SUMMER TRAINING REPORT SUBMITTED TOWARDS THE

PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN

INTERNATIONAL BUSINESS

“ANALYSIS OF WORKING CAPITAL FOR

ANSAL BUILDWELL LTD.”

SUBMITTED TO SUBMITTED BY
Col. Mohan Nitish Gautam

UGDIB+BBA

ROLL NO.

BLS INSTITUTE OF EDUCATION

MOHAN NAGAR – UTTAR PRADESH

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 COMPANY CERTIFICATE

TO WHOM IT MAY CONCERN

This is to certify that Ankit Goel , a student of Amity International Business School,
Noida, undertook a project on “Working Capital Analysis” at Dharampal Satyapal
Ltd. from 1st May’09 to 30th June’09.

Mr. Ankit Goel has successfully completed the project under the guidance of Mr.
Neeraj Goel. He is a sincere and hard-working student with pleasant manners.

We wish all success in his future endeavors.

Signature with date

(Name)

(Designation)

(Company Name)

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 CERTIFICATE OF ORIGIN

This is to certify that Mr. Ankit Goel, a student of Post Graduate Degree in MBA-IB
(2008-2010), Amity International Business School, Noida has worked in the
Dharampal Satyapal Ltd. under the able guidance and supervision of Mr.Neeraj Goel,
(Manager finance), Company Birla Power Ltd.

The period for which he was on training was for 8 weeks, starting from 1st May’09 to
30th June’09. This Summer Internship report has the requisite standard for the partial
fulfillment the Post Graduate Degree in International Business. To the best of our,
knowledge no part of this report has been reproduced from any other report and the
contents are based on original research.

Signature Signature

( FACULTY GUIDE ) ( Student )

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 ACKNOWLEDGEMENT

I express my sincere gratitude to my industry guide Mr zxcvbnm, (Manager ),

(Company) Ansal Buildwell Ltd, for his able guidance, continuous support and
cooperation throughout my project, without which the present work would not have
been possible.

I would also like to thank the entire team of Ansal Buildwell Ltd, for the constant
support and help in the successful completion of my project.

Also, I am thankful to my faculty guide Shamshul Haq of my institute, for his

continued guidance and invaluable encouragement.

Signature

(Student)

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 TABLE OF CONTENTS
S.No. Chapter Name Page No.
CH. 1.0 Executive Summary
Ch. 2-0 Research Methodology

2.1 Project Objectives

2.2 Methodology Adopted
2.3 Schedule
2.4 Scope Of Study

2.5 Limitations
Ch. 3.0 Company Profile
3.1 Industry Profile
Ch. 4.0 Evaluation Of Financial Position

4.1 Comparative Studies

Ch. 5.0 Critical Review Of Literature

5.1 Concept Of Working Capital

5.2 Operating & Cash Conversion Cycle

5.3 Balanced Working Capital Position

5.4 Determinents Of Working Capital

5.5 Issues In Working Capital Management

5.6 Estimating Working Capital Need

Ch. 6.0 Findings & Analysis & Observations

Ch. 7.0 Recommendations

Ch. 8.0 Bibliography

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 EXECUTIVE SUMMARY

The management of current assets deals with determination, maintenance, control and
monitoring the level of all the individual current assets. Current assets are referred to
as assets, which can normally be converted into cash within one year therefore
investment in current assets should be just adequate no more no less” to the needs of
the business. Excessive investments in current assets should be avoided, because it
impairs firm’s profitability, as idle investment in current assets and are non-
productive and so they can earn nothing, on the other hand inadequate amount of
working capital can threaten solvency of the firm, if it fails to meet its current
obligations.

Thus the working capital is a qualitative concept

1. It indicates the liquidity position of the firm and

2. It suggests the extent to which working capital needs may be financed by

permanent source of fund. Current assets should be sufficiently in excess of
current liabilities to constitute a margin or buffer for maturing obligation
within the ordinary cycle of business.

The basic learning objective behind the study was-

• Computation of Working Capital Management

• Operating Cycle of the firm

• Financial plan estimated for 2007-2008 and projected for 2008-2009

• Working capital credit limits

• Ratio analysis

On the basis of above calculations following conclusions can be made-

• Birla power ltd. has both long term as well as short term sources for current
asset financing. It implies that company follows matching principle for raising
funds.

• Right now company is following aggressive policy, which means that

company is maintaining lower ratio of current assets to fixed assets.

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 • Birla power solutions ltd has high collection peri0od which shows that money
has been unnecessarily blocked with the debtors.

So to overcome the above problems following are the recommendations—

• Increase the proportion of current assets over fixed assets to come to proper
proportion of current assets and fixed assets as per the basic norms and
guidelines.

• Company should shift from aggressive policy to conservative current assets

policy.

• Company should reduce the holiday period else the company will have to pay
high carrying cost.

RESEARCH METHODOLOGY
PROJECT OBJECTIVE

• The project is aimed at evaluating the financial status of Ansal Buildwell Ltd
and then doing the comparative analysis with its competitors

• Studying the working capital management at Ansal Buildwell Ltd. and

estimating the working capital requirements for 2009-2010 and then
forecasting for 2010-2011

• To find out if there is any relationship between the working capital, sales and
current assets of Birla Power

METHODOLOGY

The methodology to be adopted for the project is explained as under:

1. The initial step of the project was studying about the company and then
evaluating the financial position of the company on the basis of ratio
analysis.

2. Comparing the firm’s financial position with respect to its competitors i.e.
Parsvnath Developers Ltd, Sobha Developers Ltd, Omaxe Ltd with the
help of following ratios-

• Liquidity ratios

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 • Solvency/Leveraging ratios

• Coverage ratios

• Activity/turnover ratios

• Profitability ratios

• Investors ratios

, The project will focus on the study of overall working capital management at the
organizations, for which the following study and analysis will be undertaken:

i ) This project is aimed to estimate the operating plan for the year 2009-2010

ii ) This will also include the calculations and analysis of the operating cycle for the
company.

Iii ) Study of C M A form and to prepare for the current year.

Iv) It will also include the ratio analysis of the financial statement so that the
profitability and liquidity trade off can be analyzed.

SCHEDULE

The complete project will be for duration of 8 weeks. The project has been divided
into 2 stages with approximate time period allotted to each stage. Both the stages
along with their approximate timelines are as follows:

STAGE 1 (APPROX 2 WEEKS)

The study of company’s financial position by doing ratio analysis of the financial
statement so that the profitability and liquidity condition of the organization can be
studied closely and then comparing it with the financial statements of Parsvnath
Developers Ltd, Sobha Developers Ltd, Omaxe Ltd .

STAGE 2 (APPROX 6 WEEKS)

The study of the overall working capital management of the company will be the first
stage. Under this stage the operating plan will be prepared and the study and analysis
of the C M A form will be done. This will include the estimation of working capital

8
requirement for 2010-2011, forecasting for 2011-2012 and regression analysis and T
test for finding out the relationship between working capital, sales and current assets.

SCOPE OF THE STUDY

Studying working capital management of the Ansal Buildwell ltd and benchmarking it
with 3 of its competitors.

LIMITATIONS

In spite of my continued efforts to make the project as accurate and wide in scope as
possible, certain limitations are becoming evident while implementing the project.
These limitations cannot be removed and have to be accepted as permanent
constraints in implementing the project.

Some limitations, which have been identified, by me are:

1. Generalizations and calculated assumptions had to be made in some

areas while analyzing the financial statements, ratios etc. due to non-
availability of complete information.

2. The segment wise and product wise study of the various product
segments and units of the company have been excluded from the scope
of the project due to data and time constraints.

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 COMPANY PROFILE
Company overview

The Ansal Group is amongst the handful of Indian corporates that have built a global
reputation through a culture of innovation and excellence. Four decades ago, this
dynamic enterprise altered Delhi's corporate skyline. Today, its activity profile
encompasses the entire gamut of real estate development and construction activity,
both in India and abroad.

Bearing testimony to Ansals' unmatched expertise are a host of high-rise commercial

and residential complexes, environmental upgradation projects, farm lands, hi-tech
engineering projects, schools, technical and professional institutes, industrial estates,
etc.

Colonization is yet another thrust area for Ansals. Several modern townships have
been developed by the group with various infrastructural facilities and amenities.

In the hospitality segment, Club Florence is an exclusive lifestyle avenue which will
resonate as an enthralling social platform for leisure and recreation.

Vision and mission

Vision

To be rated as a company that should be emulated as the benchmark for processes and
practices in the real estate and construction segment.

To outperform peer groups through innovation and quality, and by offering customer-
oriented products at the most competitive prices with timely delivery, corporate
governance and management accountability.

Mission

It is our mission not only to house the homeless and achieve difficult engineering
feats by building beautiful edifices and landmarks for posterity, but also to grow and
progress without sacrificing basic and real values of life. We believe in sustainable
development and construction to provide lasting contribution towards a healthy,
happy and wholesome quality of life for the people of the world.

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Business Profile

Ansal Buildwell (ANSALBU) has business activity encompassing the entire gamut of
real estate development and construction, both in India and abroad. It was
incorporated as a private limited company on Dec. 29, 1983, got converted into a
public limited company on Jul. 16, 1985, and got its present name on Nov. 24, 1992.
The company is part of the Ansal group, a real estate conglomerate of around 35
companies with listed companies like Ansal Properties and Industries and Ansal
Housing and Construction; and private limited companies like Ansal Engineering
Projects, Ansal Club, Ansal Hotels, Star Estates Management, Sunrise Management
and Estate, Rigoss Exports International and Rigoss Estates Network.

