Negative Working Capital Can be a Positive Sign for The Success A Case Study of TVS Motor Company

Transcription

1 International Journal of Management, MIT College of Management, Vol. 2, No. 2, August 2014, pp Negative Working Capital Can be a Positive Sign for The Success A Case Study of TVS Motor Company Amit Kumar Arora 1 Pramod Kumar Garg 2 ABSTRACT In the present era of cut-throat competition, almost all the business firms are cutting the cost of operations in order to be competitive as well as financially healthy. Working capital management plays a significant role in reaching this target. In the present scenario some companies are operating in a situation of negative working capital. A negative working capital can be a sign of managerial efficiency in a business. The present study covers 8 years i.e to which are further divided into two parts i.e to (period 1) when the company is having negative working capital and to (period 2) when the company is having positive working capital. An attempt has been made by this study to compare company s performance under the negative and positive working capital zone for the above period. The objective of the study is to know whether the negative working capital affects the profitability/performance of the organization or not. The study concludes that the company performance was better when operating in the negative working capital zone. Key Words: Working Capital, Firm s Performance, Negative Working Capital, Profitability. INTRODUCTION Working Capital Management is one of the most important and challenging aspect of the overall financial management. Only more effective and efficient management of working capital can ensure long-term survival of business. It is concerned with the management of the Current Assets and Current Liabilities and the interrelation that exists between them, so to minimize the risk of insolvency and to maximize the return on assets. The ultimate objective of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short term debt and upcoming operational expenses. A great deal of controversy exists over the issue whether the working capital of a firm affects its profitability or not. On this issue academicians are sharply divided into two schools of thought (Mallik et al., 2005). One school of thought argues that working capital is not a factor of improving profitability rather it may be negatively associated with earning capability. The other school of thought opines that investment in working capital plays a vital role in enhancing corporate profitability and unless there is a minimum level of investment of working capital, output and sales cannot be maintained. They argue that inadequacy of working capital keeps fixed asset inoperative. Though there are too many researches has been conducted on the topic working capital management and its impact on profitability and on performance. All the studies are generally having the opinion that for the improvement in profitability we should manage our working capital effectively and most of the studies recommended having good amount of working capital in the organization. In the present scenario some companies are using negative working capital and getting a good amount of profits as well as good return on capital employed. Earlier negative working capital is considered as a risk of insolvency of the organizations but at present negative working capital is considered as a sign of managerial efficiency in a business. Earlier it was considered that the companies should avoid under-investment in working capital if they wanted higher profits margins as stated in the following studies. Chakraborty (1976) 1 evaluated the association between working capital turnover and profitability in Indian cement, sugar and fertilizer industries and found a positive relationship between them. Sarkar & Saha (1987) 2 made an attempt to assess the relationship between profitability crisis and working capital management in the Indian public sector. The study concluded that the profitability of the selected public enterprises suffered due to inefficient management of working capital. 1. Assistant Professor, Department of Management Studies, Krishna Institute of Engineering & Technology (K.I.E.T., Ghaziabad), U.P., India. 2. Assistant Professor, Department of Management Studies, H.R. Group of Institution, Ghaziabad, U.P., India.

