i

ii

ACKNOWLEDGEMENTI, Maneesha Jaiswal , student of MBA , sincerely thank Dr.R.K. Trivedi , the Director

of Step –HBTI , Kanpur for being associated with this reputed Institute for my MBA

studies.

I am grateful and wish to place on record my sincere thanks , for the leadership and

guidance to Rashi Saxena (Faculty Mentor) for the moral, academic and problem

solving support without which this project report would not have come up to its

present form. At this point of time I would not forget Mr. Manish Shrivastava ,

Branch Manager, Reliance Communication Ltd., Ghaziabad .

Last but not the least, I would also like to thank my colleagues and staff of the MBA

department and employees of this elite Institute for whatever they have done for

helping me out every time in completion of this project report.

I would also like to extend a vote of thanks to all those people and the websites who

guided or directed me in bringing this project to the reality. Without their guidance

and proper support this project report would not have been possible for me to prepare.

Maneesha Jaiswal

iii

DECLARATION

I , Maneesha Jaiswal , hereby declare that I have carried out summer training on

the topic, “Study of Training & Development” at Reliance Communication Ltd.

I further declare that this Research work is my original work and no part of this report has been published or submitted to anybody or university award of any other degree or diploma. I also take the responsibility of my shortcomings.

Date:

Place:

(Signature)

iv

v

CHAPTER-1

EXECUTIVE SUMMARY

vi

EXECUTIVE SUMMARY

When I was working in the company I have taken good knowledge about the working

capital management process of the company. The senior financial analysts of the

company always helped me in understanding difficulties in the ratio analysis process.

The following data and diagrams are the overview of the project. The data content

Provide an overall conceptual aspect of “Working Capital And Ratio Analysis For

Supertech Pvt Ltd”Research is defined as human activity based on intellectual

application in the investigation of matter. The primary purpose for applied research is

discovering, interpreting, and the development of methods and systems for the

advancement of human knowledge on a wide variety of scientific matters of our world

and the universe. Research can use the scientific method, but need not do so. Scientific

research relies on the application of the scientific method, a harnessing of curiosity. This

research provides scientific information and theories for the explanation of the nature and

the properties of the world around us. It makes practical applications possible. Scientific

research is funded by public authorities, by charitable organizations and by private

groups, including many companies. Scientific research can be subdivided into different

vii

classifications according to their academic and application disciplines.The selection of the

particular research approach depends on the kind of information required. Qualitative

research collects, analyzes, and interprets data that cannot be meaningfully quantified,

that is, summarized in the form of numbers. For this reason, qualitative research is

sometimes referred to as soft research. “Quantitative Research” calls for very specific

data, capable of suggesting a final course of action. A primary role of quantitative

research is to test hunches or hypotheses. These suggest that qualitative approach is a soft

research approach in which collected data cannot be meaningfully quantified and more

importantly in this approach non-structured research is conducted. But so far as

quantitative research approach is concerned, through this approach structured research is

conducted with approaching larger respondents and the collected data can be

meaningfully quantified. Research data can be collected either in the form of secondary or

primary or both. Secondary Data usually factual information can be obtained through

secondary data that has already been collected from other sources and is readily available

from those sources. The definition and characteristics of secondary data presented above

suggest us that secondary data are data that have already been collected for purpose other

than the problem in hand. Before detailing as how and what secondary data were

collected in this research, in would be worth to examine the advantages and disadvantages

of such data.

Secondary data are easily accessible, relatively inexpensive, and quickly obtained. Some

secondary data are available on topics where it would not be feasible for a firm to collect

primary data. Although it is rare for secondary data to provide all the answers to a non-

routine research problem, such data can be useful in a variety of ways. Primary data is

collected for the specific purpose of addressing the problem at hand. The collection of

primary data involves various steps. Thus obtaining primary data can be expensive and

viii

time consuming. These suggest that primary data are those data that are collected for the

particular purpose of research in hand. The disadvantage of collecting primary data is that

it is lengthy and resource and time consuming process, but the advantage of primary data

is that they are first hand information and comparatively more reliable. A researcher

originates primary data for the specific purpose of addressing the problem at hand.

According to Clifford Woody research comprises defining and redefining the problems ,

formulating hypothesis or suggested solutions, collecting , organizations and evaluating

data, making deductions making deductions and reaching conclusion and at last carefully

testing the conclusions whether they fit the formulating hypothesis. Research

methodology is a procedure designed to the extent to which it is planned and evaluated

before conducting the inquiry and the extent to which the method for making decisions is

evaluated before conducting the inquiry and the extent to which the method for making

decisions is evaluated. The research methodology if scientifically developed enables the

research to establish with high degree of confidence, cause and effect relationship

between the research between the research activities and observed outcomes.  

Along with various important tools that are essential for the firms should be fast

and responsive. These require responding to customer needs for quality, variety and

Timeliness.

Meeting these requires a workforce that is technically trained in all respect. Working

Capital Management require people who are capable of analyzing and solving job related

Problems. To survive and flourish in the present day corporate jungle, companies should

Invest time and money in upgrading the knowledge and skills of their employees

constantly .

ix

As the so taken companies act as the benchmark for Real Estate Sector, therefore their

study and evaluation in respect to social survey was a learning experience. Company’s

profile, its facts and figure though provide the background of the company but they also

showcases, “the prime importance of social survey for any organization to perpetuate

itself, through growth, there is a basic need for developing its manpower resources. It is

essential to develop skills and also update knowledge. Especially, in rapidly changing

society, employee training and development is not only an activity that is desirable but

also one that an organization must commit its resources to, if it is to maintain a viable and

knowledge workforce.

Statement of research problem:

Working capital is a financial metric which represents operating liquidity available to a

business, organization, or other entity, including governmental entity. Along with fixed

assets such as plant and equipment, working capital is considered a part of operating

capital. Net working capital is calculated as current assets minus current liabilities. It is a

derivation of working capital that is commonly used in valuation techniques such as

DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity

has a working capital deficiency, also called a working capital deficit.

Statement of Research Objectives:

To analyze the working capital management and do the ratio analysis of the

company Supertech Private Limited Company.

x

OBJECTIVES

The main objective of working capital management is to manage current assets and

current liabilities in a manner so that working capital can be kept in a satisfactory

level. It is also taken in to account that the working capital should be neither excessive

nor inadequate. Management of working capital affects profitability, risk and liquidity

of the business significantly. Managements should, therefore, maintain proper balance

among these factors while managing working capital. If the quantum of working

capital is more, it will increase liquidity, but decrease profitability and risk. If working

capital relatively declines, it will decrease liquidity but cause an increase in

profitability and risk. If business wants to earn more profit, it will have to bear higher

risk. Risk means inability of the firm to pay current liabilities in time.

xi

CHAPTER -2

INTRODUCTION

xii

INTRODUCTION

1.1 General Introduction about the sector:

The rapidly growing real estate market in India is moving towards maturity with

increasing participation from large local and international players, rising investor

interest and a market-friendly approach. The government’s decisions to allow 100%

foreign direct investment (FDI) and the entry of venture funds in real estate are

expected to add to the growth momentum created by affordable financing options and

rising disposable incomes. Further, there are indications that obstacles such as the

absence of investment instruments in real estate are likely to be removed. Already,

real estate mutual funds have been allowed to be floated in a move industry observers

believe will pave the way for the setting-up of Real Estate Investment Trust-like

structures. Apart from the IT sector, demand for commercial space is also expected to

be driven by the special economic zones, large retail formats and warehousing. The

real estate market touched US$xx by 2009 up from US$16 billion in 2009-12.It is

estimated that private equity funds would invest about US$xx in the country’s real

estate sector between 2009-2011 attracted by yields that are among the highest in the

region.

xiii

PEST Analysis of Indian Real Estate Industry:

Political Factors:

Cement Prices Reduced for State Infrastructure Projects

FDI Liberalization to Augment Industry Growth

Economic Factors:

Growth in Construction Activity Stimulating GDP Growth

Rate Hikes Unlikely To Slow Down Growth

Social Factors:

Shifting Consumption Pattern to Fuel Industry Growth

Rising Urbanization to Boost Industrial Growth

Technological Factors:

Low Technology Adoption to Hinder Growth

Construction as per Indian Requirements

xiv

SWOT Analysis of Indian Real Estate Industry:

Strength:

Employment and training opportunities

Construction of the multi building projects on the feasible locations in the

country.

Low cost well- educated and skilled labour force is now widely available

across the country.

Sufficient availability of raw material and natural resources in the country is

supportive for the industry.

Weakness:

Chances of Natural disadvantage are there.

Distance between projects reduces business efficiency.

Lack of clearly define processes and procedures for construction and its

management.

Huge amount of money need to be invested in this industry.

Opportunities:

Continuous private sector housing boom will create more opportunities.

xv

Renewable energy projects will offer opportunities to develop skills and

capacity in new markets.

More flexible training delivery techniques are now available.

Financial supports like loan and insurance and growth in income of people is

in support of industry.

Threats:

Long term market instability and uncertainty may damage the opportunities

and prevent the expansion of training and development facilities.

Current economic situation may have an adverse impact on Indian Real Estate

industry.

Infrastructure safety is a challenging task in industry.

Lack of political willingness and support on promoting new strategies

Inefficient accessibility in planning and concerning the infrastructure and

signs.

xvi

FINANCIAL ANALYSIS:

Indian Real Estate transactions are considered a key indicator of economic activity, is

showing first signs of financial stability after a free fall during the early part of this

year. According to real estate consultants, the worst phase for the industry seems to be

over as lease rentals both in peripheral areas as well as the central business district

(CBD) are showing signs of settling down, in addition to deals getting clinched.

