WORKING CAPITAL MANAGEMENT

Name- Sweta Jayaswal

Course- MBA (2021-23)

Institute- Institute of Management Studies, Banaras Hindu University

Introduction
Working capital management is a business approach which helps company effectively
make use of current assets and also maintain the sufficient cash flow to meet short term
goals and obligations. In other words, it can also be defined as current assets minus
current liabilities. It aims at more efficient use of available company’s resources by
monitoring and optimizing the use of current assets and current liabilities. Working
capital management play a vital role in corporate finance because it has direct impact of
profitability and liquidity of the company. Liquidity position of the company is decided
by how much time it is required to convert it into cash. Since we know that working
capital management is the relation between current assets and current liabilities, so
current assets can be further classified as cash and other asset items which can be
converted into cash easily. But excessive current assets will lead to firm’s realizing a
substandard return on investment. However, firms with insufficient current assets might
face difficulties and shortages in proper functioning of the business. And about current
liabilities, means the firm is obliged to pay them on time. Primary purpose of working
capital management is to maximize the profitability. But, maintaining liquidity of the
firm is also important. Increasing profits at the stake of liquidity can cause serious
problems to firms so there must be a balance between liquidity and profitability aspects.
So, if we don’t take into the profit aspect, we won’t be able to survive for a longer
period but if we don’t take into account the liquidity aspect the firm may face the
problem of insolvency. Therefore, working capital management should be taken into
consideration which affect the profitability of the company.
It is necessary to conceptualize about current assets and current liabilities in order to
properly understand the meaning of working capital. Life span of current assets is
short. These types of assets are generally engaged in current operations of the business
and normally used for those operations which are short term in nature
 during the accounting period. It includes cash, short-term securities, account
receivable, bill receivable, stock(inventory). However current liabilities include
creditors, bills payable, and outstanding expenses. Net working capital can be
positive or negative depending upon the values of current assets and current
liabilities. A positive net working capital occurs when current assets exceed current
liabilities and a negative net working capital occurs when current liabilities exceed
current assets.

