Working Capital Management-Tata Steels

BySandeep Kothari

Savvy JainNikita Dey

Digvijay MisalManish Kanani

Working Capital Management- BasicsWorking capital management is concerned with

the problems arises in managing the current assets, the current liabilities and the inter relationship that exist between them.

There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically it refers to operating or cash cycle.

Gross & Net Working CapitalGross Working Capital- Gross working

capital refers to the firm’s investment in current assets.

Net Working Capital- Net working capital refers to the difference between current assets and current liabilities.

About Tata SteelTata Steel formerly known as TISCO and Tata

Iron and Steel Company Limited, is the world's seventh largest steel company, with an annual crude steel capacity of 31 million tonnes.

It is the largest private sector steel company in India in terms of domestic production.

It is based in Jamshedpur, Jharkhand. It is part of Tata Group of companies.

Tata steel in the 8th most valuable brand according to an annual survey conducted by Brand Finance and The Economic Times in 2010.

Few Facts about Tata Steel

Type Public

Industry Steel

Founded 1907

Headquarters Mumbai

Key People Ratan Tata (Chairman)B Muthuraman (Vice Chairman)HM Nerurkar(MD)

Products •Hot and cold rolled coils and sheets•Wire and rods•Construction bars•Pipes•Structurals and forging quality steel

Revenue Rs 103,705.83 crore (US$22.5 billion)

Total Assets $24.446 billion (2010)

Total Equity $5.082 billion (2010)

Parent Tata Group

ObjectivesStudy of the working capital management is important because unless the working capital is managed effectively, the company cannot earn profits and can’t maximise shareholders’ wealth. With this primary objective of the study, the following further objectives are framed for a depth analysis:To study the working capital management of

TATA STEEL.To study the liquidity position through various

working capital related ratios.

ScopeThe scope of the study is identified after and

during the study is conducted. The study of working capital is based on tools like trend analysis & ratio analysis.

Further the study is based on last 5 years annual report of TATA STEEL and factors like competitor’s analysis, industry analysis were not considered while preparing this project.

Trend of Working CapitalYears 2005-

062006-07 2007-08 2008-09 2009-10

NetW.C. (Current Assets-Current Liabilities)

433.88 8248.23 30193.66

1311.04 3247.06

W.C indices 100 1901 6958.9 302.1 748.3

Current Assets-ObservationsIt was observed that in the year 2006-2007

current assets increased by 222.9% and current liabilities increased only by 43.1 % which affect working capital increased by 1801%.

In 2007-2008 the net working capital increased to Rs 30193.66 crores from Rs 433.88 in 2005-2006.

In year 2010 the current assets increased to 188.6% and current liabilities to 136.2% so the net working capital also increased to 648.3% i.e. Rs 3247.06 crores.

Current Liabilities-ObservationsCurrent liabilities show continues increase

every year because the company creates the credit in the market by good transactions.

As a current liability increase in the year 2008-2009 by 57.9% it reduce the working capital size in the same year.

Working Capital Ratio AnalysisWorking capital ratio means ratios which are related with the working capital management e.g. current assets, current liabilities, liquidity, profitability and risk turnoff etc. these ratio are classified as follows: Efficiency Ratios/Activity Ratios/Asset Management

Ratios: Working capital turnover ratio Inventory turnover ratio Receivables turnover ratio Current assets turnover ratio

Liquidity Ratios Current ratio Quick ratio Absolute liquid ratio

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Sales 17144.22 19763.57

22191.80 26843.73 26757.80

Net W.C 433.88 8248.23 30193.66 1311.04 3247.06

W.C TOR

39.51 2.39 0.73 20.47 8.24

Working capital turnover ratio = sales / Net working capital

Interpretation & ObservationObservation:High working capital ratio

indicates the capability of the organization to achieve maximum sales with minimum investment in working capital.

Company’s working capital shows a decrease from year 2005 to 2006 and 2007; this denotes that the sales was much less as compared to working capital.

But in year 2008, 2009 it went up to a good level.

2005-06 2006-07 2007-08 2008-09 2009-10 0

5

10

15

20

25

30

35

40

45

39.51

2.390.73

20.47

8.24

W.C TOR

W.C TOR

Particulars

2005-06 2006-07 2007-08 2008-09 2009-10

Sales 17144.22 1976.57 22191.80 26843.73 26757.80

Average Inventory

972.095 1065 1126.385 1290.385 1367.535

Inventory TOR

17.63 1.85 19.70 20.8 19.56

Inventory Turnover Ratio= Cost of goods sold/Average Inventory

Interpretation & ObservationObservations  • It is observed that inventory

turnover ratio indicates maximum sales achieved with the maximum investment in the inventory.

• High inventory turnover is desirable but high inventory turnover ratio may not be necessary for profit making.

• An organization, in order to achieve a large sales volume may sometimes sacrifice on profit making, inventory ratio may not result into high amount of profit.

