26. ijasr - financial performance of coconut oil mills in western.pdf

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FINANCIAL PERFORMANCE OF COCONUT OIL MILLS

IN WESTERN TAMIL NADU - RATIO ANALYSIS

N.DEEPA, M.MALARKODI & A.ROHINI

Assistant Professors, Department of Agricultural and Rural Management,

Tamil Nadu Agricultural University, Tamil Nadu, India

ABSTRACT

Ratio analysis was used to predict the financial performance of coconut oil mills in Western Tamil Nadu. The

study sample consisted of 40 coconut oil mills in Western Tamil Nadu and the data collected for five-year period from

2009-10 to 2013-14. The study analyzed the coconut oil mill’s financial statements with an objective to assess financial

performance of coconut oil mills. Oil mills were maintaining above standard level of liquidity ratios. Oil mills in inefficient

category had higher debt over its investments, which indicated the financial risk in future. Asset management was good in

efficient category. Oil mills were receiving 13.6 per cent of return for their investment as a whole. Regression results

revealed that working capital, total asset and efficiency of coconut oil mills significantly influenced the profit after tax

(PAT).

KEYWORDS: Coconut Oil Mills, Financial Performance, Liquidity, Leverage, Turn Over, Profitability, Ratio Analysis

Received: Jan 11, 2016; Accepted: Jan 19, 2016; Published: Jan 27, 2016; Paper Id.: IJASRFEB201626

INTRODUCTION

Ratio analysis was used to evaluate various aspects of a company’s operating and financial performance

such as its liquidity, solvency, profitability and activity. The trend of these ratios was studied to check whether they

were improving or deteriorating over time. Ratios were also compared across different companies in the same sector

to see how they stack up, and to get an idea of comparative valuations. Ratio analysis was considered as a

cornerstone of fundamental analysis. The balance sheet and profit and loss account of coconut oil mills for the

period of five years (from 2009-10 to 2013-14) were collected in order to perform the ratio analysis and to study the

financial performance.

MATERIALS AND METHODS

The sampling design, data collection and analytical frameworks are outlined in this section.

Sampling Design and Data Collection

The list of coconut oil mill was collected from Coconut Oil Mill Association and District Industries Centre

(DIC) for Western Zone (Tiruppur and Coimbatore) of Tamil Nadu. The list comprised of 126 coconut oil mills in

Tiruppur and 15 oil mills in Coimbatore districts. From that list, 40 coconut oil mills were selected by simple

random sampling method.

Five year period from 2009-10 to 2013-14 was considered for evaluating the financial performance and

efficiency of coconut oil mills in Western Tamil Nadu. The entire study profoundly relied on the interview schedule

Or i gi n al Ar t i c

l e

International Journal of Agricultural

Science and Research (IJASR)

ISSN(P): 2250-0057; ISSN(E): 2321-0087

Vol. 6, Issue 1, Feb 2016, 177-182

© TJPRC Pvt. Ltd.



178 N.Deepa, M.Malarkodi & A.Rohini

Impact Factor (JCC): 4.7987 NAAS Rating: 3.53

(financial management practices) and secondary data (balance sheet, income statement and cash flow statement) from the

annual reports of the coconut oil mills.

RESULTS AND DISCUSSIONS

Classification of Coconut Oil Mills

Based on the Overall Working Capital Management Efficiency Index (EI WCM), the coconut oil mills were

classified as efficient and inefficient category. Oil mills having EI WCM more than one (EI WCM > 1) were classified as

efficient category and less than one (EI WCM < 1) were under inefficient category. The results are presented in Table 1.

Table 1: Classification of Coconut Oil Mills

S.No. Category Numbers Percentage EI WCM

1 Efficient Category 28 70 2.51

2 Inefficient Category 12 30 0.76

Overall 40 100 1.63

t stat = 7.627118; p = 2.08E-08 < 0.01

Among the 40 coconut oil mills, majority (70 per cent) of them belonged to efficient category, while the next were

in inefficient category (30 per cent). The results of unequal variance t-test (two sample) revealed that there was a

significant difference between efficient and inefficient category oil mills.

Financial Performance of the Coconut Oil Mills

Liquidity Ratio of Selected Coconut Oil Mills

Data on current assets and current liabilities were collected from the balance sheet of the coconut oil mills and the

results are furnished efficient (E) and inefficient category (IE) in Table 2.

