A

SUMMER TRAINING PROJECT REPORT

On

ANALYSIS OF WORKING CAPITAL RATIO OF HINDALCO

SUBMITTED IN THE PARTIAL FULFILLMENT FOR THE AWARD

Of
DEGREE OF MASTER IN BUSINESS ADMINISTRATION 2013-15
UNDER THE GUIDANCE OF:
Ms. Ethi Jain
Professor, RDIAS
SUBMITTED BY:
CHHAVU AGARWAL
ROLL NO: 5680303913
BATCH NO: 2013-15

RUKMINI DEVI INSTITUTE OF ADVANCED STUDIES

An ISO 9001:2008 Certified Institute
NAAC Accredited Grade A
(Approved by AICTE, HRD Ministry, Govt. of India)
Affiliated to Guru Gobind Singh Indraprastha University, Delhi
2A & 2B, Madhuban Chowk, Outer Ring Road, Phase-1, Delhi-110085.

STUDENT DECLARATION

This to certify that I have completed the project titled ANALYSIS OF WORKING CAPITAL
RATIO OF HINDALCO under the guidance of Ms. Ethi Jain in the partial fulfillment of the
requirement for the award of the degree of Master in Business Administration from Rukmini Devi
Institute of Advanced Studies, New Delhi. This is an original work and I have not submitted it
earlier elsewhere.

Name: CHHAVI GUPTA

Enrollment No: 5860303913

CERTIFICATE

This is to certify that the project titled ANALYSIS OF WORKING CAPITAL RATIO OF
HINDALCO is an academic work done by CHHAVI GUPTA submitted in the partial fulfillment
of the requirement for the award of the degree of Masters in Business Administration from
Rukmini Devi Institute of Advanced Studies, New Delhi. under my guidance and direction. To the
best of my knowledge and belief the data and information presented by him in the project has not
been submitted earlier elsewhere.

Ms. Ethi Jain

Professor-RDIAS

ACKNOWLEDGEMENT
I offer my sincere thanks and humble regards to Rukmini Devi Institute Of Advanced Studies,
GGSIP University, New Delhi for imparting us very valuable professional training in MBA.
I pay my gratitude and sincere regards to Ms. Ethi Jain, my project Guide for giving me the cream of
his knowledge. I am thankful to him as he has been a constant source of advice, motivation and
inspiration. I am also thankful to him for giving his suggestions and encouragement throughout the
project work.
I take the opportunity to express my gratitude and thanks to our computer Lab staff and library
staff for providing me opportunity to utilize their resources for the completion of the project.
I am also thankful to my family and friends for constantly motivating me to complete the project and
providing me an environment which enhanced my knowledge

CHAPTER 1
INTRODUCTION TO
ORGANIZATION

1.1 INDUSTRY PROFILE

Aluminum Industry in India
Indian Aluminium Industry is a highly concentrated industry with the top 5 companies constituting
the majority of the country's production. With the growing demand of Aluminium, the industry is
also growing at an enviable pace. India ranks fifth in terms of aluminum production and accounts
for 5 percent of the total production worldwide In fact; Aluminum production in India is currently
outpacing the demand. Although India's per capita use of aluminum is 1.2 Kilograms as compared
to 10.6 in China, 12.4 in the USA and the global average of 11.2 Kilograms.
The Background
Though the existence of Aluminum was first established in the year 1808, it took almost 46 years to
make its production commercially viable. The research work of several years resulted in extracting
the aluminum from the ore. Aluminum is third most available element in the earth constituting
almost 7.3% by mass. Currently it is also the second most used metal in the world after steel. Due
to the consistent growth of Indian economy at a rate of 8%, the demand for metals, used for various
sectors, is also on the higher side. As a result, the Indian aluminum industry is also growing
consistently. In FY09, the aluminum industry in India saw a growth of about 9%.
The production of aluminum started in India in 1938 when the Aluminum Corporation of India's
plant was commissioned. The plant which was set up with a financial and technical collaboration
with Alcan, Canada had a capacity of producing 2,500 ton per annum. Hindustan Aluminum
Corporation (Hindalco) was set up in UP in the year 1959; it had a capacity of producing 20,000
ton per annum. In 1965, a public sector enterprise Malco which had a capacity of 10,000 ton per
annum was commissioned; by 1987, National Aluminum Company (NALCO) was commissioned
to produce aluminum. It had a capacity of producing 0.218 million ton.
During the 1970s, the government started regulating and controlling the Indian aluminum industry.
Restrictions in entry and price distribution controls were quite common in the Indian aluminum
sector. Aluminum Control Order was implemented where the aluminum producers had to sell 50%
of their products for electrical usages. However, in 1989, the order was removed as the government
decontrolling was revoked. With de-licensing of industry in 1991, the liberal import of technologies
and capital goods was started. The liberalization resulted in a growth rate of 12% of the industry,
comparing to the growth rate of 6% during the 1980

The Production
The global aluminum production which was 41.93 million tons in 2010 increased to 45.54million
tonnes in 2011, as per CRU Monitor-Aluminium. The Global aluminum production is forecast to
increase by about 8.23% i.e. to 49.28 million tons in 2012. The world aluminum consumption in
2010 and 2011 was 40.96 million tones and 44.88 million tons respectively. India produced 15.25
lakh tones aluminum in 2009-10 and 16.29 lakh tons in 2010-11 which approximately was about
3.6 % of world production.
The Consumption
India's primary aluminum production capacity is expected to increase from 1.7 tonnes per annum
(tpa) at present to 4.7 tpa by end-2017, with much of the forecast expansion in capacity and
production targeted for export markets. Aluminium production capacity is forecast to increase by
8.7 tpa to 13.3 tpa, with around 4 tpa of capacity surplus to domestic requirements.
The Major Players
The Indian aluminum industry is dominated by four or five companies that constitute the majority
of India's aluminum production. Following are the major players in the Indian aluminum industry:
Hindustan Aluminum Company (HINDALCO)
National Aluminum Company (NALCO)
Bharat Aluminum Company (BALCO)
MALCO
INDAL

Aluminium Companies in India

Hindalco
Hindustan Zinc
Jindal Stainless
Kennametal India
Nalco
Malco
Ratanamani Metal
Sujana Metal Products
Balco
Ind

1.2 COMPANY PROFILE

HINDALCO: General Overview
HINDALCO was set up in collaboration with Kaiser Aluminium and Chemicals Corporation USA, in
a record time of 18 month. Hindalco started its commercial production in the year 1962 with aluminum
facility at Renukoot in the eastern part of Uttar Pradesh with a capacity of 20,000 tons per annum.
Over the year, it has grown into the largest integrated Aluminium manufacturer in the country.
The company has grown manifold and managed by Board of Directors, with Shri Kumar Mangalam
Birla as a chairman of the Board of Directors. Mr. Debu Bhattacharya, the managing Director, leads the
entire Aluminium and copper business of the group. Day to day affairs of the company is managed by
professional executives headed by Shri Ratan k Shah as the Chief Operations Officer, Aluminium and
power.
HINDALCO ranks as a largest Aluminium producer In India, whos more than 58 % sale is in the
value added product and has more than 40% in total market share. Hindalcos integrated operations and
operational efficiency have enabled the company to be one of the worlds lowest cost producers of
Aluminium.
HINDALCO also own a large Captive power thermal plant at Renusagar that meets the power
requirement of the company very effectively. Hindalco currently has a primary Aluminium capacity of
3,45,000 tonnes.

Organization Mission
To relentlessly pursue the creation of superior shareholder value, by exceeding customer expectation
profitably, unleashing employee potential, while being a responsible corporate citizen, adhering to our
values.
Organization values Path to excellence

Honesty in every action

On the foundation of integrity, doing whatever it takes to deliver, as promised

10

Missionary zeal arising out of an emotional engagement with work

Thinking and working together across functional silos, hierarchy levels, businesses and
geographies

Objectives Of The Study

11

a) To analyze the working capital of Hindalco Industries Ltd.

b)To determine the liquidity and profitability of the company with the help of Ratio Analysis
c) To suggest measures for improvement if necessary in the management of Working Capital.

Need For the Study

An analysis of working capital and research work into the topic will help the organization to find out
lacunas in the field of working capital management and take vital decisions. So the proposed study to
analyze the working capital of Hindalco Industries Ltd. is significant.

Milestones

12

1958 - Incorporation of Hindalco Industries Limited.

1962 - Commencement of production of Renukoot (Uttar Pradesh, India) with aninitial capacity of
20000 mpta of aluminium metal and 40000 mtpa of alumina.
1965 - Downstream capacities commissioned (rolling and extrusion mills at Renukoot)
1967 - Commissioning of Renusagar power plant a strategic and farsighted more.
1991 - Beginning of major expansion programme.
1994 - A huge expansion, modernization and diversification programme taken off
1998 - Mr. Kumar Mangalam Birla takes over as chairman of Indal Board .
1999 - Aluminium alloy wheels production commenced at Silvassa Brownfield expansion of metal
capacity of Renukoot to 242,000 tpa .
2000 Acquisition of controlling stake in Indian aluminium company limited (Indal) with 74.6
percent equity holding.
2001 - Hindalco enters the Asia Top 25list of the CEO Asia Annual Report Survey .The only Indian
company in 2001.
2002 - Brownfield expansion at an outlay of Rs 1,000 crore-ninth potline commissioned.
- Amalgamation of Indo Gulf Corporation Ltds copper business Birla copper, with Hindalco with effect
from, April 2002.
- Open offer of aquire additional equity to make Indal a wholly owned subsidiary.
2003 - Hindalco acquires nifty copper mine through Aditya Birla Minerals Ltd. (ABML . Formerly,
Birla minerals Resources Pty Ltd.)
- ABML acquires the Mt. Goodson Copper mines in November 2003.
-The amalgamation of Indo Gulfs copper business with Hindalco become effective from 12 th
February 2003.
- Equity stake in Indal increased to 96.5 per cent through an open offer.

13

2004 - Scheme of arrangement announced to merge Indal with Hindalco Copper smelter expansion to
250,0000 tpa .
2005- All business of Indal expect for the kollur foil plant in Andhra Pradesh merged with Hindalco
Industries Limited.
- In September 2005 the company split its shares in a ratio of 10:1 to enhance liquidity and encourage
participation from retail investors.
- Aditya Birla Group to set up a world-class aluminium perfect in Orissa at a project cost of about Rs.11,
000 crore.
- MoUS signed with state governments of Orissa and Jharkhand for setting up greenfield alumina
refining, smelting and power plants commissioned copper 3rd expansion taking total capacity to
500,000 tpa.
2006 - Joint venture with Almix USA for manufacture of high strength aluminiumallays. Signed on
MOU with the government of Madhya Pradesh for green field Aluminium melter in Siddhi.
- Hindalco completes the largest right issues in the history of Indian capital market with a total size of
Rs. 22,266 million.
- Hindalco announce 10:1 stock split .Each shares with face value of Rs 10 split into 10 shares of Rs 1
each.
- In May 2006, enters into a joint venture with Essar power (M.P.) Ltd to overlap and operate coal mines
in Madhya Pradesh.
- In May 2006 the companys copper mining subsidiary ,Aditya Birla Minerals Limited ( Formerly Birla
Mineral Resources Pty Ltd .) come out with an equity offering and subsequent listing on the
Australian stock exchange (ASX).
- In March 2006, acquired an aluminium rolling mill and wire rods facility situated at Mouda (Nagpur)
from Asset Reconstruction company (India) Ltd (ARCIL), belonging to Rennor Aluminium Company
Ltd.

