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KOUSTUV BUSINESS SCHOOL

A Project Report on Ratio Analysis of Financial Statements &


Working of Capital Management at HV Transmissions Ltd,
Jamshedpur

SUBMITTED TO:
FACULTY GUIDE PROJECT GUIDE

PROF. GOPAL PRUSETH AMIT KUMAR AGARWAL

KOUSTUV BUSINESS SCHOOL FINANCE, HVTL

BHUBANESWAR JAMSHEDPUR

SUBMITTED BY:
GOPAL KUMAR AGARWAL

KBS, BHUBANESWAR

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KOUSTUV BUSINESS SCHOOL
BHUBANESWAR
JULY`2009

DECLARATION

I hereby declare that the projects entitled “A Ratio Analysis of Financial


Statements & Working of Capital Management at HV Transmissions Ltd ” conducted at
HV TRANSMISSIONS LTD has been prepared by me during the academic year 2009-10
under the able guidance of my faculty guide Prof. GOPAL PRUSETH and my project
mentor Mr. AMIT KUMAR AGARWAL.

I also declare that this project is the result of my effort and has not been
submitted to any other University or Institution for the award of any degree, or personal
favors whatsever. All the details and analysis provided in the report hold true to the best
of my knowledge.

Place: Jamshedpur GOPAL KUMAR AGARWAL


Date: July 2009

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CERTIFICATE BY GUIDE

This is to certify that the following student is submitting the project report titled
“ A Ratio Analysis Of Financial Statements & Working Of Capital Management at HV
TRANSMISSIONS Ltd. It is the original and bonafide work submitted in partial fulfillment
of the requirement for the award of PGDM program.

Prof. GOPAL PRUSETH

(Project Guide)

KBS, Bhubaneswar

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ACKNOWLEDGEMENT
In the course of this project I got an insight into the automobile industry, came
to know a lot about the basic working of an automobile company.

First and foremost I am very proud to be a student of Koustuv Business


School, Bhubaneswar and am most grateful for having been given the chance to work
with a reputed company like HVTL at the beginning of my career.

I would fail to do my duty if I didn’t take this opportunity to thank my faculty guide,
Prof. Gopal Pruseth for his timely help and guidance. I would like to thank him whole
heartedly for making me work harder so as to gain a more in depth knowledge of the
subject which I am sure will help me a lot in the long run as well. I would say that this
project wouldn’t have been the same without his support, guidance, encouragement
and constant demand for improvement.

I am extremely grateful to Mr. Amitava Roy (AGM, Finance, HVTL) for granting
permission to carry out the project work in his department. My company guide, Mr.
Amit Kumar Agarwal, Manager is another person who has played a key role in the
development of me as a person, in the completion of this project and in being educated
about the automobile industry in general. Without the knowledge, attention and time
that he has bestowed on me, this project would simply have been impossible. He is truly
an inspiration for me and drove me towards working harder than my expectations which
simply made me more ready for the corporate life. He truly gave me the corporate
exposure I had thought of.

I would also like to thank Mr. Ashok Kumar, Mr. Girish Shivramakrishnan,
Mrs. Sunayana for their immense support and guidance which helped me in
understanding various aspects of the subject. I would also like to thank all the
employees of the finance department for their valuable support, cooperation & help.

GOPAL KUMAR AGARWAL

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INDEX
Declaration

Certificate By Guide

Acknowledgement

TOPICS
Introduction

 Project Title

 Objectives Of the Project

 Methodology

Company Profile

 The AutoMobile Industry

 Tata Group

 Tata Motors

 HVTL Ltd

Financial Highlights of the Company

Ratio Analysis

Working Capital

Working Capital Management

Conclusion

Recommendations

Sources & Bibliography

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PART- A
INTRODUCTION

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PROJECT TITLE

A Project on Ratio Analysis of Financial Statements & Working of Capital Management at


HVTL Ltd, Jamshedpur a 85% subsidiary of Tata Motors.

OBJECTIVES OF THE PROJECT

 To analyse the financial statement of HV TRANSMISSIONS LIMITED from the Year


2003-04 to 2008-09.

 To interpret the analysis and the trend of the financial results.

 To use various activity ratios and liquidity ratios to find out the activity of assets
and liabilities and to find out the liquidity position of the company.

 Standardize financial information for comparisons.

 Evaluate current operations .

 Compare performance with past performance.

 Compare performance against other firms or industry standards.

 Study the efficiency of operations.

 Study the risk of operations.

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METHODOLOGY
Data Collection
 Primary Source

 Annual reports published by company.

 Respondents of HV Transmissions Ltd.

 Secondary Source

 Via mail, SEC or company websites.

 Published collections of data.

 Investment sites on the web.

 Official web site of the company.

 SAP

Data Presentation
Graphical and tabular representation of the collected data has been done to show the
financial position of the HVTL firm.

Data Analysis & Interpretation


Here an analysis of the annual reports of the last five fiscal years (2003-04 to
2008-09) has been done. Various ratios have been calculated to find out the profitability
and leverage of the firm.
Various working capital ratios has been calculated to observe the working
capital changes and comparisons have been made to of the last four years. A thorough
study has been made about the Inventory management system of the company and an
effort has been made to find out how well the company manages its inventories.

I have tried to evaluate the firm’s performance by using the past data of the
firm with the present data, by the time series analysis over the period of 5 to 6 years.

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THE AUTOMOBILE INDUSTRY

Indian automobile industry has grown leaps and bounds since 1898, a time
when a car had touched the Indian streets for the first time. At present it holds a
promising tenth position in the entire world. The monthly sales of passenger cars in
India exceed 100,000 units . A surge in economic growth rate and purchasing power led
to growth in the Indian automobile industry, which grew at a rate of 17% on an average.
The industry provided employment to a total of 13.1 million people as of 2006-07, which
includes direct and indirect employment. The export sector grew at a rate of 30% per
year during early 21st century.

India was one of the largest manufacturers of tractors in the world in 2005-
06, when it produced 2,93,000 units.

India is :

1. The second largest Two Wheeler manufacturer.

2. The Largest Tractor Manufacturer.

3. 4th largest Passenger Vehicle market in Asia.

4. 5th largest Commercial Vehicle manufacturer in the world.

