1

A STUDY ON WORKING CAPITAL MANAGEMENT WITH SPECIAL REFERENCE TO TUBE PRODUCTS OF INDIA LIMITED, CHENNAI.

Working capital management is a very important aspect of corporate Finance. The study has been undertaken to examine the management of finance playing a crucial role in the growth. It is concerned with examining the structure of liquidity position, leverage position and profitability position of TPI limited, Chennai. The research design followed for this study is descriptive research where the working capital management of the company. For analyzing the data, an in depth research analysis and various statistical tools and techniques were used for the purpose. The methodology adopted to collect data from the financial statements published in the annual reports of TPI Ltd. Apart from these some of data has been collected through officials of TPI and personal observation. It was found the study working capital management of the company very effective and also the firm has maintaining the liquidity and solvency position to repay its obligations in time.

------------------------------------------------------------------------------------------P. Raman, M. Com., M. Phil., MBA Senior Lecturer in Finance Dept. of management Studies Panimalar Engineering College Chennai.

1.1 INTRODUCTION
The importance of working capital in any industry needs no special emphasis. Working capital refers to that portion of total fund, which finances the day-to-day working expenses during the operating cycle. Management of working is one of the most important functions of corporate management. The efficient working capital management is the most crucial factor in maintaining liquidity and profitability of the concerned business organization. Fundamentally there are two concepts of working capital and they are 1. Gross working capital. 2. Net working capital. Gross working capital: It refers to the firms investment in total current or circulating assets. Net working capital: It as only the difference between current assets and current liabilities Net working capital = current assets current liabilities To be specific neither under stocking nor overstocking of raw materials careful maintenance and tradeoff between credit receiving period from sundry creditors and credit allowed to sundry debtors (generally credit period from sundry should be more than credit period allowed to sundry debtors). a) Optimum investment in current assets. b) Financing of current assets. A conservative management prefers to minimize risk by holding a higher level of working capital while liberal management assumes greater and greater risk by reducing the level. In this regards the management assumes should establish acceptable norms and effective policies for each of the components of working capital. We know a firm, which adequately plans its cash, inventory, sundry debtors, will have fewer problems of control than one, which operates without effective policies in these areas. Working capital

3 management is the most important area of the overall financial management of a firm. If company does not have sufficient liquidity, it may not be in a position to meet its commitments and thereby may loose its credit worthiness. In the management of working capital two characteristics of current assets must be borne in mind. 1) Short life span. 2) Swift transformation into other asset forms. Current assets have a short life span. Cash balances may be held idle for a week or two, accounts receivable may have a life span of 30 to 60 days, and inventories may be held for 30 days to 100 days. The life span of current assets depends upon the time required in the activities of procurement, production, sales and collection and the degree of synchronization among them. There are two types of working capital 1. Permanent working capital. 2. Temporary working capital. Fixed working capital refer minimum amount to be invested in various current assets is called permanent working capital. Variable working capital refer amount of working capital required to meet seasonal or special situation is called variable working capital. Excessive working capital means the firm has idle funds, which earn no profits for the firm. Inadequate working capital means the firm does not have sufficient funds for running its operations, which ultimately result in production interruptions, and lowering down the profitability. Higher levels of working capital decrease the risk and decrease the profitability too. While lower levels of working capital increase the risk but have the potentiality of increasing the profitability also An increase in the ratio of current assets to total assets will result in decline in the profitability of the firm.

4 Decrease in the ratio of current assets to total assets would increase the profitability of the firm because investment in fixed assets. Factors determining working capital: Determination of working capital requirements is TPI Ltd. 1. Nature of business Tube Product of India Ltd Manufacturer of Tube industries requires more working capital to meet the short-term requirements, so that the study has been made. 2. Volume of business Tube Products of India Ltd is a large size business, so that working capital requirement high. 3. Production policy Tube Products of India Ltd is a continuous production, so that working capital requirement is high. 4. Length of manufacturing process Tube Products of India Ltd is a manufacturer of Tube. Length of manufacturing process is larger. So that working capital requirement is more. 5. Operating cycle Tube Products of India Ltd number of operating cycle is less working capital requirement is more. 6. Conditions of supply of raw material Tube Products of India Ltd having regular supply of raw materials reduces the working capital requirements. 7. Speed of stock turnover Tube Products of India Ltd having a high stock turnover, so that reduces the working capital requirements. 8. Credit policy Tube Products of India Ltd having extending less credit requires less working capital. 9. Market conditions Tube Products of India Ltd less competition, so that working capital requirement will be less. 10. Dividend policy

5 Tube Products of India Ltd follows conservative dividend policy. Dividend can be paid from the retained earnings. 11. Lead time Tube Products of India Ltd having moderate lead time requires moderate working capital. 12. Business cycle Cyclical changes in the economy. Depression sales will be less. Collection will be delayed. Hence their requirement of working capital will be more. Boom sales will be more, more stock should be maintained which also requires more working capital.

1.2 OBJECTIVES OF THE STUDY

To access the impact of working capital. To examine the combined effect of the ratios relating to working capital management. To determined the working capital leverage for examining the sensitivity of ROI to changes in the level of gross working capital of TPI. To compare the liquidity position of the company. To know the working capital requirements. To give suggestions to improve the efficiency of working capital and liquidity management of TPI.

