1

CHAPTER 1

INTRODUCTION

Financial Management is the specific area of finance dealing

with the financial decision corporations make, and the tools
and analysis used to make the decisions.

The discipline as a whole may be divided between long-term

and short-term decisions and techniques. Both share the same
goal of enhancing firm value by ensuring that return on capital
exceeds cost of capital, without taking excessive financial risks.
Capital investment decisions comprise the long-term choices
about which projects receive investment, whether to finance
that investment with equity or debt, and when or whether to
pay dividends to shareholders.
Short-term corporate finance decisions are called working
capital managementand deal with balance of current assets
and current liabilities by managing cash, inventories, and shortterm borrowings and lending (e.g., the credit terms extended to
customers). Corporate finance is closely related to managerial
finance, which is slightly broader in scope, describing the
financial techniques available to all forms of business
enterprise, corporate or not.

LITERATURE REVIEW
Many researchers have studied financial ratios as a part of
working capital management; however, very few of them have
discussed the working capital Policies in specific.
Some earlier work by Gupta and Heffner (1972) examined
the differences in financial ratio averages between industries.
The conclusion of both the studies was that differences do exist
in mean profitability, Activity, leverage and liquidity ratios
amongst industry groups.
Pinches et al. (1973) used factor analysis to develop seven
classifications of ratios, and found that the classifications were
stable over the 1951-1969 time periods.
In a regional study, Pandey and Parera (1997) provided an
empirical evidence of working capital management policies and
practices of the private sector manufacturing companies in Sri
Lanka. The information and data for the study were gathered
through questionnaires and interviews with chief financial
officers of a sample of manufacturing companies listed on the
Colombo Stock Exchange. They found that most companies in
Sri Lanka have informal working capital policy and company
size has an influence on the overall working capital policy

(formal or informal) and approach (conservative, moderate or

aggressive). Moreover, company profitability has an influence
on the methods of working capital planning and control.
Chu et al. (1991) analysed the hospital sectors to observe the
differences of financial ratios groups between hospital sectors
and industrial firms sectors.Their study concluded that financial
ratios groups were significantly different from those of
industrial firms ratios as well these ratios were relatively stable
over the five years period. A significance relationship for about
half of industries studied indicated that results might vary from
industry to industry.
Another aspect of working capital management has been
analysed by Lamberson (1995) who studied how small firms
respond to changes in economic activities by changing their
working capital positions and level of current assets and
liabilities. Current ratio, current assets to total assets ratio and
inventory to total assets ratio were used as measure of working
capital while index of annual average coincident economic
indicator was used as a measure of economic activity. Contrary
to the expectations, the study found that there is very small
relationship between charges in economic conditions and
changes in working capital.
However, Weinraub andVisscher (1998) have discussed the
issue of aggressive and conservative working capital
management policies by using quarterly data for a period of
1984 to 1993 of US firms. Their study looked at ten diverse
industry groups to examine the relative relationship between
aggressive/conservative working capital policies. The authors
have concluded that the industries had distinctive and
significantly different working capital management policies.
Moreover, the relative nature of the working capital
management policies exhibited remarkable stability over the
ten-year study period. The study also showed a high and
significant negative correlation between industry asset and
liability policies and found that when relatively aggressive
working capital asset policies are followed they are balanced by
relatively conservative working capital financial policies.
Bollen (1999) conducted a studyon Ratio Variables on
which he found three diff erent uses of ratio variables in
aggregate data analysis: (1) as measures of theoretical
concepts, (2) as a meansto control an extraneous factor, and
(3) as a correction for heteroscedasticity. In the use of ratiosas

indices of concepts, a problem can arise if it is regressed

on other indices or variables thatcontain a common
component. For example, the relationship between two
per capita measures may be confounded with the
common population component in each variable.
Regarding thesecond use of ratios, only under exceptional
conditions will ratio variables be a suitable means of controlling
an extraneous factor. Finally, the use of ratios to correct for
heteroscedasticity is also often misused. Only under special
conditions will the common form forgers soon with
ratiov a r i a b l e s c o rre c t f o r h e t e ro s c e d a s t i c i t y. A l t e rn a t
i v e s t o r a t i o s f o r e a c h o f t h e s e c a s e s a re discussed and
evaluated.
Cooper (2000) conducted a study on Financial
Intermediation on which he observed that thequantitative
behaviour of business-cycle models in which the intermediation
process acts either as a source of fluctuations or as a
propagator of real shocks. In neither case do we find convincing
evidence that the intermediation process is an important
element
of aggregate fl uctuations. For a n e c o n o m y d r i v e n b y i n t
e rm e d i a t i o n s h o c k s , co n s u m p t i o n i s n o t s m o o t h er th
a n o u t p u t , investment is negatively correlated with output,
variations in the capital stock are quite large, and interest rates
are procyclical. The model economy thus fails to match
unconditional moments for t h e U . S . e c o n o m y. We a l s o
structurally estimate parameters of a model
e c o n o m y i n w h i c h intermediation and productivity
shocks are present, allowing for the intermediation
process to propagate the real shock. The unconditional
correlations are closer to those observed only when the
intermediation shock is relatively unimportant.
Sathyamoorthi (2002) focused on good corporate
governance and in turn effective management of business
assets. He observed that more emphasis is given to investment
in fixed assets both in management area and research.
However, effective management working capital has been
receiving little attention and yielding more significant results.
He analysed selected Co-operatives in Botswana for a period of
1993-1997 and concluded that an aggressive approach has
been followed by these firms during all the four years of study.

Filbeck and Krueger (2005) highlighted the importance of

efficientworking capital management by analysing the working
capital management policies of 32 non-financial industries in
USA. According to their findings significant differences exist
between industries in working capital practices over time.
OBJECTIVES OF STUDY
The major objectives of the resent study are to know about
financial strengths and weakness of HNG Ltd through
FINANCIAL RATIO ANALYSIS.
The main objectives of the study are:
1. To study the present financial system at HNG Ltd
2. To know the financial condition of the company.
3. Interpret the financial statement so that the strength and
weakness of a firm Historical performance and current financial
condition can be determined.
4. To analyse the liquidity position of the company.
5. Throw light on a long term solvency of a firm.
6. To offer appropriate suggestions for the better performance
of theOrganization.
METHODOLOGY:
The information is collected through secondary sources during
the project. That information was utilized for calculating
performance evaluation and based on that, interpretations
were made.
Sources of secondary data:
1. Most of the calculations are made on the financial
statements of the company provided statements.
2. Referring standard texts and referred books collected some
of the information regarding theoretical aspects.
3. Method- to assess the performance of the company method
of observation of the work in finance department in followed.

LIMITATIONS OF THE STUDY:

Non-monetary aspects are not considered making the

results unreliable.
Different accounting procedures may make results
misleading.
In spite of precautions taken there are certain procedural
and technical limitations.
Accounting concepts and conventions cause serious
limitation to financialanalysis.
Lack of sufficient time to exhaust the detail study of the
above topicbecame a hindering factor in my research.

PLAN OF THE WORK:

CHAPTER 1

INTRODUCTION

CHAPTER 2

CONCEPTUAL FRAMEWORK

CHAPTER 3

DATA FINDINGS & ANALYSIS

CHAPTER 4

CONCLUSIONS & SUGGESTIONS