A Study Report

On
“The Study of Working Capital Management in Odisha Mining
Corporation Limited Bhubaneswar”
Submitted in partial fulfillment of
Masters of Business Administration
By

Aditya Rath

Registration no-1471091016

Under the guidance of

Mr. R. K. Panda Pallavi Mishra

Dy. General Manager (Finance) Asst. Professor

OMC, Bhubaneswar Institute of Business & Computer Studies,

SOA University

Institute of Business & Computer Studies

Faculty of Management Sciences

Siksha ‘O’ Anusandhan University

Bhubaneswar - 751012, Odisha

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 Declaration
I, Mr. / Ms. Aditya Rath, hereby declare that the project report submitted by me entitled,
“The Study of Working Capital Management in Odisha Mining Corporation Limited,

Bhubaneswar” in the partial fulfilment for the degree of MBA to IBCS, SOA University,
Bhubaneswar, is the record of original work done by me. No part of the content of this report
has been submitted to any institution / university for the award of any other degree. Previous

works in this field have been duly acknowledged as and when they have been referred.

Date: - 18 /07 /2018

Place: - Bhubaneswar (Name & Signature of the Student)

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 Certificate
This is to certify that Mr. / Ms. Aditya Rath, having registration No 1471091016 has
done this research project work on “The Study of Working Capital Management in Odisha
Mining Corporation Limited, Bhubaneswar” and submitted the report in partial fulfillment
for the degree of Master of Business Administration to IBCS, SOA University, Bhubaneswar
under my supervision and guidance.

His / her report is the record of original work done by him / her. To the best of my
knowledge, no part of the content of this report has been submitted for any degree by him /
her or anybody else to any other University or Institution.

Mr. R. K. Panda

Dy. General Manager (Finance)

Corporate Guide

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 ACKNOWLEDGEMENT
This project work is an opportunity, I got to come across some great and intelligent
personality and learn something under their blessings of guidance. I take this privilege to
express my heartiest thanks to those persons who individually as well as collectively helped
me in the successful completion of this project report.
I would like to acknowledge and extend my gratitude to my company guide Mr. R.K. Panda,
Dy. General Manager (Finance) who’s deep sharing and synergy has helped me a lot in
completing my project. I would also like to thank all the employees and executives of various
departments of OMC who empowered me with valuable information and giving me their
valuable time.
I would present my heartiest thanks to Ms. Pallavi Mishra (Internal Guide) for the help and
co-operation in preparing this project.
Finally, I am thankful to my parents, friends and well-wishers for their constant support and
help towards completion of my work.

Date: - 18 /07 /2018

Place: - Bhubaneswar (Name & Signature of the Student)

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 Summary of the Report
A well designed and implemented working capital management is expected to contribute
positively to the creation of a firm’s value. The purpose of this project is to examine the trends
in working capital management (WCM) and its impact on the performance of Odisha Mining
Corporation Limited (OMC), Bhubaneswar during the last few years. This project aims at
learning various facets of working capital management at OMC by studying the day to day
activities.

Working capital management involves not only managing the different components of the
current assets, but also managing the current liabilities, or to be more precise, financing the
current assets. A firm is required to maintain a balance between liquidity and profitability
while conducting its day to day operations. Liquidity is a precondition to ensure that firms are
able to meet its short-term obligations and its continued flow can be guaranteed from a
profitable venture. The importance of cash as an indicator of continuing financial health should
not be surprising in view of its crucial role within the business. This requires that business must
be run both efficiently and profitably. In the process, an asset-liability mismatch may occur
which may increase firm’s profitability in the short run but at a risk of its insolvency. On the
other hand, too much focus on liquidity will be at the expense of profitability.

There are three main areas in working capital management and the project focuses on the
following:

1. Receivables management
2. Cash management
3. Inventory management

By using the financial statements of OMC, an analysis has been carried out to understand the
trends that have been followed. Based on the above study, certain recommendations are made.
The financial statements (mainly balance sheet along with profit & loss accounts) are used to
work out various ratios which help us in better understanding the organization’s working
capital management. The key variables used in the analysis are inventories days, accounts
receivables days, accounts payable days. These ratios are then compared with industry’s
standard to get an insight to understand the nuances of the working of the organization.

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 Table of Contents
CHAPTER 1: INTRODUCTION, OBJECTIVE, IMPORTANCE & LIMITATION OF THE
STUDY ....................................................................................................................................... 10
Title of the study ...................................................................................................................... 10
Introduction.............................................................................................................................. 11
Objective .................................................................................................................................. 11
Importance of the study ........................................................................................................... 11
Methodology of study .............................................................................................................. 12
Data Sources ............................................................................................................................ 12
Data Analysis ........................................................................................................................... 12
Limitation of the Report .......................................................................................................... 12
CHAPTER 2: COMPANY PROFILE ........................................................................................ 13
OMC- An Introduction ............................................................................................................ 13
Business lines of OMC ............................................................................................................ 13
Major milestones achieved ...................................................................................................... 14
Structure of the organization ................................................................................................... 14
Peripheral Development and C S R ......................................................................................... 16
OMC Super 30 ......................................................................................................................... 17
Core Activities of Odisha Mining Corporation(OMC) ........................................................... 18
Financial Performance of OMC .............................................................................................. 22
Chapter 3: Working Capital Management-Conceptual Framework........................................... 30
Meaning of Capital .................................................................................................................. 30
Features of Capital ................................................................................................................... 30
Introduction to Working Capital Management ....................................................................... 30
Concept of working capital...................................................................................................... 31
Scope of working capital ......................................................................................................... 32
Objectives of working capital management ............................................................................ 35
Types of Working Capital ....................................................................................................... 35
Determinants of Working Capital ........................................................................................... 37

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 Methods of estimating / analyzing working capital ................................................................ 41
Working Capital Financing ..................................................................................................... 42
Chapter 4:Analysis of Short term Financial Position (Test of liquidity) of Odisha Mining
Corporation (OMC) by using Ratio Analysis ............................................................................. 45
A. Net working capital ........................................................................................................... 45
B. Ratio Analysis ................................................................................................................... 46
CHAPTER 5: ANALYSIS OF CHANGES IN WORKING CAPITAL OF OMC USING
CASH FLOW STATEMENTS .................................................................................................. 64
Uses, Significance or Important of funds flow statement ....................................................... 64
Statement of changes in Working Capital ............................................................................... 65
CHAPTER 6: ANALYSIS OF WORKING CAPITAL MANAGEMENT OF OMC BY
USING ‘DUPOINT’ METHOD ................................................................................................. 69
What is DuPont Analysis? ....................................................................................................... 69
The Formula............................................................................................................................. 69
Key Points ................................................................................................................................ 69
Components of the DuPont Equation: ..................................................................................... 70
1. Profit Margin .................................................................................................................. 70
2. Asset Turnover ............................................................................................................... 70

3. Financial Leverage ......................................................................................................... 70

The DuPont Equation in Relation to Industries....................................................................... 70
CHAPTER 7: ANALYSIS OF WORKING CAPITAL MANAGEMENT OF OMC BY
USING ‘'ALTMAN Z-SCORE' METHOD ............................................................................... 72
What is the 'Altman Z-Score'................................................................................................... 72
Breaking down 'Altman Z-Score' ............................................................................................ 72
Deconstructing the Z-Score ..................................................................................................... 73
CHAPTER 8: FINDINGS, SUGGESTIONS AND CONCLUSIONS ...................................... 75
Findings ................................................................................................................................... 75
Suggestions .............................................................................................................................. 75
Conclusion ............................................................................................................................... 76
BIBLIOGRAPHY ....................................................................................................................... 77

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 LIST OF TABLES

Table 1 Financial Performance of OMC for last 5 years............................................................ 22

Table 2 Achievements during 2016-2017(Iron Ore) as compared to ......................................... 24
Table 3 Achievements during 2016-2017(Chrome Ore) as compared to previous years .......... 24
Table 4 Net Working Capital of OMC ...................................................................................... 45
Table 5 Current Ratio of OMC ................................................................................................... 48
Table 6 Quick Ratio of OMC ..................................................................................................... 50
Table 7 Cash Ratio of OMC ....................................................................................................... 51
Table 8 Inventory turnover ratio of OMC .................................................................................. 53
Table 9 Inventory Holding Period of OMC............................................................................... 55
Table 11 Debtors Turnover Ratio of OMC ................................................................................ 57
Table 12 Average Collection Period of OMC ............................................................................ 58
Table 13 Creditor’s turnover ratio of OMC................................................................................ 59
Table 14 Creditors Payment Period of OMC ............................................................................. 61
Table 15 Working Capital Turnover Ratio of OMC .................................................................. 62
Table 16 Statement of changes in Working Capital for the year ending 2015-16 and 2016-17
................................................................................................................................................... ..65
Table 17 Statement of changes in Working Capital for the year ending 2014-15 and 2015-16
................................................................................................................................................... ..66
Table 18 Statement of changes in Working Capital for the year 2013-14 and 2014-15 ............ 67
Table 19 Statement of changes in Working Capital for the year 2012-13 and 2013-14 ............ 68
Table 20 Computation of ‘Du Point’ of OMC for the financial years 2013-17 ......................... 71
Table 21 Computation of 'Altman Z-Score’ of OMC for the financial years 2013-17 .............. 74

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 LIST OF FIGURES

Figure 1 Employee Strength of Odisha Mining Corporation(OMC) ......................................... 14

Figure 2 Board of Directors of Odisha Mining Corporation(OMC) .......................................... 15
Figure 3 Expenditure incurred under CSR activities in the last 5 years of Odisha Mining
Corporation (OMC) .................................................................................................................... 17
Figure 4: Year Wise Production for IRON ORE ........................................................................ 19
Figure 5 Year Wise Production for CHROME ORE ................................................................. 19
Figure 6 Year Wise Production for BAUXITE .......................................................................... 20
Figure 7 Year Wise Sales for IRON ORE .................................................................................. 21
Figure 8 Year Wise Sales for CHROME ORE........................................................................... 21
Figure 9 Financial Performance of OMC for last 5 years .......................................................... 22
Figure 10 Bar graph representation for Payment made to govt. By OMC during last five years
..................................................................................................................................................... 23
Figure 11 Pie chart representation for Payment made to govt. By OMC during last five years 23
Figure 12 Expenditure of OMC for last five years ..................................................................... 24
Figure 13 Graphical Representation of Net working capital of OMC ...................................... 46
Figure 14 Graphical Representation of Current Ratio of OMC ................................................ 49
Figure 15 Graphical Representation of Quick Ratio of OMC.................................................... 50
Figure 16 Graphical Representation of Cash Ratio of OMC ..................................................... 52
Figure 17 Graphical Representation of Inventory turnover ratio of OMC ................................ 54
Figure 18 Graphical Representation of Inventory Holding Period of OMC .............................. 55
Figure 19 Graphical Representation of Debtors Turnover Ratio of OMC ................................. 57
Figure 20 Graphical Representation of Average Collection Period of OMC ........................... 58
Figure 21 Graphical Representation of Creditor’s turnover ratio of OMC ................................ 60
Figure 22 Graphical Representation of Creditors Payment Period of OMC.............................. 61
Figure 23 Graphical Representation of Working Capital Turnover Ratio of OMC................... 63

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 CHAPTER 1: INTRODUCTION, OBJECTIVE, IMPORTANCE &
LIMITATION OF THE STUDY

Title of the study

“THE STUDY OF WORKING CAPITAL MANAGEMENT IN ODISHA MINING

CORPORATION LIMITED BHUBANESWAR”

As a part of Curriculum, every student studying MBA has to undertake a project on a particular
subject assigned to him/her. Accordingly I have been assigned the project work on “The Study
of Working Capital Management in Odisha Mining Corporation Limited, Bhubaneswar.

Decision relating to working capital and short term financing are known as working capital
management. It involves the relationship between a firm’s short-term assets and its short term
liabilities.

The goal of working capital management is to ensure that the firm is able to continue its
operation and that it has sufficient cash flow to satisfy both maturing short term debt and
upcoming operational expenses.

Working capital is used in OMC for different purpose such as raw material, work in progress,
finished goods, inventories, sundry debtors, and day to cash requirement. The various
information regarding “working capital management” such as classification, determinants,
sources have been discussed relating to OMC Bhubaneswar.

