A Study on Working Capital Management of Keltron Equipments in Trivandrum- Using "Z-Score Test"


By

Dr. N. Subburaj
M.Com, M.B.A, M.Phil, Ph.D, PGDLL&AL, B.Ed
Professor in Management Studies
St.Michael College of Engineering and Technology
Shathiyagapper Nagar, Kalayarkoil-630551, Sivaganga District
 


1.1. INTRODUCTION

The study of working capital behavior occupies an important place in financial management. The earlier emphasis of financial management was more on a long-term financial decision. Working capital management, which is concerned with short term financial decision, appears to have been relatively neglected in the literature of finance.

The developing economies generally face the problem of inefficient utilization of Resources available to them. Capital is the scarcest productive resource in such economies and hence a proper utilization of these resources promotes the rate of growth, cuts down the cost of production and above all, improves the efficiency of the productivity system. Fixed capital and working capital are the dominant contributors to the capital of a developing country. Fixed capital investment generates productive capacity, whereas working capital makes the utilization of that capacity possible.

Managers, Tax Authorities and other interested groups seek answers to the following important questions about a firm:

* What is the financial position of the firm at a given point of time?
* How did the firm perform financially over a given period of time?

To answer the above questions, one has to prepare two major financial statements - the balance sheet and the income statement. The balance sheet shows the financial position or condition of the firm at a given point of time. In income statement or profit and loss account reflects the performance of the firm over a period of time.

A firm communicates financial information to the users through financial statements and reports. Balance sheet and profit and loss accounts, as these statements are used by investors and financial analysis to examine the firms performance in order to make investment decisions.

*   Prof. in Dept., of Management Studies, St.Michael College of Engineering and Technology, KalayarKoil-630551, Tamilnadu.

1.2. STATEMENT OF THE PROBLEM

The important of working capital management stems from two reasons

(i) A substantial portion of the investment is invested in current assets, and
(ii) Level of current assets will change quickly with the variation in sales.

Hence, in this study, an attempt has been made to analyse the size and composition of working capital and whether such an investment has increased or declined over a period. After determining the requirement of current assets, one of the important tasks of the financial manager is to select a group of appropriate source of finance for the current assets.

1.3. OBJECTIVES OF THE STUDY

1 To study the performance of financial position of the company.
2 To analyse the financial tools like working capital management, ratio analysis and Z score test to be applied.

1.4. SCOPE OF THE STUDY

Scope of the study was confirmed to internal environment only. The study based on the secondary data collected from annual report, journals, magazines, newspapers, and website etc.

Financial statement analysis is the process of identifying the financial position of the company. After duly recognizing the importance of financial statement analysis of this topic has been chosen as the focus of the project.

1.5. LIMITATIONS OF THE STUDY

1. The analysis of this study is mainly based on secondary data.
2. The study covers for 7 years from 2001- 02 to 2007 08.
3. The financial statements are generally based on historical or original cost. The current economical condition is ignored.

1.6. RESEARCH METHODOLOGY

Research

 The type of research used for study is descriptive research. It includes fact findings, enquiries of the different kinds the major purpose of descriptive research is description of the state of affairs as it exists at present data collection.

The task of data collection begins after a research problem has been defined and research design.

1.7. COLLECTION OF DATA

The secondary data have been collected from the annual report, periodicals, journals, magazines, text books, news papers and websites and so on.

1.8. DATA PROCESSING

After completing the collection of data by the researcher prepared for the purpose of classifying the data, lastly classification tables were prepared for further analysis and interpretation of data.

1.9. PERIOD OF THE STUDY

The analysis of financial statement of KELTRON Ltd is made on the basis of information abstracted, from the financial statements of the company for the period of seven years from the financial year 2003-04 to 2009 10. The researcher was done during the period from January march 2010.

1.10. ANALYSIS AND DISCUSSIONS

Financial management is that management activity which is concerned with the planning and controlling of firms financial resources. Finance is one of the very important and essential parts of ever organization. The four important managerial finance functions are investment decision, financing, dividend, liquidity decision.

The finance manager is the head of the department and under him there are executives and finance officers and assistants. The auditing work is done by chartered Accounts. The auditing of financial statements of KELTRON 10 the years 2001-2002 was done by a sunny and Associates chartered accounts.

The authorized share capital of KEC is Rs. 800,000,000 which includes 8000,000 shares of Rs 100/- each. Issues, subscribed and paid up shares capital is Rs 799, 155, 0. 79, 91, 550 shares of Rs.100/- fully paid up.