5. The largest three wheeler market .

6. India has the fourth largest car market in the world.

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THE INDIAN AUTOMOBILE SECTOR

Although India is the fifth largest automobile manufacturer in the world, penetration
level in the country is very low, especially in the case of passenger cars. This opens a
huge opportunity for the automobile companies to explore the Indian market. Changing
demography also adds to the increasing demand for the vehicles. The Indian automobile
industry has also made a substantial effort in developing the R & D infrastructure. This
has helped in upgrading the technology and at the same time, reduced production cost.

This provides good export opportunities for Indian manufacturers, which are being
duly exploited by Tata motors, Ashok Leyland, Maruti in the African, and South
American markets.

The fast growth of this industry is evident by the spurt in demand for automobiles in
the last few years. This is well supported by the economic reforms that have been put in
place, particularly in the financial sector and in foreign direct investment. During the last
decade, conscious efforts have been made to fine-tune state policy to enable the Indian
automobile industry to realize its potential to the fullest.

Abolition of licensing and removal of quantitative restrictions coupled with


initiatives to bring the policy framework in step with WTO requirements have set the
industry on a progressive path. The freeing of the industry from this restrictive
environment has helped it to restructure, absorb new technologies and align itself to
global development.

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Increasing competition as a result of liberalization has led to continuous
modernization as well as substantial price reduction keeping pace with the international
standards. Moreover, auto finance with aggressive marketing strategies has played a big
role in boosting the automobile demand.

Major Manufacturers Of Automobiles in India:-

 Tata Motors
 Maruti Udyog Ltd.
 General Motors India
 Ford India Ltd.
 Eicher Motors
 Bajaj Auto
 Daewoo Motors India
 Hero Motors
 Hindustan Motors
 Hyundai Motor India Ltd.
 Royal Enfield Motors
 TVS Motors
 DC Designs
 Swaraj Mazda Ltd

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PART- B
COMPANY PROFILE

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ORIGIN OF TATA MOTORS

TATA MOTORS, formely known as TELCO (Tata Engineering & Locomotive


Company) is a multinational corporation headquatered in Mumbai,India. It is a largest
automobile & commercial vehicle manufacturing company. The OICA ranked it as the
world 20th largest automaker, based on figures for 2006.

TATA MOTORS was established in the year 1945. It is a part of TATA GROUP.
It presence indeed cuts across the length and breadth of India. Over 3 million Tata
vehicles runs on Indian roads, since the first rolled out in 1954.

Jamsetji Nusserwanji Tata starts a private trading firm, laying the


foundation of the Tata Group. The Tata Group comprises 96 operating companies in
seven business sectors: information systems and communications; engineering;
materials; services; energy; consumer products; and chemicals. The Group was founded
by Jamsetji Tata in the mid 19th century, a period when India had just set out on the
road to gaining independence from British rule. Consequently, Jamsetji Tata and those
who followed him aligned business opportunities with the objective of nation building.
This approach remains enshrined in the Group's ethos to this day.
The Tata family of companies shares a set of five core values: integrity,
understanding, excellence, unity and responsibility. These values, which have been part
of the Group's beliefs and convictions from its earliest days, continue to guide and drive
the business decisions of Tata companies. The Group and its enterprises have been
steadfast and distinctive in their adherence to business ethics and their commitment to
corporate social responsibility.

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TATA GROUP

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HVTL (SUBSIDIARY OF TATA MOTORS)

HV Transmissions Limited is a leading manufacturer of automotive


transmissions, components & engineering applications for a wide range of medium &
heavy commercial vehicles.

HVTL was established on 13th March 2000 as a major subsidiary of Tata Motors
by taking over operations of Tata Motors’ erstwhile Gearbox Division. Our
manufacturing facilities are located in the industrial belt of Jamshedpur in the state of
Jharkhand, 250 kms from Kolkata, India’a leading metro city and is well connected by
road and rail to other major cities / locations.

The Company provides products and services of superior quality, matching


with the current economic and business trends in Medium and Heavy Commercial
Vehicle market.

HVTL has an asset base of Rs. 278.74 crores and its turnover during
2008-09 was Rs. 142.59 crores . The Company is spread over an area of 81,440 sq.
meters.

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The Company has a capacity of producing 1,50,000 gear boxes per year.

HVTL’s inherent strength also lies in its excellent in-house Tool room &
Tool Re-Grinding facilities, prompt component development and a modern Heat
Treatment shop.

HVTL's core competencies are emphasized through excellence in


engineering, manufacturing standards & ultimate utilization of human potential.

The Strength of HVTL lies in:-

 Strong Parentage of TML.


 Strong Manufacturing Base
 High Cost Competitiveness in Products offered.
 Professional Management
 Qualified & skilled manpower
 Extensive experience & expertise in Transmissions Manufacturing acquired over
the years ( Since year 1954).
 Product portfolio capable of serving diverse needs (vehicles of varying power-
weight ratios) & flexible to adaptation to vehicles of diverse makes
 Initiatives like TPM, KAIZEN, 5S, 6 Sigma, ISO/TS 16949 :2002 (E)
 HVTL has signed the BE-BP Agreement with Tata Sons & has scored in the band of
450-550 in the previous TBEM External Assessment .

'All resulting in an environment congenial for learning, creativity and innovation’

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MARKET SHARE OF HVTL

 Across the domestic market – HVTL 46% market share (No. 1 OE supplier).
 In Tata Motors, we have 71% market share, TML Pune has 26% & others 3%.
 100% TML, Pune M&HCV gear box volumes will be on loaded to HVTL.

VISION

To be a Most preffered partner for transmissions to existing & potential


customers in Domestic & International markets, offering best value for money &
become a Rs. 1500 Crore company by 2014-2015.

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MISSION
 Vendors & Services providers :- To foster a long- term relationship for mutual
growth.

 Employees :- To create seamless organization that inculcated and promotes


innovation, excellence, safe and high performance work culture adhering to Tata
code of conduct.

 Shareholders :- To consistently create shareholder value through sustainable and


profitable growth by continuously seeking new business opportunities and
employing best method and practices and employing best in class technologies.

 Customers :- To provide best value for mobet to customers through quality, cost
effective & innovative transmissions solutions.

 Community :- To proactively participate in environmental protection & welfare of


communities around us.

CORE VALUES

 Integrity.
 Customer Focus.
 Corporate Citizenship.
 Passion for Engineering.
 Innovation.