Transaction data show that Chennai and its adjoining areas witnessed more than 1.95

million square feet of property deals in the first half of 2011. The whole of 2009

witnessed transactions for around 4.90 million square feet. “We do not want to call it

recovery as yet, but at least we can say the downturn has been arrested. In our view,

the worst seems over. Property prices are showing signs of holding on, and it may not

fall further,” said Rajesh Babu, Chief Consultant, RECS Group a real estate

consultancy, which managed the largest deal of RBS in India Land IT Park for 3.50

lakh square feet this year.

xvii

INVESTMENT OPPORTUNITY

Private equity real estate funds are well-suited to pursue opportunistic investment

strategies. Fund structures can be used to: (a) exploit niche opportunities; (b) gain

access to new markets; and (c) enhance portfolio returns. Private equity real estate

funds have enjoyed a strong performance record, assumed an increasingly influential

role in the real estate investment market, and achieved widespread acceptance among

institutional investors (Phalippou and Ludovic, 2009a). An important caveat is that

the success of private equity real estate funds over recent years, has taken place

during a period of cap rate compression. Even poorly managed private equity real

estate funds would have shown strong absolute returns. As many industry

professionals concede: “Over the past few years, we’ve all looked like geniuses.” The

period of cap rate compression is over and superior returns will not be achieved

except through creative and disciplined management. While levels are of exposure to

them may vary. Private equity real estate funds are expected to remain a permanent

fixture within the investment portfolios of institutional investors for the foreseeable

future, primarily because of the impact that management can have on real estate

performance. As one private equity real estate fund manager has stated: “There has

never been a better time in the history of investment real estate to create value by

leveraging the creativity of human capital.” Throughout the recent recession, the

domestic real estate market performed well compared to financial assets, despite

challenging fundamentals in some sectors and regional markets.

xviii

CHAPTER -3

COMPANY PROFILE

xix

PROFILE OF THE ORGANIZATION

2.1 ORIGIN OF THE ORGANIZATION:

The Supertech was promoted by Mr. R.K. Arora aged 46 years who is a civil engineer

by profession and having more than 20 years experience in construction and allied

activities. Supertech Group started long back in 1995 with their flapship company

Supertech Constructions Pvt ltd (Changed to Supertech Ltd now). The group grew

from small company to large corporate house of well known brand “Supertech”.

Supertech Limited has developed and constructed several prestigious group housing ,

malls, hotels, multiplexes and commercial complexes in and around Delhi. The group

is known from high quality construction, innovative designs and well planned

amenities at prime location. The brand “supertech” is well known in real estate

industry and the group has successfully completed a number of residential and

commercial complexes in NCR delhi and Western U.P.

In a span of 20 years, Supertech limited has achieved an impressive growth . The

annual turnover for the year ending 31th March, 2011 stands at Rs. 214.76 crores and

Profit before Tax at Rs. 35.99 crores. The companies tangible net worth is more than

183 crores as on 31.03.2011. The Company holds an ISO 9001:2000 certification and

Supertech as a brand name is registered with the registrar of Trade Marks.

The Group has completed three Shopping Malls called “Shopprix” at Sector 61,

Noida, Sector 5, Vaishali and Kaushambi, Ghaziabad respectively. The Group has

completed Group Housing Projects like “Supertech Residency”, “Supertech Estate” at

Vaishali, Housing Project “Rameshwar Orchid” at Kaushambi and Housing Project

“Icon” at Indrapuram, Ghaziabad. The presently ongoing projects of the group

xx

includes Integrated Townships, large Group Housing Complexes, Commercial

complexes, Multi cineplexes ans 5 Star Hotel Projects .

2.2 Growth and development of the organization:

The Group has completed three Shopping Malls called “Shopprix” at Sector 61,

Noida, Sector 5, Vaishali and Kaushambi, Ghaziabad respectively. The Group has

completed Group Housing Projects like “Supertech Residency”, “Supertech Estate” at

Vaishali, Housing Project “Rameshwar Orchid” at Kaushambi and Housing Project

“Icon” at Indrapuram, Ghaziabad. The presently ongoing projects of the group

includes Integrated Townships, large Group Housing Complexes, Commercial

complexes, Multi cineplexes ans 5 Star Hotel Projects .

This Group has crafted architectural masterpieces like Emerald Court at Sector 93,

NOIDA and High End Residential Project with 7 star living facilities at Sector-34

NOIDA and a 7, 00000 square feet commercial hub, The Pentagon Mall in Haridwar.

Super-tech Group had tied up with an MNC Group to set up a 5 star Hotel at

Rudrapur, Uttarakhand and a major health care company to open medical facility

outlets in different format at all the projects developed by the Group.

xxi

2.3 Present status of the organization:

Supertech Group, founded in 1995, has set new trends and benchmarks of

architectural excellence in the contemporary global scenario. An ISO 9001:2000

certified company; Supertech has successfully completed 20 years in real estate

business and today it has revolutionized the real estate arena. Under the dynamic and

pragmatic leadership of Mr. R.K.Arora, Chairman & CMD and experienced Board

Members, Supertech Group is scaling new heights and touched the horizon of

excellence. Their vision and entrepreneurial acumen and have taken the group to the

greater heights.

All this dedication and commitment has enabled us to receive the coveted “Udyog

Ratan Award”, 2001 for unparalleled contribution to this area. The greatest

contributory factor to this landmark achievement is the vision of Mr. R.K. Arora

whose entrepreneurial skills and business acumen have steered the group diligently on

a growth path. Mr. Arora has also been bestowed with “Excellence Award” for the

year 2001 for his outstanding contributions to real estate industry.

Supertech Group has already converted more than 33 million sq. ft. area of residential

and commercial entity into architectural landmarks and more than 36 projects that

accommodates nearly 30000 families. Its various projects viz. Residential &

Commercial Townships, Shopping Malls, Hotels and IT Parks have either completed

or about to complete. We are inspired by our clients to endeavour the dreams turning

into reality. Our commitment to deliver quality with aesthetic design surges ahead

with the enterprising vision of creating value through excellence. Our world class

architecture shows true modern lifestyle.

xxii

2.4 Functional department of the organization:

Chart 1: Functional department of the organization

xxiii

ORGANIZATION

STRUCTURE

xxiv

ORGANIZATION STRUCTURE

Chart 2: Organization structure

xxv

2.6 Product and service profile of the organization:

The company has built a lot of residential and commercial projects that are considered

modern architectural masterpieces. Some of these projects are as follows: 

Supertech Czar Suites

Supertech Emperor

Supertech Livingston

Supertech Palm Greens

Supertech Metropolis at Rudrapur

Supertech Emerald Court

Supertech Icon at Indirapuram

Supertech Avant Garde at Vaishali.

Although, most of these projects are still under construction, these residential

complexes are ensuring facilities like:

R.O. Water Plant

Underground Cable

Swimming Pool

Hi-Tech round-the-clock security system with CCTV arrangements

Dedicated Parking

xxvi

Imported Wooden flooring

100% Power Backup

Sanitation with PPR pipes

Bathtub with imported shower panel

75% Green Area

In-house club with Gymnasium

In-house Play-way school, Day-care Center for Children

Gardens

Accommodation ranging from 2-bedroom flats to villas can be found with varying

price range. 

The company is about to construct many more commercial projects. They are mainly

shopping malls which will have outlets of big companies like Barista, McDonalds,

John Players, Reliance, and so on.

Shopprix, Vaishali

Shopprix, Noida

Shopprix Mall, Haridwar

Shopprix Mall, Rudrapur

Shopprix , Kausambi

Phoneix Mall, Meerut.

xxvii

Tight security, glass capsule lifts, enough car parking space, fully air-conditioned, and

multiplexes are assured in these buildings. The company has started constructing its

township project named Crossings Republic, which aims at upholding the essence of

modern living. 

MARKET PROFILE OF THE ORGANIZATION:

Supertech Group was founded in 1988. We developed some of the modern and finest

residential and commercial complexes in Delhi, National Capital Region (NCR) and

new urban settlement like Meerut, Moradabad, Haridwar and Rudrapur. Since our

inception we have been responsible for the development of many of Delhi’s other

well known urban housing colonies. Our foray into real estate and construction

industry led to creation of various landmark real estate projects – Crossings Republik,

Emerald Court, Avant-Garde, Shopprix Mall are few examples of that. Its residential

township is having all the modern and essential facilities which includes commercial

and retail properties in a modern city infrastructure with schools, hospitals, hotels and

shopping malls. This Group has crafted architectural masterpieces like Emerald Court

at Sector 93, NOIDA and High End Residential Project with 7 star living facilities at

Sector 34 NOIDA and a 7, 00000 square feet commercial hub, The Pentagon Mall in

Haridwar. Supertech Group had tied up with an MNC Group to set up a 5 star Hotel at

Rudrapur, Uttarakhand and a major health care company to open medical facility

outlets in different format at all the projects developed by the Group.

xxviii

INDUSTRY PROFILE

xxix

INDUSTRY PROFILE

The real estate sector in the country is one of great importance. According to the

report of the Technical Group on Estimation of Housing Shortage, an estimated

shortage of 26.53 million houses during the Eleventh Five Year Plan (2007-12)

provides a big investment opportunity. India leads the pack of top real estate

investment markets in Asia for 2010, according to a study by PricewaterhouseCoopers

(PwC) and Urban Land Institute, a global non-profit education and research institute,

released in December 2009. The report, which provides an outlook on Asia-Pacific

real estate investment and development trends, points out that India, in particular

Mumbai and Delhi, are good real estate investment destinations. Residential

properties are viewed as more promising than other sectors. The study is based on the

opinions of over 270 international real estate professionals, including investors,

developers, property company representatives, lenders, brokers and consultants.

Further, real estate companies are coming up with various residential and commercial

projects to fulfill the demand for residential and office properties in Tier-II and Tier-

III cities. For instance, Ansal Properties has several residential projects in cities such

as Jodhpur, Ajmer, Jaipur, Panipat, Kundli and Agra. Omaxe has also planned around

40 residential and integrated township projects in Tier-II and Tier-III cities, majority

of them being in Uttar Pradesh, Punjab, Madhya Pradesh, Rajasthan and Haryana. The

growth in real estate in Tier-II and Tier-III cities is mainly due to increase in demand

for organised realty and availability of land at affordable prices in these cities.