Objectives of working capital management

Working capital is indeed very essential for smooth functioning of business and it
needs to be paid attention to, as it represents the amount of capital company is having
in order to make payments, cover unexpected expenses. Moreover, working capital
isn’t that simple, there may be more than one objective of a working capital
management, which are:
 Meeting obligations- Working capital management should always keep in
balance the current assets of the company to have sufficient liquidity to meet its
short-term obligations. It can be achieved by acquiring payment from customers
or by extending supplier payment terms. Unexpected expenses are also a part of
obligations, so they should also be considered into the approach to working
capital management.
 Expanding the business- Effectively use of short-term assets is very important
whether it be contributing towards global expansion or investment in R&D. If
company’s assets are bounded by inventory or accounts payable
 then the business may not yield as much profits as it could be. In other words, an
overly cautious approach to working capital management is not optimal.
 Optimization of capital performance- Optimizing the efficiency of capital
usage is yet another objective of working capital management, it can be achieved
either by minimizing cost of the capital or by maximizing returns by the capital. The
former can be achieved by recovering the currently bound capital and reducing the
need for leverage, while the latter consists of ensuring that the ROI of free capital
exceeds the average funding cost.
Permanent and Variable working capital
There are two kinds of working capital- Permanent and Variable working capital.
Because of the operating cycle, need for current assets comes into play. Operating
cycle is the length of time required to convert sales to cash after converting resources
to supplies. This is an ongoing process and so the need of current assets is always felt.
However, the amount of current assets is not always the same and will increase or
decrease over time. But there is always the lowest level of current assets that a
company needs to continue to operate the business. Permanent or fixed working
capital may be defined as the minimum level or current assets required. As the
company’s fixed assets are permanent, it is also permanent in the same way. The need
for working capital over the permanent working capital fluctuates depending upon the
changes in production and sales. Variable or fluctuating working capital is the
additional working capital which is required to support the company’s changing
production and sales activities. Both types of permanent and variable working capital
are required to promote production and sales throughout the operating cycle.
Permanent working capital is stable over the long term, but temporary working capital
fluctuates, increases in some cases, and decreases in some cases.
Balanced working capital position
The company needs to maintain a solid working capital status. For proper functioning
of the business, we need enough working capital and from the company’s point of
view, a working capital position that is too high or too low is dangerous. Excess of
working capital means holding costs and idle funds and that will not benefit the
business. And the lack of working capital not only affects a company’s profitability,
but also leads to production outages, inefficiencies and sales disruptions.
Determinants of Working Capital
There are no rules or formulas for determining a company’s working capital needs.
There are numerous factors of different importance, affects a company’s working
capital requirements. With certain overtime, the importance of the factors also
changes. Therefore, it is necessary to perform an analysis of relevant factors to
determine the total investment in working capital. The following are factors that
generally affect a company’s working capital.
 Nature of Business- The working capital requirements of a company are greatly
influenced by the nature of its business. Commercial and financial companies invest
very little in fixed assets, but they need a lot of money to invest in working capital.
For example, retailers need to maintain large inventories of different products to
meet the diverse and ongoing needs of their customers. Utilities, in contrast, may
have limited working capital needs and must invest heavily in physical assets. Their
working capital requirements are small as they only have cash sales and delivery
services and may not have products. When it comes to working capital
requirements, most manufacturers fall between the two extreme requirements of
trading companies and utilities. Such companies need to make appropriate
investments in working capital, depending on the overall asset structure and other
variables.
 Market and demand conditions- a company’s working capital requirements are
related to its sales. However, it is difficult to accurately determine the relationship
between sales volume and working capital requirements. For a growing business,
working capital needs to be continuously planned in advance. Growing companies
may need to invest money in fixed assets to sustain growing production and sales.
This will increase investment in working capital and support the expansion of
business scale. Growing companies are in constant need of funding. They use
external sources as well
as internal sources to meet the growing need for funding. Sales vary depending upon
demand. Many companies are experiencing seasonal and cyclical fluctuations in the
demand for their products and services. These business fluctuations affect working
capital requirements, especially temporary working capital requirement for firms.
Seasonal fluctuations not only affect working capital requirement, but also cause
production problems for the company. When demand is high, increasing production can
be expensive for the company. Similarly, it becomes more expensive during a recession
when a company has to maintain its workforce and physical equipment without proper
production and sales. Therefore, the financial plan or arrangement should be flexible
enough to deal with sudden seasonal fluctuations.
 Price level changes- increasing price level changes complicate the task of financial
managers. She needs to anticipate the impact of price level changes on the company’s
working capital needs. In general, rising price levels require companies to hold more
working capital. When price increases, high investment is required by the same level
of current assets. However, companies that can immediately correct product prices
when price level rise do not face serious working capital problems. In addition, if the
prices of individual products are different, the firm will feel the effects of rising price
levels in different way. Therefore, some companies may not be affected by rising
prices, while others may be adversely affected.

Working Capital Ratios of Tata Steel

1. Current Ratio

Current ratio is a financial indicator which helps to measure the ability of an

organization to repay its short-term obligations within a year. It helps us understand
the liquidity position of an organization with respect to the available assets and due
liabilities. Also, it gives us the idea whether the organization would be able to generate
enough cash or not to pay off all its debts when they become due. It is used around the
world to measure the overall financial condition of a company.
The range of acceptable current ratios varies by industry, but ratios between the range
1.5 and 3 are generally considered to be healthy. A ratio which is less than 1 may
indicate a liquidity problem for the company, but if other forms of funding can be
secured, the company may not face an extreme crisis. A ratio above 3 may indicate
that the company is not using its working capital efficiently or is not properly
managing it.
 Current Assets
Current ratio= Current Liabilities

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

23372.68 19959.03 17035.58 34643.91 20097.43
= 29313.32 = 30871.30 = 25593.63 = 25607.34 = 23056.33

