2018

A Project Report on Working

VALUE MINDS with Value
Minds IT Services Pvt. Ltd.

YOUR NAME

5/05/2018
 CERTIFICATE

This is to certify that Mr. PADAVALA HARIPRASAD has successfully

completed the project work titled “WORKING CAPITAL” in partial fulfillment of

requirement for the award of MASTER OF BUSINESS ADMINISTRATION prescribed

by the COLLEGE NAME.

This project is the record of authentic work carried out during the academic

year (2016 – 2018).

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 DECLARATION

I YOUR NAME hereby declare that this project is the record of authentic

work carried out by me during the academic year 2006 – 2008 and has not been submitted

to any other University or Institute towards the award of any degree.

Signature of the student

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 ACKNOWLEDGEMENT

I am very much obliged and indebted to Mr. LIM KIM BAK,

General Manager of VALUE MINDS IT Services Private Limited for his
approval and valuable suggestions to take up the project.

I also extend my gratitude to Mr. B. V. Jayaram, Manager

Finance, Commercial and Administration for his approval and valuable
suggestions to take up the project in VALUE MINDS IT Services Private
Limited.
I express my deep sense of gratitude to Mr. Ravi Shagari Rao
Accounts Officer Finance, Commercial and Administration for his valuable
suggestions, consistent help and personal interest during my project work.

I am also thankful to Mr. B. Vimal kumar, Accountant Trainee

for his support and suggestions during the project.

I am very pleased to express my deep sense of gratitude to Mr.

R. RAMACHANDRA NAIK Associate professor for his consistent
encouragement. I shall forever cherish my association with her for exuberant
encouragement, perennial approachability, absolute freedom of thought and
action I have enjoyed during the course of the project.

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Chapter – 1

INTRODUCTION

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Introduction
FINANCE
In our present-day economy, finance is defined as the provision of
many at the time when. As the provision of money at the time when it is
required every enterprise. Where big medium and small needs finance to carry
on its operations and to achieve its target. Infects financial is so indispensable
today that it is rightly said that it is the life blood of an enterprise. Without
adequate finances, no enterprise can possibly accomplish its objectives.

“Business finance can be broadly being define as the

activity concerned with planning rising controlling and administering of the
fund used in the business”.
“Business finance that business activity that concerned with the acquisition
and conservation of capital funds in meeting financial needs and over
objectives Business enterprise”.

FINANCIAL MANAGEMENT
Form the various definitions of the terms business finance given
above. It’ can be concluded that term business finance mainly involves, rising
of fund and their effectives utilization keeping in view the overall objectives
of the firm. This requires great caution and wisdom on the part of
management. The management makes use of values financial techniques
devices, etc. for administrating the financial affairs of the firm in the most
effectives, efficient way. financial management means the entire gamut of
management efforts devoted to the management finance. Both its sources and
use of the enterprise.

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 According to Solomon “financial management is concerned with the
efficient use of an important economic resource, namely, capital fund”.
In the present context I have chosen on topic from “working capital
management” as my project work in I- MBA programmed.

WORKING CAPITAL MANAGEMENT

INTRODUCTION
Working capital is the life blood and nerve centre of any business.
Every business needs for two purposes for its establishment and to carry its
day to day operations. Long – term funds are required to create production
facilities through purchase of fixed assets such as plant, machineries, land etc.,
investment in these assets represents that part of firm’s capital, funds are also
needed for short term purpose for the purchase of raw material payment of
wages and other day to expenses etc., known as working capital in simple
words working capital refers to that part of current asset i.e., cash, marketable
securities, debtors and inventors.
The objective of working capital management is to manage
the firm’s current assets and current liabilities in such as way that as
satisfactory level of working capital is maintained. This is so because if the
firm cannot maintain a satisfactory level of working capital it is likely to
become insolvent and may become bankrupt.
Working Capital Definitions
The term working capital is used to denote the total current
assets. The following are some definitions of working capital.
1. “Working capital means current assets”
- Mead, Baker, Mallet

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 2. “The sum of current assets is the working capital of business”
- J.S Mill

- J.S Mill
Concept of working Capital
There are two concepts of working capital they re
1. Gross Working Capital
2. Net Working Capital
There term cross capital also referred as working capital that means the
total current assets

Gross Working capital = Total working capital

Importance of Gross Working Capital
1. It enables the firm to provide the amount of working capital at the right
time.
2. Every management is more interested in the total current assets with which
it as to operate than the sources from which it is made available.
The term net working capital can be defined as:
1. Net working capital i.e., the different between current assets & current
liabilities.
2. Net working capital i.e., the portion of a firm’s currents assets, which the
finance with long term funds.

Importance of Net Working Capital

1. It is a qualitative concept which indicates the firm’s ability of meet its
operating expenses and short term liabilities.

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 2. It indicates he margin of protection available to the short tem credits
like i.e., the excess of current assets over current liabilities.
It is the indicator of the financial soundness of an enterprise
Advantages of adequate working capital
The success of business besides other things depends upon the manner
in which its working capital is managed. The main advantages of maintaining
working capital are as follows:
1. Solvency of the business:
Sufficient working capital helps in maintaining solvency of the
business by providing uninterrupted flow of production.

2. Goodwill:
Sufficient working capital enables as business concern to make
payments and helps in creating and maintaining goodwill.

3. Easy Loans:
A concern having adequate working capital high solvency and good
credit standing can obtain loans from banks and others on easy and favorable
terms.
4. Cash discounts:
Adequate working capitals also enable a concern to avail cash discounts
on the purchases and hence it reduces the costs.

5. Regular supply of Raw material:

Sufficient working capital ensured regular supply of raw materials and
continues production.

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6. Regular Payments:
Adequate working capital enables regular payment of salaries, wages and
other day – to – day commitments, which production and profits of a
company.

7. Ability to face crisis:

Adequate working capital enables a concern to face business and crisis in
emergencies such as depression.

8. High morale:
Adequacy of working capital crates environment of security,
confidence and high moral and creates overall efficiency in business

Financial Management is the specific area of finance dealing with the

financial decision corporations make, and the tools and analysis used to make
the decisions. The discipline as a whole may be divided between long-term
and short-term decisions and techniques. Both share the same goal of
enhancing firm value by ensuring that return on VALUE MINDS exceeds cost
of VALUE MINDS, without taking excessive financial risks.

VALUE MINDS investment decisions comprise the long-term

choices about which projects receive investment, whether to finance that
investment with equity or debt, and when or whether to pay dividends to
shareholders. Short-term corporate finance decisions are called working
VALUE MINDS management and deal with balance of current assets and
current liabilities by managing cash, inventories, and short-term borrowings
and lending (e.g., the credit terms extended to customers).

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 Corporate finance is closely related to managerial finance, which
is slightly broader in scope, describing the financial techniques available to
all forms of business enterprise, corporate or not.

Role of Financial Managers:

The role of a financial manager can be discussed under the

following heads:

1. Nature of work

2. Working conditions

3. Employment

4. Training, Other qualifications and Advancement

5. Job outlook

6. Earnings

7. Related occupations

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 NEED OF THE STUDY

1. The study has great significance and provides benefits to various parties
whom directly or indirectly interact with the company.

2. It is beneficial to management of the company by providing crystal

clear picture regarding important aspects like liquidity, leverage,
activity and profitability.

3. The study is also beneficial to employees and offers motivation by

showing how actively they are contributing for company’s growth.

4. The investors who are interested in investing in the company’s shares

will also get benefited by going through the study and can easily take a
decision whether to invest or not to invest in the company’s shares.

OBJECTIVES

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 The major objectives of the resent study are to know about
financial strengths and weakness of VALUE MINDS through FINANCIAL
RATIO ANALYSIS.

The main objectives of resent study aimed as:

To evaluate the performance of the company by using ratios as a

yardstick to measure the efficiency of the company. To understand the
liquidity, profitability and efficiency positions of the company during the
study period. To evaluate and analyze various facts of the financial
performance of the company. To make comparisons between the ratios during
different periods.

OBJECTIVES

1. To study the present financial system at Value Minds.

2. To determine the Profitability, Liquidity Ratios.

3. To analyze the VALUE MINDS structure of the company with the help
of Leverage ratio.

4. To offer appropriate suggestions for the better performance of the

organization

SCOPE OF THE STUDY

This study is important for understanding the management of working capital
in VALUE MINDS. It gives information on the basis of analysis about
percentage of investment in each current asset causes for changes in working
capital from different sources amount of working capital required.

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 The firm’s trade creditors are interested in the firm’s ability to
meet their claims over a short period of time. So they required the evaluation
of the firm’s liquidity position.

The suppliers of the long term debts and other hand of concern
with the long term solutions and survival. They analyses the firm profitability
over time.

The main responsibility of the management is to see that the

resources of firm used most efficiently and the firm financial condition is
good.

METHODOLOGY

Methodology includes the different methods or means through

which the data is collected. This methodology plays as important role in
preparation or study of the project because it includes the collection of data,
which is the root cause of the project. Hence the main sources through which
the data had been collected are through Primary and Secondary.

Primary Data:
Collection of data through Primary source includes the
information or data given by the executives of the organization directly (i.e.)
the co-operation and assistance given by the organization and also my
personal experience.

Sources of secondary data:

1. Most of the calculations are made on the financial statements of the

company provided statements.