J. R. D Tata

“ No success or achievement in material terms is worthwhile


unless it serves the needs or interests of the country and its people
and is achieved by fair and honest means.”

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HVTL Function in a harmonious atmosphere stemming from adopting of the basic tenets
of the Tata Group’s philosophy of respect for employees and a high concern for their
needs and welfare.

HVTL’S Culture is driven by ownership, responsibility and accountability at different


levels which had led to sure, systematic and continues improvement and learning. This
is distinctly evident form quantum and sustained improvements. One such example is
the significant improvements of product.

The Culture Of HVTL is characterised by:

 A passion for engineering and innovation among the employees-a major


transformation of facilities in the past years has taken place with many firsts in
India such as unique high quality-low cost semi automated assembly line,
automated shim selection, conveyorised and automatic painting, semi automated
SqF line, 5-chamber shot blasting to mention a few.
 An increasing seamless work-culture through an approach of defining
accountability that ensures empowerment and calls for involvement in various
functions of the organization to deliver objectives.
 A learning and collaborative culture fostered by soliciting externally sourced
expertise which has led to setting up of modern facilities at significantly low costs.
 A team based culture with CFTs to achieve stretch targets on cost, quality and other
key objectives. This culture, while fostering high performance also enables HVTL to
strengthen its Coe competency of being the lowest cost manufacturer of M&HCV
transmissions. In fact during the recent down turn HVTL was not only able to
maintain the profit in the third and fourth quarters but also achieved marked
improvements in areas such as variable conversion cost.

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MANAGEMENT

Board of Directors –HVTL

Name Position

Mr. P M Telang Chairman

Mr. C Ramakrishnan Director

Mr. S B Borwankar Director

Mr. Govind Shankarnarayanan Director

Mr. N S Kulkarni Director

Chief Executive Officer

Name Position

Mr. M L Bapna CEO

Chief Financial Officer

Name Position

Mr. Amitava Roy CFO

Company Secretary

Name Position

Mr. Vispi S Patel Company Secretary

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Certificates Awarded to HVTL

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Factors Contributing to Continous Development, & High
Performance

 HV Transmissions is a part of the engineering business of TATA group of


companies that is India’s largest and best-known conglomerate, with a turnover
touching Rs.33, 000 Crores, ($ 7 Billion).

 Having an Asset base of Rs.293.03 Crores.


 Turnover for 2008-09 was Rs.142.59 Crores
 A manpower base of 1528 men
 An area of 81440 square meters
 Production capacity of 150000 GBS per year

 The company’s strength lies in:


 Skilled & highly committed employees
 In house tool room and tool regrinding facilities
 Prompt component development centre
 Modern heat treatment shop

 It is the sole supplier of gearboxes to Tata Engineering Jamshedpur and Lucknow


for their entire range of commercial vehicles which they produce.

 The company also supplies gearboxes to Vehicle Factory, Jabalpur for fitment on
vehicles for the Indian Army which is a remarkable achievement for it.

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 The company has its own Tool room and Tool regrinding facilities as well as a
modern Heat Treatment shop consisting of Continuous Carburizing furnaces and
quenching presses.

 The manufacturing operations are being carried out on modern State of the Art
machine tools with close quality monitoring and extensive and rigorous testing
facilities regularly.

 Focussed approach to on Process Control systems helps the company to meet


quality standards and delivery commitments for their customer’s.

 HVTL’s core competencies are emphasized through excellence in engineering,


manufacturing standards and ultimate utilization of human potential.

 SAP 4.6 ERP(R/3ECG 6) software is central tool for information management at


HVTL. It is used to integrate all business processes and supports effective decision
making. It covers all functional areas and departments including finance.

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RELATIONSHIP WITH TATA MOTORS

The technical relationship between the Holding company TATA MOTORS LTD. &
subsidiary HV TRANSMISSIONS LTD. is that of a Job worker. Job working means
performing some operations on the raw materials or components of one organization
by another organization, due to specialization by the latter organization or outsourcing
/not having required capacity by the former organization. The latter organization is
known as the Job worker of the former one, for which the job worker gets revenue
commonly known as PROCESSING CHARGES.

The job worker gets the required material supply form the supplying organization on
which operations are performed and thereafter the output is returned to the supplier
for use in further production.

The job worker is a system where, the job worker processes the material & components
supplied to them into finished products & has to bear the expenses of conversion, which
is paid to them in the form of PROCESSING CHARGES.

Financial Highlights of the Company

HVTL has an authorized share capital of 5,00,00,000 equity shares of Rs. 10 each. It has
issued, subscribed and paid up capital of 4,00,00,000 equity shares of Rs. 10 each. Of the
above, 340000000 equity shares are held by Tata motors, the holding company.

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From being a loss making company in its initial years, HVTL is now in the pink of financial
health. Production numbers have steadily moved up and so has HVTLs’ sales. All
financial results of HVTL have improved over the years as a reflection of overall
performance improvement.

In view of strong financial performance board of directors declared payment of an


interim dividend of Rs. 3.50 per share. And final dividend of Rs. 1.50 per share on
40000000 equity shares fully paid up on March 31, 2008 consequently total dividend of
Rs. 5 was given.

TURNOVER
Turnover has more than doubled since 2002-03, not only through rise in volumes but
also through change in product mix and higher focus on spare parts. This shows that the
firm is getting good business from its customers and the firm has been able to increase
its customer base. Due to global recession the turnover slightly decreased.

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Profit after Tax, Profit before Tax and EBIDT

Profit before taxes (PBT) and Profit after taxes (PAT) have increased many fold on
account of increased volumes, higher efficiencies and better fund management. EBIDT
(Earnings before Interest, Depreciation and Taxes) dipped slightly in 2005-06 due to
market corrections in salary structure and higher provisions on account of retirement
benefits. With increased volumes and better productivity it has improved.

PAT, PBT and EBIDT fell sharply due to global recession since the contraction in demand.

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Earnings per Share and Dividend per Share

HVTL has been paying higher dividend to its shareholders. The dividend per share
increased considerably from Rs. 1.5 per share to Rs. 5 per share. This shows that the
company is concerned for the maximization of the firm’s value which in turn maximizes
shareholders profitability.

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PRODUCTS OF HVTL

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 GBS – 40 Synchromesh Gear Box

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 GBS- 50 Synchromesh Gear Box

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 GBS- 600 Synchromesh Gear Box

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 Auxiliary Gear Box

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 GBS- 750/680 & GBS- 1400/9

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RATIO ANALYSIS

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.

