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ACKNOWLEDGEMENT
Success can never be attained without proper guidance.
Nothing concrete can be achieved without an optional combination of inspiration and
aspiration. No work can be accomplished without taking the guidance of the important critiquesfor the ingenious intellectual that helps transforms a product into a quality product.
This work is synergic product of many minds. This began as a part of project semester ofmy MBA program, so I would like to thank University of Pune for providing me an opportunity
to undertake project as a subject for practical fulfillment of MBA course. I would like to express
gratitude towards director Mr. Rayate and Prof. D.D. Walke, the project guide for valuable
guidance.
I am thankful to the staff members of Asia Automotive LTD. particularly Mr. Anand for
their valuable guidance during various phases of the project. I am also thankful to Mr. H.B.
Shirode ( finance & account Manager ), Mr. S.D. Deshpande. I am also indebted to number ofprofessionals, colleagues and other who have directly and indirectly contributed time and talent
even through anonymously in accomplishing this task.
I am grateful for the inspiration; encouragement and wisdom of many resourcepeople who helped me to bring this report into life. Thus the project has been alearning experience and has helped me to understand practical aspect of subject.
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SELECTION OF THE TOPIC :
Working capital is the life blood of the business. Every organization needs
working capital for its effective and efficient working .But, the main considering of every
organization is the effective management of working capital.
As the world is changing, competition and speed has become the part and parcel
of the working. Every work done in the organization has invoice processing system
covers both the things, that are no wastage of time and resources.
With all these consideration in the mind, Asia Automotive Ltd decides to use the
working capital in the systematic way.
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OBJECTIVE OF THE PROJECT :
As per the MBA curriculum at the end of the first year, all students are required
to undergo a summer training programme of 60 days. This summer training is an integral
part of the MBA course and in successful completion is a pre-requisite for the fulfillment
of the graduate degree in management.
1. The main objective of the project is to gain the practical knowledge and
to know the organization working culture.
2. To know the working capital performance of the Asia Automotive Ltd.
Over the last four year (2003-2006).
3. To examine the financial performance of the Asia Automotive by doing the
practical work in the company.
4. To draw the observation and conclusions based on the study and suggest
the suitable measures to over come the problems as well as to meet the goal
of the organization .
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METHODOLOGY OF STUDY :
Project means the method of preparing project. In other words project methodology
is the way of preparing the project, and presenting the project report, the work
should be systematic and done in proper order as good work gives good results.
Further the data collected to preparethe projectmust be relevant.
A) PRIMARY DATA :
Mr. H. B. Shirode is the finance and account manager of the company after the
discussion with him all the figures of balance sheet and primary data was collected.
Working capital related information collected from the other members of finance and
account department like Mr. K.K. Joshi and Mr. S. D. deshpande
Discussion with the IT Department to know the working capital analysis operation in IT
department.
B) SECONDARY DATA :
Secondary data is very important data which is provided by the organization. The
needed and essential information is collected from.
Annual Report of the Asia Automotive Ltd. 2003-2006.
Balance sheet of Asia Automotive Ltd. 2003-2006.
Web-site of the company.
The main aim of the project is to study and analyse the working capital of Asia
Automotive Ltd. By covering the four years financial data supplied from the
companys financial account.
LIMITATIONS:
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Even if the project report is prepared by considering the various aspects as possible,
there are some areas that are not considered which limit the report and the study to a
certain extent. The limits are given below :
The time frame considered is very limited. In the time period of two months
analysis of the trends of the entire company is comparatively not possible.
The data used for analysis is not first hand. The use of secondary data may lead
to the variations in the result if valued in the values in the data get changed
ultimately the reliability of secondary data limits the project analysis.
The report includes the fundamental analysis but does not includes technical
analysis hence study is limited by considering only fundamental factors so
conclusion attended may vary if technical factors are considered.
UTILITY OF THE STUDY :
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The study of an organization is one of the most important and
easiest way to realizes the physical environment of an organization.
Through these study we can understand how the financial operation
undertake by the company. It also helps to know how the organization faces
the financial problems and how they solve their problem by collecting the
capital from various sources of funds.
It gives the deep information about the company.It gives the
through knowledge of the corporate world before doing the professional job
in any organization. One can apply the knowledge through the project
surveys and to study the problems faced by the company.
Through these study we can develop our communication skill,
thinking power, awareness about the current affairs of the corporate world.
It improves our knowledge and ultimately the confidence level will goes
on increase so that we can easily do the job in future in any organization .
PROFILE OF ASIA AUTOMOTIVE LTD.
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ASIA AUTOMOTIVE LTD. Is today Indias leading manufacturing of resistance
welding products and copper alloy castings and forgings. The companys resistance
welding material and electrodes, marketed under the RESWELD name, have found Wide
acceptance in the automotive industry and in the manufacturing of bicycles, steel
furniture, drums and containers,
And welded wire mesh. Castings and forgings manufactured by ASIA AUTOMOTIVE
are used throughout India for critical applications in the automotive, electrical, railway
and defense industries.
