Written Analysis of a Case on

Working Capital Management of

SAIL
-Advance Finance Management Assignment

Presented By: J. Revanth, Section – B, 21BSP2692

Under Guidance of Dr. Sharon Mam
 Introduction

 Profitability is the financial measure of corporate ability to earn profit. It

can be measured through profitability ratio such as gross profit ratio,
net profit ratio, return on capital employed, return on total assets,
return on equity etc. Working capital management refers to the
management of current assets and current liabilities. It reflects the
corporate ability to continue its operation. It can be assessed through
current ratio, liquid ratio, debtor turnover ratio, working turnover ratio
and inventory turnover ratio. The Steel Authority of India Limited
(SAIL), a leading steel company in India, shows a tremendous
growth over the year.

 Working Capital management involves managing the relationship

between a firm's short-term assets and its short terms liabilities. In
other words, working capital is the capital invested in different items of
current assets needed for the business. viz, inventory, debtors, cash, and
other current assets such as loans & advances to third parties. Those
current assets are essential for smooth business operations and proper
utilization of fixed assets. Working Capital Management has its impact
on liquidity as well as profitability. Working capital is the life blood and
nerve center of a business. Just as circulation of blood is essential in the
human body for maintaining life, working capital is very essential to
maintain the smooth running of a business. No business can run
successfully without a working capital. It is traditionally opined that
liquidity and profitability are inversely related. The purpose of this
paper is to identify the impact of working capital management on
profitability of steel authority of India Ltd. from financial year
2015-2019 and today's economy that helps us to Sustain in the
future growth. The tools used in this study includes ratio analysis,
and statement of change in W.C.
 Reference to class concept

Definition: "The sum of the current asset is the working capital of a

business." - J.S. Mill "Working capital is the amount of funds necessary to
cover the cost of operating the enterprises". – Shubin

Concept of W.C.: Working capital management is also one of the important parts
of the financial management. Working capital is described as the capital which is
not fixed but the more common uses of the working capital is to consider it as the
difference between the book value of current assets and current liabilities.

Working Capital = C.A. - C.L.

Current assets - Current Assets are resources, which are in cash or will soon be
converted into cash with the accounting year.

Current Liabilities - Current liabilities are commitments, which will soon require
settlement within the accounting year.

 The objective behind working capital management is to ensure continuity in

the operations of a firm and that is has sufficient funds to satisfy both
maturing short-term debt and upcoming operational expenses. The basic
theme of W.C. management is to provide adequate support for smooth the
efficient functioning of day-to-day business operations.
 Working capital management examines the relationship between short-
term assets and short-term liabilities. The process oversees control of
the firm's cash, inventories, and accounts receivable/payable. The intent
of participating in working capital management is to ensure:

A) operations continue
B) available business cash exceeds current liabilities
C) the firm can satisfy maturing short-term debt, as
well as future, operational expenses

 A working capital deficit in the short-term impact’s operations, as well

as the firm's profitability. Long-term inefficiencies compromise the
firm's credit worthiness, which impacts its ability to get low-interest
loans and, consequently, to attract potential investors.

 Ratio analysis aids in identifying areas of weak or poor performance in

management of the firm's cash, inventory, and accounts
receivable/payable.

 Working capital can be classified or understood with the help of the

following two important concepts.
  Gross working capital is the result of sum of all current assets.
Concept used in financial management. Suitable for companies.
Financial position of a company is not revealed. Gross working capital
will increase when company’s borrowing increases.

Gross Working Capital = Trade receivables (debtors) + Inventory +

Marketable securities + Cash and cash equivalent + Prepaid expenses

 Net working capital, also known as working capital is the

money/assets a company needs to fend for its short-term expenses.
Short term expenses would include day to day requirements, cash,
short term debt, raw material, and a few others. Since the two terms are
the same, they will be used interchangeably in the article.
NWC = Current Assets – Current Liabilities

o Regular or Fixed or Core or Permanent Working

Capital:

The amount of current assets which are kept by a firm in hand day-in
and day out, i.e., throughout the year is designated as Regular or Fixed
Working Capital.