Table 2: Liquidirtty Ratio of Selected Coconut Oil Mills

Ratios2009-10 2010-11 2011-12 2012-13 2013-14

Category

Average

E IE E IE E IE E IE E IE E IE

Current Ratio 3.79 2.76 2.73 4.65 2.51 2.25 1.93 3.35 2.01 4.03 2.59 3.41

Absoluteliquid ratio

0.80 1.03 0.90 0.98 0.80 0.66 0.48 0.65 0.52 0.74 0.70 0.81

The current ratio of efficient and inefficient category oil mills were 2.59 and 3.41 respectively. Oil mills in both

the category exceeds the thumb rule of 2:1. The average absolute liquid ratio of efficient category was found to be 0.70,

which was slightly more than the standard level of 0.5:1. The ratio was 0.81 in inefficient category. Analysis revealed that

both category oil mills were maintaining above standard level.

Hence, it is suggested that the oil mills should go for short-term investments especially oil mills in inefficient

category to bring down their liquid assets to the required level.

Long-Term Financial Position of Coconut Oil Mills

The analysis of long-term financial position of the company is also known as the test of solvency. Leverage ratios

are used to test the solvency position of the company. Long-term financial position of coconut oil mills are presented in

Table 3.



Financial Performance of Coconut Oil Mills in Western Tamil Nadu - Ratio Analysis 179


Table 3: Leverage Ratios of Coconut Oil Mills

Ratios2009-10 2010-11 2011-12 2012-13 2013-14

Category

Average


Debt EquityRatio

3.89 3.99 3.31 4.44 3.76 4.06 2.27 3.82 2.40 3.79 3.12 4.02

Proprietor ratio 0.28 0.19 0.34 0.23 0.34 0.33 0.41 0.39 0.36 0.22 0.34 0.27

Networth ratio 2.36 2.17 1.64 1.69 1.37 1.27 1.19 0.69 0.67 0.83 1.44 1.33

Current Assetto Proprietor's

Fund

2.74 2.18 2.59 2.74 2.19 3.25 1.99 3.03 2.40 3.08 2.38 2.86

Debt equity ratio indicated the relationship between the external equities or the outsider’s funds to the internal

equities or shareholder’s funds. The debt-equity ratio of both the categories exceeded the thumb rule of 2:1. It indicated

that the coconut oil mills had more of debt finance rather than equity capital. The average debt-equity ratio of efficient

category oil mills was 3.12 and inefficient category oil mills were 4.02, which showed higher debt equity ratio and

revealed the risky financial position.

It is suggested from the proprietor ratio that coconut oil mills should improve their capital structure in such a way

that the proportion of shareholders contribution should be more rather than debt capital which inturn would improve the

financial position of the industry.

Networth ratio gives the relationship between fixed assets and shareholders fund, which measures the solvency of

a company. The ratio indicated the extent to which the owners' fund was frozen in the form of fixed assets, such as plant

and equipment, and the extent to which these funds were available for the company's operations i.e. for working capital.

Higher ratio (more than one) of coconut oil industry indicated that the owner’s funds were not sufficient to finance thefixed assets and the coconut oil mills depended more on outsiders to finance the fixed assets.

Ratio of current assets to shareholder’s fund indicated that oil mills in both the category depended more on

outsiders fund (debt capital) rather than owner’s fund (equity capital) to invest in their current assets.

In summary, oil mills in efficient category were able to meet its long-term obligations associated with its long-

term borrowings.

Turn Over Ratios or Activity Ratios

Turnover ratio was also referred as activity ratio or asset management ratio. This helps in measuring how

efficiently the firm employs the assets. The better the management of assets, the larger is the amount of sales and the

profits. They indicated the speed with which the assets were converted into sales.

Turn Over Ratios of Coconut Oil Mills

Voulgaris et al. (2000) defined total assets turnover as the ratio that expressed the number of times the firm

generated sales by utilizing their assets.

Fixed asset turnover ratio indicated that the efficiency of oil mills in efficient category to generate sales by

utilizing its fixed assets.

Total asset turnover ratio of efficient category was 2.69 followed by inefficient category (1.88). As compared to





average total asset turnover ratio, efficient category had the highest value, which indicated that the total assets were used to

generate the sales equivalent to three times of its value in a year.

Table 4: Turn Over Ratios of Coconut Oil Mills

Ratios2009-10 2010-11 2011-12 2012-13 2013-14 Category

Average


Fixed asset

turnover ratio3.90 3.89 4.49 4.58 9.71 8.26 13.08 6.23 15.52 10.99 9.34 6.79

Total asset

turnover1.81 1.46 2.42 1.84 2.82 1.95 3.00 2.18 3.42 1.98 2.69 1.88

In summary, turnover ratios (fixed and total asset) of efficient category were comparatively better than the

inefficient category. It indicated that the asset management was good in efficient category. Hence, it is suggested that the

oil mills in inefficient category have to improve their turnover ratios by investing their excess funds rather than keeping it

as idle.