The ISO 9001:2000 certified company operates in the business verticals of real estate
promotion and development, environmental upgradation, turnkey hi-tech projects,
design, engineering and consultancy, construction contracts, hospitality, overseas
operations and facilities management. Major landmarks include shops, commercial
complexes, shopping malls, and developed townships such as Sushant Lok I, II and
III; South Delhi; Ansal Krsna - I and II, Ansal`s Riverdale in Kochi, Ansal Forte in
Bangalore, Ansal`s Green Valley in Dehradun and Prakash Enclave in Moradabad.

On the hospitality front, the company has completed projects like Harmony Club and
Club Florence is under development. Major townships under development are Ansal
City in Kochi and Amritsar and a group housing project in Jhansi. It has bagged the
SLA 2006 - Winner award for North Luxury, Premium and Econony awarded by
Smart Living. Land is being acquired in Jaipur, Gwalior and Jhansi for development
of plotted and independent housing schemes. Rahul Buildwell, Rahul Township, A.C.
Shelters and A.C. Infrastructure & Development, all in Nepal, are subsidiaries.

The registered office is located at 118 Prakashdeep Building, Upper 1st Floor, 7,
Tolstoy Marg, New Delhi-110001.

Financials

The company disclosed a substantial drop in standalone net profit for the quarter
ended December 2008. During the quarter, the profit of the company declined 41.19%
to Rs 10.11 million from Rs 17.19 million in the same quarter last year. Net sales
declined 28.18% to Rs 233.66 million, while total income for the quarter fell 27.49%
to Rs 236.04 million, when compared with the prior year period.

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Key Executives:Gopal Ansal , Chairman & Managing Director

R L Gupta , Whole-time Director

Gaurav Mohan Puri , Whole-time Director

Subhash Verma , Director

Company Head Office / Quarters:118 Prakashdeep Building,

Upper 1st Floor 7 Tolstoy Marg,

New Delhi,

New Delhi-110001

Phone : 91-11-23353051 / 23353052

Fax : 91-11-23310639

E-mail : ansalabl@vsnl.com

Web : http://www.ansalabl.com

Registrars:Link Intime India Pvt Ltd

A-40 II Flr Phase-II

Naraina Indl Area

Near Batra Banquet

New Delhi - 110 028

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 Overview of Real Estate Industry
The real estate sector in India
The Indian real estate sector involves the development of commercial offices,
industrial facilities, hotels, restaurants, cinemas, residential housing, retail outlets and
the purchase and sale of land and land development rights.

Historically, the real estate sector in India has been unorganized and characterized by
various factors that impeded organized dealing, such as the absence of a centralized
title registry providing title guarantees, a lack of uniformity in local laws and their
application, non-availability of bank financing, high interest rates and transfer taxes
and the lack of transparency in transaction values in recent years, however, the real
estate sector in India has exhibited a trend towards greater organization and
transparency, accompanied by various regulatory reforms. These reforms include.

• Gol support for the repeal of the Urban Land Ceiling Act, with nine state
governments having already repealed the Act;

• Modifications in the Rent Control Act to provide greater protection to

homeowners wishing to rent out their properties.

• Rationalization of property taxes in a number of states; and

• Computerization of land records.

Real estate investments are expected to grow from Rs. 10,218 billion invested
between 2002-2006 to Rs. 19,517 billion over 2007-2011.

Total construction investments (Rs. Billion) %

Fiscal Fiscal CARG*
years years
2002-2006 2007-2011

Real scale 10,218 18,517 12.63

 Housing 9,810 17,338 12.06
 Commercial real estate 408 1,179 23.64
*CAGR: Compound Annual Growth Rate
Source: CRISIL Research Construction Annual Review (May 2007)
Residential real estate

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The main factors that are driving demand in the residential segment are described in
more detail below:

Changing demographics and increasing affluence

India’s demographics have been impacted by large increases in employment

opportunities, people in the earning age bracket (25 to 44 year olds) and higher
salaries. Such factors are increasing disposable incomes and driving demand for new
residential and retail properties.

The table below shows historic and projected annual growth rates for different
segments of India’s population, classified by levels of annual income. The figures
highlight that strong growth is expected especially in the higher income segments. For
example, the number of households with annual incomes of between Rs. 2 million and
Rs. 5 million per year, Rs. 5 million and Rs. 10 million per year and in excess of Rs.
10 million per year is expected to increase in size by 23%, 26% and 28%,
respectively, between financial year 2002 and 2010, all illustrated by the table.

These higher income segments of India’ growing middle class are expected to provide
a strong impetus for the continued development and growth of the Indian real estate
sector.

Househol Househol Househol Expected Expected CAGR CAGR CAGR

d Income d in FY96 d in FY02 households households (FY96- (FY02- (FY06-
(Rs. Mm (*000) (*000) in FY06 in FY10 02) (%) 06) (%) 10) (%)
p.a.) (*000) (*000)
10 5 20 52 141 26.0 27.0 28.3
10 to 5 11 40 103 255 24.0 26.7 25.4
5 to 2 63 201 454 4.037 21.3 22.6 22.9
2 to 1 189 546 1.122 2.373 10.3 10.7 20.6
1 to 0.5 651 1,712 3,212 6,173 17.5 17.0 17.7
0.5 to 0.2 3,881 9,034 13,188 22,268 15.1 9.9 14.0
0.2 to 28,901 41,262 53,276 75,304 6.1 6.6 9.0
0.009
0.009 131,176 135,378 132,249 114,394 0.5 (0.6) (3.6)
Total 164.877 188.193 20.3.656 221.945

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Large segment of the population economically active:

India’s growing population in the earning age bracket is recognized as a key driver of
growth in housing demand. The size of India’s main working age group, 25 to 44 year
olds, has increased hover the last two of decades. According to CRIS INFAC
estimates, as of 2005, approximately 28.2% of India’s population was in this age
bracket. This figure is expected to rise to approximately 30.5% by 2025, an increase
of approximately 5.5 million people each year, which could translate into a further
2.75 million new households per year. Also, the average age of a hoe purchaser has
fallen from 42 to 31 years old (Source: CRISINFACT Retail Finance, July 2006).

Source: UN Population Division 2002 Revision and CRIS INFAC

Shift in consumer preference from renting to owing houses:

Due to the changing demographic profile in India, there has been a steady decline in
the portion of households living in rented premises. To a certain extent, this may be
attributed to rising income levels. However, with fewer properties available to rent
today and an increase in the rents being charged to tenants, consumers have
increasingly been investing in property. Factors such as the increase in the standard of
living of consumers and the greater availability of financing for consumers are
expected to a fuel a further decline in the number of households renting premises
(CRIS INFAC Annual Review on Housing Industry, January 2006).

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 Urban areas (per unit)
Year Owned Hired Others Total
1981 44.6 50.6 4.6 100.00
1991 63.0 34.0 3.0 100.00
2001 60.7 33.8 5.5 100.00
2002 60.0 33.9 6.1 100.00
Rural areas
1981 91.2 3.4 5.4 100.00
1991 95.0 3.0 2.0 100.00
2001 92.9 4.3 2.8 100.00
2002 93.1 4.1 2.8 100.00
Source MUDPA MOSPI NSSO and CRIS INFAC

Increasing Urbanization:

India has witnessed a trend of increased urbanization as people migrate from rural to
urban areas seeking employment opportunities. According to CRIS INFAC estimates,
India’s urban population is expected to grow at a CAGR of 2.6% over the five year
period from financial year 2005 through 2010, as illustrated in the table below. Urban
areas must accommodate this increase in population which, in turn, is expected to
increase in demand for new urban areas and townships (CRIS INFAC Annual Review
on Housing Industry, January 2006).

(in thousands)
Growth in 2001 2005 2010 CAGR (fiscal 2005 to
Population fiscal 2010)
Urban 285,355 316,921 360,590 2.60%
Rural 741,600 775,575 818,488 1.10%
Total 1,027,015 1,092,496 1,179,078 1.50%
Source: CRIS INFAC

Shrinking Household Size:

India’s traditional joint family (or multi-occupant) residences are gradually being
replaced by individual or smaller nuclear family residences. For example, according
to CRIS INFAC, the average size of Indian households decreased from approximately
5.52 persons in 1994 to approximately 5.30 persons in 2001. This trend to expected to
continue as factors such as increasing urbanization and migration for employment
opportunities cause a decrease in the size of the average Indian household to an
estimated 5.05 persons by 2011. Given India’s increasing population, such contraction

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in the size of the average household is expected to increase demand for housing
(Source: CRIS INFAC Annual Review on Housing Industry, January 2006).

