WC -Working Capital Management

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RAYALASEEMA HYPO HI-STRENGTH

LIST OF CONTENTS

Chapter no Topic name

01 Introduction

Working capital management

02 Research methodology

Objectives

Company profile

03 Analysis and interpretation

04 Findings and suggestions

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CHAPTER I

INTRODUCTION

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WORKING CAPITAL

When facing volatile economic conditions it is still important for companies

to enhance shareholders value, but this is difficult to achieve in periods of near zero

growth. By re-engineering their internal process to increase the efficiency of

working capital, corporations can achieve significant results that will keep their

shareholders happy. The viability of every business activity rest on daily changes in

receivables, inventory and payable. Its the life hood of the business and every

mangers primary task is to keep it moving and put shareholders capital to work

efficiently and effectively. Lack of Working Capital may lead a business to

Technical Insolvency and ultimately liquidation. The faster a business expands the

more cash it will need for Working Capital and investment. Good management of

working capital will generate cash, help to improve profits solidify relationships

with suppliers and customers and reduce risks. When it come to managing working

capital. If you can get money to move faster-speed the cash conversion cycle, by say

reducing the amount of money tied up in inventory or accounts receivables theliquidity of the business increases the internal cash flow can be generated. Likewise,

the business may be able to reduce its debt and interest expenses. If one can

negotiate improved terms with suppliers. E.g. obtain longer terms; one can leverage

financial resources in new ways. Money trapped in working capital is money no

being used to grow. Working Capital management involves decisions relating to

current assets including decisions about how these assets have its own importance,

but the question of financing is, in fact, the key area of working capital

management. Therefore, it is pertinent to estimate the financing pattern of working

capital. Capital requirement of a business can be divided into two main categories.

Viz.

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1. Fixed Capital Requirement

2. Working Capital Requirement

The capital which is required for the acquisition of fixed assets is known as

Fixed Working Capital, where as the capital which is required to meet day to day

obligations is know as working Capital.

Concept of Working Capital:-

On the basis of concept, Working Capital can be classified into two types as

under.

1. Gross Working Capital

2. Net Working Capital

Gross Working Capital:-

It refers to the firms investment in total current assets.

Net Working Capital:-

It represents excess of current assets over current liabilities. The extent to

which the sum of current assets exceeds to the sum of current liabilities is known as

Net Working Capital.

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On the basis of gross concept the working capital is to be either positive or

zero. But on the basis of net concept, the working capital is to be either positive or

negative.

Types of Working Capital:-

Working capital can be divided into two categories on the basis of naature as

under.

1. Permanent Working Capital:-

This refers to the minimum amount of investment in all current assets, which

is required at all times to carry out minimum level of activities. This is also known

as Core Working Capital

2. Temporary Working Capital:-

The amount of working capital, which is difference between maximum

working capital and minimum working capital. This capital keeps on fluctuating

from time to time on the basis of business activities.Estimating Requirement of Working Capital:-

In order to determine the amount of Working Capital required, no of factors

to be considered by the finance manager. The following are different techniques for

assessment of Working Capital.

1. Percentage of Sales Method:

This is traditional and simple method of estimating Working Capital

requirements. According to this method, on the basis of cost experience between

sales and Working Capital requirements, a ratio can be determined for estimating

the Working Capital requirements in future.

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2 Estimation of Components of Working Capital Method:

This method is based on the various figures of Balance Sheet since, Working

Capital is the excess of current assets over current liabilities estimating amount of

different constituents can make an assessment of Working Capital requirements of

Working Capital, i.e. accounts receivables, cash balances and bills payable.

3. Operating Cycle Method:-

According to this approach, the requirements of Working Capital depend

upon the operating cycle of business.

The operating cycle begins with the acquisition of raw materials and ends

with collection of receivables. It many be broadly classified into the following fourstages.

1. Raw Material Storage Stage

2. Work in Process Stage

3. Finished Goods Inventory Stage.

4. Receivables Collection Stage.

The duration of the operating Cycle for the purpose of estimatingrequirements of Working Capital is equalant to the sum of the durations of each of

these stages less the credit period allowed by the suppliers of goods.

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Symbolically, the duration of the Working Capital cycle can be put as

follows.

O=R+W+F+D-C

Where,

O=Operating Cycle

R=Raw Material Storage Period

W=Work In Process Period

F=Finished Goods Inventory Storage Period

D=Debt Collection Period

C=Credit Payment Period

Each of the above can be classified as follows.

R = Average Stock of Raw Material

Average Stock of Raw Material Consumption per Day

W = Average Work In Progress Inventory

Average Cost of Production per Day

F = Average Finished Stock

Average Cost of Goods Sold per Day

D = Average Debtors

Average Credit Sales per Day

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C = Average Creditors

Average Credit Purchases per Day

After computing the period of one operating cycle, the total number of

operating cycles that can be completed during a year can be completed by dividing

365 days with number of operating days in a cycle. The total operating expenditure

in the year when divided by the number of operating Cycles in a year will give the

average amount of Working Capital requirement.

Maximum Permissible Bank Finance

Regarding Tandon Committee:-

The Reserve Bank of India constituted a study group to frame guidelines for

follow up of bank credit under the chairmanship of P L Tandon in 1974.

The report submitted by the committee in August, 1975 is popularly known

as Tandon Committee Report.

The following are various approaches recommended by the committee

1. As a lender, the bank should only supplement the borrower resources or

carrying a reasonable level of current assets in relation to his production

requirements.

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2. The difference between the total current assets and the current liabilities other

than bank borrowings is termed as Working Capital Gap. The Bank should

finance a part of Working Capital gap and balance should be financed

through long-term sources.

