Impact of Working Capital on Profitability and Liquidity

8/16/2019 Impact of Working Capital on Profitability and Liquidity

1/29

IMPACT OF WORKING CAPITAL ON

PROFITABILITY AND LIQUIDITY: MARUTI SUZUKI

PVT. LTD., BANGALORE

1. INTRODUCTION

1.1 Work!" C#$%#& Working capital may be regarded as the life blood of a business. Its effective provisions

can do much to ensure the success of business. The term working capital stands for that the

part of the capital which is required for the financial working of the company in simplewords, we can say that working capital is the investment needed for carrying out day-to-day

operations of the business smoothly.

Working capital refers to a firm’s investment in shortterm assets, vi. !ash short term

securities, accounts receivables and inventories of raw material, work in progress and

finished goods. It can be regarded as that portion of the firm’s total capital, which is,

employed in shortterm operations. "unds thus invested in current assets keep revolving false

and are being constantly concerted into cash and this cash flow out again in e#change for

other current assets. $ence, it is also called as %evolving or circulating capital.

Pro'%#(&%)

&rofitability has been defines as ability to earn profit. It is measured in relative terms of either

sie, past years. The most commonly used measure of profitability is in terms of sie that is

profit or loss divided by total assets. 'ometimes profitability is measured by taking profit of

two years to (udge the more profitable year. In peer terms the profitability is measured by

comparing the profits of two firms in the same industry.

&rofitability has been an important criterion to evaluate the overall efficiency of firm

operations. )eing a relative measure, it is devoid of the pitfalls associated with interpretation

of term *profit’. +ven if one ignores the past year or peer aspect of measuring profitability in

banking parlance denotes the efficiency with which a bank deploys its total resources to

optimie its profit and thus serves an inde# of assets utiliation and managerial effectiveness.

AITS,RAJAMPET(14701E0049)1 | P a g e


2/29

The relationship of profitability with macro dimensions of solvency and liquidity has been

that of risk return trade-off the more risk a bank is willing to take in terms of the

esssolvency andor low liquidity. The more return it is able to earn. In other words, there is

adirect inverse relationship between profitability and solvencyliquidity. n increased level

of solvency means low leverage, low risk and consequently low profitability. In the same

way high liquidity increases interest burden /if purchased0 or decreases earning ability /if

stored0, reduces risk and profitability becomes low.

The term *total assets’ has been used instead of working fund, s working fund is equal to

total assetsliabilities minus contra items, there is no difference between the two terms. Two

important variables, vi working fund and total income which are indicative of sie, have

therefore been used to obtain relative values for these variables and also to purge the effect of

sie factor. Thus, spread, burden and their four components have been divided by working

fund and total income respectively thereby giving 12 ratios for analysis.

The rationale behind using working fund and total income is that income is related to income

generating capacity. )oth the criteria are independent and are guided by deposit mi#, loan

portfolio, share of earning assets etc., for e#ample,. large company may have small amount

of total income in comparison to its sie, that is working fund due to large proportion of no-

performing assets and also vice versa. In spread divided by working fund is actually net

interest margin while burden has been divided by working fund to indicate efficiency of non-

banking activities. lternatively, these two variables have also been divided by total income

to measure their contribution to total revenue, in the last stage, these two variables have been

factored into their sub-components and their relative contributions in terms of sie and total

revenue have been measured by calculating eight ratio.



3/29

1.* INDUSTRY PROFILE

&rior to 1334 when the first 5-!lass rolled off 5ercedes’ production line

labama produced no passenger vehicles. In 2667, labama built it2, 666,666th

automobile. Today, labama is responsible for 289 of all passenger vehicles

built in the 'outh and is home to three automotive vehicle assembly plants, two

engine plants, and a growing automotive supplier network serving :+5s in

labama and neighbouring states

Highlights

; Mercedes-Benz, Honda and Hyundai all operate vehicle assembly plants in labama. ll

three manufacturers announced e#pansions in 2611.

; In 2611, labama’s automakers produced over 4


4/29

ocationE Talladega !ounty

nnouncedE 1333!apital InvestmentE >2 billion

#"!loy"ent: B86 million

#"!loy"ent: BB8

$roduction a!acity: 186,666 annually

$lant Size: 466,666 square feet B66,666 sq. ft.