ORIGINE :
Asia AUTOMOTIVE is the product of the entrepreneurial energy that promoted Gabriel
India limited, purolator India limited and perfect circle victor limited among others-all
dynamic Indian companies that have distinguished themselves in the countrys
automotive ancillary industry by virtue of their innovative approach, progressive outlook
and capacity for achieving sustained results.
Gabriel is Indias best known manufacturer of shock absorbers and engine bearings;
perfect circle victor a leading manufacturer of piston rings and gaskets; and purolator, the
largest manufacturer of the filters in the country.
ASIA AUTOMOTIVEs association with these companies gives the company an
additional edge that is unique in the engineering and automotive industry in India.
PLANT & FACILITIES
ASIA AUTOMOTIVES manufacturing facility, covering a production area of 13,000sq
ft, is located in Nashik, about 120 kms from Bombay. Modern and up-to-date, the plant
has a support infrastructure of laboratory and testing facilities; tools and die shops ; and
non-ferrous metal casting, forging and extruding capabilities.
Updating of processes, addition of new equipment and expansion of plant and facilities are
carried out on a continuous basis to match the companys development al plans.
COLLABORATIONS :
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ASIA AUTOMOTIVES technological edge is derived from its
collaborators :
Originally P.R. Mallory and co., U.S.A., pioneers in resistance welding the world
over, and subsequently Johnson matthey metals ltd. Of U.K. Johnson matthey are
world leaders in the field of resistance welding, with over 53 years experience in
this field.
One of the worlds most highly diversified groups, Johnson mattheys
product range includes specialized engineering materials. Precious metals such as
gold, silver, and platinum, and sophisticated powder metallurgy products.
Headquartered in London, Johnson matthey has more than 49 subsidiaries
and associate companies in most of the worlds leading industrial countries. The
company achieved a sales turnover of 1375 million 1984.
ASIA AUTOMOTIVE LTD ,NASHIK
Quality policy
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We , employees at Asia Automotive Ltd . are committed to
manufacture and supply welding products in copper alloys to meet
customers requirements by meeting specifications and delivery
expectations at optimum cost.
This shall be achieved by
Continual improvement in all areas of operation to satisfy
customers.
Reduction in operating cost with specific measurable objectives.
Involvement and participation of all employees.
COMMUNICATION AND FEEDBACK:
This policy is explained to all employees during various
training conducted.
This policy is displayed at various places in the company.
Quality objectives derived from quality policy are
received in every management review meeting
EXECUTIVE SUMMRY
1) COMPANY NAME & ADDRESS
Asia Automotive ltd.
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C-7 NICE; MIDC Area,
Satpur, Nashik-422 007.
2) CHAIRMAN
Shri. S.C.Anand
3) BOARD OF DIRECTORS
Shri. K.D.Kapoor
Shri.E.S.
4) AUDITOR
Shri.Sahni Mehra
5) BANKERS
IDBI Bank ltd.
ICICI B Bank ltd.
Central Bank Of India
Canara Bank
6) SIZE OF THE COMPANY
Small Scale Industry
7)NUMBER OF THE EMPLOYEES
The total number of the employees in the company are 40.
8)TOTAL SHIFTS
There are two shifts in the company .
First Shift - 7a.m. to 3.30p.m.
Second Shift - 3.30p.m. to 12p.m.
10)REGISTERED OFFICE
ASIA AUTOMOTIVE LTD.
115, Dr.Annie Besant Road,
Behind Poonam Chamber,
Worli, Mumbi-400 018.
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ORGANISATION CHART
BOARD OF DIRECTORS
ANALYSIS OF WORKING CAPITAL
MR SUDEEP C ANAND(CHAIRMAN)
MR.K.D.KAPOOR MR.E.S.ASOKAN
MR. SUDEEP C ANAND
(EXECUTIVE DIRECTOR)
MR.A.M.BHOSALE
(PRODUCTION MANAG)
MR.H.B.SHIRODE
(ACC.&FIN.MANAGER)
MR.K.K.JOSHI
(ACCOUNT OFFICER)
MR.S.S.DESHPANDE
(FINANCE OFFICER)
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3.1) INTRODUCTION
The working capital is classified into Gross Working capital
and Net working Capital . Gross working capital; usually
referred to as Working Capital that represents investment
in current assets such as Marketable Securities, inventories &
Bills Receivable, etc . current assets are those assets, which are
normally Converted into cash within one year.
The term Net Working Capital represents the
difference between current account & current liabilities . Current
Liabilities are those claims of outsiders, which are expected to
mature for payment within one year. Current liabilities include
creditors, bills payable, bank overdraft, outstanding expenses ,
etc .The net working can be positive or negative. When currentasset exceed Current liabilities, the net working capital
becomes positive and when current liabilities exceed Current
assets, the net Working capital becomes negative.
NET WORKING CAPITAL = CURRENT ASSET
CURRENT LIABILITIES.
3.2) DEFINATION, MEANING
Working capital is defined as Difference between assets and liabilities.
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It measures how many liquid assets are available for a business
To use for growth opportunities . A lack of working capital can really hold a
business back from reaching their full potential . There are many
different ways to obtain capital for your business .