This is the measure of inter relationship between different sections of the


financial statements which then is compared with the budgeted or forecasted results,
prior year results and or the Industrial results. To be most important ratios must include
a study of underlying data. Ratios should be taken as guides that are useful in evaluating
a company’s financial position and operations and making comparisons with results
inprevious years or with other companies. The primary purpose of ratios is to point out
areas needing further investigations. Ratios will not carry meaningful business reasoning
if there is no supporting quantitative and financial information.

When it comes to investing, analyzing financial statement information (also


known as quantitative analysis), is one of, if not the most important element in the
fundamental analysis process.

Ratios are relationship expressed in mathematical terms between 2 individual


groups of figures connected with each other. Different ratios are calculated to analyze
and study different aspects of a firm. Ratios have been classified into the following
groups:

 Liquidity ratios
 Activity ratios
 Leverage ratios
 Profitability ratios

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THE USE OF FINANCIAL RATIOS

 Financial Ratio are used as a relative measure that facilitates the evaluation of
efficiency or condition of a particular aspect of a firm's operations and status.

 Ratio Analysis involves methods of calculating and interpreting financial ratios


in order to assess a firm's performance and status.

 Assessment of the firm’s past, present and future financial conditions.

 Done to find firm’s financial strengths and weaknesses.

 Primary Tools.

 Financial Statements.

 Comparison of financial ratios to past, industry, sector and all firms

SIGNIFICANCE OF USING RATIOS

The significance of a ratio can only truly be appreciated when:

 It is compared with other ratios in the same set of financial statements.

 It is compared with the same ratio in previous financial statements (trend


analysis).

 It is compared with a standard of performance (industry average). Such a


standard may be either the ratio which represents the typical performance of the
trade or industry, or the ratio which represents the target set by management as
desirable for the business.

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USERS OF RATIO ANALYSIS

 TRADE CREDITORS are interested in firm’s ability to meet their claims over a very
short period of time. Their analysis will therefore, confine to the evaluation of the
firm’s liquidity position.

 SUPPLIERS OF LONG TERM DEBT, on the other hand ,are concerned with the
firm’s long term solvency and survival. They analyse the firm’s profitability over
time, it’s ability to generate cash to be able to pay interest and repay principal
and the relationship between various sources of funds (capital structure
relationships). Long term creditors do analyse the historical financial statements,
but they place more emphasis on the firm’s projected, or proforma, financial
statements to make analysis about its future solvency and profitability.

 INVESTORS, who have invested their money in the firm’s shares, are most
concerned about the firm’s earnings. They restore more confidence in those firms
that show steady growth in earnings. As such, they concentrate on the analysis of
the firm’s present and future profitability. They are also interested in the firm’s
financial structure to the extent it influences the firm’s earnings ability and risk.

 MANAGEMENT of the firm would be interested in every aspect of the financial


analysis. It is their overall responsibility to see that the resources of the firm are
used most effectively and efficiently, and the firm’s financial condition is sound.

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MANAGERIAL USES OF RATIO ANALYSIS

The following are the important managerial uses of ratio analysis helps in financial
forecasting : Ratio analysis is very helpful in financial forecasting. Ratios relating to past
sales, profits and financial positions from the basis for setting future trends.

 Helps in Comparison: With the help of ratio analysis, ideal ratios can be
composed and they can be used for comparing a firm’s progress and
performance. Inter firm comparison or comparison with industry averages is
made possible by ratio analysis.

 Financial Solvency of the Firm: Ratio analysis indicates the trends in financial
solvency of the firm. Solvency has two dimensions long term solvency and short
term solvency. Long term solvency refers to the financial viability of a firm and it
is closely related with the existing financial structure. On the other hand, short
term solvency is the liquidity position of the firm. With the help of ratio analysis
conclusion can be drawn regarding the firm’s liquidity and long term solvency
position.

 Evaluation of Operating Efficiency : Ratio analysis throws light on the degree


of efficiency in the management and utilization of its assets and resources.
Various activity ratios measure this kind of operational efficiency and indicate the
guidelines for economy in costs, operations and time.

 Communication Value : Different financial ratios communicate the strength


and financial standing of the firms to the internal and external parties. They
indicate the over all profitability and capital gearing etc. of the firm.

 Other Uses : Financial ratios are very helpful in the diagnosis of financial health
of a firm. They highlight liquidity the, solvency, profitability and capital gearing
etc. of the firm.

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INTERPRETATION OF RATIOS

The interpretation of ratios is an important factor. Through calculation is also important


but it is only a clerical task whereas interpretation needs skills, intelligence and
forsightedness. The interpretation of the ratios can be done in the following ways.

 Single Absolute Ratio : Generally speaking one cannot draw meaningful


conclusions when a single ratio is considered in isolation. But single ratios may be
studied in relation to certain rules of thumb which are based upon well proven
contentions.

 Groups of Ratio : Ratios may be interpreted by calculating a group of related


ratios. A single ratio supported by related additional ratios becomes more
understandable and meaningful.

 Historical Comparisons: One of the easiest and most popular ways of


evaluating the performance of the firm is to compare its present ratios with the
past ratios called comparison over time.

 Projected Ratios : Ratios can also be calculated for future standard based upon
the projected financial statements. Ratio calculation on actual financial
statements can be used for comparison with the standard ratios to find out
variance, if any. Such variance helps in interpreting and taking corrective action
for improvement in future.

 Inter firm Comparison: Ratios of one firm can also be compared with the ratios
of some other selected firms in the same industry at the same industry at the
same point of time.

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LIMITATIONS OF RATIO ANALYSIS
 A firm’s industry category is often difficult to identify.

 Published industry averages are only guidelines.

 Accounting practices differ across firms.

 Sometimes difficult to interpret deviations in ratios.

 Industry ratios may not be desirable targets.

 Seasonality affects ratios .

TYPES OF RATIOS
 Liquidity Ratios – can current debts be met

 Leverage Ratios – can all debts be met

 Activity Ratios – how efficient is the operation.

 Profitability Ratios – how profitable is the operation

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FINANCIAL STATISTICS OF HVTL

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NET SALES
Gross sales for a period after cash discounts, returns, and freight expenses have been
deducted.