$roducts: Aavistar’s line of ?7 and ?@ diesel engines

Toyota Motor Manu%acturing Ala&a"a

Location: 5adison !ounty

Announced: 2661

a!ital Invest"ent: >7B4 million

#"!loy"ent: 1,666

$roduction a!acity: 867,666 annually



5/29

$lant Size: 4@6,666 square feet

Su!!liers: B8C auto-related suppliers in labama

$roducts: ?@ engines for the Tundra and 'equoia, and ?7engines for the Tundra and

Tacoma, 766 million e#pansion.

*: $onda announced a production increase for its labama plant and addition of a second

>1 billion. Toyota 5otor

!orporation announced that it would produce 126,666 ?-@ engines annually in $untsville,

labama.

: $yundai selected 5ontgomery, labama as home for its first =.'. automotivemanufacturing facility, investing >1.1billion.5ercedes announced that its new plant

e#pansion would produce the new Drand 'ports Tourer.!ombined production at 5ercedes

and $onda was 2B6,666 units.

': $onda announced consolidation of all Aorth merican production of :dyssey to

labama and that its second assembly line would produce the $onda &ilot. 5ercedes

celebrated 16 years in labama. Toyota announced e#pansion plans to build a ?-7 engine for

the Tacoma and Tundra pickup trucks raising the company’s total investment in labama to

>2286 million e#pansion that will supply all of Toyota’s planned ?-@ engine needs for

Aorth merica. $onda will invest an additional >46 million in its labama ?-7 engine

facility to machine engine crankshafts and connecting rods, currently made by $onda in

Lapan and :hio.

0: !ombined vehicle production capacity at 5ercedes, $onda and $yundai reached

476,666 vehicles per year in labama with $yundai’s =.'. manufacturing launch at

AITS,RAJAMPET(14701E0049)! | P a g e


6/29

5ontgomery. !ar and truck engine production capacity in labama rose to 1,666,666 units

annually at $onda, Aavistar Fiesel, Toyota and $yundai.

1: With the roll-out of the $yundai 'anta "e model in 5ontgomery and 5ercedes’ D

!lass in Tuscaloosa, labama automakers now manufacture seven different vehicles, barely

16 years after first beginning production. $onda celebrated production of the 1 millionth

vehicle made in labama.

2: $yundai announces construction of a second engine plant at its 5ontgomery

production facility. $onda produced its one millionth labama-made :dyssey.

,: $onda announced production of the %idgeline pickup truck at its incoln facility.

#cono"ic )evelo!"ent $artnershi! o% Ala&a"a

333.ed!a.org

l a b a m a

Ma4or Milestones continued

+: %idgeline production began in early 2663. $onda 5anufacturing labama will become

the e#clusive global source for the :dyssey minivan, &ilot '=?, %idgeline pickup truck, and

?-7 engines. $onda announced 5FGlu#ury '=? production to start in 261B.$yundai

celebrated production of the 1 millionth vehicle made in labama. 5ercedes-)en

announced it will add production of !-class sedans to its plant in ?ance, labama starting in

[email protected] million e#pansion to accommodate production of

the !-!lass sedan.

$yundai announces >14B million e#pansion of the engine plant. $onda announces three

e#pansions totalling >248 million to increase annual production capacity to BB86 million e#pansion o begin production of a fifth vehicle in 2618,

creating @6 million e#&ension at its $untsville facility

AITS,RAJAMPET(14701E0049)" | P a g e


7/29

1.+ COMPANY PROFILE

5aruti 'uuki is one of the leading automobile manufacturers of India, and is the leaderinthe

car segment both in terms of volume of vehicle sold and revenue earned. Itwasestablished in

"ebruary, 13@1 as 5aruti =dyog td. /5=0, but actualproductionstartedin13@B with

the5aruti @66 /based on the 'uuki lto key car of Lapan0, which was the onlymodern car

available in India at that time. &reviously, the Dovernment of India [email protected]@9stake in the

company, and 8


8/29

• "ast, "le#ible and "ast 5over

• Innovation and !reativity

• Aetworking and partnership

• :penness and earning

SWOT A!#&) o- MUL

Strength:

• 'mall car technology.