= 0.80 = 0.64 = 0.66 = 1.35 = 0.87

Current Ratio
1.6

1.4
1.35
1.2

0.8 0.87
0.8
0.6 0.64 0.66

0.4

0.2

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
Interpretation
Here, we could see the current ratio of Tata Steel for all the given financial years is below
the ideal range which is 1.5-3. But the ratios with less than 1 (for years 2020-21, 2019-20,
2018-19, 2016-17) indicates that the company may face a liquidity problem in the future.
The company will not be able to pay off its debts and obligations immediately.
While considering the given five financial years, we can conclude that first there was an
increase from 2016-17 to 2017-18, then there was a steep decline in the ratio from 2017-
18 to 2018-19. And then it was approximately same in the next financial year 2019-20.
Lastly there was a slight increase in 2020-21.
Moreover, in financial year 2017-18, the value of current ratio is more than 1 because
current assets were more than current liabilities while in other financial years the value is
negative because current assets were less than current liabilities.
Suggestions
 Inventories should be increased including raw materials, work-in-progress and finished
goods.
 The company should pay off its current liabilities, and to creditors at the earliest.
 Reduce the unsecured loans from banks/financial institutions.
 Pay off its statutory dues.

2. Quick Ratio

Quick ratio which is commonly known as acid-test ratio, is an indicator that tells us a
company’s ability to repay its short-term obligations using its most liquid assets. Quick
ratio takes into consideration all the current assets that are quickly convertible into cash
such as cash in hand, bank balances, market securities, bill receivables, short terms
loans.
An ideal quick ratio should be 1:1, as company with quick ratio less than 1 will not be
able to pay off its current liabilities and those company with quick ratio greater than 1
indicates high liquidity. Quick ratio tells us more true evaluation of the liquidity
position of the company as it excludes inventory, prepaid expenses, stock, which has
comparatively low liquidity.
Quick Assets
Quick Ratio = Current Liabilities

Where Quick Assets= Current Investments + Trade receivable + Cash and Cash
Equivalents + Other balances with Banks + Loan + Other Financial Assets (Current)

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

13846.97 7316.49 3555.30 21587.49 8628.84
= 29313.31 = 30871.30 = 25593.63 = 25607.34 = 23056.33

= 0.47 = 0.23 = 0.14 = 0.84 = 0.37

Interpretation
Here, we could see that for all the financial years, Quick Ratio of Tata Steel is below the
ideal range which
Quick Ratio
is 1. For 0.9 financial year
2020-21, 0.8 0.84
2019-20,
2018-19 0.7 and 2016-17,
the ratio 0.6 is even below
than half, 0.5 which
indicates 0.4 0.47
that the
company 0.3 0.37
might indulge
0.2 0.23
0.1 0.14

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
in financial trouble in the future.
Out of all the given financial years, quick ratio is highest for the financial year 2017-18,
as investment made in the respective financial year was highest, so quick assets was
highest in the financial year 2017-18. And for all the financial years quick ratio is the
below the ideal range because quick assets were low compared to current liabilities.
Suggestions
 The company should increase it investments.
 Current liabilities should be paid off by the company at the earliest.
 Security deposits should be increased.

3. Current Asset Turnover Ratio

In order to generate sales, assets are being used. Hence, in order to maximize the
revenue a firm should handle its assets efficiently. So, we may define asset turnover
ratio as a financial ratio which evaluates how efficiently the company is using its assets
in order to generate maximum sales or revenue. Higher the asset turnover ratio, better is
the company’s performance that indicates that company is using its assets efficient and
generating the maximum revenues from it.
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
64869.00 60435.97 70610.92 60519.37 53260.96
= 23372.00 = 19959.03 = 17035.58 = 34643.91 = 20097.43

= 2.77 times = 3.02 times = 4.14 times = 1.8 times = 2.65 times
Turnover
Current Asset Turnover Ratio= Current Assets

Current Asset Turnover Ratio

4.5

4 4.14
3.5

3
3.02
2.5 2.77
2.65
2

1.5
1.8

0.5

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
 Interpretation
From the above chart, we can see that the company is having good current asset turnover
ratio. Like for example, we can say for financial year 2020-21, current asset turnover
ratio is 2.77 times which implies that the company is generating Rs.2.77 of sales for one
rupee of capital employed in current assets.
Out of all the given financial years, first this ratio decreased from 2016-17 to 2017-18,
then it shows an increase of 2.34 from 2017-18 to 2018-19. Afterwards, the ratio kept on
declining from financial year 2018-19 to 2019-20 and then from 2019-20 to 2020-21.
Suggestions
 Sales should be kept increasing to obtain better current asset turnover ratio.
 The company should also sell those assets which doesn’t produce income for the
company or those which the company doesn’t use much often.