14

2007 - Novelis become a Hindalco subsidiary with the completion of the acquisition process. The
transition make Hindalco the worlds largest aluminium rolling capacity and one of the biggest
producers of primary aluminium in Asia .
- Acquisition of Alcons 45 percent equity stake in the Utkal Alumina project , makes Hindalco the 100
% project owner.
2008

- Alumina expansion at Muri.

2009

- Hindalco Industries, Aditya Birla group flagship firm, has decided to cut its overseas and is
restructuring its capital Expenditure in India in an effort to stabilize operations.
As part of this overall plan, Novelist, which Hindalco acquired for billion in2007, is closing its sheet
mill at Rogers tone in the UK, involving 440 job losses.
2010 - Hindalco ranked ninth across industries on Forbes Asia's Fab 50. Companies list of Asia's 50

most valued companies.

- Hindalco and Birla White declared winners in the Golden Peacock Awards for Corporate Social
Responsibility 2010 by an international jury, headed by Justice P.M. Bhagwati, the erst while Chief
Justice of India
- Hindalco wins Amity International Business Schools, Amity corporate Excellence Award for
Corporate Social Responsibility.
- Hindalco - Novelis Inc. Announces Pricing of .5 Billion Senior Unsecured Notes.
2011- The Company is setting up a Greenfield Aluminium Smelter Project in Madhya Pradesh
(Mahan project) with a capacity of 359,000 TPA of aluminium supported by 900 MW capative power
plant at a cost (Including financing cost ) of Rs.10500 Crore.
- An Imminent name in aluminium production in India, Hindalco Industries has recently got
Government approval for cutting down the Forest of Orrisa , Rayagada district .The proposed
Reason for acquiring this green clearance is an alumina refinery project to be set up in Rayagada that
would involve an investment up to Rs. 6000 crore .
2012- Hindalco Industries, an integral part of the Aditya Birla Group announced it is expecting to
commence its 1.5 million tons per Annum (MTPA) alumina refinery by January 2013, located in
Orissa.
THE ADITYA BIRLA GROUP

15

Aditya Birla group, with the turnover of over US $ 40 billion and 136,000 employees, is among top
three leading business houses in india. The Aditya birla group is Indias first truly MNC whose over
30% of revenues flow from its operations across the world.
The group is transactional conglomerate with 72 state-of-the-art manufacturing units and sectoral span,
in India, Thiland, Indonesia, Malaysia, Philippines, Egypt,
Canada, Australia, China. (33 countries) Over 66 units in India as well as abroad (in Thiland,
Indonesia, Malaysia, Philippines, Egypt, Canada, Australia, China) and international trading operations
spanning several countries included Singapore, Dubai, Russia, Vietnam, Myanmar, and China make it
Indias first truly multinational conglomerate.
Commited to being a global benchmark group, the aditya birla group recheches out to the core sector in
india in industrial integral to the natons growth cement, aluminum, fertilizers, viscose staple fibre,
branded apparel, viscose filament yarn, Non ferrous metals, industrial chemicals, carbon black,
powder, telecommunication, sponge iron, insulators and financial services
The Aditya birla group enjoys a front runner position:
Globally

A metals powerhouse among the worlds most cost efficient Alluminium and copper producers.

HindalcoNovelis from its fold in fortune 500 company. Aluminium rolling company.
It ranks as No.1 in viscose staple fibre
The largest single location palm oil producer
The third largest producer of insulators
The third largest producer of carbon black
The eleventh largest producer of cement and the largest in single geography
The largest single location copper smelter
Among the worlds top 15 BPOs and among Indias top three
Among the best energy efficient fertilizer plants
In Asia

The largest integrated aluminum producer

In India
16

A premier branded garment player

The second largest chore alkali sector
Among the top five mobile communication company
Among the top three supermarket chains in the retail market
Second largest player of viscous filament yarn
Second largest private sector insurance company and a leading assests management company.
Group Vision
To be the premium metals major, global in size and reach, with a passion for excellence
Group Mission
To relentlessly pursue the creation of superior shareholder value by exceeding customer
expectations profitability, unleashing employee potential and being a responsible corporate citizen
adhering to our values.
Group Values
Integrity, Commitment, Passion, Seamlessness, Speed
Aditya Birla Group: Presence In India

A premier branded garments player

The second largest player in viscose filament yarn
The second largest in the chlor-alkali sector
Among the top five mobile telephony companies
A leading player in life insurance & asset management
Among the top three supermarket chains in the retail business

Group Companies

Grasim Industries Ltd.

Hindalco Industries Ltd.
Aditya Birla Nuvo Ltd.
Ultra Tech Cement Ltd.

Indian companies:-

17

PSI Data Systems

Aditya Birla Minacs Worldwide Ltd
Essel Mining & Industries Ltd.
Idea Cellular Ltd.Aditya Birla Insulators

Product Profile
Aluminium
Hindalco's major products include standard and specialty grade aluminas
and hydrates, aluminium ingots, billets, wire rods, flat rolled products,
extrusions and foil.
The integrated facility at Renukoot houses an alumina refinery and an
aluminium smelter, along with facilities for the production of semifabricated products namely: redraw rods, flat rolled products and extrusions. The plant is backed by a
co-generation power unit and a 742 MW captive power plant at Renusagar to ensure the continuous
supply of power for smelter and other operations.
A strong presence across the value chain and synergies between operations has given us a dominant
share in the value-added products market. As a step towards expanding the market for value-added
products and services, we have launched various brands in recent years Everlast roofing sheets,
Freshwrap kitchen foil and Freshpak semi-rigid containers.

Copper
Birla Copper, Hindalcos copper unit, is located at Dahej in Gujarat, India.
The unit has the unique distinction of being the largest single-location copper
smelter in the world. The smelter uses state-of-the-art technology and has a
capacity

of

500,000

tpa.

Birla Copper also produces precious metals, fertilizers and sulphuric and

18

phosphoric acid. The unit has captive power plants for continuous power generation and a captive jetty
to facilitate logistics and transportation.
Birla Copper upholds its longstanding reputation for quality copper cathodes and continuous cast
copper rods by assuring its management processes meet the highest standards. It has acquired
certifications such as ISO-9001:2000, ISO-14001:2004 and OHSAS-18001:2007.
Mines
Hindalco acquired two Australian copper mines, Nifty and Mt. Gordon, in 2003. The Birla Nifty
copper mine consists of an underground mine, heap leach pads and a solvent extraction and electro
winning (SXEW) processing plant, which reduces copper cathode.

The Mt. Gordon copper operation consists of an underground mine and a copper concentrate plant. Until
recently,

the

operation

produced

copper

cathode

through

the

ferric

leach

process.

In 2004, a copper concentrator was commissioned to provide concentrate for use at Hindalco's
operations in Dahej. During FY2009, Mt. Gordon produced 17,815 tones of copper in concentrate. Both
Nifty and Mt. Gordon have a long-term life of mine off-take agreement with Hindalco for supply of
copper concentrate to the copper smelter at Dahej.

Cornerstones Of Growth
19

Hindalcos well-crafted growth and integration hinges on the three cornerstones of cost, they are
competitiveness, quality and global reach. Company also committed to the triple bottom line
accountability of economic, environment and social factors. Care for the community around our
operating units is best exemplified by our deep-rooted social commitment.
HINDALCO Product Range
PRIMARY ALUMINIUM

Ingots

Hindalco produces high-purity ingots through smelting. Alloy ingots of various grades are also produced and m

20

A leading player in the

extrusions industry in India,
Hindalco

offers

wide

range of alloys, including

hard alloys and some special alloys for the defense and space sectors. Hindalcos extrusions capacity
stands at 46,000 tap.
Hindalco has two extrusion plants in India, one in Renukoot, Uttar Pradesh, and the other in
Alupuram, Kerala. Both plants have well-established manufacturing processes and QA systems honed
over five decades of experience. Extrusions are manufactured from high-quality billets made out of
virgin in-house metal and offer the widest range of shapes and alloys.
Hindalco Extrusions is a leading brand for a wide spectrum of industries, including architectural,
electrical, industrial, transport, and defense and consumer durables industries. We export extrusions
primarily to the US, Canada, Germany, the UK, France, the Netherlands, South Africa, UAE,
Singapore, Malaysia, Sri Lanka and Bangladesh .
Quality accreditations
ISO 9001:2000 Quality Management System
The company has ISO 2002 Certification since 1994
ISO 14001 Environment Management System since 1998.OHSAS 18001:1999 Occupational Health
and Safety Assessment Series
Hindalco has accorded the Star Trading House status in India.
Hindalco's aluminium metal is accepted for delivery under the High Grade Aluminium Contract on
the London Metal Exchange (LME).
Hindalcos copper quality standards are also internationally recognized and registered on the LME
with Grade A accreditation

21

PRODUCTION CAPACITY
Alumina
700000 TPA

RENUKOOT

350000 TPA

BELGAUM

450000 TPA

MURI

Aluminium
345000 TPA

RENUKOOT

161400 TPA

HIRAKUD

Extrusions
230000 TPA

RENUKOOT

8000 TPA

ALUPURAM

Flat Rolled Products

80000 TPA

RENUKOOT

45000 TPA

BELUR

50000 TPA

TALOJA

30000 TPA

MOUDA

Redraw Rods

22

56400 TPA

RENUKOOT

Foil & Packing

30000 TPA

SILVASSA

4000 TPA

KOLLUR

Captive Power
742 MW

RENUKOOT

638 MW

HIRAKUD

84 MW

RENUKOOT COGEN

30 MW

MURI

Application of Aluminium In India

Automotive industry
Aviation industry
Railways
Ship building industry
Transportation industry
Dairy industry
Packing industry
Electrical industry
Household utensils
Consumer durable products

23

Major Aluminium Producer Industries In India

COMPANY

OWNERSHIP

LOCATION

CAPACITY

Hindalco

A B Group

Renukoot
Alpuram
Hirakud
Belgaum

345,000
14,000
65,000
31,000

NALCO

Public sector

Angul

345,000

BALCO

Sterlight

Kobra

350,000

MALCO

Sterlight

Mettur

40,000

THEORATICAL BACKGROUND
Working Capital
Working capital refers to the cash a business requires for day-to-day operations, or more specifically,
for financing the conversion of raw material into finished goods, which the company sells for payment.
24

Among the most important items of working capital are levels of inventory, accounts receivable and
accounts payable. Analysts look at these items for sings of a companys efficiency and financial
strength.
Funds are also needed for short-term purposes for the purpose of raw materials, 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 firms capital, which is required for financing short- term or
current assets such as cash, marketable securities, debtors and inventories. Working capital is a
valuation metric that is calculated as current assets minus current liabilities. Working capital is also
known as operating capitals.
Current Assets and Current Liabilities
This includes three accounts, which are of special importance.These accounts represent the areas of the
business where managers have the most direct impact:
Accounts receivable (current assets)
Inventory (current assets), and
Account payable (current liabilities)
In addition, the current (payable within 12 months) portion of debts is critical, because it represents a
shorts- term claims to current assets. Common types of short-term debt are bank loans and lines of
credit.