Method-1

Under this method, bank may provide 75% of Working Capital gap and the

customer should provide the balance 25% from long-term sources.

Method-2

According top this method, the borrower should be required to provide

through long-term sources to the extent of 25% of the gross current assets. While thebalance should be provided by trade creditors and current liabilities as also banks.

Method-3

This method is similar to method-2. But it further requires that even out of

gross current assets, the core current assets should be determined and separately

funded from long-term resources.

The committee recommended that, if any borrowers case, the limit under the

particular methods exceeds, the excess should be converted into a funded debt and

liquidated within agreed period. It was also suggested that. That change over should

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be gradual i.e., a borrower is first brought into the method- then after method-2 and

finally to method-3.

Turnover Method:-

In the year 2005-06 turnover was Rs, 2970709/- Hence, anticipated turnover

for forthcoming year may be Rs.3000000. Therefore, MPBF should be Rs.600000.

I.e. 20% of Rs.3000000.

Companys Method:-

SRHH Ltd generally computes the MPBF as given under

o 30% on Debtors

o 20% on Stores and Spares

Financial Ratio Analysis

Introduction:-

Financial Analysis is the process of identifying the financial strengths and

weaknesses of the firm by the properly establishing relationships between he items

of the Balance Sheet and the Profit and Loss Account. Financial Statement

Analysis is managerial interpretation of financial statements for parties demanding

financial information.

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Ratio Analysis

Meaning and Scope:-

Ratio Analysis is a widely used tool in financial analysis. The term ratio in it

refers to the relationship expressed in mathematical terms between two individual

figures or group of figures connected with each other in some logical manner andare selected from Financial Statements of the concern. A financial Ratio helps to

express the relationship between two accounting figures in such a way that users can

draw conclusions about the performance, strength and weaknesses of a firm. A ratio

reflecting a quantitative relationship helps to from a qualitative judgment.

A single ratio does not convey much meaning and has to be compared with

some standard. Standard of comparison may consist of:

I. Past Ratios

II. Projected Ratio

III. Competitors Ratios

IV. Industry ratios

Time Series Analysis:-

When financial ratios over a period are compared, it is known as the time

series analysis. The performance of a firm is evaluated by comparing its present

ratios with past ratios.

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Cross-sectional Analysis:-

Comparing the ratios of one firm with some selected firms in the same

industry at the same point of time is known as the cross-sectional analysis.

Proforma Analysis:-

The comparison of current (or) past ratios with future ratios is projected

analysis or proforma analysis. It shows the firms relative strengths and weaknesses

in the past and future. Future ratios can be developed from the projected or pro

forma, financial statements.

Utility of Ratio Analysis

The Ratio analysis is the most powerful tool of financial analysis with the

help of ratios one can determine:

The ability of the firm to meet its current obligations;

The extent to which the firm has used its long-term solvency by borrowing

funds;

The efficiency with which of the firm is utilizing its assets in generating sales

revenue, and

The overall operating efficiency and performance of the firm

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Performance analysis:

A short term creditor will be interested in the current financial position of the

firm, while a long-term creditor will pay more attention to the solvency of the firm.

He will also be interested in the profitability of the firm. The equity shareholders are

generally concerned with their return and also about the financial conditions only

when their earnings are depressed.

Credit Analysis:

In credit analysis, the analyst will usually select a few important ratios. He

may use the current ratio or quick-ratio to judge the firms liquidity or debt-payingability; debt-equity ratio to determine the stake of the owners in the business and the

firms capacity to survive in the long run and any one of the profitability ratios.

Security Analysis:

The ratio analysis is also useful in security analysis. The major focus in

security analysis is on the long-term profitability. The detailed analysis of the

earning power is important for security analysis.

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Comparative Analysis:

The ratio of a firm by themselves does not reveal anything. For meaningful

interpretation, the ratios of a firm should be compared with the ratios of similar

firms and industry. This comparison will reveal whether the firm is significantly out

of line with its competitors. If it is significantly out of line, the firm shouldundertake a detailed analysis to spot out the trouble areas.

Trend Analysis:

Trend analysis of the ratios adds considerable significance to the financial

analysis because it studies ratios of several years and isolates the exceptional

instances occurring in one or two periods. Although the trend analysis of the

companys ratios itself is informative, but it is more informative to compare the

trends in the companys ratios with the trends in industry ratios.

Management has to protect the interest of all the conditional parties,

creditors, owners, and others. They have to ensure some minimum operating

efficiency and keep the risk of the firm at a minimum level. Their survival depends

upon their operating performance.

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Objectives (or) Purpose of Ratio Analysis

The nature of analysis will differ depending on the purpose of the analyst. It

can be undertaken by management of the firm, or by parties outside the firm namely

owners, creditors, investors and others.

Trade Creditors:-

They are interested in firms ability to meet their claims over a very short

period of time. Hence their analysis is confined to evaluation of the firms liquidity

position.

Suppliers of long-term debt:-

They are concerned with firms long-term solvency and survival. They

analyze the firms profitability over time, its ability to generate cash to be able to

pay interest and repay principal and the relationship between various sources of

funds.

Investors:-

They are most concerned about the firms earnings. They are also interested

in every aspect of the firms financial structure to the extent it influences the firms

earnings ability and risk.

