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LOVELY PROFESSIONAL UNIVERSITYLOVELY SCHOOL MANAGEMENT

2010

Analysis of Current Asset Composition

Rohan Kumar Sinha

BBA-MBA

Content1. Acknowledgement 4

2. Introduction to the topic 5

3. Analysis of Current Asset Composition 9

4. My Work 10

5. Company Profile & History

A. ITC 10

B. Trident 11

C. Samsung 12

6. Analysis of Interpretation of Financial Data

A. ITC 12

B. Trident 14

C. Samsung 15

7. Conclusion 17

8. Bibliography 18

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Acknowledgement

The satisfaction and delight that accompanies the completion of any task would be incomplete

without mentioning the people who made it possible with their constant guidance and

encouragement which put the finishing touch to all the efforts with success.

I Rohan Kumar Sinha extend my intense gratitude and respect to Ms. Jaspreet Kaur, (my course

tutor) for providing a learning platform. I express my deep sense of gratitude and sincere thanks to

her for her valuable guidance.

I would like to thanks my seniors, who helped me thoroughly for shaping out things well in order.

Rohan Kumar Sinha

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Introduction to the Topic

Working Capital:

Working capital measures how much in liquid assets a company has

available to build its business. The number can be positive or negative, depending on how much

debt the company is carrying. In general, companies that have a lot of working capital will be more

successful since they can expand and improve their operations. Companies with negative working

capital may lack the funds necessary for growth.

Concept of   working capital

1. Balance Sheet Concept- There are two interpretations of working capital under the balance

sheet concept.

A. Excess of current assets over current liabilities also termed as the net working capital or net

current assets.

B. Gross or total current assets.

2. Operating cycle concept- A company’s operating cycle typically consists of three primary

phases:

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1.       Phase 1

In Phase 1, Cash gets converted into Inventory. This includes purchase of Raw Material,

Conversion of Raw Material into Work-in-Progress, Finished Goods and finally the transfer of

goods to stock at the end of the manufacturing process. In the case of Trading Companies, this

phase is shorter as there would be no manufacturing activity and cash is directly converted into

Inventory. This Phase is of course totally absent in the case of Service Organizations.

2.       Phase 2

In Phase 2 of the cycle, the Inventory is converted into Receivables as Credit Sales are made to

customers. Firms which do not sell on Credit obviously don't have the Phase 2 of the operating

Cycle.

3.       Phase 3

The Last Phase i.e. Phase 3 of the Operating Cycle, represents the stage when Receivables are

collected. This phase completes the operating cycle. Thus, the firm has moved from cash to

inventory, to receivables and to cash again.

Need of Working Capital

The firm has to maintain cash balance to pay the bills as they come due.

In addition, the company must invest in inventories to fill customer orders promptly.

And finally, the company invests in accounts receivable to extend credit to customers.

Operating cycle is equal to the length of inventory and receivable conversion periods.

Types   of   working   capital

1. On the basis of concept

2. On the basis of time

3. Gross working capital

4. Net working capital

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5. Permanent / fixed working capital

6. Temporary / variable working capital

7. Regular working capital

8. Reserve working capital

9. Special working capital

10. Seasonal working capital

Factors affecting the composition of working capital

The factors affecting the Composition of Working Capital are:-

1. Nature of Business

Different companies operating in different Industries have different Working Capital requirements.

A purely Trading Organization will basically have finished goods Inventory, Accounts Receivable

and Cash as Current Assets and Accounts Payable as Current Liability.

On the other hand, Capital Goods manufacturing and Trading Companies will have a high

proportion of Current Assets in the form of inventory of Raw Materials and Work-in-Progress.

Thus, the nature of Business is directly linked to the requirement of Working Capital.

2. Nature of Raw Material Used

The nature of Raw Material used in the manufacture of finished goods greatly influences the

quantum of Raw Material Inventory. For example, if the raw Material is an agricultural product

whose availability is pronouncedly seasonal in character, the proportion of Raw Material Inventory

to Finished Goods Inventory will be quite high.