2005-06 2006-07 2007-08 2008-09 2009-1016

17

18

19

20

21

22

17.63

18.55

19.7

20.8

19.56

Series1Inventory TOR

Receivable Turnover Ratio = Gross sales / Average account receivables

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Gross Sales 17144 19763 21392 25945 25756

Average Debtors

585 631.5 587.5 589.5 535.5

Receivable TOR

29.3 31.2 36.4 44.01 48.09

Interpretation & ObservationsObservation:By the data in the table it is clear

that the receivables turnover ratio is increasing every year.

It gives a good indication of increasing sales every year. Slow moving graph depicts the controllable condition of sales in past 5 years.

In 2005-2006 the ratio was 29.3 while the gross sales was 17144 and the average debtors were 585, and in 2009-2010 the ratio increased to 48.09 while the gross sales had increased to 25756 and average debtors decreased to 535.5.

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

0

10

20

30

40

50

60

Receivable TORSeries1

Current Assets Turnover Ratio = Sales / Current assets

Particulars

2005-06 2006-07 2007-08 2008-09 2009-10

Sales 17144.22 19763.57 22191.80 26843.73 26757.80

Current Assets

4242.6 13701.89 36962.44 11285.09 12246.4

CA Turnover Ratio

4.04 1.44 0.60 2.37 2.18

Interpretation & ObservationObservation: It was observed that the current

assets turnover ratio indicates a varied trend over the period of time.

Turnover ratio was 4.04 in year 2005-2006 and decreased to 0.14 in 2006-2007 .

From 2007-2008 it started increased which went to 2.18 in 2009-2010.Cash helped to increase the sales volume.

In year 2009-2010 company increased its sales with increased investment in current assets, thus current assets turnover ratio increased to 2.18 from 0.14 in year 2006.

2005-06

2006-07

2007-08

2008-09

2009-10

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

4.04

1.44

0.6

2.372.18

CA Turnover Ratio

CA Turnover Ratio

Current ratio = Current Assets / Current Liabilities

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Current Assets

4242.6 13701.89 36962.44 11285.09 12246.4

Current Liabilites

3808.72 5453.66 6768.78 8974.05 8999.61

Current Ratio

1.11 2.5 5.4 1.25 1.36

Interpretation & ObservationObservations:The current ratio indicates the

availability of funds to payment of current liabilities in the form of current assets.

A high ratio indicates that there were sufficient assets available with the organization which can be converted in cash without any reduction in the value.

As ideal current ratio is 2.1 where current ratio of the firm is more than 2.1. it indicates the unnecessarily investment in the current assets in the form of debtor and cash balance.20

05-0

6

2006

-07

2007

-08

2008

-09

2009

-10

0

1

2

3

4

5

6

1.11

2.5

5.4

1.251.36

Current Ratio

Current Ratio

Quick Ratio = ( Current assets – inventory ) / Current liabilities

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Liquid Current Assets

2062.72 11368.91 34357.46

7804.9 9168.65

Current Liabilites

3808.72 5453.66 6768.78 8974.05 8999.61

Quick Ratio

0.54 2.84 5.07 0.86 1.01

Interpretation & ObservationsObservations:Quick ratio indicates that

the company has sufficient balance of payment of current liabilities.

The liquid ratio of 1:1 is supposed to be standard or ideal but here the ratio is more than 1:1 in year 2006-2008 , it indicates that the company maintains the over liquid assets than actual requirement of such assets.

2005-06

2006-07

2007-08

2008-09

2009-10

0

1

2

3

4

5

6

0.54

2.84

5.07

0.860000000000001

1.01

Quick Ratio

Quick Ratio

Absolute Liquid Ratio = Absolute liquid assets / Current Liabilities

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Absolute Liquid Assets

2505.51 11874.35 34915.13

8417.09 9792.41

Current Liabilites

2835.99 3523.20 3855 6039.86 6653.09

Absolute Liquid Ratio

.8 3.3 9.05 1.3 1.4

Interpretation & ObservationOBSERVATION: In the year 2007-2008

absolute liquid ratio increased because of company carry more cash balance, as a cash balance is ideal asset, company has to take control on such availability of funds which is affect on cost of the funds.

Series10

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1

#REF!#REF!

LimitationsLimited data: This project is completed with annual

reports; it just constitutes one part of data collection i.e. Secondary. There were limitations for primary data collection because of confidentially.

Limited period: This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company.

Limited area: Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

ConclusionWorking capital is important part of financial management. The study of working capital management of Tata Steel has revealed that the current ratio as per the standard industrial practice but the liquidity position of the company showed an increasing trend. The study has been conducted on working capital ratio analysis, working capital components which helped the company to manage its working capital effectively and efficiently.Working capital was varying every yearPositive working capital indicates that the company has the ability

of payment of short term liabilities.Working capitals increase because the increment in the current

assets is more than increase in the current liabilities.Current assets are more than current liabilities indicate that the

company used long term funds for short term requirement, where long term funds are most costly then short term funds.

Thank You