Management :-

They would be interested in every aspect of Financial Analysis. It is their

overall responsibility to see that the resources of the firm are used most effectively

and efficiently, and that the firms financial condition is sound

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Limitations of Ratio Analysis

The ratio analysis is a widely used technique to evaluate the financial position and

performance of business. Yet it suffers from various limitations.

o It is difficult to decide on proper basis of comparison.

o The company is rendered difficult because of differences in situations of two

companies or of one company over years.

o The price level changes make the interpretation of ratios invalid.

o The differences in the definitions of items in the Balance Sheet and the Profit

and Loss Statement make the interpretation of ratios difficult.

o The ratios calculated at a point of time are less informative and defective as

they suffer from short-term changes.

o The ratios are generally calculated from past financial statements and, thus

are no indicators of future.

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CHAPTER II

Research Methodology, Objectives

&

Company profile

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RESEARCH METHODOLOGY

To analyze the Working Capital, trends for the purpose of ratio analysis hasto carried out financial analysis is the analysis and interpretation of financial

statements and a proper financial analysis can be give the user better insight about

financial strengths and weakness of the firm. Financial analysis is the starting point

for making plans before using any sophisticated forecasting and planning

procedures

For the purpose, first the required information has to get collected like ratio

analysis, Working Capital and management analysis, income statement, trading and

profit and loss, etc. are to be collected then, the data in statements is to properly

organized and arranged and then relationship is to be established between financial

statements and finally conclusions are to be drawn from the interpreted information

and presented form of report.

Research involves getting tools, ideas from texts, journals, books, records,

and websites. The collection of data is an important aspect of Research. The sources

of information fall under two categories.

Internal Sources:

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Every company keeps certain records such as accounts, records, reports, etc;

these records provide simple information for research.

External Sources:

When internal records are insufficient and required information is not

available, then the organization depends on external sources. The external sources of

data are

1. Primary Data

2. Secondary Data

Primary Data

The data collected for the purpose in original and for the first time is known

as Primary data. The researcher himself to study a particular problem collects the

data.

The primary of the study is collected through interaction and discussion with

the officials and staff at Rayalaseem Hi-Strenth Hypo Ltd, Kurnool.

Secondary Data:The data collected from the published sources i.e. not for the first time is

called Secondary Data. The secondary data for the study is collected from

o Annual Reports of the company from the year 2002-06

o Accounting journals and manuals.

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o Register of Companies (R O C) Websites.

Data Analysis:-

Data Analysis is by implementing various tools like Ratio Analysis, Trend

Analysis, etc

Objectives of the Study

The present Study in Sri Rayalaseem Hi-strenth Hypo Ltd, Kurnool is

undertaken to evaluate the working capital strategy in the organization by

establishing the following objectives.

1) To identify the amount of Gross and Networking Capital of In Rayalaseem

Hi-strenth Hypo Ltd, Kurnool over the study period.

2) To study the changes in Net Working Capital during the study period.

3) To design the Operating Cycle and to find the duration for each cycle.

4) To understand the impact on Liquidity management on the Shareholders

Profitability.

5) To give viable suggestions based on the findings to improve the Liquidity

progress of Rayalaseem Hi-strenth Hypo Ltd,

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To various objectives are interrelated and it is clear that the analysis and

interpretation of these objectives are helpful to different users for different purposes.

Need for the study

The need for the study is to find out the effective means of Working capital

management followed this path with focused strategies for improving corporate

liquidity, investment optimization and the flow of financial information across the

value chain. This involved discussing the drivers of the superior Working Capital

performance because it is a barometer for the

underlying business behavior. The prime focus is to gain and develop a common

language that will be used within the organization to talk about communicate and set

targets for Working Capital. The objective is to better assess the true potential of the

company and its ability to achieve sustainable results from this potential.

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Scope of the Study

The scope of the study is defined below in terms of concepts adopted and

period under focus:

First the study management or working capital is confined only to the

Rayalaseem Hi-strenth Hypo Ltd, Kurnool.

Secondly, the concepts of working capital i.e. Gross and Net is used in

measuring profitability and liquidity respectively and also to arrive at various

objectives of the study.

Thirdly, the study is based on the annual reports of the company for a period

of four years form 2002-2006. The reason for restricting the study of this period is

due to time.

Thus on the whole the purpose of the project is to analyze the past and

present performance of company on various financial areas like

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1. Working Capital Management

2. Inventory Management

3. Receivables Management

Since the past performance will be the essential yard stick or data for

predicting.

Limitations of the Study

1. The information provided in the company balance sheet is only the data

source available.

2. Some required secondary data which is not provided by company.

3. The information available in the balance sheets has taken from the published

annual report, so it has only limitations.

4. Since financial matters are sensitive in nature the same could not be acquired

easily.

5. There is only two months period to finish the project, due to lack of time in

depth of financial matters have not been touched.

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Company Profile

Sree Rayalaseema HI-Strength Hypo Ltd (SRHHL) was incorporated on 24 th

October, 1986 as a public limited company and obtained its certificate

commencement of business on 30th October, 1986.

Initially the company has set up facilities for manufacture of chemicals and

later on the company has diversified into generation of power through wind turbines

and biomass.

Promotions:

Mr. T G Venkatesh, who hails from an industrial family promoted SRHHL.

He is bestowed with rich experience in the art of industrial management. Since its

inception, he bestowed all the devotion and hard work and ensured that the company

worked at optimum capacity and post a stellar performance, both in financial and

technical areas.

Technology:

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The company has very strong Research and Development team. They have

won national level awards in Research and Development. They are only

manufactures of Calcium Hypochlorite in India using the Sodium process. There are

very few companies in the world with this level of technology. Other division

benefit from the cutting edge research.

Main Products:

The main products include Sulphuric Acid, Oleum, Chloro Sulphonic Acid,

Calcium Hypochlorite, Stable Bleaching powder, Monochloro Acetic Acid, Bleach

Liquor, MCA, Sodium Hypo, Hydrochloric Acid and Non-Ferric alum.