According to the data released by the Department of Industrial Policy and Promotion

(DIPP), housing and real estate sector including cineplex, multiplex, integrated

townships and commercial complexes etc, attracted a cumulative foreign direct

xxx

investment (FDI) worth US$ 8.4 billion from April 2000 to April 2010 wherein the

sector witnessed FDI amounting US$ 2.8 billion in the fiscal year 2009-10.

A. Origin and development of the industry:

The realty sector in India is on a roll, attracting billions of dollars in international

funding, as developers are transforming city skylines. For the Indian real estate

industry, 2006 has indeed been an unforgettable year. Property prices have soared

across the sub-continent, despite millions of sq ft of real estate being developed, as

demand continued to soar. But for the first time in the history of the Indian real estate

sector, funding of projects has not been a problem. There has been an abundance of

money flowing into the sector, as foreign investors ploughed in the moolah, and

Indian developers floated issues in overseas exchanges, raising cash for mega

projects. The current boom in the Indian real estate sector is different from previous

ones in many ways. The property boom in the early 1990s was fuelled by speculative

buying and projects were funded by investors out to make a killing. This time,

investors are mainly institutional, and are not looking for a short-term return, but are

here to stay for the long run.

A majority of the buyers are also actual users, who are acquiring properties for their

own use. A large number of buyers are borrowing funds from housing finance

companies (HFCs), as housing loans have become affordable. While in the 1990s,

borrowers had to pay hefty rates on housing loans (up to 18 per cent), today it is

around half that level, enabling a wider group of people to access loans.  Again,

unlike in previous bull-runs, there has been no slackening in supplies, as developers

are taking up massive projects around the country. About 15 years ago, when there

was a boom, it was mainly in cities like Mumbai, Pune. Bangalore and Delhi.  But

xxxi

there is no doubt that the industry is witnessing boom conditions. Property prices in

cities like Mumbai, Delhi and Bangalore have been expanding by 75 to 100 per cent .

Most Indian cities are also witnessing an acute shortage of land, as top developers

have acquired vast tracts of land. Demand for land is soaring in urban India,

especially with hundreds of special economic zones (SEZs), IT and bio-tech parks,

airports, shopping malls, and other projects coming up by the hundreds. The billions

of dollars that are being invested in infrastructure development are also having a

terrific impact on the real estate sector. Property prices along the Delhi Metro, the

Mumbai-Pune expressway, the Ring Road in Bangalore, and other infrastructure

development sites have shot up phenomenally in recent months. 'Future of Real Estate

Investment in India,' values the industry higher at $16 billion. The ASSOCHAM

study notes that the sector had expected to burgeon to $60 billion by 2010, with FDI

inflows into the sector amounting to between $25 billion and $28 billion.

Some of the major investors so far include Royal Indian Raj International, a Canada-

based NRI group (with investments of $2.9,billion), the Blackstone group and

Goldman Sachs ($1 billion each), Citigroup ($125 million in the initial phase), and

GE Commercial Finance Real Estate ($63 million). Last month. JP Morgan's Principal

Real Estate Investments invested $60 million in a premium residential project being

developed by Lodha Builders in Mumbai.  

xxxii

(B). Growth and present status of the industry:

All immovable properties including land, structures on it and all other natural

resources can be classified as real estate. Realtors, builders, brokers, buyers and

sellers are the major players of the real estate industry. All types of residential,

commercial and industrial properties fall under its domain. With its huge growth

potential it has emerged as a major field of business in recent time. The real estate

sector in India is flourishing rapidly with a growth rate of 30 percent each year. About

80 percent of the real estate development in India has been in the field of residential

housing. The remaining 20 percent of the real estate includes office, shopping malls,

entertainment centers, hotels, multiplexes and hospitals.. In last couple of years the

share of commercial sector in the overall real estate growth has been more prominent.

Considering the advantages of significantly lower cost of operations in India, several

multinational companies across the globe are expressing their willingness to shift their

operations to India. These multinational companies have realized the fact that in order

to flourish their business, the skilled Indian work force can be of great use to them. So

they need to provide the Indian professionals with all the facilities of modern life

starting from housing to entertainment, so that they can give their best in the work

place and at the same time be happy with their standard of living. This trend has set

off the development of world-class entertainment centers and business centers, across

the country, thereby bringing a radical change in the lives of urban population in

India. The growing demand of skyscrapers in all the metropolitan cities across the

country has changed the image Indian skyline.

xxxiii

(C) Future of the industry:

Though we have experienced drastic economic issues in last year, still Kerala is a

paradise for real estate agents. Kerala is a beautiful greenish state situated in southern

part of India. Till now we can see the flow of money from other sources to real estate

industry. Investing money in land and properties is benefited not only as an asset but

also as a deposit for future. Comparing to other investing methods, real estate seems

to be more rigid and free from high fluctuations in exchange rate. Economic

specialists recommend youngsters to invest their money in solid assets like land,

house, buildings etc compared to investing money in share markets. If you are not

ready to participate in high risk business like share and equity markets, the best choice

is real-estate business. In India one of the major destinations for real estate companies

is Kerala right after major metro cities. It is because of some of the following reasons.

Growth of tourism in Kerala

Flow of NRI (Non-Resident Indian)money to this state

Growth of IT and IT related services in Kerala

High human density

Kerala is one of the top rated tourist hub in International tourism map. If we compare

the over all foreign visitors who came to India, Kerala enjoys the major share of it.

Warm and pleasant climate, hill stations, beaches and back waters of Kerala attract

visitors and the number of them increases per year. So investing money in acquiring

properties in tourist places in Kerala is a new trend we can see. Another reason for the

sudden growth of real-estate in Kerala is the huge flow of NRI income. Kerala is the

xxxiv

highly literate state in India and most of the youth is employed in United States,

European countries and in Middle East. The money send by them is mainly used to

purchase land and buildings. This phenomenon is one of the major back bone of real-

estate industry in Kerala. After tourism and NRI income, IT is the next major source

of income in Kerala. In recent years Government of Kerala is promoting IT industries

in Kerala and many new companies started their operation in Kerala. Introduction of

major IT cities encourage the investment of money in acquiring lands near them. So

due to the presence of many factors like tourism, IT industries, NRI income etc, real

estate service in Kerala seems to have good future.

xxxv

CHAPTER -4

WORKING CAPITAL MANAGEMENT

& RATIO ANALYSIS

xxxvi

WORKING CAPITAL MANAGEMENT

DEFINING WORKING CAPITAL

The term working capital refers to the amount of capital which is readily

available to an organization. That is, working capital is the difference between

resources in cash or readily convertible into cash (Current Assets) and organizational

commitments for which cash will soon be required (Current Liabilities).

Current Assets are resources which are in cash or will soon be converted into

cash in “the ordinary course of business”.

Current Liabilities are commitments which will soon require cash settlement

in “the ordinary course of business”.

WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

In a department’s Statement of Financial Position, these components of

working capital are reported under the following headings:

CURRENT ASSETS INCLUDE:

Sundry Debtors

Inventories

Loan an Advances

Interest Receivable

Cash and Bank.

Current Liabilities refer to those liabilities, which are to be paid in near future. It

includes:

Bank Overdraft

Bill Payable

Creditors

xxxvii

Outstanding expanses

Short term loans.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital – Gross and Net.

Gross Working Capital refers to the capital invested in total current assets of

the enterprise. Current assets are the assets which can be converted into cash within

an accounting year and include cash, short term securities, debtors, bills receivable

(accounts receivables or book debts) and stock.

Net Working Capital refers to the difference between current assets and

current liabilities. Current liabilities are those claims of outsiders, which are

expected to mature for payment within an accounting year, and include creditors

(accounts payable), bills payable and outstanding expenses. Net working capital can

be positive or negative. A positive net working capital will arise when current asset

exceed current liabilities. A negative net working capital occurs when current

liabilities are in excess of current assets.

DETERMINANTS OF WORKING CAPITAL NEEDS

NATURE OF BUSINESS The working capital requirement of the firm is

closely related to the nature of its business. A service firm, like an electricity

undertaking or a transport corporation, which has a short operating cycle and

which sells predominantly on cash basis, has a modest working capital

requirement. On the other hand, a manufacturing concern like a machine tools

xxxviii

unit, which has a long operating cycle and which sells largely on credit, has a

very substantial working capital requirement.

SEASONALITY OF OPERATIONS Firms, which have marked seasonality

in their operations usually, have highly fluctuating working capital

requirements. If the operations are smooth and even throughout the year the

working capital requirement will be constant and will not be affected by the

seasonal factors.

PRODUCTION POLICY A firm marked by pronounced seasonal

fluctuations in its sales may pursue a production policy, which may reduce the

sharp variations in working capital requirements.

MARKET CONDITIONS The market competitiveness has an imp bearing

on the working capital needs of a firm. When the competition is keen, a large

inventory of finished goods is required to promptly serve customers who may

not be inclined to wait because other manufactures are ready to meet their

needs. In view of competitive conditions prevailing in the market the firm may

have to offer liberal credit terms to the customers resulting in higher debtors.

Thus, the working capital requirements tend to be high because of greater

investment in finished goods inventory and account receivables. On the other

hand, a monopolistic firm may not require larger working capital. It may ask

customer to pay in advance or to wait for some time after placing the order.

CONDITIONS OF SUPPLY The time taken by a supplier of raw materials,

goods, etc. after placing an order, also determines the working capital

requirement. If goods as soon as or in a short period after placing an order,

then the purchaser will not like to maintain a high level of inventory f that

xxxix

good. Otherwise, larger inventories should be kept e.g. in case of imported

goods.