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Introduction
Working Capital Management refers to managing of funds or resources required to meet
regular expenses and requirements. It represents the liquidity position of business indicating
the management of short term assets and liabilities. Net working capital is calculated as
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 – 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 excluding deferred tax assets/liabilities, excess cash,
surplus assets and/or deposit balances.Along with fixed assets such as plant and equipment,
working capital is considered a part of operating capital. When current assets are higher than
current liabilities, that means the company is capable enough to continue its operations and
satisfy both maturing short-term debt and upcoming operational expenses. The management of
working capital involves managing inventories, accounts receivable and payable, and cash.

Working Capital Management of the Odisha Mining Corporation Ltd. (OMC) is highly
satisfactory due to efficient management of inventory, debtors, cash balances and working
funds

Objective
The objective of preparing this report can be explained under two categories. They are:

1. Broad Objective:

The objective of the study is to gain an insight into the concept of Working Capital
Management, how working capital is managed in a mining company and how it influences the
overall performance of the company.

2. Specific Objective:
a. Evaluation of Working Capital Management
b. Evaluation of liquidity position & inventory
c. Evaluation of receivables and accounts payable

Importance of the study

There are numerous aspects of working capital management that makes it an important topic
for the study.

The management of assets in any organization is an essential part of overall management.

Every management gives more importance to managing working capital. If we look at any
financial statement it will be evident that the investment in fixed assets remains more or less
static but the working capital is constantly changing.

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A healthy working capital position is the sign of a successful business. This is reflected in
adequate inventories, lowest lend of debtors, minimum utilization of bank facility for working
capital. Thus the study of working capital management occupies an important place in financial
management.

Methodology of study
Methodology is the process of carrying out a research process. In order to carry out this project
work both primary and secondary data has been used.

Data Sources
For the successful completion of the project both primary and secondary data has been used.
Most of the findings of the report is quantitative in nature.

As far as primary sources are concerned, regular personal interaction with the employees of
finance department as well as other departments of the company was conducted.

Secondary sources include information from company’s website as well as other online
sources, annual reports of the organization, existing reports on the concerned topic.

Data Analysis
As it is a quantitative report, data have been tabulated, analyzed and interpreted with the help
of different financial ratios and statistical tools and most of the calculation was done through
Microsoft Excel.

Limitation of the Report

The report faced some problems during its preparation, which has limited the purpose of the
report. The limitations are:

1. To maintain the confidentiality of the information data availability is a big issue.

2. The internship has been made for two months long duration but it is very much difficult
to set true practical experience with current world circumstances in this short span of
time. In spite of all these limitation I have tried to put the best effort as far as possible.

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 CHAPTER 2: COMPANY PROFILE

OMC- An Introduction

Odisha is one of the richest states in India in terms of mineral wealth. However, this wealth
was largely untapped as mining is a very capital intensive industry and in the early years of
independence capital was scarce. Under these circumstances, the Odisha Mining Corporation
Limited (OMC) was incorporated on 16th May 1956 as a joint venture Company of Govt. of
Odisha and Govt. of India with the objective of harnessing the mineral wealth of the State of
Odisha through exploration, extraction as well as value addition.
Four years later, following the withdrawal of the Govt of India from the company, OMC
became a wholly State-owned Corporation of Govt. of Odisha on 17th Nov 1961. As of now, it
continues to be a wholly owned corporation of the Odisha Government, which has subscribed
to the entire paid up capital of Rs.31.45 crores out of an authorized capital of Rs.100 crores.
OMC has been growing steadily over these years and today it stands as the largest State PSU in
the mining sector of the country. It recorded the highest turn-over of Rs.2851crore in the
Financial Year 2017-18.
OMC is ably managed by an eminent Board of Directors consisting of Government Directors
as well as Independent Directors. The Chairman and the Managing Director look after the day-
to-day running of the Corporation under the guidance of the Board of Directors.

Business lines of OMC

The company mainly aimed at three major minerals mines - Chrome ore, Iron ore and
Manganese ore. These three over the past few years has satisfied the requirements of plenty of
mineral based industries like Ferro-chrome, Pig iron, Sponge iron, Steel, Ferro-manganese etc.
But later from 2008-2009 onwards the company temporarily had to suspend mining of
Manganese Ore and also Lime stone ore because of environment constraints.

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Major milestones achieved
OMC has adopted SAP software, an ERP tool, since 2004 to streamline its business processes,
bring synergy in functional activities across the organization, and handle numerous business
locations and expanding volumes. It also helps in bringing greater transparency in financial
transactions and effective monitoring and financial control enabling the organization to take
informed and timely decisions. For successfully implementing the ERP package, OMC was
awarded with the Golden Peacock Award in 2006-07 by the Institute of Directors, New Delhi.

The Odisha Mining Corporation Ltd. has been classified as a “Gold” Category State PSU in
2012 and it was one of the biggest achievements of OMC till date.

Structure of the organization

a. The OMC establishments across the State are listed below:

1. Head Office is at Bhubaneswar

2. Regional Offices are at JK Road (Jajpur), Daitari (Keonjhar), Gandhamardan
(Keonjhar), Barbil (Keonjhar), Bangur (Keonjhar), Koira (Sundargarh), Rayagada and
Angul.
3. There are Mining Offices/Site Offices in various mines under every Region.
4. One Chrome Ore Beneficiation Plant (COBP) at Kaliapani.
5. Export Office at Paradip.
6. Prospecting Divisional Offices are located at J.K.Road, Barbil, Koira and Rayagada.
7. Prospecting Camps are located at Chirigunia, Bangur, Joribar, SeremdaBhadrasahi,
Gandhamardan, Khandadhar, Daitari and Bhawanipatna.
b. OMC has a large fleet of human resources for carrying out its activities. The detail
information is given below:
SL.NO. CATEGORY OF EXECUTIVE NON- TOTAL
EMPLOYEES EXECUTIVE

1 Regular 382 1773 2155

2 Deputation 08 08
3 Contractual - 59 59
4 Non-Permanent - 01 01
Employees
5 Piece-rated - 419 419
Minor(PRM)
Grand Total 390 2252 2642
Figure 1 Employee Strength of Odisha Mining Corporation(OMC)
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Status of Mineral Concessions

1. OMC currently has 34 Mining Leases (Chromite - 11, Iron - 11, Iron & Manganese - 5,
Manganese - 3, Limestone – 1, Gemstone-2 and Bauxite-1).
2. In addition to this, OMC has applied one mining lease for Bauxite which is at Govt.
level.
3. Further, 3 Prospecting Licenses for chromite have been granted to OMC and executed.
Steps for undertaking exploration are in progress, Besides, OMC has applied for two
Prospecting Licenses for Bauxite.

Board of Directors

A board of directors is a recognized group of people who jointly oversee the activities of an
organization, which can be either a for-profit business, nonprofit organization, or a government
agency. The Board of Directors of OMC is given below.

Figure 2 Board of Directors of Odisha Mining Corporation (OMC)

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Peripheral Development and C S R

Corporate Social Responsibility is not a new concept in India, however, the Ministry of
Corporate Affairs, Government of India has recently notified the Section 135 of the
Companies Act, 2013 along with Companies (Corporate Social Responsibility Policy) Rules,
2014 "hereinafter CSR Rules" and other notifications.

OMC is committed to fulfill its obligation under Corporate Social Responsibility (CSR). In
addition to undertaking development works in the vicinity of OMC Mines, large amounts of
funds have also been placed with various district administration authorities for developmental
activities in the concerned districts.

During last five years OMC Limited has spent Rs 105.14 Crores.to fulfil its obligations under
Corporate Social Responsibility (CSR) on activities like environment protection and energy
conservation, clean water and sanitation, skill development and training, education and
promotion of talent, livelihood promotion and infrastructure development, eradication of
hunger and other community developments.

The Major CSR thrust initiate during the FY 2016 -17 are

1. As part of its green initiatives, MoU has been signed with Forest & Environment
department, Government of Odisha for plantation of 1 million saplings i.e. @ 1 tree per
10 metric tons of ore extracted. Further, Rs 3.12 Cr has been given to the Forest
Department, Government of Odisha.

2. Further, to nurture and promote talent amongst the backward classes and backward
regions of the state OMC has undertaken an initiative called ‘ÓMC Super 30’. This
programme provides support to under-privileged students for higher education in
collaboration with Centre for Social Responsibility and leadership (CSRL), New Delhi
in providing residential coaching to students after plus two for competing in Joint
Entrance Examinations for IITs, NITs etc. Rs 0.96 crores were spent for the purpose in
the financial year 2016-17.

3. OMC has also committed to provide financial support for construction of 25 model
schools over a period of three years with a total expenditure of around Rs 100 Crores in
the financial year 2016-17.

4. Rs 1.05 crores were spent on LED based information system for tourists in Puri.

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OMC has formulated and adopted a POLICY ON CORPORATE SOCIAL
RESPONSIBILITY wherein 2% of the average net profit of last three years is set aside for
CSR activities.

Detailed information regarding expenditure incurred under CSR activities in the last 4 years is
given below.
.

Area 2014-15 2015- 16 2016-17 2017-18

CSR 1687.68 4450.98 2907.66 4368.90
Donation to Chief - - 3008 7007.50
Minister Relief
Fund
Periphery - - 367 1255.72
development
Expenditure
Advertisement & - - - 4191.78
Publicity
Sponsorship - - - 1054.39
Total 1687.68 4450.98 6282.66 17,878.29
Figure 3 Expenditure incurred under CSR activities in the last 5 years of Odisha Mining
Corporation (OMC)

OMC Super 30

OMC has started an initiative to support underprivileged yet bright students for higher
education. In collaboration with Center for Social Responsibility and Leadership (CSRL) New
Delhi, OMC has taken the initiative to support the coaching of talented students after Class
12th for competing in the Joint Entrance Examination (JEE) for IITs, NIITs etc.

Two batches of 30 students each were started under this initiative in 2015.'OMC SUPER 30'
batch with 30 students from keonjhar,

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Sundargarh, Jajpur, Anugul, Jagatsingpur,Khurda, Kalahandi,Koraput & Rayagarh District
and another 30 students under 'OMC SUPER 30 ODISHA' batch from all over the state. All the
students are from families with income of less than Rs 2.5 lakhs per annum (Criteria for
selection).

The 60 Students were provided 11 month free residential coaching to compete in the IIT and
other Premier engineering exams.OMC has borne the entire financial cost of Rs 1.5 crores
(Rs 2.5 lakhs per candidate).

The results have been very encouraging. Out of 60 students, 52 have qualified the JEE Mains
and hand written the JEE Advance Exam. Out of these 52 candidates,24 have qualified in the
JEE Advance exam. It is expected that most of the students will be eligible for admission in the
IITs or NITs.

Core Activities of Odisha Mining Corporation(OMC)

1. Production-OMC has shown consistency in the production of ore and ore concentrate
over the last 5 years. The production of iron ore has increased substantially from 3.4
million tonnes in 2005-06 to about 8 million tonnes in 2008-09. Similarly the production
of chrome ore and chrome concentrate has been fairly consistent in the last 5 years. Iron
Ore Production was 63,65,831 MT in FY 2016-17 against 59,70,826 MT in FY 2015-
16, which saw an increase of 6.62%. The Chrome ore production was 12,06,226 MT in
FY 2016-17 against 927,094 MT in FY 2015-16 evidencing an increase of 30.11%.
There was no production of Manganese, Lime stone & Gem stone during the year
(previous financial year nil).

At the present rate, OMC is producing about 10 % of total iron ore production of the
State and about 30 % of the total chrome ore production of the State. Presently Daitari,
Gandhamardan and Kurmitar (Khandadhar) are the major Iron ore Mines of OMC
whereas South Kaliapani is the main Chrome ore Mine of OMC. Bangur Chrome ore
Mine is the first and only underground mine of OMC.

Graphical representation of Production of iron ore, chrome ore and

bauxite ore for last five years:

18
Figure 4: Year Wise Production for IRON ORE

Figure 5 Year Wise Production for CHROME ORE

19
 Figure 6 Year Wise Production for BAUXITE

2. Sales-The rates for domestic sale of Iron, Chrome and Manganese Ores are decided on
e-auction basis. The Sale of ore to buying units/industries is restricted to their capacity
and verification of the units/industries is done to ascertain their requirement of Ore.
No ore is sold to traders except iron ore fines and manganese ore with less than 35% Mn.
Iron ore sized by Government and non-moving items and is supplied to various
units/industries. Chrome ore is sold to Ferro-chrome units, Chemical units and
Refractory units. Sale of Iron ore & Chrome ore together have increased by 61.32 %
over previous financial year (Sales quantity of Ore in FY 2016-17 was 80,11,578 MT
& in FY 2015-16 was 49,66,135 MT). Sale of Iron Ore was 71,62,090 MT in FY 2016-
17 which is an increase of 65.09%, over 43,38,368 MT achieved in FY 2015-16. The
sale quantity of Chrome ore was 8,49,488 MT in FY 2016-17 which is an increase of
35.32%, over 6,27,767 MT achieved in FY 2015-16. There was no sale of Manganese,
lime stone & Gem stone during the year (previous financial year Nil).