2. Referring standard texts and referred books collected some of the

information regarding theoretical aspects.

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 3. Method- to assess the performance of the company method of
observation of the work in finance department in followed.

LIMITATIONS

1. The study provides an insight into the financial, personnel, marketing

and other aspects of VALUE MINDS. Every study will be bound with
certain limitations.

2. The below mentioned are the constraints under which the study is
carried out.

3. One of the factors of the study was lack of availability of ample

information. Most of the information has been kept confidential and
as such as not assed as art of policy of company.

Time is an important limitation. The whole study was conducted

in a period of 45 days, which is not sufficient to carry out proper interpretation
and analysis.

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 Chapter – 2

FINANCIAL MARKET INDUSTRY

16
 INDUSTRY PROFILE

India has a diversified financial sector, which is undergoing rapid expansion.

The sector comprises commercial banks, insurance companies, non-banking
financial companies, co-operatives, pension funds, mutual funds and other
smaller financial entities. The financial sector in India is predominantly a
banking sector with commercial banks accounting for more than 60 per cent
of the total assets held by the financial system.

India's services sector has always served the country’s economy well,
accounting for about 57 per cent of the gross domestic product (GDP). In this
regard, the financial services sector has been an important contributor.

The Government of India has introduced reforms to liberalize, regulate and

enhance this industry. At present, India is undoubtedly one of the world's most
vibrant VALUE MINDS markets. Challenges remain, but the future of the
sector looks good. The advent of technology has also aided the growth of the
industry. About 75 per cent of the insurance policies sold by 2020 would, in
one way or another, be influenced by digital channels during the pre-purchase,
purchase or renewal stages, as per a report by Boston Consulting Group
(BCG) and Google India.

MARKET SIZE
The size of banking assets in India reached US$ 1.8 trillion in FY14 and is
expected to touch US$ 28.5 trillion by FY25.

The Association of Mutual Funds in India (AMFI) data show that assets of the
mutual fund industry have hit an all-time high of about Rs 12 trillion (US$
189.83 billion). Equity funds had inflows of Rs 5,217 crore (US$ 825.49
million), taking total inflows on a year-to-date basis to Rs 61,089 crore (US$
9.66 billion). Income funds and liquid funds account for the largest proportion

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of AUM, with Income funds accounting for Rs 5.22 trillion (US$ 82.59
billion) and equity funds accounting for Rs 3.06 trillion (US$ 48.41 billion).

During 2013-14, the life insurance industry recorded a premium income of Rs

3.14 trillion (US$ 49.67 billion), as against Rs 2.87 trillion (US$ 45.39 billion)
in the previous financial year, registering a growth of 9.4 per cent.

India’s life insurance sector is the biggest in the world with about 36 crore
policies, which are expected to increase at a compounded annual growth rate
(CAGR) of 12-15 per cent over the next five years. The insurance industry is
planning to hike penetration levels to five per cent by 2020 and could top the
US$ 1 trillion mark in the next seven years. The total market size of India's
insurance sector is projected to touch US$ 350-400 billion by 2020.

According to the recent data released by the Insurance Regulatory and

Development Authority (IRDA), the gross direct premium underwritten by
non-life insurance companies during 2013-14 was Rs 77,538.25 crore (US$
12.26 billion) compared to Rs 69,089 crore (US$ 10.92 billion) in 2012-13.
The gross direct premium underwritten during 2011-12 was Rs 58,119.71
crore (US$ 9.19 billion). The non-life sector growth was 19 per cent in 2012-
13 and 23 per cent in 2011-12.

India is the fifteenth largest insurance market in the world in terms of premium
volume and has the potential to grow exponentially in the coming years. Life
insurance penetration in India is just 3.1 per cent of GDP, which has almost
doubled since 2000. A fast-growing economy, rising income levels and
improving life expectancy rates are some of the many favorable factors that
are likely to boost growth in the sector in the coming years.

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Investment corpus in India’s pension sector is expected to cross US$ 1 trillion
by 2025, following the passage of the Pension Fund Regulatory and
Development Authority (PFRDA) Act 2013.

INVESTMENTS/DEVELOPMENTS

 India has moved a step closer to having a Singapore- or Dubai-like

financial hub, with the Securities and Exchange Board of India (SEBI)
approving a framework for international financial centers (IFCs)
 The RBI has allowed bonds issued by multilateral financial institutions
like World Bank Group, the Asian Development Bank and the African
Development Bank in India as eligible securities for interbank
borrowing. The move will further develop the corporate bonds market,
RBI said in a notification.
 Maharashtra’s plans to promote Mumbai as a global financial centre
have received further encouragement as Wall Street firm JPMorgan
Chase & Co. and the Japanese government arm Japan External Trade
Organization (Jethro) agreed to partner with the state government to
hold road shows to attract financial services companies to Mumbai.
 Yes, Bank Ltd has signed a memorandum of understanding (MoU) with
the US government’s development finance institution Overseas Private
Investment Corp. (OPIC) to explore US$ 220 million of financing to
lend to micro, small and medium enterprises (MSMEs) in India, the
bank said in a press release.
 Bandhan Financial Services Pvt. Ltd has raised Rs 1,600 crore (US$
252.97 million) from two international institutional investors to help
convert its microfinance business into a full-service bank.

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  JP Morgan Asset Management (UK) Ltd, JP Morgan Investment
Management Inc and JP Morgan Chase Bank NA, have acquired a 4.11
per cent stake in Mahindra & Mahindra Financial Services Ltd for Rs
113.75 crore (US$ 17.98 million).

GOVERNMENT INITIATIVES
Several measures have been outlined in the Union Budget 2014-15 that aim
at reviving and accelerating investment which, inter alia, include fiscal
consolidation with emphasis on expenditure reforms and continuation of fiscal
reforms with rationalization of tax structure; fillip to industry and
infrastructure, fiscal incentives and concrete measures for transport, power,
and other urban and rural infrastructure; measures for promotion of foreign
direct investment (FDI) in selected sectors, including defense manufacturing
and insurance; and, steps to augment low cost long-term foreign borrowings
by Indian companies. Fiscal reforms have been bolstered further by the recent
deregulation of diesel prices. The launch of ‘Make in India’ global initiative
is intended to invite both domestic and foreign investors to invest in India.
The aim of the programmed is to project India as an investment destination
and develop, promote and market India as a leading manufacturing destination
and as a hub for design and information. The programmed further aims to
radically improve the Ease of Doing Business, open FDI regime, improve the
quality of infrastructure and make India a globally competitive manufacturing
destination.

ROAD AHEAD
India is today one of the most vibrant global economies, on the back of robust
banking and insurance sectors. The country is projected to become the fifth
largest banking sector globally by 2020, as per a joint report by KPMG-CII.

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The report also expects bank credit to grow at a compound annual growth rate
(CAGR) of 17 per cent in the medium term leading to better credit penetration.
Life Insurance Council, the industry body of life insurers in the country also
projects a CAGR of 12–15 per cent over the next few years for the financial
services segment.

Also, the relaxation of foreign investment rules has received a positive

response from the insurance sector, with many companies announcing plans
to increase their stakes in joint ventures with Indian companies. Over the
coming quarters there could be a series of joint venture deals between global
insurance giants and local players.

Companies in this industry engage in financial transactions and create,

liquidate, purchase, and sell financial assets such as securities, bonds, and
insurance. Major finance and insurance companies include AIG, Bank of
America, Citigroup, Fidelity, Goldman Sachs, JPMorgan Chase, MetLife, and
Wells Fargo (all based in the US), as well as Allianz (Germany), AXA
(France), BNP Paribas (France), and Industrial and Commercial Bank of
China.

Major global financial hubs include New York, London, Hong Kong,
Singapore, Shanghai, Tokyo, and Zurich. Demand for sophisticated financial
services is expected to grow in Asia, particularly in China and Indonesia.

The US finance and insurance sector consists of about 470,000 establishments

(single-location companies and units of multi-location companies) with
combined annual revenue of about $3.7 trillion.

COMPETITIVE LANDSCAPE

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Demand is driven by business activity, returns on investments, and
consumer income. The profitability of individual companies depends on
marketing, efficient operations, and investment expertise. Large
companies often have advantages in access to cheaper VALUE MINDS,
participation in large-scale transactions, and name recognition. Small
companies can compete effectively through customer service, knowledge of
the local market, and specialization. The sector in the US is fragmented: the
largest 50 companies account for about 45 percent of sales.

The finance and insurance sector has undergone significant change in the past
decade, and more changes are likely.

This industry profile helps to gain an insight into the evolution of the industry
and competitive dynamics prevalent in the market. It discusses the significant
developments in the industry and analyzes the key trends and issues. The
profile provides inputs in strategic business planning of industry
professionals.

This profile is of immense help to management consultants, analysts, market

research organizations and corporate advisors.

The objective and scope of various sections of our industry profile has been
discussed below.

Industry Snapshot

This section gives a holistic overview of the industry. It starts with defining
the market and goes on to give historical and current market size figures. It
also clearly illustrates the major segments of the market which would be
discussed later on in the report.

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Industry Analysis

It involves a comprehensive analysis of the industry and its market segments.