BUSINESS CYCLE FLUCTUATIONS Different phases of business cycle

i.e., boom, recession, recovery etc. also effect the working capital requirement.

In case of recession period there is usually dullness in business activities and

there will be an opposite effect on the level of wor5king capital requirement.

There will be a fall in inventories and cash requirement etc.

CREDIT POLICY The credit policy means the totality of terms and

conditions on which goods are sold and purchased. A firm has to interact with

two types of credit policies at a time. One, the credit policy of the supplier of

raw materials, goods, etc., and two, the credit policy relating to credit which it

extends to its customers. In both the cases, however, the firm while deciding

the credit policy has to take care of the credit policy of the market. For

example, a firm might be purchasing goods and services on credit terms but

selling goods only for cash. The working capital requirement of this firm will

be lower than that of a firm, which is purchasing cash but has to sell on credit

basis.

xl

OPERATING CYCLE OR WORKING CAPITAL CYCLE

Operating Cycle is the time taken from the stage when cash is put into the business up

to the stage when cash is realized. A firm should aim at maximizing the wealth of its

shareholders, so the firm should earn sufficient returns from its operations. Earning a

steady amount of profit requires successful sales activity. The firm has to invest

enough funds in current assets for generating sales. Current assets are needed because

sales do not convert into cash instantaneously. There is always an Operating cycle

involved in the conversion of sales into cash.

There is difference between current and fixed assets in terms of their liquidity.

A firm requires many years to recover the initial investment in fixed assets such as

plant and machinery or land and building. On the contrary, investment in current

assets is turned over many times in a year. Investment in current assets such as

xli

inventories and debtors (accounts receivable) is realized during the firm’s operating

cycle that is usually less than a year.

OPERATING CYCLEis the time duration required to convert sales, after the

conversion of resources into inventories, into cash.

The operating cycle of manufacturing company involves three phases:

Acquisition of resources such as raw material, labour, power and fuel.

Manufacture of the product which includes conversion of raw materials into

work-in-progress into finished goods.

Sale of the product either for cash or on credit. Credit sales create account

receivable for collection.

These phases affect cash flows, which most of the time, are neither

synchronized nor certain. They are not synchronized because cash flows usually occur

before cash inflows. Cash inflows are uncertain because sales and collections which

give rise to cash inflows are difficult to forecast accurately, on the other hand, are

relatively certain. The firm is, therefore, required to invest in current assets for a

smooth, uninterrupted functioning. It needs to maintain liquidity to purchase raw

materials and pay expenses such as wages and salaries, other manufacturing,

administrative and selling expenses and taxes as there is hardly a matching between

cash inflows and outflows.

Cash is also held to meet any future exigencies. Stocks of raw materials and

work-in-progress are kept to ensure smooth production and to guard against non-

availability of raw material and other components. The firm holds stock of finished

goods to meet the demand of customers on continuous basis and sudden demand from

some customers. Debtors are created because goods are sold on credit for marketing

xlii

and competitive reasons. Thus, a firm makes adequate investment in inventories, and

debtors, for smooth, uninterrupted production and sale.

Thus, the working capital requirement of a firm is determined by a host of

factors. The determination of working capital requirement is not once a whole

exercise; rather a continuous review must be made in order to assess the working

capital requirement in the changing situation. There are various reasons, which may

require the review of the working capital requirement e.g., change in credit policy,

change in sales volume, etc.

xliii

BALANCED WORKING CAPITAL POSITION

The firm should maintain a sound working capital position. It should have adequate

working capital to run its business operations. Both excessive as well as inadequate

working capital positions are dangerous from the firm’s point of view.

Excessive working capitalmeans holding costs and idle funds, which earn no

profits for the firm.

Disadvantages of excessive working capital

Excessive working capital means idle funds which earn no profits for the

business and hence the business cannot earn a proper rate of return on its

investments.

Where there is a redundant working capital, it may lead to unnecessary

purchasing and accumulation of inventories causing more chances of theft,

waste and losses.

Excessive working capital implies excessive debtors and defective credit

policy which may cause higher incidence of bad debts.

It results in unnecessary accumulation of inventories. Thus, chances of

inventory mishandling, waste, theft and losses increase.

It is an indication of defective credit policy and slack collection period.

Consequently, higher incidence of bad debts results, which adversely affects

profits.

Excessive working capital makes management complacent which degenerates

into managerial inefficiency.

xliv

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

A concern which has inadequate working capital cannot pay its short-term

liabilities in time. Thus, it will lose its reputation and shall not be able to get

good credit facilities.

It cannot buy its requirements in bulk and cannot avail of discounts, etc

It becomes difficult for the firm to exploit favorable market conditions and

undertake profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations and it creates

inefficiencies, increases costs and reduces the profits of the business.

It becomes difficult to implement operating plans and achieve the firm’s profit

target.

Operating inefficiencies creep in when it becomes difficult even to meet day-

to-day commitments.

Fixed assets are not efficiently utilized for the lack of working capital funds

Paucity of working capital funds render the firm unable to avail attractive

credit opportunities etc.

The firm loses its reputation when it is not in a position to honor its short-term

obligations. As a result, the firm faces tight credit terms.

An enlightened management should, therefore maintain the right amount of

working capital on a continuous basis. A firm’s net working capital position is not

only important as an index of liquidity but it is also used as a measure of the firm’s

risk. Risk in this regard means chances of the firm’s being unable to meet its

obligation on due date.

xlv

IMPORTANCE OR ADVANTAGES OF ADEQUATE

WORKING CAPITAL:

Solvency of the Business

Goodwill

Easy Loans

Cash Discounts

Regular Supply of Raw Materials

Regular Payment of Salaries, Wages and Other Day-to-Day

Commitments

Exploitation of Favorable Market Conditions

Ability to Face Crisis

Quick and Regular Return on Investments

High Morale

Working capital constitutes part of the Crown’s investment in a department.

Associated with this is an opportunity cost to the Crown. (Money invested in one area

may “cost” opportunities for investment in other areas.) If a department is operating

with more working capital than is necessary, this over-investment represents an

unnecessary cost to the Crown.

From a department’s point of view, excess working capital means operating

inefficiencies. In addition, unnecessary working capital increases the amount of the

capital charge which departments are required to meet from 1 July 1991.

xlvi

SIGNIFICANCE OF WORKING CAPITAL:

Working capital has great importance in every organization. It is necessary to

maintain a sound working capital position in an organization to run its business

operations efficiently. The significance can be represented by the following diagram:

xlvii

APPROACHES TO WORKING CAPITAL MANAGEMENT:

The objective of working capital management is to maintain the optimum

balance of each of the working capital components. This includes making sure that

funds are held as cash in bank deposits for as long as and in the largest amounts

possible, thereby maximizing the interest earned. However, such cash may more

appropriately be “invested” in other assets or in reducing other liabilities.

Working capital management takes place on two levels:

Ratio analysis can be used to monitor overall trends in working capital and to

identify areas requiring closer management.

The individual components of working capital can be effectively managed by

using various techniques and strategies.

When considering these techniques and strategies, departments need to

recognize that each department has a unique mix of working capital components. The

emphasis that needs to be placed on each component varies according to department.

For example, some departments have significant inventory levels; others have little if

any inventory.

The working capital requirement of a firm depends, to a great extent upon the

operating cycle of the firm. The operating cycle may be defined as the time duration

starting from the procurement of the goods and raw materials and ending with the

sales realization of the finished product (after going through the various stages of

production).

There is the time gap between the happening of the first event and the

happening of the last event. This time gap is called ‘operating cycle’.

Thus the operating cycle of a firm consists of the time required for the

completion of the chronological sequence of the following:

xlviii

Procurement of raw material and service.

Conversion of raw material into work in progress.

Conversion of work in progress into finished goods.

Sale of finished goods.

Conversion of receivable into cash.

xlix

ISSUES IN WORKING CAPITAL MANAGEMENT

Working capital management refers to the administration of all components of

working capital – cash, marketable securities, debtors (receivables), and stock

(inventories) and creditors (payables). The financial manager must determine levels

and composition of current assets. He must see that right sources are tapped to finance

current assets, and that current liabilities are paid in time.

There are many aspects of working capital management which make it an

important function of the financial manager.

Time. Working capital management requires much of the financial manager’s

time.

Investment. Working capital represents a large portion of the total investment

in assets. Actions should be taken to curtail unnecessary investment in current

assets.

Criticality. Working capital management has great significance for all firms

but it is very critical for small firms. Small firms in India face a severe

problem of collecting their dues debtors. Further, the role of current liabilities

is more significant in case of small firms, as, unlike large firms, they face

difficulties in raising long-term finances.

Growth. The need for working capital is directly related to the firm’s growth.

As sales grow, the firm needs to invest more in inventories and debtors.

Continuous growth in sales may also require additional investment in fixed

assets.

l

MANAGEMENT OF CURRENT ASSETS

The gross working capital concept focuses attention on two aspects of current

assets management:

How to optimize investment in current assets?

How should current assets be financed?

The considerations of the level of investment in current assets should avoid two

danger points- excessive or inadequate investment in current assets. Investment in

current assets should be just adequate to the needs of the business firm.

Excessive investment in current assets should be avoided because it impairs the

firm’s profitability, as idle investment earns nothing. On the other hand, inadequate

amount of working capital can threaten solvency of the firm because of its inability to

meet its current obligations. It should e realized that the working capital needs of the

firm may be fluctuating with changing business activity. The management should be

prompt to initiate an action and correct imbalances.