P Projected

Source: Census 2001 BMPTC and CRIS INFAC

Slum Rehabilitation Scheme (“SRS”):

One sector of the real estate development market that is unique to Mumbai is it’s
Slum Rehabilitation Scheme. In 1995, the Government of Maharashtra initiated the
Slum Rehabilitation Scheme to be administered by the newly-created Slum
Rehabilitation Authority (SRA). The objective of the SRS is to redevelop slums in the
Mumbai area. Through the scheme, slum dwellings are replaced by residential
buildings containing flats of 225 square feet that are constructed free of cost to former
slum dwellers by private real estate developers participating in the scheme. The
government of Mumbai subsidizes this clearance and construction by granting
developers the right to develop a proportion of former slum land for their own
purposes, or by granting them transferable development rights (“TDRs”) which may
be used to develop land elsewhere in Mumbai north of the slum land concerned. In

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other words, in exchange for the construction of flats for slum dwellers, real estate
developers are allowed to construct residential, commercial and retail properties on
slum land, whether it is government or private land, which they can they freely sell.
Moreover, TDRs permit developers to develop land in certain parts of Mumbai that
are outside the rehabilitated slum area. A TDR is made available in the form of a
certificate issued by the municipal corporation of Mumbai, and its owner can use it
either for actual construction or can sell it on the open market. Residential
development on slum land that is subject to the SRS also benefits from a superior
Floor Space Index (FSI) allowance which determines the total permitted construction
areas a portion of the total land area of a site. Under the SRS, the FSI is generally
around 2.5 as against a normal FSI of 1.33 thereby making SRS development more
attractive for developers. Moreover, the SRS can enable a developer to acquire land in
prime locations in Mumbai, a city where the scarcity of land is a constraint on real
estate development. The acquisition can be made at, in effect, lower cost (e.g., the
cost of constructing replacement housing for the slum dwellers) than traditional
purchases of land for cash, thereby reducing the asset cycle risk for the developer
between land acquisition and sale of developed property of FSI/TDRs. The innovative
subsidy mechanism of the SRS has spurred redevelopment activity in certain deprived
areas of Mumbai which were previously unattractive to real estate developers. In
addition to helping fulfill the social obligations of the government, which does not
have the resources to undertake rehabilitation projects on a large scale, an on-going
benefit of the SRS to the government of Mumbai includes the addition of individuals
to the tax rolls when they occupy new housing who, as slum dwellers, were not
previously part of the tax base.

Commercial Real Estate

Commercial locations in India: Over the past five years, locations such as
Bangalore, Gurgaon, Hyderabad, Chennai, Kolkata an d Pune have established
themselves as emerging business destinations that are competing with traditional
business destinations such as Mumbai and Delhi, especially with respect to their
commercial real estate sector. These emerging destinations have succeeded in
matching their human resources base with necessary skill sets, competitive business
environments, operating, operating cost advantages and improved urban
infrastructure. The current relative position of the urban growth centers in India can

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be summarized either as (i) mature (ii) in transition, (iii) emerging, or (iv) tier III
destinations. These classifications are described below:

Tier III Cities: Locations such as Jaipur, Coimbatore, Ahmedabad, and Lucknow
have a large talent pool combined with low cost real estate. As such, business in the
technology sector have demonstrated a growing interest in these locations as they seek
to expand their operations.

The Retail Segment:

While real estate development in the retail sector is a relatively new phenomenon in
India, the retail sector has been growing rapidly. A.T. Kearney’s 2005 Global Retail
Development Index suggests that the Indian retail market has the largest growth
potential of worldwide retail markets. The following factors contribute to the
emergence and growth of the organized retail segment in India.

• Increase in per capita income and household consumption;

• Changing demographic and improve standards of living;

• Changing consumption patterns and access to low-cost consumer credit

• Infrastructure developments and increased availability of retail space.

Historically, the Indian retail sector has been dominated by small independent local
retailers such as traditional neighborhood grocery stores. However, during the 1990s,
organized retail outlets gained increased acceptance due to changing demographic
factors such as an increase in the number of women working, changes in the
perception of branded products, the entry of international retailers into the market and
the growing number of retail malls. The size of the organized retail segment is
expected to grow by 25% to 30% per year, reaching approximately Rs. 1,095 billion
of sales in 2010. Although operators in the organized retail segment have
concentrated on larger cities, retailers also have announced expansion plans into
towns and rural areas. Major Indian business group such as Reliance, Bennett &
Colemna, Hindustan Lever, Hero Group and Bharti as well as international retailers
such as Metro, Shoprite, Lifestyle and Dairy from International Wal-Mart, Carrefour
and Tesco have already commenced or are considering commencing operations in
India. There are 219 operational shopping malls in the six largest cities of India,
spread over 66 million square feet of land at an average size of 0.3 million square feet

19
per mall (CRIS INFAC Annual Review on Retailing Industry – September 2005). A
significant number of specialized malls, such as automobile, jewellery, furniture and
electronic malls also are being developed.

Recent reforms in the Indian real estate sector

Foreign direct investment in real estate: In 2005, the government modified the
foreign direct investment (FDI) rules applicable to the real estate sector by permitting
100% FDI with respect to certain real estate projects such as townships, housing,
built-up infrastructure and construction development projects, subject to a number of
guidelines. The new FDI rules mainly relate to the minimum area requird to be
developed by such a project, minimum amounts to be invested and time limits within
which such a project must be completed.

Housing regulations: The Indian Government enacted the Urban Land (Ceiling and
Regulation) Act (“ULCRA”) in 1976 to prevent speculation and profiteering in land
and to ensure equitable distribution of land in urban areas in order to server the
common good. Pursuant to ULCRA, urban cities were classified into A, B and C
categories. The act imposed a ceiling on the amount of vacant land that any individual
can posses in a particular urban area, based on the classification of the city in
question. In ‘A’ class cities, such as Delhi and Mumbai , this amounts to no more than
500 square meters. The excess land identified was acquired by the government after
compensating the owners thereof and used to provide housing to various sections of
the public. However, it is widely acknowledged that ULCRA has failed to achieve its
objective and has resulted in inflated prices and exacerbated housing shortages. The
Government therefore suggested the repeal of ULCA by way of the Urban Land
(Ceiling and Regulation) Repeal Act 1999 (“Repeal Act”), which has so far been
adopted by the state governments of Haryana, Punjab, Uttar Pradesh, Gujarat,
Karnataka, Madhya Pradesh, Rajasthan and Orissa, but has not been repealed in a
number of states, including Maharashtra where Mumbai is located.

Challenges Facing the Indian real estate sector

Highly regional reach of existing players: Considering the peculiar features of the
real estate sector such as the differing tastes of population across various geographies,
difficulties in mass and acquisition on unfamiliar tertian, absence of business
infrastructure to market projects at new locations, wide number of approvals to be

20
obtained from different authorities at various stages of construction under the local
laws, and the long gestation period of projects, most real estate developers in India
tend to hover in tried and tested areas where the conditions are most familiar to them.
As a result, currently there are very few players in the country, who can claim to have
pan-national area of operations.

Majority of market belonging to unorganized segment: The Indian Real Estate

Sector is highly fragmented with the disorganized segment comprising of the small
builders and contractors accounting for a majority of the housing units constructed.
As a result, there is a lesser degree of transparency in dealings or sharing of data
across players.

Demand dependent on many factors: A challenge that the real estate developers
face is generating the requisite demand for the properties constructed. The factors that
influence a customer’s choice in property is not restricted to quality alone, but is
dependent on a number of other external factors including proximity to urban areas,
amenities such as schools, roads, water supply which are often beyond the developer’s
sphere of reach. Also, demand for housing units is also influenced by policy decision
relating to housing incentives.

Increasing Raw Material Prices: Construction activities are often funded by the
client who makes cash advances at different states of construction. In other words, the
final amount of revenue from a project is pre-determined and the realization of this
revenue is scattered across the period of construction. A big challenge that real estate
developers face is dealing with adverse movements in costs. The real estate sector is
dependent on a number of components such ad cement, steel, bricks, wood, sand,
gravel and paints. As the revenues from sale of units are pre-decided, adverse price
changes in any of the raw materials directly affect the bottom lines of the developers.

Interest Rates: One of the main drivers of the growth in demand for housing units is
the availability of finance at cheap rates. Rising interest rates may dampen the growth
rate of demand for housing units.

Tax incentives: Interest payment on housing loans are tax deductible and it is one of
the major factors influencing demand. The phasing out available tax incentives could
affect the existent demand for housing units.

21
FINANCIAL ANALYSIS

LIQUIDITY RATIOS (SHORT- TERM LIQUIDITY)

Liquidity ratios measure the short term solvency, i.e., the firm’s ability to pay its
current dues and also indicate the efficiency with which working capital is being used.

Commercial banks and short-term creditors may be basically interested in the ratios
under this group. They comprise of following ratios:

• CURRENT RATIO OR WORKING CAPITAL RATIO

Current ratio is a relationship of current assets to current liabilities.

‘current assets’ means the assets that are either in the form of cash or cash
equivalents or can be converted into cash or cash equivalents in short time(say within
a year) like cash, bank balances, marketable securities, sundry debtors, stock, bills
receivables, prepaid expenses.

‘Current liabilities’ means liabilities repayable in as short time like sundry creditors,
bills payable, outstanding expenses, bank overdraft.

Computation. The ratio is calculated as follows:

Current ratio = Current assets

Current liabilities

Objective.

• The ratio is mainly used to give an idea of the company's ability to pay
back its short-term liabilities with its short-term assets.

• The higher the current ratio, the more capable the company is of paying its
obligations. A ratio under 1 suggests that the company would be unable to pay
off its obligations if they came due at that point.

• While this shows the company is not in good financial health, it does not
necessarily mean that it will go bankrupt - as there are many ways to access
financing - but it is definitely not a good sign.

• The current ratio can give a sense of the efficiency of a company's operating
cycle or its ability to turn its product into cash.

22
 • An acceptable current ratio varies by industry. For most industrial companies
1.5 is an acceptable CR. A standard CR for a healthy business is close to 2.

• However, a blind comparison of actual current ratio with the standard current
ratio may lead to unrealistic conclusions. A very high ratio indicates idleness
of funds, poor investment policies of the management and poor inventory
control, while a lower ratio indicates lack of liquidity and shortage of working
capital.