Working capital includes micro loans put out by the small
businesses administration (SBA),credit card receipt advances ,account
receivable factoring , business credit cards ,cell and leaseback , and a
standard business bank loan . it is important that you are always
conscious about building your business credit scores as you obtain
more capital . It is important to separate your personal credit from
your business credit . you can do this by obtaining financing that
reports to the small business financial exchange .
It is the part of capital which is required for the daily working of
the business . working capital is also called as circulating capital
.Circulating capital means current assets of a company that changed
in the ordinary course of business from one into another as for the
example from cash to inventories to receivables , and receivables into
cash .
Working capital can easily be converted into hard has when
Ever required ; it changes with the volume output of business
.working capital is essential for maintaining the financial position of
the organization .
A positive changes in working capital indicates that the
business has either increased current assets (that is received cash, or
other current assets) or has decreased current liabilities , for example
Has paid of some short-term creditors .
3.3 ) CONCEPTS OF WORKING CAPITAL
1) GROSS WORKING CAPITAL :
It refers to the firms investments in current assets i.e. mainly
Stock , cash .
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2) NET WORKING CAPITAL :
It is the difference between current liabilities . if the current
assets exceeds the current liabilities , it is a positive one .
3) NEGATIVE WOKING CAPITAL :
This situation occurs when the current liabilities exceed the
current assets. It is an indication of crisis to the firm.
4) FIXED WORKING CAPITAL :
Every firm is required to maintain a minimum balance of
Cash, inventory, etc . in order to meet the business need,
requirements even in the slack season . This part of the current
assets is called as permanent working capital .It will be a sound
policy, if this is financial by long - term source of finance.
VARIABLE WORKING CAPITAL
Amount of
Working capital
Fixed working capital
Period
5) VARIABLE WORKING CAPITAL :
Net working capital minus fixed working capital will be the
variable working capital . It is also called as fluctuating
working capital .It varies with seasonal requirements and scale
of operation in a business.
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3.4) NATURE OF WORKING CAPITAL
The nature of working capital is described with the help
Of Nature of operating cycle of the firm .The process of cash
or operation cycle starts when a firm uses cash to purchase the
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raw material and pay for other manufacturing cost to produce
goods .These goods are carried as inventory for some time till
they are sold . When good are sold , either cash is received or
accounts receivable are created. Accounts receivables are collected
from debtors, this brig cash into the firms.
Thus the cash cycle is complete and a new process of a
cash cycle starts over again. These processes are described as
circulating nature of current assets .The speed of the circulation of
working capital or the turnover of current asset is an indicators of
the degree of efficiency of the management.
The faster the turnover, the higher the degree of efficiency.
The goal of working capita management is to manage the
firms current assets and liabilities in such a way that a satisfactorylevel of working capital is maintained. This is so because a firm
can not maintain a satisfactory level of working capital, it is like to
become insolvent and even be forced into bankruptcy. The current
asset should be large enough to cover its current liabilities in order
to ensure a reasonable margin of safety. The interaction between
current asset and current liabilities is therefore the main theme of
the theory of working capital management.
NEED AND DETERMINANT OF WORKING CAPITAL
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The need of working capital required for running day - to- day
Business activity which cannot be over emphasized . Working
Capital is needed till a firm gets cash on sale of finished product. It
Depends on two factors
1. Manufacturing cycle-its the time required for converting the
raw material into finished product.
2. Credit policy - it is credit period give to customers and credit
Period allowed by creditors.
Thus, the sum total of this times is called a operating cycle,
and it consist of following six steps :
Conversion of cash into raw material
Conversion of raw material into work-in-progress
Conversion work-in-progress into finish products
Time for sale of finished goods-cash sales and credit sales credit
Period allowed by creditors for credit purchase of raw material
and inventory.
CHART FOR WORKING CAPITAL CYCLE
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In case of trading concern, the operating cycle will be :
Cash Stock Debtors Cash
In case of financial concern the operating cycle will be :
Cash Debtors Cash only
3.6) ADVANTAGES OF WORKING CAPITAL :
Debtors & BillsReceivable Sales
Finished
products
Cash
Raw
materi
Work in
progress
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Adequate working capital enables a firm to avail cash discount facilities
offered to it by the supplier as the amount of cash discount reduces the cost ofpurchase.
Adequate working capital enables a firm to make prompt payment ,
which creates and maintain good will.
It facilitates to meet situation of crisis and emergencies and enables
business to withstand periods of depression smoothly.
Adequate working capital helps in increasing profits as purchasing
requirements in bulks when prices are lower and holding its inventories for higher .
Sufficient amount of working capital helps in research programmers,
innovations and technical development .
Adequate working capital enable a concern to pay regular dividends toits investors , which gains confidence in minds of investors , and this situation rates
a favorable market to raise additional funds in the future .
Adequate working capital creates an environment of security,confidence, high morale, etc. and creates over all efficiency in business.
3.7) PROBLEMS FACED BY INADEQUATE WORKING CAPITAL :
In case of adequate working capital, firm may not be able to take advantage of
cash discount.
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It make not be able to take advantage of profitable business opportunities .
It may fail to dividend because of non-availability of funds .
