Report 3

WORKING CAPITAL MANAGENT AND PROFITABILITY OF A FIRMS A CASE
STUDY OF JSWL VIJAYNAGARA WORKS
EXECUTIVE SUMMARY
This project “Working capital management and profitability of a firms: a case
study of Jindal South West Steel Ltd, Vijaynagara Works” deals to ascertain this
efficiency of working capital management of the company.
Working capital may be regarded as lifeblood of business; working capital is needed to
meet the day-to-day requirement of the business unit. The exploitation of working
capital assets is possible only by efficient working capital management. This study on
working capital management is conducted in JSW Steel Ltd.
Working capital management not only shows the financial efficiency of business, but
also its credit worthiness, which has gained importance in these days of credit squeeze.
Therefore, study of the management of working capital is very necessary. Objective of
the project was to study the pattern and procedures followed for managing various
components of working capital, so as to evaluate the efficiency of working capital
management. So, this study intends to comprehensively evaluate the inventory,
receivables, creditors and cash management. The study also aims to analyze the
alternative sources of working capital financing employed by JSW Steel Ltd,
Vijaynagara Works.
Secondary data were collected from various sources including the annual reports of the
company for the year 2004-05, 2005-06, 2006-07, 2007-08, and 2008-09.
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INTRODUCTION
One of the vital aspects of company’s financial management is to manage its current
assets and the current liabilities in such a way that a satisfactory level of working
capital is maintained. Working capital management means administration of all aspects
or working capital i.e. current assets and current liabilities. Firm has to manage it
properly in order to attain its goal of wealth maximization.
MEANING
Working capital is that part of total capital which is used for carrying out routine
business operations. In simple terms, working capital is the capital with which the
business of the company is worked over. Working capital is the life blood of business
and it is the controlling system of every business firm.
The working capital management is concerned with the problems that arise in
attempting to manage the current assets and current liabilities and the interrelationships
that exist between them. This tries to evolve how much funds to be invested in each
type of current assets and what should be the proportion of long term funds to short
term funds and which are the sources that are ideal for financing current assets.
SIGNIFICANCE OF THE WORKING CAPITAL
To fulfill its endeavor to maximize the shareholder’s wealth, firm has to earn sufficient
return from its operations, which needs a successful sales activity, the firm has to
invest sufficient funds in current assets to succeed in sales, as the sale do not convert
into cash instantaneously because of time gap between the sale of goods and actual
receipts in cash. Hence there is a need for working capital in the form of current assets
to sustain sales activity during that period. Since cash inflows and cash out flow don’t
match, firms have to necessarily keep cash or investment in short term liquid securities
to fulfill its obligations as and when they become due.
The adequate stock of inventory provides a cushion against being out of stock and help
as a guard to meet the demand for its products. To be competitive, the firm must sell its
products to their customers on credit, which necessitates the holding of accounts
receivables therefore an adequate level of working capital is absolutely necessary for
the smooth sales activities, which in turn enhance the owner’s wealth.
• The working capital need arises for the following purpose:
• For purchasing raw materials, components and spare parts
Working capitalOn the basis of concepts On the basis of time
Net working
capital
Gross working
capital
Permanent
working capital
Variable
working
Seasonal
working capital
Special working
capital
Initial working
capital
Regular
working

.
INVENTORY MANAGEMENT
Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the
cash resources of a business. Insufficient stocks can result in lost sales, delays for
customers etc. the day is to know how quickly your overall stock is moving or, put
another way, how long each item of stock sit on shelves before being sold. Obviously,
average stock-holding periods will be influenced by the nature of the business..
The key issue for a business is to identify the fast and slow stock movers with the
objectives of establishing optimum stock levels for each category and thereby minimize
the cash tied up in stocks. Factors to be considered when determining optimum stock
levels include:
The broad range of project management and financial advisory services include:
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• What are the projected sales of each product?
• How widely available are raw material, component etc?
• How long does it take for delivery by supplier?
• Review the effectiveness of existing purchasing and inventory system
• Apply tight controls to the significant few items and simplify controls for the trivial
many
• Consider having part of your product outsourced to another manufacturer rather than
make it yourself.
• Review your security procedures to ensure that no stock “is going out the back door”
BENEFITS OF HOLDING INVENTORY
The second element in the optimum inventory decisions deals with the benefits
associated with holding the inventory. The major benefits of holding the inventory are
the basic function of inventory. In other words, inventories perform certain basic
functions which are of crucial importance in the firm’s production and marketing
strategies since inventories enable uncoupling of the key activities of the firm, each of
them can be operated at the most efficient rate. This has several beneficial effects on the
firm’s operations. The effects of uncoupling are follows.
BENEFITS OF PURCHASING: if the purchasing of raw materials and other goods is
not tied to production/sales, that is, a firm can purchase independently to ensure the
most efficient, purchase, several advantages would become available. In the first place,
a firm can purchase larger quantities than is warranted by the usage in production or
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sales level. Second the firms can purchase the goods before the anticipated or
announced price increase. This will lead to declining in the cost of production.
BENEFITS IN PRODUCTION: finished goods inventories serves to uncouple the
production and sale. This enables production at a rate different from that of sale. That is
production can be carried on at a rate higher or lower than the sales rate. The levels of
production are more economical as it allows the firms to reduce the costs of
discontinuities in the production process.
BENEFITS IN WORK IN PROGRESS: The inventory of work in process performs
two functions. In the first place, it is necessary because production processes are not
instantaneous. The amount of such inventory depends upon technology and the
efficiency of production. The larger the steps involved in the production process, the
larger the work in process inventory and vice-versa.
BENEFITS IN SALES: The maintenance of inventory also helps a firm to enhance its
sales efforts. For one thing, if there are no inventories of sales will depend upon the
level of production. A firm will not be able to meet demand instantaneously. There will
be a time lag depending upon the production process. If the firm has inventory, actual
sales will not have not depend on lengthy manufacturing processes.
MOTIVES OF EXTENDING THE TRADE CREDIT
OPERATING MOTIVE: Anxiety of the producer to deep its manufacturing function
insulated from the vagaries of the market.
MARKETING MOTIVE
• Entering to new market
• Increasing market share in existing market
• Means of price discrimination in a very competitive market
FINANCIAL MOTIVE: Seller having a better access to the capital than its
competitors would profit by giving trade credit to the latter.
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CREDIT EVALUATION
Sourcing credit information:
• Bankers of the customer
• Other supplier to the customer
FINANCIAL ANALYSIS OF THE PROSPECTIVE CLIENT
• Fixed asset turnover ratio
• Inventory turnover ratio
• Creditors turnover ratio
• Debt service coverage ratio
SUBJECTIVE EVALUATION
• Capacity
• Capital
• Condition
• Character
CREDIT SCORING
• Altman Z score
• Weighted average score based on the ratios analysis for the customer
DEBTORS MANAGEMENT IN JSW
• Small customer
• Large customer
• Advance
• Discount policy
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The steel major JSW ESSAR ISPAT
Debtors turnover 38.23 15.56 13.50
Average collection
period (days)
9.54 23.45 27.00
Source: Company annual report – (2004-05, 2005-06, 2006-07, 2007-08, 2008-09)
CASH MANAGEMENT
Cash is the liquid money, which a firm can disburse immediately without any
restriction. The term “cash” includes coins, currency and cheques held by the firm and
balances in its bank accounts. Sometimes near cash items, such as marketable securities
or bank deposits are also included in cash. The basic characteristics of cash assets are
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JSW 2008 2007 2006 2005 2004
Debtors
turnover
43.36 38.23 26.79 19.94 10.36
Average
collection
period
(days)
8.41 9.54 13.62 18.30 35.23