The sales figures are encouraging as there is a positive trend and the rate of increase is
considerably high. However considering the fact that it has only one customer in the
form of Tata Motors Limited the figures infers an increase in sales of TML. So in order to
increase sales in a higher rate HVTL should diversify its market. The net sales went up
from Rs 13924.05 lakhs in year 2000-01 to Rs 19197.82 in year 2007-08 but decreased to
14259.23 in the year 2008 – 09.

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Profit Before Interest and Tax
PBIT is essentially Net Income with interest, taxes, depreciation, and amortization added
back to it. It can be used to analyze and compare profitability between companies and
industries because it eliminates the effects of financing and accounting decisions.
However, this is a non-GAAP measure that allows a greater amount of discretion as to
what is (and is not) included in the calculation.

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Observation
The profit before interest and tax has gone up from -836.38 lakhs to 7632.56 lakhs in
2007-08 .This is a big achievement for HVTL. As it has proved its credibility as an
organization.

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Profit Before Tax -PBT
A profitability measure that looks at a company's profits before the company has to pay
corporate income tax. This measure deducts all expenses from revenue including
interest expenses and operating expenses, but it leaves out the payment of tax.

This measure combines all of the company's profits before tax, including
operating, non-operating, continuing operations and non-continuing operations. PBT
exists because tax expense is constantly changing and taking it out helps to give an
investor a good idea of changes in a company's profits or earnings from year to year.

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Observation
The profit before tax is rising in a consistent rate showing a very positive trend from
Rs.-2203.96 lakhs in year 2000-01 to Rs.7246 in 2007-08 reducing to 2583.1 in 2008-09.

Profit after tax (PAT)


It the net profit earned by the company after deducting all expenses like interest,
depreciation and tax.

PAT can be fully retained by a company to be used in the business. However


dividend is paid to the share holders from this residue.

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Observation
The profit after tax is rising in a consistent rate showing a very positive trend from
Rs.-2202.96 lakhs in year 2000-01 to Rs.4744.32 in 2007-08 .

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LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its short-term financial obligations when
and as they fall due.

The main concern of liquidity ratio is to measure the ability of the firms to meet
their short-term maturing obligations. Failure to do this will result in the total failure of
the business, as it would be forced into liquidation.

Common liquidity ratios include the current ratio, the quick ratio and the
operating cash flow ratio.

 Current Ratio : The current ratio is a popular financial ratio used to test a
company's liquidity (also referred to as its current or working capital position) by
deriving the proportion of current assets available to cover current liabilities.

The concept behind this ratio is to ascertain whether a company's short-


term assets (cash, cash equivalents, marketable securities, receivables and
inventory) are readily available to pay off its short-term liabilities (notes payable,
current portion of term debt, payables, accrued expenses and taxes). In theory,
the higher the current ratio, the better.

Current assets normally includes cash, marketable securities, accounts


receivable and inventories. Current liabilities consist of accounts payable, short
term notes payable, short-term loans, current maturities of long term debt,
accrued income taxes and other accrued expenses (wages).

Interpretation
1. Relatively high ratio values mean that the business is liquid, but cash is not
working.

2. If the current ratio is greater than 1.0, the business is liquid.

3. If the current ratio is less than 1.0, the business is illiquid.

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Observation
HVTL has a current ratio ranging between 0.42 to 0.79. This indicates that the current
assets of the firm are less than the current liabilities. This is because the firm has always
maintained a negative net working capital. Its current liabilities have always been
greater than current assets. Current liabilities is greater than current assets which shows
that the company is able to recover its debtors faster and has a good bargaining facility
with its suppliers.

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 Quick ratio : The quick ratio -the quick assets ratio or the acid-test ratio -is a
liquidity indicator that further refines the current ratio by measuring the amount
of the most liquid current assets there are to cover current liabilities. The quick
ratio is more conservative than the current ratio because it excludes inventory
and other current assets, which are more difficult to turn into cash. Therefore, a
higher ratio means a more liquid current position.

Interpretation
1. Relatively high ratio values mean that the business is liquid, but cash is
not working.

2. If the current ratio is greater than 1.0, the business is liquid.

3. If the current ratio is less than 1.0, the business is illiquid.

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Observation
The firm keeps a small fraction of the current assets in liquid form. The managerial
efficiency of the firm prevents any situation of default in payment of current liabilities.

LEVERAGE RATIO
The ratios indicate the degree to which the activities of a firm are supported by
creditors’ funds as opposed to owners.

The relationship of owner’s equity to borrowed funds is an important indicator


of financial strength.

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The debt requires fixed interest payments and repayment of the loan and legal
action can be taken if any amounts due are not paid at the appointed time. A relatively
high proportion of funds contributed by the owners indicates a cushion (surplus) which
shields creditors against possible losses from default in payment.

Note: The greater the proportion of equity funds, the greater the degree of financial
strength. Financial leverage will be to the advantage of the ordinary shareholders as
long as the rate of earnings on capital employed is greater than the rate payable on
borrowed funds.

 Debt Ratio : The debt ratio compares a company's total debt to its total
assets, which is used to gain a general idea as to the amount of leverage being
used by a company. A low percentage means that the company is less dependent
on leverage, i.e., money borrowed from and/or owed to others. The lower the
percentage, the less leverage a company is using and the stronger its equity
position. In general, the higher the ratio, the more risk that company is
considered to have taken on.

A debt ratio of greater than 1 indicates that a company has more debt
than assets, meanwhile, a debt ratio of less than 1 indicates that a company has
more assets than debt. Used in conjunction with other measures of financial
health, the debt ratio can help investors determine a company's level of risk.

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Observation
This ratio compares the total debt (long term as well as short term) with total
assets. Up to the financial year 2007-08 total debts were a small proportion of
total assets. However in the year 2008-09, total debts have become almost equal
to total assets the reason being the term loan raised in the year 2008-09.

 Debt-Equity Ratio : The debt-equity ratio is another leverage ratio that


compares a company's total liabilities to its total shareholders' equity. This is a
measurement of how much suppliers, lenders, creditors and obligors have
committed to the company versus what the shareholders have committed.

To a large degree, the debt equity ratio provides another vantage point on a
company's leverage position, in this case, comparing total liabilities to
shareholders' equity, as opposed to total assets in the debt ratio. Similar to the
debt ratio, a lower the percentage means that a company is using less leverage
and has a stronger equity position.