I. Current assets:
This is any cash or assets that can be quickly turned into cash. This includes prepaid expenses,
accounts receivable, most securities and your inventory.
Constituents of Current Assets: Cash in Hand and Bank Balances
25

Bill Receivables
Sundry Debtors (Less provision for bad debts)
Short terms Loans & Advances
Inventories of stocks
Raw Material
Work in Process
Stores and Spares
Finished Goods
Coal & Fuel
Bills
Temporary Investments of Surplus Funds
Prepaid Expenses
Payables
Accrued Income
II. Current liabilities:

Sundry
This is a for
liability
in the immediate future. This including wages, taxes account payable.
Provision
Taxation
Creditors
Constituents of Current Liabilities:

Bills Payable
Sundry Creditors or Accounts Payables
Short Terms Loans
Advances & Deposit
Dividend Payable
Bank Overdraft
Provision for taxes
Constituents of Current Liabilities

Current
Liabilities

Dividend
Payable

Short Term
Loans

26

Bank
Overdraft

The basic objective of financial management is to maximize shareholders wealth. For this it is
necessary to generate sufficient profits. The extent to it, which the profit can be, earn, largely depend
on the magnitude of sales. However sales do not convert into cash instantly. There is invariable the
time gap between the sale of goods and receipt of cash. There is, therefore, a need for working capital
in the form of CA to deal with the problem arising. Out of the lack of immediate realization of cash
again goods sold. Therefore, sufficient WC is necessary to sustain sales activity.
Need For Working Capital
Every business needs some amount of working capital. The need arise due to the time gap between
production and realization of cost from sales. There is an operating cycle involved in the sales and
realization of cash. There were time gap in purchase of raw materials and sales and realization cash.
The working capital is needed for the following purpose:
27

For the purchase of raw materials and spares.

To pay wages and salaries.
To incur day to day expenses and overhead costs like fuel, power and office expenses.
To provide credit facilities to customers.
To maintain the inventories of raw materials, work in progress, stores and spares and finished
goods.
A new concern need a lot of liquid funds to meet initial expenses like promotion, formation etc. The
amount needed as working capital in a new concern depends on its size, ambitions of its promoters.
Greater the size of the business unit, larger will be the need of working capital needed goes on
increasing the growth and expansion of business till it attain maturity. At maturity the amount of
working capital needed is called as normal working capital.

28

Classification Of Working Capital

Classification of Working Capital

Working capital may be classified in two ways: On the basis of time

On the basis of concept
I. On the basis of time:
There are two concept of working capital;
a. Gross Working
Capital
On the
basis of

CONCEPT

On the basis of TIME

b. Net Working Capital

a) Gross Working Capital

Gross working capital refers to the firms investment in current assets. Current assets are assets,
which can be converted into cash with in an accounting year. The main components of current assets
are cash, debtors, marketable securities and stock.
The Gross Working Capital concept focuses attention on two aspect of current asset management.
Optimum investment in current assets
Financing of current assets
Permenent

Net Working
Temporary
Gross Working Capital
Working
Capital in assets should be to avoid two-danger
Working
The consideration of level of investment
point: Capital
excessive and
Capital
inadequate in current assets. Investment in current assets should be just adequate, not more nor less to

the needs of business firm. Excessive investment in current assets should be avoided as its impairing
firms profitability. On the other hand inadequate amount of working capital can threaten solvency of
the firm.
Another aspect of gross working capital points of the need of arranging funds to finance current assets.
Whenever
a need for working capital
arises, financing arrangement
should be made
quickly. Similarly
Regular
Reserve
Special
Seasonal
arising
shall be Capital
invested inWorking
short-term securities.
Working
Capital

Working CapitalWorking Capital

b) Net Working Capital

29

Net working capital refers to the difference between currents assets and current liabilities. Current
liabilities are those claims of outsiders, which are expected to mature for payment with in an
accounting year. Current liabilities include creditors; bills payable and outstanding expenses. Net
working capital is a qualitative concept. It indicate the liquidity position of the firm and suggests the
extent to which working capital needs may be financed by permanent source of funds as share,
debenture, long-term debts etc. It covers the question of judicial mix of long and short-term funds for
financing current assets. In order to protect their interests, short-term creditors like a company to
maintain a positive NWC. Conventionally the ratio of current assets and Current liabilities is 2:1. A
negative
Net working capital means a negative liquidity, which may prove to be harmful to companys solvency
makes it unsafe and unsound.

Net working capital = Current assets - Current liabilities

II. On the basis of concept:There are two concept of working capital, they are;
a) Permanent working capital
b) Temporary or variable working capital
a) Permanent working capital
Permanent of fixed working capital is the minimum amount, which required ensuring effective
utilization of fixed facilities and for maintaining the circulation of current assets. There is always a
minimum level of current assets, which is consciously required by the enterprise to carry out normal
business operations. Every firm has to maintain a minimum level of raw materials, work-in-progress,
finished goods and cash balances. This minimum level of current assets is called permanent or fixed
working capital as this part of capital is permanently blocked in current assets.
Characteristics Of Permanent Working Capital
30

 Amount of permanent working capital remains in the business is one form or the other. The supplier
of such working capital should not accept its return during the lifetime of the firm.
It grows with the size of the firm.
Permanent working capital is permanently needed for the business.
b) Temporary or variable working capital
This is also known as the fluctuating working capital or variable working capital. Temporary working
capital is the extra working capital needed to support the changing production and sales activity of the
firm.

Cash

Debtors
(Receivable)

Raw Materials,
Labour, Overheads

WORKING CAPITAL CYCLE

31

Finished
Goods

Work-inprogress

Working capital cycle indicate the length of time between a companys paying for material, entering
into stock and receiving the cash form sales of finished goods. It can be determined by adding the
number of days required for each stage in the cycle. For example, Hindalco company hold raw material
on an average for 120 days; it gets credit from supplier for 30 days, production process needs 30 days,
finished goods for held for 60 days and credit extended to debtor. The total of all these, 240 days, i.e.,
120+30+30+60 days is the total working capital cycle. The determination of working capital cycle
helps in forecast, control and management of working capital. The duration of working capital cycle
may vary depending on the nature of business.
Estimation of working capital requirement

32

There is no set rule or formula to determine working capital requirement of the firm. The quantum of
working capital requirement of a company largely depends upon aforesaid factors. A finance manager
in order to estimate the working capital requirement of the firm has to keep in mind the above factors.
Besides he can apply any of the following techniques for assessing working capital requirement
1. Estimation of component of working capital
2. Percentage of sales method
3. Operating cycle approach
TECHNIQUE (1): -Estimation of component of working capital
Since working capital is the excess of current assets over current liabilities, estimating amount of
different constituents of working capital can makes an assessment of working capital requirement.
For example, inventories, account receivables, cash, debtors, creditors etc.
1. Inventories: - The average amount of raw material to be kept in stock will depend upon quality of
raw material required for production during a particular period and average time taken in obtaining
fresh delivery. Suitable adjustment may have to be made for incontinency and seasonal factor. It
can be calculated by following formula :
Budget Production Cost of Raw material Average inventory holding period
(Units)
(Per unit)
(Months or days)
12(months) OR 365 (Days)
2. Work-in-progress: - The cost of work-in-progress includes raw material, wages and other
overheads in determining the amount of work-in-progress the time period for which the goods will
be in process, is most important. Work-in-process is normally equivalent to 50% of total cost of
production. Symbolically;
Budget production Estimated WIP Average WIP time span
(Units)
(Per unit)
(Month or days)

12(months) OR 365 (Days)

3. Finished Goods: - The period for which finished goods have to remain in the warehouse before is
an important factor determining the amount locked up in finished goods. It summed up as:
33

Budget Production cost of goods produced finished goods holding period

(Units)
(Per unit)(Exclude DEP.)
(Months or Days)
12(months) OR 365 (Days)
4.

Sundry Debtors: - The amount of fund locked up in sundry debtors will be computed on the basis
of credit sales and time lag in collection payment. It should be estimated in relation to total cost
price as follows:-

Budgeted credit sales

(Units)

Cost of sales

Average collection period

Excl. Dep. (Per unit)

(Months or Days)

12(months) OR 365 (Days)

5. Cash or Bank balance: - The amount of money which to be kept as cash in hand or cash at bank
can be estimated on the basis of past experience.
6. Sundry creditors: - The lag in payment of supplier of raw materials, goods etc and the likely
credit purchases made during them to help in estimating the amount of creditor
Budgeted creditor raw mat. Requirement Credit period allowed
(Units)
(Units)
(Months or days)
12(months) OR 365 (Days)
7. Outstanding Expenses: - The time lag in payment of wages and other expenses will help in
estimating the amount of outstanding expenses as follow
Budgeted production Labor cost Time lag in paymt. of Exp.
(Units)
(Per unit)
(Months or Days)
12(months) OR 365 (Days)
TECHNIQUE (2): -Percentage of sale method
This is a traditional and simple method of estimating working capital requirement. According to this
method, on the basis of past experience between sales and working capital requirement, a ratio can be
determined for estimating the working capital requirement in future

34

For Example, if in the past experience shows that working capital has been 30% of sales and it is sales
for the next year would amount to 1, 00,000, the amount of working capital can be estimated to Rs.
30,000 , the basic criticism of this method is that its presumes a linear relationship between sales and
working capital. This is neither true in all cases nor the method is universally accepted.

The following table shows how the companies estimate their working capital requirement by using
percentage of the sale method for the year 2012: -

PERCENTAGE OF SALE METHOD

Items
Sales
Inventories
Sundry debtors
Cash & bank Bal.
Other current assets
Loan & advances
Total

Rs. (in millions)

% of sales

28053.24
3903.96

13.91

1427.45

5.08

722.30

2.58

355.78

5.88

1647.65

1.27

36110.38

128.72

23615.15

84.17

919.88

3.28

Less : Liabilities
Provisions

35

Total
Net current assets
Miscellaneous Exp.

24535.03

87.45

16479.44

58.74

730.28

2.60

Analysis:From this method we can conclude the data, how much working capital (in percentage) Hindalco
need in the next year. This gives help to control the working capital level. This is an important aspect
to control the cost of finished goods through reduce the cost of inventories.
Operating Cycle Approach:According to this approach working capital requirement is depends upon the operating cycle business.
The operating cycle begins with the acquisition of raw material and with the collection of receivables.
It may be broadly classified into four stages: Raw material and store storage stage
Work-in-progress stages
Finished goods storage stage
Receivable collection stage
The duration of operating cycle for the purposes of estimating working capital requirements equivalent
to the sum of the duration of each of these stages less credit period allowed by the superior of the firm.
Symbolically:
Here,
O = Duration of operating cycle
R = Raw material storage period
W = Work-in-progress period
F = Finished goods storage period
D = Debt collection period
C = Creditors payment period
36

The above can be calculated as follows:

Average Stock of raw material 365 days

R=
Average raw material store consumption

Average Work in progress inventory 365 days

W=
Average cost of production

Average finished goods inventory 365 days

F=
Average cost of goods sold

Average books of debts 365 days

D=
Average credit sales

37

Average trade creditor 365 days

C=
Average credit purchases
After completing the period of one operating cycle total number of operating cycle that can be
completed during a year can be computed by dividing 365 days with the number of operating days in a
cycle.
SYMBOLICALLY:
N = 365/O
Here,
N = numbers of operating cycles
O = duration of operating cycles
Total operating expenditures
WCR =
Number of operating cycles in a year

The working capital has the following components, which are in several forms of current assets:
Cash in hand
Cash at bank
Stock of raw material
Stock of finished goods
Value of debtors
Miscellaneous current assets (short term investment, loans & advances.