1.3 SCOPE OF THE STUDY

The study in an attempt to make appraisal of working capital of the Tube Products of India Ltd. The study will analyze the working capital management position subjected to intensive analysis with the reference to the internal appraisal of the Tube Products of India Ltd. The study of the Tube Products of India Ltd has been undertaken with certain objectives by highlighting the features, functions, and working capital as well as statuary regulations governing the company. This study can be applied for similar manufacturing companies. To access the impact of working capital and profitability of the company. To combined effect of the

6 ratios relating to working capital management of the company. To determined the working capital leverage for examining the sensitivity of ROI to changes in the level of gross working capital of TPI. To know the working capital requirements, To compare the liquidity position of the company taken place

1.4 REVIEWS
A significant portion of financial research is concerned with the management of working capital. This issue has been extensively investigated at both conceptual and empirical levels. S.m. Rabiul Alam and Syed Zabid Hossain (2003) conducted a research study on the management of working finance in ship building industry in Bangladesh. His sample consists of Khulna Shipyard Ltd only for a period of 10 years. He reported that the Chief executives properly recognished the role of efficient use of working capital in liquidity and profitability. However, in practice they could not following working capital policy, not yet fixed any norm for working capital or any component of working capital except store, spare, and accounts receivable. Even it does not prepare working capital requirement budget. The managing director is primarily responsible for the management of working capital. S.K. Khathik & P.K.Singh (2003) made a study on working capital management in Indian Farmers Fertilizer Co-operative Limited. For this, he employed several statistical tools on different ratios to examine the effective management of working capital. We concluded that the overall positions of the working capital of IFFCO are satisfactory but there is a need of improvement in inventory. We found that there is a need of immediate improvement in inventory. The management of IFFCO should be trying to proper utilization of inventory and try to maintain the inventory as per their requirement so liquidity will not interrupted.

7 However, accounting ratios played a very important role in most of the above studies, but a choice of ratios or group of ratios is often a difficult task due to the absence of a proper theory of ratio analysis.

1.5 RESEARCH METHODOLOGY

RESEARCH DESIGN: A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the reach purpose with economy in procedure. NATURE OF THE RESEARCH: DESCRIPTIVE RESEARCH: The major purpose of descriptive research is description of the state of affairs, as it exists at present. Descriptive research specifies the objectives and the techniques for collecting the information from the company and the data collected is processed and analyzed using tables and statistical tools. The company adopted descriptive research method for this study to identify the effectively utilized working capital. METHODOLOGY: The data of Tube products of India ltd., for the years 2000 to 2004 used in this study have been taken from mainly secondary sources. The necessary data have been collected from the financial statements published in the Annual Reports of the Tube Products of India Ltd. Apart from these some of the data has been collected through visits and personal observation. Editing, classification and tabulation of the financial data collection from the above-mention source have been done as per the requirements of the study. For assessing the performances of the financial data collected form the abovementioned source have been done as per the requirements of the study. TOOLS FOR PRESENTATION: Line charts are used for presentation.

8 PERIOD OF STUDY: The period covered the past 5 years from 1st April 2000 to 31st March 2004 and the study is conducted during Jan to Mar of 2005 TOOLS USED: Simple mathematical tools 1. Ratios. 2. Percentage analysis. 3. Correlation analysis. 4. Statement of working capital. 5. Comparison of working capital. 6. Correlation co-efficiency. 7. Student t-test. 8. Mean and standard deviation. 9. Motaals comprehensive test

CORRELATION ANALYSIS: Correlation analysis attempts to determine the degree of relationship between variable. The co-efficient of correlation is denoted by r. while Karl Pearsons correlation is studied using the formula R= N N x2 ( xy ( x)
2

x )(

y) y)
2

y2 (

Spearmans rank correlation using

1 6 D2

R=

N N 2 1

Studentt test: This relationship is not valid for small samples because of wide fluctuation in the values of sample standard deviation(s). Based upon this Variation, Gossett came up with different sets of critical scores called t scores. T=

r 1 r2

n2

Percentage Analysis: This method id used as making comparison between two or more sources of data. Percentage is used to decide relationships percentages can also be used to compare the distribution of two are more sources of data.

Graphs: Graphs are used to get a clear-cut idea of what has been tabulated and is the easiest way to understand any data. The various types of graphs used are line chart etc.

Mean: According to Bowley An average is only a short way of expressing an arithmetical result. Arithmetic average is also called as mean. It is the most common type and widely used measure of central tendency. Arithmetic average of a series is the figure obtained by dividing the total value of the various items by their number. There are two types of arithmetic average i) ii) Simple arithmetic average. Weighted arithmetic average.

Standard deviation: Standard deviation is also called Root-mean square deviation or mean Error or mean square Error. The reason is that it is the square root of the means of the squared deviation from the arithmetic mean. The standard deviation is denoted by the Greek Letter (sigma)

10

DATA ANALYSIS AND INTERPRETATION

Table: 2.1 The following table shows current ratio for various periods from 2000 to 2004.
Rupees in Lakhs Current ratio
2.20 2.37 2.00 1.75 1.68

Years
2000 2001 2002 2003 2004

Current assets
39347.64 39241.41 41216.82 44978.23 44077.00

Current liabilities
17875.63 16567.42 20597.75 25645.98 26295.00

Source: Data collected and compiled from Annual Reports Findings: From the above table we can notify that the Current ratio shows an increasing trend from 2000 to 2001. But after that it is decreasing for the both two previous years 2002, 2003 and 2004. Generally it is said that a Current ratio of 2:1 is the appropriate position that every company should maintain. More amount of liquidity also dangers of

the company and inadequate of liquidity dangers of the company. But this company has
maintained little bit high Current ratio, which is because of its ability to work so effectively and efficiently

Inference: From the above table it could be inferred that most of the Current assets has increased during 2003.

Figure: 2.1
Current Ratio
3 Ratios 2 1 0 2000 2001 2002 Years 2003 2004 2.2 2.37 2 1.75 1.68

11

2) Quick ratio: -

Quick ratio establishes a relationship between quick or liquid assets and current Liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset. It is also known as acid test ratio. Current assets Inventories Quick Ratios = Current Liabilities

Table: 2.2 The following table shows quick ratio for various periods from 2000 to 2004.
Rupees in Lakhs Quick ratio
1.52 1.71 1.59 1.38 1.28

Years
2000 2001 2002 2003 2004

Current assets Inventories 27192.46 28300.57 32666.41 35267.03 33530.00

Current liabilities
17875.63 16567.42 20597.75 25645.98 26295.00

Source: Data collected and compiled from Annual Reports Findings: From the above table it is found that the quick ratio shows 1.71 of quick ratio have increased during 2001and also amount of current assets has increased during 2003. Quick ratio has decreased during 2004 (i.e. 1.28)

Inference: From the above table it could be inferred that most of the current assets has increased during 2003.