In other words, to maintain the normal day-to-day activities, a certain

minimum level of working capital is required on a continuous and
uninterrupted basis which will have to be met permanently along with other
fixed assets; they are considered as fixed working capital.

o Temporary Working Capital

On the other hand, due to seasonal variation/fluctuation, investment in raw

materials, W-I-P, finished products will fluctuate or fall in consequence, this
portion of the working capital is required to meet such fluctuation. It can
also be stated that any amount over and above the permanent level of
working capital is Variable or Seasonal or Temporary Working Capital.

o SEMI VARIABLE WORKING CAPITAL

Certain amount of Working Capital is in the field level up to a certain stage

and after that, it will increase depending upon the change of sales or time

To earn sufficient profits, a firm must depend on its sales activities

apart from others. We know that sales are not always converted
into cash immediately, i.e., there is a time-lag between the sale of a
product and the realization of cash.

So, an adequate amount of working capital is required by a firm in

the form of different current assets, for its activities to continue
uninterrupted and to tackle the problems that may arise because
of the time-lag.

Details of Case study

SAILING IN ROUGH WINDS:

Rayansh figured out that SAIL had a sales turnover of INR 511.29
billion during 2014-15, which was 2% lower than the previous year
A lower sales volume was the prime cause for the decline. Steel prices, which
were soaring at the beginning of 2014-15, had started to gradually decline in
September 2014. They hit a rock-bottom at the end of the financial
year 2014-15. The profit after tax during 2014-15 was INR 20.93
billion as compared to INR 26.16 billion in the previous financial
year.

HISTORY OF SAIL:

The foundation of SAIL was laid in the early years after India became
independent. The leaders of emerging and newly independent nation
envisioned that to lay a strong foundation for the growth and strength of the
country, they needed to focus on infrastructure and rapid industrialization in
the country

Steel Authority of India limited (SAIL) is the largest steelmaking company in

India and one of the seven maharatna's of the country's central
public sector enterprises. The government of India owns about
75% of SAIL's equity and retains voting control of the company. It
headquarters is located at New Delhi, India. SAIL operates and owns 5
integrated steel plants at Bhilai, Durgapur, Rourkela Bokaro, Burnpur
(Asansol) and 3 special steel plants at Saleon, Durgapur and Bhadrawath. It
also owns a ferro alloy plant at chandrapur. SAIL traces its origin to the
Hindustan Steel Limited (HSL) which was set up on 19 January 1954.

THE STEEL MANUFACTURING PROCESS:

Rayansh had a look at the steel manufacturing process of SAIL The

Raw Materials and Material Handling Plant received, blended,
stored, and supplied different raw materials to the Blast Furnace,
Sinter Plant, and Refractory Materials Plant as per their
requirements. It also maintained a buffer stock to take care of any supply
interruptions. The Coke Oven Complex converted prime coking coal
and medium coking coal from various mines (Jharia, Dugda,
Moonidih, Kargali, Kathara, Mahuda, etc.) blended with imported
coal into high quality coke for the Blast Furnaces, and recovered
valuable by-products like Anthracene Oil, Benzene, Toluene,
Xylene, Light Solvent Naphtha, Ammonium Sulphate, and Extra-
hard Pitch in the process. Blast Furnaces that produced molten
iron – Hot Metal – for steelmaking used Bell-less Top Charging,
modernized double cast houses, coal dust injection, and cast
house slag granulation technologies. The process of ironmaking was
automated, using the PLC Charging System and the Computer Controlled
Supervision System. Waste products like the Blast Furnace slag and gas were
either used directly within the plant or processed for recycling / re-use.

INDUSTRY OUTLOOK:

The industry performance depended on the recovery of global markets. The

domestic demand was predicted to improve the situation of steel companies.

Workings (Calculations) From Case Study

1) Working Capital Requirement:

Working capital Working capital requirement Final Answer

= Inventory + Account
requirement Receivable - Accounts
Payable.
March 2014 152008.2 + 54822.8 - 174777.6
32053.4
March 2015 177363.7 + 31920 - 173246.9
36036.8

Therefore, % of change (or) growth = (173246.9 - 174777.6) / 174777.6

 = -0.008757

= -0.8757% negative
growth

2) Working Capital
Working capital Working capital = Current Final Answer
Assets - Current Liabilities

March 2014 268695.4 – 283402.8 (14707.4)

March 2015 284822.9 -344567.8 (59744.9)

Therefore, % of change (or) growth = {(14707.4) + 59744.9}/ (14707.4)

= -3.0622

= -306.22% negative
growth

3) Working Capital Ratio (or) Current

Ratio
Working capital Working capital Ratio= = Final Answer
Current Assets / Current
Ratio Liabilities
March 2014 268695.4 / 283402.8 0.948(0.95 = approx.)