Components of working capital

Basis of valuation

38

1. Stock of raw material

Purchase cost of raw material

2. Stock of work in progress

At cost or market value, whichever is lower

3. Stock of finished goods

Cost of production

4. Debtors
Cost of sales or sales value
5. Cash
Working expenses
II: Working Capital Management
Every business needs investment to procure fixed assets, which remain in use for a longer period.
Money invested in these assets is called long term funds or fixed capital.
Business also needs funds for short-term purposes to finance current operations. Investment in short
term assets like cash, inventories debtors etc. is called short term funds or working capital.
The working capital is categorized as fund needed for carrying out day-to-day operations of the
business smoothly. The management of the working capital is equally important as the management of
long term financial investment.
Every running business needs working capital. Even a business which is fully equipped with all types
of fixed assets required is bound to collapse without1)
2)
3)
4)

Adequate supply of raw materials for processing.

Cash to pay for wages, power and other costs.
Creating a stock of finished goods to feed the market demand regularly.
The ability to grant credit to its customers.
All these require working capital.
Working capital is like the lifeblood of a business
The business will not be able to carry on day-to-day activities without the availability of adequate
working capital.

39

Working capital, also known as net working capital, is a financial metric which represents operating
liquidity available to a business.
Along with fixed assets such as plant and equipment, working capital is considered a part of operating
capital. It is calculated as current assets minus current liabilities. If current assets are less than current
liabilities, an entity has a working capital deficiency, also called as working capital deficit.
A company can be endowed with assets and profitability but short of liquidity if its assets cannot
readily be converted into cash. Positive working capital is required to ensure that a firm is able to
continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and
upcoming operational expenses. The management of working capital involves managing inventories,
accounts receivables and payable and cash.
Calculations
Current assets and current liabilities include three accounts which are of special importance. These
accounts represent the areas of business where the managers have the most direct impactAccounts receivable (current assets)
Inventory (current assets), and
Accounts payable (current liabilities)
The current portion of debt (payable within 12 months) is critical, because it represent a short term
claim to current assets and is often secured by long term assets. Common types of short-term debts are
bank loans and lines of credit.
An increase in working capital indicates that the business has either increased current assets (that is
received cash, or other current assets) or has increased current liabilities, for example paid off some
short-term creditors.
Current assets- this is any cash or assets that can be quickly turned into cash. This includes prepaid
expenses, accounts receivables, most securities and your inventory.
Constituents of current assets Cash in hand and bank balances
40

 Bill receivables
Sundry debtors (less provision for bad debts)
Short term loans and advances
Inventories of stock
Raw material
Work in process
Stores and spares
Finished goods
Coal and fuel
Temporary investments of surplus funds
Prepaid expenses
Accrued expenses

Current liabilities- This is a liability in the immediate future. This includes wages, taxes and
accounts payable.
Constituents of current liabilities

Bills payable
Sundry creditors or accounts payable
Short term loans, advances & deposits.
Dividend payable
Bank overdraft
Provision for taxation, if it does not amount to appropriation of profits
Current assets current liabilities (excluding deferred tax assets/liabilities, excess cash,

surplus assets and/or deposit balances)

Working Capital Management
Decision relating to working capital and short term financing are referred to as working capital
management. These involves managing the relationship between a firms short term assets and short
term liabilities. The goal of working capital management is to ensure that the firm is able to continue
its operations and that it has sufficient cash flows to satisfy both maturing short-term debt and
upcoming operational expenses.
Decision criteria

41

By definition, working capital management entails short term decisions- generally related to next one
year period- which are reversible. These decisions are therefore not taken on the same basis as
capital investment decisions (NPV or related, as above) rather they will be based on cash flows and/or
profitability.
One measure of cash flow is provided by the cash conversion cycle- the net number of days from the
outlay of cash for raw material for receiving payment from the customers. As a management tool
this metric makes explicit the inter-relatedness of decision relating to inventories, accounts
receivables and payables and cash. Because this number effectively corresponds to the time that the
firms cash is tied up in operations and unavailable for other activities, management generally aims
at a low net count.
In this context, the most useful measure of profitability is return on capital (ROC). The result is shown
as a percentage, determined by dividing relevant income for the 12 months by capital employed;
return on equity (ROE) shows this result for the firms shareholders. Firm value is enhanced when,
and if, the return on capital, which results from working capital management, exceeds the cost of
capital, which results from capital investments decisions as above. ROC measures are therefore
useful as a management tool, in that they link short-term policy with long-term decision making.
See economic value added (EVA).
Management of working capital
Measurement will use a combination of policies and techniques for the management of working
capital. These policies aims at managing the current assets (generally cash and cash equivalents,
inventories and debtors) and the short term financing, such as cash flows and returns are acceptable.
Cash management- Identify the cash balance which allows for the business to meet day to day
expenses, but reducing cash holdings costs.
Inventory management- Identify the level of inventory which allows for uninterrupted production but
reduces the investment in raw materials- and minimizes reordering costs- and hence increases cash
flows; see supply chain management; just in time (JIT); economic order quantity (EOQ); Economic
production quantity.

42

Debtors management- Identify the appropriate credit policy, i.e. credit terms which will attract
customers, such that any impact on cash flows and the cash conversion cycle will be offset by
increased revenue and hence return on capital (or vice versa) see discount and allowances.
Short term financing- Identify the appropriate source of financing, given the cash conversion cycle;
the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to
utilize a bank loan (or overdraft), or to convert debtors to cash through factoring.

Component of working capital management

Inventory Management
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.
INVENTORY MANAGEMENT IN HINDALCO
Hindalco produces normal production cycle items against the firm orders from customers. Because of
this as well as sizeable raw materials and compulsory bulk purchase of items, the company has to carry
high level of inventories.
A low inventory turnover ratio is a signal of inefficiency, since inventory usually has a rate of return
of zero. It also implies either poor sales or excess inventory. A low turnover rate can indicate poor
liquidity, possible overstocking, and obsolescence, but it may also reflect a planned inventory buildup
in the case of material shortages or in anticipation of rapidly rising prices.
A high inventory turnover ratio implies either strong sales or ineffective buying (the company buys
too often in small quantities, therefore the buying price is higher).A high inventory turnover ratio can

43

indicate better liquidity, but it can also indicate a shortage or inadequate inventory levels, which may
lead to a loss in business.
Receivables Management
Given a choice, every business would prefer selling its produce on cash basis. However, due to factors
like trade policies, prevailing marketing conditions, etc., businesses are compelled to sell their goods
on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing
sales. Extending credit means creating a current asset in the form of Debtorsor Accounts
Receivable. Investment in this type of current assets needs proper and effective management as it
gives rise to costs such as:
i. Cost of carrying receivable (payment of interest etc.)
ii. Cost of bad debt losses
Thus the objective of any management policy pertaining to accounts receivables would be to ensure
that the benefits arising due to the receivables are more than the cost incurred for receivables and the
gap between benefit and cost increases resulting in increased profits. An effective control of
receivables helps a great deal in properly managing it. Each business should, therefore, try to find out
average credit extended to its client using the below given formula
DEBTORS MANAGEMENT IN HINDALCO
Hindalco is one of the leading producers of aluminium and copper. Our aluminium units across the
globe encompass the entire gamut of operations, from bauxite mining, alumina refining and aluminium
smelting to downstream rolling, extrusions, foils, along with captive power plants and coal mines. Its
debt policy is not very flexible. It has been observed that there is no exceeding six months in past few
years. The reason behind this may be that most of its customers are big corporate over the world.

In most of the contracts, payments of Hindalco are made in following stages:

Payment Terms:
44

Advance from customers.

At the time of dispatch of goods.
At the time of MRC(Material Receipt at Site)

However, the above terms may vary from contract to contract

Each business should project expected sales and expected investment in receivables based on various
factors, which influence the working capital requirement. From this it would be possible to find out the
average credit days using the above given formula. A business should continuously try to monitor the
credit days and see that the average credit offered to clients is not crossing the budgeted period.
Otherwise, the requirement of investment in the working capital would increase and, as a result,
activities may get squeezed and this may lead to cash crisis.
Cash Management
Cash is the most liquid current asset. It is of vital importance to the daily operations of business. While
the proportion of assets held in the form of cash is very small, its efficient management is crucial to the
solvency of the business.
Therefore, planning cash and controlling its use are very important tasks. Cash budgeting is a useful
device for this purpose.
Cash Budget
Cash budget basically incorporates estimates of future inflows and outflows of cash over a projected
short period of time which may usually be a year, a half or a quarter year. Effective cash management
is facilitated if the cash budget is further broken down into month, week or even on daily basis.
There are two components of cash budget (i) cash inflows and (ii) cash outflows.
The main sources for these flows are given here under:
Cash Inflows:
(a) Cash sales
45

(b) Cash received from debtors

(c) Cash received from loans, deposits, etc.
(d) Cash receipt of other revenue income
(e) Cash received from sale of investments or assets

Cash Outflows:
(a) Cash purchases
(b) Cash payment to creditors
(c) Cash payment for other revenue Expenditure
(d) Cash payment for assets creation
(e) Cash payment for withdrawals, taxes
(f) Repayment of loans, etc.
Now let us understand the means to finance the working capital. Working capital or current assets are
those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be
financed through short-term funds. Short-term funds are also called current liabilities. The following
are the major sources of raising short-term funds
Cash Management
It is the duty of the finance manager to provide adequate cash to all segments of the organization. At
the same time, he/she has also to ensure that no funds are blocked in idle cash as this will involve cost
46

in terms of interest to the concern. A sound cash management scheme has to maintain the twin
objective of liquidity and cost.
Motives For Holding Cash
In spite of the fact that cash does not earn any substantial return for the business, it is held by the
concern with the following motives.

Transaction motive: A company enters a variety of business transactions resulting both inflow
and outflow of cash; at times the cash outflow exceed the cash inflow. In order to meet the
business obligations in such situation, it is necessary to maintain adequate cash balance. Thus, a
firm with the motive of making routine business payments maintains cash balance.

Precautionary motive: A firm holds cash balance to meet sudden cash needs arising out of
unexpected contingencies such as floods, strikes, obsolesces; sharp increase in prices of raw
materials, presentation of bills of payment earlier than expected date more amount of cash will be
kept by the firm if there is more possibility of such contingencies.

Speculative motive: Hindalco also keeps cash balance to take advantage of unexpected business
opportunities. Such motive is there of speculative nature.

Compensation motive: Banks provide certain services to their customers free of charge. So they
usually require the customers to keep minimum cash balance with them which enables them to
earn interest and compensate for the free services rendered.

Reasons Of Cash Management

Cash management involves the following four basic problems.