Another aspect of the gross working capital points to the need of arranging

funds to finance current assets. Whenever a need for working capital funds arises due

to the increasing level of business activity or for nay other reason, financing

arrangement should be made quickly. Similarly, if suddenly, some surplus funds arise

they should not be allowed to remain idle, but should be invested in short term

securities. Thus, the financial manager should have knowledge of the sources of

working capital funds as well as investment avenues where idle funds may

temporarily are invested.

li

LIQUIDITY MANAGEMENT

Net working capital is a qualitative concept. It indicates the liquidity position of

the firm and suggests the extent to which working capital needs may be financed by

permanent sources of funds. Current assets should be sufficiently in excess of current

liabilities to constitute margin or buffer for maturing obligations within the ordinary

operating cycle of business. In order to protect their interests, short- term creditors

always like a company to maintain current assets at a

higher level than current liabilities. However, the quality of current assets should be

considered in determining level of current assets vis-à-vis current liabilities. A weak

liquidity position possesses a threat to the solvency of the company and makes it

unsafe and unsound. A negative working capital means a negative liquidity, and may

prove to be harmful for the company’s reputation. Excessive liquidity is also bad. It

may be due to mismanagement of current assets. Therefore, prompt and timely action

should be taken by management to improve and correct the imbalances in the liquidity

position of the firm.

For every firm, there is a minimum amount of net working capital, which is

permanent. Therefore, a portion of working capital should be financed with

permanent sources of funds such as equity share capital, debentures, long-term debt,

preference share capital or retained earnings. Management must, therefore, decide the

extent to which the current assets should be financed with equity capital or borrowed

capital.

lii

It may be emphasized that both gross and net concepts of working capital are

equally important for the efficient management of working capital. There is no precise

way to determine the exact amount of gross or net working capital of a firm. A

judicious mix of long and short term finances should be invested in current assets.

Since current assets involve cost of funds, they should be put to productive use.

liii

LIQUIDITY V/S PROFITABILITY

A large investment in current assets under certainty would mean a low rate of

return on investment for the firm, as excess investment in current assets will not earn

enough return. A smaller investment in current assets, on the other hand, would mea

interrupted production and sales, because of frequent stock-outs and inability to pay

creditors in time due to restrictive policy.

Given a firm’s technology and production policy, sales and demand conditions,

operating efficiency etc., its current assets holdings will depend upon its working

capital policy. These policies involve risk-return trade-offs. A conservative policy

means lower return and risk, while an aggressive policy produces higher return and

risk.

The two important aims of the working capital management are: profitability and

solvency. Solvency, used in the technical sense, refers to the firm’s continuous ability

to meet maturing obligations. If the fir maintains a relatively large investment in

current assets, it will have no difficulty in paying claims of creditors when they

become due and will be able to fill all sales orders and ensure smooth production.

Thus, a liquid firm has less risk of insolvency; that is, it will hardly experience a cash

shortage or a stock-out situation. However, there is a cost associated with maintaining

a sound liquidity position. A considerable amount of the firm’s will be tied up in

current assets, and to the extent this investment is idle, the firm’s profitability will

suffer.

liv

To have higher profitability, the firm may sacrifice solvency and maintain a

relatively low level of current assets. When the firm does so, its profitability will

improve as fewer funds are tied up in idle current assets, but its solvency would be

threatened and would be exposed to greater risk of cash shortage and stock-outs.

lv

WORKING CAPITAL RATIOS

RATIOS FORMULAE RESULT INTERPRETATION

Stock Turnover

Ratio (in days)

(Average

stock*365)/COGS

X days On average you turn over the value of your

entire stock every x days. You may need to

break this down into product groups for

effective stock management. Obsolete

stock, slow moving lines will extend

overall stock turnover days. Faster

production, fewer product lines, just in time

ordering will reduce average days.

Debtor Turnover

Ratio (in days)

(Average

debtor*365)/sales

X days Its takes you on average x days in

collecting money from debtors. Effective

debtor management will minimize the days.

Creditor Turnover

Ratio (in days)

(Average

creditor*365)/purchases

X days On average you pay your creditors every x

day. If you negotiate better credit terms this

will improve, if you pay early to get

discount this will decrease, if you simply

defer paying your suppliers this will

increase but your reputation, the quality of

service and any flexibility provided by your

supplier may suffer.

Current Ratio Current assets/current

liabilities

X times Current Assets are assets that you can

readily turn in to cash or will do so within

12 months in the course of business.

Current Liabilities are amount you are due

lvi

to pay within the coming 12 months. For

example, 1.5 times means that you should

be able to lay your hands on $1.50 for

every $1.00 you owe. Less than 1 times e.g.

0.75 means that you could have liquidity

problems and be under pressure to generate

sufficient cash to meet oncoming demands.

Quick Ratio (Current assets-stock-

prepaid expenses)

/current liabilities

X times Similar to current ratio but takes account of

the fact that it may take time to convert

inventory into cash.

Working Capital

Ratio

COGS/working capital % A high % means that the working capital

needs are high relative to sales.

lvii

COMPONENTS OF WORKING CAPITAL

Cash

Marketable Securities

Inventory

Receivables

1) Cash management

Meaning:

Cash is one of the current assets of a business. It is needed at all times to keep

the business going. A business concern should always keep sufficient cash for

meeting its obligations. Any shortage of cash will hamper the operation of a concern

and any excess of it will be unproductive. Cash is the most unproductive of all the

assets. While fixed assets like machinery, plant, etc. and current assets such as

inventory will help the business in increasing its earning capacity, cash in hand will

not add anything to the concern.

Cash management refers to management of cash balance and the bank

balance including the short terms deposits. For cash management purposes, the term

cash is used in this broader sense, i.e. it covers cash, cash equivalents and those assets

which are immediately convertible into cash. Cash management deals with

optimization of cash as an asset. It is required to manage the cash inflows and

outflows arising out of the operations of the firm.

Objectives:

Meeting the Payment Schedule

Minimizing Funds Committed to Cash Balances

lviii

Strategies:

Efficient Inventory- Production Management

Stretching Accounts Payable

Speeding Collection of Accounts Receivable

Combined Cash Management Strategies

2) Marketable securities management

Meaning:

Marketable securities are short- term investment instruments to obtain a

return on temporarily idle funds. In other words, they are securities which can be

converted into cash in a short period of time, typically a few days. Once the optimum

level of cash balance of a firm has been determined, the residual of its liquid assets is

invested in marketable securities. The basic characteristics of marketable securities

affect the degree of their marketability/ liquidity.

To be liquid, security must have two basic characteristics: a ready market and

safety of principal. Ready marketability minimizes the amount of time required to

convert a security into cash.

The second determinant of liquidity is that there should be little or no loss in the

value of a marketable security over time. Only those securities that can be easily

converted into cash without any reduction in the principal amount qualify for short-

term investments.

Selection Criteria:

Safety

lix

Maturity

Marketability

Liquidity

Taxability

Types:

Treasury Bills (TB’s)

Commercial Papers (CP’s)

Certificates of Deposits (CD’s)

Inter- Corporate Deposits (ICD’s)

Money Market Mutual Funds (MMMF’s)

Bank Deposits

3) Inventory management

Meaning:

Inventory means “stock of goods”. Inventory is defined as “Tangible property held

for sale in the ordinary course of business, in the process of production for such sale

or, to be consumed in the process of production of goods or services for sale”.

Inventory management involves proper planning of purchasing, handling,

storing and accounting. The investment in inventory is very high in most of the

undertaking engaged manufacturing, whole-sale and retail trade. The amount of

investment is sometimes more in inventory than in other assets. About 90% part of

working capital invested in inventories. It is necessary for every management to give

proper attention to inventory management. An efficient system of inventory

management will determine:

lx

a. What to purchase?

b. How much to purchase?

c. From where to purchase?

d. Where to store, etc.

The purpose of inventory management is to keep stocks in such a way that

neither there is over-stocking nor under-stocking. The over-stocking will mean

reduction of liquidity and starving of other production processes, under-stocking, on

the other hand, will result in stoppage of work. The investments in inventory should

keep in reasonable limits.

Objectives:

Operating Objectives

Availability of Materials

Minimizing the Wastage

Promotion of Manufacturing Efficiency

Better Service to Customers

Control of Production Level

Optimal Level of Inventories

Financial Objectives

Economy in Purchasing

Optimum Investment and efficient Use of Capital

Reasonable Price

lxi

Tools and Techniques:

Determination of Stock Levels

Minimum Level

Re-ordering Level

Maximum Level

Danger Level

Average Stock Level

Determination of Safety Stocks

Ordering Systems of Inventory

Fixed Order Quantity System (or Q System)

Periodic Review System (or P System)

Modified Replenishment System

Economic Order Quantity (EOQ)

Just-In-Time (JIT)

A-B-C Analysis

VED Analysis

Inventory Turnover Ratios

Ageing of Inventories

Perpetual Inventory System

lxii

4) Receivables management

Meaning:

Receivables are asset accounts representing amount owed to the firm as a

result of sale of goods or services in the ordinary course of business. These are claims

of the firm against its customers and form part of its current assets. Receivables are

also known as accounts receivables, trade receivables, customer receivables or

book debts. Receivables are the extension of credit facilities to customers. Their basic

aim is to provide facility to customers to allow them a reasonable time in which they

can pay for goods purchased by them. The purpose of maintaining or investing in

receivables is to meet competition and to increase the sales and profits.

lxiii

Receivables management is the process of making decisions relating to

investment in trade debtors. Certain investment in receivables is necessary to increase

the sales and the profits of a firm. But at the same time investment in this asset

involves cost considerations also. Further, there is always a risk of bad debts too.

Receivables management may be defined as collection of steps and procedure

required to properly weigh the costs and benefits attached with the credit policies. The

Receivables management consists of matching the cost of increasing sales

(particularly credit sales) with the benefits arising out of increased sales with the

objective of maximizing the return on investment of the firm.

Objectives:

Book Debts are used as a Marketing Tool for Improvement of Business.

Optimum Level of Investment in Receivables.

Increase in Sales.

Increase in Profits.