that they can readily be converted into cash, and we invest it in marketable securities.
The kind of the investment contributes some profit to the firm.
Approximately 1.5% of the average industrial firm’s assets are held in form of cash
which is defined as deposits plus currency. Cash is often called as “non-earning asset”.
It is needed to pay for labor and raw materials, to buy fixed assets, to pay taxes, to
service debts, to pay dividends and so on however, cash itself earns no interest. Thus
the goal of the firms must hold for use in conducting its normal business activities. It is
the same time it should have cash.
• To take trade discounts
• To maintain its credit rating
• To meet unexpected cash needs
CASH MANAGEMENT TECHNIQUE OR PROCEDURES
• Improving forecasts of cash flows
• Synchronizing cash inflows and outflows
• Speed up the cheque clearing process
• Using float
• Accelerating collections
• Getting available funds to where they are needed
• Controlling disbursements
STATEMENT OF THE PROBLEM
The working capital is the most critical problem in financial management. Importance
of working capital management system from two reasons viz..,
• A substantial portion of total investment is invested in current assets
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• Level of current assets and current liabilities will change quickly with the variation in
sales.
• The level of working capital, which can be determined, by the level of current asset and
current liability.
• The composition of current assets and current liabilities.
REVIEW OF LITERATURE
• Shin & Soenen (1998), In intention to discover the relationship between efficient
working capital management and firm’s profitability used net-trade cycle (NTC) as a
measure of working capital management. NTC is basically equal to the CCC whereby
all three components are expressed as a percentage of sales. The reason by using NTC
because it can be an easy device to estimate for additional financing needs with regard
to working capital expressed as a function of the projected sales growth.
• Eljelly (2004), The following ones were very interesting and useful for our research:
elucidated that efficient liquidity management involves planning andcontrolling current
assets and current liabilities in such a manner that eliminates the risk of inability to
meet due short-term obligations and avoids excessive investment in these assets. The
relation between profitability and liquidity was examined, The study found that the cash
conversion cycle was of more importance as a measure of liquidity than the current
ratio that affects profitability. The size variable was found to have significant effect on
profitability at the industry level.
• Ghosh and Maji (2003), in this paper made an attempt to examine the efficiency of
working capital management of the Indian cement companies during 1992 – 1993
to2001 – 2002. For measuring the efficiency of working capital
management,performance, utilization, and overall efficiency indices were calculated
instead of using some common working capital management ratios. Setting industry
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norms as target-efficiency levels of the individual firms, this paper also tested the speed
of achieving that target level of efficiency by an individual firm during the period of
study. Findings of the study indicated that the Indian Cement Industry as a whole did
not perform remarkably well during this period.
• The above review of literature reveals that these studies are largely conduction to assess
various aspects of Working Capital Management and Profitability of a firms however
any made an attempt to changes working capital management, these for the present
study is conducted with the following objectives.
NEED AND IMPORTANCE OF STUDY
To fulfill its endeavor and to maximize the shareholder’s wealth, firm has to earn
sufficient return from its operations, which needs a successful sales activity. The firm
has to invest sufficient funds in current assets to succeed in sales, as the sale do not
convert into cash instantaneously because of time gap between the sale of goods and
actual receipts in cash. Hence there is a need for working capital in the form of current
assets to sustain sales activity during that period. Since cash inflows and cash outflows
don’t match, firms have to necessarily keep cash or investment in short term liquid
securities to fulfill its obligations as and when they become due. The adequate stock of
inventory provides a cushion against being out of stock and help as a guard to meet the
demand for its products. To be competitive, the firm must sell its products to their
customers on credit, which necessitates the holding of accounts receivables therefore an
adequate level of working capital is absolutely necessary for the smooth sales activities,
which in turn enhance the owner’s wealth.
The working capital need arises for the following purpose:
• For purchasing raw materials, components and spare parts
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• For paying wages and salaries
• To incur day-to-day expense and overhead costs like fuel, power and office expense
etc.
• To meet selling costs of packing advertising etc….
• To provide credit facilities to customers
OBJECTIVES OF STUDY
• To study the efficiency of working capital management of the company
• To analyze the working capital trends in the company
• To study the efficiency of cash, inventory and receivables management of the
company.
• To understand and analyze the working capital position of JSW Steel Ltd. During the
period of 2004-05 to 2008-09.
• To study the pattern and procedures followed for managing various components of
working capital.
• To measure the overall financial position of the organization with the help of ratio
analysis.
SCOPE OF STUDY
Since the decision regarding working capital are of an operating nature not one time
decision, the scope of the study is geared towards identifying important areas of control
and to establish model for better control of the various components of working capital
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The study would also attempt to identify the various sources available for financing of
working capital.
The study gives a fair idea of improvement in efficiency of working capital
management and also to have proper control over the components of working capital
and managing of efficiency.
METHODOLOGY
Desk research method is adopted for this study. The required information was collected
through secondary sources.
Secondary data were collected from various sources including the annual reports of the
company for the years between 2004-05 to 2008-09.
Referring to books from Jindal knowledge centre
SECONDARY DATA
Secondary data is the data which is already collected by someone else and which is
used for our study purpose. It is the data, which gives relevant information in the
different fields wherever we want. There are different sources of secondary data
collection.
Following are secondary source of data:
• Internet
• Reference materials
• The company annual reports (challengers)
LIMITATION OF THE STUDY
• This study deals only with the data made available. Hence the result of this study
cannot judge the business of the firm in general.
• The study has been influenced by the limitation of the ratio analysis.
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• The study extensively uses the data provided in the financial reports of the firm which
may also have their own limited perspective.
• The analysis made on the working capital management is for a particular period of time
the current assets and current liabilities will change for an analysis made at any other of
time
“EVALUATING THE FINANCIAL PERFORMANCE OF JSW STEEL LTD”
WORKING CAPITAL MANAGEMENT
SCHEDULE SHOWING WORKING CAPITAL FOR THE FINANCIAL YEARS
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(Rs in crores)
Table4.1: Gross Working Capital of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
A. Current assets
Inventories 743.41 924.23 1011.35 1549.16 2051.42
Sundry debtors 266.60 229.19 245.16 337.39 398.14
Cash and bank
balance
122.49 98.87 337.80 339.22 419.96
Loans and
advances
761.50 979.42 549.28 840.42 1744.88
Other current
assets
---------- 513.70 342.04 19.81 17.24
Total current assets
or gross working
capital
1894.00 2745.41 2485.63 3086.00 4631.64
(Rs in corors)
Table 4.2: Net working capital of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
A. Current assets
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Inventories 743.41 924.23 1011.35 1549.16 2051.42
Sundry debtors 266.60 229.19 245.16 337.39 398.14
Cash and bank
balance
122.49 98.87 337.80 339.22 419.96
Loans and
advances
761.50 979.42 549.28 840.42 1744.88
Other current
assets
--------- 513.70 342.04 19.81 17.24
Total current assets or
gross working capital
1894.00 2745.41 2485.63 3086.00 4631.64
B. Current liabilities
Liabilities 1375.95 1926.86 2210.51 3738.12 7476.28
Provisions 232.31 393.26 75.22 363.71 80.93
Total current liabilities 1608.26 2320.12 2285.73 4101.83 7557.21
(A-B)= Net working
capital
285.74 425.29 199.90 (1015.83) (2925.57)
LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its obligations in the short-run, usually
one year. Liquidity ratios are generally based on the relationship between current assets
(the sources for meeting short term obligations) and current liabilities. The important
liquidity ratios are: current ratio, acid-test ratio and cash ratio.
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CURRENT RATIO
This is most widely used ratio to know the capital position. This ratio expresses the
relationship between current assets and current liabilities. This ratio gives the
information about firm ability to meet short term and long term working capital.
Components of Current Ratio
Current Assets Current Liabilities
Cash in hand
Cash at bank
Marketable securities (short-term)
Short term investment
Bills Receivable
Sundry Debtors
Inventories (stock)
Work-in-progress
Prepaid Expenses
Outstanding or accrued expenses
Bills payable
Sundry creditors
Short-term advances
Income-tax payable
Dividends payable
Bank overdraft (if not permanent
arrangement)
Current assets
Current Ratio = ---------------------------------
Current Liabilities
Table4.3:Current Ratio of JSWL for 2004-05to2008-09
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Graph4.3: Current Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
Page 17
Particulars/years 2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
Current Assets 1894 2745.4
1
2485.6
3
3086 4631.64
Current Liabilities 1608.2
6
2320.1
2
2285.7
3
4101.8
3
7557.21
Current Ratio 1.18 1.18 1.09 0.75 0.61