Short-term liabilities can not be paid because of inadequate working capital,which leads to borrow funds at exorbitant rates of intrest.
Fixed assets can not effectively and efficiently be utilized on account of lackof sufficient working capital.
It low liquidity position may lead to liquidation of firm thus it may lose itsreputation therefore a firm may not be able to get credit facilities.
DETERMINANTS OF WORKING CAPITAL:
1. Nature of Business:
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The nature of a business concern has got a bearing on its
working capital requirements. In certain types of enterprises
public utilities and railways current capital requirement when
compared to fixed capital the requirement of working capital
is small while in manufacturing concerns, a larger amount
working capital is needed.
2. Manufacturing Cycle :
The quantum of working capital needed is influenced by the
length of the manufacturing cycle. Manufacturing process
always involves a time lag between the time when the raw
materials are fed into the production line and finishedproducts are finally turned out by it. The length of the period
of manufacture in turn depends on the nature of the product
as well as production, technology used by a concern.
3. Economies of scale :
The need for working capital is significantly determined by the
economies of the scale of operation of a business enterprise. In
very small companies a large amount of working capital is
needed due to high overhead charges, high buying and selling
costs and less efficient technical equipments.
4) Business Fluctuations :
The need for the working capital increases during the periods of
inflation and depression and declines during other periods of
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trade cycled. During the boom period, the manufactures would
like to produce more of finished products for sale in a buoyant
market. This necessitates them maintaining huge stocks of raw
material, which in turn demand a larger amount of working capital.
5) Rapidity of Turnover :
There is a high degree of inverse co-relation between the
quantum of working capital and the velocity with which the
sale are affected. When a company has to carry on a large slow
moving stock, it needs a larger working capital as against
another whose turnover is rapid.
6) Terms of Purchase and sale :
As a result of extension of liberal credit by certain companies, a
large amount of working capital gets locked up in sundry
debtors and bills receivable. When the credit terms extended by
a company to its customers are for longer periods than what is
extended to it by its suppliers, a larger working capital is
needed and vice-versa.
7) Fluctuation in supply :
Certain companies have to procure and maintain huge stocks of raw
materials due to their irregular supply throughout the year. This is
applicable especially to manufacturing concerns requiring an
unusual type of raw material which can be procured form limited
sources separated by long geographical distances.
8) Current assets :
If company follows conservative assets policy, it will operate with
a high level of current assets relative to its sales volume. It has to
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carry large stocks of material, inventories and finished goods, offer
liberal terms of credit to customers and carry a large amount of
cash to meet its current expenditure , all of which in turn demand a
larger working capital.
3.4) ADVANTAGES OF WORKING CAPITAL
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Adequate working capital enables a firm to avail cash
discount facilities offered to it by the supplier as the amount of cash
discount reduces the cost of purchase.
Adequate working capital enables a firm to make promptpayment , which creates and maintain good will.
It facilitates to meet situation of crisis and emergencies and
enables business to withstand periods of depression smoothly.
Adequate working capital helps in increasing profits as
purchasing requirements in bulks when prices are lower and holding
its inventories for higher .
Sufficient amount of working capital helps in research
programmers, innovations and technical development .
Adequate working capital enable a concern to pay regular
dividends to its investors , which gains confidence in minds of
investors , and this situation rates a favorable market to raise
additional funds in the future .
Adequate working capital creates an environment of
security, confidence, high morale, etc. and creates over all efficiencyin business.
3.7) ESTIMATES OF WORKING CAPITAL:
The most ticklish problem that is faced by business man
is the determination of the amount of working capital required
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at a particular level business operation. A working capital
forecast is prepared for this purpose involving some
calculations after taking into consideration all the aspects of
business activity.
The following items are usually include in the calculation of
working capital requirements.
1) Total costs incurred on materials, wages and overheads as
from cost records
2) Time lag during which raw material are remained in stock before
they are issue for productive purposes.
3) Duration of the production cycle-longer the duration of the cycle,
larger will be the working capital required.
4) Length of the scale cycle indicating the duration of time duringwhich business concerns having seasonal sales of goods, stocks have
to be maintained throughout the rest of the year and the working
capital requirement will be very high.
5) Time allowed to debtors. If longer periods of credit allowed to the
customers by a company without the same being extended to it by its
suppliers, a larger working capital will be needed.
6) The period of credit extended by creditors. When a longer period of
credit is extended to its customers, working capital requirements will
be considerably reduced.
7) Time lag involved in the payment of wages andthe overheads.
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3.8) PROBLEMS FACED BY INADEQUATE WORKING CAPITAL :
In case of adequate working capital, firm may not be able to take advantage of
cash discount.
It make not be able to take advantage of profitable business opportunities .
It may fail to dividend because of non-availability of funds .
Short-term liabilities can not be paid because of inadequate working capital,which leads to borrow funds at exorbitant rates of interest.
Fixed assets can not effectively and efficiently be utilized on account of lackof sufficient working capital.
It low liquidity position may lead to liquidation of firm thus it may lose itsreputation therefore a firm may not be able to get credit facilities.