Ansal
Buildwell Parsvnath Shobha Omaxe
Current ratio Ltd. Developers Developers Ltd.
2010 3.12 3.05 3.10 4.21

Inference

Ansal Buildwell Ltd. is in a better position to meet its short term obligations as can be seen
by a high current ratio. This is mainly due to high proportion of Loans & Advances and a
significantly low proportion of Debtors.
The ratio is acceptable in case of Parsvnath Developers & Shobha Developers
For Omaxe Ltd. the ratio is high mainly due to significantly high debtors and Loans & Advances

• Liquid ratio or Quick ratio or Acid test ratio

Liquid ratio is a relationship of liquid assets with current liabilities. It is fairly

stringent measure of liquidity.

Liquid assets are those assets which are either in the form of cash or cash equivalents
or can be converted into cash within a short period. Liquid assets are computed by
deducting stock and prepaid expenses from the current assets. Stock is excluded from
liquid assets because it may take some time before it is converted into cash. Similarly,
prepaid expenses do not provide cash at all and are thus, excluded from liquid assets.

Computation. The ratio is calculated is as under:

Liquid ratio= Liquid assets

Current liabilities

23
Objective.

• The ratio of current assets less inventories to total current liabilities. This ratio
is the most stringent measure of how well the company is covering its short-
term obligations, since the ratio only considers that part of current assets
which can be turned into cash immediately (thus the exclusion of inventories).

• The ratio tells creditors how much of the company's short term debt can be
met by selling all the company's liquid assets at very short notice. also called
acid-test ratio.

• The current ratio does not indicate adequately the ability of the enterprise to
discharge the current liabilities as and when they fall due. Liquid ratio is
considered as a refinement of current ratio as non-liquid portion of current
assets is eliminated to calculate the liquid assets. Thus it is a better indicator of
liquidity.

• A quick ratio of 1:1 is considered standard and ideal, since for every rupee of
current liabilities, there is a rupee of quick assets. A decline in the liquid ratio
indicates over-trading, which, if serious, may land the company in difficulties.

Ansal
Buildwell Parsvnath Shobha Omaxe
Quick Ratio Ltd. Developers Developers Ltd.
2010 1.60 1.56 1.07 3.85

Inference

Ansal Buildwell Ltd. is better off than Parsvnath Developers and Shobha Developers in
meeting the short -term debts by selling all the
liquid assets of the company at a very short notice.
May be that Parsvnath Developers and Shobha Developers are indulged in over-trading.
The company should try to keep quick
ratio greater than 1. Omaxe Ltd. is also in an excellent position with a high Quick Ratio.

SOLVENCY/LEVERAGE RATIOS (LONG-TERM SOLVENCY)

The term ‘solvency’ implies ability of an enterprise to meet its long term indebt ness
and thus, solvency ratios convey the long term financial prospects of the company.

24
The shareholders, debenture holders and other lenders of the long-term finance/term
loans may be basically interested in the ratios falling under this group.

Following are the different solvency ratios:

• Debt-equity Ratio

The debt-equity ratio is worked out to ascertain soundness of the long term financial
policies of the firm. This ratio expresses a relationship between debt (external
equities) and the equity (internal equities).

Debt means long-term loans, i.e., debentures, public deposits, loans (long term) from
financial institutions. Equity means shareholder’s funds, i.e., preference share capital,
equity share capital, reserves less losses and fictitious assets like preliminary
expenses.

Computation. Te ratio is calculated as under:

Debt-Equity Ratio = Debt (Long-term Loans)

Equity (shareholder’s funds)
Objective.

• The objective of this ratio is to arrive at an idea of the amount of capital

supplied to the concern by the proprietors and of asset ‘cushion’ or cover
available to its creditors on liquidation of the organization.equity.

• It also indicates the extent to which the firm depends upon outsiders for its
existence. In other words, it portrays the proportion of total funds acquired by
a firm by way of loans.

• A high debt-equity ratio may indicate that the financial stake of the creditors is
more than that of the owners. A very high debt-equity ratio may make the
proposition of investment in the organization a risky one.

• While a low ratio indicates safer financial position, a very low ratio may mean
that the borrowing capacity of the organization is being underutilized.

• The debt/equity ratio also depends on the industry in which the company
operates. For example, capital-intensive industries such as auto manufacturing
tend to have a debt/equity ratio above 2, while personal computer companies
have a debt/equity of under 0.5.

25
 • The readers of financial management may remember that to borrow the funds
from outsiders is one of the best possible ways to increase the earnings
available to the equity shareholders, basically due to two reasons:

a) The expectations of the creditors in the form of return on their investment are
comparatively less as compared to the returns expected by the equity shareholders.

b) The return on investment paid to the creditors is a tax-deductible expenditure.

Ansal
Debt Equity Buildwell Parsvnath Shobha Omaxe
Ratio Ltd. Developers Developers Ltd.
2010 1.29 0.71 0.85 1.13

Inference

In Parsvnath Developers there is greater use of capital being supplied by the proprietor.
Borrowing capacity is being underutilised.
For Ansal Buildwell Ltd. and Omaxe Ltd.the proportion of debt to shareholders fund is almost same.
However, there is greater use of long term debt in Ansal Buildwell Ltd. as compared to Omaxe Ltd.

26
 • Total Assets to Debts Ratio

The total asset to debt ratio establishes a relationship between total assets and the total
long-term debts.

Total assets include fixed as well as current assets. However, fictitious assets like
preliminary expenses, underwriting commission, share issue expenses, discount on
issue of shares/debentures, etc., and debit balance of profit and loss account are not
included. Long-term debts refer to debts that will mature after one year. It includes
debentures, bonds, and loans from financial institutions.

Computation. This ratio is computed as under:

Total Assets to Debt Ratio = Total Assets

Long-term debts
Objective.

• This ratio is computed to measure the safety margin available to the providers
of long-term debts. It measures the extent of coverage provided to long term
debts by the assets o the firm.

• A higher ratio represents higher security to lenders for extending the long-term
loans to the business. On the other hand, a low ratio represents a risky
financial position as it means that the business depends on outside loans for its
existence.

Ansal
Total asset to Buildwell Parsvnath Shobha Omaxe
Debt ratio Ltd. Developers Developers Ltd.
2010 2.06 2.40 2.17 1.90

Inference

In case Omaxe Ltd of there is greater dependence on outside loans for financing the assets,
which is not a healthy sign.
In case of Ansal Buildwell Ltd. there is greater safety margin available to the providers of long term deb
In case of Parsvnath Developers and Shobha Developers it is satisfactory.

• Proprietary Ratio

27
The proprietary ratio establishes a relationship between proprietor’s fund and total
assets.

Proprietor’s fund means share capital plus reserves and surplus both of capital and
revenue nature. Loss, if any, should be deducted. Funds payable to others should not
be added.

Computation. This ratio is worked out as follows:

Proprietor’s Ratio = Proprietor’s Fund or Shareholders Fund

Total Assets
Objective.

 This ratio throws a light on the general financial position of the concern. It
shows the extent to which shareholders own the business. This ratio is of
particular importance to the creditors as it helps them to ascertain the
proportion of shareholder’s funds in the total assets employed in the firm.
 The higher this Proprietary ratio denotes that the shareholders have provided
the funds to purchase the assets of the concern instead of relying on other
sources of funds like bank borrowings, trade creditors and others.
 However, too high a proprietary ratio say 100%Â means that management
has not effectively utilize cheaper sources of finance like trade and long term
creditors. As these sources of funds are cheaper, the inability to make use of
it might lead to lower earnings and hence a lower rate of dividend payout.
 This ratio is a test of credit strength as too low a proprietary ratio would
mean that the enterprise is relying a lot more on its creditors to supply its
working capital.
Ansal
Proprietors Buildwell Parsvnath Shobha Omaxe
Ratio Ltd. Developers Developers Ltd.
2010 0.08 0.05 0.03 0.06

• Total Debt Ratio

Total debt ratio is a relationship of Total Debt of a firm to its Capital Employed.

Computation. This ratio is calculated as under.

Total Debt Ratio = Debt

28
 Capital Employed
Objective.

• A ratio that indicates what proportion of debt a company has relative to its
assets. The measure gives an idea to the leverage of the company along with
the potential risks the company faces in terms of its debt-load.

• A debt ratio of greater than 1 indicates that a company has more debt than
assets, meanwhile, a debt ratio of less than 1 indicates that a company has
more assets than debt. Used in conjunction with other measures of financial
health, the debt ratio can help investors determine a company's level of risk.
Ansal
Total Debt Buildwell Parsvnath Shobha Omaxe
Ratio Ltd. Developers Developers Ltd.
2010 0.94 0.71 0.85 1.13

Inference

Ansal Buildwell Ltd. and Omaxe Ltd. uses a greater proportion of debt as
compared to Parsvnath Developers and Shobha Developers
Parsvnath Developers has a very low ratio debt ratio indicating there is more reliance on capital

provided by the proprietors.

Fixed Assets to Capital Employed Ratio

Fixed assets to Capital employed ratio gives the amount of fixed assets as a
percentage of the capital employed of the company.

Computation. This ratio is calculated as follows:

Fixed Assets to Capital Employed = Net Fixed assets x 100

Capital Employed

Objective.

• This ratio indicates the extent to which the long term funds are sunk into fixed
assets.

• It has been an accepted principle of financial management that not only fixed
assets should be financed by way of long-term loans but also a part of current
assets or working capital should be financed by way of long-term funds, and
this part may be in the form of permanent working capital.

29
 • A very high trend of this ratio may indicate that a major portion of long term
funds is utilized for the purpose of fixed assets leaving a small proportion for
the investment in the current assets or working capital.