Controlling level of cash: One of the basic objectives of cash management is to minimize the
level of cash balances with the firm. This objective is sought to be achieved by means of the
following:

47

Preparing cash budget: Cash budget is the most important device for planning and controlling
the use of cash. It involves the future receipts and payments of the firm. On the basis of this
information the finance manager can determine the future cash needs of the firm.

Providing for unpredictable discrepancies: Cash budget shows discrepancies between cash
receipts and payments on the basis of normal business activities.

Availability of alternative source of funds: A firm may not require keep large cash balance, if it
has arrangements with banks for borrowing money in times of emergencies.

Controlling of cash inflow: In order to prevent fraudulent diversion of cash receipt and speeding
up collections of cash, an adequate control on cash inflow is necessary. A properly installed check
system can, to a great extent, minimize the possibility of fraudulent diversion of cash. Speedier
collection of cash can be made possible by adoption of the following two techniques

Concentration banking system: It is a system of decentralizing collection of account receivables.

According to this system, Hindalcos branch offices are authorized to collect the payment from the
customers, and deposit in the local bank accounts. This system facilities fast movement of funds.
This system is good in case of the firms having their spread over a large area.

Lock box system: This system is more popular in the U.S.A. and is further step in speeding up
collection of cash. This system has been devised to element delay arising in cash of the
concentration banking system on account of a time gap between actual receipt of cheques by the
regional collection centers and its deposits in the local bank account. Under this system company
hire a post office box and instruct its customers for their remits to the box. It also reduces the
chances of frauds in the cash collection process and controls the cash inflows better. In order to
avoid the unnecessary pockets of idle funds, the company should maintain minimum number of
bank accounts.

Controlling outflows of cash: An efficient control over cash outflows is equally important for
conserving cash and reducing financial requirements. Control over cash outflows signifies slow
disbursement. In order to control the outflows of cash efficiently, a firm should keep in view the
following considerations:

48

Centralized system for cash payments should be followed as compared to decentralized system in
cash of collections. All payments should be made from a single control account, i.e. from the central
office of the company.
1) Suppliers Credit
At times, business gets raw material on credit from the suppliers. The cost of raw material is paid
after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash
the business is in a position to use raw material and continue the activities. The credit given by the
suppliers of raw materials is for a short period and is considered current liabilities. These funds
should be used for creating current assets like stock of raw material, work in process, finished goods,
etc.

2) Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extend loans tobusinesses to help them
create necessary current assets so as to achieve the required business level. The loans are available for
creating the following current assets:

Stock of Raw Materials

Stock of Work in Process
Stock of Finished Goods
Debtors

Banks give short-term loans against these assets, keeping some security margin.The advances given by
banks against current assets are short-term in nature and banks have the right to ask for immediate
repayment if they consider doing so. Thus bank loans for creation of current assets are also current
liabilities.
3) Promoters Fund

49

It is advisable to finance a portion of current assets from the promoters funds They are long-term
funds and, therefore do not require immediate repayment. These funds increase the liquidity of the
business.

Ratio Analysis
Ratio Analysis is the most commonly and widely used tool of financial analysis.
Ratio Analysis is used to interpret the financial statement so that the strength and
weaknesses of a firm as well as its historical performance and current financial
condition can be determined.
A Financial Ratio is defined as, the relationship between two accounting figures,
expressed mathematically. Ratio Analysis makes related information comparable.
It helps to summaries large quantities of financial datas and to make,
quantitative judgments about financial performance.

Classification Of Ratios
In view of the financial management have been classified as below:

Liquidity ratios
Activity ratios
Solvency ratios
Profitability ratios

LIQUIDITY RATIOS
The liquidity Ratio measures the ability of firm to meet its short-term obligations and reflect its shortterm financial strength/ solvency of firm. Liquidity Ratio is generally based on the relationship
between current assets and current liabilities.
Some important liquidity ratios are:
(a) Current Ratio :
50

The current ratio is the ratio of total current assets to total current liabilities. It is calculated by
dividing current assets by current liabilities.

Current Ratio = Current Assets / Current Liabilities

It measures the short-term solvency of the firm; the higher current ratio measures the higher margin of
safety.
(b) Quick Ratio or Liquid Ratio :
It is a measurement of firms ability to convert its current assets quickly into cash in order to meet its
current liabilities.

Ratiois=ratio
Quick
Assets / quick
Current
Liabilities
The acidQuick
test ratio
between
assets
and current liabilities and calculated by dividing the

quick assets by current liabilities. Quick assets are that which can be converted into cash immediately
at a short notice without a loss of value.
(c) Cash Ratio :
Since cash ratio is the most liquid asset, a financial analyst may examine cash ratio and if equivalent
to current liabilities. Trade investment or marketable securities are equivalent of cash. Therefore,
they may be included in the computation of cash ratio.

Cash Ratio = Cash balance / Current Liabilities

51

ACTIVITY RATIOS
Activity ratios that measure a firm's ability to convert different accounts within their balance sheets into
cash or sales. Activity ratios help investors evaluate a firms ability to effectively and efficiently manage
its operations and assets. The most commonly used activity ratios include:
(a) Stock turnover ratio :
This ratio is a relationship between the cost of goods sold during a particular period of time and the
cost of average inventory during a particular period. It is expressed in number of times. Stock
turnover ratio / Inventory turnover ratio indicates the number of time the stock has been turned over
during the period and evaluates the efficiency with which a firm is able to manage its inventory. This
ratio indicates whether investment in stock is within proper limit or not.

Inventory Turnover Ratio = Cost of goods sold / Average inventory

(b) Debtors turnover ratio :
This ratio indicates the velocity of debt collection of a firm. In simple words it indicates the
number of times average debtors (receivable) are turned over during a year.

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

(c) Average Collection Period :

The Debtors / Receivable Turnover ratio when calculated in terms of days is known as Average
Collection Period or Debtors Collection Period Ratio.

52

The average collection period ratio

represents the average number of days for which a firm has to wait before its debtors are converted
into cash.

Average collection period = (Trade Debtors No. of Working Days) / Net Credit
Sales

(d) Working capital turnover ratio :

This ratio indicates the velocity of the utilization of net working capital. This ratio represents the
number of times the working capital is turned over in the course of year.

Working Capital Turnover Ratio = Cost of Sales / Net Working Capital

(e) Fixed assets turnover ratio:

This ratio is also known as sales to fixed assets ratio. This ratio measures the efficiency and profit
earning capacity of the concern. Higher the ratio, greater is the intensive utilization of fixed assets.
Lower ratio means under-utilization of fixed assets.

53

Fixed Assets Turnover Ratio = Cost of Sales / Net Fixed Assets

SOLVENCY RATIOS
Solvency ratios measure the financial soundness of a business and how well the company can satisfy
its short- and long-term obligations. Solvency ratios help investors assess a companys ability to meet
its long-term obligations. They also tell investors how the company has been financed (debt or equity)
and whether that is changing over time. Some solvency Ratios are;
(a)

Debt-to-Equity ratio:
This ratio indicates the relationship between the external equities or outsiders funds and the internal
equities or shareholders funds. It is also known as external internal equity ratio. It is determined to
ascertain soundness of the long term financial policies of the company.

Total long term debt /Shareholders funds

(b) Interest coverage ratio

This ratio is also known as debt service ratio or debt service coverage ratio. This ratio relates the
fixed interest charges to the income earned by the business. It indicates whether the business has
earned sufficient profits to pay periodically the interest charges. It is calculated by using the
following formula.

54

Interest Coverage Ratio = Net Profit before Interest and Tax / Fixed Interest Charges

PROFITABILITY RATIOS
Profitability reflects the final result of business operations. Poor operational performance may indicate
poor sales and hence poor profit. A lower profitability may arise due to the lack of control over the
expenses. Some profitability ratios are;
(a) Gross Profit Ratio:
Gross profit ratio is the result of the relationship between price, sales value and cost. The gross profit
ratio can also be used in determining the extent of loss caused by theft, spoilage, damage etc. A high
ratio of gross profit is sign of good management, as it implies that the cost of production is relatively
low or vice- versa.

Gross Profit Ratio =Gross Profit / Net Sales * 100

(b) Net Profit Ratio :

Net profit ratio measures the relationship between net profit and sales of a firm. It shows the overall
efficiency of production, administration, financing. This ratio shows the earning left for
shareholders as a percentage of net sales.

Profit Ratio = Net Profit / Sales * 100

(c) Operating Profit Ratio :

55

This ratio is complementary of net profit ratio. It is computed to overcome the limitation of net
profit ratio. This ratio measures the relationship between operating profit and sale
Operating Profit Ratio = Operating / Sales * 100

This ratio indicates an average operating margin on a sale of Rs. 100 what portion of sales is left to
cover non- operating expenses to pay dividends and to create reserves.
(d) Return on Investment or Return on Capital Employed Ratio :
The prime objective of making investments in any business is to obtain satisfactory return on
capital invested. Hence, the return on capital employed is used as a measure of success of a
business in realizing this objective. Return on capital employed establishes the relationship
between the profit and the capital employed. It indicates the percentage of return on capital
employed in the business and it can be used to show the overall profitability and efficiency of the
business.

Gross capital employed = Fixed assets + Investments + Current assets

Net capital employed = Fixed assets + Investments + Working capital*
(e)

*Working capital = current assets current liabilities.

Divi
den

d Yield Ratio:
Dividend yield ratio is the relationship between dividends per share and the market value of the
shares. Shareholders are real owners of a company and they are interested in real sense in the
earnings distributed and paid to them as dividend. Therefore, dividend yield ratio is calculated to
evaluate the relationship between dividends per share paid and the market value of the shares.

Dividend Yield Ratio = Dividend per Share / Market Value Per Share
56

(f) Dividend Payout Ratio :

Dividend pay-out ratio is calculated to find the extent to which earnings per share have been used
for paying dividend and to know what portion of earnings has been retained in the business. It is
an important ratio because ploughing back of profits enables a company to grow and pay more
dividends in future.

Dividend Payout Ratio = Dividend per Equity Share / Earnings per Share

A complementary of this ratio is retained earnings ratio. Retained earnings ratio is calculated by
using the following formula:
Retained Earnings Ratio = Retained Earnings Per Share / Earning Per
Share

(g) Earnings Per Share (EPS) Ratio :

Earnings per share ratio (EPS Ratio) are small variation of return on equity capital ratio and are
calculated by dividing the net profit after taxes and preference dividend by the total number of
equity shares.
Earnings per share Ratio = (Net profit after tax Preference dividend) / No.
Of equity shares

57

CHAPTER 2
LITERATURE
REVIEW

2.1 THE SCENARIO OF RATIO ANALYSIS

Ratios are highly essential profit tools in financial analysis that help financial analysts implement plans
that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage.

58

Although ratios report mostly on past performances, they can be predictive too, and provide lead
indications of potential problem areas.
Ratio analysis is primarily used to compare a company's financial figures over a period of time, a
method sometimes called trend analysis. Through trend analysis, you can identify trends, good and
bad, and adjust your business practices accordingly. You can also see how your ratios stack up against
other businesses, both in and out of your industry.
There are several considerations you must be aware of when comparing ratios from one financial
period to another or when comparing the financial ratios of two or more companies.