Geared Up For Exports:

Sree Rayalaseema Hi-Strength Hypo Ltd, the torch bearer of theconglomerate, is only India manufacturer of Calcium Hypochlorite, and one of the

very few in the world. A state of the art sodium process technology developed

through in house Research and Development efforts helps the company in

manufacturing the product with a chlorine content of 65% to 70%. Sree

Rayalaseema Hi-Strength Hypo Ltd, exports Calcium Hypochlorite to countries all

across the globe Viz. Australia, Bangladesh, Belgium, Brunei, China, Colombia,

Cyprus, Durban, England, France, Germany, Hungary, Iran, Kenya, Korea,

Malaysia, Mauritius, Netherlands, Oman, Peru, Philippines, Sri Lanka, Saudi

Arabia, Singapore, Tanzania, Thailand, USA, Vietnam, etc. The certificate of Merit

awarded by CHEMEXCIL for outstanding export performance reinforces its status

as a recognized export house.

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Calcium Hypoclorite touches vital facets of human existence and its of

proven importance in many areas of day-to-day activity. Sree Rayalaseema Hi-

Strength Hypo Ltd, has distinctive edge in the maucfacture of this product, thanks to

the twin advantages of indigenous raw materials availability and supply of some

specialized chemicals by Sree Rayalaseema Alkalis and Allied Chemicals Ltd.

The company is also a front-ranking producer of Monochloro Actic Acid.

Manufactured by the scientific Crystallizer technology, the product meets

international quality standards. All leading manufactures of Non-Seroid Anti-

Inflammatory Drugs, other pharmaceuticals, pesticides, organ chemicals, etc use

Monochloro Acetic Acids.

Product Range and Applications:

o Calcium Hypochlorite (Gramules and Tablets)

o Stable Bleaching Powder

o Monochloro Acetic Acid

o Chloro Sulphonic Acid

o Oleum 23% and 65%

o Bromine

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o Battery and Commercial grades Sulphuric acid

Calcium Hypoclorite is used extensively in aquaculture, textile, leather, Paper

and Sugar Industries. Stable Bleaching powder has taker in sanitization, water

treatment, and aquaculture and pesticide makers. Chloro Sulphonic Acid Caters to

the Pharmaceutical, and dyes & Intermediaries industry. Producers of dyes &

intermediaries, soaps and dtergetns, explosives and others use oleum. Bromine,

manufactured by a proven indigenous technology, finds application in various

industries including petrochemicals, dye intermediates photography, pesticides,

pharmaceuticals, bleaching of paper, pulp and others. Sulphuric Acid finds

widespread usage in sulphonation, fertilizer industry, as an intermediary in

pharmaceutical industry amongst others.

Production Capacity:

Product Installed Capacity

(Tons Per annum)

Calcium Hypoclorite 6600

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Stable Bleaching Powder 9900

Monochloro Acetic Acid 2400

Sulphuric Acid 49500

Chloro Sulphonic Acid 33000

Bromine 65

Sree Rayalaseema Hi-Strength Hypo Ltd has provided capacitors and also

uses steam for refrigeration to conserve energy. Brick lined CSA operating

efficiencies. A 9 MW biomass powder project at Kurnool cater to the companys

growing power requirements.

Sree Rayalaseema Hi-Strength Hypo Ltd adheres to all international

standards of quality. The ISO 14001 certification for Environmental Management

and the ISO 9002 certification for Quality systems bear out the companys

commitment to ensuring quality of implacable standards.

Sree Rayalaseema Dutch Kassenbouw Limited Purifying

Water for Health.

Sree Rayalaseema Dutch Kassenbouw Limited is a leading producer ofpremium Stable Bleaching Powder (tropical chloritde of lime) under the brand name

Rayalaseema Stable Bleaching Powder. The state of the art manufacturing facility

has an output capacity of 15 TPD. The company specializes in the production of

approved ISI Grade-I, Grade-II and TGV Super-9 brands of leaching powder.

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The company has the credit of contributing hygienic water to all the

surrounding areas. Stable Bleaching Powder manufactured by the Rheinfedlens

bleaching powder process, is an effective disinfectant, bactericide, algaecide,

fungicide and bleaching agent. It is widely used by municipalities, hospitals,

railways, aqua culturists, textile manufactures, bleachers and others.

Weighted Operating Cycle:-

2002-03 2003-04 2004-05 2005-06

Duration of Various Stage

1.Raw Material 244.50 221.67 225.00 107.23

2.Finished Goods 18.46 8.61 3.00 1.17

3.Debtors 80.7 68.77 44.67 22.17

4.Creditors 56.1 64.17 69.92 88.58

Weights of Various Stage

5.Raw Material 0.30 0.30 0.30 0.41

6.Finished Goods 0.66 0.71 0.76 0.80

7.Debtors 1.00 1.00 1.00 1.00

8.Creditors 0.30 0.30 0.30 0.30

Weighted Operating Cycle

(1*5)+(2*6)+(3*7)+(4*8)

149 Days 123 Days 94 Days 31 Days

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Summary of Performance

S No Particulars 2002-03 2003-04 2004-05 2005-06

01 Working Capital Gap 1984.62 2064.68 1671.25 653.66

02 Current Ratio 2.90:1 2.91:1 2.24:1 7.34:1

03 Debt-Equity Ratio 0.54 0.56 0.54 0.25

04 Operating Profit 231.38 222.58 183.69 8.84

05 Profit from Previous years 1167.77 1366.66 1548.64 1612.81

06 Total Balance of P&L A/c 1366.66 1548.62 1612.81 1620.91

The main purpose of Working Capital Ratio Analysis is

To indicate Working Capital management performance and ;

To assist in identifying areas requesting closer management

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Key points have been taken into consideration while analyzing financial

ratios. They are as under.

