ANALYSIS OF WORKING CAPITAL

J K CEMENT

WORKING CAPITAL:- Working capital is of two types one is gross working capital and other is
networking capital. Gross working capital is equal to total current assets of the company.

Net working capital is equal to net current assets ie current assets – current
liabilities.

The amount of working capital required depends on various factors like

1. Nature of business

2. Market demand and conditions.

3. Technology and manufacturing policy.

4. Credit policy

5. Availability of credit from suppliers

6. Price level changes.

Balance Sheet of JK Cement ------------------- in Rs. Cr. -------------------

 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

12 12 mths 12 mths 12 mths 12 mths

mths

Sources Of Funds
Total Share Capital 49.93 69.93 69.93 69.93 69.93
Equity Share Capital 49.93 69.93 69.93 69.93 69.93
Share Application Money 0 0 0 0 0
Preference Share Capital 0 0 0 0 0
Reserves 6.33 285.98 445.44 692.26 838.27
Revaluation Reserves 337.08 318.37 304.74 291.15 277.85
Networth 393.34 674.28 820.11 1,053.34 1,186.05
Secured Loans 474.65 443.14 429.94 382.79 436.86
Unsecured Loans 79.78 110.4 97.82 127.74 127.54
Total Debt 554.43 553.54 527.76 510.53 564.4
Total Liabilities 947.77 1,227.82 1,347.87 1,563.87 1,750.45

Application Of Funds
Gross Block 921.07 959.2 1,029.42 1,089.13 1,215.75
Less: Accum. Depreciation 17.83 61.21 106.98 0 0
Net Block 903.24 897.99 922.44 1,089.13 1,215.75
Capital Work in Progress 17.84 56.9 164.39 133.84 35.06
Investments 0 0 15.91 9.5 10.74
Inventories 66.56 83.98 110.01 114.53 136.13
Sundry Debtors 42.27 46.13 62.16 57.26 53.04
Cash and Bank Balance 27.79 32.62 45.25 145.44 125.2
Total Current Assets 136.62 162.73 217.42 317.23 314.37
Loans and Advances 106.81 115.39 176.3 353.83 598.53
Fixed Deposits 40.36 252.8 147.28 0 0
Total CA, Loans & Advances 283.79 530.92 541 671.06 912.9
Deffered Credit 0 0 0 0 0
Current Liabilities 258.79 247.25 255.9 289.62 382.69
Provisions 0 12.65 41.72 52.01 43.74
Total CL & Provisions 258.79 259.9 297.62 341.63 426.43
Net Current Assets 25 271.02 243.38 329.43 486.47
Miscellaneous Expenses 1.67 1.9 1.74 1.96 2.44
Total Assets 947.75 1,227.81 1,347.86 1,563.86 1,750.46

Contingent Liabilities 22.09 153.96 161.88 299.99 581.86

Book Value (Rs) 11.27 50.9 73.7 109 129.88
PROFIT AND LOSS ACCOUNT.

Profit & Loss account of JK ------------------- in Rs. Cr. -------------------

Cement

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

12 12 mths 12 mths 12 mths 12 mths

mths

Income
Sales Turnover 423.44 1,108.68 1,529.67 1,458.25 1,496.84
Excise Duty 68.51 168.86 186.03 0 0
Net Sales 354.93 939.82 1,343.64 1,458.25 1,496.84
Other Income 9.27 8.71 28.27 23.19 17.05
Stock Adjustments 9.55 15.55 1.84 -17.27 5.23
Total Income 373.75 964.08 1,373.75 1,464.17 1,519.12
Expenditure
Raw Materials 67.21 165.07 206.47 140.9 163.44
Power & Fuel Cost 120.21 285.6 309.7 0 376.14
Employee Cost 16.07 41.2 48.84 68.48 84.62
Other Manufacturing 4.53 12.55 13.67 445.99 124.97
Expenses
Selling and Admin Expenses 109.81 297.11 408.86 324.49 363.83
Miscellaneous Expenses 8.09 20.69 27.8 45.47 65.06
Preoperative Exp 0 0 0 0 0
Capitalised
Total Expenses 325.92 822.22 1,015.34 1,025.33 1,178.06

Operating Profit 38.56 133.15 330.14 415.65 324.01

PBDIT 47.83 141.86 358.41 438.84 341.06
Interest 24.33 58.59 53.26 51.21 54.67
PBDT 23.5 83.27 305.15 387.63 286.39
Depreciation 12.56 31.02 33.16 41.07 52.42
Other Written Off 0 0 0 0 0
Profit Before Tax 10.94 52.25 271.99 346.56 233.97
Extra-ordinary items 0 -0.04 -0.01 0 0
PBT (Post Extra-ord Items) 10.94 52.21 271.98 346.56 233.97
Tax 4.5 19.64 93.37 81.4 91.62
Reported Net Profit 6.3 32.57 178.62 265.17 142.34
Total Value Addition 258.71 657.15 808.87 884.42 1,014.62
RATIOS.