Ali et al. (2011) conducted a comprehensive study about banks’ profitability in Pakistan, where they found

significant relation between asset management ratio, capital and economic growth with Return on Assets (ROA). The

operating efficiency, asset management and economic growth were significant with the Return on Equity (ROE).

Analysis of Profitability Ratio

Overall efficiency of the business is assessed through profitability ratios. Generally, profitability ratios are

calculated either in relation to sales or in relation to investment. The results are presented in Table 5.

Table 5: Profitability Ratio of Coconut Oil Mills

Ratios2009-10 2010-11 2011-12 2012-13 2013-14

Category

Average


Net Profit

Ratio0.041 0.025 0.048 0.030 0.053 0.030 0.059 0.035 0.051 0.032 0.050 0.030

Return on

Investment0.074 0.037 0.116 0.055 0.149 0.059 0.177 0.076 0.174 0.063 0.136 0.057

Net Profit ratio establishes the relationship between the net profit after tax and sales. This indicates the efficiency

of the management in manufacturing, selling, administrative and other activities of the firm. The net profit ratio of efficient

category was 0.05, followed by inefficient category (0.03). As compared to annual average net profit ratio, efficient

category had the highest value, which indicated that the overall efficiency was good.

The return on investment of efficient category was 0.136, which indicated that those oil mills were receiving 13.6

per cent of return for their investment as a whole. About 5.7 per cent return on investment was noticed in inefficient

category, which was lesser than the annual average of all mills.

Effect of Working Capital, Total Assets and Efficiency on Profit after Tax (Pat) of Coconut oil Mills

The effect of working capital, efficiency and total assets on profit after tax of coconut oil mills was analyzed using

multiple regression analysis. Panel data for five years (2009-10 to 2013-14) was used for analysis. The results are

presented in Table 6.



Financial Performance of Coconut Oil Mills in Western Tamil Nadu - Ratio Analysis 181


It is inferred from the R square value that 51.7 per cent of the variations in profit after tax was explained by the

independent variables included in the model. Among the three independent variables, working capital, total asset and

efficiency of coconut oil mills significantly influenced the profit after tax at 0.01 level.

Table 6: Effect of Working Capital, Total Assets and Efficiency onProfit after Tax (PAT) of Coconut Oil Mills

VariablesUnstandardized Coefficients

T Sig.B Std. Error

(Constant)

WC

TA

Efficiency

2.923 1.698 1.721 .008

.080** .015 5.357 .000

.041** .008 4.794 .000

1.002** 0.479 2.090 .000

R Square : 0.517; Dependent Variable: Profit After Tax

** Regression is significant at the 0.01 level; n=200

Efficiency had the greatest effect on profit after tax, one rupee increase in efficiency, holding total assets and

working capital constant resulted in 1.002 rupees0 increase in profit after tax. Effective utilization of financial resources

would reduce the cost of capital, which in turn would improve the profit after tax. Whereas one rupee increase in working

capital, holding efficiency and total assets constant, resulted in 0.080 rupee increase in profit after tax. Proper utilization of

working capital would reduce the dependence of debt capital, which in turn would improve the capital structure of the

coconut oil mills and maximize the profit in the long-run. Total assets had comparatively less effect on profit after tax, one

rupee increase in total assets holding working capital and efficiency constant, resulted in 0.041 rupee increase in profit after

tax. Increase in total assets would reduce the total cost and would improve the profit after tax. Deloof (2003) proved that

the way working capital managed had a significant effect on the overall performance of businesses.

CONCLUSIONS

It is concluded that both category oil mills were maintaining above standard level of liquidity ratios. Oil mills in

inefficient category had higher debt over its investments, which indicated the financial risk in future. Asset management

was good in efficient category. Hence, it is suggested that the oil mills in inefficient category have to improve their

turnover ratios by investing their excess funds rather than keeping it as idle. The return on investment of efficient category

was 0.136, which indicated that those oil mills were receiving 13.6 per cent of return for their investment as a whole.

Working capital, total asset and efficiency of coconut oil mills significantly influenced the profit after tax.

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2. Ameer, R., and Othman, R. (2012). Sustainability Practices and Corporate Financial Performance: A study Based on the Top

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108(1), 61-79.

3. Beaver, W. H. (1966). Financial Ratios as Predictors of Failure. Journal of Accounting Research, 4(3), 71-111.

4. Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance &

Accounting, 30(3), 573-587.





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