The results are based on highly summarized information.

Consequently, situations which require might not be apparent, or

situations which dont warrant significant effort, might be

unnecessarily highlighted.

Different departments face very different situations. Comparisons

among them, or with Global ideal ratio values, can be misleading.

Ratio analysis is somewhat one-sided, favorable results mean little,

whereas, unfavorable results are usually significant.

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Theoretical background of the study

Financial analysis is helpful in assessing the financial position and

profitability of a company. It is the process of identifying the financial

strengths of the balance sheet and profit and loss account. It can be under

taken by the management of the firm. Or by parties outside the firm, viz.,

owners creditor, investors and others.

Introduction to the ratio analysis:

Nature of ratios:

Ratio analysis is a powerful tool of financial analysis. A ratio is

defined as the indicated quotient of two mathematical expressions and as

the relationship between two or more things. In financial analysis, a ratio is

used as an index or yardstick for evaluating the financial position and

performance of affirm. The relationship between two accounting figure,

expressed mathematically, is known as a financial a ratio.

Ratios help to summarize the large quantities of financial data and

to make qualitative judgement about the firms financial position. The greater

ratio, the greater firms liquidity and vice versa. The point to note is that a

ratio indicates a quantitative relationship, which can be in turn, used to make a

qualitative judgement. Such is in the nature of all financial ratios.

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Ratio analysis gives the efficiency and effectiveness of the companys

performance on many parameters. Ratio analysis is done to develop meaning

full relationship between individual items and group of items usually shown in

the periodical financial statements published by the concern. An accounting

ratio shows the relationship between the two interrelated accounting figures as

gross profit to sales etc.,

REQUISITE FOR RATIO ANANLYSIS:

more confidence in those firms that shows steady growth inearnings as such, they concentrate on the analysis of the firms

present and future profitability. They are also interested in the

firms financial position to the extent it influences the firms

earnings ability. Owners are investors desire primarily a basis for

estimating capacity.

1. Creditors:

Creditors are concerned primarily with liquidity and ability to

pay interest on redeem loan with in a specific period.

2. Long term creditors:

The requisite of ratio analysis to come in to being caused by the following

facts.

1. Business facts displayed in balance sheet and profit and loss account do

not convey any pompous individually. Their significance likes in the

fact that they are interrelated. From this time onward, there is need for

fixing relationship between various related items.

2. Ratio analysis a tool for the interpretation of financial statements is also

important because ratios helps the analysis to have a profound

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cautiously in to the data given statements figure in their peremptory

forms shown in financial statements are neither significant nor to enable

to be compared.

Users of ratio analysis:

The nature of ratio analysis will differ depending on the purpose of

analyst. Ratio analysis the starting point for making plans before using any

sophisticated forecasting and budgeting procedures. The ratio analysis is

useful for the following persons;

3. share holders and investors:

Investors and shareholders, who have invested their money in the

firms,. Shares are most concerned about the firms earnings.They restore The long-term creditors are interested in firms

long-term solvency and survival. They analyses about the firms

future solvency and profitability overtime, its ability to generate

cash, to be able to pay interest and repay principal and

relationship between various sources of funds.

4. Employees:

The employees are also interested in the financial position of the

concern especially profitability. There wages increase the amountof fringe benefits are related to the volume of profits earned by

the concern. The employees make use of information available in

financial statements.

5. Government :

Government is also interested to know the strength and weakness

of the firm. Government makes the future plans, policies on the basis of

financial information available from various units of the company.

6. Management:Finally, management of the firms or executives would be

interested in every aspect of the fianancial analysis. It is their overall

responsibility to see at the resources of the are used, most effectively and

efficiently, and that the firms financial condition is should. Through the

financial analysis they try to seek answers to the following questions.

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1. Is the firm in a position to meet its current obligations?

2. What sources of long term finance are employed by the firm and what

is the relationship between them? Is there any danger due to the

employment of excessive debt?3. How efficiently does the firm use its assets?

4. Are the earnings of the firm adequate?

5. Do investors consider the firm profitable and safe for the purpose of

investing their money in the shares of the firm?

Financial analysis may not provide exact answers to these questions,

but it does indicate what can be expected in the future.

Standards of comparisons:

A single ratio in itself does not indicate favorable

or unfavorable condition. It should be compared with some standard.

Standards of comparison may consist of :

1. Ratios calculated from past financial statements of the same firm.

2. Ratios developed using the projected or performed financial

statements of the same firm.

3. Ratios of some selected firm, especially the most progressive and

successful at the same point in time.

4. Ratios of the industry to which the firm belongs.

The easiest way to evaluate the performance of a firms is to compare its

present ratios with past ratios. When financial ratios over a period of time are

compared it gives an indication of the direction of change and reflects whether

the firms financial position and performance has improved, deteriote or

remained constant over time. This kind of comparison is valid only when the

firms accounting policies and procedures have not changed over time.

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Some times future ratio are used as the standard comparison. Future

ratios can be developed from the projected or performed financial statements.

The comparisons strengths and weaknesses in the past and the future. If the

future ratios indicate weak financial position, corrective actions should be

initiated. Another way of comparison is to compare the ratio of one firm withsome related firms in the same industry at the same point of time. In most of

the cases, it is more useful to compare the firms ratios of a few carefully

selected competitors indicates the relative financial position and performance

of the firm.

