WORKING CAPITAL

MANAGEMENT
WORKING CAPITAL:
Is a measure of both company’s efficiency &
01 short term health.

02 Indicator of firm’s financial short term

position to meet its obligations

Debt ratio below 1 indicates negative working capital

03 & excess of 2 indicates under-investment of firm in
assets.

04 Ratio between 1.2 to 2 is sufficient, known

as net working capital
PARAMETERS FOR COMPARISONS OF
WORKING CAPITAL MANAGEMENT

PAYABLE CURRENT RATIO

TURNOVER
01
06 02
CASH CONVERSION RECEIVABLE
CYCLE TURNOVER
05 03
04

RETURN ON INVENTORY
CAPITAL EMPLOYED TURNOVER
 KEY TERMS USED:

01 CASH CONVERSION CYCLE 02 RETURN ON CAPITAL EMPLOYED:

It refers to average It is ratio of company’s

net time difference in return measured in
days bw payment in EBIT to capital
cash by firm for it employed, it
purchases to its represents efficiency
creditors & receipt of in usage of capital
cash from debtors for employed by
product sold. company.
COMPANIES SELECTED FOR ANALYSIS:

ITC LTD

HINDUSTAN
UNILEVER NESTLE INDIA

GODREJ CONSUMER
DABUR INDIA PRODUCTS LTD
HINDUSTAN UNILEVER
LIMITED:
WORKING CAPITAL (SHORT TERM LIQUIDITY POSITION
HINDUSTAN UNILEVER
LIMITED:

WORKING CAPITAL MANAGEMENT EFFICIENCY:

INTERPRETATION OF HUL:
• Company with –ve working capital still generates excellent return on capital
employed. This contrasting results signifies managerial efficiency.
• Decreasing C.R indicates current liabilities are more than current assets.
• Company has managed to accelerate its cash inflows by collecting payments
for its sales from customers.
• -ve net working capital not always necessarily means bad financial health is
proven by HUL.
• -ve cash conversion cycle of HUL means company is able to recover money
from customers much faster than payment to be made to its creditors.
ITC LIMITED
Working capital (short term liquidity position)
ITC LIMITED
WORKING CAPITAL MANAGEMENT EFFICIENCY:
INTERPRETATION OF ITC:
• Net working capital was found to be positive throughout the years.
• Cash conversion cycle was also found to be positive for ITC
throughout the years.
• Return on capital for the firm too was found to be positive over the
years.
• Current ratio was observed to be increasing from 1.09 to 1.45 but still
did not confirmed to ideal ratio of 2:1.
NESTLE INDIA:
Working capital (short term liquidity position)
NESTLE INDIA:
WORKING CAPITAL MANAGEMENT EFFICIENCY:
INTERPRETATION OF NESTLE:
• Company even with –ve working capital was found to be generating
excellent return on capital employed. It signifies managerial
efficiency.
• Decreasing current ratio and pretty below 2:1
• Negative net working capital not always necessarily means bad
financial health is proven by Nestle India
• -ve cash conversion cycle of NESTLE means company is able to
recover money from customers much faster than payment to be
made to its creditors.
GODREJ CONSUMER
PRODUCTS LTD:
Working capital (short term liquidity position)
GODREJ CONSUMER
PRODUCTS LTD:
WORKING CAPITAL MANAGEMENT EFFICIENCY:
INTERPRETATION OF GODREJ CONSUMER
PRODUCTS LTD:
• Net working capital is positive over the years.
• Cash conversion cycle was negative for Godrej .
• Return on capital for firm was positive over the years.
• Current ratio is declining over the years which indicates
higher proportion of current liabilities as compared to
current assets of firm.
DABUR INDIA:
Working capital (short term liquidity position)
DABUR INDIA:
WORKING CAPITAL MANAGEMENT EFFICIENCY:
INTERPRETATION OF DABUR INDIA:
• Net working capital is positive over years except last year when it was
negative because of increase in current liabilities and simultaneously
decrease in current assets.
• Current ratio is not ideal over the years and range around 1.
• Return on capital employed is positive over the years.
• Cash conversion cycle is also positive of DABUR over the years.
COMPARATIVE ANALYSIS OF 5
COMPANIES SELECTED:
1 Negative working capital is preferred by FMCG
companies in order to reduce cost of borrowing for
financing of working capital.

Companies with -ve net working capital earn high

2 profits. This could be attributed with lower cost of
interest and borrowings.

FMCG Companies thrived on –ve working capital with

3 help of their strong brand in market that assisted them
in lowering operating cost of product.
4 Higher profitability of FMCG companies can be attributed to
early cash realization & low level of debtors leading to
minimum instances of bad debt.