This section discusses the key developments that have taken place in the
industry. It also identifies and analyzes the driving factors and challenges of
the industry. A description of the regulatory structure tells us about the major
regulatory bodies, laws and government policies.

Country Analysis

This section presents the key facts & figures of the country. It also discusses
the political environment and the macroeconomic indicators. It analyzes
government stability and economic growth of the country.

Competitor Assessment

This section compares the major competitors in the industry. The Competitors
At-a-Glance is aimed at giving an overview of the competitive landscape in
the industry.

Company Profiles

The major companies are profiled in this section. For each company, business
description is given followed by financial highlights and recent developments.

Chapter – 3

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 OVERVIEW OF

VALUE MINDS SERVICES

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 COMPANY PROFILE
S&P VALUE MINDS, INC. PROVIDES MULTI-ASSET CLASS AND REAL TIME

DATA, RESEARCH, AND ANALYTICS TO INSTITUTIONAL INVESTORS, INVESTMENT

AND COMMERCIAL BANKS, INVESTMENT ADVISORS AND WEALTH MANAGERS,

CORPORATIONS, AND UNIVERSITIES AROUND THE WORLD.

IT OFFERS INFORMATION FOCUSING ON FINANCIALS AND VALUATION,

QUALITATIVE DATA, GLOBAL MARKET DATA, SELL-SIDE RESEARCH AND

ESTIMATES, NEWS AND EVENTS, FIXED INCOME, ALPHA AND RISK MODELS,

CREDIT RISK SOLUTIONS, CREDIT RATINGS AND RESEARCH, INVESTMENT

RESEARCH, REFERENCE DATA SERVICES, SECURITY VALUATION AND PRICING,

REAL-TIME SOLUTIONS, AND GLOBAL MARKET INTELLIGENCE.

THE COMPANY PROVIDES A SUITE OF CAPABILITIES THAT ENABLE TO GENERATE

IDEAS AND TARGETS, BUILD AND MAINTAIN MODELS, MONITOR MARKETS AND

COMPANIES, MONITOR CORPORATE RESULTS, ANALYZE PORTFOLIO

PERFORMANCE, STREAMLINE QUANTITATIVE RESEARCH, CREATE AND UPDATE

PRESENTATIONS, DISTRIBUTE PROPRIETARY RESEARCH, ENHANCE INTERNAL

RATING SYSTEM, MAKE INVESTMENT RECOMMENDATIONS, MANAGE RISK AND

EXPOSURE, ASSESS PORTFOLIO RISK AND VALUE, AND ANALYZE MULTI-ASSET

SCENARIOS, AS WELL AS MANAGE WORKFLOW, CONTACTS, AND DATA.

ITS CUSTOMERS INCLUDE RESEARCH FIRMS, INVESTMENT MANAGERS, PRIVATE

EQUITY FIRMS, GOVERNMENT AGENCIES, CONSULTANTS AND ADVISORS, AND

SALES AND TRADING MARKETS. THE COMPANY WAS FORMERLY KNOWN AS

VALUE MINDS, INC. AND CHANGED ITS NAME TO S&P VALUE MINDS,
INC. IN SEPTEMBER 2011. THE COMPANY WAS FOUNDED IN 1998 AND IS

25
HEADQUARTERED IN NEW YORK, NEW YORK. S&P VALUE MINDS, INC.
OPERATES AS A SUBSIDIARY OF MCGRAW HILL FINANCIAL, INC.

S&P GROUP PROFILE

S&P VALUE MINDS is a leading provider of multi-asset class and real-time

data, research and analytics to institutional investors, investment &

26
commercial banks, investment advisors and wealth managers, corporations
and universities worldwide. Our broad suite of capabilities is designed to help
track performance, generate alpha, identify new trading & investment ideas,
and perform risk analysis.

Our offerings include: S&P VALUE MINDS, Real-Time Workstation,

ClariFi, Global Credit Portal, Market Scope Advisor and Valuations Portal.
Our content, analytics and tools can be delivered via multiple channels
including desktop, enterprise, mobile and on-demand services.

Standard & Poor's Financial Services LLC (S&P) is an American financial

services company. It is a division of McGraw Hill Financial that publishes
financial research and analysis on stocks and bonds. S&P is known for its
stock market indices such as the U.S.-based S&P 500, the Canadian
S&P/TSX, and the Australian S&P/ASX 200. S&P is considered one of the
Big Three credit-rating agencies, which also include Moody's Investor Service
and Fitch Ratings. Its head office is located on 55 Water Street in Lower
Manhattan, New York City.

The company traces its history back to 1860, with the publication by Henry
Varnum Poor of History of Railroads and Canals in the United States. This
book compiled comprehensive information about the financial and
operational state of U.S. railroad companies. In 1868, Henry Varnum Poor
established H.V. and H.W. Poor Co. with his son, Henry William Poor, and
published two annually updated hardback guidebooks, Poor's Manual of the
Railroads of the United States and Poor's Directory of Railway Officials.
In 1906, Luther Lee Blake founded the Standard Statistics Bureau, with the
view to providing financial information on non-railroad companies. Instead
of an annually published book, Standard Statistics would use 5" x 7" cards,
allowing for more frequent updates.
In 1941, Poor's Publishing and Standard Statistics merged to become
Standard & Poor's Corp. In 1966, the company was acquired by The
McGraw-Hill Companies, extending McGraw-Hill into the field of financial
information services.
As a credit-rating agency (CRA), the company issues credit ratings for the
debt of public and private companies, and other public borrowers such as
governments and governmental entities. It is one of several CRAs that have

27
been designated a nationally recognized statistical rating organization by the
U.S. Securities and Exchange Commission.
S&P issues both short-term and long-term credit ratings.

Long-term credit ratings

World countries by Standard & Poor's Sovereign Rating:

The company rates borrowers on a scale from AAA to D. Intermediate ratings
are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-
). For some borrowers, the company may also offer guidance (termed a "credit
watch") as to whether it is likely to be upgraded (positive), downgraded
(negative) or uncertain (neutral).
Investment Grade

 AAA: An obligor rated 'AAA' has extremely strong capacity to meet its
financial commitments. 'AAA' is the highest issuer credit rating
assigned by Standard & Poor's.
 AA: An obligor rated 'AA' has very strong capacity to meet its financial
commitments. It differs from the highest-rated obligors only to a small
degree. Includes:
o AA+: equivalent to Moody's Aa1 (high quality, with very low
credit risk, but susceptibility to long-term risks appears
somewhat greater)
o AA: equivalent to Aa2
o AA-: equivalent to Aa3
 A: An obligor rated 'A' has strong capacity to meet its financial
commitments but is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligors in
higher-rated categories.
o A+: equivalent to A1
o A: equivalent to A2
 BBB: An obligor rated 'BBB' has adequate capacity to meet its financial
commitments. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitments.

Non-Investment Grade (also known as speculative-grade)

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  BB: An obligor rated 'BB' is less vulnerable in the near term than other
lower-rated obligors. However, it faces major ongoing uncertainties
and exposure to adverse business, financial, or economic conditions,
which could lead to the obligor's inadequate capacity to meet its
financial commitments.
 B: An obligor rated 'B' is more vulnerable than the obligors rated 'BB',
but the obligor currently has the capacity to meet its financial
commitments. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet its financial
commitments.
 CCC: An obligor rated 'CCC' is currently vulnerable, and is dependent
upon favorable business, financial, and economic conditions to meet its
financial commitments.
 CC: An obligor rated 'CC' is currently highly vulnerable.
 C: highly vulnerable, perhaps in bankruptcy or in arrears but still
continuing to pay out on obligations
 R: An obligor rated 'R' is under regulatory supervision owing to its
financial condition. During the pendency of the regulatory supervision,
the regulators may have the power to favor one class of obligations over
others or pay some obligations and not others.
 SD: has selectively defaulted on some obligations
 D: has defaulted on obligations and S&P believes that it will generally
default on most or all obligations
 NR: not rated

Short-term issue credit ratings

The company rates specific issues on a scale from A-1 to D. Within the A-1
category it can be designated with a plus sign (+). This indicates that the
issuer's commitment to meet its obligation is very strong. Country risk and
currency of repayment of the obligor to meet the issue obligation are factored
into the credit analysis and reflected in the issue rating.

 A-1: obligor's capacity to meet its financial commitment on the

obligation is strong
 A-2: is susceptible to adverse economic conditions however the
obligor's capacity to meet its financial commitment on the obligation is
satisfactory
 A-3: adverse economic conditions are likely to weaken the obligor's
capacity to meet its financial commitment on the obligation

29
 B: has significant speculative characteristics. The obligor currently has
the capacity to meet its financial obligation but faces major ongoing
uncertainties that could impact its financial commitment on the
obligation
 C: currently vulnerable to nonpayment and is dependent upon favorable
business, financial and economic conditions for the obligor to meet its
financial commitment on the obligation
 D: is in payment default. Obligation not made on due date and grace
period may not have expired. The rating is also used upon the filing of
a bankruptcy petition.

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Chapter – 4

31
ANALYSIS

32
 THEORY OF WORKING CAPITAL

Working capital may be regarded as life blood of a business. Its

effective provision can do much to ensure the success of a business. While its
inefficient management can lead not only to less of profits but also to the
ultimate down fall of what otherwise might be considered as a promising
concern.
A study of working capital is of major importance to internal and
external analysis because of its close relationship with the day-to-day
operations of business.
In accounting working capital is the difference between the
inflow and out flow of funds. It is defined as the excess of current assets over
current liabilities and provisions. In other words, it is “net current assets or net
wworking capital”.