4. Operating Profit Ratio

Operating profit is the ratio of the difference between the sales and the total cost of
goods sold and operating expenses to the net sales or revenue. It determines how
correctly an enterprise manages and continues charges whilst producing revenue or
sales. The smaller the ratio, the more efficiently the company can generate revenue for
total expenses. When the ratio is around 10% then the performance is considered to be
an average but when it exceeds 20% then it is considered to be an excellent.
Profit before exceptionalitems∧tax
Operating Profit Ratio= Net Sales
∗100

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

15022.08 8314.56 16341.48 10004.54 6060.31
= 65506.89 *100 = 60840.09 *100 = 73016 *100 = 61283.03 *100 = 53675.42 *100
= 22.93% = 13.66% = 22.38% = 16.32% = 11.30%

Operating Profit Ratio

25

22.93 22.38
20

15 16.32

13.66

10 11.3

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
From the above chart, we could determine the performance of the company on the basis
of operating profit. For financial years, 2020-21, 2018-19, the performance is excellent
comparative to the other mentioned years i.e., 2019-20, 2017-18, 2016-17.
The more the operating ratio, the better the performance will be of the company. While
considering the given years, firstly the operating ratio increased from the financial year
2016-17 to 2017-18, then it again increased in the next financial year 2018-19 then again
it decreased in the financial year 2019-20 and lastly, we could see in financial year 2020-
21 there was an increase of 9.27.
Suggestions
 The company should keep increasing its sales and should also focus on reducing the
cost of production without compromising with the quality.

5. Net Debt to Equity ratio

This ratio is a measure of a company’s financial leverage. It is calculated by dividing net
debt by average net worth. This is measured against the most up-to-date balance sheet
available, whether in the middle or at the end of the year, and includes the impact of
intangible assets. It is one of the important tools used in corporate finance. High D/E ratio
indicates high risk which implies that a company is aggressively financing its growth
using debt. Ideally lower the ratio, the better it will be. Any number between 0.5-1.5 is
considered to be good.
Net Debt
Net Debt to Equity Ratio= Average Net Worth

Where Net Debt= non-current borrowings + Current borrowings + Current maturities of

long-term borrowings and lease obligations- Current investments – Cash and cash
equivalents – Other balances with banks (including non- current earmarked balances)
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
20218.76 36906.53 28470.93 8768.73 21963.64
= 84052.61 = 74783.91 = 68259.77 = 57861.92 = 50423.19

= 0.24 = 0.49 = 0.42 = 0.15 = 0.43

Net Debt to Equity Ratio

0.6

0.5
0.49

0.4 0.42 0.43

0.3

0.2
0.24

0.15
0.1

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
From the above graph, we can conclude that for all the financial years, Net debt to equity
ratio for all the financial year is below the ideal range which is 0.5- 1.5, and we also
know that the lesser the ratio the better it will be for the company.
The ratio was minimum in financial year 2017-18 because net debt in the same financial
year was lowest out of all the financial years, and on the other hand the ratio was
maximum in the financial year 2019-20 because net debt was highest in the respective
year.
So out of all the given financial years, we can conclude that the ratio decreased from the
financial year 2016-17 from 2017-18, then it again increased twice in the next financial
year 2018-19 and then in 2019-20. Lastly, the ratio decreased in 2020-21 from 2019-20
by 0.25.
Suggestions
 Borrowings should be kept reduced, both current as well as non-current.
 The company should try to focus on increasing current investments, cash and cash
equivalents and bank balances.
6. Return on average capital employed

Return on capital employed is one of the profitability indicators that helps to determine
the profitability of a company based on the efficiency of capital management. This ratio
means that value of profit generated by the company per Rs 1 of capital employed. There
is no such ideal range for this ratio, higher the ratio, stronger is the profitability capacity
of the company, more efficient the company will be.
EBIT
Return on average capital employed= Average Capital Employed ∗100

