study on working capital management and ratio analysis done at biological evon limited

A STUDY ON WORKING CAPITAL MANAGEMENT AND RATIO ANALYSIS DONE FOR

BIOLOGICAL (E) LTD., HYDERABAD

Under the guidance of Dr. Y. Subba Rayadu Assistant professor Department of Business Management

Presented by:M.Hanumantha ReddyEnrolment No.-0011406008

Introduction Working Capital is the name given to the “short-

term” area of the balance sheet. These items are also referred to as circulating capital Working Capital includes the current assets and

current liabilities areas of the balance sheet. Working Capital can be called by its alternative name

“Net Current Assets. companies short time liquidity which leads to long term survival.

Definition

“ circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivable to cash” ……Genestenbreg

Company Profile Indian Bio-pharmaceutical industry. Labour and management

representatives are maintained in equal numbers by the government.

These board are chaired by government nominated members representing the public

Need and importance of the study Financial decision making.

Problems of stock-out.

Satisfactory level of working capital.

Objectives of the study To Study the Existing System of Working Capital Management 1. To determine the flow of revenue form current operations by taking into consideration of

working capital related ratios.2. To examine feasibility of present system of managing working capital.3. To analyze the financial performance of the company with reference to working capital.4. To give some suggestions to the management based on the information studied. 5. To study the existing system of working capital management in BIOLOGICAL (E) LTD.6. To know the liquidity position of the BIOLOGICAL (E) LTD.7. To know how the working capital is being financed.8. To know the various norms to be followed by BIOLOGICAL (E) LTD for inventories,

accounts receivable, investment debtors

SCOPE OF THE STUDY: The scope of the study is to know the working capital position in

Biological (E) Ltd., simultaneously it is also proposed to study the strength and weakness in the working capital. In this study I evaluated the data of Ratio analysis and cash management of Biological (E) Ltd. The study mainly focuses on BIOLOGICAL (E) LTD.

The study focuses on ratios to find profitability position of the BIOLOGICAL (E) LTD.

The study is confined to evaluation of the last five years annual reports only. The study mainly focuses on working capital management. The information obtained from the primary and secondary sources were

limited to BIOLOGICAL (E) LTD.

Methodology and database

The study of the management working capital is based on primary as well as

secondary data. The primary data was gathered through personal interaction with the senior

Finance Manager. The secondary data was collected from company’s annual report from 2006-2011

and also-

The Balance Sheet and P&L account statement of M/S. Biological (E) Ltd., for last five years.

Other information available in connection with the management of working capital. Publications & Text books in the connection with financial management written by

different author.

Company profile:Introduction: Dr. Vijay Kumar Datla is the Chairmen & Managing Director of Biological (E) Ltd., and holds over 97% of

the share along with his family members. exiting profit making company. commenced its operations in 1953.Alliances Established alliances with world-renowned pharmaceutical organizations such as Evan, Glaxo,Solvay,ICO

and Aventis Pasteur.Product profile enjoys a formidable presence in the fields of vaccines, anticoagulants, anti- infective and the respiratory

segment. (coscopin bethadoxin and bestozyme ) IN therapeutic segments.Shareholding and Net worth The promoters and associates hold 97.11% of the shares of the company. The book value per share is

Rs.2302 at historical cost as on 31.3.05 and a face value of Rs.100 each .

Company profile:New project- Expansion programme Give further impetus to its formulations and vaccines business the new vaccines proposed to be

manufactured are: Measles Hib Hbv Dpt-hib Dpt-bhv Dpt-hbv-hib

BE developed is vaccine with the technical tie ups with national institute of public heath and the environment (RIVM), indian institute of science ( hepatitis B) and bio pharma (BE), indonesia (for measles).

Working on clinical trials for its combination vaccines. Be has decided to expand its vaccine manufacturing facilities further. As part of this exercise, BE

is setting up a state-of – art modern manufacturing unit at shapoorji pallonji biotech park private ltd., Thurkapalli village,shamirpet mandal, ranga reddy dist., Andhra pradesh at a cost of rupees 9500 lakhs.

Indian Pharmaceutical industry

An OverviewDomestic and External Trade: The Indian pharmaceutical industry is highly regulated. The Govt. controls prices of the

large number of bulk drugs and formulations. Profit margins in this trade vary widely in both domestic and export sales due to many factors.