If you are making a comparative analysis of a company's financial statements over a certain
period of time, make an appropriate allowance for any changes in accounting policies that occurred
during the same time span.

When comparing your business with others in your industry, allow for any material differences in
accounting policies between your company and industry norms.

When comparing ratios from various fiscal periods or companies, inquire about the types of
accounting policies used. Different accounting methods can result in a wide variety of reported figures.

Determine whether ratios were calculated before or after adjustments were made to the balance
sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. In
many cases, these adjustments can significantly affect the ratios.

Carefully examine any departures from industry norms.

Ratio Analysis is a useful tool in the following aspects:

Evaluation of Liquidity: The ability of a firm to meet its short term payment commitments is called
liquidity. Current Ratio and Quick Ratio help to assets the short-term solvency (liquidity) of the firm.
59

Evaluation of Profitability: Profitability ratios i.e. Gross Profit Ratio, Operating Profit Ratio, Net
Profit Ratio are basic indicators of the profitability of the firm. In addition, various profitability
indicators like Return on Capital Employed (ROCE), Earnings per share (EPS), Return on Assets
(ROA) etc. are used to assess the financial performance.
Evaluation of Operating Efficiency: Ratios throw light on the degree of efficiency in the
management and utilization of assets and resources. These are indicated by activity or performance or
turnover ratios e.g. Stock Turnover Ratio, Debtors Turnover Ratio. These indicate the ability of the
firm to generate revenue (sales) per rupee of investment in its assets.
Evaluation of Financial Strength: Long-term solvency strength is indicated by Capital Structure
Ratios like Debt-Equity Ratio, Gearing Ratio, Leverage Ratios etc. These ratios signify the effect of
various sources of finance e.g. debt, preference and equity. They also show whether the firm is exposed
to serious financial strain or is justified in the use of debt funds.
Inter-firm and Intra-firm comparison: Comparison of the firms ratios with the industry average
will help evaluate the firms position vis--vis the industry. It will help in analyzing the firms strengths
and weaknesses and take corrective action. Trend Analysis of ratios over a period of years will indicate
the direction of the firms financial policies.
Budgeting: Ratios are not mere post-modern of operations. They help in depicting future financial
positions. Ratios have predictor value and are helpful in planning and forecasting the business
activities of a firm for future periods, e.g. estimation of working capital requirements.

2.2 LIMITATION OF RATIO ANALYSIS

(a) Window Dressing: Ratios depict the picture of performance at a particular point of time. Sometimes,
a business can make year-end adjustments in order to result in favorable ratios (e.g. current ratio,
operating profit ratio, debt-equity ratio etc.)
60

(b) Impact of Inflation: Financial Statements are affected by inflation. Ratios may not depict the correct
picture. For example, fixed assets are accounted at historical cost while profits are measured in current
rupee terms. In inflationary situations, the Return on Assets or Return on Capital Employed may be very
high due to less investment in fixed assets. Ratios may not indicate the true position in such situations.
(c) Product Line diversification: Detailed ratios for different divisions, products and market segments
etc. may not be available to the users in order to make an informed judgment. For example, loss in one
product may be set off by substantial profits in another product line. But, the overall net profit ratio may
be favorable.
(d) Impact of Seasonal Factors: When the operations do not follow a uniform pattern during the
financial period, ratios may not indicate the correct situation. For example, if the peak supply season of a
business is between Februarys to June, it will hold substantial stocks on the balance sheet date. This will
lead to a very favorable current ratio on that date. But the position for the rest of the year may be entirely
different.
(e) Differences in Accounting Policies: Different firms follow different accounting policies, e.g. rate and
methods of depreciation. Strait-jacket comparison of ratios may lead to misleading results.
(f) Lack of Standards: Even though some norms can be set for ratios, there is no uniformity as to what
an ideal ratio is. Generally it is said that Current Ratio should be 2:1. But if a firm supplies mainly to
Government Departments where debt collection period is high, a Current Ratio of 4:1 or 5:1, may also
be considered normal.
(g) High or Low: A number by itself cannot be high or low. Hence, a ratio by itself cannot become
good or bad. The line of difference between good ratio and bad ratio is very thin.
(h) Interdependence: Financial Ratios cannot be considered in isolation. Decision taken on the basis of
one ratio may be incorrect when a set of ratios are analyzed.
From the above discussion, it is felt that, the ratio is a measuring device to judge the growth,
development and present condition of a concern. Further, it is found that, Each and every ratio
61

indicates the financial position as well as it is also helpful for taking several management decisions for
the future period effectively and efficiently.

2.3 CAPITAL INVESTMENT DECISIONS

Capital investment decisions are long-term corporate finance decisions relating to fixed assets and
capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to
maximize the value of the firm by investing in projects which yield a positive net present value when
valued using an appropriate discount rate. These projects must also be financed appropriately. If no such
opportunities exist, maximizing shareholder value dictates that management returns excess cash to
shareholders. Capital investment decisions thus comprise an investment decision, a financing decision,
and a dividend decision.
The investment decision
Management must allocate limited resources between competing opportunities ("projects") in a process
known as capital budgeting. Making this capital allocation decision requires estimating the value of each
opportunity or project: a function of the size, timing and predictability of future cash flows.
Project valuation
In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the
opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected
(applied to Corporate Finance by Joel Dean in 1951. This requires estimating the size and timing of all
of the incremental cash flows resulting from the project. These future cash flows are then discounted to
determine their present value. These present values are then summed, and this sum net of the initial
investment outlay is the NPV.
The NPV is greatly affected by the discount rate. Thus identifying the proper discount ratethe project
"hurdle rate"is critical to making the right decision. The hurdle rate is the minimum acceptable return
on an investmenti.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness
of the investment, typically measured by volatility of cash flows, and must take into account the
financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate

62

appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the
financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC
that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular
project differs markedly from that of the firm's existing portfolio of assets.)
In conjunction with NPV, there are several other measures used as (secondary) selection criteria in
corporate finance. These are visible from the DCF and include discounted payback period, IRR,
Modified IRR, equivalent annuity, capital efficiency, and ROI.

2.4 CAPITAL VERSUS INVESTMENT

What is investment?
Strictly speaking, investment is the change in capital stock during a period. Consequently, unlike
capital, investment is a flow term and not a stock term. This means that while capital is measured at a
point in time, while investment can only be measured over a period of time.
If we ask "what is capital right now?
We might get an answer along the lines of N10 trillion.
But if we ask "what is investment right now?
This cannot be answered. The quantity of a flow always depends on the period in consideration. Thus,
we can answer "what is investment this month?" (And might be told it is N10 million) or "what is
investment this year?" (And might be told N1 billion).
We can calculate the investment flow in a period as the difference between the capital stock at the end
of the period and the capital stock at the beginning of the period. Thus, the investment flow at time
period t can be defined as:
It = Kt - Kt-1

63

Where Kt is the stock of capital at the end of period t and K t-1 is the stock of capital at the end of period
t-1 (and thus at the beginning of period t).
How is the theory of investment different from the theory of capital? If all capital is circulating capital,
so that it is completely used up within a period, then no capital built up during the previous period can
be brought over into next period. In this special case, the theory of capital and the theory of investment
become one and the same thing.
With fixed capital, the story is different -- and more complicated as there seems to be two decisions
that must be addressed: the amount of capital and the amount of investment. These are different
decisions. One is about the desired level of capital stock. The other is about the desired rate of
investment flow. The decisions governing one will inevitably affect the other, but it is not necessarily
the case that one is reducible to the other.
There are effectively two ways of thinking about investment. At the risk of annoying some people, we
shall refer to these as the "Hayekian" and "Keynesian" perspectives. The Hayekian perspective
conceives of investment as the adjustment to equilibrium and thus the optimal amount of investment is
effectively a decision on the optimal speed of adjustment. A firm may decide it needs a factory (the
"capital stock" decision), but its decision on how fast to build it, how much to spend each month
building it, etc. -- effectively, the "investment" decision -- is a separate consideration.
Naturally, the capital decision influences the investment decision: a firm which has N 10 billion of
capital and decides that it needs N 15 billion of capital, therefore requires investment of N 5 billion.
But if this adjustment can be done "instantly", then there is really no actual investment decision to
speak of. We just change the capital stock automatically. The capital decision governs everything.

64

CHAPTER 3
Research Methodology

3.1 RESEARCH DESIGN

Analytical research is used in the project. Analytical research is a type of research that utilises
critical thinking to find out facts about a given topic and from the answers obtained develop new
and useful ways of doing things. Critical thinking is a method of thinking that puts assumptions into
question to decide whether a given claim is true or false

65

 The research method selected for the study is a combination of a survey and an industrial study. The
survey research method is described hereunder that:
1)

It is a design in which primary data is gathered from members of the sample that represents a specific
population;

2)

It is a design in which a structure and systematic research instrument like a questionnaire or an

interview schedule is utilized together with the primary data;

3)

It is a method in which the researcher manipulates no explanatory variables because they have
already occurred and so they cannot be manipulated;

4)

Data are not directly from the subjects.

5)

The subjects give the data the natural settings of their workplaces;

6)

The answers of the respondents are assumed to be largely unaffected of the content in which they are
brought;

7)

The impacts of the confounding factors are controlled statistically; and

8)

The aim of the research may span from the exploration phenomena to hypotheses testing (stone
1995).

The survey research method has some merit, which are to be articulated hereunder: In the survey
research method, the sample of the respondents are selected in such a way as to make it low due to the
utilization of big sample sizes, which results in generally low sample errors.
The survey research method also has the merit that data collection takes place in the natural settings of
the workplace rather than an activated laboratory. Data are not directly from the respondents. The
advantage that the survey yields data that suggests new hypothesis is very illuminating. There is also the
merit that a set of systematic data collection instruments such as questionnaire interview schedules and
observation gadgets can either be used alone or in conjunction with other instruments (stone, 1995).

3.2 Collection of Data

66

For carrying out the study of this particular topic the data have been collected basically from two major
sources. They are;
Secondary Sources:The secondary data have been collected from the available sources of the company and external
sources for the period under study. These include: Annual Reports of Hindalco Industries Ltd.
Internet
Industry portals
Questionnaire
As earlier stated, the primary data collection instrument in this study is the questionnaire. In the
questionnaire method of primary data collection, heavy dependence is placed on verbal reports from the
subjects to get information on the earnings per share and standard set.
The questionnaire has a lot of merits. It needs less skill to administer. Questionnaire can be administered
to a big number of individuals at the same time. Also with a specific research budget, it is usually
possible to cover a broader area. The impersonal nature of a questionnaire, its structure and standardized
wording, its order of question, its standardized instructions for recording answers might make one to
conclude that it offers some uniformity from one measurement occasion to another (Selltiz et al, 1976).