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

17795.13 6610.98 16227.25 6638.25 5356.93
= 124925.19
= 117180.72
= 104206.45
= 92252.32
*100 = 85848.25 *100
*100 *100 *100
= 7.19% = 6.24%
= 14.24% = 5.64% = 15.57%
Return on Average Capital Employed
18

16
15.57
14
14.24
12

10

6
7.19
6.24
5.64
4

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
Interpretation
From the above graph, we can say that the return on average capital employed for Tata
Steel for five years is pretty good, especially for financial year 2020-21 and 2018-19. As
there is no such ideal range so while comparing the given financial years, we can say that
the ratio first increased consequently from 2016-17 to 2017-18 then in 2018-19, then was
a huge decline in the financial year 2019-20 but again the company managed to increase
the ratio by 8.6 in 2020-21.
Suggestions
 Borrowings should be reduced, both current as well as non-current.

7. Operating Expense Ratio

Operating Expense Ratio is basically the ratio of operating expense to the sales of the
company, and operating expenses are the sum of the expenses of the sold products,
management expenses, and sales expenses and distribution expenses. The lower the ratio
of operating expenses, the more efficiently the company will be able to pay off its debt
and interests and distribute dividends. To analyze deeply about the expenses, the
company should evaluate the ratio of individual operating expense to sales. Also, in order
to understand that if the company is spending high or low, operating expense ratios of
other companies (with similar domain) should be calculated. It will help us to monitor
our expenses.
Cost of MaterialConsumed + Employee Benefits +other expenses
Operating Expense Ratio= Net Sales
*100

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

41814.72 46246.83 49594.16 43884.5 42051
= 65506.89 *100 = 60840.09 *100 = 73016 *100 = 61283.03 *100 = 53675.42 *100

= 63.83% = 76.01% = 67.92% = 71.60% = 78.34%

 Operating Expense Ratio
90

80
78.34
70
76.01
71.6
67.92
60 63.83

50

40

30

20

10

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
From the above graph, we can say that the operating expense ratio for Tata Steel of all the
financial years is quite high and as we know the lesser the ratio will be, the better it will
be for the company. The reason behind this ratio being high is that the cost of material
consumed, employee benefits and other expenses were quite high.
On comparing between all the given financial years, we can say that for financial year
2016-17 the ratio was highest and for the financial year 2020-21 it was lowest. It
decreased consequently from 2016-17 to 2017-18 then from 2017-18 to 2018-19. But
then it increased in the financial year 2019-20 and again decreased in 2020-21.
Suggestions
 Sales should be kept increasing.
 The company should pay off its bill in advance.
 The company should also outsource talents, which will help in reducing labor costs.

8. Gross Profit Ratio

Gross profit which is likewise typically referred to as gross profit margin is a kind of
profitability ratios which allows us recognize how well the business enterprise is making
 use of its labor, raw materials and plant and machinery. It is calculated via dividing
turnover minus price of the products sold by net sales. Large value of gross profit ratio
with respect to the industry average implies that the enterprise is able to produce the
goods at comparatively lower costs. It is a mark of proper management. On the other
hand, a low gross profit ratio shows that the company’s cost of goods sold is
comparatively excessive and company is not able to purchase the raw materials
effectively, not making proper use of plant and machinery. Ideally, any number between
50-70% is considered to be healthy.
Net Sales−Cost of Goods Sold
Gross Profit Ratio= Net Sales
*100

Where Cost of Goods Sold= Beginning Inventory + Purchases – Ending Inventory

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

46439.47 38396.44 48044.65 39576.55 36573.51
= 65506.89 *100 = 60840.09 *100 = 73016 *100 = 61283.03 *100 = 53675.42 *100

= 70.89% = 63.11% = 65.80% = 64.58% = 68.13%

Gross Profit Ratio

72

70 70.89

68
68.13

66
65.8
64 64.58

63.11
62

60

58
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
 From the above graph, we can conclude that Tata Steel is maintaining a good gross profit
ratio for all the five financial years as ideally the ratio should lie between 50-70%.
But on comparing the given five financial years, we can say that for 2020-21 the ratio
was highest and for 2019-20 it was lowest of all. The ratio was quite fluctuating among
these five financial years as first it decreased from 2016-17 to 2017-18 then it increased
from 2017-18 to 2018-19 but then again it decreased in 2019-20 and lastly increased in
2020-21.