MEANING OF WORKING CAPITAL

Capital required for a business can be classified into
1. Fixed capital
2. Working capital
Every business needs funds for its establishment and to carry out
its day-to-day operations. Long-term funds are needed for creating production
facilities through purchase of fixed assets.
Funds are also needed for short-term purposes for the purchase
of raw materials, payment of wages and of the day-to-day expenses, etc.,
These funds are known as revolving or circulating capital or
short-term capital as the funds invested in current assets keep revolving fast
and are being constantly converted into cash and this cash flows out again in
exchange for other current assets.
According to shubin, “Working capital” is the amount of funds
of necessary to cover the cost of operating the enterprise.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital:
1. Gross working capital

2. Net working capital

In the aboard sense, the term working capital refers to the gross
Working capital and represents the amount of funds invested in current assets.
Thus the gross working capital is the capital invested in total current assets.
Current assets are the assets, which can be converted into cash within an

33
accounting year and include cash, short-term securities, bill receivables and
stock.
Net working capital refers to the difference between current
assets and current liabilities. Current liabilities are those claims of outsiders
which are expected to mature for payment within an accounting year and
include creditors, bills payable and outstanding expenses.
The two concepts of working capital “gross” and “net” are not
exclusive; rather they have equal significance from management view point.
The gross working capital concept focuses attention on two
aspects of current assets management, (a) optimum investment in current
assets and (b) suggests the extent to which capital needs may be financed by
permanent sources of funds.
In summary, it may be emphasized that, both gross and net
concepts of working capital are equally important for the efficient
management of working capital.

TYPE OF WORKING CAPITAL

1. Net working capital

2. Gross working capital

3. Permanent working capital

4. Variable working capital

5. Balance sheet working capital

6. Cash working capital

7. Negative working capital

NET WORKING CAPITAL:

The net working capital is the difference between current assets
and current liabilities. The concept of net working capital enables a firm to
determine how much amount is left for operational requirements.

GROSS WORKING CAPITAL:

Gross working capital is the amount of funds invested in the
various components of current assets. Current assets are the assets which can
be converted in to cash with in an accounting year.

PERMANENT WORKING CAPITAL:

34
 Permanent working capital is the minimum amount of current
assets. Which is needed to conduct a business even during the dullest season
of the year. This amount various from year to year, depending upon the growth
of a company and the stage of the business cycle in which it operates.

TEMPORARY OR VARIABLE WORKING CAPITAL:

It represents the additional assets which are required at different
times during the operating year additional inventory, extra cash etc.
BALANCE SHEET WORKING CAPITAL:
The balance sheet working capital is one which is calculated
from the items appearing in the balance sheet. Gross working capital, which
is represented by current, and net working capital, which is represented by the
excess of current assets over current liabilities, are examples of the balance
sheet working capital.

CASH WORKING CAPITAL

Cash working capital is one which is calculated from the items appearing
in the profit and loss account. It shows the real flow of money or value at a
particuar time and is considered to be the most realistic approach in working
capital management.

NEGATIVE WORKING CAPITAL

Negative working capital emerges when current liabilities exceed.
Current assets. Such a situation is not absolutely theoretical, and occurs when
a firm is nearing a crisis of some magnitude.
DETERMINANTS OF WORKING CAPITAL
There are no set rules or formulae to determine the working
capital requirements of firms. A large number of factors, watch having a
different importance, influence working capital needs of firms.
The following is the description of factors which generally
influence the working capital requirements of firms.

NATURE & SIZE OF BUSINESS

Nature of the business influences the working capital
requirements. E.g., Trading and financial firms have a very less investment in
fixed assets but require large investments in working capital. The firm with
larger scale of operation will need more working capital than a small firm.
MANUFACTURING CYCLE
Longer the manufacturing cycle, larger will be the firm’s
working capital requirements.

35
BUSINESS FLUCTUATIONS
Business variations affect the working capital requirements,
specially the temporary working capital requirements, specially the temporary
working capital requirements of the firm. Therefore, financial arrangements
for seasonal working capital requirements can be made in advance.
PRODUCTION POLICY
The firm whose production capacities can be utilized for
manufacturing varied products, can have the advantage of diversified
activities and solve their working capital problems.
FIRM’S CREDIT POLICY
The credit policy of the firm affects working capital by
influencing the level of books debits. The firm should follow a rationalized
credit policy based on the credit standing of the customers and other relevant
factors.
AVAILABILITY OF CREDIT
A firm which can get credit easily on favorable conditions will
operate with less working capital than a firm without such a facility.
GROWTH AND EXPANSION ACTIVITIES
The working capital needs of a firm increases as it grows in terms
of sales or fixed assets. Proper plan may be done by companies to finance their
increasing needs for working capital.
PRICE LEVEL CHANGES:
The increasing shifts in price level make functions of financial
manager difficult. He should anticipate the effect of price level changes on
working capital requirements of the firm.

OPERATING EFFICIENCY
The firm will be effectively contributing to its working capital, if
it is efficient in controlling operating costs.
NEED FOR WORKING CAPITAL
The need for working capital to run the day-to-day business
activates cannot be overemphasized. We will hardly find a business firm,
which does not require any amount of working capital. Indeed, firms differ in
their requirements of the working capital. Earning a steady amount of profit

36
requires successful sales activity. The firm has to invest enough funds in
current assets for generating sales.
Current assets are needed because sales do not convert into cash
instantaneously. There is always an operating cycle involved in the conversion
of sales into cash.

ESTIMATION OF WORKING CAPITAL:

A number of methods, in addition to the operating cycle concept
may be used to determine working capital needs in practice. There are three
approaches which have been successfully used.
One common approach in projective the working capital
requirements is to use ratios developed on the basis of proper year’s
experience. That relates inventories and receivables to costs and sales.
The second approach is to assume total working capital to be
related to sales and calculate it as a percentage of sales.

Operating cycle:
Operating cycle is the time duration required to convert sales,
after the conversion of resources in to inventories, into cash. The operating
cycle of a manufacturing company involves three phases.
Acquisition of resources such as raw material, labour, power and fuel etc.
Manufacture of the product, which includes conversion of raw material into
work in progress into finished goods.
Sales of the product either for cash or on credit. Credit sales create account
receivable for collection.
The length of the operating cycle is the sum of (1) inventory
Conversion period (ICP) and (2) debtors conversion period (DCP).
OC = ICP + DCP
Inventory conversion period (ICP) is the sum of (a) raw material
conversion (RMCP) and (b) work-in-progress conversion period (WIPCP),
and (c) finished good conversion period (FGCP)
ICP = RMCP + WIPCP + FGCP
The debtor’s conversion period is the time required to collect the outstanding
amount from the customers. The total of inventory conversion period and
debtor’s conversion period is referred to as gross operating cycle (GOC).

37
 Cash

Raw
Materials

Debtors

Work in
Progress

Finished
Goods

MANAGEMENT OF WORKING CAPITAL

Management of working capital includes four components.

1. Management of cash

2. Management of receivables

3. Management of payables

4. Management of inventory

38
MANGEMENT OF CASH

Cash is the basis input needed to keep the business running on a

continuous basis. The firm should keep sufficient cash neither more nor less.
Management of cash includes four phases:
1. Cash planning

2. Management of cash flows

3. Optimum cash level

4. Investing surplus cash

CASH PLANNING
Cash inflows and outflows should be planned to project cash
surplus or defect for each period of the planning period. Cash budger should
be prepared for this purpose.
MANAGING THE CASH FLOWS
The flow of cash should be properly managed. The inflows of
cash should be accelerated as far as possible, while the flows of cash should
be decelerated.
OPTIMUM CASH LEVEL:
The firm should decide above the appropriate level of cash
balances. The cost of excess cash and the disadvantages of cash deficiency
should be matched to determine optimum level of cash balances.
INVESTING SURPLUS CASH
The surplus cash balances should be properly invested to earn
profits. The firm should decide above the division of such cash balances
between bank deposits, marketable securities and inter corporate lending.

MANAGEMENT OF RECEIVABLES
Receivables constitute a substantial portion of current assets of
several firms. Receivables constitute above are third of current assets in India.
As sustain amounts are tied up in trade debtor, it needs careful analysis and
proper management.

39
 Firm’s investment receivables depend on the volume of credit
sales and the collection period. The investment in receivables may be
expressed in terms and of costs instead of sales value.
The investment in receivables depends on the firm’s credit policy.
Credit policy refers to the combination of three decision variables:
 Credit standard

 Credit terms

 Collection efforts

CREDIT STANDARDS:
Credit standards are criteria to decide the types of customers to
whom goods could be sold on credit. If affirm has move slow-paying
customers, its investment in accounts receivable will increase. The firm will
also be exposed to higher risk of default.
CREDIT TERMS:
Credit terms specify duration of credit and terms of payment by
customers. Investment in accounts receivable and vice versa
MANAGEMENT OF PAYABLES:
Payable management is the process of making decisions relating
to investment made by the trade creditors in the firm. Payables represent
amounts owed by the firm as result of credit purchases in the ordinary course
of business. Payables are also known as “Accounts Payables”, and “Trade
Payables”. The period of credit and the extent of payables depend upon the
firm’s liquidity position as well as the credit policy followed by the suppliers,
creditors.