A firm can easily resort to such a comparison, as it is not

difficult to get the published financial statements of the similar firms to

determine the financial conditions and performance of a performance of a firm

its may be compared with average ratios of the industry of which the firm in a

member, industry ratios are important standards in view of the fact that each

industry, as its characteristics which influences the financial and operatingrelationships.

But there are certain practical difficulties in using the industry ratios.

1. It is difficult to get ratio for the industry.

2. Even if industry ratios are available, they are averages of the ratios of

strong and weak firms. Some times the spread may is wide that the

average may not be little utility.

3. The averages will meaningless and the comparison futile. If the firmwithin the same industry widely differ in their accounting policies and

practices.

4. It is possible to extremely strong and extremely weak firms, the

industry and eliminate extremely6 strong and extremely weak firms, the

industry ratios will prove to be useful in evaluating the fianancial

conditions and performance of a firm.

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Utility of ratio analysis:

It is most important tool of financial analysis. Many diverse groups

people are illustrated in analyzing the financial information to indicate the

operating and financial efficiency and growth of the firm. The people useratios to determine those financial characterics of the firm in which they

are interested with the help of ratio one can determine.

The ability of the firm to meet its current obligations.

1. the extent which the firm has used its long-term solvency by

borrowing funds.

2. The efficiency to which the firm is utilizing its assets ingenerating

its sales revenue and3. The overall operating efficiency and performance.

Types of ratios:

Several ratios can be calculated from the accounting data

contained in the fianancial statements. These ratios can grouped in to

various claases accoarding tyo the fianancialactivity or function to

evaluated. As stated earlier, the parties, which generally undertake

financial analysis, or short-term creditors, long term creditors, ownersand management. Short-term creditors main interest is in the liquidity

position of the short-term solvency of the firm. Long term creditors on

other hand, are more interested in the long-term solvency and

profitability analysis and the analysis of the firms financial conditions.

Management is interested in evaluating every activity of the firm. They

have to protect the interests of all parties and see that the firm goes

profitability.

In view of the requirements of the user of the ratios, we may

classify them as follows:

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Traditional classification:

1. Balance sheet ratios: balance sheet ratios deal with the relationship

between two balance sheet items must however pertain to same balance

sheet ex: current ratios.2. Profit and loss account ratios: This ratios deal with the relation ship

between the two profit and loss account items. Both the items must

belong to the same profit and loss account. Ex: current ratios.

3. Composite or mixed ratios: These ratios are exhibit statement items and

balance sheet items. Ex. Stock turn over ratios.

Functional classification

1. Liquidity ratios: It is extremely essential for a firm to able to meet its

obligations as they become due liquidity ratios measure the ability of

the firm to meet its current obligations. In fact, analysis of liquidity

needs the preparation of cash budgets and cash flows statements. But

liquidity ratios by estabuilishing and relation ship between cash flow

statements. But liquidity ratios by establishing a relation ship betweencash and other current assets to currents obligations provide quick

measure of liquidity.

Also that is not too much meets its obligations. Due to lack of

sufficient liquidity will result in bad credit rating, loss of creditors

confidence our even in law suits resulting in the closure of the

company. A view high degree of liquidity is also bad. Therefore it

is necessary to strike a proper balance between liquidity and lack of

liquidity. The most common ratios which indicates the extent of

liquidity or lack of it are; current ratio and quick ratio.

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2. Leverage ratio:

The long term creditors, like debenture holders, financial

institutions etc. Are more concerned with the firms long term

financial position of the firm. Leverage of capital structure ratiosis calculated. The ratios indicate the funds provide by the owners

and creditors as a general; there should be and appropriate mix of

debt and owners equity in financing the firms assets.

3. Activity ratios:

The funds of creditors and owners are invested in various kinds

of assets to generate sales and profits. The better in management

of assets. The larger the amount of sales. Activity ratios areemployed to evaluate the efficiency with which the firm

managers and utilizes its assets. These ratios are also called turn

over ratios because they indicate the speed with which assets are

being converted or turned power in to sales activity ratios, thus

involve a relation ship between sales and the various assets. A

p[roper balance between sales assets generally reflects that assets

are managed well.

4.Profitability ratios:

A company should earn profits to survive and grow over a long

period of time. Profits are essential, but it would be wrong to

assume that every action initiated by management of company

should be aimed at maximizing profits. Irrespective of social

consequences.

Profits are difference between total revenues and total

expenses over period of time. Profits are the ultimate output of

the company and it will have no future if it falls to makesufficient profits. The profitability ratios are calculated to

measure the operating efficiency of the company. Creditors and

owners are also interestred in the profitability of the firm.

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Limitations of ratio analysis:

The ratio is a widely used technique to evaluate the

financial position and performance of a business. But there areproblems in using ratios. The analyst should be aware of these

problems. The following are the limitations of the ratio analysis.

1. It is difficult decide on paper for comparison.

2. The comparison is rendered difficult because of differences in

situations of two companies or one of the companies over years.

3. The price level changes make the interpretations of ratios invalid.

4. The ratios calculated at a point of time or less informative and

defective and they suffer from short term changes.5. A single ratio usually, does not convey much sense.

6. The differences in the definitions of items in the balance sheet

and profit and loss statement make the interpretation of ratios

difficult.

7. The ratios are generally calculated from past financial statements

and, thus are indicators of future.

8. Ratios are only means of financial analysis and an end in itself.

Ratios have to be interpretated and difficult people may interpret

the same in different ways.

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LIQUIDITY RATIOS

Liquidity refers to the ability of a concern to meet its current

debt obligations. The short term expenses or current liabilities are met byrealizing amounts from current assets. The current assets should be either

liquid or near liquidity. These should be convertible into cash for meeting the

current debt obligations.