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Graphical representation of Sale of iron ore and chrome ore for last five
years:

Figure 7 Year Wise Sales for IRON ORE

Figure 8 Year Wise Sales for CHROME ORE

21
Financial Performance of OMC

Consistent good performance has helped OMC generate substantial profits over the last few
years. This has led to OMC contributing substantially to the exchequers of the National as well
as State governments.

Graphical representation of information on the financial performance of OMC, payments made

by OMC to Govt. and Item-wise Budgeted provision and actual performance of last five years
is given below:

(Figures in Crores)
Year TurnOver PROFIT PROFIT CUMULATIVE
BEFORE AFTER RESERVES
TAX TAX AND
SURPLUS
2017-18 2830.31 -713.74 -713.74 5,153.39
(Provisional &
Un-audited)
2016-17 2331.43 1314.36 770.24 5867.13
2015-16 1548.08 990.05 629.89 5698.68
2014-15 1,881.26 1,487.10 977.32 5670.58
2013-14 1,853.88 1,449.95 867.82 5,864.17

Table 1 Financial Performance of OMC for last 5 years

Figure 9 Financial Performance of OMC for last 5 years

22
Payment made to Govt. By OMC during last five years

Figure 10 Bar graph representation for Payment made to govt. By OMC

during last five years

Figure 11 Pie chart representation for Payment made to govt. By OMC

during last five years

23
Budgeted and Actual performance of O.M.C for last five years

Figure 12 Expenditure of OMC for last five years

Following tabular statement indicates the achievements during 2016-2017 as
compared to previous years
Iron ore
Year Production (in Sales (in ‘000 Sales Value
‘000 MT) MT) ( in crores)
2012-13 2,470 2,710 1,112.10
2013-14 2,439 3,191 1,007.43
2014-15 3,170 3,497 1,083.92
2015-16 5,971 4,338 838.04
2016-17 6,366 7,162 1,257.80
Table 2 Achievements during 2016-2017(Iron Ore) as compared to
previous years

Chrome ore
Year Production (in Sales (in ‘000 Sales Value
‘000 MT) MT) ( in crores)
2012-13 680 476 546.04
2013-14 637 709 846.45
2014-15 732 615 797.34
2015-16 927 628 710.04
2016-17 1206 849 1073.63

Table 3 Achievements during 2016-2017(Chrome Ore) as compared to

previous years
24
The Odisha Mining Corporation Limited BALANCE SHEET as at March 31,
2017, 2016 2015, 2014 and 2013

1. Particulars As As As As at As
at March at March at March March at March
31, 2017 31, 2016 31, 2015 31, 2014 31, 2013

ASSETS
Non-current assets
a) Property, Plant 13,14087.3 6,791.65 27,554.02 7,030.89 7,155.57
and Equipment
b) Capital work- 5,630.22 10,076.47 6,134.10 3,659.59 3,029.41
in-progress

c) Other
intangible 34,850.41 10,076.47 - - -
assets
d) Intangible
assets under 12,286.71 10,076.47 - - -
development
e) Financial
Assets
i. Investments 39,902.59 26,464.71 38,335.89 37,435.89 14,339.89
ii. Loans 72,512.62 149,392.96 86,672.99 46,674.37 51,189.17
f) Deferred tax 1,117.80 1,501.51 362.94 557.09
assets (Net)
g) Other non- 33,015.79 47,274.73 27,469.70 12,999.55 2,454.69
current assets
Total non-current 2,11,285.69 3,10,895.69 5,11,365.6 8,08,285.69 2,07,885.69
assets 9
Current assets
a) Inventories 56,878.90 59,077.13 42,333.93 27,864.56 33,316.26
b) Financial
Assets
i. Trade 10,608.04 6,604.21 3,643.15 973.17 766.26
receivables
ii. Cash and cash 10,000.98 285,746.51 4,07,211.4 4,09,274.12 4,12,243.74
equivalents 4
iii. Bank balances 1,05,389.44 - - - -
other than (ii)
above
iv. Loans 39,324.50 80,632.62 1,54,349.9 1,15,927.41 1,05,540.90
9
v. Others 1,53,630.10 - - - -
c) Current Tax 65,528.66 - - - -
Assets (Net)

25
 d) Other current 15 977.79 24,300.82 27,143.87 27,634.56 27,691.95
assets
Total Current Assets 4,57,338.41 4,56,361.29 6,34,682.3 5,81,673.82 5,79,559.11
TOTAL ASSETS 6,68,624.10 6,97,479.60 8,01,622.2 689,837.06 658,284.92

EQUITY AND LIABILITIES

a) Equity Share 3,145.48 3,145.48 3,145.48 3,145.48 3,145.48

capital
b) Other Equity 5,86,713.28 5,67,450.79 5,65,654.6 586,417.45 514,982.14
3
Total equity 5,89,858.76 570,596.27 5,68,800.1 589,562.93 518,127.62

LIABILITIES
Non-current liabilities
a) Provisions 12,010.39 7,256.32 6,593.75 4,108.59 4,328.37
b) Deferred tax 10,110.64 - - - -
liabilities (Net)
c) Other Long - 1,970.00 2,422.17 2,422.17 2,422.17
Term
Liabilities
Total non-current 22, 121.03 9,226.32 9,015.92 6,530.76 6,750.54
liabilities
Current liablllties
a) Financial
Liabilities
i. Borrowings - 73,700.00 1,50,200.0 37,056.47 30,516.36
0
ii. Trade payables 24,582.86 29,434.67 39,742.36 24,554.86 69,094.56
iii. Other financial 5,711.50 - -
liabilities
b) Other current 25,809.96 14,522.28 33,605.02 31,476.76 32,878.40
liabilities
c) Provisions 539.99 0.05 258.86 655.29 917.44
Total Current 56,644.31 117,657.01 2,23,806.2 93,743.37 133,406.76
liablllties
TOTAL EQUITY 6,68,624.10 697,479.60 8,01,622.2 689,837.06 658,284.92
AND LIABILITIES

26
The Odisha Mining Corporation Limited statement of PROFIT & LOSS for the
year ended March 31, 2017, 2016 2015, 2014 and 2013
Particulars For the year For the year For the year For the For the
ended ended ended year ended year ended
March 31, March 31, March 31, March 31, March 31,
2017 2016 2015 2014 2013
Revenue from Operations 2,33,142.96 154,642.27 188,126.21 185,388.17 165,814.57
Other Income 37,413.71 48,122.37 53,526.03 58,099.91 54,061.05
A. Total Revenue 2 70 556.67 202,764.64 241,652.25 243,488.09 219,875.62
Expenses

Cost of Materials Consumed - 812.03 737.05 1,471.78 625.72

Changes in Inventories 1,794.08 (17,037.32) (14,574.16) 5,612.50 1,783.79
Employee benefits expense 25,064.91 17,033.79 16,291.79 15,871.24 14,554.66
Finance costs 882.60 3,324.37 3,354.91 1,578.42 1,321.12
Depreciation and amortization
expense 7,643.67 922.56 1,093.29 1,054.71 1,214.16
Excise duty 811.22 - - - -
Corporate Social Resposibility - 4,451.00 1,687.59 - -
Other expenses 1,02.309.41 94,458.12 84,351.66 72,904.10 65,597.90
B. Total expenses 1,38,505.89 103,964.55 92,942.14 98,492.75 81,529.77
C. Profit/Loss before
extraordinary items
and Tax (A-B) 1,32,050.78 98,800.09 148,710.11 144,995.34 138,345.85
D. Extraordinary Items - - -
E. Profit/Loss before
Tax (C-D) 1,32,050.78 98,800.09 148,710.11 144,995.34 138,345.85

Less : Provision For Taxation

-Current year Income Tax 42,692.10 33,071.76 52,111.77 55,307.13 48,776.53

-Deferred Tax 14,719.59 383.71 1,138.56 194.14 (60.13)
-Earlier years (3 000.00) 3,000.00 - 2,711.48 18.27
-Wealth Tax 5.17 1.05 1.12
F. Total Provision for 60411.69 36,455.47 50,978.38 58,213.81 48,735.80
Taxation
G. Profit/Loss after Tax 71639.09 62,344.62 97,731.73 86,781.53 89,610.05
(E-F)
Earning per Equity Share :
(Face Value of Rs. 100/- each)

i. Basic 2,448.73 1,982.04 3,107.05 2,758.93 2,848.85

ii. Diluted 2,448.73 1,977.37 3,087.21 2,759.31 2,852.56

27
 The Odisha Mining Corporation Limited statement of CASH FLOW for the
year ended March 31, 2017, 2016 2015, 2014 and 2013
Particulars For the year For the year For the year For the year For the year
ended ended ended ended ended
March 31, March 31, March 31, March 31, March 31,
2017 2016 2015 2014 2013
A. Cash Flow from
Operating
Activities
Net Profit Before Taxes & 1,32,050. 78 98,947.00 149,334.14 1,45,007.34 138,462.39
Extraordinary Prior
Period items
Finance costs recognized in 882.60 3,324.37 - - -
profit or loss
Depreciation 7,643.67 927.21 1,093.29 1,054.71 1,214.16
&Amortization (Incl.
Impairment)
Interest on Deposits with - (27,583.79) (42,090.35) (40,636.72) -48,148.52
banks
Purchase of - 450.71 (900.00) - -
Investments(Diminuation)
Other Interest - (12,129.61) (7,107.24) (6,798.98) -4,335.59
Operating profit before - 60,611.52 100,329.85 98,626.35 87,192.45
working capital
adjustments
Increase(-)/Decrease(+) in 2,637.30 (16,999.06) (14,469.37) 5,451.70 -1,791.28
inventories
Increase(-)/Decrease(+) in (3,442.10) (2,961.06) (2,669.98) (206.92) 655.88
Trade Receivables
Increase(-)/Decrease(+) in 2,637.30 (2,961.06) 69,171.86 2,175.36 (65,906.00)
Long Term & Short Term
Loans & Advances
Increase(-)/Decrease(+) in 16 536.80 (23,194.52) 969.69 573.49 (2,096.76)
accrued Interest on deposits
with Banks
Increase(-)/Decrease(+) in - 8,860.78 (479.01) 516.10 -65.34
other Current Assets
Increase(-)/Decrease(+) in - (6,017.73) 14,470.15 10,544.85 -2,355.26
Other Non-Current Assets
Increase(-)/Decrease(+) in - (106,355.46) 130,459.29 (34,832.47) 73,061.24
Long Term, Short Term
Liab. & Trade Payables
Increase(-)/Decrease(+) in 388.08 659.57 2,086.84 (481.87) 713.19
Long Term & Short Term
provisions
Prior Period Adjustment (146.91) (624.03) 9.35 -116.55
Cash Generated from 1,53,586.46 (165,959.41) 31,631.42 (38,372.31 2,099.11
Operations
Direct Taxes(Net) - 7,931.97 (61,361.10) (66,065.68) -95,394.31
Wealth Tax - 0.05 (3.27) (1.12) -0.77
Cash Outflow in - 7,932.02 (61,364.38) (66,066.81) -95,395.08
Operating Activities

28
Cash Used(-)/(+) - (97,415.87) 70,596.89 (5,812.77) -6,103.52
Generated from
Operating Activities (A)
B. Cash Flow from
Investing
Activities
Purchase of Tangible & (57,819.10) (886.22) (888.09) -951.40 -1,144.21
Intangible assets
Increase(-)/Decrease(+) in (3,187.17) (2,474.50) (630.18) -867.07
CWIP
Purchase of Investments (2,017.41) (900.00) 23,096.00) -300.00
Interest on Deposits with 35,663.01 27,583.79 42,090.35 40,636.72 48,148.52
banks
Other Interest 107.71 12,129.61 7,107.24 6,798.98 4,335.59
Increase(-)/Decrease(+) in 26,720.00 117,632.34 90.54 6,833.64 42,619.87
Investment in Term
Deposits with more than 3
months
Cash Used(-)/(+) 39,464.20 153,272.35 45,925.54 29,591.76 92,936.32
Generated in Investing
Activities (B)
C Cash flow from
Financing Activities
Payment of Dividends (73,700.00) (50,000.00) (100,000.00) 40,000.00 -50,000.00
Tax on Dividends 60,178.82) (10,178.82) (18,494.56) 6,798.00 -8,111.25
Increase(-)/Decrease(+) in - - - 26,883.01 -26,883.01
Balances with Banks for
unpaid dividend
Cash Used(-)/(+) Generated (1,35,706.451) (60,178.82) (118,494.56) 19,914.99 -84,994.26
in Financing Activities (C)
Net Increase(+)/Decrease(-) (4,322.34) (1,972.13) 3,864.02 1,838.53
in Cash & Cash
Equivalents(A+B+C)
Cash & Cash Equivalents in 2,175.97 6,498.30 8,470.43 4,606.41 2,767.88
the beginning of the year
Cash & Cash Equivalents in 10,000.98 2,175.96 6,498.30 8,470.43 4,606.41
the end of the year
Net Increase in Cash & 7,825.01 (4,322.34) (1,972.13) 3,864.02 1,838.53
Cash Equivalents
Components of Cash &
cash Equivalents:
Cash & Cheques on Hand - 6.43 3.60 5.17 10.76
Balances with Scheduled
Banks
In Current Account - 2,169.52 6,494.70 8,465.26 4,595.65
8,470.43 4,606.41

29
 Chapter 3: Working Capital Management-Conceptual Framework

Meaning of Capital

Capital in general refers to the initial investment made by the businessman or the owner in a
business.