Some of the factors influence the size of the payables:

 Size of credit purchases

 Credit Policies

 Terms Policies

 Terms of Trade

 Credit Collection efforts by creditors

 Firms liquidity status

MANAGEMENT OF INVENTORY:

40
 The term inventory refers to the stock pile of the product a firm
is offering for sale and the components that make up the product. In other
words, inventory is composed of assets that will be sold in future in the normal
course of business operations. The assets which firms store as inventory in
anticipation of need are
 Raw materials

 Work In Progress (Semi-Finished goods) and

 Finished goods.

The raw material inventory contains items that are purchase by

the firm from others and are converted in to finished goods through the
manufacturing process. They are an important input of the final product. The
work in progress inventory consists of items currently being used in the
production process. They are normally partially or semi finished goods that
are at various stages of production in a multi stage production process.
Finished goods represent final or completed products which are available for
sale. The inventory of such goods consists of items that have been produced
but are yet to be sold.

The basic concepts relevant to the management and control of

inventory. The aspects covered are:
 Determination of the type of control required.

 The basic economic order quantity

 The re-order point, and

 Safety stocks.

The objective of inventory management consists of two

COUNTER BALANCING PARTS
To minimize the firms investments in inventory
To meet the demand for the product by efficiently organizing the firms
production and sales operations.
LIMITATIONS:
Working capital considers the purpose of current assets as
providing adequate cover for current liabilities. This definition suffers from
many limitations as stated below:

41
 First, the amount of working capital, viewed in either sense, is
obtained from the data contained in the balance sheet, which merely indicates
the financial position of company as on specific date and is therefore, ‘static’
in nature.
Secondly, the balance sheet of a company is prepared and
presented in the annual report in accordance with the Schedule V!
Requirements of the Indian Companies Act. As a result the amount of net
working capital obtained by subtracting current liabilities from current assets
presented in the balance sheet fails to reflect the true amount of net working
capital.

BALANCED WORKING CAPITAL POSITION

The firm should maintain a sound working capital position. It
should have adequate working capital to run its business operations. Both
excessive as well as inadequate working capital positions are dangerous from
the firm’s point of view. Excessive working capital means idle funds which
earn no profits for the firm. Paucity of working capital not only impairs the
firm’s profitability but also results in production interruptions and
inefficiencies;
The dangers of excessive working capital are as follows:
 It results in unnecessary accumulation of inventories. Thus, chances of
inventory mishandling, waste, theft and loses increase.

 It is an indication of defective credit policy and slack collection period.

Consequently, higher incidence of bad debts results, which adversely

affecters profits.

 Excessive working capital makes management co placement, which

degenerates into managerial inefficient.

 Tendencies of accumulating inventors tend to make speculative profits

grow. This may to make dividends policy liberal and difficult to cope

with in future when the form is unable to make speculative profits.

42
Inadequate working capital also results in dangers:
 It stagnates growth. It becomes difficult for the firm to undertake

profitable projects for non-availability of working capital funds.

 It becomes difficult to implement operating plans to achieve the firm’s

profit target.

 Operating inefficiencies creep in when it becomes difficult even to meet

day-to-day commitments.

 Fixed assets are not efficiently utilized for the lack of working capital

funds. Thus the firm’s profitability would deteriorate.

 Paucity of working capital render the firm unable to avail attractive

credit opportunities etc.,

 The firm loses its reputation when it is not in position to honor its short-

term obligations.

GOALS OF WORKING CAPITAL POLILCIES

The firm’s policy for managing its working capital should be
designed to achieve three goals:
1. Adequate liquidity:
If a firm sufficient cash to pay its bills when due, it will
experience continuing problems. The most important goal is to achieve
adequate liquidity for the conduct of day-to-day operations.
2. Minimization of risk:
In selecting its sources of financing payables and other short-
term liabilities may involve relatively low costs. The firm must ensure that
these near current assets on hand to pay them. The matching of assets and
liabilities among current accounts is task of minimizing the risk of being
unable to pay bills and other obligations.
3. Contribute to maximizing firm’s valve:
The firm holds working capital for the same purpose as it holds any other
assets, that is, to maximize the present value of common stock and value of

43
the firm. It should not hold idle current assets any more than it should have
idle fixed assets

ANALYSIS & INTERPRETATION RATIO RELATIONS WORKING CAPITAL

PROFORMA

STATEMENT OF CHANGES IN WORKING CAPITAL

Particulars Previous Current Effect on Working

Year Year Capital

Increase Decrease
a) Current Assets:
Inventories
Bills receivable
Debtors
Temporary Investment
Prepaid Expenses
Loans and advances
Other Current assets

Total Current assets – (A)

b) Current Liabilities:
Creditors
Over Draft
Bills Payable
Cash Credit
Interest accounted & due
Provision for tax
Other current liabilities

Total current liabilities – (B)

Networking capital (A-B)
Increase / Decrease

SCHEDULE OF CHANGES IN WORKING CAPITAL BETWEEN

2011-12&2012-2013
(Amount in Rs.)

44
 Particulars 2011 - 12 2012 - 13
SOURCES OF FUNDS:
1) SHAREHOLDERS' FUNDS
(a) VALUE MINDS 18,719,280 18,719,280
(b) Reserves and Surplus 37,754372 78,340,733
56,473,652 97,060,013
2) DEFFERED TAX LIABILITY 2,794,350 2,478,428
TOTAL 59,268,002 99,538,441
APPLICATION OF FUNDS:
1) FIXED ASSETS
(a) Gross Block 29,767,979 31,057,596
(b) Less: Depreciation 14,710,986 16,894,562
(c) Net Block 15,056,993 14,163,034
2) CURRENT ASSETS, LOANS AND ADVANCES
(a) Sundry Debtors 37,856,420 80,712,804
(b) Cash and Bank Balances 51,690,326 34,043,520
(c) Other Current Assets 857,753 152,228
(d) Loans and Advances 923,709 733,516
91,328,208 115,642,068
LESS: CURRENT LIABILITIES AND PROVISIONS
(a) Liabilities 38,591,265 21,596,916
(b) Provisions 8,525,934 8,669,745
47,117,199 30,266,661
NET CURRENT ASSETS 44,211,009 85,375,407
TOTAL 59,268,002 99,538,441

INTERPRETATION:

In this year there is a increase in working capital as compare to

the previous year, it is due to increase in inventories, debtors, and other current
assets. At last we can conclude that working capital is satisfactory.

SCHEDULE OF CHANGES IN WORKING CAPITAL BETWEEN

2013-14&2014-2015

45
 (Amount in Rs.)

Particulars 2013- 14 2014 - 15

SOURCES OF FUNDS:
1) SHAREHOLDERS' FUNDS
(a) VALUE MINDS 18,719,280 18,719,280
(b) Reserves and Surplus 78,340,733 37,754,372
97,060,013 56,473,652
2) DEFFERED TAX LIABILITY 2,478,428 2,794,350
TOTAL 99,538,441 59,268,002
APPLICATION OF FUNDS:
1) FIXED ASSETS
(a) Gross Block 31,057,596 29,767,979
(b) Less: Depreciation 16,894,562 14,710,986
(c) Net Block 14,163,034 15,056,993
2) CURRENT ASSETS, LOANS AND ADVANCES
(a) Sundry Debtors 80,712,804 37,856,420
(b) Cash and Bank Balances 34,043,520 51,690,326
(c) Other Current Assets 152,228 857,753
(d) Loans and Advances 733,516 923,709
115,642,068 91,328,208
LESS: CURRENT LIABILITIES AND PROVISIONS
(a) Liabilities 21,596,916 38,591,265
(b) Provisions 8,669,745 8,525,934
30,266,661 47,117,199
NET CURRENT ASSETS 85,375,407 44,211,009
TOTAL 99,538,441 59,268,002

INTERPRETATION:

In this year there is as increase in working capital as compare to

the previous year, It is due to increase in inventories, debtors and other current
assets. At last we can conclude that working capital is satisfactory

Balance sheet as on 31st March 2007

46
 (Amount in Rs.)

Particulars 2006 - 07 2005 - 06

SOURCES OF FUNDS:
1) SHAREHOLDERS' FUNDS
(a) VALUE MINDS 18,719,280 18,719,280
(b) Reserves and Surplus 78,340,733 37,754,372
97,060,013 56,473,652
2) DEFFERED TAX LIABILITY 2,478,428 2,794,350
TOTAL 99,538,441 59,268,002
APPLICATION OF FUNDS:
1) FIXED ASSETS
(a) Gross Block 31,057,596 29,767,979
(b) Less: Depreciation 16,894,562 14,710,986
(c) Net Block 14,163,034 15,056,993
2) CURRENT ASSETS, LOANS AND ADVANCES
(a) Sundry Debtors 80,712,804 37,856,420
(b) Cash and Bank Balances 34,043,520 51,690,326
(c) Other Current Assets 152,228 857,753
(d) Loans and Advances 733,516 923,709
115,642,068 91,328,208
LESS: CURRENT LIABILITIES AND PROVISIONS
(a) Liabilities 21,596,916 38,591,265
(b) Provisions 8,669,745 8,525,934
30,266,661 47,117,199
NET CURRENT ASSETS 85,375,407 44,211,009
TOTAL 99,538,441 59,268,002

INTERPRETATION:

In this year there is a decrease in working capital as compare to

the previous year, it is due to decrease in inventories, debtors and other current
assets and increase in current liabilities. At least we can conclude that working
capital is unsatisfactory.