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Observation
The ratio indicates to what extent long term debts have been employed in
relation to shareholders funds. The extent of employment of long term debts in
relation to shareholders funds has increased to 0.61 in 2007-08. The sudden hike
in the ratio is because the company took a term loan in the financial year
2007-08.

 Interest Coverage Ratio : This ratio measures the debt servicing capacity
of a firm as fixed interest on long term loan is concerned. It is determined by
dividing the operating profits or earnings before interest and taxes (EBIT) by the
fixed interest charges on loans. Thus, interest 45 coverage = EBIT / Interest From
the point of view of the creditors, the larger the coverage, the greater is the
ability of the firm to handle fixed charge capabilities and the more assured is the
payment of interest to the creditors. However, too high a ratio may imply unused
debt capacity.

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The lower the ratio, the more the company is burdened by debt expense.
When a company's interest coverage ratio is 1.5 or lower, its ability to meet
interest expenses may be questionable. An interest coverage ratio below 1
indicates the company is not generating sufficient revenues to satisfy interest
expenses.

Present and prospective loan creditors such as bondholders, are vitally


interested to know how adequate the interest payments on their loans are
covered by the earnings available for such payments.

Owners, managers and directors are also interested in the ability of the
business to service the fixed interest charges on outstanding debt.

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Observation
This ratio measures the ability of a firm to service debts. HVTL has a favorable
interest coverage ratio which means that in the year 2006-07. HVTL had operating
profits which were 19 times that of its interest liability. The interest coverage
ratio decreased considerably in 2007-08 because fresh debts were raised by the
firm in the year 2007-08 the service of the term loan required huge funds still
decreasing in 2008-09.

 Financial Leverage Ratio : Financial leverage refers to presence of fixed


charge in the income statement of the firm. Interest amount does not change
with PBIT, whereas the residual profits available to shareholders is affected by a
change in PBIT. Thus the ratio measures the relationship between PBIT and PBT.

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Observation
Financial leverage refers to presence of fixed charge in the income statement of
the firm. Interest amount does not change with EBIT, whereas the residual profits
available to shareholders is affected by a change in EBIT.

Thus the ratio measures the relationship between PBIT and PBT.

For the last 4 years, the FL ratio has been favorable. This indicates that the firm is
trading on Equity.

ACTIVITY RATIO
Accounting ratios that measure a firm's ability to convert different accounts
within their balance sheets into cash or sales. Companies will typically try to turn
their production into cash or sales as fast as possible because this will generally
lead to higher revenues.

Such ratios are frequently used when performing fundamental analysis on


different companies. The asset turnover ratio and inventory turnover ratio are
good examples of activity ratios.

 Inventory Turnover Ratio : Inventory Turnover Ratio indicates how fast


inventory is sold. A high ratio is good from the viewpoint of liquidity and vice
versa. A low ratio would signify that inventory does not sell fast and stays on the
shelf or in the warehouse for a long time.

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Observation
The inventory turn over ratio ranges from 8.43 in the year 2000-01 to 8.50 in the
year 2008-09. It was highest in the year 2002-03 due to inventory control
measures taken by the management. However, it has reduced since then and
measures need to be taken to increase it .

 Days Of Inventory Holding :


The number of days inventory is also known as average inventory period and
inventory holding period.

A high number of days inventory indicates that their is a lack of demand for the
product being sold.

A low days inventory ratio (inventory holding period) may indicate that the
company is not keeping enough stock on hand to meet demands.

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Observation
The number of days of inventory holding has been fluctuating since inception it
gradually came down to its lowest in year 2002-03 but went up once again.
However, it is seen that it ranges from 43.31 days of inventory holding in year
2000-01 to 42.96 days in year 2008-09.

 Fixed Asset Turnover Ratio : This ratio is a rough measure of the


productivity of a company's fixed assets (property, plant and equipment or PP&E)
with respect to generating sales. For most companies, their investment in fixed
assets represents the single largest component of their total assets. This annual
turnover ratio is designed to reflect a company's efficiency in managing these
significant assets. Simply the higher the yearly turnover rate, the better.

It represents a multiplicity of management decisions on capital expenditures.

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Observation
The fixed asset turnover ratio went up gradually from 1.04 in the year 2000-01 to
2.06 in the year 2006-07 but due to capitalization in the year 2007-08 it fell to
0.66.

 Total Assets Turnover Ratio : This ratio is also known as the investment
turnover ratio. It is based on the relationship between the cost of goods sold and
assets/ investments of a firm as reflected in its earning power. Depending upon
the different concepts of assets employed, there are many variants of this ratio.

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Observation :
As it is a manufacturing industry it has a higher composition of fixed assets .The
total asset turnover ratio is consistently below 1 because the company is a job
worker. However the trend shows that this ratio has been rising because of
increase in sales from 0.72 in year 2000-01 to 0.96 in year 2004-05 .

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Profitability Ratios

Profit margin analysis uses the percentage calculation to provide a comprehensive


measure of a company's profitability on a historical basis (3-5 years) and in
comparison to peer companies and industry benchmarks.

Basically, it is the amount of profit (at the gross, operating, pretax or net
income level) generated by the company as a percent of the sales generated. The
objective of margin analysis is to detect consistency or positive/negative trends in
a company's earnings. Positive profit margin analysis translates into positive
investment quality. To a large degree, it is the quality, and growth, of a company's
earnings that drive its stock price.

 EBIDTA : A company's cost of sales, or cost of goods sold, represents the


expense related to labour, raw materials and manufacturing overhead involved in
its production process. This expense is deducted from the company's net
sales/revenue, which results in a company's first level of profit, or gross profit.
The gross profit margin is used to analyze how efficiently a company is using its
raw materials, labour and manufacturing-related fixed assets to generate profits.
A higher margin percentage is a favorable profit indicator.

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Observation
The gross profit margin is consistently high. We can see that in year 2006-07 it
went up to 41.94% then reduced to 18.12% in 2008-09.

 Net Profit Margin : Often referred to simply as a company's profit margin,


the so-called bottom line is the most often mentioned when discussing a
company's profitability. While undeniably an important number, investors can
easily see from a complete profit margin analysis that there are several income
and expense operating elements in an income statement that determine a net
profit margin. It behooves investors to take a comprehensive look at a company's
profit margins on a systematic basis.

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Observation
The net profit margin rose considerably from 15.82% in the year 2000-01 to
25.62% in 2006-07 but is decreased in the year 2008-09. The trend however
shows a consistent net margin since 2003-04.

