Financial Management II Project Report on Working Capital Management and Dividend Policy of ARVIND LIMITED

Submitted by: Shikhar Mehrotra 13PGDM053

TABLE OF CONTENTS
Working Capital Management ........................................................................................................ 3 Gross Working Capital: ................................................................................................................... 3 Net Working Capital: ....................................................................................................................... 3 Ratio Analysis .................................................................................................................................. 4 Current Ratio ............................................................................................................................... 4 Quick Ratio ................................................................................... Error! Bookmark not defined. Inventory Turnover Ratio ............................................................................................................ 5 Debtors Turnover Ratio ................................................................ Error! Bookmark not defined. Days Sales Outstanding ............................................................................................................... 7 Average Holding Period............................................................................................................... 7 Dividend Policy ................................................................................................................................ 9 Dividend per Share ...................................................................................................................... 9 Dividend Payout Ratio ................................................................................................................. 9
Earning Retention Ratio.9

Working Capital Management

Working Capital management is the management of assets that are current in nature. Current assets are the assets normally converted to cash within a period of one year. Hence working capital management can be considered as the management of cash, market securities receivable, inventories and current liabilities. Maintaining an optimum level of working capital is important for a company. If the company doesnt have much inventory of raw material, work-in-progress in hand or finished goods, blockage of funds is low. But, not keeping appropriate amount of stock may have adverse impact in case of an increased demand. Two concepts in working capital management are important: Gross Working Capital Net working Capital

Gross Working Capital:

Gross working capital refers to the firms investment in current assets. Current assets are the assets, which can be converted into cash within a one accounting year or operating cycle, & include cash short -term securities, debtors, receivable, & stock. The gross working capital concept focuses attention on two aspects of current assets management, Optimum investment in current assets Financing the current assets

These two aspects will help in remaining away from the two danger points of excessive or inadequate investment in current assets. Whenever a need of working capital funds arises due to increase in level of business activity or for any other reason the arrangement should be made quickly, and similarly if some surpluses are available, they should not be allowed to lie ideal but should be put to some effective use.

Net Working Capital:

Net working capital refers to the difference between the current assets and current liabilities. Current liabilities are those claim of outside which are expected to mature for payment within one accounting year. Net working capital can be positive as well as negative. Positive working capital refers to the situation where current assets exceed current liabilities and negative working capital refers to the situation where current liabilities exceed current assets. The net working capital helps in comparing the liquidity of the same firm over time. The goal of working capital management is to manage the current assets and liabilities in such a way that an acceptable level of net working capital is maintained.

RATIO ANALYSIS
The values of the Ratio and cash conversion period for the last 3 years of ARVIND LTD are shown in the table below; the formulae are mentioned in the analysis.
INDUSTRY SCENARIO(FOR 2013)

Ratios Quick Ratio Current Ratio Inventory Turnover Ratio Debtors Turnover Ratio Days Sales Outstanding Average Holding Period

Mar '13

Mar '12

Mar '11

Raymond's Raymond's Raymond's

0.86 0.92 3.69 5.08

0.64275 0.518918

0.90214

1.594334 1.368486 1.993708 4.32268 4.821216 3.812875 Raymond's 8.578138 8.659524 4.729716 Raymond's 71.85039 42.55002 42.15012 77.17165 Raymond's 98.91599 84.43836 75.70704 95.72828

Shri Dinesh Mills Shri Dinesh Mills Shri Dinesh Mills Shri Dinesh Mills Shri Dinesh Mills Shri Dinesh Mills

1.05 2.23 2.71 6.65 54.88722 134.6863

The calculations have been done in the excel sheet.

CURRENT RATIO
It is an indicator of firms ability to meet its short term obligations. Current Ratio represents a margin of safety for creditors. A Current Ratio of 1.33:1 is considered satisfactory. It is given by the following formula: Current Ratio= Current Assets/ Current Liabilities

Current Ratio
2.5 2 1.5 1 0.5 0 1 2 3

The current ratio has been higher than 1.33:1 in the last three years. It shows that the company is capable of paying its short-term obligations.
4

QUICK RATIO
Quick Ratio is an indicator of short term liquidity of the firm. It is a measurement of the firms ability to convert its most liquid assets quickly into cash in order to meet current liabilities. Generally a Quick Ratio of 1:1 is considered satisfactory. It is given by the following formula: Quick Ratio= (Current Assets- Inventories)/ Current Liabilities

Quick Ratio
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1 2 3

The companys quick ratio has been below 1:1 for the last three years. This depicts that companys liquidity position is not so good currently. Its current assets are less than its current liabilities.