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WORING CAPITAL ANALYSIS WITH RATIO
INTRODUCTION
The financial statement of a business firm includes :1) Trading account.
2) Profit and loss account.
3) Balance sheet.
The financial statement provides a summarized view of the Financial
position and operations of the firm therefore much can be learnt about a firm
from a careful examination of its financial statement as invaluable document /
performance reports. The analysis of financial statement is thus an important
aid to financial analysis. This is necessary to find out the realistic picture of the
business. This is also necessary to analyze the business from various angles like
liquidity, profitability , solvency , etc.
MEANING :
Ratio analysis is widely used tool of financial analysis. It is defined as the
strength systematic use of ratio to interpret the financial statement so that the
strength and weakness of a firm and current financial position can be
determined.
The ratios reveals the relationship in more meaning full way so as to enable usto draw conclusions from them .They enable analyst to draw convulsions
regarding financial operations.
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4.2) CALCULATION OF RATIOS
A) LIQUIDITY RATIO :
1) Net working capital :
Net working capital is the difference between current assets and
current liabilities. It shows the liquidity of the firm, greater the
amount of NWC, greater is the liquidity of the firm. The net
working capital can be positive or negative. If current assets
exceed current liabilities, the difference is positive net working
capital and when current liabilities exceed current assets, the
difference is negative working capital. Inadequate working capital
is the sign of financial problem for a firm.
Net Working Capital = Current Assets Current liabilities
Year Current
Assets
Current
Liabilities
Net working
capital
2002-2003 53,17,876 69,42,745 -16,24,869
2003-2004 76,24,110 87,94,808 -11,70,698
2004-2005 80,72,375 82,16,245 -1,43,870
2005-2006 84,30,112 76,36,441 7,93,671
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Chart Showing Changing Net Working Capital Of Year 2002 - 2006
-2000000
-1500000
-1000000
-500000
0
500000
1000000
2002-03 2003-04 2004-05 2005-06
Net Working Capital
COMMENS :
The net working capital of the firm indicate improvement in each
year. In 2003 year the net working Capital was negative but, in
each year goes on decreasing and in 2006 year the net working
capital is positive. It shows that the Asia Automotive has asufficient net working capital to meet the claims of creditors and
day to day needs of business.
2) CURRENT RATIO :
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The current ratio is the ratio of total current assets to current
liabilities. The current ratio indicates the firms ability to pay its
current liabilities . By using this ratio the extent of the
soundness of current financial position of an undertaking
and the degree of safety provided to the creditors. Grater the
current ratio the larger amount of rupee available to the firm per
rupee of current liabilities.
Current Ratio = Current Assets
Current Liabilities
Year
CA / CL Current Ratio
2002-2003 53,17,876 / 69,42,745
0.77
2003-2004 76,24,110 / 87,94,808 0.87
2004-2005 80,72,375 / 82,16,245 0.98
2005-2006 84,30,112 / 76,36,441 1.10
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0
0.2
0.4
0.6
0.8
1
1.2
2002-03 2003-04 2004-05 2005-06
Current Ratio
COMMENTS :
The current ratio of a firm measures its short-term solvency, its
ability to meet short term obligations. The higher the current
ratio that is more than 2:1 indicates the sound solvency
position, the more is the firms ability to meet current
obligation and the greater is the safety of funds of short term
creditors and lower ratio that is less than 2:1 indicates
inadequate working capital.
Asia Automotive indicates its improved current ratio. In each
year the current ratio of the firm goes on increase .It shows that
in the future company can achieve more than 2:1 current ratio.
There fore it is able to the company to meet its obligation and
for the creditors the firm is less risky.
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3) Quick Ratio :
Quick ratio also called as Acid test ratio. The quick ratio is a
fairly stringent measures of liquidity. It is based on those current
assets which are highly liquid inventories are excluded from the
numerator of this ratio because inventories are deemed to be the least
liquid component of current assets. Quick ratio can be calculate by
dividing the quick assets by current liabilities. Quick ratio is a
liquidity ratio or 1:1 ratio this ratio indicates liquid financial position
of an enterprise.
Quick Assets
Quick Ratio =
Current Liabilities
Year QA/CL Quick
Ratio
2002-2003 46,62,662 / 69,42,745 0.67
2003-2004 59,50,490 / 87,94,808 0.68
2004-2005 66,36,583 / 82,16,245 0.80
2005-2006 76,94,077 / 76,36,441 1.00
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0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
2002-03 2003-04 2004-05 2005-06
Quick Ratio
COMMENTS :
Acid Test or Quick ratio indicates the firm ability to convert its
current assets quickly into cash in order to meet its current
liabilities. If the ratio is higher that is more than 1:1 ratio it shows
the good position of the company and the lower ratio indicates
financial difficulty of the company.
Above graph indicate that the quick ratio is not equal or more
than 1:1 ratio. But in each year the quick ratio of the company
shows some improvement. So that we can conclude that very
soon company has a sound financial position.