Features of Capital

1. Capital is man made

2. Capital is perishable
3. Capital is controlled by human
4. Capital is mobile
5. Capital is human sacrifice
6. Capital is scarce
7. Capital is a passive factor

Introduction to Working Capital Management

Every business needs funds for two purposes for its establishment and to carry out its day- to-
day operations. Long term funds are required to create production facilities through purchase
of fixed assets such as plant & machinery, land, building, furniture, etc. Investments in these
assets represent that part of firm’s capital which is blocked on permanent or fixed basis and is
called fixed capital. Funds are also needed for short-term purposes for the purchase of raw
material, payment of wages and other day – to- day expenses etc. These funds are known as
working capital. In simple words, working capital refers to that part of the firm’s capital which
is required for financing short- term or current assets such as cash, marketable securities,
debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being
constantly converted in to cash and this cash flows out again in exchange for other current
assets. Hence, it is also known as revolving or circulating capital or short term capital.

30
Concept of working capital

There are two concepts of working capital:

1. Gross working capital-Gross Working Capital refers to the firm's investment in current
assets. Current assets are the assets which can be converted into cash within an
accounting year and include cash, short-term securities, debtors, (accounts receivable or
book debts) bills receivables and stock (inventory)

It is useful for the following purposes:

a. It is the total investment in current assets which earns profit.

b. Management can give attention to manage very efficiently and carefully each item of the
current assets in order to minimize bad debt, slow-moving and non-moving items, idle
cash etc.

c. It takes into consideration of the fact that, if other things remain constant, infusion of
fund in the business increases its working capital.

d. It enables management to compute the rate of return on total investment in current

assets.

2. Net working capital-Net Working Capital refers to the difference between current
assets and current liabilities. Current liabilities are those claims of outsiders which are
expected to mature for payment within an accounting year and include creditors
(accounts payable), bills payable, and outstanding expenses. Net working capital can be
positive or negative. A positive net working capital will arise when current assets exceed
current liabilities. Also, negative net working capital will arise when current liabilities
exceed current assets.

It is useful for the following purposes:

a. It indicates the liquidity position of the firm i.e., ability of the firm to meet its short- term
obligations.

b. It helps creditors and other potential investors to judge the financial health of the firm.

c. Gross concept of working capital may lead to incorrect conclusion regarding financial
stability of firms having the same amount of current assets.

31
 d. It indicates the extent of long-term sources of fund used in financing current assets of a
business enterprise.

So both gross concept of working capital and net concept of working capital are useful for
working capital management. However, while preparing a vertical form of balance sheet, the
Institute of Chartered Accountants of India has defined and shown working capital as the
difference between current assets and current liabilities.

There is yet another view, according to which the net working capital may be referred to as the
qualitative—and the gross working capital as the quantitative—aspects of the idea. These two
concepts of working capital are generally known as the balance sheet concepts as they depend
upon the contents of balance sheet items.

Scope of working capital

1. Maintain the adequate level of working capital, always to meet the rising turnover, this
way peak needs can be taken care of.

2. Sufficient liquidity to meet short-term obligations & when they arise also to avail market
opportunities like purchase of raw material at low prices or at attractive discount.

3. Proper interdepartmental co-ordination to minimize working capital investment. i.e. co-

ordination between the marketing department & production department.

4. Selection of appropriate sources of working capital like trades credit, bank finance, or
other short-term finance as well as long term finance.

5. It becomes easy to avail finance for the working capital if the firm banker relationship
are good and built on strong good faith.

For the purposes of optimizing working capital, the most important factors are:

1. Accounts receivables management

2. Inventory management
3. Liquidity and Cash management
4. Accounts payable management

32
 1. Receivable Management

Trade credit arises when a firm sells its product or services on credit and does not receive cash
immediately. It is an essential marketing tool, acting as a bridge for the movement of goods
through production and distribution stages of customers.

A firm grants trade credit:

a. To protect its sales from the competitors.

b. To attract the potential customers to buy its product at favorable terms.

Trade credit creates account receivable. The customers from whom receivables or book debt
have to be collected in near future are called as trade debtors or simply as debtors and represent
the firm’s claim or asset. The credit sales have three characteristics:-

a. It involves an element of risk that should be carefully analyzed.

b. Credit sales are based on economic value.
c. The buyer will make the cash payment for good or services received by him in a
future period.

Debtors constitute a substantial portion of current assets of several firms. Trade debtors are the
major part of current assets. The interval between the date of sale and the payment has to be
financed out from working capital of an organization. This necessitates the firm to get funds
from banks or other sources. Thus, trade debtors represent investment. If substantial amounts
are tied-up in trade debtors; it needs careful analysis and proper management.

2. Inventory Management

“Inventory refers to the stockpile of the products a firm is offering for the sale and the
components that make up the product”. In other words, inventory management is a process of
maintaining the raw materials when entered in the company till it is converted into finished
goods. The importance of keeping the right level of inventory lies in the fact that a maximum
proportion of working capital remains blocked in the inventory until it is completely sold off
and debtors realized

 Objectives of Inventory Management

a. To minimize investments in inventory.

b. To meet a demand for the product by efficiently organizing the production and sales
operations.
c. To maintain an optimum level of inventory at right place with minimum of cost to avoid
a stock out option.

33
Maintaining optimum level of inventory also has other benefits like:

a. Meeting the market demand when it arises

b. Meeting the unexpected demand when it arises
c. Handling seasonal or cyclical fluctuations
d. Customer satisfaction
e. Minimizing cost of sales so that affordability of sales remains

 Cost of holding inventory

Those cost that arise due to storing of inventory (Carrying Cost)

 Benefits of holding inventory:

There are various benefits of holding inventory-

a. Benefits in Purchasing
b. Benefits in Production
c. Benefits in Work in Process
d. Benefits in Sales

Inventory includes all types of stocks. For effective working capital management, inventory
needs to be managed effectively. The level of inventory should be such that the total cost of
ordering and holding inventory is the least. Simultaneously, stock out costs should also be
minimized. Business, therefore, should fix the minimum safety stock level, re-order level and
ordering quantity so that the inventory cost is reduced and its management becomes efficient.

3. Liquidity and Cash Management

Cash is the lifeline of an organization. A sustained growth of an organization depends on the

cash ability of the profit, not the profit per se as reflected in the income statement. The rising
profit curve of an organization may mislead managers into high rates of growth, which are
unsustainable due to the actual cash position of the company. This leads to continuous erosion
of liquidity and may even make a company sick. There has not been much of cash management
in Indian enterprises due to easy availability of working capital finance from banks. However,
recently, cash management as a discipline is emerging in the country.

Three main activities contribute to the cash flow:

34
 a. Operating activities cover cash flows relating to all revenue generating activities of the
organization.
b. Investing activities cover cash flows arising from investments.
c. Financing activities cover cash flows arising out of all capital and debt issues of the
organization.

Objectives of working capital management

The various objectives of working capital mgmt in any organization are as follows-

a. To maximize profit of the firm.

b. Prompt payment of bills and other dues.
c. To maintain sufficient current assets.
d. To enhance the liquidity position and solvency of a firm.
e. To maintain good relationships with banks and other financial institutions.
f. To discharge current liabilities.
g. To increase the value of the firm.
h. To minimize the risk of the business.

Types of Working Capital

Figure 13 Types of Working Capital

35
On the basis of Balance Sheet View, types of working capital are described below:

1. GROSS WORKING CAPITAL

Gross Working Capital refers to the firm's investment in current assets. Current assets
are the assets which can be converted into cash within an accounting year and include
cash, short-term securities, debtors, (accounts receivable or book debts) bills receivables
and stock (inventory).

2. NET WORKING CAPITAL

Net Working Capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to mature
for payment within an accounting year and include creditors (accounts payable), bills
payable, and outstanding expenses. Net working capital can be positive or negative. A
positive net working capital will arise when current assets exceed current liabilities.
Also, negative net working capital will arise when current liabilities exceed current
assets.

On the basis of Operating Cycle View, types of working capital are as below:

1. PERMANENT / FIXED WORKING CAPITAL

Permanent working Capital is the minimum amount of raw materials, work in progress,
finished goods and cash balance which is required to ensure optimum utilization of fixed
assets. This minimum level of current assets always blocked in the business is called
permanent or fixed working capital.
 Initial working Capital- It is very much essential for a company to have sufficient cash
balance and other assets during the preliminary stages of operation. These funds which
are used to meet the preliminary requirements are called Initial working Capital
 Regular Working Capital-Regular working capital refers to the minimum amount of
liquid capital such as cash balance, raw materials and other assets required for smooth
operation of a business.
2. TEMPORARY/FLUCTUATING WORKING CAPITAL
Temporary working capital is used to meet with the seasonal and sudden requirements. It is
divided into two types.

 Seasonal Working Capital-The amount or volume of working capital requirement varies

greatly from one industry to other. Even a same company can have different working
capital requirements in different seasons. Hence the capital required to meet the varying
seasonal requirements of a firm is referred as Seasonal Working Capital.

36
  Special Working Capital-The capital required to meet requirements like experiments
with new products, new techniques of production, advertisements etc.

Determinants of Working Capital

In general, the following factors are to be considered in determining the working capital
requirement of a firm:

1. Nature of Business:
The working capital requirements of a firm are widely influenced by the nature of business.
Public utilities like bus service, railways, water supply etc. have the lowest requirements for
working capital—partly because of the cash nature of their business and partly because of their
rendering service rather than manufacturing product and there is no need of maintaining any
inventory or book debt except capital assets.

On the contrary, trading concerns are required to maintain more working capital because they
have to carry stock-in-trade, receivables and liquid cash. Manufacturing concerns also require
large amount of working capital because of the time lag involved in the conversion of raw
materials into finished products and, finally, into cash.

2. Size of the Business:

The amount of working capital requirement also depends upon the size of the business. The
size can be measured in terms of the scale of operations. A large firm with a high scale of
operation will require maintaining a large amount of working capital than a firm with a small
scale of operation.

3. Production Cycle:
Production cycle is the time involved in manufacturing or processing a product. It starts when
raw materials are put in the production process and ends with the completion of manufacturing
of the product. Longer the production cycle, higher is the need of working capital.

This is because funds remain blocked in work-in-progress for long periods of time. For
example, the working capital needs of a ship-building industry will be much longer than those
of a bakery.

4. Business Cycle:
The working capital requirements are also determined by the nature of the business cycle.
During the boom period, the need for working capital will increase to meet the requirements of
increased production and sales. On the other hand, in a slack period, the reduced volume of
operation will require relatively lower amount of working capital.