INVENTORY TURNOVER RATIO

Inventory Turnover Ratio measures how quickly the inventory or the stock is sold. The ability to rotate the inventory faster helps in keeping the blockage of funds low. It is given by the following formula: Inventory Turnover Ratio= Sales/ Inventories

Inventory Turnover Ratio

6 5 4 3 2 1 0 1 2 3

The companys inventory turnover ratio has been low, which shows that it doesnt has much higher levels of inventory against sales. Moreover, the changes in the ratio for the company has remained more or less within the range of 10% in successive years. It is more than both the competitors analyzed here.

DEBTORS TURNOVER RATIO

Debtors Turnover Ratio indicates how quickly receivables or debtors are converted into cash. Generally the higher the value of Debtors Turnover Ratio, the more efficient is the management of credit. It is given by the following formula: Debtor Turnover Ratio= Total Credit Sales/ Sundry Debtor

Debtors Turnover Ratio

10 9 8 7 6 5 4 3 2 1 0 1 2 3

The companys debtor turnover ratio for period 2012-13 has increased by about 81.18% from the period 2010-11 which shows that the companys management of credit has improved significantly. It has decreased slightly as compared to the previous financial year.

Compared with the other industry players, the company fairs better with a debtor turnover ratio higher than both of them.

DAYS SALES OUTSTANDING

It is the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money. It is given by the following formula: Days Sales Outstanding = 365/ Debtor Turnover Ratio

Days Sales Outstanding

90 80 70 60 50 40 30 20 10 0 1 2 3

It is good to compare DSO with the industry average. Arvinds DSO is lower than both the other two players analyzed. Thus, the company is able to maintain its receivables accounts quite well.

AVERAGE HOLDING PERIOD

Holding period refers to the time between an asset's purchase and its sale. It is given by the following formula: Average Holding Period = 365/ Inventory Turnover Ratio

Average Holding Period

120 100 80 60 40 20 0 1 2 3

The companys average holding period has declined by about 44.86% from the financial year 2010-11 to 2012-13. This indicates that management has been able to reduce the number of days an asset is held as inventory. It has remained almost equal to the last financial year. It is lesser than the other two industry players.

WORKING CAPITAL
It is a measure of both a company's efficiency and its short-term financial health. If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital.

Year

Total Current Assets (CA)

Total Current liabilities (CL) 922.63 857.4 640.51

Working Capital (CA-CL) 548.35 315.94 636.48

2013 1,470.98 2012 1,173.34 2011 1,276.99

It can be seen from the above table that the company has been able to maintain positive working capital over the past three financial cycles, which is a good signal as it shows that the companys assets are more than its liabilities.

DIVIDEND POLICY DIVIDEND PER SHARE

It is the sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. The company has not given dividends in the last three financial years. This indicates that the company might have some investment plans and the management is planning to re-invest the companys profits for the same. However, the company has proposed to pay a dividend of Rs 1.65 per share on August 5, 2013.

DIVIDEND PAYOUT RATIO

Dividend payout ratio compares the dividends paid by a company to its earnings. The part of earnings that is not paid out in dividends is used for reinvestment and growth in future earnings. Investors who are interested in short term earnings prefer to invest in companies with high dividend payout ratio. On the other hand, investors who prefer to have capital growth like to invest in companies with lower dividend payout ratio. Dividend payout ratio differs from company to company. Mature, stable and large companies usually have higher dividend payout ratio. Companies which are young and seeking growth have lower or modest dividend payout ratio. Investors usually seek a consistent and/or improving dividends payout ratio. The dividend payout ratio should not be too high. The earnings should support the payment of dividends. If the company pays high levels of dividends it may become for it to maintain such levels of dividends if the earnings fall in the future. Dividends are paid in cash; therefore, high dividend payout ratio can have implications for the cash management and liquidity of the company. As stated earlier, Arvind has not paid dividend in the last 3 financial years which means the company is having investments plans in the near future.

EARNING RETENTION RATIO

It measures the amount of earnings retained after dividends have been paid out to the shareholders. The prime idea behind earnings retention ratio is that the more the company retains the faster it has chances of growing as a business. There is always a conflict when it comes to calculation of Earnings retention ratio, the managers of the company want a higher earnings retention ratio, while the shareholders of the company would think otherwise, as the higher the plowback ratio the uncertain their control over their shares and finances are. Arvind has retained all of its earnings in the last three financial years.