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B) TURNOVER RATIO :
1) Inventory Turnover Ratio :
The inventory turnover ratio or stock turnover ratio measures
how fast the inventories is moving through the firm and generating
sales. This ratio can be calculated as cost of good sold by average
inventory. The inventory turnover reflects the efficiency of
inventory management. The higher the ratio, the more efficient the
management of inventories and vice versa. A high inventory
turnover may be caused by a low level of inventory which may
result in frequent stock outs and loss of sales and customer
goodwill. This ratio measures the number of times stock is
replaced during the year.
Cost of goods sold
Inventory Turnover Ratio =
Average inventory
Year
COGS / AVG INV Inventory Turnover Ratio
2002-2003 49,11,297 / 5,90,143 8.32
2003-2004 69,86,362 / 11,64,417 5.99
2004-2005 88,80,174 / 15,54,706 5.71
2005-2006 90,18,205 / 10,85,914 8.30
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0
1
2
3
4
5
6
7
8
9
2002-03 2003-04 2004-05 2005-06
InventoryTurnover ratio
COMMENTS :
The inventory turnover ratio measures how quickly inventory is sold. It is
test of efficient inventory management. A high inventory turnover ratio is
better than a low ratio.
Asia Automotive companys inventory turnover ratio was good in the year
2003 but in the year 2004-05 was less. Again in 2006 the ratio shows
improvement .The company has to maintain the ratio in decreasing order.
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2) Debtors Turnover Ratio :
This is ratio shows how many times sundry debtors (account
receivable) turnover during the year. It is calculated as net
credit sales by average debtors . if the figure for net credit
sales is not available, one may have to make do with the net
sales figure. The higher the debtors turnover the grater the
efficiency of credit management. This ratio indicates how
quickly the receivable or debtors are converted into cash.
Net Credit Sales
Debtors Turnover Ratio =
Average Debtors
Average Debtors = opening Debtors + Closing Debtors / 2
Year
NCS / Avg. Debtors Debtors Turnover Ratio
2002-2003 141,47,123 / 3063641 4.62
2003-2004 180,68,771 / 3798407 4.75
2004-2005 221,50,623 / 4707596 4.70
2005-2006 219,59,644 / 5571166
3.94
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0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2002-03 2003-04 2004-05 2005-06
Debtors Turnover Ratio
COMMENTS :
Debtors turnover ratio measures how rapidly debts are collected. Higher
ratio is indicative of shorter time lag between credit sales and cash
collection. A low ratio shows that debts are not collected rapidly.
Asia Automotive company has a satisfactory debtors turnover ratio.
which indicates that there is the shorter time lag between credit sales
and cash collection. Only in the year 2006 the ratio is low which
indicate that the company has given the more period to the debtors of
the company.
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3) Debt Collection Period :
The higher the ratio, lower is the collection period. While lower ratio
indicates high collection period. The actual collection period can be
compared with stated credit terms of the company. If it is longer than those
terms, then this indicates some inefficiency in the procedure for collection
debt. The debt collection period which is shorter than the credit period
allowed by the firm needs to be interpreted carefully. it may mean
efficiency of credit management or excessive conservatism in credit
granting that may result in the loss of some desirable sales.
Debt Collection Period = 365 days / debtors turn over ratio
Year 365 / DTR Debt. Collection period
2002-03 365 / 4.62 79
2003-04 365 / 4.75 77
2004-05 365 / 4.70 78
2005-06 365 / 3.94 92
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0
10
20
30
40
50
60
70
80
90
100
2002-03 2003-04 2004-05 2005-06
Debt collection period
COMMENTS :
The average collection period, which is shorter than the
credit period allowed by the firm, needs to be analyzed
carefully.
Asia Automotive indicates more debt collection period it isnecessary to decrease its collection period.
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4) Working Capital Turnover Ratio :
This ratio is also called as Investment Turnover Ratio.
Working Capital Turnover Ratio computed by dividing sales by
Net Working Capital or by dividing cost of good sold by working
capital. The indication given by this ratio is the number of times
working capital is turned around in particular period. This ratio
helps to measures the efficiency of the utilization of net working
capital. If any increases in sale is contemplated working capital
should be adequate.
Sales
Working Capital Turnover Ratio =
Working Capital
Year Sales / working capital Working Capital Turnover
Ratio
2002-03 141,47,123 / -16,24,869 -8.71
2003-04 180,68,771 / -11,70,698 -15.43
2004-05 212,50,623 / -1,43,870 -147.71
2005-06 219,59,644 / 7,93,671 27.67
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-160
-140
-120
-100
-80
-60
-40
-20
0
20
40
2002-03 2003-04 2004-05 2005-06
Working Capital Turnover Ratio
COMMENTS :
The higher ratio the better is the utilization of the working capital as
well as lower the investment in working capital.
Asia Automotive working capital turnover ratio shows the
improvement in each year. Initially in the 2003 year the ratio wasnegative, but in 2004 and 2005 it goes on increasing and finally in the
2006 year there is thepositive ratio these is the good indication of the
ratio .The firm should give the proper attention towards the utilization of
working capital.
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5) Current Asset Turnover Ratio :
The asset turnover ratio however measures the efficiency of the firm in
managing and utilizing its assets. This ratio is computed by dividing the sales
by current assets. The grater the turnover ratio, the more efficient is the
management and utilization of assets and lower the turnover ratio, shows
under utilization of assets. An analysis of this ratio over a period of time
reflects working capital management of a firm.
