working capital study

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PERFORMANCE DRIVERS OF A COMPANY Current ratio: current assets/current liabilitiesConventionally- 2:1

Quick ratio: (current assets-stock)/(current liabilities-bank overdraft)Conventionally: 1:1

Inventory turnover ratio: It depicts number of times a companys inventory is turned into sales.High ITR= efficient inventory management because the average inventory holding period would be less.

Debt turnover ratio: Number of times each year the debtors turn into cash.High DTR=quality of the companys portfolio of debtors is good.Investment in inventory represents idle cash. The lesser the inventory the greater the cash available for meeting operating needs.High ITR means inventory holding period is less because it is equal to 365/ITR

High DTR means the debtors are being converted rapidly into cash which is positive for the firm, of course

1Working capital turnover : Working capital is defined as the amount by which current assets exceed current liabilities. A higher working capital turnover ratio is better. It means that the company is utilizing its working capital more efficiently i.e. generating more revenue using less investment.Assets Turnover Ratio: The asset turnover ratio is an efficiency ratio that measures a company's ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales.Inventory Turnover Ratio: This is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. This measures how many times average inventory is "turned" or sold during a period.

RATIOS2014-132013-122012-112011-10Current Ratio0.650.670.420.24Quick Ratio0.470.520.280.15Inventory Turnover Ratio37.7537.3340.8443.88Debtors Turnover Ratio31.8850.72117.09162.08Asset Turnover Ratio4.634.494.854.85HERO MOTOCORP4Year

Debtors to current assets

Inventories to current assets

Cash and Bank Balance to current assetsLoans and Advances to current assets

2014-130.5390.3920.0690.7052013-120.4480.4290.1220.9452012-110.2710.6730.0560.9232011-100.1860.7460.0681.114HERO MOTOCORPYear

Debtors to current assets

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2014-134131922013-1232431242012-112312812011-101424113MOTAALS TESTThe company(hero motocorp) performed better in year 2011-12 but its liquidity position has fluctuated over the years and has gone better in the year 2013-14TVS MOTORS

RATIOS2014-132013-122012-112011-10Current Ratio0.870.850.711Quick Ratio0.570.510.440.59Inventory Turnover Ratio14.5213.8612.1913.27Debtors Turnover Ratio25.0926.4328.2425.17Asset Turnover Ratio4.353.873.883.38TVS MOTORSYear

Debtors to current assets

Inventories to current assets

Cash and Bank Balance to current assetsLoans and Advances to current assets

2014-130.3460.5680.0860.5492013-120.3630.6160.0210.4532012-110.2810.7030.0160.3612011-100.3360.6560.0070.577TVSYear

Debtors to current assets

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2014-1331431132013-1242321132012-111421812011-102314102MOTAALS TESTThe company TVS performed better in the year 2011-12 Correlations (TVS)CorrelationsOperating Profit MarginCurrent RatioQuick RatioInventory Turnover RatioDebtors Turnover RatioAssets Turnover RatioOperating Profit MarginPearson Correlation1-.970*-.820-.303.746.654Sig. (2-tailed).030.180.697.254.346N444444Current RatioPearson Correlation-.970*1.935.484-.884-.463Sig. (2-tailed).030.065.516.116.537N444444Quick RatioPearson Correlation-.820.9351.686-.986*-.138Sig. (2-tailed).180.065.314.014.862N444444Inventory Turnover RatioPearson Correlation-.303.484.6861-.797.502Sig. (2-tailed).697.516.314.203.498N444444Debtors Turnover RatioPearson Correlation.746-.884-.986*-.7971-.004Sig. (2-tailed).254.116.014.203.996N444444Assets Turnover RatioPearson Correlation.654-.463-.138.502-.0041Sig. (2-tailed).346.537.862.498.996N444444*. Correlation is significant at the 0.05 level (2-tailed).Operating Profit MarginCurrent RatioQuick RatioInventory Turnover RatioDebtors Turnover RatioAssets Turnover Ratio12TATA MOTORS