• A very low trend of this ratio coupled with a constant declining trend of
current ratio may indicate an urgent for the introduction of long-term funds for
financing the working capital in the business.

Fixed assets to
Capital Ansal
Employeed Buildwell Parsvnath Shobha Omaxe
Ratio Ltd. Developers Developers Ltd.
2010 0.24 0.26 0.15 0.27

Inference

This ratio indicates that a major portion of long-term funds is utilized for the purpose
of fixed assets leaving a small portion for the investment in current assets or working
capital. In Ansal Buildwell Ltd. a small proportion of capital employed is used for the
purpose of fixed assets.

• Inventory to Net Working Capital Ratio

Inventory to Net working Capital Ratio tells how much of a company’s funds are tied
up in inventory.

Computation. The formula is as under:

Inventory to Net Working Capital = Inventory

Net Working Capital
Objective.

• Keeping track of inventory levels is crucial to determine the financial health of

a business.
• It is preferable to run a business as little inventory as possible on hand, while
not affecting potential sales opportunities.
• If this ratio is high compared to the average for the industry, it could mean that
the business is carrying too much inventory.
Inventory to net Ansal
working capital Buildwell Parsvnath Shobha Omaxe
ratio Ltd. Developers Developers Ltd.
2010 2.08 0.75 0.35 0.11

30
Inference

In Shobha Developers Inventory form nearly one-third of the working capital unlike in
Ansal Buildwell Ltd. where Inventories form majority of the Working capital which is
not a healthy proposition.

PROFITABILITY RATIOS
Profit as compared to the capital employed indicated profitability of the concern. A
measure of ‘profitability’ is the overall measure of efficiency. The different
profitability ratios are as follows:

• Net Profit ratio

The Net profit ratio establishes the relationship between net profit and net sales,
expressed in percentage form.

Net Profit is derived by deducting administratitive and marketing expenses, finance

charges and making adjustments for non-operating expenses and incomes.

Computation. This ratio is calculated as follows:

Net Profit ratio = Net Profit after taxes x 100

Net Sales

31
Objective.

• The net profit ratio determines the overall efficiency of the business.It
indicates that proportion of sales available to the owners after the
consideration of all types of expenses and costs – either operating or non-
operating or normal or abnormal.
• A high net profit indicates profitability of the business. Hence, higher the
ratio, the better the business is.
Ansal
Buildwell Parsvnath Shobha Omaxe
Net profit ratio Ltd. Developers Developers Ltd.
2010 0.13 0.17 0.12 0.11

Inference

Parsvnath Developers has been able to generate a high Net profit ratio among the four.
For Ansal Buildwell Ltd. the ratio is on a lower side so it should aim to achieve
a higher ratio.
COVERAGE RATIOS

• Interest Coverage Ratio

The interest coverage Ratio establishes the relationship between PBIT (Profits before
interest and taxes) and Debt interest.

Computation. It is calculated as:

Interest Coverage Ratio = Profit before Interest and Taxes

Debt Interest

The numerator considers the profit before income tax and interest on both term and
working capital borrowings.

The denominator considers the interest charges, which are in the form of interest on
long-term borrowings and not the interest on working capital facilities.

Objective.

 Interest coverage is a financial ratio that provides a quick picture of a

company’s ability to pay the interest charges on its debt.

32
  The 'coverage' aspect of the ratio indicates how many times the interest could
be paid from available earnings, thereby providing a sense of the safety
margin a company has for paying its interest for any period.

 A company that sustains earnings well above its interest requirements is in an

excellent position to weather possible financial storms.

 As a general rule of thumb, investors should not own a stock that has an
interest coverage ratio under 1.5. An interest coverage ratio below 1.0
indicates the business is having difficulties generating the cash necessary to
pay its interest obligations.

 The ratio suffers from the following limitations:

a) The fixed obligations in the form of preference dividend or installments of
long-term borrowings are not considered.

b) The funds available for meeting the obligations of interest payments may not
be necessarily in the form of p[profits before interest and taxes only, as the
amount of [profits so calculated may consider the amount of depreciation
debited to Profit and Loss Account which does not involve any outflow of
funds.

Ansal
Interest Buildwell Parsvnath Shobha Omaxe
coverage ratio Ltd. Developers Developers Ltd.
2010 3.09 3.14 3.72 1.91

Inference

Maximum interest coverage is available in case of Shobha Developers

indicating it is in good capacity to pay
the interest charges on debt. For Parsvnath Developers it is also good.
However, in case of Omaxe Ltd it is lowest. All companies have been able to generate enough
Profit necessary to meet their interest obligations.

This ratio indicates that the cash available for the repayment of the interest will be
more than profit, as depreciation will also be added in profit (because it is a non-cash
expense). So rather than maintaining such high cash firm should try to reinvest its
earnings rather then blocking the available resources.

33
ACTIVITY (TURNOVER OR PERFORMANCE) RATIOS
Turnover indicates the speed with which capital employed is rotated in the process of
doing business. Activity ratios measure the effectiveness with which a concern uses
resources at its disposal. The following are the important activity (turnover or
performance) ratios:

• Capital Turnover Ratio

Capital Turnover ratio establishes between the Net Sales and the Capital Employed of
a firm.

Computation. This ratio is computed with the help of the following formula:

Capital turnover ratio = Net sales

Capital Employed
Objective.

 This ratio indicates the effectives of the organization with which the capital
employed is being utilized.
 A high capital turnover ratio indicates the capability of the organization to
achieve maximum sales with minimum amount of capital employed. It
indicates that the capital turnover ratio better will be the situation.
Ansal
Capital Buildwell Parsvnath Shobha Omaxe
turnover ratio Ltd. Developers Developers Ltd.
2010 2.56 0.35 0.65 0.58

34
Inference

In Parsvnath Developers and Omaxe Ltd capital employed is not being utilised effectively to
Generate maximum sales. In case of Shobha Developers it is satisfactory.
Capital employed is utilised most effectively in case of Ansal Buildwell Ltd. as it has been
successfully able to generate good amount of sales with the capital employed.
Capital turnover ratio indicates that the firm’s capital employed is being efficiently
used. This ratio indicates that the organization is able to achieve maximum sales with
minimum amount of capital employed. It indicates that the capital employed is turned
over in the form of sales more number of times.

• Working Capital Turnover Ratio

The working capital turnover ratio indicates the number of times a unit invested in
working capital produces sale. In other words, this ratio shows the efficiency in the
use of short-term funds for achieving sales.

Working capital is computed by deducting current liabilities from current assets. A

careful handling of the short-term assets and funds will mean a reduction in the
amount of capital employed thereby improving turnover.

Computation. The ratio is calculated as follows:

Working capital turnover ratio = Net sales

Working capital
Objective.

 A company uses working capital (current assets - current liabilities) to fund

operations and purchase inventory. These operations and inventory are then
converted into sales revenue for the company.

 The working capital turnover ratio is used to analyze the relationship between
the money used to fund operations and the sales generated from these
operations.

 In a general sense, the higher the working capital turnover, the better because
it means that the company is generating a lot of sales compared to the money
it uses to fund the sales.

35
  A high, or increasing Working Capital Turnover is usually a positive sign,
showing the company is better able to generate sales from its Working
Capital. Either the company has been able to gain more Net Sales with the
same or smaller amount of Working Capital, or it has been able to reduce its
Working Capital while being able to maintain its sales.

 As such, higher this ratio, the better will be the situation. However, a very high
ratio may indicate overtrading – the working capital being meager for the scale
of operations.

Working Ansal
capital turnover Buildwell Parsvnath Shobha Omaxe
ratio Ltd. Developers Developers Ltd.
2010 1.51 0.24 0.38 0.30

Inference

In Ansal Buildwell Ltd. there is better use of working capital for

generating sales.
In Parsvnath Developers , Shobha Developers and Omaxe Ltd. the
management needs to utilize the working capital in a better manner so
that it can increase the sales.
• Inventory Turnover ratios

Inventory Turnover ratio= Net sales

Inventory
Objective.

• A high inventory turnover ratio indicates that maximum sales turnover is

achieved with the minimum investment in inventory. As such, as a general rule,
high inventory turnover ratio is desirable.

• However, the high inventory turnover ratio should be viewed from some more
angles. Firstly, it may indicate that there is under investment in inventory
whereby the organization may loose customer patronage f it is unable to maintain
the delivery schedule. Secondly, high inventory turnover ratio may not
necessarily indicate profitable situation.

36
 • An organization, in order to achieve a large sales volume, may sometimes
sacrifice on profits, whereby a high inventory turnover ratio may not result into
high amount of profits.

On the other hand, a low inventory turnover ratio may indicate over investment in
inventory, existence of excessive or obsolete/non-moving inventory, improper
inventory management, accumulation of inventories at the year end in anticipation
of increased prices or sales volume in near future and so on.

There can be no standard inventory turnover ratio which may be considered ideal.
It may depend on nature of industry and marketing strategies followed by the
organization.

Ansal
Inventory Buildwell Parsvnath Shobha Omaxe
turnover ratio Ltd. Developers Developers Ltd.
2010 0.53 0.32 1.10 0.35

Inference

Ansal Buildwell Ltd. has the highest ratio after Shobha Developers among the category
which is a good sign as it indicates the increasing efficiency in the management of
the inventory. This shows that the company is having sufficient amount of sales.
This ratio indicates that maximum sales turnover is achieved with the minimum
investment in inventory.