Figure 2.2
Quick Ratio
2 1.5 1 0.5 0 1.38 1.59 1.28

Ratios

1.52

1.71

2000

2001

2002 Years

2003

2004

12

3) Current assets to Total assets: -

This ratio establishes a relationship between current assets and total assets. This ratio indicates the extend of total funds invested for working capital purpose. CTTR = Current assets Total assets

Table: 2.3 The following table shows current assets to total assets ratio for various periods from 2000 to 2004.
Rupees in Lakhs CTTR
0.73 0.70 0.71 0.72 0.68

Years

Current assets

Total assets

2000 39699.47 54611.17 2001 39241.41 56163.81 2002 41216.82 58168.37 2003 44978.23 62782.94 2004 44077.00 64789.00 Source: Data collected and compiled from Annual Reports

Findings: The above table differentiates the relationship between Current assets and Total assets. The ratio of current assets to total assets ratio shows 0.72 has to increase during 2003, and total asset has increase during 2004. CTTR has decreased during 2004.

Inference: From the above table it could be inferred that most of the current assets has increased during 2003, and also total assets has increased during 2004.

Figure: 2.3
Current assets to Total assets

0.74 0.72 0.7 0.68 0.66 0.64

0.72 0.73 0.7 2000 2001 0.71 0.68 2002 Years 2003 2004

Ratios

13

4) Current assets to sales ratio: -

Table: 2.4 The following table shows current assets to sales for various periods from 2000 to 2004.
Rupees in Lakhs CTSR
0.41 0.36 0.42 0.41 0.39

This ratio establishes a relationship between current assets and sales. Current assets CTSR = Sales

Years
2000 2001 2002 2003 2004

Current assets
39699.47 39241.41 41216.82 44978.23 44077.00

Sales
96599.68 109002.18 98829.01 108657.00 115708.00

Source: Data collected and compiled from Annual Reports Findings: From the above table we can notify that the current asset to sales ratio shows 0.42 of CTSR has to increase during 2002 and sales has increased during 2004. The 0.36 CTSR has decreased during the year 2001.

Inference: From the above table it could be inferred that most of the current assets has increased during 2003, and sales has increased during 2004.

Figure: 2.4
Current Assets to Sales Ratio
0.44 0.42 0.4 0.38 0.36 0.34 0.32 Ratios 0.39 0.41 0.36 2000 2001 2002 Years 2003 2004 0.42 0.41

14

5) Working capital ratio: Working capital ratio represents how effectively the working capital is utilized. Net working capital ratio is relationship between cost of sales and net working capital. Net working capital ratio = Cost of sales Net Working capital

Cost of goods sold = Sales Gross working capital Gross profit = sales opening stock + net purchases closing stock

Table: 2.5 The following table shows working capital turn over ratio for various periods from 2000 to 2004.
Rupees in Lakhs WTR
2.50 2.46 2.64 3.40 4.12

Years
2000 2001 2002 2003 2004

Cost of goods sold

53515.11 55723.40 54525.53 65659.92 73195.00

Net working capital 21429.56 22673.99 20619.07 19332.25 17782.00

Source: Data collected and compiled from Annual Reports Findings: From the above table it is found that the working capital ratio shows 4.12 of WTR
has to increased during 2004, and working capital decreased during 2001 (i.e. 2.46)

Inference: - From the above table it could be inferred that most of the sales increased
during 2004, and working capital has decreased during 2004.

Figure: 2.5
Working capital ratio 5 4 3 2 1 0 3.4 4.12 2.5 2000 2.46 2001 2.64 2002 Years 2003 2004

Ratios

15

6) Inventory turnover ratio: It is the number of times inventory had turned over in a year. It is the relationship between cost of goods sold and average inventory at cost. ITR = Net sales Inventory at cost

Table: 2.6 The following table shows inventory turnover ratio for various periods from 2000 to 2004.
Rupees in Lakhs ITR
8.06 9.48 11.56 11.19 10.97

Years
2000 2001 2002 2003 2004

Net sales
97993.42 109002.18 98829.01 108657.38 115708.00

Inventory at cost
12155.18 11502.64 8550.47 9711.20 10547.00

Source: Data collected and compiled from Annual Reports Findings: The above table differentiates the relationship between sales and cost of inventory. ITR ratio shows 11.56 has to increase during 2002, and inventory decreased during 2002. the 8.06 ITR has decreased during 2000.

Inference: From the above table it could be inferred that most of the net sales increased during 2004, and inventory has increased during 2000.

Figure: 2.6
Inventory turnover ratio
15 Ratios 10 5 0 2000 2001 2002 Years 2003 2004 8.06 9.48 11.56 11.19 10.97

16

7) Debtor turnover ratio: -

It is the relationship between net credit sales and average trade debtors. Net credit sales DTR = Debtors

Debtors turnover ratio indicates the number of times the debtors are converted in to cash.

Net credit sales = Total sales sales returns cash sales

Table: 2.7 The following table shows debtor turnover ratio for various periods from 2000 to 2004.
Rupees in Lakhs DTR
4.78 5.26 4.28 4.19 4.76

Years
2000 2001 2002 2003 2004

Net sales
97993.42 109002.18 98829.01 108657.38 115708.00

Debtors
20512.09 20741.90 23041.87 25941.11 24303.00

Source: Data collected and compiled from Annual Reports Findings: From the above table we can notify that the DTR shows 5.26 of DTR has to increased during 2001, and debtors increased during the year 2003. the 4.19 DTR has decreased during 2003.

Inference: -

High ratio indicates the collection efficiency of the company. DTR shows

a fluctuating trend the period of study.