Suggestions
 The company should try to focus on reducing the cost of goods sold without making
any changes to the selling price.
 The company should keep managing its inventory well in order to reduce the wastage.

9. Working Capital Turnover Ratio

Working capital turnover ratio helps us understand how effectively the company is using
its working capital which means current assets minus current liabilities. Negative
working capital turnover ratio doesn’t indicate a good sign to the company and hence can
create problems for the company in the future. Ideally 1.5-2 is considered to be a good
working capital turnover ratio.
Sales
Working Capital Turnover Ratio= Current Assets−Current Liabilities

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

64869 60435.97 70610.92 60519.37 53260.96
= −5940.64 = −10912.27 = −8558.05 = 9036.57 = −2958.9
Working Capital Turnover Ratio
= -10.92 = -5.54
FY 2020-21 FY 2019-20= -8.25FY 2018-19 =FY 6.70
2017-18 = -18
FY 2016-17
10

5 6.7

-5 -5.54
-8.25
-10 -10.92

-15
-18

-20
 Interpretation
Here, we can say that for almost all the given financial years except for 2017-18, working
capital turnover ratio of Tata Steel is negative, as for each case except for 2017-18,
current liabilities were greater than current assets. Ideally, the ratio should lie between
1.5-2 so for financial year 2017-18 only the ratio is above the ideal range, and for all the
rest financial year it was below the range only.
Out of given financial years, the ratio was highest in 2017-18 and lowest in 2016-17 as
the absolute difference between the current assets and current liabilities was highest in
2016-17, also with a negative sign which indicates current liabilities were greater than
current assets.
Suggestions
 The company should increase it investments, and increase their cash and cash
equivalents, balances with banks.
 Also, the company should pay off its current liabilities at the earliest.
 Inventory management should be done efficiently.
 The company should also focus on increasing its sales.

10. Return on Investment

Return on investment is a mathematical formula for calculating how much a company is

generating returns on the basis of their investments. It also helps in taking important
investment decisions. Ideally, Return on Investment ratio above 10% is considered to be
a good ratio. For example, for financial year 2021-22, we can say that the company is
generating return of Rs 26.06 on the investment of Rs 1 and similarly for other years.
 EBIT
Return on Investment= Capital Employed *100

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

17795.13 6610.98 16227.25 6638.25 5356.93
= 125727.11
= 124123.27
= 110238.18
= 98174.73 *100 = 86329.91 *100
*100 *100 *100
= 6.76% = 6.27%
= 14.15% = 5.32% = 14.72%

Return On Investement
16

14 14.72
14.15
12

10

6 6.76
6.27
5.32
4

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
From the above graph, we can deduce that for financial year 2020-21 and 2018-19, the
company has higher return on investment compared to other financial years. On the other
hand, it was lowest for 2019-20. Ideally this ratio is considered to be good when its above
10%, so for financial year 2020-21 and 2018-19 it was good but the ratio was below the
ideal range for the financial years 2019-20, 2017-18, 2016-17.
Suggestions
 Borrowings should be kept reduced, both current as well as non-current.
 Sales should be increased.

Working Capital Ratios of JSW Steel Ltd

1. Current Ratio
Current Assets
Current Ratio= Current Liabilties
 Current Ratio
0.9

0.8 0.82
0.8 0.81
0.7
0.76
0.68
0.6

0.5

0.4

0.3

0.2

0.1

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

29703 29375 28009 19253 17784.83
= 37040 = 35594 = 34398 = 25205 = 26079.74

= 0.80 = 0.82 = 0.81 = 0.76 = 0.68

Interpretation
From the above graph, we can deduce that the current ratio of JSW steel Ltd for all the
financial years is below the ideal range, which is 1.5-3. The main reason behind this is that
 the current assets were less than current liabilities.
But out of all the given current ratios, we can say that the ratio consequently increased
thrice financial year from 2016-17 to 2017-18 then from 2017-18 to 2018-19 and again
from 2018-19 to 2019-20. Lastly, we can see there was a slight decrease in financial year
2020-21.
Moreover, the ratio was highest in the financial year 2019-20 and that too lowest in 2016-
17.