• Assets Turnover Ratios

 Asset turnover measures a firm's efficiency at using its assets in generating

sales or revenue - the higher the number the better.
 It also indicates pricing strategy: companies with low profit margins tend to
have high asset turnover, while those with high profit margins have low asset
turnover.
 A high Assets turnover ratio indicates the capability of the organization to
achieve maximum sales with the minimum investment in assets. It indicates
that the assets are turned over in the form of sales more number of times. S
such, higher the ratio, better will be the situation.
a) Total Assets Turnover

37
 Computation. This ratio is computed using the following formula:

Total Assets Turnover Ratio = Net Sales

Total Assets

Ansal
Total assets Buildwell Parsvnath Shobha Omaxe
turnover ratio Ltd. Developers Developers Ltd.
2010 6.39 3.83 3.85 15.66

b) Fixed Assets Turnover

Computation. This ratio is calculated as follows:

Fixed Assets Turnover Ratio = Net Sales

Fixed Assets

Fixed assets include net fixed assets, i.e., fixed assets after providing for
depreciation

Ansal
Fixed assets Buildwell Parsvnath Shobha Omaxe
turnover ratio Ltd. Developers Developers Ltd.
2010 6.40 3.84 3.85 15.83

c) Current Assets Turnover

Computation. This ratio is calculated s follows:

Current Assets turnover Ratio = Net Sales

Current Assets

Objective.

• A high Assets turnover ratio indicates the capability of the organization to

achieve maximum sales with the minimum investment in assets.
• It indicates that the assets are turned over in the form of sales more number of
times. S such, higher the ratio, better will be the situation.
Ansal
Current assets Buildwell Parsvnath Shobha Omaxe
turnover ratio Ltd. Developers Developers Ltd.
2010 1.35 0.20 0.35 0.27

• Debtors Turnover Ratio

Computation. The ratio will be computed as:

38
 Debtors Turnover ratio = Net credit sales
Average sundry debtors
Objective.

• This ratio indicates the speed at which the sundry debtors are converted in the
form of cash. However this intention is not correctly achieved by making the
calculations in this way.
Ansal
Debtors Buildwell Parsvnath Shobha Omaxe
turnover ratio Ltd. Developers Developers Ltd.
2010 15.32 0.70 2.87 6.98

As such this ratio is normally supported by the calculations of Average Collection

Period which is calculated as under:

a) Calculation of Daily Sales

Net credit Sales

No of Working Day

Ansal
Buildwell Parsvnath Shobha Omaxe
Daily sales Ltd. Developers Developers Ltd.
2010 1.65 1.20 3.27 3

Inference

It is highest in case of Shobha Developers followed by Omaxe Ltd. and Ansal Buildwell
Ltd. respectively.

b) Calculation of Average Collection Period:

Average Sundry Debtors

Daily Sales
The average collection period as computed above should be compared with the
normal credit period extended to the customers. If the average collection period is
more than normal credit period allowed to the customers, it may indicate over
investment in debtors which may be the result of over-extension of credit period,
liberalization of credit terms and ineffective collection procedures.

39
Average Ansal
collection Buildwell Parsvnath Shobha Omaxe
period Ltd. Developers Developers Ltd.
2010 23.75 521.60 127.40 53.50

Inference

The firm should try to reduce its debtors holding period . By this, the funds which are
blocked with the customers, and hence are becoming idle, can be reduced and that
money can be utilized for other profitable purposes.

RETURN ON INVESTMENT
The ratios computed in this group indicate the relationship between the profits of a
firm and investment in the firm. There can be three ways in which the term
‘investment’ may be interpreted, i.e., Assets, Capital Employed and Shareholder’s
Funds. As such, there can be three broad classifications of ROI:

Return on Assets (ROA)

Computation. This ratio is calculated as:

ROA = EBIT
Average Total Assets
Objective.

 An indicator of how profitable a company is relative to its total assets. ROA

gives an idea as to how efficient management is at using its assets to generate
earnings.

 The assets of the company are comprised of both debt and equity. Both of
these types of financing are used to fund the operations of the company. The
ROA figure gives investors an idea of how effectively the company is
converting the money it has to invest into net income.

 The higher the ROA number, the better, because the company is earning more
money on less investment.

Return on Ansal Parsvnath Shobha Omaxe

assets Buildwell Developers Developers Ltd.

40
 Ltd.
2010 65.68 111.68 174.22 79.46

Inference

For Parsvnath Developers and Shobha Developers it is on same side indicating that assets have
been utilised well to generate earnings.
In case of Ansal Buildwell Ltd. and Omaxe Ltd it is on a lower side so the management needs to
make sure it utilises the assets well enough to generate good earnings.

• Return on Capital Employed (ROCE)

Computation. The ratio is calculated as:

Profit Before Interest & Taxes x 100

Average Capital employed
Objective.

 It is used in finance as a measure of the returns that a company is realising

from its capital employed.
 It is commonly used as a measure for comparing the performance between
businesses and for assessing whether a business generates enough returns to
pay for its cost of capital.
 ROCE measures the profitability of the capital employed in the business. A
high ROCE indicates a better and profitable use of long-term funds of owners
and creditors. As such, a high ROCE will always be preferred.

Return on Ansal
capital Buildwell Parsvnath Shobha Omaxe
employeed Ltd. Developers Developers Ltd.
2010 23.65 6.51 7.17 6.08

Inference

A high ratio in case of Ansal Buildwell Ltd. indicates a better and profitable
use of long term funds of owners
and creditors.

41
 In case of Shobha Developers it is satisfactory. However, for Parsvnath Developers and Omaxe
Ltd. it is low.
• Return on Shareholder’s Funds

It is calculated as:

Profit After Tax x 100

Shareholder’s funds

• This is the most popular ratio to measure whether the firm has earned
sufficient returns for its shareholders or not. As such, this ratio is the most
crucial one from the owners/shareholders point of view. Higher the ratio better
will be the situation.
Ansal
Return on Buildwell Parsvnath Shobha Omaxe
euity Ltd. Developers Developers Ltd.
2010 1.43 0.67 1.39 0.52

Inference

Ansal Buildwell Ltd. has been able to generate exceptionally high ROSF. Higher the return more
satisfied will be the shareholders.
For Shobha Developers and Parsvnath Developers it is good but slightly on a lower side
. Omaxe Ltd. product has the lowest
Return among the category.
INVESTOR RATIOS
• Earnings per Share (EPS)

Computation. The ratio is calculated as:

Net Profit after Taxes – preference Dividend

Number of Equity shares Outstanding

Objective.

• It is widely used ratio to measure the profits available to the equity

shareholders on a per share basis. EPS is calculated on the basis of current
profits and not on the basis of retained profits.

42
 • As such, increasing EPS may indicate the increasing trend of current [profits
per equity share. However, EPS does not indicate how much of the earnings
are paid to the owners by way of dividend and how much of the earnings are
retained in the business.
Ansal
Earning per Buildwell Parsvnath Shobha Omaxe
share Ltd. Developers Developers Ltd.
2010 14.92 6.74 13.94 5.23

43
 CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital – Gross and Net

• Gross Working Capital refers to the firm’s investment in current assets.

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.

Focusing on management of current assets

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

a) How to optimize investment in current assets?

b) 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.

44
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.

Focusing on 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.

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

45
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.

OPERATING AND CASH CONVERSION CYCLE

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 inventories and
debtors (accounts receivable) is realized during the firm’s operating cycle that is
usually less than a year.

OPERATING CYCLE is 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, labor power,equipments, fuel

etc.

• 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.

46
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 construction, 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.. Debtors are created because units are sold on credit
for marketing and competitive reasons. Thus, a firm makes adequate investment in
inventories, and debtors, for smooth, uninterrupted contruction and sale.

Length of Operating Cycle

The length of the operating cycle can be calculated in two ways:

a) Gross Operating Cycle

b) Net Operating Cycle

a) Gross Operating Cycle

The gross operating cycle of a manufacturing concern is the sum of Inventory

Conversion Period and debtors (receivable) conversion period. Thus, Gross Operating
Cycle is gives as follows:

Inventory conversion Period + Debtors Conversion Period

Inventory Conversion Period:

The inventory conversion period is the total time needed for producing and selling the
product. It is the sum of (1) raw material conversion period, (2) work-in-progress
conversion period, and (3) finished goods conversion period.

• Raw material conversion period

The raw material conversion period is the average time period taken to convert
material into work-in-progress. Raw material conversion period depends on: (a) Raw
material consumption per day, and (b) Raw material inventory. Raw material
consumption par day is given by the total raw material consumption divided by the
number of days in the year (say 360). The raw material conversion period is obtained
when raw material inventory is divided by raw material consumption per day.

Raw material conversion period = Raw material inventory

47
 [Raw material consumption]/360
• Work-in-progress conversion period

Work-in-progress conversion period is the average time taken to complete the semi-
finished or work-in-progress. It is given by the following formula:

Work-in-progress conversion period = work-in-progress inventory

[Cost of production]/360
• Finished goods conversion period

Finished goods conversion period is the average time taken to sell the finished goods.
It can be calculated as follows-

Finished goods inventory

[Cost of goods sold]/360

Debtor’s conversion period:

Debtor’s conversion period is the average time taken to convert debtors into cash. It
represents the average collection period. It is calculated as follows:

Debtors
[Credit sales]/360

b) cash conversion or Net operating cycle

Net operating cycle is the difference between Gross operating cycle and creditors
(payables) Deferral period.