The above table and graph shows that the current ratio of the company was 1.18:1 in
the year 2004-05 which has been maintained same as 1.08:1 in the year 2005-06. In the
year 2006-07 it has been reduced to 1.09:1 which further decreased to 0.75:1 in the year
2007-08 and 0.61:1 in the year 2008-09, which is below 1. The standard current ratio
should be 1.33:1 but in 2007-08 and 2008-09 the current ratio of the company is less
than one. Even though we find variation in the current ratio, the company met its
current obligations or current liabilities by making huge profits. The ratio presents the
margin of safety.
QUICK RATIO
Liquid ratios express the relationship between liquid assets and liquid liabilities. The
ideal ratio for a concern is 1:1. This ratio measures the repayment of immediate
liabilities.
Current Assets-Inventory
Acid test Ratio = ------------------------------------------
Current Liabilities
(Rs in crores)
Table4.4: Quick Ratio of JSWL for 2004-05to2008-09
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05
2005-
06
2006-
07
2007-
08
2008-
09
Quick Assets 1150.5
9
1821.1
8
1474.2
8
1536.8
4
2580.22
Current Liabilities 1608.2
6
2320.1
2
2285.7
3
4101.8
3
7557.21
Quick Ratio 0.72 0.79 0.65 0.38 0.34