March 2015 284822.9 / 344567.8 0.8266(0.83 = approx.)

Therefore, % of change (or) growth = (0.83-0.95)/0.95

 = -0.12631

= -12.631% negative
growth

4) Quick (Acid Test) Ratio

Quick Ratio Quick Ratio= (Current Final Answer
Assets-Inventory) / Current
Liabilities
March 2014 (268695.4-152008.2) / 0.312
283402.8
March 2015 (284822.9-177363.7) / 0.412
344567.8

Therefore, % of change (or) growth = (0.412-0.312)/0.312

= 0.32051

= 32.051% growth

5) Cash Ratio
Cash Ratio Cash Ratio= (Cash + Final Answer
Marketable Securities)/
Current Liabilities
March 2014 28559.5 / 283402.8 0.1007

March 2015 23052.4/ 344567.8 0.0670

Here marketable securities are zero. So, it is not considered.

Therefore, % of change (or) growth = (0.0670-0.1007)/0.1007

= - 0.33465

= -33.465% negative
growth

6) Debt to Equity Ratio

Debt to Equity Ratio Debt to Equity Ratio= Final Answer
Liabilities / Shareholders
Equity
March 2014 209552.6/426663.5 0.491

March 2015 213653.1/435047.8 0.49

Therefore, % of change (or) growth = (0.49-0.491)/0.491

= - 0.0020366

= -0.203% negative growth

7) Inventory Ratio
Inventory Ratio Inventory Ratio= Net Final Answer
Revenue(turnover)/Inventory

March 2014 466823.8/152008.2 3.07

March 2015 457107.8/177363.7 2.58

Assumption: There is no opening stock given for 2014. So, directly consider
closing stock as average inventory for both 2014 and 2015
Therefore, % of change (or) growth = (2.58-3.07)/3.07

= - 0.159609

= -15.960% negative
growth

8) Working Capital Turnover Ratio

Working Capital Working Capital Turnover Final Answer
Ratio = Turnover/Working
Turnover Ratio Capital
March 2014 466823.8/ (14707.4) -31.7407

March 2015 457107.8/ (59744.9) -7.65099

Therefore, % of change (or) growth = (-7.65099+31.7407)/-31.7407

= -0.758953331

= -75.895% negative
growth

9) Return On Equity
Return On Equity Return On Equity Ratio = Final Answer
PAT/Equity Shareholders
Ratio Funds
March 2014 26164.8/426663.5 0.061324205

March 2015 20926.8/435047.8 0.0481023005

Therefore, % of change (or) growth = (4.8%-6.13%)/6.13% [taking

approx. values]

= -0.216965

= -21.696% negative
growth

Analysis and Recommendations for this Case Study

a) Working Capital Requirement:

A rise in WCR comes either from a higher number of accounts
receivable, a higher inventory, or a lower number in accounts payable.
And the reverse – that is, if the result of your working capital
requirement calculation shows a drop – comes from either a lower DSO
or DIO, a higher DPO, or a combination thereof.

A rise in WCR usually means companies are spending a lot of their financial
resources just running the business and therefore have less money to pursue
other objectives such as new product development, geographical expansion,
acquisitions, modernisation, or debt reduction. The higher your working
capital requirement, the more constraints you face in making forward-looking
investments.

Here if we see that the Working Capital Required for March-2014 is

Rs.174777.6 and for March-2015 is Rs.173246.9 which shows that the
SAIL Ltd is having INADEQUATE WORKING CAPITAL but a balanced WCR
and if you observe the trend in graph, it clearly shows that the inadequacy is
being declining to -0.8757% negative growth which a good sign but not to
be excited since the % is barely recognisable.
Recommendation:

Its good that the WCR started to reduce even though the change of % is
low. So, the company must make a lot of efforts and analyse and
scrutinise to make sure their WCR won’t rise again. Also, so monitor any
change in working capital requirement closely

b) Working Capital

If current assets exceed current liabilities, it is called positive

working capital and if current liabilities exceed current assets, it is
called negative working capital. Needless to mention, if gross
concept of working capital is used, there will always be positive working
capital

On the other hand, if net concept of working capital is used, there may
be positive, negative, or nil working capital. If current assets are
financed from long- term sources, working capital will always be
positive one. On the contrary, if fixed assets are financed from short-
term sources, working capital will always be negative one.
the public sector undertakings suffer greatly from under-utilisation of the
capacity due to lack of required funds. Needless to mention that when such
acute working capital deficit arises and the firm operates its resources below
the break-even point of utilisation, it experiences deficit instead of creating
surplus/profit.