5 Inventory in absolute terms shows decreasing trend which is

directly contributing in fall of working capital.

6 Low debt collection period indicates at the efficiency of

company that effectively contributes to decline in its working
capital.
COMPANIES SELECTED FOR ANALYSIS:

TATA STEEL
LTD.

STEEL
AUTHORITY OF ESSAR STEEL
INDIA LTD. LTD.

JSW STEEL JINDAL STEEL &

LTD. POWER LTD.
ESSAR STEEL LIMITED:

WORKING CAPITAL (SHORT TERM LIQUIDITY POSITION

ESSAR LIMITED:

WORKING CAPITAL MANAGEMENT EFFICIENCY:

INTERPRETATION OF ESSAR:
• Inventory holds major part in total current assets i.e. 45%. In none of the
years, working capital is negative, which is a good sign for the company.

• In none of the year the company has achieved the ideal current ratio
(2:1), though in 2011 it is near to it.

• In the last two years, inventory turnover ratio has declined, there is
possibility that the company is not able to manage its stock effectively.
JINDAL STEEL
LIMITED
Working capital (short term liquidity position)
JINDAL STEEL
LIMITED
WORKING CAPITAL MANAGEMENT EFFICIENCY:
INTERPRETATION OF JINDAL STEEL LTD:
• Net working capital was found to be positive throughout the years.
Among all current assets , loans and advances hold major portion of
51% and other current assets hold negligible portion of 2%.

• Sales to working capital ratio is very fluctuating over the period.

• Average current ratio of the company is 1.6 during the period that
shows good liquidity position of the company.
JSW STEEL LTD:
Working capital (short term liquidity position)
JSW STEEL
LIMITED:
WORKING CAPITAL MANAGEMENT EFFICIENCY:
INTERPRETATION OF JSW STEEL:
• In total current assets, inventory holds major portion of 43%. The company
has negative net working capital in the last few years.

• Current ratio is much lower than ideal ratio. That shows the company has
maintained less current assets than current liabilities.

• Cash and bank balance is increasing over the period.

• Rise in inventory may lead to blockage of cash which might be harmful.

STEEL AUTHORITY OF
INDIA LTD:
Working capital (short term liquidity position)
STEEL AUTHORITY OF
INDIA LTD:
WORKING CAPITAL MANAGEMENT EFFICIENCY:
 INTERPRETATION OF STEEL AUTHORITY
LTD:
• Rise in debtors shows rise in net credit sale.

• Company has positive net working capital over the period .

• There is decrease in inventory and debtors turnover ratio.

• The company is able to maintain ideal Current ratio over the past years .

• Receivable days are less than payable days which is good.

TATA STEEL LTD:
Working capital (short term liquidity position)
TATA STEEL:
WORKING CAPITAL MANAGEMENT EFFICIENCY:
INTERPRETATION OF TATA:
• Net working capital was negative in the initial year and hence after it
kept on fluctuating but remained positive.

• Current ratio is not ideal over the years and range around 1.

• Company is able to maintain stable inventory turnover ratio

• Payable days are greater than receivable days ( Good Sign)

COMPARATIVE ANALYSIS OF 5
COMPANIES SELECTED:
 CONCLUSION
•The excessive working capital means that firm has idle fund which earn no profit for
the firm, inadequate working capital means firm does not have sufficient fund for
running its operations.

•Tata steel ltd has highest growth of NWC during holding period followed by Jindal
steel ltd. It is negative with JSW steel. High working capital indicate that company has
ability to repay its short term liabilities.

•Average growth rate of current liabilities is highest with Jindal steel followed by JSW
steel. It is low with SAIL and Tata steel compared to others. High current liabilities
means that company is using credit facilities by its creditors.

•Total current assets are growing at more than 30 percent with Jindal steel and Tata
steel, while it is only 17.81 percent with SAIL.
•Sundry debtor’s growth is negative with Essar steel and Tata steel that shows good
position in credit management. The firms can focus on credit sales as it increases
the profitability of firm considering the receivable period.

•All companies have maintained current ratio less than 2:1 except Tata steel i.e 2.06.

•Tata steel is in top position in inventory turnover with 8.71 followed by JSW steel i.e
8.65 and Jindal still with 7.54.

•Debtors turnover ratio is highest with Tata steel i.e 45. 26 followed by JSW steel
with 37.66 and Essar steel with 23.87. SAIL is in top position in receivable days with
23.36 days followed by Jindal steel with 20.77; it is lowest with Tata steel.

•Inventory days are highest with Essar steel i.e 75.54 days followed by SAIL i.e 65.02.

•Creditors’ turnover is lowest with Tata steel followed by Jindal steel i.e 4.35