Graph4.4: Quick Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
The above table and graph shows that the quick ratio of the company was 0.72:1 in the
year 2004-05 which has been increased to 0.79:1 in the year 2005-06. But in the year
2006-07 it has been reduced to 0.65:1 and which has been further reduced to 0.38:1 in
the year 2007-08 and 0.34:1 in the year 2008-09. The company has not maintained
more than the standard quick ratio of 1:1 for all the above years. It shows that the
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company is not maintaining its liquidity position up to standard ratio so it should give
importance to improve the liquidity position.
1. CASH RATIO
It is the ratio of cash equivalent balance to current liability; it can be calculated as
follows
Cash
Cash Ratio = ---------------------------------
Current Liability
(Rs. In Crores)
Table4.5: Cash Ratio of JSWL for 2004-05to2008-09
05
2005-
06
2006-
07
2007-
08
2008-
09
Cash 122.49 98.87 337.8 339.22 419.96
Current
Liability
1608.2
6
2320.1
2
2285.7
3
4101.8
3
7557.21
Cash Ratio 0.08 0.04 0.15 0.09 0.06
Graph4.5: Cash Ratio of JSWL for 2004-05to2008-09
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INTERPRETATION
The above table and graph shows that the cash ratio of the company was 0.08 in the
year 2004-05 which has been decreased to 0.04 in the year 2005-06. In the year 2006-
07 it has increased to 0.15 and again in the year 2007-08 it has decreased to 0.09 and
further decreased to 0.06 in the year 2008-09. Which is not near to standard ratio 0.5:1
lack of immediate cash may not matter if the firm can stretch its payment or borrow
money at short notice if it is not able to do this, firm should maintain adequate cash and
bank balance to meet short term obligations.
LEVERAGE RATIOS
Financial leverage refers to the use of debt finance. While debt capital is cheaper
source of finance, it is also riskier source of finance. Leverage ratios help in assessing
the risk arising from the use of debt capital. Two types of ratios are commonly used to
analyze financial leverage; structural ratios and coverage ratios. Structural ratios are
based on the proportions of debt and equity in the financial structure of the firm. The
important structural ratios are: debt-equity ratios and debt asset ratio.
DEBT EQUITY RATIO
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The debt-equity ratio shows the relative contribution of creditors and owners. It is
defined as:
Debt
Debt-equity Ratio = -------------------------------
Equity
(Rs in crores)
Table4.6: Debt-Equity Ratio of JSWL for 2004-05to2008-09
Particulars/years 2004-05 2005-06 2006-07 2007-08 2008-09
Debt 3568.44 4096.05 4173.03 7546.53 11272.63
Equity 3149.72 4356.22 5594.05 7677.25 7959.25
Debt-Equity
ratio
1.13 0.94 0.75 0.98 1.42
Graph4.6: Debt-Equity Ratio of JSWL for 2004-05to2008-09
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INTERPRETATION
The above table and graph shows that the debt equity ratio is 1.13:1 in the year 2004-05
which has been decreased to 0.94:1 in the year 2005-06. In the year 2006-07 debt-
equity ratio decreased to 0.75:1 and it is increased in the year 2007-08 to 0.98:1. In
2008-09 it has been increased to 1.42 times. It shows that the high ratio shows a large
share of financing by the creditors of the firm; a low ratio implies a smaller claim of
creditors.
DEBT TO ASSET RATIO
The debt to asset ratio measures the extent to which borrowed funds supports the firm’s
assets. It can be defined as
Debt
Debt to asset ratio = -------------------
Asset
(Rs in crores)
Table4.7: Debt to Asset Ratio of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Debt 3568.44 4096.05 4173.03 7546.53 11272.63
Asset 7291.62 9194.30 10779.74 16475.62 20653.04
Debt to
asset ratio
0.49 0.45 0.39 0.46 0.55
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Graph4.7: Debt to Asset Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
The above table and graph shows that the debt to asset ratio is 0.49 times in the year
2004-05 which has been decreased to 0.45 times in the year 2005-06. In the year 2006-
07 debt to asset ratio decreased to 0.39 times and in the year 2007-08 it has been
increased to 0.46. In the year 2008-09 it has been increased to 0.55 times. This ratio
indicates that extent to which borrowed funds support the firm’s assets. In terms of
company increase the asset proportion compare to debt proportion regarding this
company is efficiency in management, the company not depend on the external funds.
TURN OVER RATIOS
Turn over ratios, also referred to as activity ratios or assets management ratios. Measure
how efficiently the assets are employed by a firm. These ratios are based on the
relationship between the level of activity, represented by sales or cost of goods sold,
and levels of various assets. The important turnover ratios are: inventory turnover ratio,
average collection period, receivables turnover ratio, fixed assets turnover ratio and
total assets turnover ratio.
INVENTORY TURNOVER RATIO
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This ratio indicates the number of times inventory is replaced during the year. It
measures the relationship between the cost of goods sold and the inventory level. The
ratio can be compared in two ways
Sales COGS
Inventory turnover ratio = ---------------------------- or --------------------------
Closing inventory Avg inventory
(Rs in crores)
Table4.8: Inventory Turnover Ratio of JSWL for 2004-05to2008-09
Sales 6679.36 6180.10 8554.36 11420.00 14001.25
closing
Inventory
743.41 924.23 1011.35 1549.16 2051.42
Inventory
turnover ratio
8.98 6.68 8.46 7.37 6.83
Graph4.8: Inventory Turnover Ratio of JSWL for 2004-05to2008-09
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INTERPRETATION
The above table and graph shows that the inventory turnover ratio is 8.98 times in the
year 2004-05. In the year 2005-06 inventory turnover ratio decreased to 6.68 times and
which has been increased to 8.46 times in the year 2006-07. This ratio indicates how
fast the inventory is converted into sales. Here high ratio implies good inventory
management. In the year 2004-05 was higher ratio maintained a good inventory
management but in coming year 2005-06 and 2006-07 decrease compared to 2004-05
now its maintained good inventory management. In the year 2007-08 and in the year
2008-09 it has been decreased 7.37 times and 6.83 times compare to 2006-07.
RAW MATERIAL TURNOVER RATIO
Raw material turnover ratio can be defined as
Raw material consumed
RMTR = ----------------------------------------
Avg stock of raw material
(Rs in crores)
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Table4.9: Raw Material Turnover Ratio of JSWL for 2004-05to2008-09
Raw material
consumed
2887.97 3112.05 3964.00 5888.53 8735.70
Average stock of
raw material
327.69 473.88 546.54 715.00 810
Raw material
turnover ratio
8.81 6.57 7.25 8.23 10.79
Source: Company annual report – (2004-05, 2005-06, 2006-07, 2007-08, 2008-09
Graph4.9: Raw Material Turnover Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
The above table and graph shows that the raw material turnover ratio is 8.81 times in
the year 2004-05 which has been decreased to 6.57 times in the year 2005-06 and which
has been increased to 7.25 in the year 2006-07 and further increased to 8.23 times in the
year 2007-08. In the year 2008-09 it has been increased to 10.79 times. This ratio
indicates how fast the raw material is converted into sales. So the company needs to
improve this ratio.
Raw material conversion period: It can be defined as:
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365
Raw material conversion period = ---------------------------------------------
Raw material turns over ratio
(In days)
Table4.10:Raw material conversion period of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
No of days in a year
(365 days)
365 365 365 365 365
Raw material turns
over ratio
8.81 6.57 7.25 8.23 10.79
Raw material
conversion period
41 55 50 44 34
WIP TURNOVER RATIO
Work in progress can be defined as:
Cost of production
WIP turnover ratio = ----------------------------------
Average WIP
(Rs. In Crores)
Table4.11: WIP Turnover Ratio of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Cost of production 4225.30 4306.95 5602.15 7791.42 11963.339
Average WIP 38.40 80.27 72.27 63.10 88.08
WIP turnover ratio 110.03 53.66 77.52 123.48 135.824
INTERPRETATION
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The above table and graph shows that the work in progress turnover ratio is than half to
53.66 times in the year 2005-06 and increased to 77.52 times in the year 2006-07 but
later in the year it has been increased to 123.48 times in the year 2007-0and further
increased to 123.52 times in the year 2008-09. The ratio indicates how fast the WIP is
converting in to sales. So the company needs to improve this ratio further.
WIP conversion period: It can be defined as:
365
WIP conversion period = -------------------------------
WIP turnover ratio
(In Days)
Table4.12: WIP Conversion Period of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
No of days in a year 365 365 365 365 365
WIP turnover ratio 110.003 53.66 77.52 123.48 135.824
WIP conversion
period
3 7 5 3 3
FINISHED GOODS TURNOVER RATIO
It can be defined as
Cost of goods sold
FGTR = -------------------------------------------
Average finished goods
Page 29