• +#tensive +#cellent image of 5= in compact car segment.

• "ewer &roblem with the product compared to other brands.

• 7@1 'tate of rt showrooms across India.

• 2474 quality service station.

• +#port facility at 5udra &ort.

• +#pertise in product portfolio.

• Puality products.

• +#tensive sales and service network )rand strengthE

• Integrated manufacturing facility.

• 5aruti "inanceE

• 5aruti InsuranceE

Weakness:

o""odity $rice 9is8 E This risk relates to higher costs due to changes in prices of

input'uch as "erro-alloys and non-"erro-alloys, plastic and rubber which go into production

of'wift.

#!ort 9ate 9is8 E %isk due to fluctuations in foreign e#change rates of components, raw

5aterials and vehicles.

Opportunities

Increased spending by the consumers. Increased demand for compact cars in India as well as

abroad.

Threats

• Threat from competitors like Toyota, $onda, ?olkswagen etc.

• Threats from commodity price and e#port rate fluctuations.

So#e I#$ortat Milestoes

• Fecember 1


9/29

• 1336 Q Three bo# 1666 cc car 5aruti 1666 launched

• 133B Q Ren launched

• 133< Q +steem 1.B litre /123@ cc, three bo# car0 launched

• 1334 Q Aew 5aruti @66 /437 cc, hatchback car0 launched in 'tandard and Felu#e

?ersions• 1333 Q Wagon % and )ale no launched

• 2666 Q lto launched

• 2661 Q ?ersa launched

• 2662 Q lto e#i Q 'pin launched, Wagon % &ride is launched, +steem Fiesel

aunched and all variants upgraded

• 266B Q The new Drand ?itoria launched

• 266< Q 5aruti 'uuki 'wift launched

• 2667 Q Ren +stela and 'wift Fiier launched

•2664 - 'G< lu#ury 'edan launched with the tagline J5en are backK

• 266@ Q 5'I launches fifth world strategic model -'tar

• 2663 Q 5aruti 'uuki launches %it

*. urrent situation ; Microenviron"ent$olitical

• The 29 hike in the e#cise duty announced in the =nion )udget 2616-11 may result in

an increase in the prices of automobiles. The effect of this development could be

Insignificant for the < car segment.

• The increase in the fuel price proposed in the budget would increase the burden on the

consumer but its impact on the < segment would be negligible.

• The increase in weighted deduction for in-house %F to 2669 from 1869 and

:utsourced %F from 1289 to 1489 would spur industry focus on innovation,

%Fand product development that would increase the competiveness of the industry

longer term

• The broadening of the ta# slabs would boost the disposable income in the hands of the

middle class and is a positive sign creating a larger customer base for auto sector

• llocation for road transport increased by over 1B9 from %s 14,826 crore to

%s13,@3< crore will be a boost to the industry

#cono"ic

• Indian economy is e#pected to grow at a rate of more than 79 this year

• The < segment is e#pected to grow annually at the rate of B69 per year for the ne#t8

years

• The upper middle class segment is e#pected to grow from B9 in 2616 to 129 in 2618

• The people who fall under JrichK segment is e#pected to grow from 19 in 2616 to


10/29

• The Indian economy is e#pected to grow at more than 49 in the coming years after

the present slowdown. Social

• India is the


11/29

16 cities. 'ince the sale of this model was constantly on the decline, 5arutidecided not to go

for up gradation and modification. The more economically viable option was to phase out the

car, a decision which would have no impact on the overall sales figures.&re liberaliation

5aruti 'uuki was the clear market leader in the passenger car segment in India. &ost

liberaliation, when many foreign players started entering the market with car which were

superior to 5aruti in all aspects, 5aruti’s market share started to decline. To overcome this

situation 5aruti improved the technology used in its cars and came out withmany new

models. In its counteroffensive defence strategy, 5aruti took the competition head:n,

launching a full frontal attack with its new models. This later on ensured that5arutiregained

its position as the clear market leader in the passenger car segment in India.