RATIO ANALYSIS
FINANCIAL ANALYSIS

47
 Financial analysis is the process of identifying the financial
strengths and weaknesses of the firm and establishing relationship between
the items of the balance sheet and profit & loss account.

Financial ratio analysis is the calculation and comparison of

ratios, which are derived from the information in a company’s financial
statements. The level and historical trends of these ratios can be used to make
inferences about a company’s financial condition, its operations and
attractiveness as an investment. The information in the statements is used by

 Trade creditors, to identify the firm’s ability to meet their claims i.e.
liquidity position of the company.

 Investors, to know about the present and future profitability of the

company and its financial structure.

 Management, in every aspect of the financial analysis. It is the

responsibility of the management to maintain sound financial condition
in the company.

RATIO ANALYSIS

The term “Ratio” refers to the numerical and quantitative

relationship between two items or variables. This relationship can be exposed
as

 Percentages

48
  Fractions

 Proportion of numbers

Ratio analysis is defined as the systematic use of the ratio to

interpret the financial statements. So that the strengths and weaknesses of a
firm, as well as its historical performance and current financial condition can
be determined. Ratio reflects a quantitative relationship helps to form a
quantitative judgment.

STEPS IN RATIO ANALYSIS

 The first task of the financial analysis is to select the information

relevant to the decision under consideration from the statements and
calculates appropriate ratios.

 To compare the calculated ratios with the ratios of the same firm
relating to the pas6t or with the industry ratios. It facilitates in assessing
success or failure of the firm.

 Third step is to interpretation, drawing of inferences and report writing

conclusions are drawn after comparison in the shape of report or
recommended courses of action.

BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between

variables. They enable analyst to draw conclusions regarding financial
operations. They use of ratios as a tool of financial analysis involves the

49
comparison with related facts. This is the basis of ratio analysis. The basis of
ratio analysis is of four types.

 Past ratios, calculated from past financial statements of the firm.

 Competitor’s ratio, of the some most progressive and successful

competitor firm at the same point of time.

 Industry ratio, the industry ratios to which the firm belongs to

 Projected ratios, ratios of the future developed from the projected or pro
forma financial statements

NATURE OF RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of

financial statements. It is the process of establishing and interpreting various
ratios for helping in making certain decisions. It is only a means of
understanding of financial strengths and weaknesses of a firm. There are a
number of ratios which can be calculated from the information given in the
financial statements, but the analyst has to select the appropriate data and
calculate only a few appropriate ratios. The following are the four steps
involved in the ratio analysis.

50
  Selection of relevant data from the financial statements depending upon
the objective of the analysis.

 Calculation of appropriate ratios from the above data.

 Comparison of the calculated ratios with the ratios of the same firm in
the past, or the ratios developed from projected financial statements or
the ratios of some other firms or the comparison with ratios of the
industry to which the firm belongs.

INTERPRETATION OF THE RATIOS

The interpretation of ratios is an important factor. The inherent

limitations of ratio analysis should be kept in mind while interpreting them.
The impact of factors such as price level changes, change in accounting
policies, window dressing etc., should also be kept in mind when attempting
to interpret ratios. The interpretation of ratios can be made in the following
ways.

 Single absolute ratio

 Group of ratios

 Historical comparison

 Projected ratios

 Inter-firm comparison

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS

51
 The calculation of ratios may not be a difficult task but their use
is not easy. Following guidelines or factors may be kept in mind while
interpreting various ratios are

 Accuracy of financial statements

 Objective or purpose of analysis

 Selection of ratios

 Use of standards

 Caliber of the analysis

IMPORTANCE OF RATIO ANALYSIS

 Aid to measure general efficiency

 Aid to measure financial solvency

 Aid in forecasting and planning

 Facilitate decision making

 Aid in corrective action

 Aid in intra-firm comparison

 Act as a good communication

 Evaluation of efficiency

 Effective tool

52
LIMITATIONS OF RATIO ANALYSIS

 Differences in definitions

 Limitations of accounting records

 Lack of proper standards

 No allowances for price level changes

 Changes in accounting procedures

 Quantitative factors are ignored

 Limited use of single ratio

 Background is over looked

 Limited use

 Personal bias

CLASSIFICATIONS OF RATIOS

The use of ratio analysis is not confined to financial manager

only. There are different parties interested in the ratio analysis for knowing
the financial position of a firm for different purposes. Various accounting
ratios can be classified as follows:

1. Traditional Classification

2. Functional Classification

3. Significance ratios

1. Traditional Classification

It includes the following.

53
  Balance sheet (or) position statement ratio: They deal with the
relationship between two balance sheet items, e.g. the ratio of current
assets to current liabilities etc., both the items must, however, pertain
to the same balance sheet.

 Profit & loss account (or) revenue statement ratios: These ratios deal
with the relationship between two profit & loss account items, e.g. the
ratio of gross profit to sales etc.,

 Composite (or) inter statement ratios: These ratios exhibit the relation
between a profit & loss account or income statement item and a balance
sheet items, e.g. stock turnover ratio, or the ratio of total assets to sales.

2. Functional Classification

These include liquidity ratios, long term solvency and leverage

ratios, activity ratios and profitability ratios.

3. Significance ratios

Some ratios are important than others and the firm may classify
them as primary and secondary ratios. The primary ratio is one, which is of
the prime importance to a concern. The other ratios that support the primary
ratio are called secondary ratios.

IN THE VIEW OF FUNCTIONAL CLASSIFICATION, THE RATIOS

ARE

1. Liquidity ratio

2. Leverage ratio

54
3. Activity ratio

4. Profitability ratio

Chapter – 5

DATA ANALYSIS

55
LIQUIDITY RATIO

1. CURRENT RATIO

(Amount in Rs.)

Current Ratio

Year Current Assets Current Liabilities Ratio

2003 58,574,151 7,903,952 7.41

2004 69,765,346 31,884,616 2.19
2005 72,021,081 16,065,621 4.48
2006 91,328,208 47,117,199 1.94
2007 115,642,068 30,266,661 3.82

Interpretation

As a rule, the current ratio with 2:1 (or) more is considered as

satisfactory position of the firm.

When compared with 2006, there is an increase in the provision

for tax, because the debtors are raised and for that the provision is created.
The current liabilities majorly included Value minds It services for
consultancy additional services.

The sundry debtors have increased due to the increase to

corporate taxes.

In the year 2006, the cash and bank balance are reduced because
that is used for payment of dividends. In the year 2007, the loans and advances
include majorly the advances to employees and deposits to government. The
loans and advances reduced because the employees set off their claims. The

56
other current assets include the interest attained from the deposits. The
deposits reduced due to the declaration of dividends. So, the other current
assets decreased.

The huge increase in sundry debtors resulted an increase in the

ratio, which is above the benchmark level of 2:1 which shows the comfortable
position of the firm.

GRAPHICAL REPRESENTATION

CURRENT RATIO

8.00 7.41
7.00
6.00
4.48
5.00 3.82
Ratio 4.00
2.19 1.94
3.00 Ratio

2.00
1.00
0.00
2003 2004 2005 2006 2007
Years

57
2. QUICK RATIO

(Amount in Rs.)

Quick Ratio

Year Quick Assets Current Liabilities Ratio

2003 58,574,151 7,903,952 7.41

2004 52,470,336 31,884,616 1.65
2005 69,883,268 16,065,620 4.35
2006 89,433,596 47,117,199 1.9
2007 115,431,868 30,266,661 3.81

Interpretation

Quick assets are those assets which can be converted into cash
within a short period of time, say to six months. So, here the sundry debtors
which are with the long period does not include in the quick assets.

Compare with 2006, the Quick ratio is increased because the

sundry debtors are increased due to the increase in the corporate tax and for
that the provision created is also increased. So, the ratio is also increased with
the 2006.

GRAPHICAL REPRESENTATION

58
 QUICK RATIO

8.00 7.41
7.00
6.00
5.00 4.35 3.81
Ratio 4.00
3.00 Ratios
1.90
1.65
2.00
1.00
0.00
2003 2004 2005 2006 2007
Years

59
3. ABOSULTE LIQUIDITY RATIO

(Amount in Rs.)

Absolute Cash Ratio

Year Absolute Liquid Assets Current Liabilities Ratio

2003 31,004,027 7,903,952 3.92

2004 10,859,778 31,884,616 0.34
2005 39,466,542 16,065,620 2.46
2006 53,850,852 47,117,199 1.14
2007 35,649,070 30,266,661 1.18

Interpretation

The current assets which are ready in the form of cash are
considered as absolute liquid assets. Here, the cash and bank balance and the
interest on fixed assts are absolute liquid assets.

In the year 2006, the cash and bank balance are decreased due to
decrease in the deposits and the current liabilities are also reduced because of
the payment of dividend. That causes a slight increase in the current year’s
ratio.