Sales
Current Asset Turnover Ratio =
Current Assets
Year Sales / Current Assets Current Asset Turnover Ratio
2002-03 141,47,123 / 53,17,876 2.66
2003-04 180,68,771 / 76,24,110 2.36
2004-05 221,50,623 / 80,72,375 2.75
2005-06 2,19,59,644 / 84,30,112 2.60
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2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2002-03 2003-04 2004-05 2005-06
Current Assets Turnover Ratio
COMMENTS :
Current asset turnover ratio indicates the firms efficiency inutilization of its assets . The greater the ratio which indicates
there is the efficient management and maximum utilization of
the assets. If the ratio is lower it indicates under utilization of
the assets.
Asia Automotive current asset turnover ratio is not constantly
goes on increasing, the ratio is fluctuate in all four year. There
fore Asia Automotive has to increase its current asset turnover
ratio, which is seen to be decreasing. The firm should carefully
utilize its assets in order to increase the efficiency of the firm.
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6) Creditors Turnover Ratio :
This ratio is computed as net credit purchase divide by average
creditors .The creditor turnover ratio indicates the actual payment behavior
of the customer - organization. If the creditors turnover ratio of a customer
is larger than the receivable turnover ratio then it is beneficial for the
organization. If the ratio is registering a falling trend, it is likely that there
has been a slow down in the collection of accounts receivable of the
customer which will be reflected by a falling receivable turnover ratio.
Net Credit Purchase
Creditors Turnover Ratio =
Average Creditors
Year
Net Credit Purchase / Avg. Creditors
Ratio
2002-03
1,22,062 / 48,39,357
0.03
2003-04
1,77,448 / 56,83,848
0.03
2004-05
2,31,237 / 64,41,311
0.04
2005-06
1,77,478 / 60,44,033 0.02
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0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04
2002-03 2003-04 2004-05 2005-06
Creditors Turnover Ratio
COMMENTS :
The high creditors turnover ratio indicates that account are to
be settled rapidly, and the low ratio reflects liberal credit terms
granted by suppliers. The credit turnover ratio is an important
tool of analysis a firm can reduce its requirement of current
assets by relying on suppliers credit.
The company has a low ratio which indicates the liberal creditterms of the company are granted by the supplier. Only in the
year 2004 the ratio was high which indicate that the account of
the Asia Automotive is settled rapidly.
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PROFITABILITY RATIO :
A) NET PROFIT RATIO :
This ratio indicates the earning left for shareholder as a percentage of
sale of net sale. It measures the overall efficiency of production,
administration, selling, financing pricing, and tax management. Jointly
considered, the gross and bet profit margin ratios provide a valuable
understanding of the cost and profit structure of the firm and enable the
analyst to identify the sources of business efficiency. Net profit ratio is
computed by dividing net profit ratio by sales.
Net profit
Net Profit Ratio =
Sales
Year Net profit / Sales Net Profit Ratio
2002-03 4,84,624 / 141,47,123 3.4 %
2003-04 5,28,926 / 180,68,771 2.9 %
2004-05 8,85,466 / 221,50,623 3.9 %
2005-06 8,01,956 / 219,59,644 3.6%
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0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
2002-03 2003-04 2004-05 2005-06
Net Profit Ratio
COMMENTS :
The net profit ratio is a measures of overall profitability and is very
useful to the proprietor and investors in judging the prospects of return on
their investments.
The above graph indicate that the net profit ratio of the company is high
this is the good sign which mean that the company has high return ontheir investments and the company is in good position.
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B) Gross Profit Ratio :
Gross profit ratio is defined as the difference between net sales and cost of
good sold. This ratio shows the margin left after the meeting
manufacturing costs. It measures the efficiency of production as well as
pricing. To analyze the factors underlying the variation in gross profit
margin the proportion of various element of cost to sales is studied. The
gross profit ratio is computed by dividing gross profit by sales
Gross profit
Gross Profit Ratio =
Sales
Year
Gross Profit / Sales
Ratio
2002-03
9235826 / 14147123 65 %
2003-04
11082409 / 18068771
61 %
2004-05
13270449 / 22150623
60 %
2005-06
12941439 / 21959644 59 %
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56%
57%
58%
59%
60%
61%
62%
63%
64%
65%
2002-03 2003-04 2004-05 2005-06
Gross Profit Ratio
COMMENTS :
Higher ratio indicates higher profitability and lower ratio indicates
lower profitability and unfavorable mark up policy.
The above graph indicate that the gross profit ratio of the firm goes on
decreasing . The low ratio is not the good indication. The firm mustgive attention to increase its gross profit and its profitability.
CHANGES IN WORKING CAPITAL
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FOR YEAR 2003-2004
Particulars Year
2003
Year
2004
Increase in
working capital
Decrease in
working capital
Current AssetsA. Inventory :
Raw material
Work-in-progressStores & Spares
Finished goods
Sundry Debtors :
Outstanding for a 6
Months
Other Debts
Cash and Bank bal.