(Rs in crores)
Table4.13:Finished Goods Turnover Ratio of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Cost of goods sold 4318.27 4395.47 5602.38 8032.00 11721.069
Average finished
goods
60.60 150.80 195.18 315.58 328.38
Finished goods
turnover ratio
71.26 29.15 28.70 25.45 35.69
Graph4.13:Finished Goods Turnover Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
The above table and graph shows that the finished goods turnover ratio is 71.90 times
in the year 2004-05, which has been decreased to 29.15 times in the year 2005-06, in
the year 2006-07 the ratio decreases to 28.70 times and in the year 2007-08 it has been
still decreased to 25.45, this ratio indicates how fast the finished goods are converted
into sales. The finished goods turnover has to be improved by the company.
Page 30

FINISHED GOODS CONVERSION PERIOD It can be defined as
365
Finished goods conversion period = ------------------------------------------
Finished goods turnover ratio
(In days)
Table4.14: Finished goods Conversion period of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
No of days in year 365 365 365 365 365
FG turnover ratio 71.90 29.15 28.70 25.45 35.69
FG conversion period 5 13 13 14 11
DEBTOR TURNOVER RATIO
This ratio shows how many times sundry debtors turn over during the year. It can be
defined as
Credit sales
Debtors turnover ratio = ----------------------------
Average debtors
(Rs. In crores)
Table4.15: Debtor Turnover Ratio of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Credit sales 6679.36 6180.10 8594.44 11420.00 14001.25
Average Debtors 336.66 247.89 243.21 291.27 367.5
Debtors turnover
ratio
19.84 24.93 35.34 39.20 38.11
Page 31

Graph4.15: Debtor Turnover Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
The above table and graph shows that the debtor turnover ratio is 19.84 times in the
year 2004-05, which has been increased to 24.93 times in the year 2005-06 and which
has been further increased to 35.34 times in the year 2006-07. It indicates that the speed
of collection of credit sales is increasing every year from 2004-07. In the year 2007-08
it has been increased 39.20 and further decreased to 38.11 in the year 2008-09. It shows
that the shortened time span between the credit sales and cash collection. Higher the
turnover ratio and shorter the average collection period, the better is the trade credit
management and the better is the liquidity of debtors, as shorter collection period and
high turnover implies prompt payment on the part of debtors. If lower the turnover ratio
and long collection period reflect delayed payment by debtors. In this case short
collection period (high turnover ratio) is preferable.
Average collection period: It can be defined as:
365
Average collection period = --------------------------------
Debtors turnover ratio
Page 32