Inventory Turnover Ratio 5.45 11.3 12.46 12.73 11

Debtors Turnover Ratio 8.4 21.26 24.82 24.42 27.14
Investments Turnover Ratio 16.61 26.97 32.22 12.73 11
Average Raw Material 45.04 18.46 26.96 25.3 21.2
Holding
Average Finished Goods 10.66 7.01 7.57 7.7 6.89
Held
Number of Days In Working 25.36 103.81 65.21 81.33 117
Capital
Quick Ratio 0.78 1.64 1.41 1.63 1.78

ANALYSIS:- If we analyze the balance sheet, profit and loss AC and investment turnover ratio’s
we see following things.

1. Net working capital and sales. Net working capital in the year 2005 is 25cr and net
sales is 295 cr. In the year 2006 the sales jump to 939cr and the working capital is
increased to 271cr. The sales have increased 3 times and the working capital has
increased more than 10 times.

In year 2007 the sales increased to 1343cr but the working capital decreased
to 243cr. In the next two years sales remain same almost 1450cr but the working capital
has increased to 486cr in year 2009 from 330cr in year 2008.

Here we can see that the company is not able to manage the working capital
according to sales. The increase in sales as shown in balance sheet should increase WC
so that it supports the increase in sales, here we see that the sales have a smooth
increase but the increase working capital is not smooth in one year it has increased and
in the next it has decreased and increased. If we see the year 2006 and 2007 the sales
has increased but the working capital has decreased. This can be because of the reason
that they have increased working capital in year 2006 by a large margin and there is
excess of WC in the company in this year. Then in next year they have reduced WC by
 increasing provisions. They must have kept provision for some Loans or tax, as the loans
and taxes have increased when compared to previous year.

2. Gross working capital and Expenses:- Here again we can see that gross WC is much less
as compared to the expenses to be met in a year. The company should have the at least
that amount of working capital by which it can pay its main current expenses in case the
company is not able to covert finished goods into cash. The gross working capital when
compared with in year 2008 and 2009 is very low. The main reason for this is that the
company is not having much debtors and is doing most of its business in cash which is
very good for the company.

Even though we can say that it is good that

company is converting cash into cash and does not need enough working capital but still
some margin should be kept, to make the future secure as future is uncertain.

3. Increase in capacity:- The increase in the capacity in the year 2006 has made a change
in the trend of working capital. In 2005 the net working capital was 25cr and in the year
2006 it jumped up to 270cr the main reason for this is the increase in the capacity of the
plants. The capacity was increased by 4.35 million tones which is a huge increase and to
get the benefit of this capacity increase the company had to utilize capacity. For utilizing
the capacity the company has to increase the working capital in order to operate the
increased capacity and this is the main reason the company had a 10 times jump in the
working capital.

4. Debtors and debtor turnover ratio:- Debtors of the company are not much which is
good for the company as they are converting debts into cash in less than a year or they
sell in cash only. This is shown in the balance sheet when we see that the debtors are
not more than 60cr except one year ie 2007.

The debtor turnover ratio is increasing which is very

good for the company. As the intensity of debt collection has increased from 8.4 times
to 27 times, but it won’t have much impact in the company as the debt is not much as
compared to current assets.

5. Inventory and inventory turnover ratio:- The inventory of the company is increasing
which is good for the company as the sales are increasing. As the sales are increasing
the company has to increase the inventory to meet the demand. J K cement has
increased the inventory from 66.5cr to 136cr this has been done keeping in view the
increase in sales and increase in the demand of sales. The company is maintaining
inventory according the demand which is showing good sign of inventory management.
 Inventory turnover ratio is also increased from 5 times to 12
times in 2008 which is good as the company is able to convert inventory into sales but in
the year 2009 it has reduced to 11 times which is not a good sign for the company. The
main reason for this reduction is due to the decrease in the demand of cement. In year
2009 the cement demand reduced throughout because of the rise in price of raw
materials.

6. No of days in working capital or cash conversion period. The no of days in working

capital has shown variation in trend. It has increased in year 2006 and then decreased in
year 2007 and again increased in 2008 and 2009. The increase in 2006 is much high from
25.3 days to 103 days. The reason may have been the bulk of order, as the company had
a huge amount of sales increase also which made them increase the inventory and the
order may have been in a bulks from big projects in that year.

The reduction in the cash conversion period in 2007 is because of

the reason that they have revived the production process and the demand was may not
have been in bulks. Then there is a steady increase in the inventory and more the
inventory more time it will take to process and get converted into cash.

7. Cash Management:- The company is having efficient cash management, the company’s
cash balance is increasing which is good for the company. The main reason for this is
debtor turnover ratio is increasing plus the sales is also increasing which means the
company is able to convert debt into cash easily.

8. Current Liabilities:- The current liability of the company is increasing which is a good
sign for the company as it is mostly in the form of creditors. More the creditors better it
is for the company unless they don’t have the cash to pay it. Since the company is
having enough current assets to pay to their liability therefore it is a good sign for the
company as it is doing operations on the cost of others money.

9. Quick ratio:- The quick ratio is showing an upward trend continuously which is very
good sign for the company. Again the reason for this is the continuous increase in the
cash balance of company. The company is having a good liquidity position.

10. Nature of business:- The working capital mainly depends upon the nature of the
business and the business of J K cement is manufacturing and selling of cement. The
cement manufacturing process consists of many simultaneous operations thus
increasing the operating cost. The increase in operation cost needs more money thus it
needs more working capital.
From

Azfar Jan Kawosa

Section 1903(08)

To

Mr. Rohit Duggal