Figure 2.7
Debtors turnover ratio 6 Ratios 4 2 0 2000 2001 2002 Years 2003 2004 4.78 5.26 4.28 4.19 4.76

17

8) Cash position ratio: It is the relationship between absolute liquid assets and current liabilities. CR = Cash + marketable securities

Current Liabilities The purpose of prepar ing this ratio is to find out the absolute liquidity position. The standard norm is 0.5 : 1

Table: 2.8 The following table shows cash position ratio for various periods from 2000 to 2004.
Rupees in Lakhs CPR
0.16 0.18 0.18 0.12 0.14

Years
2000 2001 2002 2003 2004

Absolute liquid assets 2902.44 2979.14 3714.69 3114.36 3591.00

Current liabilities
17875.63 16567.42 20597.75 25645.98 26295.00

Source: Data collected and compiled from Annual Reports Findings: From the above table it is found that the cash position ratio shows 0.18 of CPR has increased during the years 2001 and 2002, and decreased during 2004 (i.e. 0.12)

Inference: Company.

High ratio indicates decrease in current liabilities and increase in cash.

This ratio standard norm 0.5: 1. This ratio indicates the cash position efficiently of the

Figure 2.8
Cash position ratio

0.2 0.15 0.1 0.05 0

Ratios

0.16

0.18

0.18 0.12

0.14

2000

2001

2002 Years

2003

2004

18

9) Return on investment: - (ROI)

employed. ROI =

It is the relationship between operating profit (adjusted net profit) and capital Operating profit (OR) Adjusted net profit Capital employed 100

Table: 2.9 The following table shows return on investment for various periods from 2000 to 2004.
Rupees in Lakhs ROI (%)
3.57 5.58 7.32 7.93 11.14

Capital employed = Shareholders fund + long-term liabilities

Years
2000 2001 2002 2003 2004

Operating profit
1946.35 3132.42 3994.92 4725.13 6805.00

Capital employed
54569.17 56163.81 54586.71 59584.73 61094.00

Source: Data collected and compiled from Annual Reports Findings: From the above table shows that return on investment in percentage. This ratioincreasing trend the period of study. It was as increased 11.14 in the year and as low as 3.57 in the year 2000.

Inference: From the above table it could be inferred that most of the operating profit increased during the year 2004, increase shareholder funds, and long-term liabilities during the year 2004.

Figure 2.9
15 Ratios 10 5 0 2000 2001 2002 Years 2003 2004 3.57
Return on investment

5.58

7.32 7.93 11.14

19

Table: 2.10 The following table shows statement of working capital for various periods from 2000 to 2004.
Particulars
a) Current assets 1.Inventories 2.sundry debtors 3.cash and bank balance 4.loans and advances 12155.18 20512.09 2902.44 4129.76 39699.47 100 100 100 100 100 11502.64 20741.90 2979.14 4017.73 39241.41 (94.63) 101.12 12.64 (97.29) (98.85) 8550.41 23042.87 3714.69 5908.85 41216.82 (70.34) 112.34 127.99 143.08 13.82 9711.20 25941.11 3114.36 6211.56 44978.23 (79.89) 126.47 17.30 150.41 113.30 10547.00 24303.00 3591.00 5636.00 44077 (86.77) 118.48 123.72 136.47

2000

2001

2002

Rupees in Lakhs
2003 %

2004

Total current asset

b) Current liabilities & Provisions: 1.Sundry creditors 2.Interest accured but not due 3.Other Liabilities 4. Due to subsidiary company 5.Due to directors 6.Unclaimed dividends 7.Unclaimed deposits 8.Unclaimed debendures 9.Dividend proposedFinal 10.Dividend Tax

111.03

11976.05 412.71 4964.21 34.45 9.00 149.57 40.63 615.58 67.71

100 100 100 100 100 100 100 100 (100) 100

10175.58 254.08 4707.25 41.28 11.59 20.91 _ _ 1231.15 125.58

(84.97) (61.56) (94.82) 119.83 128.78 (13.98) (100.00) (100.00) (0) 185.47

12470.92 12.18 6529.55 27.00 28.09 1.70 3.74 1354.27 _

14.13 (44.22) 131.53 (100.00) 3.00 (18.78) (4.18) (0.61) (0) (0)

14404.15 317.74 7861.71 1095.57 51.61 34.79 2.47 2.38 1662.34 213.02

120.27 (76.99) 158.37 3180.00 573.44 (23.26) (6.08) (0.39) (0) 314.61

17179 125 6810 _ 61.00 35.00 _ 1.00 1847.00 237.00

143.44 (30.29) 137.18 (100) 677.78 (23.40) (100) (0.16) (0) 350.0

Total current Liabilities Networking capital (a - b)

8269.91 21429.56

100 100

16567.42 22673.99

(90.68) 105.81

20597.75 20619.07

112.74 (96.22)

25645.98 19332.25

140.37 (90.21)

26295 17782

143.93 (82.98)

Source: Collected and Compiled from Annual Reports 1st April 2000 to 31st March 2004

20

Findings: 1. Current financial and liquidity position: i. For studying the current financial position or short-term financial position of a concern, one should see the working capital in all the years. ii. In case of TPI Ltd, the net working capital has increased in the year 2001 by 5.81%. In this year current assets has decreased during 2001 and decreased in current liabilities during 2001. Remaining all the years working capital decreasing trend, so good in the company. In all the years, working capital utilized in effective ways. iii. The second aspect we should look in is the liquidity position of the company. The cash and bank balance and debtors have good position in all the years. iv. Net working capital down trend in all the years.

Inference: From the above table it could be inferred that most of the current assets increasing and decreasing trend during the years and current liabilities continuous increased the period of study.

