
(a)Cost of material 13605.07 13121.76 13184.97 11756.21 11765.56
consumed
(b)Purchase of stock in 6869.40 4289.71 4300.32 2991.98 3566.57
trade
(c)Change in inventory of (526.86) (176.34) (180.14) 1041.85 644.17
finished goods, stock in
trade and work in
progress
(d)Employee benefit 2820.95 2658.21 2728.44 2487.46 2444.31
expenses
(e)Finance cost 47.47 55.72 34.19 86.65 22.95
(f)Depreciation and 1561.83 1563.27 1311.70 1145.37 1038.04
amortisation expenses
(g)Other expenses 7167.09 7822.11 7656.55 6809.06 7090.03
Total Expenses 31544.95 29334.44 29036.03 26318.58 26571.63
Profit and loss before tax 17164.15 19166.81 18444.16 16851.70 15502.96
Tax expenses (4132.51) (4030.76) (5979.84) (5628.45) (5302.06)
Profit and loss for the 13031.64 15136.05 12464.32 11223.25 10200.90
period

50
Balance Sheet of ITC Ltd

Particulars Mar 21 Mar 20 Mar 19 Mar 18 Mar 17


A. Equity and liabilities
1. Shareholders fund
Equity share capital 1230.88 1229.22 1225.86 1220.43 1214.74
Reserves and surplus 56067.18 60777.76 54725.99 50179.64 44126.22
Total shareholders fund 59004.58 64029.16 57949.79 51400.07 45340.96
2. Non current liabilities
Long term borrowings 5.28 5.63 7.89 11.13 17.99
Deferred tax liabilities 1727.73 1617.65 2044.14 1917.94 1871.70
Other long term liabilities 511.71 349.72 41.90 73.66 23.86
Long term provisions 157.07 143.79 132.64 121.91 131.37
Total non current liabilities 2401.79 2116.79 2226.57 2124.64 2044.92
3. Current liabilities
Short term borrowings 0.00 0.00 0.00 0.00 0.01
Trade payables 4119.53 3446.74 3368.28 3382.28 2551.22
Other current liabilities 5885.59 5524.73 6228.04 5435.08 4237.01
Short term provisions 169.05 117.94 25.24 39.24 41.83
Total current liabilities 10174.17 9089.41 9621.56 8856.60 6830.07
Total capital and liabilities 71580.54 75235.36 69797.92 62381.31 54215.95
B. Assets
4. Non current assets
Tangible assets 19216.75 19612.74 17945.65 15120.00 14469.32
Intangible assets 2581.52 519.45 540.75 445.99 410.92
Capital work in progress 3329.97 2776.31 3391.47 5016.85 3491.33
Other assets 376.56 385.36 0.00 0.00 0.00
Fixed assets 25508.30 23297.75 21887.76 20591.57 18417.26
Non current investments 12950.38 13455.59 14071.45 13493.77 8485.51
Long term loans and advances 2.37 3.31 6.21 7.40 5.84
Other non current assets 1304.07 1971.80 4263.54 3785.57 2769.95
Total non current assets 39765.12 38728.45 40228.96 37878.31 29678.56
5. Current assets
Current investments 14046.71 17175.02 12506.55 9903.45 10099.78
Inventories 9470.87 8038.07 7587.24 7237.15 7863.99
Trade receivables 2090.35 2092.00 3646.22 2357.01 2207.50
Cash and cash equivalents 4001.50 6843.27 3768.73 2594.88 2747.27
Short term loans and advances 2.77 4.87 5.02 4.15 3.37
Other current assets 2203.22 2353.68 2055.20 2406.36 1615.48
Total current assets 31815.42 36506.91 29568.96 24503.00 24537.39
Total assets 71580.54 75235.36 69797.92 62381.31 54215.95

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