Another merit of questionnaire is that subjects may have a bigger confidence in their anonymity, and
thus feel freer to express views they feel might be disapproved.
Another attribute of the questionnaire that is sometimes, though not always desirable is that it might
place less pressure on the subjects for immediate response (Selltiz et al, 1976).
The questionnaire also has some demerits. It has noted that for purpose of giving dependable responses
to a questionnaire, respondents must be considerably educated. Thus one of the demerits of the usual

67

questionnaire is that it is appropriate only for with a considerable amount of education. There is also
demerit that subject may be reluctant and unable.
To report on the particular subject matter. Also, if a subject misinterprets a question or give his or her
answer in a batting manner, there is often a little that can be done to ameliorate the situation. In a
questionnaire, the information the researcher gets is limited to the fixed alternative answer format, when
a specific answer is not available, it can lead to error (Selltiz, 1976).
There is also limitation of memory in reporting on past facts. The researcher is not a policeman that can
compel answers. That is, the information may not be readily accessible to subject and thus the subject
may be reluctant to put forth enough alternative information that he or she is only barely conscious of
(Selltiz et al, 1996).
In this research project, a structured and undisguised questionnaire is utilized which is made up of two
parts namely, the personal data section and the section on the data on the actual subject matter of the
work. The questionnaire was undisguised in the sense that the purpose of the data collection which was
to collect primary data for writing up the researchers ND project was made know to the 200
respondents. The questionnaire was structured in the sense the questions are logically sequenced and are
to be asked to the respondents in the same manner and no follow up questions are to be allowed.
The structured questionnaire has the merit that it yields data that is easier to analysis than data produced
by an unstructured questionnaire. Also the structured nature diminishes both researchers and research
instrument biases. It however has the demerit that the rigidity of the research instrument diminishes the
amount of information that could be got.
Interview
The method of communication of the research instrument is by means of the personal interview. The
method has the merit that it produces a better sample of the population than either mail or the
telephone methods. It also has the merit that it gives a very high completion and response rates. It has
the merit that the interview has a bigger sensitively misunderstandings by the respondents and gives a
chance for clarification of misunderstood questions. It has the merit that it is a very feasible method

68

(Selltiz et al, 1976). The personal interview method has the demerit that it is more costly than the mail
or the telephone methods of communication of a questionnaire.
Observations
In addition to questionnaire and face-to face interviews, observation was also carried out. This was to
enable the researcher to witness by herself the officers of this firm and to interact with these people.

3.3 Description of Data Presentation and Analysis Tools

The data presentation tools are simple bar charts, histograms, and pictorial tables. The most important
parts of a table include;
(a)

Table numbers

(b)

Title of the table

(c)

Caption

(d)

Stub or the designation of the rows and columns

(e)

The body of the table.

(f)

The head note or prefatory note or explanatory just before the title.

(g)

Source note, which refers to the literally or scientific source of the table (Mills and Walter 1995)

Anywise (1994) has observed that a table has the following merits over a prose information that;
(f) A table ensures an easy location of the required figure;
(g) Comparisons are easily made utilizing a table than a prose information;

69

(h) Patterns or trends within the figures which cannot be visualized in the prose information can be
revealed and better depicted by a table; and
A table is more concise and takes up a less space than a prose formation:
The data is to be analyzed by means of percentage, cross tabulation and the chi-square test of
population proportions for testing the two hypotheses. Percentages express the ratio of two sets of data
to a common base of 100. The researcher made use of the computer program called SPSS (statistical
package for social science) to carry out the computation of the hypothesis testing.

70

CHAPTER 4
Analysis & Interpretation

4.1 ANALYSIS OF DATA

Statement Of Working Capital

Particulars

2012

2011
71

2010

(A)Current Assets
Inventories

7742.86

7652.19

5921.41

Debtors

1427.45

1268.99

1311.87

Cash & bank Bal.

565.19

111.12

139.96

Loan & advances

2976.26

1750.22

1588.62

Total

12711.76

10782.52

8961.86

Liabilities

7949.49

8583.69

6391.19

Provisions

1207.20

644.68

721.49

Total

9156.69

9228.37

7612.68

Working capital (A B )

3555.07

1554.15

1349.18

Increase/Dec. in W.C

2000.92

204.97

(B) Current Liability

72

14000
12000
10000
8000

current assests
current liabilities
working capital

6000
4000
2000
0
2010

2011

2012

Interpretation:
The above data shows that working capital is increasing in comparison to last year which is good for
the liquidity of the company. Current assets are increased by 117.89% and current liabilities are
decreased by 0.78% in 2012. This means that current assets are adequate to meet its currents liabilities
as there is decrease in current liabilities. The current ratio of the company is 1.7. It shows that company
is having good liquidity position but they should try to improve it.
Working Capital at Hindalco
In Hindalco working capital requirement is finance basically through following sources:
Internal funds
Short term liabilities
Bank loan

Internal funds: An internal fund denotes the funds generated through operation of the firm. This is
the major source of financing working capital requirement of the firm.

73

Short term securities: On account of uncertainties attached with generation of funds through sales
or through day to day operations, the company has invested in several short term securities to meet its
day to day requirement of funds. The maturity of these securities is form source of financing working
capital requirement.
Working capital turnover at Hindalco:

Working capital turnover = sales/working capital

Particulars

2012

2011

2010

(A)Current Assets
Inventories

7742.86

7652.19

5921.41

Debtors

1427.45

1268.99

1311.87

Cash & bank Bal.

565.19

111.12

139.96

Loan & advances

2976.26

1750.22

1588.62

Total

12711.76

10782.52

8961.86

Liabilities

7949.49

8583.69

6391.19

Provisions

1207.20

644.68

721.49

Total

9156.69

9228.37

7612.68

Working capital

3555.07

1554.15

1349.18

(B) Current Liability

74

Sales

26596.78

23859.21

19393.83

Working capital turnover

8 times

16 times

15 times

Graphical representation of working capital turnover:

working capital turnover

18

16

16

15

14
12
10
8

working capital turnover

8

6
4
2
0
2012

2011

2010

Interpretation:
In the year 2010 the working capital is 1349.18, in 2011 it increases to 1554.15, and in 2012 it
increases to 3555.07. It means that in the last year the companys liquidity is improve and the company
become more efficient to pay its current obligations.
75

At the same time if we compare no. of days of net working capital to turnover, it has come down to 8
times from 16 times in previous year. This is the result of good working capital management policies in
this year. This improvement does not come accidently but considerable measures have been taken to
control working capital in organization in financial year 2011-12.
There is direct relation of working capital requirement with Debtors and Inventory. Above data
indicates that company has taken certain strategic measures to manage its Debtor and Inventory. After
analyzing we find that the inventory is the main factor by which assets are increasing in comparison to
liability. The inventory turnover is 5.54 and 5.43 in 2011 and 2012 respectively. The days of turnover
are 66 days in 2012 and 68 days in 2011.
But if we see the turnover of year 2010 then we came to know that in 2010 the turnover is 2.43, which
is almost half of the current year and the days of turnover is 151 days.
Following are the measures:Special task forces were built up from Debtors and Inventory Management at senior level.
Regular follow up at senior level.
A close contact with the customers.
Proper age-wise analysis of the debtors.
Proper classification between collectible debtors and bad debts.
Bad debts written off as early as possible after making all efforts of its collection.

Product cycle minimized so that cost of the product does not become high to the agreed amount
because of time factor.
Formation of specific group in each area to identify the wastage elements and seek participation of all.
Formulation of action plan to eliminate/minimize wastage.
Identification of corrective actions and their implementation.

76

Debtors Turnover Ratio

Receivables turnover ratio measures company's efficiency in collecting its sales on credit and
collection policies. This ratio takes in consideration ONLY the credit sales. If the cash sales are
included, the ratio will be affected and may lose its significance. It is best to use average accounts
receivable to avoid seasonality effects. If the company uses discounts, those discounts must be taken
into consideration when calculate net accounts receivable.
Accounts receivable represents the indirect interest free loans that the company is providing to its
clients. Therefore, it is very important to know how "costly" these loans are for the company.
A high receivables turnover ratio implies either that the company operates on a cash basis or that its
extension of credit and collection of accounts receivable are efficient. Also, a high ratio reflects a short
lapse of time between sales and the collection of cash, while a low number means collection takes
longer.
The lower the ratio is the longer receivables are being held and the risk to not be collected increases.
A low receivables turnover ratio implies that the company should re-assess its credit policies in order
to ensure the timely collection of credit sales that is not earning interest for the firm.

Debtor Turnover Ratio = Net sales / Average Debtors

Tabular Presentation of Debtors Turnover Ratio

Year

Net sales

Average Debtors

Debtors
Ratio

2012

26596.78

1427.25

77

18.63

Turnover

2011

23859.21

1268.99

18.80

2010

19393.83

1311.87

14.78

Graphical representation of debtor turnover

debtor turnover
20

19

19

18
16

14

14
12

debtor turnover

10
8
6
4
2
0
2012

2011

2010

Interpretation:
Here, In spite of increase in sales from 2011 to 2012, total debtors have been increased, which
indicated that the company is not having very effective credit policy. But the same case is not for the
previous years.

78

Whereas if we analyze the debtors turnover ratio, we can say that the company is capable of reducing
the period of debtors to turnover. Higher the debtors turnover ratio, lesser time it will take to collect
debts.
In 2012, Period of Debtors to Turnover has been reduced to approx 19 days. Last year also the same
debtor turnover is found in the research, it implies that there is not any improvement in turnover in
spite of increase in sales.
Although the balance of debtor comes down considerably but still there is scope in Debtors
Management for the Company

STEPS INVOLVED IN MANAGEMENT OF DEBTORS:

The following steps are involved in debtors management

There should be close contact with the customers.

There should be proper age-wise analysis of the debtors.
There should be proper classification between collectible Debtor and Bad Debts.
Bad debts should be written off as early as possible after making all efforts for its collection.
Product cycle should be minimized so that cost of the product should not become high to the agreed

amount because of time factor.

There must be a provision of discount for early payment of debts by the customers.
Regular checking of the records of the debtors is essential so as to analyze the current position of that
organization.
While making a policy, regarding the debtors the point should be considered that customers having
excellent past record, follow the lenient policy which is adopted for doubtful customers.
Manage the working capital according to need as recovering the debt from customer as early as
possible while, get extension of payment of dues on the company of others as suppliers of raw
material as late as possible.
Inventory Management in Hindalco
Inventory Turnover Ratio:

79

A ratio showing how many times a companys inventory is sold and replaced over a period. It is
calculated as:
Stock / Inventory Turnover Ratio

Stock Turnover Ratio = Cost of Goods Sold / Average Stock

Tabular Presentation of Stock Turnover Ratio

Year

Cost of Goods
Sold

Inventory
Average Stock

Turnover Ratio

2012

20508.2

3698.19

5.54

2011

17871.02

3290.62

5.43

2010

14469.8

5393.81

2.43

80

INVENTORY TURNOVER
6

5.54

5.43

5
4
INVENTORY TURNOVER
3

2.43

2
1
0
2012

2011

2010

Interpretation:
The turnover increases due to either increase in sales or minimizing the inventory level. In my
research, I find that there is very minor change in the turnover in year 2011 and 2012. The inventory
turnover is 5.54 and 5.43 in 2011 and 2012 respectively. The days of turnover are 66 days in 2012 and
68 days in 2011.
But if we see the turnover of year 2010 then we came to know that in 2010 the turnover is 2.43, which
is almost half of the current year and the days of turnover is 151 days.
This suggests that the company is improving year by year in its operation and its sale is also increasing
year after year.

