Ratio Analysis Of Working Capital

3161 Words7 Pages

As we know working capital is the life blood and centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management if working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.
The analysis of working capital can be conducted through a number of devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting

1. RATIO ANALYSIS
A ratio is a simple …show more content…

It is defined as the relation between current assets and current liabilities. Thus,

Current ratio = Current assets Current liabilities

The two components of this ratio are
Current assets
Current liabilities
Current assets include cash, marketable securities, bill receivable, sundry debtors, inventories and work in progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. Other hand a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e, current assets double the current liabilities is considered to be satisfactory.

Calculation of current ratio
Table no 4.1. showing the current ratio ( Rupees in crores) year 2011-12 2012-13 2013-14
Current assets 2.37 10.33 33.64
Current liabilities 0.96 5.90 15.26
Current ratio 2.47 1.74 …show more content…

Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirement. The above graph is indicate that in 2011-12the cash is .039 crores but in 2012-13 it has increase to2.64 Crores & in 2012-13 it is increased to 2.39Crorse. in 2013-14, it is increased up to approx. 5.13% cash balance. So in 2010-11, the company has no problem for meeting its requirement as compare to 2011-12.
DEBTORES:
Table no 4.11 SHOWING THE DEBTOR4S NIN THE ORGANIZATION (Rs. In Crores)
Year 2011-12 2012-13 2013-14
Debtors 1.00 0.54 15.34 Source: computed from annual report

Figure 4.8 showing the debtors in the organization

Interpretation:
Debtors constitute a substantial portion of total assets. In India it constitute one one third of current assets. The above graph is depicting that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit

Open Document