60
GRAPHICAL REPRESENTATION

ABSOLUTE CASH RATIO

3.92
4
3.5
3 2.46
2.5
Ratios 2
1.14 1.18
1.5 Ratios
1 0.34
0.5
0
2003 2004 2005 2006 2007
Years

61
LEVERAGE RATIOS

4. PROPRIETORY RATIO

(Amount in Rs.)

Proprietary Ratio

Year Share Holders Funds Total Assets Ratio

2003 67,679,219 78,572,171 0.86

2004 53,301,834 88,438,107 0.6
2005 70,231,061 89,158,391 0.79
2006 56,473,652 106,385,201 0.53
2007 97,060,013 129,805,102 0.75

Interpretation

The proprietary ratio establishes the relationship between

shareholders funds to total assets. It determines the long-term solvency of the
firm. This ratio indicates the extent to which the assets of the company can be
lost without affecting the interest of the company.

There is no increase in the VALUE MINDS from the year2004.

The share holder’s funds include VALUE MINDS and reserves and surplus.
The reserves and surplus are increased due to the increase in balance in profit
and loss account, which is caused by the increase of income from services.

Total assets, includes fixed and current assets. The fixed assets
are reduced because of the depreciation and there are no major increments in
the fixed assets. The current assets are increased compared with the year

62
2006. Total assets are also increased than precious year, which resulted an
increase in the ratio than older.

GRAPHICAL REPRESENTATION

PROPRIETORY RATIO

0.90 0.86
0.79 0.75
0.80
0.70 0.60
0.53
0.60
0.50
Ratios
0.40
Ratios
0.30
0.20
0.10
0.00
2003 2004 2005 2006 2007
Years

63
ACTIVITY RATIOS

5. WORKING VALUE MINDS TURNOVER RATIO

(Amount in Rs.)

Working VALUE MINDS Turnover Ratio

Working VALUE
Year Income from Services MINDS Ratio

2003 36,309,834 50,670,199 0.72

2004 53,899,084 37,880,730 1.42
2005 72,728,759 55,355,460 1.31
2006 55,550,649 44,211,009 1.26
2007 96,654,902 85,375,407 1.13

Interpretation

Income from services is greatly increased due to the extra invoice

for Operations & Maintenance fee and the working VALUE MINDS is also
increased greater due to the increase in from services because the huge
increase in current assets.

The income from services is raised and the current assets are
also raised together resulted in the decrease of the ratio of 2007 compared
with 2006.

64
GRAPHICAL REPRESENTATION

WORKING CAPITAL TURNOVER RATIO

1.60 1.42 1.31

1.40 1.26
1.13
1.20
1.00
0.72
Ratio 0.80
0.60 Ratio
0.40
0.20
0.00
2003 2004 2005 2006 2007
Years

65
6. FIXED ASSETS TURNOVER RATIO

(Amount in Rs.)

Fixed Assets Turnover Ratio

Year Income from Services Net Fixed Assets Ratio

2003 36,309,834 28,834,317 1.26

2004 53,899,084 29,568,279 1.82
2005 72,728,759 17,137,310 4.24
2006 55,550,649 15,056,993 3.69
2007 96,654,902 14,163,034 6.82

Interpretation

Fixed assets are used in the business for producing the goods to
be sold. This ratio shows the firm’s ability in generating sales from all
financial resources committed to total assets. The ratio indicates the account
of one-rupee investment in fixed assets.

The income from services is greatly increased in the current year

due to the increase in the Operations & Maintenance fee due to the increase
in extra invoice and the net fixed assets are reduced because of the increased
charge of depreciation. Finally, that effected a huge increase in the ratio
compared with the previous year’s ratio.

66
GRAPHICAL REPRSENTATION

FIXED ASSETS TURNOVER RATIO

6.82
7.00
6.00
5.00 4.24 3.69
4.00
Ratios
3.00
1.82 Ratios
2.00 1.26

1.00
0.00
2003 2004 2005 2006 2007
Years

67
7. VALUE MINDS TURNOVER RATIO

(Amount in Rs.)

VALUE MINDS Turnover Ratio

VALUE MINDS
Year Income from Services Employed Ratio

2003 36,309,834 37,175,892 0.98

2004 53,899,084 53,301,834 1.01
2005 72,728,759 70,231,061 1.04
2006 55,550,649 56,473,652 0.98
2007 96,654,902 97,060,013 1.00

Interpretation

This is another ratio to judge the efficiency and effectiveness of

the company like profitability ratio.

The income from services is greatly increased compared with

the previous year and the total VALUE MINDS employed includes VALUE
MINDS and reserves & surplus. Due to huge increase in the net profit the
VALUE MINDS employed is also increased along with income from services.
Both are affected in the increment of the ratio of current year.

68
GRAPHICAL REPRESENTATION

CAPITAL TURNOVER RATIO

1.04 1.04
1.03
1.02 1.01
1.01
1.00
1.00
0.98
Ratios 0.99 0.98
0.98 Ratios
0.97
0.96
0.95
0.94
2003 2004 2005 2006 2007
Years

69
8. CURRENT ASSETS TO FIXED ASSETS RATIO

(Amount in Rs.)

Current Assets to Fixed Assets Ratio

Year Current Assets Fixed Assets Ratio

2003 58,524,151 19,998,020 2.93

2004 69,765,346 18,672,761 3.74
2005 72,021,081 17,137,310 4.20
2006 91,328,208 15,056,993 6.07
2007 115,642,068 14,163,034 8.17

Interpretation

Current assets are increased due to the increase in the sundry

debtors and the net fixed assets of the firm are decreased due to the charge of
depreciation and there is no major increment in the fixed assets.

The increment in current assets and the decrease in fixed assets

resulted an increase in the ratio compared with the previous year

70
GRAPHICAL REPRESENTATION

CURRENT ASSETS TO FIXED ASSETS RATIO

9.00 8.17
8.00
7.00 6.07
6.00
5.00 4.20
Ratios 3.74
4.00 2.93
Ratios
3.00
2.00
1.00
0.00
2003 2004 2005 2006 2007
Years

71
PROFITABILITY RATIOS

GENERAL PROFITABILITY RATIOS

9. NET PROFIT RATIO

(Amount in Rs.)
Net Profit Ratio

Year Net Profit After Tax Income from Services Ratio

2003 21,123,474 36,039,834 0.59

2004 16,125,942 53,899,084 0.30
2005 16,929,227 72,728,759 0.23
2006 18,259,580 55,550,649 0.33
2007 40,586,359 96,654,902 0.42

Interpretation

The net profit ratio is the overall measure of the firm’s ability to
turn each rupee of income from services in net profit. If the net margin is
inadequate the firm will fail to achieve return on shareholder’s funds. High
net profit ratio will help the firm service in the fall of income from services,
rise in cost of production or declining demand.

The net profit is increased because the income from services is

increased. The increment resulted a slight increase in 2007 ratio compared
with the year 2006.

72
GRAPHICAL REPRESENTATION

NET PROFIT RATIO

0.59
0.60

0.50 0.42

0.40 0.33
0.30
Ratios 0.30 0.23
Ratios
0.20

0.10

0.00
2003 2004 2005 2006 2007
Years

73
10. OPERATING PROFIT

(Amount in Rs.)
Operating Profit

Year Operating Profit Income from Services Ratio

2003 36,094,877 36,309,834 0.99

2004 27,576,814 53,899,084 0.51
2005 29,540,599 72,728,759 0.41
2006 31,586,718 55,550,649 0.57
2007 67,192,677 96,654,902 0.70

Interpretation

The operating profit ratio is used to measure the relationship

between net profits and sales of a firm. Depending on the concept, it will
decide.

The operating profit ratio is increased compared with the last

year. The earnings are increased due to the increase in the income from
services because of Operations & Maintenance fee. So, the ratio is increased
slightly compared with the previous year.

74
GRAPHICAL REPRESENTATION

OPERATING PROFIT RATIO

0.99
1.00
0.90
0.80 0.70
0.70
0.51 0.57
0.60
Ratios 0.50 0.41
0.40 Ratios
0.30
0.20
0.10
0.00
2003 2004 2005 2006 2007
Years

75
11. RETURN ON TOTAL ASSETS RATIO

(Amount in Rs.)
Return on Total Assets Ratio

Year Net Profit After Tax Total Assets Ratio

2003 21,123,474 78,572,171 0.27

2004 16,125,942 88,438,107 0.18
2005 16,929,227 89,158,391 0.19
2006 18,259,580 106,385,201 0.17
2007 40,586,359 129,805,102 0.31

Interpretation

This is the ratio between net profit and total assets. The ratio
indicates the return on total assets in the form of profits.

The net profit is increased in the current year because of the

increment in the income from services due to the increase in Operations &
Maintenance fee. The fixed assets are reduced due to the charge of
depreciation and no major increments in fixed assets but the current assets are
increased because of sundry debtors and that effects an increase in the ratio
compared with the last year i.e. 2006.