$resent situation

5aruti 'uuki is the market leader in the 2 and B segments. In the 2 segment 5aruti has

a market share of 8B.B9 and in the B segment it has a market share of


12/29

Toyota is the present market leader. The strategy it is adopting in this segment is

a!ombination of position defence and 5obile defence. Toyota is building on its superior

brand image and superior performance along with lower price to defend its market share. t

the same time Toyota keeps on innovating its product to meet the ever changing needs of

thecustomer. $onda civic is the market challenger. $onda and Toyota are global rivals. In this

segment both the companies have decided not to go for a full frontal attack. )oth the ltis

and the !ivic appeal to different sections in a way. Their strategy has been such that they

have emphasised that the !ivic is youthful, while the lt is mature. The !ivic is sharp and

designed to look quick and fast, while the ltis is rounded and has a ma(esty of bearing while

on the move. The !ivic breaks new ground when it comes to sedan design, while the

ltisimproves upon what already works. The !ivic appeals to those with a sportymindset,

while the ltis is for whom such things usually don’t matter. The ltis stole !ivics’ market

share in this market, by emphasising on these aspects.

o"!etitive %orces

< segment Q determining the long run attractiveness of the market with the help of &orter’s

five forces.

1. Treat of intense segment rivalry Q t the present moment there are only < player’s the

market and a new entrant. The target customers of this segment is growing rapidly in India

and the sie of the pie is increasing rapidly. evel of segment rivalry irrelatively low at this

point in time. The different players in the segment in a way are targeting different sets of

people.

2. Threat of new entrants Q With India being one of the fastest growing economies in the

world, this would be the perfect market for various players to enter.

B. Threat of substitute products is low


13/29

1. The cost of the product is high. $ence higher the importance of taking right decision.

2. &eople attach their self-image with cars which they buy.

B. The decision will affect the consumers for a long duration. 'ince, purchase of car is a high

involvement decision it goes through all five stages of consumer decision making. The

various steps that define the consumer decision making process areE

1. $ro&le" 9ecognition: This occurs when consumers see a significant difference between

their ideal and actual state. They get the notion of ideal state because of various stimuli which

can be either internal or e#ternal.

a. $ast #!erience: !onsumer past e#perience has a significant effect on the car they will

like to purchase. They may be unsatisfied with their present means transport. There can also

be a failure and lack of appeal for the e#isting car. The &urchase decision is aimed at solving

their past needs.

b. ?uture As!irations: !onsumers can have various future aspirations like status, !omfort

while driving, and driving a powerful car etc.

c. $eers: !ars used by peers /friends and family members0 and views of peer’s on cars

significantly affect consumers.

d. Mar8eting: The consumer can be attracted to various features of the car

throughadvertising campaigns launched for the product. "or cars advertisement shown onT?

stimulates consumers the most.

1. In%or"ation Search: The second step to the consumer decision process isinformation

search. Information search can beE

a. Internal search: The consumer recalls information, e#periences, and feelings concerning

various cars within the price range they are looking at. The information that is recalled areE

i. )rands

ii. ttributes

iii. +#periences

a. #ternal Search: !onsumer look for information from e#ternal sources like internet,

retailers, peers, and various other sources of information like T?, magaines. The most

frequently used sources of information for cars is firstly, various websites on which

consumers can find detailed information about alternative cars and also compare various cars.

!ompany’s websites also provide detailed information about the cars they have in market.

'econdly, consumer gather information directly from retailers.

*. #valuation o% Alternatives



14/29

Furing the information search and from past e#perience consumers gather various criteria to

evaluate a carE

a. &rice

b. )rand

c. 5aintenance !ost

d. !omfort

e. +ase of availability and quality of service

f. &ower

g. ppearance

h. 'ie

I. "uel-+fficiency !onsumers give more weight to the criteria that are important to them. "or

cars in F-segment various factors influence the criteria’s for evaluating alternatives.

1. AgeE !onsumers within the age group of 1@-B8 prefers power, style and brand image in the

given order. !onsumer in the age bracket of B8 and above prefers comfort, brand image,

appearance in the given order.