2. Quick Ratio
Quick Assets
Quick Ratio= Current Liabilities

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

17160 17682 15183 5954 5848.64
= 37040 = 35594 = 34398 = 25205 = 26079.74

= 0.46 = 0.50 = 0.44 = 0.23 = 0.22

Quick Ratio
0.6

0.5
0.5
0.46
0.4
0.44

0.3

0.2 0.23 0.22

0.1

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
As we know that ideally quick ratio should be 1:1, but from the above graph we can say
that the quick ratio of JSW Steel Ltd. For all the financial years is below the ideal range.
Main reason behind this is that the quick assets were less than that of current liabilities.
The ratio was highest in the financial year 2019-20 and that too lowest in 2016-17.
While considering only the given financial years we can deduce that first there was a very
slight increase in the ratio from 2016-17 to 2017-18, then it again increased consequently
two times from 2017-18 to 2018-19 then in 2019-20, and at the end we can see that it
shows a decline in the ratio from 2019-20 to 2020-21.

3. Current Asset Turnover Ratio

Sales
Current Asset Turnover Ratio= Current Assets

Current Asset Turnover Ratio

4

3.5
3.44
3

2.5 2.74
2.38
2 2.18 2.18

1.5

0.5

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

70727 64262 76727 66324 56913.25
= 29703 = 29375 = 28009 = 19253 = 26079.74

= 2.38 times = 2.18 times = 2.74 times = 3.44 times = 2.18 times
 Interpretation
On the basis of above graph, we can deduce that the company managed to maintain
decent current asset turnover ratio. And by current asset turnover ratio we mean that for
example, in financial year 2020-21 the ratio is 2.38 which implies that company is
generating Rs.2.38 of sales for one rupee of capital employed in current assets.
Also, while considering these five financial years, we can say that first the ratio increased
from 2016-17 to 2017-18, then it decreased twice from 2017-18 to 2018-19 and then in
2018-19 to 2019-20. Finally, there was an increase of 0.20 from financial year 2019-20 to
2020-21.

4. Operating Profit Ratio

Profit before exceptionalitems∧tax
Operating Profit Ratio= Net Sales
∗100

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

12582 5601 11817 7309 5131.28
= 71396 *100 = 64890 *100 = 77246 *100 = 66447 *100 = 57168.71 *100

= 17.62% = 8.63% = 15.29% = 11% = 9%

Operating Profit Ratio

20

18
17.62
16

14 15.29

12

10 11

8 8.63 9

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
Interpretation
Operating profit ratio of JSW Steel Ltd is quite average as the ratio between 10-20% is
considered to be moderately average. And out of these given years, the ratio was highest in
financial year 2020-21 and that too lowest in 2019-20.
The reason behind this ratio being low is that the profit before exceptional items and tax is
quite low. We could see the ratio increased twice from the financial year 2016-17 to 2017-
18 and then from 2017-18 to 2018-19, but in 2019-20 there was a huge decline of 6.66 in
2019-20, and finally, again it increased in 2020-21.

5. Net Debt to Equity Ratio

Net Debt
Net Debt to Equity Ratio= Average Net Worth

Where Net Debt= non-current borrowings + Current borrowings + Current maturities of

long-term borrowings and lease obligations- Current investments – Cash and cash
equivalents – Other balances with banks (including non- current earmarked balances)
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
36009 39768 36257 35580 36947.31
= 46977 = 38362 = 35162 = 27907 = 24098.10

= 0.77 = 1.04 = 1.03 = 1.27 = 1.53

Net Debt to Equity Ratio

1.8

1.6
1.53
1.4

1.2 1.27

1 1.04 1.03
0.8
0.77
0.6

0.4

0.2

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
From the above graph, we can say that except for financial year 2016-17, the net debt to
equity ratio is between 0.5 to 1.5 which is considered to be an ideal range. Also, we know
that the lesser the ratio, better the performance will be of the company. But for 2016-17
the ratio is 1.53 which is greater than the ideal range.
Out of all the given financial years, the ratio was highest in 2016-17 as the net debt was
highest in the respective year and on the other hand it was lowest in 2020-21 as the net
debt was lowest in the same year.
The ratio first decreased twice from the financial year 2016-17 to 2017-18 and then from
2017-18 to 2018-19, it then increased in 2019-20 but again decreased in 2020-21.