Here if we see that the Net Working Capital for March-2014 is Rs.
(14707.4) and for March-2015 is Rs. (59744.9) which shows that the SAIL
Ltd is having INADEQUATE WORKING CAPITAL and if you observe the
trend in graph, it clearly shows that the inadequacy is being raising to -
306.22% negative growth which a very bad sign. This might have
happened due fixed assets (or) purchases from vendors are financed
from short-term sources and accounts payables.

RECOMMENDATION:

Inadequate Working Capital creates a lot of problems, an amount more

than the requisite Working Capital, which is not utilized properly and
remains idle, can also increase the cost. Therefore, to avoid both these
difficulties, a Working Capital Requirement Forecast is prepared after
scrutinizing and analysing every aspect of business activity.

c) Working Capital Ratio (or) Current Ratio:

The ability of your company to pay for its current liabilities with its current
assets is the working capital ratio. However, instead of resulting in a hard
number, as does the working capital requirement, the working capital ratio is
a percentage, showing the relative proportion of your company’s current
assets to its current liabilities.

A good working capital ratio is 1.2 to 2, and suggests a company is on

solid financial ground in terms of liquidity. Less than one is taken as
a negative working capital ratio, signalling potential future liquidity
problems. An exception to this is when negative working capital arises
in businesses that generate cash very quickly and can sell products to
their customers before paying their suppliers.
Here if we see that the Working Capital Ratio for March-2014 is 0.948 and
for March-2015 is 0.8266 which shows that the SAIL Ltd is not even
having 1 which is a bad current ratio and if you observe the trend in graph,
it clearly shows that the ratio is being declining to --12.631% negative growth
which a very bad sign and not negligible at all. The reasons may be due to
the company might not have enough short-term assets to pay off its
short-term debt.

Recommendation:

There are some points which may be helpful for the company for future
purpose if they want to improve their current ratio.

Incentivize Receivables, Meet Debt Obligations, Choose Vendors Who

Offer Discounts, Examine Interest Payments, Manage Inventory and
Automate Accounts Receivable and Payment Monitoring

d) Quick Ratio:

Quick ratio is an indicator of most readily available current assets to pay off
short-term obligations. It is particularly useful in assessing liquidity situation
of companies in a crunch situation, i.e., when they find it difficult to sell
inventories.

Prepayments are subtracted from current assets in calculating quick ratio

because such payments can’t be easily reversed. Inventories are also
excluded because they are not directly convertible to cash, i.e., they result in
accounts receivable which in turn results in cash flows and because their net
realizable value drops when they are sold in panic situation. Quick ratio’s
independence of inventories makes it a good indicator of liquidity in case of
companies that have slow-moving inventories, as indicated by their
low inventory turnover ratio.

Quick ratio should be analyzed in the context of other liquidity ratios such as
current ratio, cash ratio, etc., the relevant industry of the company, its
competitors and the ratio’s trend over time. A quick ratio lower than the
industry average might indicate that the company may face difficulty
honoring its current obligations. Alternatively, a quick ratio significantly
higher than the industry average highlights inefficiency as it indicates
that the company has parked too much cash in low-return assets. A
quick ratio in line with industry average indicates availability of
sufficient good quality liquidity.

Here if we see that the Quick Ratio for March-2014 is 0.312and for
March-2015 is 0.412 which shows that the SAIL LTD acid-test ratio is less
than 1which do not have enough liquid assets to pay their current
liabilities and should be treated with caution.
If the acid-test ratio is much lower than the current ratio, it means that a
company's current assets are highly dependent on inventory.