(In days)
Table4.16: Average Collection period of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
No of days in a year 365 365 365 365 365
Debtors turnover
ratio
19.84 24.93 35.34 39.20 38.11
Avg collection
period
18 15 11 9 10
INTERPRETATION
This is the ratio which indicate the extent to which debt have been collected in time. It
indicates the average time taken by the firm to collects it debt. In short, it is the ratio,
which indicates the average collection period or the average period of credit allowed to
debtors. In the year 2007-08 average collection period decreased but further in 2008-09
it has increased by 1 day
FIXED ASSET TURNOVER RATIO
This ratio measures sales per rupee of investment in fixed assets. It is defined as
Net sales
FATR = --------------------------------
Average fixed assets
Page 33

(Rs in crores)
Table4.17: Fixed Asset Turnover Ratio of JSWL for 2004-05to2008-09
Net sales 6679.36 6180.10 8594.44 11420.00 14001.25
Average fixed
assets
5835.81 7402.79 9285.98 13380.00 15424.54
Fixed asset
turnover ratio
1.14 0.83 0.93 0.85 0.91
Graph4.17: Fixed Asset Turnover Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
The above table and graph shows that the fixed asset turnover ratio is 1.14 times in the
year in the 2004-05 which has been decreased to 0.83 times in the year 2005-06 In the
year 2006-07 it has been increased to 0.93 times and further it has been decreased to
0.85 times in the year 2007-08 and further increased to 0.91 in the year 2008-09. This
ratio is to measure the efficiency with which fixed assets are employed- a high ratio
indicates a higher degree of efficiency in asset utilization and a low ratio reflects
inefficient use of assets. In this case company utilizing the assets efficiently.
Page 34

WORKING CAPITAL TURNOVER RATIO
Working capital of a concern is directly related to sales this ratio measures the
efficiency with which working capital is being used by a company. It can be defined as:
Net sales
WCTR = ----------------------------------
Net working capital
(Rs in crores)
Table4.18: Working Capital Turnover Ratio of JSWL for 2004-05to2008-09
Net Sales 6679.36 6180.10 8594.44 11420.00 14001.25
Net working capital 285.74 425.30 193.45 (1015.83) (2925.57)
Working capital
turnover ratio
23.37 14.53 44.43 (11.24) (4.79)
Graph4.18: Working Capital Turnover Ratio of JSWL for 2004-05to2008-09
Page 35

INTERPRETATION
The above table and graph shows that the working capital turnover ratio is 23.37
times in the year 2004-05 and in the year 2005-06 it has been decreased to 14.53 times.
In the year 2006-07 working capital turnover ratio has increased to 44.43 times. It
shows that higher the ratio indicates the efficient utilization of working capital and in
the year 2007-08 and in the year 2008-09 it goes to negative value of 11.24 times and
4.79 times respectively; this lower ratio indicates inefficient management of working
capital.
CURRENT ASSET TURNOVER RATIO
Net sales
Current asset turnover ratio = -------------------------
Current assets
(Rs in crores)
Table4.19: Current Asset Turnover Ratio of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Net Sales 6679.36 6180.10 8594.44 11420.00 14001.25
Current assets 1894.00 2745.41 2485.63 3086.00 4631.64
Current asset
turnover ratio
3.53 2.25 3.46 3.70 3.02
Graph4.19: Current Asset Turnover Ratio of JSWL for 2004-05to2008-09
Page 36

INTERPRETATION
The above table and graph shows that the current asset turnover ratio is 3.53 times in
the year 2004-05 which has been decreased to 2.25 times in the year 2005-06. In the
year 2006-07 current asset turnover ratio increased to 3.46 times and in the year 2007-
08 it increases to 3.70 times and further decreases to 3.02 times in the year 2008-09. It
shows that the ability of the company to generate sales per rupee of current asset which
has been increasing and decreasing every year which has to be improved by the
company in coming years.
TOTAL ASSET TURNOVER RATIO: It can be defined as:
Net Sales
Total asset turnover ratio = --------------------------------
Average Total asset
(Rs in crores)
Page 37

Table4.20: Total Asset Turnover Ratio of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Net Sales 6679.36 6180.10 8594.44 11420.00 14001.25
Average
Total assets
7285.21 11125.30 11812.73 19653.92 26960.14
Total assets
turnover
ratio
0.92 0.56 0.73 0.58 0.52
Graph4.20: Total Asset Turnover Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
The above table and graph shows that the total asset turnover ratio is 0.92 times in the
year 2004-05, which has been decreased to 0.56 times in the year 2005-06. In the year
2006-07 the total asset turnover ratio has been increased to 0.73 times, which has been
further decreased to 0.58 times in the year 2007-08. This ratio measures that efficiency
of the management and utilization of assets, here in the year 2004-05 the total asset
turnover ratio is high means more efficiency and utilization of assets in that year. In the
year 2005-06 lower the turnover ratio under utilization of available resources and
presence of idle capacity. In 2007-08 and in 2008-09 the turnover ratio is decreased.
SALES TO CURRENT ASSETS RATIO:It can be defined as
Page 38

Net Sales
Sales to current asset ratio = ------------------------
Current asset
(Rs in crores)
Table4.21: Sales to Current Asset Ratio of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Net Sales 6679.36 6180.10 8594.44 11420.00 14001.25
Current assets 1894.00 2745.41 2485.63 3086.00 4631.64
Sales to current
asset ratio
3.53 2.25 3.46 3.70 3.02
Graph4.21: Sales to Current Asset Ratio of JSWL for 2004-05to2008-09
INTERPRETATION
Page 39