6. Return on Average Capital Employed

EBIT
Return on average capital employed= Average Capital Employed ∗100

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

12196 4292 11817 7075 5131.28
= 94336.5 *100 = 85607.5 *100 = 73264 *100 = 64930.42 *100 = 59884.83 *100

= 12.93% = 5.01% = 16.13% = 10.90% = 8.57%

Return on Average Capital Employed

18

16
16.13
14

12 12.93

10 10.9

8 8.57
6

4 5.01

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
From the above graph we can say that the return on average capital employed for all the
 five financial years of JSW Steel Ltd is pretty decent, and it is highest for the financial
year 2018-19 and that too lowest for 2019-20.
Out of given financial years, we could see that the ratio increased two times from the
financial year 2016-17 to 2017-18 and then in 2018-19, but then it shows a huge decline
in the financial year 2019-20. But again, the company managed to increase the ratio by
7.92.

7. Operating Expense Ratio

Cost of MaterialConsumed + Employee Benefits +other expenses
Operating Expense Ratio= Net Sales
*100

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

45169 51352 58014 49759 41191.81

= 71396 *100 = 64890 *100 = 77246 *100 = 66447 *100 = 57168.71 *100

= 63.26% = 79.13% = 75.10% = 74.88% = 72.05%

Operating Expense Ratio

90

80
79.13
70 75.1 74.88
72.05

60 63.26

50

40

30

20

10

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
From the above graph, we can say that the operating expense ratio for JSW Steel Ltd of
all the financial years is quite high and as we know the lesser the ratio will be, the better
it will be for the company. The reason behind this ratio being high is that the cost of
material consumed, employee benefits and other expenses were quite high.
On comparing between all the given financial years, we can say that for financial year
2019-20 the ratio was highest and for the financial year 2020-21 it was lowest. It
increased consequently from 2016-17 to 2017-18 then from 2017-18 to 2018-19 and
again from 2018-19 to 2019-20. But then it decreased in the financial year 2020-21 by
15.87.

8. Gross Profit Ratio

Net Sales−Cost of Goods Sold
Gross Profit Ratio= Net Sales
*100

Where Cost of Goods Sold= Beginning Inventory + Purchases – Ending Inventory

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
40483 29693 36257 29192 27601.15
= 70727 *100 = 64262 *100 = 77246 *100 = 66447 *100 = 57168.71 *100

= 57.24% = 46.20% = 46.93% = 43.93% = 48.30%

Gross Profit Ratio

70

60
57.24
50
46.93 48.3
46.2
40 43.93

30

20

10

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation
As we know that ideally the gross profit ratio should lie between 50-70%, so except for
financial year 2020-21, for all the other financial years the ratio was below the ideal
range.
9. Working Capital Turnover Ratio
Sales
Working Capital Turnover Ratio= Current Assets−Current Liabilities

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

70727 64262 76727 66234 56913.25
= −7337 = −6219 = −6389 = −5952 = −8294.91

= -9.64 = -10.33 = -12 = -11.12 = -6.86

Working Capital Turnover Ratio

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17
0

-2

-4

-6 -6.86

-8
-9.64
-10 -10.33
-11.12
-12
-12

-14

Interpretation
10. Return on Investment
EBIT
Return on Investment= Capital Employed *100

FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

12196 4292 11817 7075 5131.28
= 97827 *100 = 90846 *100 = 80369 *100 = 66159 *100 = 63701.85 100

= 12.46% = 4.72% = 14.70% = 10.70% = 8.05%

 Return on Investment
16

14 14.7

12 12.46

10 10.7

8
8.05
6

4 4.72

0
FY 2020-21 FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17

Interpretation