The only good news is that the company growth for quick ratio is
positive with 32.051% so they can maintain this to stabilise to 1:1

Recommendation:

When interpreting and analysing the acid ratio over various periods,
it is necessary to consider seasonal changes in some industries
which may produce the ratio to be traditionally higher or lower
at certain times of the year as seasonal businesses experience
illegitimate effusion of activities leading to changing levels
current assets and liabilities over the time.

Basically, the company should focus on continuing to keep this ratio

that maintains adequate leverage against liquidity risk, given
the variables in a particular sector of business, among other
considerations.

e) Cash Ratio

The cash ratio shows how well a company can pay off its current liabilities
with only cash and cash equivalents. This ratio shows cash and equivalents as
a percentage of current liabilities.

A ratio of 1 means that the company has the same amount of cash and
equivalents as it has current debt. In other words, to pay off its current
debt, the company would have to use all its cash and equivalents. A ratio
above 1 means that all the current liabilities can be paid with cash and
equivalents. A ratio below 1 means that the company needs more than
just its cash reserves to pay off its current debt.

As with most liquidity ratios, a higher cash coverage ratio means that the
company is more liquid and can more easily fund its debt. Creditors are
particularly interested in this ratio because they want to make sure their
loans will be repaid. Any ratio above 1 is a good liquidity measure.

Here if we see that the Cash Ratio for March-2014 is 0.1007and for
March-2015 is 0.067 which shows that the SAIL LTD acid-test ratio is less
than 1 which do not have enough liquidity to pay their current liabilities and
should be treated with caution. But also, there may be indicator of a
company's specific strategy that calls for maintaining low cash
reserves—because funds are being used for expansion of the business.

Recommendations:

It must make sure that the ratio should be stabilized to 1 in the future if
they are in mood of expansion but if not immediately, they must take
the necessary precautions and
  maintain cash ratio between 0.5 and 1 with immediate effect

f) Debt to Equity Ratio

Each industry has different debt to equity ratio benchmarks, as some

industries tend to use more debt financing than others. A debt ratio of .5

means that there are half as many liabilities than there is equity. In other

words, the assets of the company are funded 2-to-1 by investors to creditors.

A debt-to-equity ratio of 1 would mean that investors and creditors

have an equal stake in the business assets.

A lower debt to equity ratio usually implies a more financially stable

business. Companies with a higher debt to equity ratio are considered riskier
to creditors and investors than companies with a lower ratio. Unlike equity
financing, debt must be repaid to the lender. Since debt financing also
requires debt servicing or regular interest payments, debt can be a far more
expensive form of financing than equity financing. Companies leveraging
large amounts of debt might not be able to make the payments.
Here if we see that the Debt-to-Equity Ratio for March-2014 is 0.491 and
for March-2015 is 0.49 which shows that the SAIL LTD debt to equity
ratio is less than 1 implies a more financially stable business. But the trend
shows declining to -0.203% negative growth (but it is positive sign) which is
ok as of now but not very negligible. It also indicates that assets are
financed mainly through equity, and it primarily relies on wholly owned
funds to leverage its finances.

Recommendation:

The company should maintain this debt-to-equity ratio and to be in a

stabled position without any trending fluctuations and always monitor
on the trend since its good to have equity as funding, but it may
sometimes be risk so should at least maintain a minimum debt level.

g) Inventory Ratio:
A high inventory turnover may be the result of a very low level of
inventory which results in shortage of goods in relation to demand and
a position of stock-out or the turnover may be high due to a conservative
method of valuing inventories at lower values or the policy of the firm being
to buy frequently in small lots.

A very high turnover of inventory does not necessarily imply higher

profits. The profits may be low due to excessive cost incurred in replacing
stocks in small lots, stock-out situations, selling inventories at very low prices,
etc. Hence, in cases of too high or too low inventory turnover further
investigation should be made before interpreting the results.

It may also be mentioned here that there are no ‘rules of thumb’ or ‘standard
inventory turnover ratio'(generally acceptable norms) for interpreting the
inventory turnover ratio. The norms may be different for different firms
depending upon the nature of industry and business conditions. However, a
study of the comparative or trend analysis of inventory turnover is still useful
for financial analysis. But sweet spot for inventory turnover is between 2 and
4

Here if we see that the Inventory Turnover Ratio for March-2014 is 3.07
and for March-2015 is 2.58 which shows that the SAIL LTD Inventory
turnover ratio is between 2 to 4 which is quite admirable. But the trend is
declining with -15.960% negative growth which is a very bad sign since if
it continues like this then it may fall below to 2 which should not happen at
all.