The above table and graph shows that the sales that the sales to current asset turnover ratio is
3.53 times in the year 2004-05 which has been decreased to 2.25 times in the year 2005-06.
In the year 2006-07 sales to current asset turnover ratio increased to 3.46 times and further
increased to 3.70 times in the year 2007-08 and later decreased to 3.02 times in the year
2008-09. This ratio indicates that how the company utilize the current asset. In the current
situation so this shows efficiency at the company to use its current assets to a maximum
extend to get a maximum output and it also measures sufficient utilization of working capital.
(In days)
Table4.22: Operating cycle and Cash cycle of JSWL for 2004-05to2008-09
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Raw material holding
period
41 55 50 44 34
Work-in-progress
period
3 7 5 3 3
Finished goods period 5 13 13 14 11
Average payment period 18 15 11 9 10
Gross operating cycle 67 90 79 70 58
Less ACP(Average
Creditors Payment)
Period
56 56 55 9 59
FINDINGS
Page 40

• The net working capital has been decreased over its study period of 2004-05 to 2008-
09
• The current ratio has reduced 1.18 to 0.61 crore over its study period
• The quick ratio has reduced in the year in the year 2006-07 when compared to 2005-
06. And that continually declined
• The debt- equity ratio has been increased in the year 2008-09 when compared to
2007-08.
• The inventory turnover ratio has been reduced in the year 2008-09 when compared to
2007-08.
• The fixed asset turnover ratio has increased in the year 2008-09 when compared to
2007-08.
• The working capital turnover ratio has reduced in the year 2008-09 when compared
to 2007-08. But it is still negative
• The total asset turnover ratio has reduced in the year 2008-09 when compared to
2007-08
SUGGESTIONS
• Good and efficient utilization of funds should be made.
• The net working capital should be improved.
• Company has to maintain sound current ratio in future.
• The company has to improve the inventory turnover ratio.
• The company has to maintain efficient working capital management.
Page 41

RECOMMENDATIONS
• The company has good sales & returns, and it adopts cost reduction techniques.But
still the company as suffering negative working capital. The negative working capital
is the one of the source of working capital but it doesn’t mean the company can
depend on the external fund (current liabilities) so in order to maintain a standard ratio
and share holders interest the company has to introduce the new source for working
capital. We have two alternatives one is equity and debt. But the company has debt
equity ratios 1.24 and WACC 8.22. The debt equity ratio is already more than the
limit so company better to rise the fund through equity. We are shore it will not
impact the EPS and the value of share in future because of the company has good
strength, opportunities and the govt. Given the more facilities to industrial sectors, so
the sales will not come down. That will give more returns.
• While analyzing the financial department of the company we come to know that the
company still didn’t adopt any cash management techniques and the company
suffering from negative balance even though the company has good receivable
management and creditors management. At the year end the company had Rs 4,19.96
crore balance. It shows the company doesn’t have good cash management. So we are
recommending the company should be adopt a cash management techniques, that is
miller -Orr model.
Page 42

CONCLUSION
This report includes the in depth analysis of working capital management. On the
basis of the analysis following conclusions has been made.
• JSW is a growing company and the third largest producer of steel in India.
Production of other items is also increasing because domestic and international demand
of steel products is continuously rising.
• With the ongoing expansion activities, working capital carries immense importance in
an organization such as JSW.
• Trade creditors, amount owed by the business for supplies and services, are a plus in
the working capital equation. The higher the figure, the more has been extended by
other (usually at no cost) towards working capital needs. But there are limits to the
good news. Firms that go beyond agreed credit limits run into trouble; they lose out on
cash discounts, can incur interest charges, and upset their find themselves in court with
additional costs and penalties to pay. Therefore, companies should try to find out the
ways to delay the payments to its creditors so that more funds are available for daily
operations.
• Cash management is a very important element of the working capital management.
Forecasting is thus a planning tool. There are many kinds of forecasts are done in a
business. Like sales forecasts, production forecasts, material, machinery etc. All these
forecast are based on accrual basis. Cash forecasting is very important in the realm of
overall business forecasting. It is concerned with every segment of business
environment,
• Be it permanent or temporary, capital or revenue, income or expenses.
• In 2008 the American recession affects Indian steel industries a lot, the prices of steel
came down but in spite of that the Jindal has done well in the market.
Page 43

BIBLIOGRAPHY:
1. Eljelly A. (2004), ‘Liquidity-Profitability Tradeoff: An empirical Investigation in
An Emerging Market’ International Journal of Commerce & Management, 14(2), 48
– 61
2. Chandra,Prasanna(1992), Financial Management Theory and Practice, Tata
McGraw Hill Publishing Company limited, New Delhi.
3. Grag . M.C (1994), ‘Working Capital Management in Marketing Federation a
case study of the Rajasthan state Co-Operative Marketing Federation’ India
Journal of Finance.Vol11 No06
4. Lazaridis, I., & Tryfonidis, D. (2006), ‘Relationship between Working Capital
Management and Profitability of Listed Companies in the Athens Stock
Exchange’ Journal of Financial Management and Analysis, 19(1), 26-35.
5. Lyroudi, K., & Lazaridis, Y. (2000), ‘The Cash Conversion Cycle and Liquidity
Analysis of the Food Industry in Greece’ [Electronic Version]. EFMA 2000
Athens, from http://ssrn.com/paper=236175.
6. Shin, H. H., & Soenen, L. (1998 and ), ‘Efficiency of Working Capital
Management Corporate Profitability’. Financial Practice and Education, 8(2), 37-
45.
7. Raheman, A. & Nasr, M. (2007), ‘Working capital management and profitability’
– case of Pakistani firms. International Review of Business Research Papers, 3 (1),
279-300.
Page 44