Domestic Trade: More than 85% of the formulation produced in the country or sold in the domestic market. Exports: Over 60% of India’s bulk drug production is exported.Research & Development Research & Development is the key to the future of pharmaceutical industry. These R&D companies will also enjoy tax holiday for 10 years. A promotional research and

development fund of Rs. 150 Crores is set up by the Government to promote research and development in the pharmaceuticals sector

DATA ANALYSIS Data analysis and interpretation

Increase DecreaseParticulars 2005-2006 2006- 2007 Working Capital

Inventories 4157.12 3569.27 587.85Sundry Debtors 2214.13 2153.44 60.69Cash & Bank 622.75 878.30 255.55Other Current Assets 867.87 1185.10 317.23Loans & Advances 939.31 963.26 23.95TOTAL (A) 8801.18 8749.37CURRENT LIABILITIESCurrent Liabilities 6032.28 6379.00 346.72Provisions 373.98 643.41 269.43TOTAL (B) 6406.26 7022.41WORKING CAPITAL (A)-(B) 2394.92 1726.96

Decrease in working capital 667.96 667.96

2394.92 2394.92 1264.69 1264.69

Data analysis and interpretation

Particulars 2007-08 2008-09 Working CapitalIncrease Decrease

CURRENT ASSETS Inventories 3022.16 3180.00 162.84Sundry Debtors 3557.71 2882.10 851.61Cash & Bank 742.41 800.00 57.59Other Current Assets 420.12 520.00 109.88Loans & Advances 1170.72 1270.00 99.28TOTAL (A) 8913.12 8491.10CURRENT LIABILITIESCurrent Liabilities 5850.88 5396.60 572.28Provisions 160.86 240.00 54.14TOTAL (B) 6011.44 5636.60WORKING CAPITAL (A)-(B) 2901.38 3015.50

increase in working capital 114.12 114.12

3015.50 3015.50 868.87 868.87

Data analysis and interpretationParticulars 2009-10 2010-11 Working Capital

Increase DecreaseCURRENT ASSETS

Inventories 3052.00 1651.31 1400.69Sundry Debtors 2856.10 2109.92 746.18Cash & Bank 800.00 1459.04 659.04Other Current Assets 550.00 550.00Loans & Advances 1240.00 2952.13 1712.13TOTAL (A) 8498.10 8172.40 CURRENT LIABILITIESCurrent Liabilities 5171.60 2536.90 2634.70Provisions 215.00 48.73 166.27TOTAL (B) 5386.60 2585.63WORKING CAPITAL (A)-(B) 3111.50 5586.77

increase in working capital 2475.27 2475.27

5586.77 5586.77 5172.14 5172.14

Data analysis and interpretation

Particulars 2011-12 2012-13 Working CapitalIncrease Decrease

CURRENT ASSETS Inventories 1350.59 1246.82 103.77Sundry Debtors 1623.00 1734.00 111.00Cash & Bank 4760.89 2760.08 2000.81Other Current Assets Loans & Advances 2397.63 8941.94 6544.31TOTAL (A) 10132.11 14682.84CURRENT LIABILITIESCurrent Liabilities 3077.73 9196.81 6119.08Provisions 85.87 1007.03 921.16TOTAL (B) 3163.60 10203.84WORKING CAPITAL (A)-(B) 6968.51 4479.00