Recommendations:

As of now the company is performing well in Inventory management

but should be very careful with the ongoing trend since its declining
rapidly and should monitor the trend analysis constantly.

h) Working capital Turnover Ratio:

Generally, a high working capital turnover ratio is better. A low ratio indicates
inefficient utilization of working capital during the period. The ratio should be
compared with the previous years’ ratio, competitors’, or industry’s average
ratio to have a meaningful idea of the company’s efficiency in using its
working capital.

The working capital turnover ratio should be carefully interpreted

because a very high ratio may also be a sign of insufficient quantity of
working capital in the business.
 Here if we see that the Working Capital Turnover Ratio for March-2014 is
-31.7407 and for March-2015 is -7.65099 which shows that the SAIL LTD
has no proper utilization of working capital. Also, the values are in
negatives where the company must take an immediate action otherwise there
might be a financial crisis for the company which may lead to dissolution
also. The reason might be they are investing in too many accounts
receivable and inventory to support its sales, which lead to an excessive
amount of bad debts or obsolete inventory.

The only good news is that the ratio has gotten far better with a growth
of 75.895% which is a very good sign, and it also shows that the
company is taking measures to at least stabilize it for a period.

Recommendations:

The company should immediately act about it and have an accurate forecast
and should not be lenient because of improvement in the trend since if
neglected they may again fall in the same crisis.
 i) Return on Equity:
Return on equity measures how efficiently a firm can use the money from
shareholders to generate profits and grow the company. Unlike other return
on investment ratios, ROE is a profitability ratio from the investor’s point of
view—not the company. In other words, this ratio calculates how much
money is made based on the investors’ investment in the company, not the
company’s investment in assets or something else.

A high ROE could mean a company is more successful in generating

profit internally. However, it doesn’t fully show the risk associated with
that return. A company may rely heavily on debt to generate a higher net
profit, thereby boosting the ROE higher.

 An ROE is considered satisfactory based on industry standards,

though a ratio near the long-term average of the S&P 500 of
around 14% is typically considered acceptable.

Here if we see the Return on Equity, it’s been for 4.81% in 2014 and
6.132% in 2015 but it is not to the level of general industry norms. But
also, there is decline in the trend as well. When the ROE of a company goes
makes a sudden leap, it might be because the company is using debt
excessively. As an investor, you need to watch out for this kind of
financial leverage. A company can use debt instead of equity to expand
their business and generate higher profits.

Recommendations:

The company must build its ROE with general industry and try not to
have a declining trend. But to be careful that the company should not be
forced to do window dressing for the sake of ROE.

Conclusion

Working capital is vital for the day-to-day operations of a company. Such as

procuring raw materials, payment of wages, salaries, and overheads, and
making sure that production matches demand, among other key objectives.
That is why companies are contently looking for ways to improve their
working capital position. Shortage of w.c. may lead to lack of liquidity as well
as loss of production and sales. To maintain the solvency of the business
and continue production, it is necessary that adequate funds be
available to pay the bill for material, labour, selling and administrative
expenses and other cost of doing business. The prompt payment or bills,
to suppliers of materials ensures a continued supply the raw materials and
established credit for the future or for reasonable operations.
Steel Authority of India is a public sector company. From the above
study I have analyzed cash management, receivable management,
inventory management and loans and advances management. I
concluded that cash, receivable, and inventory management are satisfactory
which is good sign for the company. The company should keep it going in
the future also. But in loan and advances I found that the companies
have given excess loans and advances. Therefore, it is suggested to
recover its loans and advances because there is a possibility of bad
debts.

. From the beginning stage of the company the w.c. is not satisfactory.
But now it has growing trend and SAIL has negative w.c. So, SAIL need
to utilize their current assets properly and should have maintain the
level of w.c. I would like to suggest the simplest formula for improving the
w.c. position is to collect receivables early and slow down the payables. This
is of course, easier said than done. Many companies often find the reverse
happing and run short on cash. Hence, SAIL must constantly monitor its cash
flow.
There should be enough funds for meeting short terms debts, but that
should not come at the cost or losing return on investment (ROI) in
assets.

The End