8. Smith, K. V. (1980), Profitability and liquidity trade off in working capital
management. In Reading on the Management of Working capital (pp. 549-562).
St. Paul: West Publishing Co.
9. Padachi, K. (2006), ‘Trends in working capital management and its impact on
firms performance’ an analysis of Mauritian small manufacturing firms.
International Review of Business Research Papers, 2(2), 45-58.
10. Ghosh, S. K. and Maji, S. G. (2003), ‘Working Capital Management Efficiency: A
study on the Indian Cement Industry’, The Institute of Cost and Works Accountants of
India
WEBSITES
• http://ssrn.com/paper=236175.
• www.bizresearchpapers.com/Kesseven.pdf
• www.docstoc.com/.../EFFECT-OF-WORKING-CAPITAL-MANAGEMENT-ON-
PROFITABILITY-OF-FIRMS-IN-/-
• www.jswl.com
• http://www.bsu.edu/mcobwin/majb/?p=64
• http://www.flipkart.com/book/working-capital-management-bhattacharya-
hrishikes/8120336364
Page 45

SUMMARY OF PROFIT AND LOSS ACCOUNT
“PROFIT AND LOSS ACCOUNT OF JSW STEEL LIMITED FOR 5 YEARS”
Page 46

Page 47
Particulars 2008-09 2007-08 2006-07 2005-06 2004-05
Income
1.Gross turnover 15179.29
12628.9
1 9337.34 6766.09 8690.13
Less: Inter divisional transfer ----------- ---------- -------- ---------- (1654.23)
Gross Sales 15179.29
12628.9
1 9337.34 6766.09 7035.90
Less: Excise duty 1178.04 1208.91 742.90 (585.99) (356.54)
Net Sales 14001.25
11420.0
0 8594.44 6180.10 6679.36
2.Other Income 259.56 259.14 105.15 382.96 18.98
14260.81
11677.1
4 8699.59 6563.06 6698.34
Expenditure
3.Cost of Materials 8450.10 5693.85 4029.95 2981.20 2848.88
4.Manufacturing & other expenses 2429.29 2097.57 1572.20 1325.75 1376.42
5.Employees Remuneration & Benefits 288.75 273.98 175.47 127.04 107.21
6.Interest & Finance charges 797.25 440.44 399.54 360.32 469.87
7.Depreciation 827.66 687.18 498.23 405.82 359.54
8.Miscellanous expenditure written-off
-----------
- ---------- 109.02 61.79 60.48
12793.05 9193.02 6784.41 5261.92 5222.40
Profit before Exceptional items &
taxation 1467.76 2484.12 1915.18 1301.14 1475.94
9.Exceptional Items 790.13 ---------- ---------- ---------- (3.33)
Profit before Taxation 677.63 ----------- ---------- 1301.14 1472.61
10.Provision for Taxation 219.13 755.93 623.18
Current Tax ----------- ---------- ---------- 79.50 74.50
Deferred Tax ----------- ---------- ---------- 357.35 528.00
Profit after Taxation 458.50 1728.19 1292.00 856.53 870.11
11.Profit/(Loss) brought forward from
earlier year 3505.86 2267.56 1331.66 719.57 (131.90)
Amount Available for Appropriations 3964.36 3995.75 2623.66 1576.10 738.21
12. Appropriations
Transfer to debenture redemption
reserve 20.45 23.30 39.48 (17.00) 25.00
Dividend on preference shares (28.99) (29.06) (27.90) 27.90 47.5
Interim dividend on equity shares ----------- ---------- (204.98) --------- 38.71
Proposed final dividend on equity
shares (18.71) (261.87) ---------- 125.58 64.52
Tax on equity and preference dividend (8.11) (49.44) (33.49) 21.53 20.58
Transfer to General reserve (45.85) (172.82) (129.21) 86.43 87.02
Balance carried to balance sheet 3883.15 3505.86 2267.56 1331.66 454.88
Earnings per share
Basic 22.70 95.26 80.11 55.57 64.98
Diluted 22.70 94.18 78.88 55.57 59.66

Summary of Balance Sheet
“Balance Sheet of JSW Steel Limited for 5 years”
Particulars 2008-09 2007-08 2006-07 2005-06 2004-05
Sources of Funds
1.Shareholder’s Funds:
Share Capital 537.01 537.01 525.80 497.06 469.13
Reserves and Surplus 7422.24 7140.24 5068.25 3859.16 2680.59
7959.25 7677.25 5594.05 4356.22 3149.72
2.Loan Funds:
Secured loans 8214.61 5497.08 3632.50 4058.71 3568.44
Unsecured loans 3058.02 2049.45 540.53 37.34 -----------
11272.63 7546.53 4173.03 4096.05 3568.44
3.Deffered tax liability-net 1421.16 1251.84 1012.66 742.03 573.46
Total 20653.04 16475.62 10779.74 9194.30 7291.62
Application of Funds
1.Fixed Assets
Gross block 16896.75 13952.32 10512.76 8368.43 7520.30
Less: depreciation 3810.31 2996.83 2323.66 1850.45 1443.91
Net block 13086.44 10955.49 8189.10 6517.98 6076.39
Capital WIP 9242.06 5612.43 2002.93 1861.90 349.30
22328.50 16567.92 10192.03 8379.88 6425.69
2.Investments 1250.11 923.53 192.94 85.08 229.57
Page 48

3.Current assets, Loans &
advances
Inventories 2051.42 1549.16 1011.35 924.23 743.41
Sundry Debtors 398.14 337.39 245.16 229.19 266.60
Cash & Bank balance 419.96 339.22 337.80 98.87 122.49
Loans & Advances 1744.88 842.15 549.28 979.42 761.50
Other current assets 17.24 18.62 342.04 513.70 ----------
4631.64 3086.54 2485.63 2745.42 1894.00
Less: Current liabilities &
Provisions
Liabilities 7476.28 3666.36 2210.51 1926.86 1375.95
Provisions 80.93 436.01 75.22 393.26 232.31
7557.21 4102.37 2285.73 2320.12 1608.26
Net Current Assets (2925.57
)
(1015.83
)
199.90 425.30 285.74
4.Miscellaneous
Expenditure
----------- ----------- 194.87 304.04 350.62
Total 20653.04 16475.62 10779.74 9194.30 7291.62
Page 49

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