decrease in working capital 2489.51 2489.51

6968.51 6968.51 9114.82 9114.82

Instructor : Dr. S V Subba Reddy

RATIO ANALYSIS

Year Current Assets Current Labiality Ratio

2005-06 8801 6406 1.37

2006-07 8749 7022 1.24

2007-08 8913 6012 1.48

2008-09 8652 5637 1.53

2009-10 8498 5387 1.58

2010-11 8172 2586 3.16

2011-12 10132 3164 3.20

2012-13 14683 4479 3.28

CURRENT RATIO

ACID TEST OR QUICK RATIO

Year Quick Assets Current Labiality Ratio

2005-06 4464 6406 0.72

2006-07 5180 7022 0.74

2007-08 5891 6012 0.99

2008-09 5472 5637 1.03

2009-10 5446 5387 1.01

2010-11 6521 2586 2.52

2011-12 8782 3164 2.77

2012-13 13436 10204 1.32

TURNOVER RATIOSYear Turn Over Inventory Ratio

2005-06 7478 4157 1.80

2006-07 8896 3569 2.49

2007-08 10920 3022 3.61

2008-09 11854 3180 3.73

2009-10 13900 3052 4.55

2010-11 14300 1651 8.66

2011-12 15600 1350 11.56

2012-13 26549 1246 21.30

DEBTORS TURNOVER RATIO

Year Turn Over Debtors Ratio

2005-06 7478 2214 3.38

2006-07 8896 2153 4.13

2007-08 10920 3558 3.06

2008-09 11854 2882 4.11

2009-10 13900 2856 4.87

2010-11 14300 2110 6.78

2011-12 15600 1623 9.61

2012-13 26549 1734 15.31

CREDITORS TURNOVER RATIO

Year Purchases Creditors Ratio2007-08 4726 1236 3.82008-09 3604 1410 2.62009-10 1848 602 3.12010-11 2060 349 5.92011-12 3401 2814 1.22012-13 6708 6188 1.1

CREDITORS TURNOVER RATIO ( Rs. in lakhs)

CREDITORS TURNOVER RATIOIt is determined by dividing the net credit purchases by average creditors out standing during the year. Thus, Creditors Turnover Ratio = Net Credit Purchases

Average Creditor

Operating profit ratio

Year EBIT SALES Ratio

2007-08 538 7478 0.07

2008-09 929 8896 0.10

2009-10 1101 10920 0.10

2010-11 2372 13900 0.17

2011-12 2290 14300 0.16

2012-13 2570 15600 0.16 Operating Profit ratio

(Rs in lakhs)

1. Operating Profit ratio = Earnings before interest taxes (EBIT) Sales

2. Operating Profit ratio = Earnings after interest and taxes (EAT)

Sales

NET PROFIT RATIOYear Net profit Sales Ratio

2007-08 43661738 1282249304 3.4

2008-09 2556025 1080691260 0.236

2009-10 5023614 656333117 0.765

2010-11 17862362 802603124 2.22

2011-12 54436812 960787055 5.6

2012-13 59285507 947947228 6.3

NET PROFIT RATIO Table:10

Findings and SUGGESSIONS FINDINGS On observing the changes in Working Capital from the years 2005 -06 to 2012-13, it has been noticed that except

for the years 2006-07and 2012-13 remaining all years, the working capital of the company was increasing year by year.

The current ratio reveals that the company can meet its short term obligations at any given point of time. Though the ratio of 2:1 is considered satisfactory, the survey revels that the company’s current ratio is above the standard as it was 3.20 in the year 2012-13.

It has been observed from the survey that quick ratio had been above the standard except for two years 2005-06 and 2007-08. In the year 2005-06 it was 0.74, it was 0.99 in the year 2007-08.from the 2009-10to2012-13 it was 1.01, 2.52, 1.59 and 1.68 respectively.

The inventory turnover ratio indicates that conversion of inventory into cash is very fast throughout the study. It has an increasing trend which is good for the company.

As per the debtors turnover ratio it is observed that the cash is collected rapidly from the debtors in the years 2010-11 and 2012-13 compared to the other years.

It has been observed that the creditors are paid rapidly in the year2010-11. In other preceding years the creditors are maintaining a steady payment period. It was at 5.19in the year 2010-11 and decreased to 1.1in the year 2012-13.

The operating profit ratio indicates that the operating profit has been constantly increasing year by year. It was at 0.07 in the year 2007-08 to 0.16 in the year2012-13

Suggestions The company has to utilise the idle funds i.e., the current ratio is 3.20; it has to take proper

measures in decreasing to 2:1. Nearly 50% of the inventory or the company remains in the form of raw material, which will

lead to high carrying cost and storage cost. So it should be reduced to avoid unnecessary costs. The company maintains high – level finished stock. This should be reduced for smooth cash flow cycle.

Cash from the debtors is not collected efficiently. Most of the funds are blocked with the debtors. To maintain an efficient cash cycle the debtors should be collected more accurately.

The creditors payment period should be delayed for some more days, in order to have good

management working capital. The company should concentrate on increasing the operating profit, will increase the net profit.

Thank u……