2 International Journal of Management, MIT College of Management, Vol. 2, No. 2, August 2014, pp Jain (1988) 3 considered 10 manufacturing, trading and service industries from the state of Rajasthan in his study and concluded that the companies should avoid under-investment in working capital if they wanted higher profit margins. Parasuraman (2004) 4 inferred that leading companies employed greater working capital for improving profitability. Arun Kumar and Radharamanan (2012) 5 in their study examined the effect of working capital management on corporate profitability of Indian Manufacturing firms and found positive relationship for number of days of inventory and number of days of accounts payable with the profitability. The study also finds that profitability improves when a shorter cash conversion cycle exists and when current assets and current liabilities are equal. All the above studies are very important for the present study because all studies focuses on the sufficient positive working capital in the organizations. But in the present studies there is an attempt to show that an organization having negative working capital can also do well and it doesn t adversely affects the profitability as stated by above studies. The present study findings are similar with the another study conducted by Arora (2013) 6 on Negative Working Capital and its Impact of Profitability A case study of Hindustan Unilever Ltd. The study concludes that negative working capital doesn t affect the company s Performance. COMPANIE S PROFILE The two-wheeler market in India is the biggest contributor to the automobile industry, with a size of Rs. 1, 00,000 million. India is the second largest producer of two wheelers in the world. In the last few years, the Indian two wheeler industry has seen spectacular growth. TVS Motor Company Ltd., the flagship company of TVS Group is the third largest two-wheeler manufacturer in India after Hero Motors Corps Ltd. and Bajaj Auto Ltd. The company manufactures a wide range of two-wheelers from mopeds to racing inspired motorcycles. The company is having their manufacturing plants at Hosur in Tamilnadu, Mysore in Karnataka and Solan in Himachal Pradesh. They are also having one unit located at Indonesia. TVS Motor Company Ltd. is a part of Sundaram Clayton group in TVS group of companies. In the year 1979, Sundaram-Clayton Ltd. started Moped Division at Hosur to manufacture TVS 50 mopeds. In the year 1982, the company entered into a technical know-how and assistance agreement with Suzuki Motor Co Ltd. of Japan and in the year 1985, they incorporated a new company Lakshmi Auto Components Pvt. Ltd. for the manufacture of critical engines and transmission parts. In the year 1986, the company acquired the assets of the moped division from Sundaram Clayton Ltd. Also, the name of the company was changed from Indo Suzuki Motorcycles Ltd. to TVS Suzuki Ltd. During , TVS Suzuki Ltd was amalgamated with Sundaram Auto Engineers Ltd., an unlisted group company which was incorporated in the year As per the scheme, all the assets and liabilities of erstwhile TVS Suzuki Ltd. together with all obligations and contingent liabilities were vested in Sundaram Auto Engineers (India) Ltd. with effect from April 22, This merged entity was later renamed TVS Suzuki Ltd. The TVS group and Suzuki Motor Corporation parted ways from their 15-year-old joint venture on September 27, 2001 and the name of the company was changed to TVS Motor Company Ltd. The main two wheelers of TVS Motors are apache, phoenix, flame, star city, wego, scooty streak, scooty pep etc. OBJECTIVES The basic objective of the study is to analyze and evaluate the impact of negative working capital on the performance and profitability of the organization. The secondary objective is to analyze the point that the companies should avoid under-investment in working capital if they wanted higher profit margins as stated by the several researchers as stated above is essential for all the organizations. RESEARCH METHODOLOGY The present study is basically based on the secondary data. The data for the study has been taken from the published annual reports of TVS Motor Company and other websites. The study covers a period of 8 years viz., to which are further divided into two parts i.e., to (period 1) when the company is having negative working capital and to (period 2) when the company is having positive working capital. For the purpose of analysis the data, both financial tools as well as statistical techniques have been used. The ratios relating to working capital management, which have been used in this study, are: Current Ratio, Liquidity Ratio, Inventory turnover ratio, Debtor turnover ratio. For the profitability measure Profit Before Interest and Tax Margin, Return on capital Employed, Net Profit Margin are considered. For measuring the relationship between the different variables correlation analysis is performed. TOOLS OF ANALYSIS The present study analysis is arranged in the following four parts as given below: Descriptive Statistics which include: Mean, Standard deviation, Coefficient of Variance. Structural Analysis of components of working capital in absolute and relative terms. Ratio Analysis. Correlation Analysis. STRUCTURAL ANALYSIS The structural analysis includes the study of the components of the working capital of the TVS Motor Ltd. It includes inventory, receivables, cash and bank, loans and advances fixed deposits and current liabilities and provisions. The analysis is given below-