Figure 2.10
Percentage of net working capital 150 100 50 0 -50 -100 -150 Percentage 105.81 100 2000 2001 2002 -96.22 Years 2003 -90.21 2004 -82.98

21

Table 2.11 The following table shows ratios relating to liquidity management of TPI
=

x2 N

( N )2

x)

Years
2000 2001 2002 2003 2004

CR
2.20 2.37 2.00 1.75 1.68 2.00 0.26 13

QR
1.52 1.71 1.59 1.38 1.28 1.5 0.15 10

CPR
0.16 0.18 0.18 0.12 0.14 0.16 0.02 12.5

CTTR
0.73 0.70 0.71 0.72 0.68 0.71 0.02 2.82

ITR
8.06 9.48 11.56 11.19 10.97 10.252 1.30 12.68

DTR
4.78 5.26 4.28 4.19 4.76 4.65 0.39 8.39

S.D CV (%)

CR ------- Current ratio QR ------- Quick ratio CPR ------- Cash position ratio CTTR ------- Current assets to total assets ITR ------- Inventory turnover ratio DTR ------- Debtors turnover ratio S.D ------- Standard deviation CV ------- Co-efficient variation ------- Mean

22

Current Ratio (CR)

This ratio shows the relationship between current assets and current liabilities of a company. It is an important measure of analyzing the firms ability to payoff its current obligations out of its short-term resources. The higher the current ratio, the higher is the amount available per rupee of current obligations and accordingly the higher is the feeling of safety and security. This rule of thumb about the CR is 2:1. The standard

norms applicable to all types of businesses. Each firm should develop its own standard for CR from past experience. Findings: This table shows that the CR in TPI Ltd registered a fluctuating trend during the period under study. It was as high as 2.37 in the year 2001 and as low as 1.68 in the year 2004 on the average in CR in TPI Ltd was 2.00 during the period under study. It indicates that the liquidity position of the company.

Inference: Definite inference can be drawn based on this ratio about the liquidity position of the company as CR considers the quantity of the current assets and consider the quality.

Quick Ratio: This ratio used judging the short-term repaying ability of a firm in the near future. This ratio considers quality of current assets. This ratio excludes inventories, which is considered slow moving assets in relation to other current assets. It can be assess the

liquidity position of a company more effectively. The standard norms about QR 1:1 Findings: This table shows that the quick ratio in TPI Ltd registered a fluctuating trend during the period of study. It was as high as 1.71 of quick ratio has increased during 2001 and as low as 1.28 of quick ratio has decreased during 2004.

23

Inference: The quick ratio in TPI Ltd was much above than the standard norms 1:1 throughout the period of study. So it is clearly indicates of the company was satisfactory. It can be conclude that throughout the period under study quick assets of TPI. We above adequate also danger in the company. So reduce the current assets and increase the current liabilities.

Cash Position Ratio (CPR)

This ratio is also known as super quick ratio. A high CPR is good from the creditors point of view where as from the management point of view it indicates poor investment policy.

Findings: This table shows that the CPR in TPI Ltd registered a fluctuating trend during the period of study. It was as high as 0.18 in the years 2001 and 2002, it as low as 0.12 in the year 2003. The average the CPR in TPI Ltd was 0.16 during the period under study. This ratio all the years it was greater than standard norms.

Inference: This ratio indicates that the liquidity position of the company in all the years was good enough to meet its obligations in time.

Current assets to total assets (CTTR) Findings: This ratio indicates the extent of total funds invested for working capital purpose. This table shows that this ratio recorded a fluctuating trend under the period of study. It was as high as 0.73 in the year 2000 and as low as 0.68 in the year 2004. The average of current assets to total assets in TPI Ltd was 0.71, which showed that about 71% of funds remained tied-up in working capital, and another 29% remained invested in permanent assets during the period under study.

Inference: -

This ratio indicates that the investment position of the company in all the

year is satisfactory. I recommended investment more in fixed assets.

24

Inventory turnover ratio (ITR) Findings: This ratio focuses light on the inventory control policy adopted by a concern. This ratio shows the relationship between the cost of goods sold during a all year and inventories kept by a concern during all the year. Higher ITR shows higher efficiency of the management and lower ITR shows lower efficiency of the management. It was as high as 11.56 in the year 2002 and as low as 8.06 in the year 2000. An average of this ratio was 10.252 during the period under study.

Inference: -

It is clear that the management tried to control its inventory levels largely

during the later period of the study. Average ITR of Indian manufacturing companies was 2.12. The average of ITR in TPI Ltd was more than the standard set by the CMIE. It is thus management of TPI Ltd was very good during the period under study.

Debtors turnover ratio (DTR) Findings: This ratio throws light on the credit and collection policy pursued by a concern. DTR is an important tool of analyzing the efficiency of liquidity management of a company. It was as high as 5.26 in the year 2001, and as low as 4.19 in the year 2003. the high DTR implies the prompt payments made by debtors and low DTR implies the does not prompt payment made by debtors. This table shows that the DTR also recorded a fluctuating trend during the period under study in TPI Ltd.

Inference: - On an average, the DTR in TPI Ltd was 4.65 during the period understudy.
Standard norm is DTR of 11. The DTR in TPI Ltd was lower than the standard set by the CMIE in most of the years under study. It signifies slackness of collection policy and inefficiency of collection programs followed by the TPI. The variable for which the c.v is greater is said to be more fluctuating or conversely less consistent, less stable or less uniform and vice versa. The table shows six different parameters of liquidity management CTTR is most consistent and stable followed by DTR, QR, CPR, ITR and CR respectively.

25

Table 2.12 The following table shows ranking in order of liquidity and working capital management of TPI
Years NWC to CAR Inventory to CAR Liquid assets to CAR Loans and advances to CAR Sundry Debtors to CAR Cash and bank balance to CAR Total ranks Ultimate Rank

% 2000 2001 2002 2003 2004

% 10.50 10.24 14.34 13.81 12.79

r 4 5 1 2 3

% 7.38 7.59 9.01 6.92 8.15

r 4 3 1 5 2

(1+2+3+ 4+5+6) 24 22 9 16 19 5 4 1 2 3

53.98 2 57.78 1 50.03 3 42.98 4 40.34 5

30.89 5 29.31 4 20.74 1 21.59 2 23.93 3

72.12 4 69.11 5 79.26 1 78.41 2 76.07 3

51.24 5 52.26 4 55.91 2 57.67 1 55.14 3

CAR % r

Current assets ratio Percentage Rank

26

Findings: This table shows the relationship between the current assets and six different types of parameters. Net working capital to current assets ratio, liquid assets to current ratio, loans & advances to current assets, cash and bank balances to current assets and sundry debtors to current assets ratio have been computed and combined in a points score. A high value of all ratios to current assets shows greater liquidity and accordingly ranking has been done in that order. On the other hand, a low inventory to current assets ratio indicates more favorable liquidity position and therefore ranking has been done accordingly in that order. Total rank has further been done on the basis that the total of individual ranks, the more favorable is the liquidity position of the concern and the less favorable is the liquidity position of the concern. This table shows that the ratios furnishes that the TPI the year 2002 marked the most sound liquidity and profitability position and it followed by the years 2003,2004,2001 and 2000.