If current assets can pay off current liabilities, then liquidity

position is said to be satisfactory. If the liabilities are less, then the current

assets cannot be met from them, then the liquidity position is considered bad.

The bankers, suppliers of the goods and other short term

creditors are interested in the liquidity position of a business concern. They

extend the credit only if they are sure that current assets are adequate to pay

out the obligations. To measure the liquidity position of a business concern,

the following ratios can be calculated.

A. Current Ratio.

B. Quick Ratio.

Current Ratio

Current ratio may be defined as the relationship between

current assets and current liabilities. In other words, it is the ratio of current

assets and current liabilities. The ratio is also known as working capital

ratio. It is measure of general liquidity and is most widely used to make the

analysis of a short term financial position or liquidity of a business

enterprise.

The two basic components of the ratio are: current assets

and current liabilities. The following table gives the details of the items

constituting these two elements.

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Components of Current Ratio

CURRENT ASSETS

CURRENT LIABILITIES

. Bills receivables . Income tax payable

. Cash at bank . Bills prepaid

. Cash in hand . Out standing expenses

. Inventories . Bank overdraft

.Sundry debtors .Sundry creditors.

.Work in progress .Dividend payable.Prepaid expenses

Current ratio= Current assets

Current liabilities

particulars 2004 2005 2006 2007 2008

Current

assets

(Rs in lakhs)

3149015.77 2991760.4

0

3578910.4

9

4198691

.79

4053543.7

7

Current

liabilities

(Rs in lakhs)

1083661.19 135237.59 1928977.6

5

1550552

.76

2108740.7

2

Current ratio 2.90:1 2.21:1 1.85:1 2.70:1 1.92:1

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0

500000

1000000

1500000

2000000

2500000

30000003500000

4000000

4500000

2004 2005 2006 2007 2008

Current assets

Current liabilities

Current ratio

INTERPRETATION:

The current ratio of the firm measures in short term solvency. The

accepted standard ratio is 2:1. The current ratio of the firm was not

good in the year 2006 and 2008 current ratio was not satisfactory.Because having less than 2:1 ratio. However, the company needs to

improve its short term financial position.

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A Quick ratio/acid test ratio/liquid ratio

The term liquidity refers to the ability of a business enterprise to pay its short

term liabilities. Quick ratio may be defined as the relationship between quickassets and current liabilities. As assets is said to be liquid, it can be converted

in to cash with in a short period.

Components of quick ratio:

Quick assets Quick liabilities

. Cash on hand . Out standing expenses

. Cash at bank . Bills payable. Bills receivable . Sundry creditors

. Sundry debtors . Dividend payable

. marketable securities . Bank over draft

Quick ratio= Quick assets

Current liabilities

Particulars 2004 2005 2006 2007 2008

Quick

assets

2653175.0

7

2533610.34 2932398.49 3565590.54 2926053.48

Current

liabilities

1083661.1

9

1352237.59 1928977.65 1550552.76 2108740.72

Quick ratio 2.44:1 1.87:1 1.52:1 2.30:1 1.39:1

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0

500000

1000000

1500000

2000000

2500000

30000003500000

4000000

Quick assets

Current

liabilities

Quick ratio

3-D Column 4

All current assets, except stock and prepaid expenses are quick assets.

A quick ratio of 1 is considered as ideal, a quick ratio less than 1,

indicates inadequate liquidity of the firm.

INTERPRETATION:-

The Quick ratio is more than the standard of 1:1, the company

had excess liquid assets. This indicates company extremely had high liquidity

position.

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Super Quick Ratio/ Absolute Ratio:

The cash Ratio measure the absolute liquidity of the

business. This ratio considers only the absolute liquidity

available with the firm. This ratio is calculated as;

Cash + Marketable Securities

Cash Ratio = ______________________________Current Liabilities

(Rs. Inlakhs)

Particulars Super Quick

Assets(A)

Current Liabilities

(B)

Ratio (A/B)

2004 91973.21 1083661.19 0.08

2005 71150.60 1352237.59 0.052006 113171.38 1928977.65 0.06

2007 195291.02 1550552.76 0.13

2008 276745.26 2108740.72 0.13

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INTERPRETATION:

The Universal Standard is 0.50:1 so, Company almost all years had less

super liquid Assets. This Indicates Company had huge balances in debtors

besides their collection period was very high. So, company was not easy to

meet quick obligations immediately.

47

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

1 2 3 4 5

2004-2008

SuperQuickRatios

Ratios (A/B)


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ACTIVITY RATIOS:

The funds of creditors and owners are invested in various kinds of

assets to generate sales and profits. The better the management of assets, the

larger the amount of sales. Activity ratios are employed to evaluated the

efficiency with which the firm managers and utilizes its assets. These ratios

are also called turn over ratios because they indicate the speed with which

assets are being converted or turned or turned over into sales. Active ratios,

thus involve a relationship between sales and various assets. And presume that

there exists an appropriate balance between sales and various assets generally

reflect that assets are managed well.

Some of the activity ratios are given under:

Inventory turnover ratio= Sales

Inventory

Debtors turnover ratio= Sales

Debtors

Assets turnover ratio=Sales

Net assets

Total asset turnover ratio=SalesTotal assets

Fixed asset turnover ratio=Sales

Net fixed assets

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Inventory turnover ratio:This ratio is indicated the efficiency of the firm in

selling its products. It is calculated by dividing the sales by average inventory

or the year ended inventory. This ratio measures how quickly inventory is

sold, a test of efficient management. Usually a high inventory turn over ratio

indicates efficient management of inventory because more frequently the

stocks are sold. The lesser amount of money is required to finance the

inventory. This implied under investment in or very low level of inventory.