Cash on handBalance with schedule
Bank .
B. Loans and Advances :
Sundry Deposits
Balance with Excise
authorities .
Current Liabilities :
Sundry Creditors
Other liabilities
Total
1,85,328
1,03,994
1,50,047
2,15,845
93,089
31,66,633
26,16310,25,909
3,15,299
35,569
48,12,592
21,30,153
---
4,52,116
6,23,463
1,50,075
4,47,966
1,48,857
41,88,234
28,59312,15,836
3,56,725
12,245
65,55,104
22,39,704
---
2,66,788
51,94,469
28
2,32,121
55,768
10,21,601
2,4301,89,927
41,426
22,73,790
23,324
17,42,512
1,09,551
18,75,387
Net increases in working capital = 22,73,790 18,75,387 = 3,98,403
CHANGES IN WORKING CAPITAL
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FOR YEAR 2004-2005
Particulars Year
2004
Year
2005
Increase in
Working
capital
Decrease in
Working
capital
Current Assets
A. Inventory :
Raw material
Work-in-progressStores & Spares
Finished goods
Sundry Debtors :Outstanding for a 6
Months
Other Debts
Cash and Bank bal.
Cash on handBalance with
Schedule Bank
B. Loans and AdvancesSundry Deposits
Balance with Excise
authorities .
Current Liabilities :
Sundry Creditors
Other liabilities
4,52,1166,23,463
1,50,075
4,47,966
1,48,857
41,88,234
28,593
12,15,836
3,56,72512,245
65,55,104
22,39,704
4,12,8491,05,298
1,82,122
7,35,523
-
50,78,101
20,916
9,82,137
3,87,7881,67,641
63,27,517
18,88,728
32,047
2,87,557
8,89,867
31,0631,55, 396
2,27,587
3,50,976
39,2675,18,165
1,48,857
7,677
2,33,699
Total --- --- 19,74,493 9,47,665
NET INCREASE IN WORKING CAPITAL = 19,74,493 - 9,47,665 = 10,26,828
CHANGES IN WORKING CAPITAL
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FOR YEAR 2004-2005
Particulars Year
2004
Year
2005
Increase in
Working
capital
Decrease in
Working
capital
Current Assets
A. Inventory :
Raw material
Work-in-progressStores & Spares
Finished goods
Sundry Debtors :Outstanding for a 6
Months
Other Debts
Cash and Bank bal.
Cash on handBalance with
Schedule Bank
B. Loans and AdvancesSundry Deposits
Balance with Excise
authorities .
Current Liabilities :
Sundry Creditors
Other liabilities
4,52,1166,23,463
1,50,075
4,47,966
1,48,857
41,88,234
28,593
12,15,836
3,56,72512,245
65,55,104
22,39,704
4,12,8491,05,298
1,82,122
7,35,523
-
50,78,101
20,916
9,82,137
3,87,7881,67,641
63,27,517
18,88,728
32,047
2,87,557
8,89,867
31,0631,55, 396
2,27,587
3,50,976
39,2675,18,165
1,48,857
7,677
2,33,699
Total --- --- 19,74,493 9,47,665
NET INCREASE IN WORKING CAPITAL = 19,74,493 - 9,47,665 = 10,26,828
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CHANGES IN WORKING CAPITAL
FOR YEAR 2005-2006
Particulars Year
2005
Year
2006
Increase in
Working
capital
Decrease in
Working
capitalCurrent
Assets
A. Inventory :Raw material
Work-in-progress
Stores & SparesFinished goods
Sundry Debtors :Outstanding for a 6Months
Other Debts
Cash and Bank bal.
Cash on hand
Balance withSchedule Bank
B. Loans and Advances
Sundry DepositsBalance with Excise
authorities .
Current Liabilities :
Sundry Creditors
Other liabilities
4,12,849
1,05,298
1,82,1227,35,523
-
50,78,101
20,916
9,82,137
3,87,788
1,67,641
63,27,517
18,88,728
1,66,628
1,89,109
1,08,7732,71,525
1,64,210
59,00,021
34,061
7,81,033
8,00,644
14,108
57,60,549
18,75,892
83,811
1,64,210
8,21,920
13,145
4,12,856
5,66,968
12,836
2,46,221
73,3494,63,998
2,01,104
1,53,533
Total --- --- 20,75,746 11,38,205
NET CHANGING IN WORKING CAPITAL = 20,75,746 11,38,205 = 9,37,541
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0
200000
400000
600000
800000
1000000
1200000
2003-04 2004-05 2005-06
Changes In Working Capital
COMMENT :
From the above graph it can be seen that the working capital is
Decreased in the year 2006 as compared to the previous
year. This indicate that the company has not a sufficient
capital. There fore the company have to increase it working
capital in the next year.
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RECOMMENDATION & SUGGESTION
Following are the recommendation and suggestions
The ratio like current ratio working capital turnover ratio should be
improved through the efficient working and effective policies so as to
facilitate the lower investment in working capital.
Creditors should be paid in proper time period and debtors collection
period should be reduced.
The proper follow up procedure for making the collection from
debtors should under take by the company.
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