Inference: From the above table it could be inferred that most of liquidity position increased in the year 2002, and liquidity position decreased in the year 2001.

27

Table 2.13 The following table shows rank correlation between liquidity and profitability of TPI
Years Current assets to Total assets (CTTR) Percentage Rank-R1
2000 2001 2002 2003 2004 72.05 69.87 70.86 71.70 68.03 5 1 4 3 2

Return on Investment (ROI) Percentage Rank-R2

3.57 5.58 7.32 7.93 11.14 5 4 3 2 1

(R1 R2) D

D2

-4 0 0 0 4

16 0 0 0 16
D2 = 32

R=

1 6

N N 2 1

D2

1 6

5 5 1
2

32

r = 1 1.6 = -0.6 There is no relation between the two values the working capital position is more than the employed. H0: - Null hypothesis There is no correlation between the ranked data of Current assets to Total assets and ROI. H1: - Alternative hypothesis There is correlation between the ranked data of Current assets to Total assets and ROI. = 0.05 level of significance for testing these hypothesis

28

T=

r 1 r2

n2

0 .6 1 (0.6) 2
t = - 1.2975 Table value = 2.776

52

Conclusion: The computed value of t (-1.2975) is less than the critical value of t 2.776. Hence the null hypothesis is accepted which means there is a no significant correlation between liquidity and profitability in TPI.

Findings: In this table shows the relationship between current assets to total assets and return on investment. This two relationship between liquidity and profitability of TPI Ltd by computing rank correlation co-efficient. An applied also been made to test whether the computed value of such correlation co-efficient is significant or not, studentt test has further been applied. The ratio of current assets to total assets has been used as the liquidity indicator and the ratio of return on investment has been taken as the profitability parameter. This relationship between two got the value of correlation co-efficient (-) 0.6 it is a negative correlation. The t-test proves that the correlation co-efficient between CTTR and ROI is statistically insignificant. It is therefore concluded that the liquidity and profitability moves in the different direction. In other words say the negative correlation between CTTR and ROI imply unfavorable impact of the liquidity on the profitability of TPI. This table shows that current assets to total assets (CTTR) as high as liquidity position in the year 2000 and as low as liquidity position in the year 2004, and also taken as the another parameter for profitability is return on investment (ROI) as high as profitability position in the year 2004 and as low as profitability position in the year 2000.

29

Inference: From the above table it could be inferred that most of the CTTR has increased during 2000, and ROI has increased during 2004. Return on Investment (ROI) represents the earning power of the company. ROI depends on two ratios. 1) Net Profits Ratios. 2) Capital Turnover Ratio. A change in any of these ratios will change the firms earning power. These two ratios are affected by many factors. A change in any of these factors will change these ratios also. The various factors affecting the ROI can be put through a chart given below.

30

Table 2.14 The following table shows simple correlation analysis between selected ratios relating to working capital management and return on investment.
Years
2000 2001 2002 2003 2004 Correlation Co ( r)

WCR
2.20 2.37 2.00 1.75 1.68 -0.84

ATR
1.52 1.71 1.59 1.38 1.28 -0.71

CTSP CTTR WTR ITR

0.41 0.36 0.42 0.41 0.39 -.008 0.73 0.70 0.71 0.72 0.68 -0.74 2.50 2.46 2.64 3.40 4.12 -0.89 8.06 9.48 11.56 11.19 10.97 0.78

DTR CPR
4.78 5.26 4.28 4.19 4.76 -0.29 0.16 0.18 0.18 0.12 0.14 -.46

ROI(%)
3.57 5.58 7.32 7.93 11.14

t value of r H0 H1

-2.69

-1.74

-0.01 -

-1.90

-3.38 -

2.16

-0.52

-0.90

H0: - There is no correlation between the ratios of TPI. H1: - There is a correlation between the ratios of TPI. = 0.05 level of significance for testing these hypothesis. Table value of with (n-2) i.e. 3 degree of freedom at 0.05 level of significance is 3.182 respectively.

31 T= r 1 r2 n2

0.84 1 0.84 2 t = - 2.69

52

Correlation matrix
Particulars WCR ATR CTSR CTTR WTR ITR DTR CPR ROI(%) WCR
1.00 0.91 -0.17 0.33 -0.90 -0.70 0.65 0.76 -0.84 1.00 -0.33 0.28 -0.88 -0.36 0.23 0.83 1.00 0.49 1.12 0.26 -0.85 -0.24 1.00 -0.58 -0.41 -0.33 -0.02 -0.74 1.00 0.53 -0.26 -0.72 0.89 1.00 -0.63 -0.26 0.78 1.00 0.45 -0.29 1.00 -0.46 1.00

ATR CTSR CTTR WTR

ITR

DTR

CPR ROI(%)

-0.71 -0.008

WCR ------ Current assets ratio ATR ------ Acid test ratio CTTR ------ Current assets to total assets

32

WTR ------Working capital turn over ratio ITR ------ Inventory turnover ratio DTR ------ Debtors turn over ratio CPR ------ Cash position ratio ROI ------ Return on investment Findings: The co-efficient of correlation between selected ratios relating to working capital management and ROI The above table shows the correlation co-efficient between ROI and WCR is (-) 0.84. It indicated that there is a higher degree of negative association between the profitability and the net working capital ratio of the company. The value of the correlation co-efficient if found to be in significant at 5 percent level. The correlation co-efficient between ROI and ATR is (-) 0.71, which is found to be in significant at 0.05 levels. It is also a higher degree of negative correlation between two variables. Two ratios that the amount of current assets and liquid assets decreases risk as well as increase profitability. The co-efficient of correlation between ROI and CTSP (-) 0.008 which is found to be in significant at 0.05 levels, It reflected a lower degree of negative association between the two variables. Simply the lower the current assets to sales ratio the greater the efficiency of the working capital and wide scope of profitability. The co-efficient of correlation between CTTR and ROI is (-) 0.74, which found to be in significant at 0.05 levels. It indicates there is a higher degree of negative correlation between the two variables at 5% level the value of the correlation co-efficient is found to be in significant. The correlation between ROI and WTR is (-) 0.89, which indicates a higher degree of negative correlation between these two variables. This value is found to be significant at 5% level. The movement working capital turnover ratio fluctuating trend the higher investment and greater is the profitability conforms to principle.