Similarly companies using Imported Raw Materials with long lead time tend to have a high

proportion of Raw Material Inventory. In the case of Capital Goods Manufacturing Company the

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demand for whose product is growing over time, the tendency will be to have high Inventory of

Raw Material and Components.

3. Process Technology Used

In case the Raw Material has to go through several stages during the process of production, the

Work-in-Progress Inventory is likely to be much higher than any other item of the Current Assets

thereby increasing the need of Working Capital.

4. Nature of Finished Goods

The nature of Finished Goods greatly affects the amount of finished goods inventory. For example,

if the finished goods have a short span of 'shelf-life' as in the case of cigarettes the finished goods

inventory will constitute a very low percentage of current assets.

In the case of companies the demand for whose finished goods is seasonal in nature, as in the case

of fans, the inventory of finished goods will constitute a high percentage of total current assets. This

is mainly because from the point of view of the fixed costs to be incurred by the company it would

be more economical to maintain an optimum level of production throughout the year than by

stepping up production operations during the busy season.

5. Degree of Competition in the Market

When the Degree of Competition in the market for finished goods in an industry is high, then

companies belonging to the Industry may have to resort to an increased credit period to its

customers, partially lowering credit standards and similar other practices to push their products.

These practices are likely to result in a high proportion for Accounts Receivables thereby increasing

the need for Working Capital.

6. Growth and Expansion

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As the company grows, it is logical to expect that a larger amount of working capital is required. It

is, of course, difficult to determine precisely the relationship between the growth in volume of

business of a company and the increase in the working capital. The composition of working capital

also shifts with economic circumstances and corporate practices. Other things being equal, growth

Industries require more working capital than those that are static. The Critical fact however, is that

the need for increased working capital funds does not follow the growth in business activities but

precedes it. Advance planning of working capital, is therefore a continuing necessity for a growing

concern.

Analysis of Current Asset Composition

Understanding factors that have caused changes in the amount of a firm's current asset from one

period to another in no way diminishes the need to know the changes that have occurred in current

asset composition. The adequacy of any company's current asset composition depends on the

proportion of current assets to current liabilities-not on the dollar amount of current asset

composition.

To discover changes in composition, credit analysts must consider the balance sheet and try to

answer such questions as the following:

To what extent has any increase in receivables or inventories been financed by growth of

working capital and to what extent by growth of current debt? 

What has been the form of any important increases in current debt? Accounts payable? 

Notes payable to the bank? 

What about current maturity on long-term debt? 

Has any decrease in receivables and inventories been accompanied by a like decrease in

current debts and by a growth of the cash balance? 

Has any decrease in receivables and inventories been accompanied by continued heavy

current debt and by shrinkage in working capital?

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My Work:

“In my term paper of Financial Management , I am going to analyse the current asset

composition of three companies from different industries, which are ITC from Food

Industry, Trident Group of Companies from Manufacturing Industry and Samsung

India from Software Industry. I am also going to analyse and interpret the difference

between current assets of these companies at the bottom of each graph.”

Company Profile & History

ITC

ITC is one of India's foremost private sector companies with a market capitalisation of nearly US $

19 billion and a turnover of over US $ 5 billion. ITC is rated among the World's Best Big

Companies, Asia's 'February 50' and the World's Most Reputable Companies by Forbes magazine,

among India's Most Respected Companies by Business World and among India's Most Valuable

Companies by Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in

a study conducted by Brand Finance and published by the Economic Times. ITC also ranks among

Asia's 50 best performing companies compiled by Business Week.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging,

Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel,

Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding

market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-

Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods &

Confectionery, Branded Apparel, Personal Care and Stationery.

ITC employs over 26,000 people at more than 60 locations across India. The Company

continuously endeavours to enhance its wealth generating capabilities in a globalising environment

to consistently reward more than 3, 50,000 shareholders, fulfil the aspirations of its stakeholders

and meet societal expectations. This over-arching vision of the company is expressively captured in

its corporate positioning statement: "Enduring Value, for the nation, For the Shareholder".