37
 5. Credit terms of Purchase and Sale:
The period of credit given by the suppliers and the period of credit granted to the customers
will affect the working capital needs of a firm. If a firm allows a very short credit period, cash
will be realised very soon from debtors. So the need for the working capital will be less.

On the other hand, a liberal credit policy will result in higher amount of book debts. Higher
book debts will mean more working capital requirement. If the firm has to purchase raw
materials in cash or gets credit for shorter period, it has to arrange for relatively higher amount
of working capital.

6. Seasonal Variations:
There are industries like cold drinks, ice-cream and woolen where the goods are either
produced or sold seasonally. So, in such industries, working capital requirements during
production or sale seasons will be large and these will start decreasing when the season starts
coming-to end.

However, much depends on the policy of management with regard to production or sale of
goods. For example, the management of a woolen industry wants to carry on production evenly
throughout the year rather than concentrating on its production only in the busy season. In that
case the working capital requirements will be low.

7. Operating Efficiency:
If the operating efficiency of a firm is very high, the resources will be properly utilized. As a
result, it improves the profitability of the firm which ultimately, helps in releasing the pressure
of working capital. On other hand, inefficiency compels the firm to maintain relatively a high
level of working capital.

8. Price level changes:

If prices of input rise, the firm requires additional working capital to maintain the same level of
production.

9. Growth and Expansion of the Business:

Every concern wants to grow over a period of time and with the increase in its size, so the
working capital requirements are bound to increase. A growing firm would require greater
working capital than a static one.

10.Profitability and Retention Money:

The net profit earned by the firm goes to increase the working capital to the extent it has been
earned in cash. The cash profit can be found by adjusting non-cash items such as depreciation,
outstanding expenses and losses or intangible assets written-off in the net profit.

38
But what portion of this profit will be reinvested as working capital will depend upon the
retention policy of a firm which is, again influenced by corporate tax structure and dividend
policy. So, if the amount of retained profit is not immediately invested outside the business, it
would increase the amount of working capital.

11. Relationship of Material Cost to Total Cost:

In manufacturing concerns, where raw material costs bear a large proportion to the total cost of
production, a greater amount of working capital will have to be maintained. For example, in
industries like textile and electronics, large sums are required to maintain the inventory of such
raw materials.

12. Turnover of Current Assets:

The speed with which the current assets revolve around also affects working capital
requirements of a firm. In few cases like vegetables or fruit shops, stocks get sold very quickly
and, for this reason, a little or no working capital is required in carrying over the stock.

On the other hand, there are some businesses, like jewelry, having very slow turnover of the
stocks leading to the need for a larger amount of working capital.

Adequacy of Working Capital

Working capital is just like a heart of the industrial enterprise. If it is weak, the business firm
cannot prosper and even survive, although there is a large investment in fixed assets. Moreover
not only the existence of working capital is a must for the industry, it must be adequate also.
Working Capital in an organization should be adequate to meet the day to day requirements of
a firm as well as to protect the shrinkage of the current assets of the firm. Sufficient working
Capital also ensures smooth operation of the firm during emergencies like strikes, floods or
during any other natural calamities.

The principal advantages of maintaining sufficient working capital are given below:

1. Maintenance of the solvency of the company or avoidance of its commercial insolvency

by continuing production.
2. Maintenance of credit by prompt payment to supplies of raw materials and others.
3. Availability of cash discount which increases the volume of profit of the company.
4. Willingness of banks to grant seasonal loans.
5. Good opportunities can be exploited, e.g., the Company may make off seasonal
purchases resulting in substantial savings or it can fetch big supply orders.
6. Availability of emergency capital on soft terms is ensured.

39
 7. Fixed assets like plant and machinery need not remain idle. This will enhance the
efficiency of the assets which in turn will enhance the efficiency of the firm.
8. High morale of employees because of an environment of certainty, security and
confidence which is a great psychological factor.
9. Regular payment of dividend is assured due to the availability of sufficient liquidity
10.Production efficiency is enhanced by making expenditures on research, innovation and
technical development and by maintaining continuous flow of materials.

Inadequate working capital

Inadequate working capital means shortage of working capital to meet the day to day operating
activities of the business concern. In other words, the quantum of inadequate working capital is
the difference between actual working capital and adequate working capital.

Disadvantages of Inadequate working capital:

The following are the dangers, limitations or disadvantages of inadequate working.

1. The growth of the business concern will be stagnated. The reason is that the business
concern is not in a position to take up a profitable venture due to unavailability of
working capital funds.
2. It affects the goodwill of the company.
3. The objectives of the business concern cannot be achieved. Moreover, average rate of
return cannot be earned by the company.
4. The short term liabilities cannot be met in time.
5. Fixed assets cannot be used properly due to inadequate working capital.
6. The market opportunities like cash discount and trade discount cannot be availed by the
business concern.
7. Sometimes, business opportunities are not utilized due to non availability of adequate
working capital.
8. Production capacity is not used fully. It results in the low level of production. This leads
to failure to meet the regular demands. Hence, the customers may switch over to some
other products.
9. It directly affects the liquidity position of the business firm.
10.Whenever the goodwill of the company is affected, the credit worthiness of the company
is decreased to some extent among the banks and financial institutions.

40
Dangers of excessive working Capital

1. When there is a redundant working capital, it may lead to unnecessary purchasing and
accumulation of inventories causing more chances of theft, waste and losses.
2. Indication of defective credit policy and slack collection period which results in bad
debts adversely affecting profits.
3. Excessive Working Capital means idle funds which earn no profits for the business and
hence the business cannot earn a proper rate of return on its investments.
4. Excessive working capital implies excessive debtors and defective credit policy which
may cause higher incidence of bad debts.
5. It may result into overall inefficiency in the organization.
6. When there is excessive working capital, relations with banks and other financial
institutions may not be maintained.
7. Due to low rate of return on investments, the value of shares may also fall.
8. The redundant working capital gives rise to speculative transactions.

Methods of estimating / analyzing working capital

1. Percentage of sales method:

It is the easiest of the methods for calculating the working capital requirement of a company.
This method is based on the principle of ‘history repeats itself’. For estimating, a relationship
of sales and working capital is worked out for say last 5 years. If it is constantly coming near
say 40% i.e. working capital level is 40% of sales, the next year estimation is done based on
this estimate. If the expected sale is Rs 500, Rs 200 would be required as working capital.

The advantage of this method is that it is very simple to understand and calculate also.
Disadvantage includes its assumption which is difficult to be true for many organizations. So,
where there is no linear relationship between the revenue and working capital, this method is
not useful. In new startup projects also, this method is not applicable because there is no past.

2. Regression analysis method:

This statistical estimation tool is utilized by mass for various types of estimation. It tries to
establish trend relationship. We will use it for working capital estimation. This method
expresses the relationship between revenue & working capital in the form of an equation
(Working Capital = Intercept + Slope * Revenue). The slope is the rate of change of working
capital with one unit change in revenue. Intercept is the point where regression line and
working capital axis meets

41
 3. Operating cycle method:

This is probably the best of the methods because it takes into account the actual business or
industry situation into consideration while giving an estimate of working capital. A general
rule can be stated in this method. Longer the working capital operating cycle, higher would be
the requirement of working capital and vice versa. We would agree to the point also. The
following formula can be used to estimate or calculate the working capital

Working Capital = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle / 365
Days) + Bank and Cash Balance.

Working Capital Financing

Working capital financing is done by various modes such as trade credit, cash credit/bank
overdraft, working capital loan, purchase of bills/discount of bills, bank guarantee, letter of
credit, factoring, commercial paper, inter-corporate deposits etc.

Arrangement of working capital financing forms a major part of the day to day activities of a
finance manager. It is a very crucial activity and requires continuous attention because working
capital is the money which keeps the day to day business operations smooth. Without
appropriate and sufficient working capital financing, a firm may get into troubles. Insufficient
working capital may result in nonpayment of certain dues on time. Inappropriate mode of
financing would result in loss of interest

1. Trade Credit

This is simply the credit period which is extended by the creditor of the business. Trade credit
is extended based on the creditworthiness of the firm which is reflected by its earning records,
liquidity position, and records of payment. Just like other sources of working capital financing,
trade credit also comes with a cost after the free credit period. Normally, it is a costly source as
a means of financing business working capital.

2. Cash Credit / Bank Overdraft

Cash credit or bank overdraft is the most useful and appropriate type of working capital
financing extensively used by all small and big businesses. It is a facility offered by
commercial banks whereby the borrower is sanctioned a particular amount which can be
utilized for making his business payments. The borrower has to make sure that he does not
cross the sanctioned limit. The best part is that the interest is charged to the extent the money is
used and not on the sanctioned amount which motivates him to keep depositing the amount as

42
soon as possible to save on interest cost. Without a doubt, this is a cost-effective working
capital financing.

3. Working Capital Loans

Working capital loans are as good as term loan for a short period. These loans may be repaid in
installments or a lump sum at the end. The borrower should take such loans for financing
permanent working capital needs. The cost of interest would not allow using such loans for
temporary working capital.

4. Purchase / Discount of Bills

For a business, it is another good service provided by commercial banks for working capital
financing. Every firm generates bills in the normal course of business while selling goods to
debtors. Ultimately, that bill acts as a document to receive payment from the debtor. The seller
who requires money will approach the bank with that bill and bank will apply the discount on
the total amount of the bill based on the prevailing interest rates and pay the remaining amount
to the seller. On the date of maturity of that bill, the bank will approach the debtor and collect
the money from him.

5. Bank Guarantee

It is primarily known as non-fund based working capital financing. Bank guarantee is acquired
by a buyer or seller to reduce the risk of loss to the opposite party due to non-performance of
the agreed task which may be repaying money or providing of some services etc. A buyer ‘B1’
is buying some products from seller ‘S1’. In this case, ‘B1’ may acquire bank guarantee from
the bank and give it to ‘S1’ to save him from the risk of nonpayment. Similarly, if ‘S1’ may
acquire bank guarantee and hand it over to ‘B1’ to save him from the risk of getting lower
quality goods or late delivery of goods etc. In essence, a bank guarantee is revoked by the
holder only in case of non-performance by the other party. Bank charges some commission for
same and may also ask for security.

6. Letter of Credit
It is also known as non-fund based working capital financing. Letter of credit and bank
guarantee has a very thin line of difference. Bank guarantee is revoked and the bank makes
payment to the holder in case of non-performance of the opposite party whereas, in the case of
a letter of credit, the bank will pay the opposite party as soon as the party performs as per
agreed terms. So, a buyer would buy a letter of credit and send it to the seller. Once the seller
sends the goods as per the agreement, the bank would pay the seller and collects that money
from the buyer.

43
 7. Factoring
Factoring is an arrangement whereby a business sells all or selected accounts payables to a
third party at a price lower than the realizable value of those accounts. The third party here is
known as the ‘factor’ who provides factoring services to business. The factor would not only
provide financing by purchasing the accounts but also collects the amount from the debtors.
Factoring is of two types – with recourse and without recourse. The credit risk of nonpayment
by the debtor is borne by the business in case of with recourse and it is borne by the factor in
the case of without recourse.

Some other sources of working capital financing used are inter-corporate deposits, commercial
paper, public deposits etc.

44
Chapter 4:Analysis of Short term Financial Position (Test of liquidity) of
Odisha Mining Corporation (OMC) by using Ratio Analysis

A. Net Working Capital

1. Net working capital is the aggregate amount of all current assets and current liabilities.
It is used to measure the short-term liquidity of a business, and can also be used to obtain
a general impression of the ability of the management to utilize assets in an efficient
manner.

2. An analysis of the net working capital will be very help full to know the operational
efficiency of the company.

3. Net working capital is expressed as

𝑵𝒆𝒕 𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 (𝑵𝑾𝑪) = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 .

The following table provides the data relating to the net working capital of OMC.

All figures are Rs. In Lakh

Year Current Asset Current Liabilities NWC

2017 4,57,338.41 56,644.31 4,00,694.1
2016 5,07,846.72 1,18,076.36 3,89,770.36
2015 6,34,682.39 2,23,806.23 4,10,876.16
2014 5,81,673.82 93,743.37 4,87,930.45
2013 5,79,559.11 1,33,406.77 4,46,152.34
Table 4 Net Working Capital of OMC

45
 NET WORKING CAPITAL
600000

500000

400000

300000

200000

100000

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013
Series1 400694.1 389770.36 410876.16 487930.45 446152.34

Figure 14 Graphical Representation of Net working capital of OMC

Interpretation of results

The above chart shows that the working capital in the financial year 2017-16 was Rs
4,00,694.1, similarly Rs 3,89,770.36 in 2016-15, Rs 4,10,876.16 in 2015-14 , Rs 4,87,930.45
in 2014-13 and Rs 4,46,152.34 in 2013-12.