1.10.1. Statement of Changes in 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".

Table.1
Statement of Changes in Working Capital
         
(Rs in Millions)

Year

Current Assets

Current liabilities

Networking capital

increase

Decrease

2001-02

2761.15

5644.77

(2883.62)

-

-

2002-03

2566.26

6322.65

(3755.78)

-

872.16

2003-04

3077.41

7493.35

(4415.94)

-

660.16

2004-05

3414.05

8510.57

(5096.52)

-

680.16

2005-06

4085.42

1161.02

2924.40

2172.12

-

2006-07

3899.20

1129.57

2769.63

-

154.77

2007-08

4757.66

2027.01

2730.65

-

38.98

          Source: Calculated Data

The current asset of the firm is 4757.66 in the year 2007-08. The current liability is very high 5096.52 in the year 2004-05. The working capital is increased in the year 2005-06. Last year 2007-08 working capitals was decreased into 38.98

1.10.2. Z- SCORE ANALYSIS

1.10.2.1. Liquidity Test

Liquidity or short term solvency is an attribute that signifies the capacity to meet the financial obligation as and when required. The liquidity ratios are used to measure the short term solvency and indicate the ability of a firm to meet its debt requirements as and when they become due current liabilities are used as the denominator of the ratios because they are considered to represent the most urgent debt, requiring retirement within one year or most preciously, within one operating cycle.

Table.2
Liquidity Test
                
(Rs.in.millions)

Year

Current assets

Liquid assets

Current Liabilities

Current Ratio

Quick ratio

2001-02

2761.15

2060.25

5644.77

0.49

0.36

2002-03

2566.26

1799.26

6322.05

0.40

0.28

2003-04

3077.41

2332.73

7493.35

0.41

0.31

2004-05

3414.05

2459.19

8510.57

0.40

0.28

2005-06

4085.42

3374.43

1161.02

3.52

2.91

2006-07

3899.20

3270.42

1129.57

3.45

2.89

2007-08

4757.66

3734.51

2027.01

2.35

1.84

                 Source: Calculated Data

The current asset position of the company is presented above the table. It was Rs.2566.26 in the year 2002-03, gradually increased to Rs.4085.42 in the year 2005-06 after it was decreased into Rs.3899.20 and last year it was increased into Rs.4757.66

The liquid assets position was Rs.1799.26 in 2002-03, and gradually increased up to Rs.3734.51 in 2007-08 and continues the same performance because of liquid assets and better management of inventory.

Figure.1
Diagrammatic Representation of Liquidity Test for Current Assets, Liquid Assets and Current Liabilities


In order to test the liquidity position of KELTRON, two most popular ratios via current ratio, which is worked out by dividing the current assets by current liability and quick ratio.The current ratio was moderate level from 2001-02 to 2004-05 and after, 3.52 in 2005-06 was decreased into 2.35 in 2007-08. The quick ratio is variation in every year, growth and decline.

Figure .2
Diagrammatic Representation of Liquidity Test for Current Ratio and Quick Ratio


1.10.2.2. Working Capital Investment Efficiency Test

In order to substantiate the liquidity test, it is essential to test the working capital investment efficiency test because inventory and accounts receivable the two important constituents of current assets, may sometimes block the proprietors fund. A blockage occurs when money becomes tied up in slow paying debtors, or in slow moving stock. In such a case, the business may appear to have a satisfactory amount of working capital but little or to liquidity. The common working capital investment efficiency ratios are 

* Inventory turnover Ratio  =  Cost of sales / Inventory
* Days inventory outstanding   = 365 / Inventory turnover ratio
* Debtors turnover ratio  = Sales / Debtors
* Days sales outstanding  = 365 / Debtors turnover ratio

The working capital investment efficiency ratio of KELTRON is presented in following table.

Table .3
Working Capital Investment Efficiency Test
                   
(Rs.in millions)

Year

Inventory Turnover Ratio

Days stock outstanding

Debtors turnover ratio

Days sales outstanding

2001-02

6.49

56

1.06

344

2002-03

5.45

67

1.15

317

2003-04

7.05

52

1.04

351

2004-05

4.15

88

1.24

294

2005-06

4.77

77

1.36

268

2006-07

6.76

54

1.39

263

2007-08

7.65

48

0.86

424

                    Source: Calculated Data

The inventory turnover ratio has shown a overall dismal performance during the initial stage of the study period. It indicates the company was in financial distress. The inventory was no gradual improvement, but, from 2004-05 ratios 4.15 was improving into 7.65 in 2007-08.

Debtors Turnover Ratio has also started with a poor ratio of 1.06 but from the year 2002-03 ratio was 1.04 increased into 1.39 in 2006-07, but the last year the ratio decreased into 0.86.

The outcomes of the working capital investment efficiency test can be depicted in the following schematic way.
 

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Source: E-mail January 20, 2011

          

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