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History:

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India

Limited. As the Company's ownership progressively Indianised, the name of the Company was

changed from Imperial Tobacco Company of India Limited to India Tobacco Company

Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the Company's multi -

business portfolio encompassing a wide range of businesses - Cigarettes & Tobacco, Hotels,

Information Technology, Packaging, Paperboards & Specialty Papers, Agri-business, Foods,

Lifestyle Retailing, Education & Stationery and Personal Care - the full stops in the Company's

name were removed effective September 18, 2001. The Company now stands rechristened 'ITC

Limited'.

Trident

Trident Group is a dynamic and continuously growing group of companies creating a buoyant economic climate. The group is focused on generating economic prosperity for the stakeholders, while growing harmoniously with the community and environment.

Leveraging business from an expanding product portfolio, Abhishek Industries Limited, the flagship company of the group, is one among the top 5 global terry towel giants of the world. What's more, the company is one of the world's largest agro-based paper manufacturers and one of the largest yarn producers in India.

Strong business ethics, excellence in business, productive work environment, continuous improvement through sound corporate governance and dynamic employee engagement have been at the foundation of the continuous success of the group.

Making way in Punjab as an agro-based manufacturer in 1990, the group has diversified and expanded manifold, giving way to businesses based on sustainable growth. Under the dynamic leadership of Mr. Rajinder Gupta, the CEO and MD of the group, Trident continues to grow embracing new challenges, expanding boundaries and creating new opportunities.

With businesses spanning across 65 countries, Trident Group today is a Rs. 25 billion enterprise with an employee headcount of more than 10,000, and providing indirect employment to 20,000 people. Therefore, Trident is a pioneer at implementing sound Corporate Governance as the basic management principle.

Apart from being the proud recipient of ICSI National Award for Excellence in Corporate Governance in 2006, Abhishek Industries Limited has been continuously lauded with the prestigious 'International Supplier of the Year' award for 2001, 2003, 2005 and 2006 by Wal-Mart, USA, 'Supplier of the Year Award' for 2006 by JC Penney Corporation and IKEA TASA 'Best

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Supplier of the year' Quality Award. Today with a Compound Annual Growth Rate (CAGR) of more than 30%, we are one of the fastest growing groups of companies of India.

And at the core of this progress is our motto - Inspired by challenge.

Samsung

Samsung India is the hub for Samsung's South West Asia Regional operations. The South West

Asia Headquarters, under the leadership of Mr. J S Shin, President, & CEO, looks after the

Samsung business in Nepal, Sri Lanka, Bangladesh, Maldives and Bhutan besides India. Samsung

India which commenced its operations in India in December 1995 enjoys a sales turnover of over

US$ 1Bn in just a decade of operations in the country.

Headquartered in New Delhi, Samsung India has widespread network of sales offices all over the

country. The Samsung manufacturing complex housing manufacturing facilities for Colour

Televisions, Mobile phones, Refrigerators and Washing Machines are located at Noida, near Delhi.

Samsung 'Made in India' products like Colour Televisions, Mobile phones and Refrigerators are

being exported to Middle East, CIS and SAARC countries from its Noida manufacturing complex.

In November 2007, Samsung commenced the manufacture of Colour televisions and LCD

televisions at its state–of-the-art manufacturing facility at Sriperumbudur, Tamil Nadu. The

Company is also manufacturing fully automatic front loading washing machines at its

Sriperumbudur facility.

History

From its inception as a small export business in Taegu, Korea, Samsung has grown to become one

of the world’s leading electronic companies, specialising in digital appliances and media,

semiconductors, memory, and system integration. Today Samsung’s innovative and top quality

products and processes are world recognised.

Analysis of Financial Data

1. (A) Current Asset of ITC Limited

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Particulars Mar 2005 Mar 2006 Mar 2007 Mar 2008 Mar 2009

Inventories 2,002.99 2,636.29 3,354.03 4,050.52 4,599.72

Sundry Debtors 527.76 547.96 636.69 736.93 668.67

Cash and Bank Balance 52.45 67.47 103.54 153.34 68.73

Total Current Assets 2,583.20 3,251.72 4,094.26 4,940.79 5,337.12

Finding- As ITC is mainly deal in Tobacco and FMCG products, so they have to manage

maximum amount of inventories than liquid cash and their debtors.