Low turn over implies over investment in inventories, dull business.

Inventory turnover ratio= Sales

Inventory

Particulars 2004 2005 2006 2007 2008

Sales 4544096.08 4117146.88 5998742.15 6563134.94 6875918.22

Inventory 155096.08 130849.92 404966.54 227862.78 226460.78

Inventory

turn over

ratio

29.30 (times) 31.46(times) 14.81(times

)

28.80(times) 30.36(times)

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INTERPRETATION:

This ratio measures the rapidity with which stock is turning into

receivables through sales company produces good very quickly rest of year.

However, the company produces goods quickly. This indicates company had a

strong production capacity.

50

0

000000

000000

000000

4000000

5000000

000000

2004 2006 2008

Sales

Inventory

Inventory

turnover ratio


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Debtors turn over ratio

Debtors turn over ratio is the relationship between the credit sales and

debtors of the firm.

Debtors turn over ratio= Sales

Debtors

INTERPRETATION:

Debtors turnover ratio measures the collection period of debtors. Here

sales were so rapidly converting into cash. This so good to Company. Year

2007-08 was little bit high rather than rest of years.

Particulars 2004 2005 2006 2007 2008Sales 5884308.6

5

5661902.9

2

8309824.99 11941052.77 11755303.2

8

Debtors 604128.58 604498.36 817828.04 71928655 919879.62

Debtors turn over

ratio

9.74

(times)

9.36

(times)

10.16

(times)

16.60 (times) 18.96(times)

51

0

2000000

4000000

6000000

8000000

10000000

12000000

2004 2006 2008

Sales

Debtors

Debtors turn

over ratio


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Asset turn over ratioAsset turn over ratio is also known as Investment turn

over ratio. It is based on the relationship between the cost of goods sold

(sales) and the assets of the firm.

Asset turn over ratio=Sales

Net assets

Note: Net assets = net fixed assets + net current assets.

0

2000000

4000000

6000000

8000000

10000000

12000000

2004 2005 2006 2007 2008

SalesNet assets

Assets turn over ratio

3-D Column 4

INTERPRETATION:

This ratio measures the net assets capacity with turnover. Here, net

assets are not sufficient for production of goods. However, company should

concentrate on more fixed assets rather than current assets.

Particulars 2004 2005 2006 2007 2008Sales 5884308.65 5661902.92 8309824.99 11941052.27 11755303.28

Net assets 9040038.01 8769273.84 7723318.16 8875816.43 9419328.67

Assets turn over

ratio

0.6:1 0.64:1 1.07:1 1.34:1 1.25:1

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Fixed asset turn over ratio

Fixed asset turn over ratio= Sales

Net fixed assets

Particulars 2004 2005 2006 2007 2008

Sales 58843089.65 5661902.92 8309824.99 11941052.27 11755303.28

Net fixed

assets

591022.24 5777513.44 4144407.67 4677124.64 5365784.90

Fixed asset

turn over ratio

1:1 0.98:1 2:1 2.55:1 2.19:1

0

2000000

4000000

6000000

8000000

10000000

12000000

2004 2005 2006 2007 2008

Sales

Net fixed assets

Fixed asset turn over

ratio

INTERPRETATION:

This ratio measures fixed assets capacity with turnover. Here, fixed

assets sufficient for production of goods. However, company should

concentrate on more fixed assets rather than currents assets.

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FINDINGS

Weighted operating cycle analysis helps in estimating the amount of funds

that are required for the various stages of the cycle. It is a method of

estimating working capital requirement for SRHH Ltd in the year 2002-03

was only 31 days.

Operating statement of SRHH Ltd clearly indicates the heavy operating

expenses. Thats why they are getting less profits.

The liquidity ratio such as current ratio, Quick ratio, etc is satisfactory. The

current ratio is more than 2:1 and quick ratio is more than 1:1 which isacceptable.

Movement of accounts payable is shown an decrease trend. This indicates

company is able to generate credit at liberal terms and generate revenues at

other cost.

Company was able to manage with lower working capital borrowings

because of short-term loans and outstanding creditors.

The inventory turnover ratio is continuously declining

The activity ratios are employed to know the efficiently of firm in managing

and utilizing the assets.

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SUGGESTIONS

o The company must try to maintain an optimum level of inventory and

develop the strategy of investing excess cash balance.

o The company should improve profits by reducing indirect or operating

expenses.

o SRHH Ltd should develop optimum credit policy

o SRHH Ltd should determine the maximum length of trade-credit

period with the help of following formula

M=m+N/N-W*(n-m)

o Company concentrate only shareholders funds it was so, expensive

than other funds.

o Year 2005-06 Companys turnover was very poor. Company

management must take necessary actions for forthcoming years.

o Companys had a more inventory. Management should adopt

necessary inventory policies like ABC Analysis, EOQ, etc

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CONCLUSIONS

The Management of Sri Rayalaseema Hi-Strength Hypo-Ltd, Kurnool is well

aware of taking necessary step in making of effective decisions. Still, some time

some decisions cant be put into practice due to some other influences, which cant

be prevented within their scope.

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BIBLIOGRAPHY

Financial Management : Khan & Jain, I M Pandy

Management Accountancy : S N Maheswari

Research Methodology : C R Kothari

Company Profile : Manual of SRHH Ltd

Financial Analysis : Balance Sheets, Profit & Loss

Accounts of SRHH Ltd

from 2004 to 2008

WC -Working Capital Management

Documents