Working

Capital Management

1. Two firms– A ltd. & B ltd. are similar in all respects for their level of mix of current
assets. The assets & liabilities of the 2 firms stood as follows:
A ltd. B ltd.

Cash 400 400

Marketable Securities _ 100
Account Receivables 200 200
Inventories 415 415
Current Assets 1015 1115
+Net fixed assets 1480 1480
Total 2495 2595

Current Liabilities 415 415

Long term debt 415 415
Equity Capital 1665 1765
Total 2495 2595

The profit after tax for the 2 firms stood at Rs. 250 lacs & Rs. 255.28 lacs respectively.
Marketable securities fetch a return of 8% for B ltd. The tax rate applicable to both the
firms is 34%. Analyze the impact of the difference in level & mix of current assets of the
2 firms on their profit liquidity position. Also, discuss the implications of your analysis
for current assets management.

Solution:
A ltd. (in lacs) B ltd. (in lacs)

Net income 250 255.28

Current Ratio (CA/CL) 1015/415= 2.45 1115/415= 2.69
Net working capital (CA-CL) 1015-415= 600 1115-415= 700
Return on total assets 250/2495= .1002 or 255.28/2595= .0983
10.02% or 9.83%
Current ratio of A ltd. Is 2.45 & earning on assets is 10.02%. While B ltd. has current
ratio of 2.69 & earning on assets is 9.84% only. Thus the earning is higher in case of A
ltd.. Infact, B ltd. has introduced marketable securities having earning of 8% (post tax
earning= 8(1-.34)= 5.28%), which has resulted in declined profit percentage.
Investment in marketable securities has increased the liquidity of B ltd., but it’s
profitability is lower on such asset. Firm B ltd.’s income on securities is 8% of 100 lacs= 8
lacs, which after tax is Rs. 5.28 lacs.