Professional Documents
Culture Documents
FM Automobile
FM Automobile
IlMTROdlJCTiON
CHAPTER I
INTRODUCTION
1
over a period of time. In addition, working capital has acquired a great
significance and sound position for the twin objects of Profitability and
Liquidity. It consumes a great deal of time to increase profitability as well as
to maintain proper liquidity at minimum risk. Leslie R. Howard rightly
pointed out that a deeper understanding of the importance of working capital
and its satisfactory provision can lead not only to material savings in the
economical use of capital but can also assist in furthering the ultimate aim of
a business, namely, that of maximizing financial returns on the minimum
amount of capital which need to be employed.
2
The mismanagement of working capital will lead to loss of profits in the
short-run but it will ultimately lead to the downfall of the enterprises in the long-run.
An excessive investment in working capital will lower the rate of return while
inadequate investment will hamper the solvency position and growth thereby
affecting the operation of business. The adequacy of working capital together with
its efficient handling virtually determines the survival or demise of an enterprise.
Thus this study attempts to determine the operational adequacy of working capital
with the use of Bivariate Discriminant Analysis. In working capital analysis, the
direction of change over a period of time is of crucial importance. It is, therefore,
very essential for an analyst to make a study about the trend and direction of
working capital. Not only that, analysis of working capital trends provide a base to
judge whether the practice and prevailing policy of the management with regard to
working capital is good enough or an improvement is to be made in managing the
working capital funds. Hence, in this study, an attempt is made about the trend of
the components of the working capital movements to provide a deep and broad base
while examining the working capital management of the selected enterprise.
After determining the requirements of current assets, one of the important
tasks of the financial manager is to select as assortment of appropriate sources of
finance for the current assets. Normally, the current assets of a firm are supported by
a combination of long-term and short-term sources of financing. The short-term
financing is less costly than long-term financing but the former is more risky than
the latter. Thus, the choice should naturally involve a trade-off between risk and
return. Normally the excess of current assets over current liabilities should be
financed by long-term sources, precisely it is not possible to find out which long-
term source has been used to finance current assets, but it can be examined as to
what proportion of current assets has been financed by long-term funds. Therefore,
an attempt has been made in the study in this regard.
3
It is observed that different authors have approached the study of
working capital management in different ways. The major inferences of
almost all the studies concerning the approaches of working capital
management centres around risk-return trade off. Based on these approaches,
this study also attempts to develop an approach with the help of which risk-
return analysis of working capital position can be conducted for the selected
enterprises.
4
Selection of Automobile Industry
Transport sector is the backbone of countrys economic growth and
development. Transportation throughout the world has made possible an
unprecedented level of mobility across the geographical boundaries. The mobility
has given many people more options about where to live and work than they had
years ago. Similarly, mobility has broadened the access of business to new markets
and more choices by increasing the available pool of resources. From the economic
point of view, transportation is a vital factor for steady economic growth and
development. The trade facilitated by transportation has been a growing component
of national income in all the countries. Studies show that the contribution of
transportation in GDP has a positive impact. The structure of the economy also
influences the transport system because consumer expenditure on transportation
contributes to national economy. Transport sector is equally important for both
industrialized and developing economics. Transport sector including water
transport, aviation and surface transports are major players of Gross Domestic
Product (GDP), which includes the value of all goods and services. Being the largest
transport networking in the world, particularly in road transportation, automobile
industry plays a significant role in the GDP of the country.
5
industry has been selected for this study in order to determine its working
capital performance during the study period. In this study researcher focuses
on automobiles such as commercial vehicles, passenger cars and multiutility
vehicles and two and three wheelers.
6
capital management of Indian automobile industry after liberalization.
Therefore, to cover the gaps in the earlier studies, the present study is
undertaken to give an insight into the working capital management of
selected sectors of Indian automobile industry. It would also enable
shareholders, investors and investment analyst to identify the determinants of
corporate performance. Further, it would provide insight to banks, financial
institutions and long - term lenders to understand the financial capability and
effectiveness of the companies. Moreover, it would open up new vistas to the
industry association and the government in understanding the characteristics
of the companies for their and intra - firm comparison. It might also help the
academic researchers in securities, industry and company by providing
different perspective of the analysis.
Research Questions
Based on earlier studies the following questions have been arisen,
necessitating the present research.
1. What is the structure of working capital in the selected enterprises?
Is there any significant change taking place over a period of time?
2. Is investment in current assets utilized effectively?
3. What is the pattern of financing working capital?
4. How can a discriminant analysis be useful in assessing the short-
term liquidity position of enterprises?
5. What is the impact of working capital ratios on profitability of
enterprises?
6. Do transactions demand for working capital and its various
components vary proportionately to changes in the volume of sales?
These are some of the important questions this study seeks to answer.
7
References
1. Cohn, R.A. and Pringle, J.J. (1975), Steps Towards an Integration of
Corporate Financial Theory, in Management of Working Capital: A
Reader, Keith V. Smith (ed.), New York: West Publishing Co., p.369.
2. Smith, K.V. (1976), State of the Art of Working Capital Management, in
Issues in Managerial Finance, Eugene F. Brigham and Ramom E.
Johnson, (ed.), Illinois: The Dryden Press, p.63.
3. Howard, L.R. (1971), Working Capital - Its Management and Control.
London: Mac Donald & Evans Ltd, p.2.
4. Knight, W.D. (Spring 1972), Working Capital Management - Satisficing
versus Optimization, Financial Management, pp.33-40.
5. Donnell, 0. and Goldberg (1964), Elements of Financial Administration,
New Delhi: Prentice Hall of India Pvt. Ltd., p.55.