 Return On Equity : This ratio indicates how profitable a company is by


comparing its net income to its average shareholders' equity. The return on
equity ratio (ROE) measures how much the shareholders earned for their
investment in the company. The higher the ratio percentage, the more efficient
management is in utilizing its equity base and the better return is to investors.

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Widely used by investors, the ROE ratio is an important measure of a
company's earnings performance. The ROE tells common shareholders how
effectively their money is being employed. Peer company, industry and overall
market comparisons are appropriate; however, it should be recognized that there
are variations in ROEs among some types of businesses.

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Observation
HV Transmission Limited has done well in terms of return on equity which shows
that in year 2000-01 it was -27.54% but in year 2007-08 it has risen to 33.74, in
turn decreasing to 12.91 in 2008-09%.

 Return On Investment : In finance, rate of return (ROR), also known as


return on investment (ROI), rate of profit or sometimes just return, is the ratio of
money gained or lost (whether realized or unrealized) on an investment relative
to the amount of money invested. The amount of money gained or lost may be
referred to as interest, profit/loss, gain/loss, or net income/loss. The money
invested may be referred to as the asset, capital, principal, or the cost basis of the
investment. ROI is usually expressed as a percentage rather than a fraction.

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Return on investment is a very popular metric because of its versatility and
simplicity. That is, if an investment does not have a positive ROI, or if there are
other opportunities with a higher ROI, then the investment should be not be
undertaken.

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Observation
The return on investment had been quiet encouraging where as it has been
inconsistent . It is fluctuating every year. A more sustainable and consistent
figures are something which the management should look forward to achieve.
It ranges from -5.15% in year 2000-01 to 9.27% in year 2008-09.

 Earnings Per Share -EPS : The portion of a company's profit allocated to


each outstanding share of common stock. Earnings per share serves as an
indicator of a company's profitability.

Calculated as:

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When calculating, it is more accurate to use a weighted average number of shares
outstanding over the reporting term, because the number of shares outstanding
can change over time. However, data sources sometimes simplify the calculation
by using the number of shares outstanding at the end of the period.

Earnings per share is generally considered to be the single most important


variable in determining a share's price. It is also a major component used to
calculate the price-to-earnings valuation ratio.

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Observation
The earning per share has gone up considerably which is a very good news for the
share holders . From 0 in year 2000-01 it has climbed to 11.86 in year 2007-08
with a decrease to 4.86 in the year 2008 – 09.

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WORKING CAPITAL
Working capital, also known as net working capital, is a financial metric which
represents operating liquidity available to a business. Along with fixed assets such
as plant and equipment, working capital is considered a part of operating capital.
It is calculated as current assets minus current liabilities. If current assets are less
than current liabilities, an entity has a working capital deficiency, also called a
working capital deficit.

A company can be endowed with assets and profitability but short of


liquidity if its assets cannot readily be converted into cash. Positive working
capital is required to ensure that a firm is able to continue its operations and that
it has sufficient funds to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable and cash.

An increase in working capital indicates that the business has either


increased current assets (that is received cash, or other current assets) or has
decreased current liabilities, for example has paid off some short-term creditors.

 Gross Working Capital : Total current assets.

 Net Working Capital : Current assets -Current liabilities.

 Net operating working capital (NOWC) : Operating CA – Operating CL =


(Cash + Inv. + A/R) – (Accruals + A/P)

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FACTORS TO CONSIDER
 Accounts receivable management

 Inventory management

 Diversification of operations

 Type of business

 Grain merchandising practices

 Prepayment activity

 Leverage

 Expansion plans

PRINCIPLES OF WORKING CAPITAL

There are four principle of working capital management. They are being depicted
as below :

(i) Principle of Risk Variation: -The goal of WC management is to establish a


suitable trade between profitability and risk. Risk here refers to a firm's ability to
honor its obligation as and when they become due for payments. Larger
investment in current assets will lead to dependence. Short term borrowings
increases liquidity, reduces risk and thereby decreases the opportunity for gain or
loss On the other hand the reserve situation will increase risk and profitability And
reduce liquidity thus there is direct relationship between risk and profitability and
inverse relationship between liquidity and risk.

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(ii) Principle of Cost Capital: -The various sources of raising WC finance have
different cost of capital and the degree of risk involved. Generally higher the cost
lower the risk, Lower the risk higher the cost. A sound WC management should
always try to achieve the balance between these two.

(iii) Principle of Equity Position: -This principle is considered with planning the
total investment in current assets. As per this principle the amount of WC
investment in each component should be adequately justified by a firms equity
position. Every rupee contributed current assets should contribute to the net
worth of the firm The level of current assets may be measured with the help of
two ratios. They are:

 Current assets as a percentage of total assets.

 Current assets as a percentage of total sales.

(iv) Principle of Maturity Payment: -This principle is concerned with planning


the source of finance for WC. As per this principle a firm should make every effort
to relate maturities of its flow of internally generated funds in other words it
should plan its cash inflow in such a way that it could easily cover its cash out
flows or else it will fail to meet its obligation in time.

NEED FOR WORKING CAPITAL

For earning profit and continue production activity, the firm has to invest enough
funds in Current Assets in generating sales. Current Assets are needed because
sometimes sales do not convert into cash instantaneously and it includes an
operating cycle.

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ESTIMATING WORKING CAPITAL NEEDS
Working Capital needs can be estimated by three different methods, which have
been successfully applied in practice.

They are follows:

1. Current Assets Holding Period: To estimate Working Capital requirements


on the basis of average holding period of Current Assets and relating them to
costs based on the company's experience in the previous years. This method is
based on the operating cycle concept.

2. Ratio of Sales: To estimate Working Capital requirements as a ratio of sales


on assumption that Current Assets change with sales.

3. Ratio of fixed Investment: To estimate Working Capital requirements as a


percentage of fixed investment.

CRITERIA FOR EVALUATION OF WORKING


CAPITAL MANAGEMENT.
Working capital can be considered in 2 ways.

 One, When working capital is viewed as the difference between current


assets and current liabilities, the basic objective of working capital appears to be
one of providing adequate cover to meet the current obligations of a company as
and when they become due. This approach lays greater emphasis on the liquidity
aspect of working capital.