Dimensions:

1. Credit Policy: The credit policy of a company can be regarded as a kind of

trade-off between increased credit sales leading to increased in profit and the

cost of having larger amount of cash locked up in the form of receivables and

the loss due to the incidence of bad debts. The credit policy decision of a firm

has three broad dimensions:

Credit Standards

Credit Terms

Collection Efforts

lxiv

2. Credit Evaluation: A firm should develop procedure for evaluating credit

applicants. The second aspect of receivables management of a firm is credit

analysis and investigation. Two basic steps are involved in the credit

investigation process:

Obtaining Credit Information

Internal

External

Analysis of Credit Information

Well known 5C’s of credit:

Character

Capacity

Capital

Collateral

Conditions

3. Monitoring Receivables: The next important step in management of

receivables is control of these receivables. In order to control the level of

receivable, the firm should apply regular checks and there must be continuous

monitoring system. The firm should keep a watch on the creditworthiness of

all the customers as well as on the total credit policy of the firm. The

following methods can be used:

Average Collection Period

Aging Schedule of Receivables

Line of Credit

Accounting Ratios

lxv

WORKING CAPITAL FINANCING

The working capital requirements of a concern can be classified as:

1) FINANCING OF PERMANENT/ FIXED OR LONG-TERM

WORKING CAPITAL

Permanent working capital should be financed in such a manner that the

enterprise may have its uninterrupted use for a sufficiently long period. The

important sources of permanent or long-term working capital are:

Shares: Issue of shares is the most important source for raising the

permanent or long- term capital. A company can issue various types of

shares as equity shares, preference shares and deferred shares. As far

as possible, a company should raise the maximum amount of

permanent capital by the issue of shares.

Debentures: A debenture is an instrument issued by the company

acknowledging its debt to its holder. It is an important method of

raising long- term working capital. The debenture- holders are the

creditors of the company. When the debentures are secured they are

paid on priority to other creditors.

Ploughing Back of Profits: Ploughing back of profits means the

reinvestments by concern of its surplus earnings in its business. It is an

internal source of finance and is most suitable for an established firm

for its expansion, modernization and replacement etc. This method of

finance has a number of advantages as it is the cheapest rather cost-free

source of finance.

Loans from Financial Institutions: Financial institutions such as

Commercial Banks, Life Insurance Corporation, Industrial Finance

lxvi

Corporation of India, State Financial Corporation, State Industrial

Development Corporations, Industrial Development Bank of India, etc.

also provide short-term, medium-term and long-term loans.

2) FINANCING OF TEMPORARY/ VARIABLE OR SHORT-

TERM WORKING CAPITAL

The important sources of temporary or short-term working capital are:

Commercial Banks/ Bank Finance: Commercial banks are the main

institutional sources of working capital finance in India. After trade

credit, bank credit is the most important source of financing working

capital requirements of firms in India. The amount approved by the

bank for the firm’s working capital is called credit limit. Credit limit is

the maximum funds which a firm can obtain from the banking system.

The forms of bank are:

Loans

Cash Credit

Overdrafts

Purchasing and Discounting of Bills

Note Lending System

Letter of Credit

Trade Credit: Trade credit refers to the credit extended by the

suppliers of goods in the normal course of business. As present day

commerce is build upon credit, the trade credit arrangement of a firm

with its suppliers in an important source of short-term finance. The

lxvii

credit-worthiness of a firm and the confidence of its suppliers are the

main basis of securing trade credit. It is mostly granted on an open

account basis whereby supplier sends goods to the buyer for the

payment to be received in future as per terms of the sales invoice. It

may also take the form of bills payable whereby the buyer signs a bill

of exchanges payable on a specified future date.

Commercial Paper: Commercial paper (CP) is an important money

market instrument in advanced countries like U.S.A. to raise short-term

funds. In India, Reserve Bank of India (RBI) introduced commercial

paper in the Indian money market. Commercial paper, as it is known in

the advanced countries, is a form of unsecured promissory note issued

by firms to raise short-term funds.

Factoring of Receivables: Credit management is a specialized

activity, and involves a lot of time and efforts of a company. Collection

of receivables poses a problem, particularly for small scale enterprises.

Banks have the policy of financing receivable. However, this support is

available for a limited period and the seller of goods and services has

to bear the risk of default by debtors. A company can assign its

credit management and collection to

specialist organizations, called factoring organizations. Factoring is a

popular mechanism of managing, financing and collecting receivables

in developed countries like USA and UK, and has extended to a

number of other countries in the recent past, including India.

Subsidiaries of four Indian banks – State bank of India, Canara Bank,

lxviii

Punjab National Bank and Allahabad Bank – provide factoring

services.

Public Deposits: public deposits are the fixed deposits accepted by a

business enterprise directly from the public. This source of raising

short term and medium-term finance was very popular in the absence

of banking facilities. Many firms, large and small, have solicited

unsecured deposits from the public in recent years, mainly to finance

their working capital requirements.

Installment Credit: This is another method by which the assets are

purchased and the possession of goods is taken immediately but the

payment is made in installments over a pre-determined period of time.

Generally, interest is charged on the unpaid price or it may be adjusted

in the price. But, in any case, it provides funds for some time and is

used as a source of short- term working capital by many business

houses which have difficult fund position.

Advances: Some business houses get advances from their customers

and agents against orders and this source is a short- term source of

finance for them. It is a cheap source of finance and in order to

minimize their investment in working capital, some firms

having long production cycle, especially the firms manufacturing

industrial products prefer to take advances from their customers.

Accrued Expenses and Deferred Incomes: Accrued expenses are the

expenses which have been incurred but not yet due and hence not yet

paid also. These simply represent a liability that a firm has to pay for

the services already received by it. The most important items of

lxix

accruals are wages and salaries, interest and taxes. Wages and salaries

are usually paid on monthly, fortnightly or weekly basis for the

services already rendered by employees. The longer the payment-

period, the greater is the amount of liability towards employees or the

funds provided by them. Deferred incomes are incomes received in

advance before supplying goods or services. They represent funds

received by a firm for which it has to supply goods or services in

future.

lxx

CHAPTER 5

RESEARCH

METHODOLOGY

lxxi

DEFINITION OF RESEARCH METHODOLOGY

In simple terms methodology can be defined as, it is used to give a clear cut idea on

what the researcher is carrying out his or her research. In order to plan in a right point

of time and to advance the research work methodology makes the right platform to the

researcher to mapping out the research work in relevance to make solid plans. More

over methodology guides the researcher to involve and to be active in his or her

particular field of enquiry. Most of the situations the aim of the research and the

research topic won't be same at all time it varies from its objectives and flow of the

research but by adopting a suitable methodology this can be achieved. Research

methodology drives the researcher in the right track. The entire research plan is based

on the concept of right methodology. More over through methodology the external!

environment constitutes the research by giving a depth idea on setting the right

research objective, followed by literature point of view, based on that chosen analysis

through interviews or questionnaires findings will be obtained and finally concluded

message by this research.

lxxii

OBJECTIVES

lxxiii

OBJECTIVES

To identify the financial strengths & weakness of the company. Through the net

profit ratio & other profitability ratio, understand the Profitability of the

company.

Evaluating company s performance relating to financial statement analysis.

To know the liquidity position of the company with the help of current ratio.

To find out the utility of financial ratio in credit analysis & determining the

financial capacity of the firm.

To know the most effective method for analyzing the financial statement.

To know the financial statement that are used in financial statement analysis.

To know the used of Financial analysis.

To know the different purposes of doing the financial statement analysis.

lxxiv

RESEARCH DESIGN

In this research report, I took exploratory research, A research design is the overall

plan on programming of research. It includes an outline of what the investigator will

do from writing the hypothesis and their operational implications to the final analysis

of data. I used exploratory research. 

SAMPLING DESIGN:

I used non- probability sampling design (Convenience).

CONVENIENCE SAMPLING

Convenience sampling refers to the non probability process by which a scientist

gathers statistical data from the population. This form of selection is done based on

the ease of gaining the statistical data. Rather than gathering a more accurate array of

data from the population, the researcher simply gathers data from people nearby. A

researcher might go to a nearby mall, or street comer to gather data. This form of data

collection works for some areas of study, but researcher bias may result in inaccurate

METHOD OF DATA COLLECTION IN TO TWO TYPES

1. Primary

2. Secondary

I collected my data regarding research report thought Secondary Data.

SECONDARY DATA

When an investigator uses the data that has been already collected by others, is called

secondary data. The secondary data could be collected from Journals, Reports,

libraries, magazines, fair & conference and other publications. I my research report I

collected data through Balance Sheet of The company working Capital statement of

the company.

lxxv

EXPLORATORY RESEARCH.

In this research report it took the objective of the exploratory research is to seek

new ideas and to discover new relationship between different set factors in a

way that will permit of specific hypothesis. 

COLLECTION OF DATA THROUGH QUESTIONNAIRES

This method of data collection is quite popular, particularly incase of big

inquiries. It is being adopted private researchers, and workers, and private and

public organizations and even government. In this method a questionnaire is sent

(usually by post) to the persons concerned with a request to answer the question

and return the questionnaire.  

The method of collecting data wise mailing the questionnaires to respondents is

the most extensively employed in various economy and business surveys. The

merits claimed on behalf of this method are as follows: 

lxxvi

CHAPTER 6:

DATA ANALYSIS AND

INTERPRETATION

lxxvii

Q1. From how many years you have been working in your organization?

Less than 2 Years 20%

2 to less than 4 Years 40%

4 to less than 6 Years 30%

More than 6 Years 10%

Interpretation

40% respondents replied that they are working in the organization from 2

to less than 4 years but 30% respondents replied that they are working in

the organization from 4 to less than 6 years.

20%

40%

30%

10%

0%5%

10%15%20%25%30%35%40%45%

Less than 2Years

2 to less than 4Years

4 to less than 6Years

More than 6Years

lxxviii

Q2. What types of financial statement are used in financial statement analysis?

Balance sheet: also referred to as satement of financial position or condition,

reports on a company's assets, liabilities, and Ownership equity at a given

point in time.

