A STUDY ON WORKING CAPITAL MANAGEMENT THROUGH RATIO ANALYSIS WITH REFERENCE TO KARNATAKA POWER CORPORATION LIMITED
ABSTRACT Working capital is nerve system of any business. Without proper working capital management company cannot achieve its objectives and not possible to maintain financial soundness. So in this perspective present study is undertaken to study working capital management through ratio analysis at Karnataka Power Corporation limited. From the present study it is found that company financial position was seeing to be sound because the company tries to increase its production and also net profit.
INTRODUCTION One of the most important areas in the day to day management of the firm is the management of working capital. Working capital refers to the funds invested in the current assets i.e. investment in stock, sundry debtors, cash and others current are essential to use fixed assets profitability for e.g.: A machinery cannot be used without raw materials. The investments on the purchase of raw material are identified as working capital. It is obvious that a certain amount of the fund is always tied up in raw material inventories. Working capital may be regarded as lifeblood of a business. Its effective provision can do much ensure the success of the business, while its inefficient management can lead not only loss of the profits but also the ultimate downfall of what otherwise might be considered as promising concern. The importance of working capital in commercial under takings can never be over emphasized. A concerned needs funds for its day to day running. A large amount of working capital would mean that the company has idle funds the various study is conducted by the bureau of public enterprises have shown that one of the reasons for poor performance of the public sector undertaking in our country has been the large amount of the funds locked up in working capital. Since funds have a cost, the company has to pay huge amount as interest on funds. This results in over the capitalization. Over the capitalization implies that company has too large funds for its requirements, resulting in low rate of the return, a situation which implies a less than optimal use of resources. A firm has therefore, to be very careful in estimating its working capital requirements.
REVIEW OF LITERATURE Eljelly, (2004): elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. The relation between profitability and liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability. The size variable was found to have significant effect on profitability at the industry level. The results were stable and had important implications for liquidity management in various Saudi companies. First, it was clear that there was a negative relationship between profitability and liquidity indicators such as current ratio and cash gap in the Saudi sample examined. Second, the study also revealed that there was great variation among industries with respect to the significant measure of liquidity. Deloof,( 2003): discussed that most firms had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results he suggested that managers could create value for their shareholders by reducing the number of days’ accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills. Ghosh and Maji, (2003): in this paper made an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992 – 1993 to 2001 – 2002. For measuring the efficiency of working capital management, performance, utilization, and overall efficiency indices were calculated instead of using some common working capital management ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also tested the speed of achieving that target level of efficiency by an individual firm during the period of study. Findings of the study indicated that the Indian Cement Industry as a whole did not perform remarkably well during this period. Shin and Soenen, (1998): highlighted that efficient Working Capital Management was very important for creating value for the shareholders. The way working capital was managed had a significant impact on both profitability and liquidity. The relationship between the length of Net Trading Cycle, corporate profitability and risk adjusted stock return was examined using correlation and regression analysis, by industry and capital intensity. They found a strong negative relationship between lengths of the firm’s net-trading Cycle and its profitability. In addition, shorter net trade cycles were associated with higher risk adjusted stock returns. Smith and Begemann (1997): emphasized that those who promoted working capital theory shared that profitability and liquidity comprised the salient goals of working capital management. The problem arose because the maximization of the firm's returns could seriously threaten its liquidity, and the pursuit of liquidity had a tendency to dilute returns.