2. Inco"eE !onsumer buys a car that can be maintained and afforded with hisher respective

income. =pper middle class /


15/29

AITS,RAJAMPET(14701E0049)1! | P a g e


16/29

*. RESEARC METODOLOGY

*.1 N//0 o- %/ S%20)

The purpose of this study is hopefully to contribute towards a crucial element in financial

management which working capital management. It is almost untouched in very little

research has been done in this area. Working capital management and its effects on

profitability and liquidity is focused in this study. 'pecific ob(ectives are to e#amine a

relationship between the two ob(ectives of liquidity and profitability of the firms and to

investigate the relationship between debt used by the firm and its profitability.

*.*o(3/4%5/

To analyse the working capital management of 5aruti 'uuki pvt limited

To know the relationship between liquidity ratios and profitability.

To assess the profitability position of 5aruti 'uukipvt limited.

To study the liquidity position of 5aruti 'uuki pvt limited.

*.+ S4o$/ o- %/ S%20)

The basis scope of the study is to understand determine the impact of working capital on

profitability and liquidity of 5aruti 'uuki pvt.imited. The study is also includes an

observation of different years impact of working capital on profitability and liquidity

performance of the 5aruti'uuki pvt imited

*.6 So2r4/ o- D#%#

The study is based on secondary data. The data of 5aruti 'uuki pvtimited for the year of

2667-2618 used in the study have been collected from the financial statements published

annual reports of 5aruti 'uuki pvt imited. The data consists of annual reports of 5aruti

'uuki pvt imited ranging for the 16 years

*.7 Too& o- A!#&)

F!#!4#& Too&

Current Ratio

&'rret ratio is te ratio et*ee +'rret assets a +'rret liailities-

Te.r# is sai to te +o#/ortale i its li'iit $ositio i/ te +'rret

ratio

AITS,RAJAMPET(14701E0049)1" | P a g e


17/29

current ratio current assets

current liabilities

Quick Ratio/Acid Test Ratio

It is the ratio between liquid assets and liquid liabilities. It supplements the information given

by current ratio. Puick ratio is also called as acid test ratio. The standard of the quick ratio is

1E1.

Puick ratioquick assets

current liabilities

Working Capital Turnover Ratio

The working capital turnover ratio is the ratio that e#presses the relationship between

working capital net sales. Working capital is the e#cess of current assets current

liabilities. This ratio indicates the efficient or inefficient utiliation of working capital of an

enterprise.

Working !apital Turnover %atio net sales

net working capital

Current Assets to Total Assets Ratio

It e#presses the fund investment in working capital and the proportion of current assets to

total assets. This ratio helps to assess the importance of current assets in total assets. $igher

proportion reveals that the company gives more importance to working capital investments

and vice-ve%sa.

!urrent ssets to Total ssets %atio current assets

total assets

Return on investment ratio

It is one of the very important parameters affecting business plans. The profitability of the

firms is measured in term of return investment. The term investment may refer to total assets,

capital employed or owner equity.

%eturn on Investment %atio profit beforeintest tax

capital employed



18/29

Inventory Turnover ratio

The inventory turnover ratio shows the relationship between sales and average inventory. It

focuses on the inventory control policy adopted by a concern.

Inventory turnover ratio costof goods soldaverageinventory

e!tor Turnover Ratio

Febtor turnover ratio indicates the number of debtor turnover each year. $igher the value of

debtor turnover, the more efficient is the management of

Febtors turnover ratio ¿

credit sales

averagedebtors

Cash Turnover Ratio

The cash turnover ratio is computed by dividing the sales by cash during the year. Aet credit

sales consist of gross credit sales minus returns, if any from customer and cash balance of the

year

&as t'roer ratiosale

cash

Correlation

!orrelation is a statistical device, which helps us in analysing the covariance of two or more

variables. With the help of correlation analysis we can measure in one figure the degree of

relationship between the variables.