Income statement: also referred to as Profit and Loss statement (or a ''P&L''),

reports on a company's income, expenses, and profits over a period of time.

Profit & Loss account provide information on the operation of the enterprise.

These include sale and the various expenses incurred during the processing

state.

Statement of retained earnings: explains the changes in a company's

retained earnings over the reporting period.

Statement of cash flows: reports on a company's cash flow activities,

particularly its operating, investing and financing activities.

InterpretationFor large corporations, these statements are often complex and may include an

extensive set of notes to the financial statements and management discussion and

analysis. The notes typically describe each item on the balance sheet, income

statement and cash flow statement in further detail. Notes to financial statements are

considered an integral part of the financial statement

lxxix

Q3. Financial analysis is widely used to summarize the information in a

company's financial statements in assessing its financial health

Strongly Agree 35%

Agree 45%

Neutral 5%

Disagree 12%

Strongly Disagree 3%

35%

45%

5%

12%

3%

0%5%

10%15%20%25%30%35%40%45%50%

StronglyAgree

Agree Neutral Disagree StronglyDisagree

Interpretation

45% respondents are agree with this statement but 12% respondents are disagree with

this statement

lxxx

Q4. Both the company's profitability (as measured in terms of profit margin) and

efficiency (as measured in terms of asset turnover) determine its ROA. This ROA

Strongly Agree 30%

Agree 55%

Neutral 5%

Disagree 8%

Strongly Disagree 2%

30%

55%

5%8%

2%0%

10%

20%

30%

40%

50%

60%

StronglyAgree

Agree Neutral Disagree StronglyDisagree

Interpretation30% respondents are strongly agree with this statement but 8% respondents are

disagree with this statement

lxxxi

Q5. The changes in the company's ROE are to be noted and explained through its

profit margin, asset turnover, and equity multiplier over time

Strongly Agree 29%

Agree 49%

Neutral 13%

Disagree 8%

Strongly Disagree 1%

29%

49%

13%8%

1%0%

10%

20%

30%

40%

50%

60%

StronglyAgree

Agree Neutral Disagree StronglyDisagree

Interpretation29% respondents are strongly agree with this statement but 8% respondents are

disagree with this statement

.

lxxxii

Q6. Debt ratios show the extent to which a firm is relying on debt to finance its

investments and operations, and how well it can manage the debt obligation

Strongly Agree 31%

Agree 52%

Neutral 10%

Disagree 6%

Strongly Disagree 1%

31%

52%

10%6%

1%0%

10%

20%

30%

40%

50%

60%

StronglyAgree

Agree Neutral Disagree StronglyDisagree

Interpretation

31% respondents are strongly agree with this statement but 6% respondents are

disagree with this statement

lxxxiii

Q7. What are the limitations in case of analyzing the financial statement?

1.  There is considerable subjectivity involved, as there is no “correct” number for the

various ratios.  Further, it is hard to reach a definite conclusion when some of the

ratios are favorable and some are unfavorable. 

2.  Ratios may not be strictly comparable for different firms due to a variety of factors

such as different accounting practices or different fiscal year periods.  Furthermore, if

a firm is engaged in diverse product lines, it may be difficult to identify the industry

category to which the firm belongs.  Also, just because a specific ratio is better than

the average does not necessarily mean that the company is doing well; it is quite

possible rest of the industry is doing very poorly. 

3.  Ratios are based on financial statements that reflect the past and not the

future.   Unless the ratios are stable, it may be difficult to make reasonable projections

about future trends.  Furthermore, financial statements such as the balance sheet

indicate the picture at “one point” in time, and thus may not be representative of

longer periods. 

4.  Financial statements provide an assessment of the costs and not value.  For

example, fixed assets are usually shown on the balance sheet as the cost of the assets

less their accumulated depreciation, which may not reflect the actual current market

value of those assets.  

5.  Financial statements do not include all items.  For example, it is hard to put a value

on human capital (such as management expertise).  And recent accounting scandals

have brought light to the extent of financing that may occur off the balance sheet.

lxxxiv

Q8. What are the different purposes of doing the financial statement analysis?

Owners and managers require financial statements to make important business

decisions that affect its continued operations. Financial analysis is then

performed on these statements to provide management with a more detailed

understanding of the figures. These statements are also used as part of

management's annual report to the stockholders.

Employees also need these reports in making collective bargaining agreements

(CBA) with the management, in the case of labor unions or for individuals in

discussing their compensation, promotion and rankings.

Prospective investors make use of financial statements to assess the viability

of investing in a business. Financial analyses are often used by investors and

are prepared by professionals (financial analysts), thus providing them with

the basis for making investment decisions.

Financial institutions (banks and other lending companies) use them to decide

whether to grant a company with fresh working capital or extend

debt securities (such as a long-term bank loan or debentures) to finance

expansion and other significant expenditures.

Government entities (tax authorities) need financial statements to ascertain the

propriety and accuracy of taxes and other duties declared and paid by a

company.

Vendors who extend credit to a business require financial statements to assess

the credit worthiness of the business.

lxxxv

FINDINGS

lxxxvi

FINDINGS:Comments on Ratio Analysis:

Liquidity ratios show the short-term solvency of the company. The liquidity

ratios of the Supertech Group Limited are as follows:

Current ratio is increasing; it means that current assets of the company are

increasing.

Cash ratio is constant in 2009 and 2010 and then starts increasing.

Acid test ratio increase in 2010 and then decrease in 2011.This ratio decreased

in 2011 due to increase in inventory and prepayments.

The overall liquid position of the company is becoming fair.

Interest coverage ratio of the company decreased in 2010 due to decrease in

EBIT and increase in financial charges. It then increases in 2011 due to the

reason vice versa.

Leverage ratios of the company are as follows:

Total capitalization ratio decrease in 2010 and then increases in 2011 due to

increase in equity as more shares were issued in 2011.

Long-term debt to equity ratio is increasing due to more long term financing to

the company.

Long-term debt to total assets ratio is decreasing because total assets are

increasing every year.

lxxxvii

Total debt to equity and total debt to total assets ratios is increasing due to

increase in short term and long-term debt.

Activity ratios of the company are as follows:

R.T.R in days are increasing but still fair and not increasing at tremendous

rate.

P.T.R in days decreases in 2010 and increases in 2011 and is more than 90

days, which is not a good thing for company’s goodwill.

I.T.R in days is increasing due to increase in goods manufactured.

Due to above a situation operating cycle and cash cycle is increasing.

Total assts turnover ratios decrease in 2010 due to decrease in sales and then

slightly increase in 2011 due to increase in sales.

Profitability ratios of the company as follows:

Gross profit margin of the company is increasing due increase in sales.

Operating profit margin is decreasing slightly due to increase in operating

expenses like selling and administration expenses. Net profit margin is

decreasing due to decrease in operating margin and due to increase in financial

charges.

R.O.I is first decreasing and then slightly increasing. It is decreasing due to

decrease in net profit and is increasing in 2011 due to increase in assets.

R.O.E is decreasing with the decrease in net profit.

lxxxviii

Earning per share decreased due to decrease in profit of te company.

Price to earning ratio increased because price of the share is same in all the

years but EPS decreased every year.

Dividend payout ratio is very low in all the years because company is not

paying the dividend in cash.

Comments on common size analysis:

In the common size analysis, the performance of the current assets decreases

in 2010 and then increased in 2011.

The same is the case with the fixed assets. These are going towards better

performance. As a whole the common size analysis is good in balance sheet

items.

In income statement, the cost of goods sold is increasing and expenses are

increasing. The taxation increases in 2010 and then decreases in 2011. Interest

charges are increasing due to increase in external financing. The increase in

expenses causes a decrease in net profit.

Comments on index analysis:

In index analysis there is an increasing trend in the assets as compared to the base

year. All the assets are in increasing percentage. Liabilities are also increasing but at

lower rate as compared to assets. The percentage of the building decrease in 2010 and

increases in 2011, which shows that more land is, build in the year 2011. The

percentage of the sale is low in 2010 as compared to 2009 and 2011 and there is also

increase in CGS. Financial charges against debt have a tremendous percentage as

lxxxix

compared to the base year. Taxation has low percentage in 2010 and more in 2011 as

compared to the base year 2009. The net profit percentage is also decreasing at

decreasing rate as compared to the base year 2009.

xc

RATIO ANALYSIS

To understand the information contained in financial statements with a view to know

the strength or weaknesses of the firm and to make forecast about the future prospects

of the firm and thereby enabling the financial analyst to take different decisions

regarding the operations of the firm.

Ratio Analysis: Fundamental Analysis has a very broad scope. One aspect looks at

the general (qualitative) factors of a company. The other side considers tangible and

measurable factors (quantitative). This means crunching and analyzing numbers from

the financial statements. If used in conjunction with other methods, quantitative

analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet, income

statement, and cash flow statement. It's comparing the number against previous years,

other companies, the industry, or even the economy in general. Ratios look at the

relationships between individual values and relate them to how a company has

performed in the past, and might perform in the future

Meaning of Ratio: It is a mathematical yardstick that measures the relationship

between two figures, which are related to each other and mutually interdependent.

Ratio is express by dividing one figure by the other related figure. It can be

expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as “so

many times”. As accounting ratio is an expression relating two figures or accounts or

two sets of account heads or group contain in the financial statements

xci

Meaning of Ratio Analysis:

Ratio analysis is the method or process by which the relationship of items or group of

items in the financial statement are computed, determined and presented.

Ratio analysis is an attempt to derive quantitative measure or guides concerning the

financial health and profitability of business enterprises. Ratio analysis can be used

both in trend and static analysis. There are several ratios at the disposal of an annalist

but their group of ratio he would prefer depends on the purpose and the objective of

analysis.

While a detailed explanation of ratio analysis is beyond the scope of this section, we

will focus on a technique, which is easy to use. It can provide you with a valuable

investment analysis tool.