 Second, When working capital is looked upon as the amount held in


different forms of current assets to provide adequate support to the smooth
functioning of the normal business operations of a company the objective
becomes one of deciding the tradeoff between liquidity and profitability.

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WORKING CAPITAL MANAGEMENT
Decisions relating to working capital and short term financing are referred to as
working capital management. These involve managing the relationship between a
firm's short-term assets and its short-term liabilities. The goal of working capital
management is to ensure that the firm is able to continue its operations and that
it has sufficient cash flow to satisfy both maturing short-term debt and upcoming
operational expenses.

Implementing an effective working capital management system is an


excellent way for many companies to improve their earnings. The two main
aspects of working capital management are ratio analysis and management of
individual components of working capital.

A few key performance ratios of a working capital management system are


the working capital ratio, inventory turnover and the collection ratio. Ratio
analysis will lead management to identify areas of focus such as inventory
management, cash management, accounts receivable and payable management.

MANAGEMENT OF WORKING CAPITAL


Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at
managing the current assets (generally cash and cash equivalents, inventories and
debtors) and the short term financing, such that cash flows and returns are
acceptable.

 Cash Management : Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.

 Inventory Management : Identify the level of inventory which allows


for uninterrupted production but reduces the investment in raw materials -
and minimizes reordering costs -and hence increases cash flow; see Supply
chain management; Just In Time (JIT); Economic order quantity (EOQ);
Economic production quantity.

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 Debtors Management : Identify the appropriate credit policy, i.e. credit
terms which will attract customers, such that any impact on cash flows and
the cash conversion cycle will be offset by increased revenue and hence
Return on Capital (or vice versa); see Discounts and allowances.

 Short Term Financing: Identify the appropriate source of financing,


given the cash conversion cycle: the inventory is ideally financed by credit
granted by the supplier; however, it may be necessary to utilize a bank loan
(or overdraft), or to "convert debtors to cash" through "factoring".

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GROSS WORKING CAPITAL
The firm's investment in current assets (such as cash and marketable securities,
receivables, and inventory).

Gross Working Capital refers to the firm's investment in Current Assets.


Current Assets are the assets, which can be converted into cash within an
accounting year or operating cycle. It includes cash, short-term securities, debtors
(account receivables or book debts), bills receivables and stock (inventory).

The concept of Gross Working Capital focuses attention on two aspects of


Current Assets' management. They are:

a) Way of optimizing investment in Current Assets.

b) Way of financing current assets.

Gross Working Capital = Total Current Assets of the company during the financial
year.

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Observation
The gross working capital of the firm decreased initially but since 2003 it has been
increasing considerably. The gross working capital for the financial year 2008-09 is
Rs. 3620.46 lakhs.

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NET WORKING CAPITAL
Net Working Capital, is defined as Current Assets minus Current Liabilities. Current
assets include stocks, debtors, cash & equivalents and other current assets. Current
liabilities include all the short-term borrowings.

Net Working Capital refers to the difference between Current Assets and
Current Liabilities are those claims of outsiders, which are expected to mature for
payment within an accounting year. It includes creditors or accounts payables, bills
payables and outstanding expenses. Net Working Copulate can be positive or
negative. A positive Net Working Capital will arise when Courtney Assets exceed
Current Liabilities and vice versa.

Concept of Net Working Capital


This is a qualitative concept. It indicates the liquidity position of and suggests the
extent to which working Capital needs may be financed by permanent sources of
funds. Current Assets should be optimally more than Courtney Liabilities. It also
covers the point of right combination of long term and short-term funds for
financing court Assents. For every firm a particular amount of net Working Capital in
permanent. Therefore it can be financed with long-term funds.

The net working capital metric is directly related to the current ratio. If you
look at the calculation of the current ratio, you see that you use the same balance
sheet data to calculate net working capital.

Net Working Capital = Total Current Assets – Total


Current Liabilities

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Observation
The net working capital of the firm has been negative throughout since its inception.
There has been various changes in the net working capital of the firm. However, the
current liabilities of HVTL have always been greater than the current assets.

CONCLUSION
From the ratio analysis of the firm we come to know about the profitability of the
firm. Leverage ratios indicate the composition of long term debts and its impact on
overall financial position of the firm. Liquidity ratios give idea maintenance of liquid
assets in the company. From the analysis of the working capital and its components
of HVTL, we found that the company follows aggressive policy of managing liquidity .
The company is earning huge profits and is in good financial health.

HVTL despite having a negative net working capital, the company is in sound
financial health. This indicates the managerial efficiency of the company. The
company does not have unnecessary funds tied up in the form cash or any current
assets increasing the liquidity and thus decreasing the profitability of the company.
As there is a tradeoff between profitability and liquidity the firm maintains current
assets up to the level necessary for the smooth functioning of the business.

On the current liabilities side, there are various non cash provisions for
employees of the company. Sundry creditors are managed by keeping a close check
on the deferral period. The profitability ratio shows that the organization is making
good profits and paying dividend worth Rs.5 per share. Which proves HVTL’s
credibility.

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RECOMMENDATIONS
 The revenue from the sale of products and other income for the year 2008-09 is
Rs.14294.06 lakhs which has decreased in comparison to the previous year which
was Rs.19229.42 lakhs.
 The company paid 2459.90 lakhs as the dividend which has increased in
comparison to the previous year, which was Rs 701.97 lakhs.
 The relationship between HVTL and Tata Motors is that of a job worker. The gear
boxes are produced in accordance with the production schedule received from
Tata Motors. Whatever is produced is dispatched to Tata Motors immediately.
 The gross working capital of the firm decreased initially but since 2003 it has been
increasing considerably. The gross working capital for the financial year 2008-09 is
Rs. 3620.46 lakhs.
 The net working capital of the firm has been negative throughout since its
inception. There has been various changes in the net working capital of the firm.
However, the current liabilities of HVTL have always been greater than the
current assets.

 Ideally the current ratio of 2:1 is considered satisfactory. But, HVTL has a current
ratio ranging between .71 to .58 this indicates that the current assets of the firm
are less than the current liabilities. This is because the firm has always maintained
a negative net working capital. Its current liabilities have always been greater
than current assets.

 HVTL has been able to save Rs. 281 lakhs in the financial year 2008-09 by direct
material cost reduction.

 Profit after tax has reduced by 58.27% for the financial year 2008-09 in
comparison to the previous year PAT due to global recession affecting customer’s
demand.

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