!orrelation nalysis

NεXY − (εX ) (εY )

√ Nε x

2−

(εX

)2

r !orrelation co-efficient A number of years

G dependent variable N independent variable

AITS,RAJAMPET(14701E0049)1% | P a g e


19/29

'. )ATA ANALYSIS AND INTERPRETATIONS

T#(&/ !o+.1: C#&42%o! o- L820%) R#%o:

'ourceE Fata compiled from financial reports of 5aruti 'uuki pvt .ltd


EAR &'rret Ratio 'i+5 ratio

200" 0-93 2-

2007 0-"9 2-9"

200% 0-74 3-04

2009 0-"3 2-%1

2010 0-"7 3-"2

2011 1-23 3-27

2012 0-97 2-71

2013 0-"9 3-0%

2014 0-!4 3-00

201! 0-4" 2-"!Mea 0-7" 2-99

S6 0-23 0-!9


20/29

200" 2007 200% 2009 2010 2011 2012 2013 2014 201!0-00

0-!0

1-00

1-!0

2-00

2-!0

3-00

3-!0

4-00

i'iit Ratio

&'rret Ratio 'i+5 ratio

Gr#$ &820%) r#%o

INT#9$9#TATI7N:

!urrent ratioE

bove table refers that current ratio from the of 5aruti 'uuki pvt.ltdH company over a period

of 16 years from 2667 to 2618 the highest liquidity ratio is 1.2B in the year 2611 and the leastis 6.


21/29

T#(&/ !o +.* T2r!o5/r R#%o

!alculation of Turnover %atio

EAR Working capital

turnover ratio

current assets to total

assets ratio

Inventory

turnover ratio

Febtors

turnover ratio

2667 -16


22/29

InterpretationE

!urrent assets to Total assets

bove table refers that current assets to total assets ratio from the of 5aruti 'uuki pvt.ltdH

company over a period of 16 years from 2667 to 2618 the highest turnover ratio is 6.B< in the

year 2611 and the least is 6.17 in the year 2618 the quick ratio also fluctuated in the study

period .The average liquidity ratio is %atio6.2B, the standard deviation is 6.64.

Working capital Turnover %atioE

bove table refers that working capital turnover ratio from the of 5aruti 'uuki pvt.ltdH

company over a period of 16 years from 2667 to 2618 the highest turnover ratio is -11.83 in

the year 2618 and the least is -212.6@ in the year 2612 the quick ratio also fluctuated in the

study period .The average liquidity ratio is -86.61, the standard deviation is 128.36.

Inventory Turnover %atioE

bove table refers that inventory turnover ratio from the of 5aruti 'uuki pvt.ltdH company

over a period of 16 years from 2667 to 2618 the highest turnover ratio is 14.76 in the year

2611 and the least is @.22 in the year 2667 the quick ratio also fluctuated in the study

period .The average liquidity ratio is 12.


23/29

2616 6.


24/29

ash Turnover 9atio:

bove table refers that return on investment ratio from the of 5aruti 'uuki pvt.ltdH company

over a period of 16 years from 2667 to 2618 the highest turnover ratio is 24B6.7B in the year

2618 and the least is 1


25/29

6. FINDINGS

1. The current ratio of the 5aruti 'uuki pvt.ltd was fluctuated because of decreasing the

current assets and increasing the current liabilities. 5oreover, the current ratio was below the

standard norm2E1 that leads to poor management of current assets

2. The quick ratio of the 5aruti 'uuki pvt.ltd was satisfactory during the study period,

because of efficient management of quick assets that leads to e#ceed the standard norm of

quick ratio.

B. The return on investment ratio of the 5aruti 'uuki pvt.ltd was not satisfactory, because

of the earning capacity of the company is not constant.


26/29

7. SUGGISIONS

1. The company should maintain good relationship between current assets and current

liabilities. Then it will satisfy the day Qto-day financial obligations.

2. The company should give special attention to the management of inventory, as inventories

constitute the most significant part of the working capital wit in the company.

B. The cash turnover ratio of the company was fluctuated during the study period, so it is

suggested that the company should try to improve the cash turnover capacity of the company

through maintaining of cash reserves.

AITS,RAJAMPET(14701E0049)2" | P a g e


27/29

9. CONCLUSION

The impact of working capital on profitability and liquidity of 5aruti 'uuki pvt.ltd was

good. The company should concentrate on maintaining current assets more than is current

liabilities, then the company should satisfying the its short term obligations, and as well as

Increase its profits.



28/29

BIBLI7


29/29

Date post:	05-Jul-2018
Category:	Documents
Upload:	mamilla-babu
View:	221 times
Download:	0 times

Impact of Working Capital on Profitability and Liquidity

Documents