Creditor’s deferral period:

Creditor’s deferral period is the average time taken by the firm in paying its suppliers.
It is calculated as follows:

Creditors
[Credit purchases]/360

In practice, a firm may acquire resources (such as raw materials) on credit and
temporarily postpone payment of certain expenses. Payables, which a firm can defer,
are spontaneous sources of capital to finance investment in current assets. The
creditor’s deferral period is the length of time the firm is able to defer payments on
various resource purchases.

48
Net operating cycle is also referred to as cash conversion cycle. It is the net time
interval between cash collections from sale of the product and cash payments for
resources acquired by the firm. It also represents the time interval over which
additional funds, called working capital, should be obtained in order to carry out the
firm’s operations. The firm has to negotiate working capital from sources such as
commercial banks. The negotiated sources of working capital financing are called
non-spontaneous sources. If net operating cycle of a firm increases, it means further
need for negotiated working capital.

There are two ways of calculations of cash conversion cycle. One is that depreciation
and profit should be excluded in the computation of cash conversion cycle since the
firm’s concern is with cash flows associated with conversion at cost; depreciation is a
non-cash item and profits re not costs.

A contrary view air that a firm has to ultimately recover total costs and make profits;
therefore the calculation of operating cycle should include depreciation, and even the
profits.

The above operating cycle concept relates to a manufacturing firm. Non-

manufacturing firms such as wholesalers and retailers will not have the manufacturing
phase. They will acquire stock of finished goods and convert them into debtors and
debtors into cash. Further, service and financial enterprises will not have inventory of
goods (cash will be their inventory). Their operating cycles will be the shortest. They
need to acquire cash, then lend (create debtors) and again convert lending into cash.

49
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 capital means holding costs and idle funds, which earn no profits
for the firm. The dangers of excessive working capital are as follows:

• 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.

• Tendencies of accumulating inventories tend to make speculative profits grow.

This may tend to make dividend policy liberal and difficult to cope with in
future when the firm is unable to make speculative profits.

Inadequate working capital is also bad as it not only impairs the firm’s profitability
but also results in production interrupts and in efficiencies and sales disruptions.
Inadequate working has the following dangers:

• It stagnates growth. It becomes difficult for the firm to undertake profitable

projects for non-availability of working capital funds.

• 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.

50
 • The firm looses 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. The lenders consider a positive net working capital as a measure of safety.
All other things being equal, the more the net working capital a firm has, the less
likely that it will default in meeting it current financial obligations.

DETERMINANTS OF WORKING CAPITAL

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 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
through out 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 important 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

51
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 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 o 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.

Operating Cycle:

Time taken from the stage when cash is put into the business up to the stage when
cash is realized.

52
Thus, the working capital requirement of a firm is determined by a host of factors.
Every consideration is to be weighted relatively to determine the working capital
requirement.

Further, 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.

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.

Liquidity vs. Profitability: Risk-Return Trade-off

53
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.

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.

ESTIMATING WORKIN CAPITAL NEEDS

• Current Assets Holding Period. To estimate working capital requirement on

the basis of average holding period of current assets and relating them to costs
based on the company’s experience in the previous years. This method is
essentially based on the operating cycle concept.

54
 • Ratio of Sales. To estimate working capital requirements as a ratio of sales on
the assumption that current change with sales

• Ratio of Fixed Investment. To estimate working capital requirements as a

percentage of fixed investment.

POLICIES FOR FINANCING FIXED ASSETS

A firm can adopt different financing policies vis-à-vis current assets. Three types of
financing may be distinguished:

• Long-term Financing. The sources of long-term financing include ordinary

share capital, preference share capital, debentures, long-term borrowings from
financial institutions and reserves and surplus (retained earnings).

• Short-Term Financing. The short-term financing is obtained for a period less

than one year. It is arranged in advance from banks and other surplus of short-
term finance in the money market. It includes working capital funds from
banks, public deposits, commercial paper, factoring of receivables etc

• Spontaneous Financing. It refers to the automatic sources of short-term funds

arising in the normal course of a business. Trade (supplier’s) credit and
outstanding expenses are examples of spontaneous financing.

The real choice of financing current assets, once the spontaneous sources of financing
have been fully utilized, is between the long-term and short-term sources of finance.

Depending on the mix of short-term and long-term financing, the approach followed
by a company may be refereed to as:

55
 • Matching approach

• Conservative approach

• Aggressive approach

Matching Approach

The firm following matching approach (also known as hedging approach) adopts a
financial plan which matches the expected life of the sources of funds raised to
finance assets. For e.g., a ten-year loan may be raised to finance a plant with an
expected life of ten years. The justification for the exact matching is that, since the
purpose of financing is to pay for the assets, the source of financing for short-term
assets is expensive, as funds will not be utilized for the full period. Similarly,
financing the long-term assets with short-term financing is costly as well as
inconvenient as arrangement for the new short-term financing will have to be made on
a continuing basis.

Conservative approach

Under a conservative plan, the firm finances its permanent assets and also a part of
temporary currents assets with long-term financing. In the periods when the firm has
no need for temporary current assets, the idle long-term funds can be invested in the
tradable securities to conserve liquidity. The conservative plan relies heavily on long-
term financing and, therefore, the firm has less risk of facing the problem of shortage
of funds.

Aggressive approach

An aggressive approach policy is said to be followed by the firm when it uses more
short-term financing than warranted by the matching plan. The firm finances a part of
its permanent current assets with short term financing. The relatively more use of
short-term financing makes the firm more risky.

56
INVENTORY MANAGEMENT

 INTRODUCTION: Inventories constitute the most significant part of current

assets of a; large number majority of companies in India. On an average,
inventories are approximately 60 % of current assets in public limited
companies in India. Because of the large size of the inventories maintained by
the firm, a considerable amount of funds is required to be committed to them.
It is, therefore, absolutely imperative to manage inventories efficiently and
effectively in order to avoid unnecessary investment.

Inventories are stock of the product a company is manufacturing for sale and
components that make up the product. The various forms in which inventories exist in
a manufacturing company are:

 Raw materials are those basis inputs that re converted into finished product
through the manufacturing process. Raw materials inventories are those units,
which have been purchased and stored for future productions.

 Work-in-progress inventories are semi-manufactured products. They represent

those products that need more work before they become finished products for
sale.

 Finished goods inventories are those completely manufactured products,

which are ready for sale. Stocks of the raw materials and work-in-process
facilitate production, while stock of finished goods is required for smooth
marketing operations. Thus the inventories serve as a link between the
production and the consumption of goods.

The levels of the three kinds of inventories for the firm depend on the nature of the
business. A manufacturing firm will have substantially high level of finished goods
inventories and no raw material and work-in progress inventories within
manufacturing firm, there will be differences.

57
THE OPERATING CYCLE AND WORKING CAPITAL

The working capital requirement of a firm depends, to a great extent up on operating

cycle of the firm. The operating cycle may be defined as the time duration starting
from the procurement of goods or raw material and ending with the sales realization
the length and nature of the operating cycle may differ from one firm to another
depending on the size and nature of the firm.

The investment in working capital is influenced by four key events in the production
and sales cycle form:

 Purchase of raw materials

 payment of raw materials

 sale of finished goods

 collection of cash for sales

Operating cycle period: the firm begins with the purchase of raw material, which are
paid for after a delay, which represents the accounts payable period. The firm
converts raw material into finished goods and then sell the same. The time that,
elapses between the purchase of raw material and the collection of cash for the sales is
referred to as the operating cycle. The length or time duration of the operating cycle
of any firm can be defined as the sum of its inventory conversion period and the
receivables conversion period.

A) Inventory Conversion period (ICP): The time lag between the

purchase of raw material and the sale of finished goods is the inventory
conversion period. In the manufacturing firm ICP consists of raw
materials conversion period (RPCP), work-in-progress conversion
period (WPCP), and the finished goods conversion period (FGCP).

RMCP refers to the period for which the raw material is generally kept in
stores before it is used by the production department. The WPCP refers to
the period for which the raw material remains in the production process
before it is taken out s a finished product. The FGCP refers to the period
for which finished goods remain in stores before being sold to a customer.

58
B) Receivables conversion period (RCP): It is the time required to convert the credit
sales into cash realization. It refers to the period between the occurrence of credit sales and
collection from debtors.

The total of ICP and RCP is also known as Total Operating Cycle period (TOCP). The firm
might be getting some credit facilities from the supplier o a material, wage earners, etc. this
period for which the payment of these parties are deferred or delayed is known as Deferral
Period (DP). The Net Operating Cycle (NOC) of the firm is arrived at by deducting the DP
fro the TOCP. NOC is also known as cash cycle.

RMCP = (AVG. raw material stock/ Total raw materials stock)*365

WPCP = (avg. work-in process/ Total work-in-process)*365

FGCP = (Avg. finished goods/ Total cost of goods sold)*365

RCP = (Avg. receivables / Total credit purchase)*365

DP = (Avg. creditors / Total credit purchase)*365

In respect of these formulations, the following points are note worthy:

a) The “Average” value in the numerator is the average of opening balance and closing
balance of the respective item. However, if only the closing balance is available, then
even the closing balance may be taken as the “Average”.
b) The figure “365” represents number of days in a year. It may also be taken as “360”
for the ease of calculation.
c) The “total” figure in the denominator refers to the total value of the item in a
particular year.
d) In the calculation of RMCP, WPCP, ad FGCP. The denominator is calculated at cost-
basis and the profit margin has been excluded. The reason big that there is no
investment of funds in profit as such.