This technique is called cross-sectional analysis. Cross-sectional analysis compares

financial ratios of several companies from the same industry. Ratio analysis can

provide valuable information about a company's financial health. A financial ratio

measures a company's performance in a specific area. For example, you could use a

ratio of a company's debt to its equity to measure a company's leverage. By

comparing the leverage ratios of two companies, you can determine which company

uses greater debt in the conduct of its business. A company whose leverage ratio is

higher than a competitor's has more debt per equity. You can use this information to

make a judgment as to which company is a better investment risk.

However, you must be careful not to place too much importance on one ratio. You

obtain a better indication of the direction in which a company is moving when several

ratios are taken as a group.

xcii

Types of Comparisons:

The ratio can be compared in three different ways –

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare them with

the ratio or ratios of some other selected firm in the same industry at the same point of

time. So it involves the comparison of two or more firm’s financial ratio at the same

point of time. The cross section analysis helps the analyst to find out as to how a

particular firm has performed in relation to its competitors. The firm’s performance

maybe compared with the performance of the leader in the industry in order to

uncover the major operational inefficiencies. The cross section analysis is easy to be

undertaken as most of the data required for this may be available in financial

statement of the firm.

2] Time series analysis:

The analysis is called Time series analysis when the performance of a firm is

evaluated over a period of time. By comparing the present performance of a firm with

the performance of the same firm over the last few years, an assessment can be made

about the trend in progress of the firm, about the direction of progress of the firm.

Time series analysis helps to the firm to assess whether the firm is approaching the

long-term goals or not. The Time series analysis looks for (1) important trends in

financial performance (2) shift in trend over the years (3) significant deviation if any

from the other set of data

xciii

3] Combined analysis:

If the cross section & time analysis, both are combined together to study the behavior

& pattern of ratio, then meaningful & comprehensive evaluation of the performance

of the firm can definitely be made. A trend of ratio of a firm compared with the trend

of the ratio of the standard firm can give good results. For example, the ratio of

operating expenses to net sales for firm may be higher than the industry average

however, over the years it has been declining for the firm, whereas the industry

average has not shown any significant changes.

Pre-Requisites to ratio analysis:

In order to use the ratio analysis as device to make purposeful conclusions, there are

certain pre-requisites, which must be taken care of. It may be noted that these

prerequisites are not conditions for calculations for meaningful conclusions. The

accounting figures are inactive in them & can be used for any ratio but meaningful

&correct interpretation & conclusion can be arrived only if the following points are

well considered.

1) The dates of different financial statements from where data is taken must be same.

2) If possible, only audited financial statements should be considered, otherwise there

must be sufficient evidence that the data is correct.

3) Accounting policies followed by different firms must be same in case of cross

section analysis otherwise the results of the ratio analysis would be distorted.

4) One ratio may not throw light on any performance of the firm. Therefore, a group

of ratios must be preferred. This will be conductive to counter checks.

xciv

5) Last but not least, the analyst must find out that the two figures being used to

calculate a ratio must be related to each other, otherwise there is no purpose of

calculating a ratio

Financial analysts often assess the firm's:

1. Profitability - its ability to earn income and sustain growth in both short-term and

long-term. A company's degree of profitability is usually based on the income

statement, which reports on the company's results of operations;

2. Solvency - its ability to pay its obligation to creditors and other third parties in the

long-term;

3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate

obligations;

Both 2 and 3 are based on the company's balance sheet, which indicates the financial

condition of a business as of a given point in time.

4. Stability- the firm's ability to remain in business in the long run, without having to

sustain significant losses in the conduct of its business. Assessing a company's

stability requires the use of the income statement and the balance sheet, as well as

other financial and non-financial indicators.

xcv

LIMITATION

xcvi

LIMITATION

1.  Ratios may not be strictly comparable for different firms due to a variety of factors

such as different accounting practices or different fiscal year periods.  Furthermore, if

a firm is engaged in diverse product lines, it may be difficult to identify the industry

category to which the firm belongs.  Also, just because a specific ratio is better than

the average does not necessarily mean that the company is doing well; it is quite

possible rest of the industry is doing very poorly. 

2.  Ratios are based on financial statements that reflect the past and not the

future.   Unless the ratios are stable, it may be difficult to make reasonable projections

about future trends.  Furthermore, financial statements such as the balance sheet

indicate the picture at “one point” in time, and thus may not be representative of

longer periods. 

3.  Financial statements provide an assessment of the costs and not value.  For

example, fixed assets are usually shown on the balance sheet as the cost of the assets

less their accumulated depreciation, which may not reflect the actual current market

value of those assets.  

4.  Financial statements do not include all items.  For example, it is hard to put a value

on human capital (such as management expertise).  And recent accounting scandals

have brought light to the extent of financing that may occur off the balance sheet.

xcvii

CONCLUSION

xcviii

CONCLUSION

For analysis of the financial conditions of Supertech we can segregate the financial

statements (ratios) of Supertech into four different parts - liquidity ratios, asset

management ratios, debt management ratios, and profitability ratios. These ratios can

be used to evaluate the overall condition of any company. Here I am providing the

overall comments about Supertech based on the liquidity ratios, asset management

ratios, debt management ratios, and profitability ratios. In case of liquidity ratios, their

current ratio is decreased than the previous year but it is higher than the industry

average. Side by side their quick ratio is decreased than the previous year and the

industry average. So we can say that for current ratio their have some little idle

money. But in case of quick ratio at the present rate it is not possible for the company

to pay its bills as they come due. In case of asset management their inventory turnover

in days is higher than the previous year and industry average. This suggests that

inventory stocks of Supertech are higher than they need to be. Side by side is in better

position in comparison with previous year. In case of debt management, Supertech’s

debt to asset ratio is higher than the previous year but lower than the industry average.

So they have the opportunity to increase their debt up to 10% to expand their

business. Their debt to equity ratio is higher than the previous year and they have to

maintain the standard. In case of profitability position of this company – return on

assets is increased than the previous year and industry average. Return on equity is

decrease than the previous year but both are higher than the industry average. Net

profit margin is increase than the previous year and industry average. So we can say

that, overall the company’s profitability position is good in spite of their net profit

margin slightly lower than the industry average.

xcix

RECOMMENDATION

c

RECOMMENDATION

Financial statements are most significant part of a company because financial

statement analysis involves a comparison of a firm’s performance with that of other

firms in the same line of business, which usually identified by the firm’s industry

classification. The analysis is used to determine the firm’s financial position so as to

identify its current strength and weakness and to suggest actions the firm might

pursue to take advantage of the strengths and correct any weakness. Here is our

recommendations about this company are as follows:

Our valuation of the debt to total assets suggests that Supertech’s debt to total

assets currently is lower than the industry average. So they have the

opportunity to expand their business by increasing their debt.

Our evaluations of the account receivables turnover suggest that Supertech’s

average days to collect its credit sale currently is lower than the industry

average which is determines that companies account receivables turnover is

good.

Our evaluations of the acid test ratio suggest that Supertech’s liquidity

position currently is poor. Supertech’s ratio test ratio seems inadequate.

The year 2008-09 has lowest capital as compared to earlier years. The

company must increase its capital. The greater the margin, the better will be

the liquidity of the firm.

The company should maintain the low level of creditors because the company

can pay them easily whenever required.

ci

Our opinion of the return on common shareholders’ equity suggests that

Supertech’s net income were earned for each taka invested by the owners is

higher than the industry average. We think the return on common

shareholders’ equity of this company is maintaining a good standard. So they

should maintain this immovability

The company should maintain a proper inventory management system, so the

unnecessary blockage of money can be avoided.

The company must have adequate cash and bank balance to face any situations. The

company has low cash and bank balance in the year 2009-11.

cii

CHAPTER -7

APPENDIX

ciii

APPENDIX

QUESTIONNAIRE

Q1. From how many years you have been working in your organization?

(a) Less than 2 Years (b) 2 to less than 4 Years

(c) 4 to less than 6 Years (d) More than 6 Years

Q2. What types of financial statement are used in financial statement analysis?

Balance sheet: Income statement Statement of retained earnings Statement of cash flows Both

Q3. Financial analysis is widely used to summarize the information in a company's

financial statements in assessing its financial health

(a) Strongly Agree (b) Agree

(c) Neutral (d) Disagree (e) Strongly Disagree

Q4. Both the company's profitability (as measured in terms of profit margin) and

efficiency (as measured in terms of asset turnover) determine its ROA. This

ROA

(a) Strongly Agree (b) Agree

(c) Neutral (d) Disagree (e) Strongly Disagree

civ

Q5. The changes in the company's ROE are to be noted and explained through its

profit margin, asset turnover, and equity multiplier over time

(a) Strongly Agree (b) Agree

(c) Neutral (d) Disagree (e) Strongly Disagree

Q6. Debt ratios show the extent to which a firm is relying on debt to finance its

investments and operations, and how well it can manage the debt obligation

(a) Strongly Agree (b) Agree

(c) Neutral (d) Disagree (e) Strongly Disagree

Q7. What are the limitations in case of analyzing the financial statement?

Q8. What are the different purposes of doing the financial statement analysis?

____________________________________________________________

cv

CHAPTER -8

BIBLIOGRAPHY

cvi

BIBLIOGRAPHY

BOOKS

Brealey, R.A. and S.C. Myers. Principles of Corporate Finance (2000),

6th Edition, The McGraw-Hill Companies, Inc.

Koehn, J.L. and Hallam, J.J. A Course Survey of Financial Statement

Analysis, issues in Accounting.

Ross, S.A., R.W. Westerfield and J. Jaffe. Corporate Finance 5th Edition,

Irwin/McGraw-Hill.

Scott, D.F., J.D. Martin, J.W. Petty and A. Keown. Basic Financial

Management  Prentice-Hall, Inc

Websites

www.google.com

www.wikipedia.com

cvii