This implies that the company had maintained a stable working capital for all the years from
2013-2017. It can be concluded that the company has a good liquidity position and has
sufficient working capital to pay off its current liabilities.

B. Ratio Analysis
1. The analysis of the financial statements and interpretations of financial results of a
particular period of operations with the help of ‘ratio’ is termed as “ratio analysis.”
Ratio analysis used to determine the financial soundness of a business concern.

2. Ratio analysis can be defined as relationships worked out among various accounting
data. It may be defined as to one number with another number and to express it in items
of another.

3. Robert Anthony defines the ratio as “simply one number expressed in terms of another”.
A great number of ratios can be computed from the basis of financial statements, i.e.
Balance Sheet and Profit & Loss A/C.

46
Advantages of Ratio Analysis
Ratio analysis is necessary to establish the relationship between two accounting figures to
highlight the significant information to the management or users who can analyze the business
situation and to monitor their performance in a meaningful way. The following are the
advantages of ratio analysis:

1. It facilitates the accounting information to be summarized and simplified in a required

form

2. It highlights the inter-relationship between the facts and figures of various segments of
business.

3. Ratio analysis helps to remove all type of wastages and inefficiencies.

4. It provides necessary information to the management to take prompt decision relating to

business.

5. It helps to the management for effectively discharge its functions such as planning,
organizing, controlling, directing and forecasting

6. Ratio analysis reveals profitable and unprofitable activities. Thus, the management is
able to concentrate on unprofitable activities and consider improving the efficiency
.
7. Ratio analysis provides all assistance to the management to fix responsibilities.

8. Ratio analysis helps to determine the performance of liquidity, profitability and solvency
position of the business concern.

Limitations of Ratio Analysis

1. Ratio analysis is one of the important techniques of determining the performance of
financial strength and weakness of a firm. Though ratio analysis is relevant and useful
technique for the business concern, the analysis is based on the information available in
the financial statements.

2. There are some situations, where ratios are misused; it may lead the management to
wrong direction. The ratio analysis suffers from the following limitations

3. Ratio analysis is used on the basis of financial statements. Number of limitations of

financial statements may affect the accuracy or liquidity of ratio analysis.
47
 4. Ratio analysis heavily depends on quantitative facts and figures and it ignores qualitative
facts and figures and it ignores qualitative data. Therefore this may limit accuracy.

5. Ratio analysis is a poor measure of a firm’s performance due to lack of adequate

standards laid for ideal ratios.

CURRENT RATIO

1. It is the ratio which expresses the relationship between the total current assets and
current liabilities. It indicates the availability of current assets in rupees for every one
rupee of current liabilities. A ratio of greater than one means the firm has more current
assets than current liabilities. A standard ratio between them is 2:1.

2. A high current ratio is an indication that the firm has the ability to pay its current
obligations in time as and when they become due.

3. An increase in the current ratio means an improvement in the liquidity position of the
firm.

4. Current Ratio is expressed as

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

The following table provides the data relating to the Current Ratio of OMC.

Figures are in Rs. Lakh

Year Current Assets Current Liabilities Current Ratio

2017 4,57,338.41 56,644.31 8.07

2016 5,07,846.72 1,18,076.36 4.30

2015 6,34,682.39 2,23,806.23 2.84

2014 5,81,673.82 93,743.37 6.20

2013 5,79,559.11 1,33,406.77 4.34

Table 5 Current Ratio of OMC

48
 Current Ratio
9
8
7
6
5
4
3
2
1
0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013
Series1 8.07 4.3 2.84 6.2 4.34

Figure 15 Graphical Representation of Current Ratio of OMC

Interpretation of results
It is seen from the above chart that the current ratio for year 2017-16 was 8.07 which
was the highest among all the five financial years. However the value of current ratio for
all other financial years was lower than 8.07 but the firm was able to maintain the ratio
above the standard value of 2:1, hence it can be concluded that the company has enough
current assets to successfully meet its current obligations or liabilities.

ACID TEST RATIO/QUICK RATIO/LIQUID RATIO

1. This ratio measures the firm’s ability to meet its short-term obligations with its most
liquid assets. Liquid assets are those that can be quickly turned into cash. Most of the
current assets are highly liquid with the exception of inventory, which often takes a
longer amount of time to turn into cash.

2. A company with quick ratio of less than one cannot currently fully pay back its current
liabilities. However a firm having a high Quick ratio may not have a satisfactory
liquidity position if it has low paying deters. On the other hand a firm having a low
quick ratio may have a good liquidity position if it has fast paying deters.

3. It is a more rigorous test of liquidity than Current Ratio.

49
4. Quick ratio is expressed as

𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠(𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦)

𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

The following table provides the data relating to the Quick Ratio of OMC.

All figures are Rs. Lakh

Year Quick Assets Current Liabilities Quick Ratio

2017 4,00,459.51 56,644.31 7.06

2016 4,48,769.6 1,18076.36 3.80

2015 5,92,348.46 1,33,406.77 4.44

2014 5,53,809.26 93,743.37 5.90

2013 5,10,854.59 2,23,806.23 2.82

Table 6 Quick Ratio of OMC

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013
Series1 7.06 3.8 4.44 5.9 2.82

Figure 16 Graphical Representation of Quick Ratio of OMC

50
Interpretation of results

The above chart indicates that the quick ratio in the financial year 2017-16 was 7.06
which were the highest among all the years, however it declined 3.80 in 2016-15, and
however it rose to 4.44 in 2015-14 due to an increase in quick assets, 5.90 in 2014-13
due to a decline in current liabilities and 2.82 in 2013-12.

This shows the company maintains satisfactory quick ratio. The quick ratio is above the
standard ratio i.e. 1:1. Hence it shows the liquidity position of the company is adequate.

Absolute Liquid Ratio/Cash Ratio

1. In addition to computing current and quick ratio, some analysts also compute absolute
liquid ratio to test the liquidity of the business. The Absolute Liquid ratio is a liquidity
ratio that measures a firm’s ability to pay, off its current liabilities with only cash and
cash equivalent.

2. The cash ratio is much more restrictive than the current ratio or quick ratio because no
other current assets can be used to pay off current debt in cash.

3. The formula to compute this ratio is given below:

𝑪𝒂𝒔𝒉 𝒂𝒏𝒅 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕

𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
The following table provides the data relating to the cash Ratio of OMC.
All figures are Rs. Lakh

Year Cash and Cash Equiv. Current Liabilities Cash Ratio

2017 10,000.98 56,644.31 0.176

2016 2,175.97 1,18076.36 0.018

2015 4,07,211.44 2,23,806.23 1.82

2014 4,09,273.12 93,743.37 4.36

2013 4,12,243.74 1,33,406.77 3.09

Table 7 Cash Ratio of OMC

51
 5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013
Series1 0.176 0.018 1.82 4.36 3.09

Figure 17 Graphical Representation of Cash Ratio of OMC

Interpretation of results
The above chart indicates that the cash ratio in the financial year 2017-16 was 0.176
which is satisfactory, however it declined to 0.018 in year 2016-15 due to a sudden
decline in cash and cash equivalents, which was the lowest among all the years, however
it rose to 1.82 in 2015-14 and 4.36 in 2014-13 and 3.09 in 2013-12 indicating increase in
the cash position of the organization.

Hence it shows the liquidity position of the company is satisfactory.

TurnOver Ratios
These are the ratios which indicate3 the speed with which assets are converted or turned over
into sales.
i) Inventory Turnover Ratio

ii) Debtors turnover Ratio

iii) Creditors Turnover Ratio

iv) Working capital turnover ratio

52
i) Inventory Turnover Ratio

1. ITR indicates the number of times the stock has turned over during the period. It
evaluates the efficiency with which the firm is able to manage its inventory.
2. Higher ITR indicates that the stocks are sold more frequently and lesser amount of
money is blocked in goods.
3. Lower ITR indicates dull business, slow moving goods and hence lower profit. However
a very high ITR may be the result of a very low inventory which results in shortage of
goods during times of high demand.
4. Quick ratio is expressed as
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒔𝒐𝒍𝒅
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝑶𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

If the cost of goods sold figure does not available to an outside analyst form the published
annual accounts, then inventory turnover can be calculated as follows.

𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝑶𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

The following table provides the data relating to the the inventory turnover ratio of OMC.

Year Net Sales (Rs. In Closing inventory (Rs. In Inventory turnover ratio

Lakh) Lakh)

2017 2,33,142.96 56,878.90 4

2016 1,54,808.06 59,077.12 2.62

2015 1,88,126.21 42,078.07 4.47

2014 1,85,388.17 27,864.56 6.65

2013 1,65,814.57 33,316.26 4.97

Table 8 Inventory turnover ratio of OMC

53
 7

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013
Series1 4 2.62 4.47 6.65 4.97

Figure 18 Graphical Representation of Inventory turnover ratio of OMC

Interpretation of results
The above chart indicates that the inventory turnover ratio in the financial year 2017-16 was 4
times, however it declined to 2.62 times in year 2016-15 due to a sudden decline in sales,
which was the lowest among all the years, however it rose to 4.47 times in 2015-14 and
6.65times in 2014-13 and 4.97 times in 2013-12 .

Hence it shows the company has satisfactory sales.

Inventory Holding Period

1. This period measures the average time taken for clearing the stocks. It indicates that how
many days inventory take to convert from raw material to finished gods.
2. This formula is used to determine how quickly a company is converting their inventory
into sales. A slower turnaround on sales may be a warning sign that there are problems
internally, such as brand image or the product, or externally, such as an industry
downturn or the overall economy.
3. Inventory Holding Period is expressed as

𝑫𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑯𝒐𝒍𝒅𝒊𝒏𝒈 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐

54
The following table provides the data relating to the Inventory Holding Period of OMC.

Year Days in a year Inventory Turnover Ratio Inventory Holding Period

(days)

2017 365 4 91

2016 365 2.62 139

2015 365 4.47 81

2014 365 6.65 54

2013 365 4.97 73

Table 9 Inventory Holding Period of OMC.

160

140

120

100

80

60

40

20

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013
Series1 91 139 81 54 73

Figure 19 Graphical Representation of Inventory Holding Period of OMC

Interpretation of results
The above chart indicates that the inventory holding Period in the financial year 2017-16 was
91 days, however it increased to 139 days in year 2016-15 due to a decline in sales, which was
the highest among all the years, again it declined to 81 days in 2015-14, 54 days in 2014-13
and 73days in 2013-12 due to an increase in sales figure.

Hence it shows the company is minimizing inventory holding period thereby to increase sales.

55
Debtors Turnover Ratio

1. The Debtors Turnover Ratio is an accounting measure used to quantify a firm's

effectiveness in extending credit and in collecting debts on that credit. The receivables
turnover ratio is an activity ratio measuring how efficiently a firm uses its assets.
2. A high receivables turnover ratio can imply a variety of things about a company. It may
suggest that a company operates on a cash basis, for example. It may also indicate that
the company’s collection of accounts receivable is efficient, and that the company has a
high proportion of quality customers that pay off their debts quickly. A high ratio can
also suggest that the company has a conservative policy regarding its extension of credit.
This can often be a good thing, as this filter out customers who may be more likely to
take a long time in paying their debts. On the other hand, a company’s policy may be too
conservative if it is too tight in extending credit, which can drive away potential
customers and give business to competitors. In this case, a company may want to loosen
policies to improve business, even though it may reduce its receivables turnover ratio.
3. A low ratio, in a similar way, can also suggest a few things about a company, such as
that the company may have poor collecting processes a bad credit policy or none at all,
or bad customers or customers with financial difficulty. Theoretically, a low ratio can
also often mean that the company has a high amount of cash receivables for collection
from its various debtors, should it improve its collection processes. Generally, however,
a low ratio implies that the company should reassess its credit policies in order to ensure
the timely collection of imparted credit that is not earning interest for the firm
4. Debtors Turnover Ratio is expressed as
𝑵𝒆𝒕 𝒄𝒓𝒆𝒅𝒊𝒕 𝒂𝒏𝒏𝒖𝒂𝒍 𝒔𝒂𝒍𝒆𝒔
𝑫𝒆𝒃𝒕𝒐𝒓𝒔 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑫𝒆𝒃𝒕𝒐𝒓𝒔

Note: In OMC, we have taken the total net sales instead of the credit sales, because of the non-
availability of the credit sales information in the annual reports for the calculation of DTR.