81

Analysis of Cash Management with the Help of Certain Ratios

(1) Current Ratio

Current Ratio = Current Assets / Current Liabilities

Tabular Presentation Of Current Ratios

Current

Current

Assets

Liabilities

2012

16479.44

10035.04

1.64

2011

15929.20

9842.64

1.62

2010

8864.29

6148.42

1.44

Year

82

Current Ratio

Current Ratio
1.7
1.65

1.64

1.62

1.6
1.55

Current Ratio

1.5
1.44

1.45
1.4
1.35
1.3
2012

2011

2010

Interpretation:
In 2011-12, the current ratio of the company is 1.64, which is higher than the previous year. It indicates
that the companys current liabilities were increased but with the lower rate as compared to current asset.
Due to increase in the current liabilities at lower rate and increase in current assets with higher rate as
compared to previous year, there is little improvement in current ration but it is favorable for the
company because it indicates the company is in position to meet its liabilities.

(2) Liquid / Quick / Acid - Test Ratio

Quick Ratios = Liquid Assets / Current Liabilities

83

Tabular Presentation of Liquid Ratio

Year

Liquid Assets

Current Liabilities

Quick Ratio

2012

8736.2

10035.04

0.87

2011

8277.8

9842.64

0.84

2010

2942.88

6,148.42

0.48

Quick Ratio
1
0.9

0.87

0.84

0.8
0.7
0.6
0.48

0.5
0.4
0.3
0.2
0.1
0
2012

2011

2010

84

Quick Ratio

Interpretation:
Now we compare the companys position according to the liquidity ratio. As we know the standard of
the liquid ratio is 1:1.
In 2011-12 the liquid ratio of the company is 0.87 which is less than the standard ratio this indicates the
liquidity position of company is not optimum. But if we compare the data with previous year then there
is some improvement observed in the quick ratio. The liquidity ratio follows the same trend in the year
further due to large amount of inventories are considered as liquid asset of the company.
(3) Cash Ratio

Cash Ratios = Cash & Bank Balance / Current Liabilities

Tabular Presentation of Cash Ratio

Cash & Bank

Current

Balance

Liabilities

2012

722.30

10035.04

0.07

2011

233.39

9842.64

0.02

2010

140.21

6,148.42

0.02

Year

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Cash Ratios

Cash Ratio
0.08
0.07

0.07
0.06
0.05

Cash Ratio

0.04
0.03
0.02

0.02

0.02

2011

2010

0.01
0
2012

Interpretation:
Here, the Hindalco cash ratio is 0.07 in 2012 which shows the company carries a small amount of cash.
But, at the same time, there is nothing to be worried about the lack of cash if the company has reserve
borrowing power. In India, firms have credit limit sanctioned from banks. And can easily draw cash.

(4) Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio = Net Sales / Net Fixed Assets

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Tabular Presentation of Fixed Assets Turnover Ratio

Fixed Assets
Year

Net sales

Net Fixed
Assets

Turnover Ratio

2012

23492

23407

1.00

2011

20705

13615

1.52

2010

19536

11437

1.71

Fixed Asset Turnover Ratio

1.71

1.8
1.52

1.6
1.4
1.2
1

Fixed Asset Turnover Ratio

0.8
0.6
0.4
0.2
0
2012

2011

2010

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Interpretation:
This Ratio establishes the relationship between net sales and fixed assets indicating how efficiently
they have been used in achieving the sales. It measures the efficiency with which the fixed assets are
employed. A higher rate indicates a high degree of efficiency in fixed assets utilization and vice-versa.
In the FY 2012 the ratio has decreased to 1.00 when compared to the previous year ratio.

(5) Return On Total Assets

Return On Total Assets = (Net Profit / Total Assets) * 100

Tabular Presentation of Return on Total Assets

Return on Total
Year

Net Profit

Total Assets

2012

2237

55647.62

4.02

2011

2137

46536.34

4.59

2010

1916

20301.9

9.44

88

Assets

Return of Total Assets

10

9.44

9
8
7
6

Return of Total Assets

4.02

4.59

3
2
1
0
2012

2011

2010

Interpretation:
This ratio shows the percentage of net profit earned on the total assets. It measures how effectively the
assets are employed. It seems that assets are very effectively employed in FY 2011 but less effectively
in 2012 and 2010.
(6) Net Profit Ratio

Net Profit Ratio = (Net Profit / Net sales) * 100

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Tabular Presentation of Net Profit Ratio

Year

Net Profit

Net sales

Net Profit Ratio

2012

2237

26597

8.41

2011

2137

23859

8.96

2010

1916

19536

9.81

Net Profit Ratio

10

9.81

9.5
8.96

9
8.5

Net Profit Ratio

8.41

8
7.5
2012

2011

2010

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Interpretation:
Net Profit Ratio of Hindalco is continuously decreasing, which is not a healthy sign for the company.
Net Profit Ratio determines the operational efficiency of the business. In the FY 2010 the ratio was
high around 9.81 and again the ratio slipped to around 8.41 in the FY 2012.
(7) Operating Profit Ratio

Operating Profit Ratio = (Net Operating Profit / Net Sales) * 100

Tabular Presentation of Operating Profit Ratio

Operating Profit
Year

Net Operating
Profit

Net sales

2012

3105

26597

11.67

2011

3155

23859

13.22

2010

2950

19536

15.10

Ratio

Interpretation:
This Ratio is an indicator of the overall efficiency of the business. Higher the Operating Profit Ratio
better will be the business. It also determines the operational efficiency of the business. The Operating
Profit Ratio of Hindalco is continuously decreasing, as the raw material consumption has increased but
the sales did not increase in the same proportion.
Hindalco has short term investment in:

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1. Debenture of HPCL unit of UTI, HDFC, ICICI, IDBI, Franklin Templeton Funds, Birla mutual
funds, GIC mutual funds and alliance mutual funds, DSP Merrill lynch mutual funds, standard
chartered mutual funds, Zurich India mutual funds.
The total current investment of the company for the year ended 31.03.12 amount to Rs. 4583.40 cr.
2. Besides above, the company has various credit arrangements with banks to finance the daily
working capital requirement. These are of following types:
Cash credit
Purchase/discounting of bills
Working capital term loans
Letter of credit
1) Cash credit:
The company has cash credit facilities with various banks. The administrative of this is done at the
principle office at Renukoot. However its Regional and area offices are authorized to utilize the
cash credit facilities up to the limit described by the principle office.
2) Purchase/discounting of bill:
The company has also purchase and discounts the bills issued by its customers to meet daily
requirements.
3) Working capital term loans
4) Letter of credit: the companies Export/Import operations are done through letter of credit.

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CHAPTER 5
LIMITATION, SUGGESTION
&CONCLUSION

5.1 LIMITATIONS OF THE STUDY

1) As project has to be completed within a short span of time, the scarcity of time was an important
hindrance and hence much information could not be gathered , nor evaluated .
2) Another important limitation is that analysis is very much dependent on the companys internal
bulletin.

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3) There are no well accepted standards or rules of thumb for all ratios, which can be accepted as
norms. It renders interpretation of ratios difficult.

While making ratio analysis no consideration is given to price level

FINDINGS
Through this research work, the researcher was able to discover that
1. Ratios are means for presenting numerical relationships between items or groups of items. A ratio is
determined by dividing one item in a relationship with the other.
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2. Generally, financial ratios are computed from financial statements and so ratios developed for an
analysis of a firms performance and financial position are subject to the same limitations, which are
present in the accounting statements themselves.
3. Ratios are used in the analysis of financial statements of a business in order to reveal underlying
economic trends in its activities and to discover its STRENGTHS AND WEAKNESSES as
compared with the trends of sister companies.
4. Capital investment decisions are long-term corporate finance decisions relating to fixed assets and
capital structure.
5. Making big investment decisions means that we must allocate substantial amounts of major
resources of people, time, technology, intellectual capital, and, of course, money
6. The working capital is increasing in comparison to last year which is good for the liquidity of the
company.
7. The working capital turnover is decrease in 2012; it means the company is efficient to manage its
working capital.
8. The inventory turnover is not much varying from previous year, this shows that the company is not
able to do much for inventory management. But if we compare the data with 2010 then they
efficiently manage their inventory and able to increase its sale.
9. In spite of increase in sales from 2011 to 2012, total debtors have been increased, which indicated
that the company is not having very effective credit policy. But the same case is not for the previous
years.
10. The companys current ratio is increasing in comparison to previous year it shows that the
companys is able to improve its liquidity position in comparison to previous year.

5.2 SUGGESTIONS
1) The company should concentrate more on the Cash and Bank Balance side. As the Reserves and
Surplus are decreasing year by year whereas the Debts / Loans are increasing. It should be
controlled.
2) Hindalco has been paid the major portion of its earnings as dividend when compared to previous
years (2010-11). The enterprise has to retain some more amounts of its earnings for the future use.
The enterprise may have some extension plans for future.

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3) Hindalco will have to consider the steep increase in the Current Liabilities in financial year 200910. The Firm should take measures to control and repay them as far as possible.
4) The company should keep sufficient cash or bank balance in order to meet its liability
immediately. Otherwise it will adversely affect the liquidity position of the company.
5) There should be a proper management for the effective utilization of Current Assets and Fixed
Assets in order of making sales.
6) Hindalco should develop a proper method for identifying budgeted sales. The raw material
consumption is to be controlled according to the budgeted sales. This will helps to increase their
operating profit as well as gross profit.
7) The company should focus on the debtors side, as the number of debtors goes on increasing each
year. Increasing number of debtors leads to lower working capital.
8) The company should adopt proper sales strategy and their collection facilities.
9) A formal Inventory policy should be drawn out in respect of Raw Materials, as it is a critical area
for the Company
The overall profitability and efficiency of the business should enhance. Otherwise the business cannot
obtain satisfactory return on capital invested and return on Total Assets.

5.3 CONCLUSION
Hindalco Industries Limited is a leading Aluminium producing industry under the flag ship of Aditya
Birla Group. As the working capital is essential for the smooth running of a business it is important to
study whether the Hindalco Industries Ltd. has achieved adequate amount of working capital or not.
Maintaining adequate working capital ensures the improvement of profitability. The finance manager
always tries to maintain an adequate working capital at every time so as to carry on operations
successfully and maximize the return on investment. Better working capital will reduce interest cost.

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The study has helped to have a clear understanding of the working capital management and also
arrived at the following conclusions:

Firm has a good working capital management policy.

Firm is able to meet its both short term and long term obligations.
Firm is able to continuously decrease its receivables period
The firms turnover ratio is up to the mark
The firm is continuously indulged in expansion policy and is making optimum utilization of funds.

BIBLIOGRAPHY

BOOKS REFERRED
1) Financial Management I.M.Pandey, 9th edition; New Delhi:Vikas
2) Fundamentals of Financial Management R.P.Rustagi, 3rd edition; New Delhi: Galgotia Publishing
Company; 2002.
3) Financial Management Prassanna Chandra
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MAGAZINE AND JOURNALS

1)
2)
3)
4)

Annual Report of FY 2010-11, 2011-12 of Hindalco Industries Ltd.

Aditya Kiran
Hindalco Sandesh
Induction Guide (Training Centre)

WEBSITES REFERRED
1)
2)
3)
4)

www.hindalco.com
www.workingcapital.com
www.investopedia.com
www.adityabirlagroup.com

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