33

The co-efficient of correlation between ROI and ITR is found to be (+) 0.78. It is a higher degree of positive correlation between the variables. This value is found to be in significant at 5% level. Inventory ratio has increase higher efficiency of the management and also ITR has decrease lower efficiency of the management. The co-efficient of correlation between ROI and DTR (-) 0.29, It indicates that there is a lower degree of negative association between the profitability and the debtors turnover ratio of the company. The value of the correlation co-efficient is found to be in significant at 5% level. The co-efficient of correlation between ROI and CPR is (-) 0.46. It indicated that there is a moderate degree of negative association. The correlation is in significant. This study indicates the impact of working capital and profitability viewed more number of negative impacts and only one positive impacts. The study of the relationship between the profitability and working capital ratios conform with accepted rule that larger the turnover increases the profitability of the company.

Inference: From the above shows that it could be inferred that most of correlation coefficient(r) negative correlation and only one positive correlation.

34

Working: Followed to measure r value to all the factors.

X 2.20 2.37 2.00 1.75 1.68 X = 10

Y 1.52 1.71 1.59 1.38 1.28 Y = 7.48

XY 3.3444 4.0527 3.1800 2.4150 2.1504 XY = 15.1421

X2 4.8400 5.6169 4.0000 3.0625 2.8224 X2 = 20.3418

Y2 2.3104 2.9241 2.5281 1.9044 1.6384 Y2 = 11.3054

R=

N N x2 (

xy ( x)
2

x )( N

y) y2 ( y)
2

5(15.1421)(10 )(7.48) 5(20.3418) (10 )

2

5(11.3054) (7.48) 2

R= 0.91

35

Table 2.15 The following table shows absolute changes in working capital management of TPI (2000-2002)
Particulars 2000 2001 2002 Absolute Absolute Absolute Change Change Change Rs % Rs
2000-2001 2001-2002

Absolute Change %

(a)Current assets:1.Inventories 2.Sundry debtors 3.Cash and bank balance 4.Loans & advances
Total current assets

12155.18 20512.09 2902.44 4129.76 39699.47

11502.64 20741.90 2979.14 4017.73 39241.41

8550.41 23042.87 3714.69 5908.85 41216.82

(652.54) 229.81 76.7 (112.03) (458.06)

(5.34) 1.12 2.64 (2.71) (1.15)

(2952.23) 2300.97 735.55 1891.12 1975.41

(25.67) 11.09 24.69 47.07 5.03

(b) Current Liabilities & provisions: 1.Sundry creditors 2.Interest accured but not due 3.Other Liabilities 4. Due to subsidiary company 5.Due to directors 6.Unclaimed dividends 7.Unclaimed deposits 8.Unclaimed debendures 9.Dividend proposedFinal 10.Dividend Tax

11976.05 412.71 4964.21 34.45 9.00 149.57 40.63 615.58 _ 67.71

10175.58 254.08 4707.25 41.28 11.59 20.91 _ _ 1231.15 125.58

12470.92 182.48 6529.55 _ 27.00 28.09 1.70 3.74 1354.27 _

(1800.47) (158.63) (256.96) 6.83 2.59 (128.66) (40.63) (615.58) 1231. 15 57.87

(15.03) (38.44) (5.18) 19.83 28.78 86.02 (100) (100) 0 85.47

2295.34 71.60 1822.3 41.28 15.41 7.18 1.70 3.74 123.12 (125.58)

22.56 28.18 38.71 100.00 132.96 34.34 0 0 10.00 0

Total current liabilities

18269.91

16567.42

20597.75

(1702.49)

(9.32)

4030.33

24.33

Networking capital (a-b)

21429.56

22673.99

20619.07

1244.43

5.81

(2054.92)

(9.06)

Source: Collected and Compiled from Annual Reports 1st April 2000 to 31st March 2002

36

Findings: For studying the current financial position or short-term financial position of a concern, one should see the working capital in three years. In case of TPI Ltd, the net working capital has increased in the year 2001 by 5.81% to the year ending 2000, there has been decreased in the year 2002 by (-) 9.06% as comparing with 2001. it shows a fluctuating trend in the short-term financial position of the company. The second aspect we should look in is the liquidity position of the company. The cash and bank balance and debtors have increased in the years 2001 & 2002 over the years. Cash and bank balances 2.64% and 24.69% and also sundry debtors 1.12% and 11.09%.

Inference: From the above table it could be inferred that cash and bank balances and debtors have increased in the years 2001 & 2003 over the years. Cash & bank balance 2.64% & 24.69% and also sundry debtors 1.12% to 11.09%.