The following table provides the data relating to the Debtors Turnover Ratio of OMC

56
 Year Net Sale(Rs. In Average Debtors(Rs. In Debtors Turnover Ratio

Lakh) Lakh)

2017 2,33,142.96 8,606.125 27.09

2016 1,54,808.06 5,123.68 30.21

2015 1,88,126.21 2,308.43 81.49

2014 1,85,388.17 1,209.45 153.28

2013 1,65,814.57 1,119.41 148.12

Table 10 Debtors Turnover Ratio of OMC

180

160

140

120

100

80 Series1

60

40

20

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013

Figure 20 Graphical Representation of Debtors Turnover Ratio of OMC

Interpretation of results
The above chart indicates that the debtors turnover ratio in the financial year 2017-16 was
27.09 times, however it increased to 30.21 times in year 2016-15, again it increased to 81.49
times in 2015-14 , 153.28 times in 2014-13 and 148.12 times in 2013-12 .An increasing trend
of debtors turnover ratio was observed.

Hence it shows the company has an excellent credit policy.

57
Average Collection Period

It measures the quality of debtors since it measures the rapidity or slowness with which money
is collected from them. A shorter collection period implies prompt payment by debtors and
hence the chance of bad debts is reduced. A large collection period implies too liberal and
insufficient credit collection performance.
𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 =
𝐷𝑒𝑏𝑡𝑜𝑟𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜

Year Day in a year Debtor Turnover Debtor Collection

Ratio(Time) Period(Days)

2017 365 27.09 13.47

2016 365 30.21 12.08

2015 365 81.49 4.47

2014 365 153.28 2.38

2013 365 148.12 2.46

Table 11 Average Collection Period of OMC

16

14

12

10

8
Series1
6

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013

Figure 21 Graphical Representation of Average Collection Period of OMC

Interpretation of results
58
The above chart indicates that the debtors collection period in the financial year 2017-16 was
13.47 days, however it decreased to 12.08 days in year 2016-15 4.47days in 2015-14 , 2.38
days in 2014-13 and 2.46 days in 2013-12 .

Hence it is concluded that the company has an excellent credit policy and the company is able
to collect the debts in the shortest duration possible.

Creditor Turnover Ratio

1. Creditor’s turnover ratio is the ratio, which indicates the number of times the debts are
paid in the year.
2. A decreasing turnover ratio indicates that a company is taking longer to pay off its
suppliers than in previous periods. When the turnover ratio is increasing, the company is
paying off suppliers at a faster rate than in previous periods. The rate at which a
company pays its debts could indicate the financial condition of the firm. A decreasing
ratio could signal that a company is in financial distress; alternatively, it could reflect
that the company has negotiated different payment arrangements with its suppliers.
3. The ratio is calculated as

𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠/ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠

Year Net Average Creditors(Rs. In Creditors Turnover

Purchases(Rs. In Lakh) Ratio

Lakh)

2017 1,38,507.53 26,520.47 5.22

2016 1,03,105.64 21,667.17 4.75

2015 92,942.14 32,148.61 2.89

2014 98,492.75 46,824.71 2.10

2013 81,529.77 73,887.075 1.10

Table 12 Creditor’s turnover ratio of OMC

59
 6

3
Series1

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013

Figure 22 Graphical Representation of Creditor’s turnover ratio of OMC

Interpretation of results
The above chart indicates that the creditor turnover ratio is changing over the years. In the
financial year 2017-16, CTR was 5.22 times, however it decreased to 4.75 times in year 2016-
15, 2.89 times in 2015-14, 2.10 times in 2014-13 and 1.10 times in 2013-12.

Hence it is concluded that the company has an excellent payment policy and the company is
able to pay back all its current liabilities effectively.

Creditors Payment Period

1. The Creditors Payment Period represents the average number of days taken by the firm
to pay the creditors and other bills payable.
2. The Creditors Payment Period is given by-

𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜

60
 Year Day in a year Creditors Creditors Collection

Turnover Period(Days)

Ratio(Time)

2017 365 5.22 70

2016 365 4.75 77

2015 365 2.89 126

2014 365 2.10 173

2013 365 1.10 311

Table 13 Creditors Payment Period of OMC

350

300

250

200
Series1
150

100

50

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013

Figure 23 Graphical Representation of Creditors Payment Period of OMC

Interpretation of results
The above chart indicates in the financial year 2017-16, Creditors Payment Period was 70
days, it increased to 77 days in financial year 2016-15, 126 days in financial year 2015-14, 173
days in financial year 2014-13, and 311 days in financial year 2013-12.

It can be concluded that the company has maintained a good time frame for making prompt
payment to its creditors.

61
Working Capital Turnover Ratio (WCTR)

1. This ratio indicates that the number of times the working capital is turned over in the course of the year.
It measures the efficiency with which the working capital is used by the firm. A higher ratio indicates
the efficient utilization of working capital and a lower ratio indicates otherwise, but a very high
working capital turnover is not a good situation for any firm.

2. Working Capital Turnover Ratio is given by-

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Year Net Sales(Rs. In Net working WCTR

Lakh) Capital (Rs. In

Lakh)

2017 2,33,142.96 4,00,694.1 0.58

2016 1,54,808.06 3,89,770.36 0.39

2015 1,88,126.21 4,10,876.16 0.45

2014 1,85,388.17 4,87,930.45 0.37

2013 1,65,814.57 4,46,152.34 0.38

Table 14 Working Capital Turnover Ratio of OMC

62
 0.7

0.6

0.5

0.4
Series1
0.3

0.2

0.1

0
Year 2017 Year 2016 Year 2015 Year 2014 Year 2013

Figure 24 Graphical Representation of Working Capital Turnover Ratio of OMC

Interpretation of results
The above chart indicates in the financial year 2017-16, Working Capital Turnover Ratio was
0.58 times, 0.39 times in financial year 2016-15, 0.45 times in financial year 2015-14, 0.37
times in financial year 2014-13, and 0.38 times in financial year 2013-12.

It can be concluded that the company is utilizing working capital effectively.

63
CHAPTER 5: ANALYSIS OF CHANGES IN WORKING CAPITAL
OF OMC USING CASH FLOW STATEMENTS
Funds flow statement is a statement prepared to analyze the reasons for changes in the financial
position of a company to balance sheets. It shows the inflow and outflow of funds like sources
and applications of funds for a particular period. In other words, a funds flow statement is
prepared to explain the changes in working capital position of a company. The term ‘fund’
used here means working capital that is the excess of current assets over current liabilities.

Uses, Significance or Important of funds flow statement

1. It helps in the analysis of financial operations.
2. It throws light on many perplexing question of general interest.
3. It helps in the proper allocation of resource.
4. It acts as a figure guide.
5. It helps in appraising the use of working capital.
6. It helps to know the creditworthiness of a firm.

Limitations of funds flow statement

1. It provides only some additional information as regards changes in working capital. It is
not a substitute of balance sheet.
2. It cannot reveal continuous changes.
3. It is not an original statement but simply an arrangement of data given in the financial
statement.
4. It is essentially historic in nature and projected funds flow statement can’t be prepared
much necessary.
5. Changes in cash are more important and relevant for financial management than the
working capital.

64
Statement of changes in Working Capital

Paticulars As on 31- As on 31-03-17 Effect on Working Capital

03-16 Increase Decrease
Current Assets
Inventories 59,077.12 56,878.90 2,198.22
Sundry Deters 6,604.21 10,608.04 4,003.83
Cash and cash balances 2,175.97 10,000.98 7,825.01
Loans and Advances 33,708.62 39,324.50 5,615.88
Other Current Assets 4,06,276.05 3,40,525.99 65,750.06
A. Total Current 5,07,846.72 4,57,338.41 50,508.31
Assets
Liabilities
Sundry Creditors 28,458.08 24,582.86 - 3,875.22
Provisions 421.73 539.99 118.26
Other Current 89,196.55 31,521.46 - 57,675.09
Liabilities
B. Total Current 1,18,076.36 56,644.31 61,432.05
Liabilities
(A-B) Net Working 3,89,770.36 4,00,694.1
Capital
Increase/Decrease 10,923.74
in working Capital
Table 15 Statement of changes in Working Capital for the year ending 2015-16 and 2016-
17

Interpretation

It can be observed from the above table that there was a net increase in the working
capital from Rs 3, 89,770.36 in financial year 2015-16 to Rs 4, 00,694.1 in financial year
2016-17.

This is because of-

1. Increase in current assets like Sundry Deters, Cash and cash balance and Loans and
Advances.
2. Decrease in current liabilities like Sundry Creditors and Other Current Liabilities.

65
 Paticulars As on 31-03-15 As on 31-03-16 Effect on Working Capital
Increase Decrease
Current Assets
Inventories 42,078.07 59,077.12 16,999.05 -
Sundry Deters 3,643.15 6,604.21 2,961.06
Cash and cash balances 4,07,211.44 2,175.97 - 4,05,035.47
Loans and Advances 1,54,349.99 33,708.62 1,20,641.37
Other Current Assets 27,143.87 4,06,276.05 379132.18 -
C. Total Current 6,34,426.53 5,07,846.72 - 1,26,579.81
Assets
Liabilities
Sundry Creditors 39,742.36 28,458.08 - 11284.28
Provisions 3.00 421.73 418.73
Other Current 1,83,805.01 89,196.55 - 94,608.46
Liabilities
D. Total Current 2,23,550.37 1,18,076.36 - 1,05,474.01
Liabilities
(A-B) Net Working 4,10,876.16 3,89,770.36
Capital
Increase/ Decrease in 21,105.8
working Capital

Table 16 Statement of changes in Working Capital for the year ending 2014-15 and 2015-
16

Interpretation

It can be observed from the above table that there was a decrease in the working capital
from Rs 4, 10,876.16 in financial year 2014-15 to Rs 3, 89,770.36 in financial year
2015-16.

This is because of-

1. Decrease in current assets like Cash and cash balances and Loans and Advances.
2. Increase in current liabilities like Provisions.

66
 Paticulars As on 31-03-14 As on 31-03-15 Effect on Working Capital
Increase Decrease
Current Assets
Inventories 42,078.07 27,864.56 - 14,213.51
Sundry Deters 3,643.15 973.17 - 2,669.98

Cash and cash balances 4,07,211.44 4,09,274.12 20,62.68 -

Loans and Advances 1,54,349.99 1,15,927.41 - 38,422.58
Other Current Assets 27,143.87 27,634.56 490.69 -
A. Total Current 6,34,426.53 5,81,673.82 - 52,752.71
Assets
Liabilities
Sundry Creditors 39,742.36 24,554.86 - 15,187.5
Provisions 3.00 655.29 652.29
Other Current 1,83,805.01 68,533.23 - 1,15,271.78
Liabilities
B. Total Current 2,23,550.37 93,743.37 - 1,29,807
Liabilities
(A-B) Net Working 4,10,876.16 4,87,930.45 - -
Capital
Increase in working 77,054.29 -
Capital

Table 17 Statement of changes in Working Capital for the year 2013-14 and 2014-15

Interpretation

It can be observed from the above table that there was an increase in the working capital
from Rs 4, 10,876.16 in financial year 2013-14 to Rs 4, 87,930.45 in financial year
2014-15.

This is because of-

1. Increase in current assets like Cash and cash balances and Other Current Assets.
2. Decrease in current liabilities like Sundry Creditors and Other Current Liabilities.

67
 Paticulars As on 31-03-13 As on 31-03-14 Effect on Working Capital
Increase Decrease
Current Assets
Inventories 33,316.26 27,864.56 - 5451.7
Sundry Deters 766.26 973.17 206.91 -
Cash and cash balances 4,12,243.74 4,09,274.12 - 2,969.62
Loans and Advances 1,05,540.90 1,15,927.41 10,386.51 -
Other Current Assets 27,691.95 27,634.56 - 57.39
A. Total Current 5,79,559.11 5,81,673.82 5,24,114.71 -
Assets
Liabilities
Sundry Creditors 69,094.56 24,554.86 - 44,539.7
Provisions 917.44 655.29 - 262.15
Other Current 63,394.76 68,533.23 5,138.47 -
Liabilities
B. Total Current 1,33,406.76 93,743.37 - 39,663.39
Liabilities
(A-B) Net Working 4,46,152.35 4,87,930.45 - -
Capital
Increase in working 41,778.22
Capital

Table 18 Statement of changes in Working Capital for the year 2012-13 and 2013-14
Interpretation

It can be observed from the above table that there was an increase in the working capital
from Rs 4, 46,152.35 in financial year 2012-13 to Rs 4, 87,930.45 in financial year
2013-14.