RATIOS / YEAR2014201320122011MeanS.D.C.O.VOperating Profit Margin(%)2.563.837.699.96.003.4056.66%Current Ratio0.430.420.50.520.470.0510.68%Quick Ratio0.360.40.430.540.430.0817.85%Inventory Turnover Ratio8.8910.0511.8412.110.721.5214.21%Debtors Turnover Ratio22.6219.7820.4518.8620.431.607.83%Assets Turnover Ratio1.021.41.661.431.380.2719.25%CorrelationsOperating Profit MarginCurrent RatioQuick RatioInventory Turnover RatioDebtors Turnover RatioAssets Turnover RatioOperating Profit MarginPearson Correlation1.836.875.978*-.894.850Sig. (2-tailed).164.125.022.106.150N444444Current RatioPearson Correlation.8361.850.918-.555.611Sig. (2-tailed).164.150.082.445.389N444444Quick RatioPearson Correlation.875.8501.851-.827.491Sig. (2-tailed).125.150.149.173.509N444444Inventory Turnover RatioPearson Correlation.978*.918.8511-.782.849Sig. (2-tailed).022.082.149.218.151N444444Debtors Turnover RatioPearson Correlation-.894-.555-.827-.7821-.687Sig. (2-tailed).106.445.173.218.313N444444Assets Turnover RatioPearson Correlation.850.611.491.849-.6871Sig. (2-tailed).150.389.509.151.313N444444*. Correlation is significant at the 0.05 level (2-tailed).INVENTORIES/CURRENT ASSETDEBTORS/CABANK/CALOAN/CA2013-1472.0822.934.2682.402012-1366.1326.996.8778.772011-1250.2129.6320.1463.812010-1143.6029.1627.2260.82MOTAALS TESTYear

Debtors to current assets

Inventories to current assets

Cash and Bank Balance to current assets

Loans and Advances to current assets

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Overall

2014-1344411312013-1233321122012-112123832011-10121483

RATIOS / YEAR2014201320122011MeanS.D.C.O.VOperating Profit Margin(%)11.79.766.999.99.8751.94320.27%Current Ratio0.781.041.131.471.1050.28525.79%Quick Ratio0.680.901.031.140.93750.19721.00%Inventory Turnover Ratio25.2123.4819.6325.8323.542.7811.6%Debtors Turnover Ratio29.8535.5038.2343.6636.815.7415.61%Assets Turnover Ratio2.022.362.282.632.3220.1010.81%Operating Profit MarginCurrent RatioQuick RatioInventory Turnover RatioDebtors Turnover RatioAssets Turnover RatioOperating Profit MarginPearson Correlation1-.390-.631.885-.492-.291Sig. (2-tailed).610.369.115.508.709N444444Current RatioPearson Correlation-.3901.960*.084.994**.964*Sig. (2-tailed).610.040.916.006.036N444444Quick RatioPearson Correlation-.631.960*1-.197.986*.905Sig. (2-tailed).369.040.803.014.095N444444Inventory Turnover RatioPearson Correlation.885.084-.1971-.029.173Sig. (2-tailed).115.916.803.971.827N444444Debtors Turnover RatioPearson Correlation-.492.994**.986*-.0291.947Sig. (2-tailed).508.006.014.971.053N444444Assets Turnover RatioPearson Correlation-.291.964*.905.173.9471Sig. (2-tailed).709.036.095.827.053N444444*. Correlation is significant at the 0.05 level (2-tailed).**. Correlation is significant at the 0.01 level (2-tailed).INVENTORIES/CURRENT ASSETDEBTORS/CABANK/CALOAN/CA2013-1445.4437.7716.8286.862012-1345.5635.2019.1894.782011-1234.7418.1047.1155.172010-1129.8017.3052.8345.88MOTAALS TESTYear

Debtors to current assets

Inventories to current assets

Cash and Bank Balance to current assets

Loans and Advances to current assets

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2014-133141932013-1242321112012-1123231112011-101414102CONCLUSION-As we observed the following ratios of 6 companies chosen by us: Tata motors, Hyundai, Maruti- Suzuki, Ford, TVS MotorsUnder the period of study of four from 2011-2014, these are the conclusions we drew Current Ratios: It shows a decreasing trend that means current assets are reducing while the current liabilities may be increasing too. None of the observed companies keep 2:1 ratio.Quick Ratio: It also shows the decreasing trend in the industry. Hence the industry needs to improve its quick ratio as of now.Inventory Turnover Ratio too has decreased which means the time lag of inventory to convert into sales has increased. This means the demand analysis for the industry is overestimated and not appropriate. So industry should look into it and try to reduce it. Debtors Turnover Ratio: Higher debtor turnover ratio is good because more higher debtor turnover ratio means, more fastly, we are collecting money. But in the automobile industry it is lower thats why it needs to be improved.Assets Turnover Ratio: This ratio measures how efficiently a firm uses its assets to generate sales. Higher turnover ratios mean the company is using its assets more efficiently.This ratio has increased for almost all companies which shows that industry is using its assets effectively.Working Capital Turnover Ratio: Working capital is defined as the amount by which current assets exceed current liabilities. A higher working capital turnover ratio is better. It means that the company is utilizing its working capital more efficiently i.e. generating more revenue using less investment. This ratio is increasing for all companies which is a good sign for industry.

Relationship between liquidity and profitability: Current ratio and Quick Ratio are usually used to assess the liquidity position of a company. From the scatter plots it is observed that there is a negative relationship between Profitability and Current/Quick Ratio. Hence it can be concluded that there is a negative relationship between profitability and liquidity. As the liquidity increases, profitability decreases. So despite the huge potential and emerging automobile market, individual profitability of firms is going down.