76
GRAPHICAL REPRESENTATION

RETURN ON TOTAL ASSETS

0.35
0.31
0.30 0.27
0.25
0.18 0.19
0.20 0.17
Ratios
0.15 Ratios
0.10

0.05

0.00
2003 2004 2005 2006 2007
Years

77
12. RESERVES & SURPLUS TO VALUE MINDS RATIO

(Amount in Rs.)
Reserves & Surplus to VALUE MINDS Ratio

Year Reserves & Surplus VALUE MINDS Ratio

2003 65,599,299 2,079,920 31.54

2004 34,582,554 18,719,280 1.85
2005 51,511,781 18,719,280 2.75
2006 37,754,372 18,719,280 2.02
2007 78,340,733 18,719,280 4.19

Interpretation

The ratio is used to reveal the policy pursued by the company a

very high ratio indicates a conservative dividend policy and vice-versa.
Higher the ratio better will be the position.

The reserves & surplus is decreased in the year 2006, due to the
payment of dividends and in the year 2007 the profit is increased. But the
VALUE MINDS is remaining constant from the year 2004. So, the increase
in the reserves & surplus caused a greater increase in the current year’s ratio
compared with the older.

78
GRAPHICAL REPRESENTATION

RESERVES & SRUPLUS TO CAPITAL RATIO

35.00 31.54
30.00
25.00
20.00
Ratios
15.00
Ratios
10.00
2.75 4.19
1.85 2.02
5.00
-
2003 2004 2005 2006 2007
Years

79
OVERALL PROFITABILITY RATIOS

13. EARNINGS PER SHARE

(Amount in Rs.)
Earnings Per Share

Year Net Profit After Tax No of Equity Shares Ratio

2003 21,123,474 207,992 101.56

2004 16,125,942 1,871,928 8.61
2005 16,929,227 1,871,928 9.04
2006 18,259,580 1,871,928 9.75
2007 40,586,359 1,871,928 21.68

Interpretation

Earnings per share ratio are used to find out the return that the
shareholders earn from their shares. After charging depreciation and after
payment of tax, the remaining amount will be distributed by all the
shareholders.

Net profit after tax is increased due to the huge increase in the
income from services. That is the amount which is available to the
shareholders to take. There are 1,871,928 shares of Rs.10/- each. The share
VALUE MINDS is constant from the year 2004. Due to the huge increase in
net profit the earnings per share is greatly increased in 2007.

80
GRAPHICAL REPRESENTATION

EARNINGS PER SHARE

120.00
101.56
100.00

80.00

Ratios 60.00
Ratios
40.00 21.68
8.61 9.75
9.04
20.00

0.00
2003 2004 2005 2006 2007
Years

81
14. PRICE EARNINGS (P/E) RATIO

(Amount in Rs.)
Price Earning (P/E) Ratio

Year Market Price Per Share Earnings Per Share Ratio

2003 32.54 101.56 0.32

2004 28.47 8.61 3.30
2005 37.52 9.04 4.15
2006 30.17 9.75 3.09
2007 51.85 21.68 2.39

Interpretation

The ratio is calculated to make an estimate of application in the

value of share of a company.

The market price per share is increased due to the increase in the
reserves & surplus. The earnings per share are also increased greatly
compared with the last year because of increase in the net profit. So, the ratio
is decreased compared with the previous year.

82
GRAPHICAL REPRESENTATION

P/E RATIO

4.50 4.15
4.00
3.30
3.50 3.09
3.00 2.39
2.50
Ratios
2.00
Ratios
1.50
1.00
0.32
0.50
0.00
2003 2004 2005 2006 2007
Years

83
15. RETURN ON INVESTMENT

(Amount in Rs.)
Return on Investment

Year Net Profit After Tax Share Holders Fund Ratio

2003 21,123,474 67,679,219 0.31

2004 16,125,942 53,301,834 0.3
2005 16,929,227 70,231,061 0.24
2006 18,259,580 56,473,652 0.32
2007 40,586,359 97,060,013 0.42

Interpretation

This is the ratio between net profits and shareholders’ funds. The
ratio is generally calculated as percentage multiplying with 100.

The net profit is increased due to the increase in the income from
services ant the shareholders funds are increased because of reserve & surplus.
So, the ratio is increased in the current year.

84
GRAPHICAL REPRESENTATION

RETURN ON INVESTMENT RATIO

0.45 0.42
0.40
0.31 0.32
0.35 0.30
0.30 0.24
0.25
Ratios
0.20
RatioS
0.15
0.10
0.05
0.00
2003 2004 2005 2006 2007
Years

85
Chapter – 7

FINDINGS, SUMARRY & CONCLUSION

86
FINDINGS OF THE STUDY

1. The current ratio has shown in a fluctuating trend as 7.41, 2.19, 4.48,
1.98, and 3.82 during 2003 of which indicates a continuous increase in
both current assets and current liabilities.

2. The quick ratio is also in a fluctuating trend throughout the period 2003
– 07 resulting as 7.41, 1.65, 4.35, 1.9, and 3.81. The company’s present
liquidity position is satisfactory.

3. The absolute liquid ratio has been decreased from 3.92 to 1.18, from
2003 – 07.

4. The proprietary ratio has shown a fluctuating trend. The proprietary

ratio is increased compared with the last year. So, the long-term
solvency of the firm is increased.

5. The working VALUE MINDS increased from 0.72 to 1.13 in the year
2003 – 07.

6. The fixed assets turnover ratio is in increasing trend from the year 2003
– 07 (1.26, 1.82, 4.24, 3.69, and 6.82). It indicates that the company is
efficiently utilizing the fixed assets.

7. The VALUE MINDS turnover ratio is increased form 2003 – 05 (0.98,

1.01, and 1.04) and decreased in 2006 to 0.98. It increased in the current
year as 1.00.

8. The current assets to fixed assets ratio is increasing gradually from 2003
– 07 as 2.93, 3.74, 4.20, 6.07 and 8.17. It shows that the current assets
are increased than fixed assets.

87
9. The net profit ratio is in fluctuation manner. It increased in the current
year compared with the previous year from 0.33 to 0.42.

10.The net profit is increased greatly in the current year. So, the return on
total assets ratio is increased from 0.17 to 0.31.

11.The Reserves and Surplus to VALUE MINDS ratio is increased to 4.19

from 2.02. The VALUE MINDS is constant, but the reserves and
surplus are increased in the current year.

12.The earnings per share was very high in the year 2003 i.e., 101.56. That
is decreased in the following years because number of equity shares are
increased and the net profit is decreased. In the current year the net
profit is increased due to the increase in operating and maintenance fee.
So, the earnings per share is increased.

13.The operating profit ratio is in fluctuating manner as 0.99, 0.51, 0.41,

0.57 and 0.69 from 2003 – 07 respectively.

14.Price Earnings ratio is reduced when compared with the last year. It is
reduced from 3.09 to 2.39, because the earnings per share is increased.

15.The return on investment is increased from 0.32 to 0.42 compared with

the previous year. Both the profit and shareholders’ funds increase
cause an increase in the ratio.

88
SUMMARY

1) After the analysis of Financial Statements, the company status is better,

because the Net working VALUE MINDS of the company is doubled
from the last year’s position.

2) The company profits are huge in the current year; it is better to declare
the dividend to shareholders.

3) The company is utilising the fixed assets, which majorly help to the
growth of the organisation. The company should maintain that
perfectly.

4) The company fixed deposits are raised from the inception, it gives the
other income i.e., Interest on fixed deposits.

CONCLUSION

The company’s overall position is at a good position. Particularly

the current year’s position is well due to raise in the profit level from the last
year position. It is better for the organization to diversify the funds to different
sectors in the present market scenario.

89
BIBLIOGRAPHY

REFFERED BOOKS

 FINANCIAL MANAGEMENT - I. M. PANDEY

 MANAGEMENT ACCOUNTANCY - PILLAI & BAGAVATI

 MANAGEMENT ACCOUNTING – SHARMA & GUPTA

INTERNET SITE

 www.ercap.org

 www.wikipedia.com

 www.nwda.gov.in

90
 APPENDIX
Profit and Loss Account for the period ended on 31st March 2007

(Amount in Rs.)

Particulars 2006 - 07 2005 – 06

I.INCOME
Income from Services 96,654,902 55,550,649
Other Income 2,398,220 2,285,896
TOTAL 99,053,122 57,836,545
II.EXPENDITURE
Administrative and Other Expenses 81,334,750 75,599,719
81,334,750 75,599,719
Less: Expenditure Reimbursable under Operations
and Maintenance Agreement 49,474,305 49,349,892
TOTAL 31,860,445 26,249,827
III. PROFIT BEFORE DEPRECIATION AND TAXATION 67,192,677 31,586,718
Provision for Depreciation 2,183,576 2,279,917
IV. PROFIT BEFORE TAXATION 65,009,101 29,306,801
Provision for Taxation
- Current 24,292,000 10,680,440
- Deferred (315,922) (67,359)
- Fringe Benefits 446,663 434,140
V. PROFIT AFTER TAXATION 40,586,359 18,259,580
Surplus brought forward from Previous Year 26,699,257 44,951,851
VI. PROFIT AVAIALABLE FOR APPROPRIATIONS 67,285,617 63,211,431
Transfer to General Reserve - 4,495,185
Interim Dividend Rs.15 per equity Share (2005- NIL) - 28,078,920
Provision for Dividend Distribution Tax - 3,938,069
VII. BALANCE CARRIED TO BALANCE SHEET 67,285,617 26,699,257

Earnings Per Share - Basic & Diluted 22 10

91