This is because of-

Increase in current assets like Sundry Deters and Loans and Advances.
Decrease in current liabilities like Sundry Creditors and Provisions.

68
 CHAPTER 6: ANALYSIS OF WORKING CAPITAL
MANAGEMENT OF OMC BY USING ‘DUPOINT’ METHOD

What is DuPont Analysis?

DuPont Analysis is an extended examination of Return on Equity (ROE) of a company which

analyses Net Profit Margin, Asset Turnover, and Financial Leverage. This analysis was
developed by the DuPont Corporation in the year 1920.

In simple words, it breaks down the ROE to analyze how corporate can increase the return for
their shareholders

Return on equity (ROE) measures the rate of return on the ownership interest or shareholders’
equity of the common stock owners. It is a measure of a company’s efficiency at generating
profits using the shareholders’ stake of equity in the business. In other words, return on equity
is an indication of how well a company uses investment funds to generate earnings growth. It is
also commonly used as a target for executive compensation, since ratios such as ROE tend to
give management an incentive to perform better. Returns on equity between 15% and 20% are
generally considered to be acceptable.

The Formula

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 = 𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝒙 𝑨𝒔𝒔𝒆𝒕 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 𝒙 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑳𝒆𝒗𝒆𝒓𝒂𝒈𝒆

= (𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 / 𝑺𝒂𝒍𝒆𝒔) 𝒙 (𝑺𝒂𝒍𝒆𝒔 / 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔) 𝒙 (𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 / 𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚)

Key Points

1. By splitting ROE into three parts, companies can more easily understand changes in
their returns on equity over time.
2. As profit margin increases, every sale will bring more money to a company’s bottom
line, resulting in a higher overall return on equity.
3. As asset turnover increases, a company will generate more sales per asset owned,
resulting in a higher overall return on equity.
4. Increased financial leverage will also lead to an increase in return on equity, since using
more debt financing brings on higher interest payments, which are tax deductible.

69
Components of the DuPont Equation:

1. Profit Margin
Profit margin is a measure of profitability. It is an indicator of a company’s pricing strategies
and how well the company controls costs. Profit margin is calculated by finding the net profit
as a percentage of the total revenue. As one feature of the DuPont equation, if the profit margin
of a company increases, every sale will bring more money to a company’s bottom line,
resulting in a higher overall return on equity.

2. Asset Turnover

Asset turnover is a financial ratio that measures how efficiently a company uses its assets to
generate sales revenue or sales income for the company. Companies with low profit margins
tend to have high asset turnover, while those with high profit margins tend to have low asset
turnover. Similar to profit margin, if asset turnover increases, a company will generate more
sales per asset owned, once again resulting in a higher overall return on equity.

3. Financial Leverage

Financial leverage refers to the amount of debt that a company utilizes to finance its
operations, as compared with the amount of equity that the company utilizes. As was the case
with asset turnover and profit margin, increased financial leverage will also lead to an increase
in return on equity. This is because the increased use of debt as financing will cause a company
to have higher interest payments, which are tax deductible. Because dividend payments are not
tax deductible, maintaining a high proportion of debt in a company’s capital structure leads to a
higher return on equity.

The DuPont Equation in Relation to Industries

The DuPont equation is less useful for some industries, that do not use certain concepts or for
which the concepts are less meaningful. On the other hand, some industries may rely on a
single factor of the DuPont equation more than others. Thus, the equation allows analysts to
determine which of the factors is dominant in relation to a company’s return on equity. For
example, certain types of high turnover industries, such as retail stores, may have very low
profit margins on sales and relatively low financial leverage. In industries such as these, the
measure of asset turnover is much more important.

70
High margin industries, on the other hand, such as fashion, may derive a substantial portion of
their competitive advantage from selling at a higher margin. For high end fashion and other
luxury brands, increasing sales without sacrificing margin may be critical. Finally, some
industries, such as those in the financial sector, chiefly rely on high leverage to generate an
acceptable return on equity. While a high level of leverage could be seen as too risky from
some perspectives, DuPont analysis enables third parties to compare that leverage with other
financial elements that can determine a company’s return on equity.

Computation of ‘Du Point’ of OMC for the financial years 2013-17

Particulars For year For year For year For year For year
ending ending ending ending ending
2017 2016 2015 2014 2013
Net Profit Margin 16 % 31 % 28 % 31 % 33 %
Asset Turnover 0.35 0.22 0.23 0.97 0.98
Ratio
Financial 1.13 1.22 1.40 1.17 1.16
Leverage
Return on 6 .3 % 8.3 % 9.0 % 35 % 37.5 %
Equity
Table 19 Computation of ‘Du Point’ of OMC for the financial years 2013-17

Interpretation of results

From the above table it was seen that OMC had maintained a very good profit margin without
a much change in the Financial Leverage, which is a positive sign for the company. This
implies that the shareholders of the organization are well satisfied with their returns and the
overall profitability as well as the liquidity of the firm is satisfactory.

71
 CHAPTER 7: ANALYSIS OF WORKING CAPITAL
MANAGEMENT OF OMC BY USING ‘'ALTMAN Z-SCORE'
METHOD

What is the 'Altman Z-Score'

The Altman Z-score is the output of a credit-strength test that gauges a publicly traded
manufacturing company's likelihood of bankruptcy. The Altman Z-score is based on five
financial ratios that can be calculated from data found on a company's annual 10K report. It
uses profitability, leverage, liquidity, solvency and activity to predict whether a company has a
high degree of probability of being insolvent. NYU Stern Finance Professor Edward Altman,
developed the Altman Z-score formula in 1967, and it was published in 1968. In 2012, he
released an updated version called the Altman Z-score Plus that can be used to evaluate public
and private companies, manufacturing and nonmanufacturing companies, and U.S. and non-
U.S. companies. The Altman Z-score Plus can be used to evaluate corporate credit risk.

BREAKING DOWN 'Altman Z-Score'

The Altman Z-Score actually consists of five

performance ratios that are combined into a
single score.

When analysing the Z-Score of a company, the

lower the value, the higher the odds that the
company is headed toward bankruptcy. Altman
came up with the following rules for interpreting a firm’s Z-Score:

1. Below 1.8 indicates a firm is headed for bankruptcy.

2. Between 1.8 and 3.0 is a statistical “gray area.”
3. Above 3.0 indicates a firm is unlikely to enter bankruptcy

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

A = working capital / total assets

B = retained earnings / total assets

C = earnings before interest and tax / total assets

72
D = market value of equity / total liabilities

E = sales / total assets

Deconstructing the Z-Score

1. Working Capital to Total Assets -Working capital is a company’s current assets less
its current liabilities and measures a company’s efficiency and its short-term financial
health. Positive working capital means that the company is able to meet its short-term
obligations. Negative working capital means that a company’s current assets cannot
meet its short-term liabilities; it could have problems paying back creditors in the short
term, ultimately forcing it into bankruptcy. Companies with healthy, positive working
capital shouldn’t have problems paying their bills.

2. Retained Earnings to Total Assets -The retained earnings of a company are the
percentage of net earnings not paid out as dividends; they are “retained” to be reinvested
in the firm or used to pay down debt. Retained earnings are calculated as follows:
Beginning retained earnings + net income (net loss) – dividends paid The ratio of
retained earnings to total assets helps measure the extent to which a company relies on
debt, or leverage. The lower the ratio, the more a company is funding assets by
borrowing instead of through retained earnings which, again, increases the risk of
bankruptcy if the firm cannot meet its debt obligations.

3. Earnings before Interest & Taxes to Total Assets -This is a variation on return on
assets, which is net income divided by total assets. This ratio assesses a firm’s ability to
generate profits from its assets before deducting interest and taxes.

4. Market Value of Equity to Total Liabilities- The ratio of market value of equity to
total liabilities shows how much a company’s market value (as measured by market
capitalization, or share price times shares outstanding) could decline before liabilities
exceeded assets. Unlike the other ratio components used by the Z-Score, market value
isn’t based purely on fundamentals— the market capitalization of a firm is an indication
of the market’s confidence in a company’s financial position. Generally speaking, the
higher the market capitalization of a company, the higher the likelihood that the firm can
survive going forward.

5. Sales to Total Assets -The ratio of sales to total assets, more commonly referred to as
asset turnover, measures the amount of sales generated by a company for every dollar’s
worth of its assets. In other words, asset turnover is an indication of how efficiently a
company is as using its assets to generate sales. The higher the number the better, while
73
 low or falling asset turnover can signal a failure by the company to expand its market
share.

Computation of 'Altman Z-Score’ of OMC for the financial years 2013-17

Year Working Retained Earnings Market Sales / Z-Score

capital / earnings / before value of Total
Total Total interest equity / assets
assets assets and tax / Total
Total liabilities (E)
(A) (B) assets
(D)
(C)

For year 0.61 0.52 0.20 0.039 0.35 2.99

ending
2017
For year 0.56 0.48 0.18 0.031 0.34 3.23
ending
2016
For year 0.61 0.32 0.21 0.025 0.31 4.01
ending
2015
For year 0.57 0.41 0.17 0.023 0.29 3.91
ending
2014
For year 0.63 0.56 0.16 0.029 0.39 3.99
ending
2013
Table 20 Computation of 'Altman Z-Score’ of OMC for the financial years 2013-17

Interpretation of results
From the above table it can be concluded that OMC has no chance of getting bankrupted in
upcoming two financial years as the value of Altman Z-score for the financial years 2013-17
was well above 3.0.This also indicates that the organization is having sufficient working capital
to meet all its current obligations using its current assets.

74
 CHAPTER 8: FINDINGS, SUGGESTIONS AND CONCLUSIONS

Findings
1. Working capital of Odisha Mining Corporation is satisfactory in every year and showing
progress year by year and the organization is successfully able to meet with all its short
term obligations by using the current assets.

2. OMC has very high current ratio and quick ratio, which is a positive sign for the
company. In the financial year 2016-17 there was an outstanding performance of the
company. In 2017-16 the current ratio was 8.07 and quick ratio was 7.06.

3. Inventory turnover ratio of the company OMC is also in excellent position. In the
financial year 2016-17, Inventory turnover ratio was 4 times.

4. Debtor’s turnover ratio is also very high in the year 2016-17 i.e. 27.04 times, which
shows the speed of debt collection of the firm.

5. Debtor’s turnover ratio is also satisfactory in the year 2016-17 i.e. 5.22 times.

6. Working capital turnover ratio is very high, because of the net sales of the company
being good. In the financial year 2016-17, Working capital turnover ratio was 0.58
times.

Suggestions
1. Working capital of OMC is sufficient to meet with all its short term obligations.
This is good sign for the company. It has to maintain it further, to run the business long
term.

2. The current ratio and quick ratio are almost up to the standard requirements, so the
working capital management of OMC is satisfactory and it has to maintain it further.

3. The company has sufficient working capital and has better liquidity position.
By efficient utilization of this short-term capital, then it should increase the turnover.

4. Company should increase its sales so that working capital turnover ratio will grow up.

5. Regular effort should be made to increase the sales volume to generate more revenue.

75
Conclusion
1. The study on working capital management was conducted in Odisha Mining Corporation
(OMC) to analyze the Financial position of the organization using Annual Reports of
OMC from 2012-13 to 2016-17.

2. The financial status of OMC is very good. In the year 2016-17 company’s performance
was very high. In this year company has made highest profit and the inventory turnover
ratio was also increased. Each and every year, OMC has the ability to maintain the
requirement of working capital which is a good indication for the company. There are
adequate funds to further invest in current assets.

3. From ratio analysis of OMC of the financial year 2012-13 to 2016-17, it was found that
the liquidity position of the company is very strong. To summarize the above project we
can mention here that, the liquidity position of the company is very strong.

To conclude the project we can mention that all the above ratios show a satisfactory financial
position of the company and the company is moving forward with excellent management.

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 BIBLIOGRAPHY

1. Annual Reports of OMC

2. Internet

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