(B) Current Asset with Current Liablities

Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Total Current Assets 2,583.20 3,251.72 4,094.26 4,940.79 5,337.12

Current Liabilities 2,499.10 2,736.95 3,113.01 3,619.76 4,121.59

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Finding- As it is clearly observed that in the beginning of its financial year 2005 the current

asset is nealy equal to their current liablities but as the time passed and the production is

increased, the ITC company rely more on the current asset rather than to increase current

liablities.

2. (A) Current Asset of Trident Group

Particulars Mar 2005 Mar 2006 Mar 2007 Mar 2008 Mar 2009

Inventories 177.81 197.76 234.19 225.21 211

Sundry Debtors 28.94 36 29.9 38.66 60.21

Cash and Bank Balance 1.27 1.91 6.18 4.57 6.41

Total Current Assets 208.02 235.67 270.27 268.44 277.62

Finding- Over the span of five years, we can observe that the total current asset is increased

at a constant rate but around jan 2008, current asset of the company increased slightly more

than average, it is because the manufacturing companies were at boom at that time.

(B) Current Asset with Current Liablities

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Particulars Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

Total Current Assets 208.02 235.67 270.27 268.44 277.62

Current Liabilities 86.19 105.82 152.19 241.54 343.6

Finding- In the beginning of the year 2005 the difference between current asset and current

liablities was near about 100 crores and as the time passed the current asset and current

liablities intersected and current liablities crossed the current asset in mar 2008. It cleasly

showed that Trident company rely on getting creditors than to cash investment.

3. (A) Current Asset of Samsung

Particulars Mar-05 Mar-06 Mar-07 Mar-08

Inventories 5,865 6,753 7,969 9,493

Sundry Debtors 16,432 14,477 14,514 17,455

Cash and Bank Balance 8,144 7,726 10,894 12,406

Total Current Asset 30, 441 28, 956 33, 377 39, 354

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Finding- As we can observe in this chart that the cash in hand/bank is more than inventories

of the Samsung Company, it can be due to the nature of indutry in Samsung is dealing with.

(B) Current Asset with Current Liablities

Particulars Mar-05 Mar-06 Mar-07 Mar-08Total Current Asset 30441 28956 33377 39354Liabilities 32,854 33,426 37,403 42,377

Finding- The current asset and the current liablities of this company is moving

at a constant rate excluding a slighter change in Jan 2006.

Comparison of Current Asset between these three companies:

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Particulars Mar-05 Mar-06 Mar-07 Mar-08

ITC 2,583.20 3,251.72 4,094.26 4,940.79

Trident 2080.2 2356.7 2702.7 2684.4

Samsung 3044 2895 3337 3935

Finding- We can see that the current asset of ITC is increasing at a constant rate whereas

the Trident is showing slowdown after Jan 2007. And the Current asset of the trident

Company increased after Jan 2006. It is all because the nature and type of industry for these

three companies are different. As well the area of operation and number of business tiers also

differentiate these companies from each other.

Conclusion

I am very thankful to my faculty because she gave me a chance to analyse the current asset of

different companies from different sectors. After doing this term paper, I can easily interpret that

why the companies from different sectors have different composition of current asset. The company

from food industry has more current asset than a manufacturing industry’s company or software

industry’s company. But the financial management helps in managing the optimum level of current

asset in a company.

Thanking You

Bibliography

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http://www.transtutors.com/finance-homework-help/working-capital-management/working-capital-

financing.aspx

http://www.moneycontrol.com/financials/abhishekindustries/balance-sheet/AI01

http://www.asiaing.com/samsung-electronics-2009-annual-report.html

http://www.samsung.com/in/aboutsamsung/corporateprofile/index.html

http://www.itcportal.com/sets/itc_frameset.htm

http://www.tridentindia.com/AboutUs.htm

http://www.tridentindia.com/Investor-AnnulReport.htm

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