37

Table 2.16 The following table shows absolute changes in working capital management of TPI (2002-2004)
Particulars 2002 2003 2004 Absolute Absolute Absolute Change Change Change Rs % Rs
2002-2003 2003-2004

Absolute Change %

(a)Current assets:1.Inventories 2.Sundry debtors 3.Cash and bank balance 4.Loans & advances
Total current assets

8550.41 23042.87 3714.69 5908.85 41216.82

9711.20 25941.11 3114.36 6211.56 44978.23

10547.00 24303.00 3591.00 5636.00 44077

1160.79 2898.24 (600.33) 302.71 3761.41

13.58 12.58 16.16 5.12 9.13

835.80 (1638.11) 476.64 (575.56) (901.23)

7.92 (6.31) 13.27 (9.27) (2.00)

(b) Current Liabilities & provisions: 1.Sundry creditors 2.Interest accured but not due 3.Other Liabilities 4. Due to subsidiary company 5.Due to directors 6.Unclaimed dividends 7.Unclaimed deposits 8.Unclaimed debendures 9.Dividend proposedFinal 10.Dividend Tax Total current liabilities 12470.92 182.48 6529.55 _ 27.00 28.09 1.70 3.74 1354.27 _ 20597.75 14404.15 317.74 7861.71 1095.57 51.61 34.79 2.47 2.38 1662.54 213.02 25645.98 17179 125 6810 _ 61.00 35.00 1.00 1847.00 237.00 26295 1933.23 135.26 1332.16 1095.57 24.61 6.7 6.77 (1.36) 308.27 213.02 5048.23 15.50 74.12 2040.00 0 91.15 23.85 45.29 36.36 22.76 0 24.51 2774.85 (192.74) 1051.71) (1095.57) 9.39 0.21 (2.47) (1.38) 184.46 23.98 649.02 16.15 60.66 (13.38) (100) 18.19 -0.60 (100) (57.98) 11.10 11.26 2.53

Networking capital (a-b)

20619.07

19332.25

17782

(1286.82)

(6.24)

1550.25)

(8.72)

Source: Collected and Compiled from Annual Reports 1st April 2002 to 31st March 2004

38

Findings: For studying the current financial position or short-term financial position of a concern, one should see the working capital in the three years. In case of TPI Ltd the net working capital has reduced from the form the previous year 2002 by (-) 6.24% shows a downtrend in the working capital of the company, which is a positive sign for the company. The second aspect we would look in is the liquidity position of the company. The cash and bank balances have decreased in the year 2003 over the first year 2002 by (-) 16.16% and have increased in the year 2004 over the first year 2003 by (+) 13.27%. The debtors have increased in the year 2003 over the first year 2002 by (+) 12.58% and have decreased in the year 2004 over the first year 2003 by (-) 6.31%.

Inference: From the above table it could be inferred that most of the current assets, current liabilities and net working capital. The current assets have increased in the year 2003 over the first year 2002 by (+) 9.13% and have decreased in the year 2004 over the first year 2003 by (-) 2.00%. The current liabilities have increased in the years 2003 over the first year 2002 and 2004 over the first year 2003 by (+) 24.51 and (+) 2.53%. The net working capital have decreased in the years 2003 over the first year 2002 and 2004 over the first year 2003 by (-) 6.24 and (-) 8.72.

39

SUGGESTIONS
The suggestions given by the researcher is only the opinion that he derived based on the study conducted by him. It has left to the discretion of the company for adheres those suggestions. To improve the profitability position. TPI Ltd should always maintain an adequate amount of net current assets in relation of current liabilities as to keep a very good amount of liquidity throughout the year. Suggest that little bit control the liquidity of current assets and improve the current liabilities. The company always maintains level of quick assets in relation to current liabilities, which will also increase the ratio of networking capital to current liabilities. The company tries to control the networking. More

amount of working capital also dangers of the company and inadequate amount of working capital also dangers of the company.
The company maintains a high level of absolute liquid assets in order to short term commitments and emergency requirements. The company maintains large amount of absolute so more of kept idle of the funds. Suggest only limited amount of absolute liquid assets maintain of the company. Company makes a greater profit. The company tries to maintain 40% of net fixed assets. So that controls the current assets. Suitable format presenting the level of different components of inventory at fixed time interval be introduced to exercise an effective control on the over all inventory levels. The company should follow tight credit policy and reduce the amount tied up in debtors. The company must be preparing monthly debtors reports and the management may take effective action time to time. The company more amount of liquidity position. Suggest that try to control over the liquidity amount. The correlation co-efficient and studentst test there is no significant negative association between liquidity and profitability of the company during the period under study.

40

CONCLUSION
The efficiency of all activities in Tube Products of India Ltd (Export Division) It is the duty of the finance manager to maintain working capital at the optimum level by maximizing the profitability with our impairing the liquidity of the concern. The setting optimum of working capital it needs to undertake an exercise for determining the level of current assets where total cost is minimal Analyze on working capital trends brings out certain important trends in the working capital. In view of recent credit extract squeeze is expected that inventories will be managed efficiently and their levels will be brought down. Working capital management and profitability of the company disclosed both negative and positive association number of negative association only one positive association. Out of the nine ratios, namely WCP, ATR, CTSR, CTTR, WTR, DTR and CPR regarded negative correlation with the selected profitability ratio ROI. The ROI equation shows that positive and negative influences of variations in the independent variables on the profitability of the company. Working capital and liquidity of the company concluded, the increase in the profitability of the company was less than the proportion to decrease in working capital.

References:
1. Padey, I.M (2001) Financial Management, Eighth revised Edition, Vikas Publishing House Pvt.Ltd., NewDelhi,2001. 2. Khan.M.Y., P.K. Jain, (2001) Financial Management, Text and Problems Tata Mc Graw Hill Publishing Company Ltd., New Delhi, 2001. 3. Enrich, A. Halfert,(19920 Techniques of financial Analysis , Sultan Chand & sons, New Delhi, 2002.

41 4. Chakraborthy, S.K., (1990) Financial Management and Control 5. Dina, R. Havrington, (1998) Corporate Financial Analyssis- in A Global Environment, south- West college Publishing, Ohio, USA, 1998. 6. Bhattacharya Hrishikes, Working Capital Management strategies Prentice- Hall 7. Mian Shehzad and smith Clifford j r., Accounts Receivables management Policy theory and evidence Journal of Finance, March 1992. 8. R.Hamsalakshmi & M.Manicham., Financial Performance Analysis of Selected Software Companies , Finance India , Vol.XIX no.3, Sep 2005. 9. S.K.Khatik & Pradeep kumar. Sing., Financial Appraisal of IDBI Bank Limited., finance India, Vol .XIX No.3., Sep 2005. 10. Brigham and Ehrhardt, Financial management- Theory and Practice. South western, 10th Edition