59
WORKING CAPITAL LIMITS
FUND BASED CREDIT LIMITS

1. CASH CREDIT/PACKING CREDIT:

The cash credit facility is similar to the overdraft arrangement. It is the most poplar method of
bank finance for working capital in India. Under the cash credit facility, a borrower is allowed
to withdraw funs from the bank up to the cash credit limit. He is not required to borrow the
entire sanctioned credit once, rather, he can draw periodically to the extent of his requirement
and repay by depositing surplus funds in his cash credit account. Cash credit is sanctioned
against the security of current assets. Cash credit is the most flexible arrangement from the
borrower’s point of view.

2. DISCOUNTING OF BILLS
Under the purchase or discounting of bills, a borrower can obtain credit from a bank against
its bills. The bank purchase or discounts the borrower’s bills. He amount provided under this
agreement is covered within the overall cash credit or overdraft limit

Before purchasing or discounting the bills, the bank satisfies itself as credit worthiness of the
drawer. Though, the item “bills purchased” implies that the bank becomes owner of the bill.
In practice, bank hold bills as security for the credit. When a bill is discounted, the borrower
is paid he discounted amount of the bills, (visa, full amount of bill minus the discount charged
by the bank). The bank collects full amount on maturity. The major part of bank borrowings
comes through Discounting Bills. On this firm has to pay interest of 12%.

NON-FUND BASED

1. LETTER OF CREDIT
Commonly used in international trade, the letter o credit is now used in domestic trade as
well. A letter of credit, or L/C, is used by a bank on behalf of its customers (buyer) to the
seller. As per this document, the bank agrees to honor drafts on it for the supplies made to
the customer if the seller fulfills the conditions laid down in the L/C.

The L/C serves several useful functions:

(i) It virtually eliminates credit risk, if the bank has a good standing.
(ii) It reduces uncertainty, as the seller knows the conditions that should be fulfilled
receive payment.
(iii) It offers safety to the buyer who wants to ensure that payment is made only in
conformity with the conditions of the L/C.

60
Letter of credit is non-fund based source credit that is why it is available at very low rate i.e.
0.5%.

2. BANK GURANTEE
Bank Guarantee is very similar to Letter of Credit but it is provided for much longer
period compared to letter of credit. Very small portion of working capital is funded by
Bank Guarantee.

RECOMMENDATIONS

Current assets to fixed assets ratio

Ansal Buildwell Ltd. should determine the optimal level of current assets so that
the wealth of the shareholder’s is maximized. It needs current assets and fixed
assets to support a particular level of current assets. As the firm’s output and sales
are increasing and will also increase in projected year 2010, it shows that
company needs to increase the current assets.

The level of current assets can be measured by relating current assets to fixed
assets. Dividing current assets by fixed assets vs. CA/FA ratio. Assuming a
constant level of fixed assets, a higher CA/FA ratio indicates a conservative assets
policy and a lower CA/FA ratio means an aggressive current policy other factors
remaining constant.

Company has an aggressive policy till 2007. This implies that company is
incurring high risk and low liquidity but in projected year 2010 company is
moving from aggressive policy to conservative policy in which there will be
greater liquidity and lower risk. So I would suggest the company to maintain
conservative policy rather than the aggressive one so as to cope up with the
anticipated changes and operating condition.

Current assets Financing Policy

Two types of policies- conservative which depends upon long-term sources like
debentures and aggressive which depends heavily upon short term bank finance
and seek to reduce dependence on long term financing are suggested

Conservative policy on one hand reduces the risk that the firm will be unable to
repay or replace its short-term debt periodically. It, however, enhances the cost of
financing because the long term sources of finance, debt and equity, have a higher

61
cost associated with them.. Hence it would be suggested to go for more short-
term financing as it may reduce the interest cost which will increase profitability
in return.

The Cost Trade Off

It is a different way of looking into risk-return trade off in terms of the cost of
maintaining a particular level of current assets. There are two types of cost
involved—the cost of liquidity and the cost of illiquidity

If the firm’s level of current assets is very high, then it has excessive liquidity. Its
return on assets will be low, as funds tied up in idle cash and stocks earn nothing
and high level of debtors reduces profitability. Thus, the cost increases with the
level of current assets.

The cost of illiquidity is the cost of holding insufficient current assets. Ansal
Buildwell Ltd. is presently not in a position to honor its obligations because it
carries too little cash. This may force. Ansal Buildwell Ltd. to borrow at high rate
of interest. This will adversely affect the credit worthiness of it.Thus company
should maintain its current asse6s at the level where the sum of both-cost of
liquidity and cost of illiquidity is minimized.

Flexibility

It is relatively easy to refund short-term funds when for funds diminishes. Long-
term funds such as debenture loan or preference capital cannot be refunded before
time. Hence. Ansal Buildwell Ltd. Should try to anticipate more in short-term
funds than long-term funds as it will reduce the interest rate and will increase the
liquidity.

Reduce the Operating cycle

Ansal Buildwell Ltd. Should try to reduce its operating cycle. In year ended 2005
company debtor collection period is 50 days. It shows that company collecting
period is very high. That’s why unnecessarily company blocked its money with
debtors. Hence company should try to adopt new policies like cash credit policy
and discount credit policy.

62
BIBLIOGRAPHY
 I.M PANDEY

 Financial mgt using Financial modeling by Ruzbeh J. Bodhanwala

 M.Y KHAN

 R.P Rustogi

63
Synopsis of the project
Ansal Buildwell Ltd.

Student’s Name:

Industry Guide:

Faculty Guide:

Objective.

• The project is aimed at evaluating the financial status of Ansal Buildwell Ltd.
and then doing the comparative analysis with its competitors

• Studying the working capital management at Ansal Buildwell Ltd. and

estimating the working capital requirements for 2010-2011 and then
forecasting for 2011-2012

• To find out if there is any relationship between the working capital, sales and
current assets of Ansal Buildwell Ltd.

The project deals with the working capital management in Ansal Buildwell ltd. For
the study of working capital in the first of all I have looked on the company profile,

Because working capital requirements may differ vastly according to the profile of
industry. Then I will analyze the working capital management and fulfillment policies
of the company.

Ansal Buildwell Ltd is a Real Estate company and deals in the area of construction
(i.e. Building Townships, Malls ,Shopping Complexes etc)

Working capital, also called as net current assets, is the excess of current assets over
current liabilities. The efficient management of working capital is important from the
point of view of both liquidity and profitability. Working capital management may be
defined as the management of firm’s resources and use of working capital in order to
maximize the wealth of shareholders.

A firm should maintain a sound working capital position and there should be optimum
investment in the working capital, working capital refers to the administration of
current assets, namely cash, marketable securities, debtors, stock (inventories) and
current liabilities.

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The project will be dealing with the various components of working capital i.e.

a) Raw Materials
b) Work-in-progress
c) Finished goods (finished projects)
d) Receivables etc.
An industry had s to hold raw materials and work-in-progress (semi-finished projects)
to maintain production flow and finished goods to meet the timely needs of its
customers. The working capital requirement is, therefore, directly linked with the
inventory and the time taken by the purchasers of the goods to pay the account.

Inventory management involves a trade-of between the costs associated with the
keeping inventory versus the benefit of holding inventory. Higher inventory results in
increased cost from storage, insurance, spoilage and interest on borrowed funds
needed to finance inventory acquisition. However, an increase in inventory lowers the
possibility of the loss of sales due to stock outs and the incidence of production
slowdowns from inadequate inventory.

Accounts receivables arise due to credit sales affected y the firm. While it may
appear advisable to sale against cash only, conditions in the market like a highly
competitive one, might compel a company to give credit in order to affect sales.
Moreover, extending the credit often results in higher sales and hence higher profits.
These receivables are influenced by a number of factors like credit policy, market
strategy, pricing policy, type of buyers, credit allowed by the competitors, etc.

Calculation of operating cycle period and its analysis will also be apart of this
project. The working capital requirement of the firm depends, to a large 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 or raw material and ending with
the sales realization.

The operating cycle consists of the time required for the completion of the
chronological sequence of some or all of the following:

i) procurement of raw material and services

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 ii) conversion of raw material into work-in-progress
iii) conversion of work-in-progress in finished goods
iv) Sale of finished goods
v) Conversion of receivables into cash.
Operating cycle period: The length or the time period of the operating cycle of any
firm can be defined as the sum of its inventory conversion period and the receivables
conversion period.

a) Inventory conversion period: It is the time required for the conversion of the
raw material into finished goods sales. In the manufacturing firm it consists of
raw material conversion period, work-in-progress conversion period and
finished goods conversion period.
b) Receivables conversion period: It is the time required to convert the credit
sales into cash realization. It refers to the period between the occurrence of
credit sales and collection from debtors
The total on Inventory conversion period and receivables conversion period is known
as Total Operating Cycle Period (TOCP). The firm might he getting some credit
facilities from the supplier of raw material, wage earners, etc. this period for which
the payment of these parties are deferred or delayed is known as Deferral Period (DP).
The Net Operating Cycle (NOC) of the firm is arrived at by deducting the Deferral
period from the Total Operating Cycle period.

Financing of working capital: The funds that are deployed on short term are mainly
used for the working capital or operating purposes. For the day-to-day operations, a
firm will have to provide money towards the purchase of raw material, payment of
salaries of employees, to extent the credit to buyers of goods as well as to meet other
day-to-day obligations. However the firm can secure part of these funds from its own
suppliers of raw material and other needed suppliers. Therefore, from the total
requirement of funds for the operational purposes, the credit the firm can obtain from
others is deducted; the difference would be the amount of money the firm has to find
against the working capital requirements.

Ratio Analysis of various factors will be done. With the help of ratio analysis liquidity
and profitability of the firm is analyzed.

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