3 International Journal of Management, MIT College of Management, Vol. 2, No. 2, August 2014, pp Net Working Capital for Period 1 ( to ): In the above said period company has used negative working capital in its operation as shown in Table 1. The overall average is (114.14) crores with a moderate standard deviation of and a coefficient of variation of (36.73%). Net Working Capital for Period 2 ( to ): In the above said period company has used positive working capital in its operation and having an increasing tendency except for the year where we can notice slightly decrease as shown in Table 2. The overall average is crores with a moderate standard deviation of and a coefficient of variation of 54.69%. Table 1: Working Capital Structure (in Rs. Cr.) TVS Motor Company Year Inventory Receivables Cash & Bank Loan & Advances Fixed Deposits C.L.& Prov. NWC Average S.D C.V. % Table 2: Working Capital Structure (in Rs. Cr.) TVS Motor Company Average S.D C.V. % Inventories For the Period 1: Inventory in absolute terms is showing a clear increasing trend for the above said period. In relative terms also it is showing increasing trend except in the year where it show a decrease (As Shown in Table 1). Overall the average inventory is crores in the above said period having highest gross working capital having a standard deviation of with a coefficient of variation of 26.94%. Inventories For the Period 2: Inventory in absolute terms as well as in relative terms is showing a decreasing trend except for the year where we can notice slightly increase as shown in Table 2. Overall average is crores with a moderate standard deviation of and low coefficient of variation of 16.10%. It is having a 38.93% share in gross working capital which is the second highest for the period after loans and advances. Receivables for the Period 1: There is a decreasing trend except in the year where we can see the increase as shown in Table 1. The overall average is crores having a low standard deviation of and a coefficient of variation of 20.74%. It incurred 9.62% share in gross working capital. Receivables for the Period 2: There is an Increasing trend except in the year where we can see the decrease as shown in Table 2 which is opposite to the above. The overall average of crores having a standard deviation of and a coefficient of variation of 40.82%. It is having a 15.91% share in gross working capital. Cash and Bank Balance for Period 1: There is a decreasing trend except for the year where we can notice slightly increase as shown in Table 1. The overall average is crores with a low standard deviation of and having a high coefficient of variation of %. It is having only 4.82 gross working capital. Cash and Bank Balance for Period 2: There is a decreasing trend except for the year as shown in Table 2. Overall average for the period is 25 crores with a low standard deviation of and a high coefficient of variation of 75.61%. It is having a very low share of 2.59 the gross working capital. Loans and Advances for Period 1: It has a clear cut increasing trend during the above said period as shown in Table 1. Overall average is crores with a standard deviation of and a coefficient of variation of 31.47%. On an

4 International Journal of Management, MIT College of Management, Vol. 2, No. 2, August 2014, pp average it is gross working capital which is the second highest component for the period after inventory. Loans and Advances for Period 2: It has an increasing trend during the above said period except for the year where we can notice a slightly decrease as shown in Table 2. Overall average is crores with a standard deviation of and a coefficient of variation of 20.32%. On an average it is gross working capital which is the highest component for the period. Fixed Deposits for the Period 1: There is no certain trend noticed for the period. The Overall average is crores with a low standard deviation of and a high coefficient of variation of 91.17%. On an average it incurred only 5.18 gross working capital. Fixed Deposits for Period 2: It is showing a decreasing trend except for the year , where it has increased too much as shown in Table 2. The Overall average is 33.34% for the period with a standard deviation of 38.54% and a high coefficient of variation of %. It is having only 3.59% share in gross working capital. Current Liabilities and Provisions for Period 1: It has an increasing trend throughout the period of study as shown in Table 1. On an average it is crore with a very high standard deviation of and a low coefficient of variation 15.26%. Current Liabilities and Provisions for Period 2: It has an increasing trend except for the year as shown in Table 2. On an average it is crore with a standard deviation of and a low coefficient of variation 5.92%. RATIO ANALYSIS The various ratios are used in the study it includes inventory turnover ratio, inventory conversion period, debtor turnover ratio, debtor collection period, current ratio, quick ratio, working capital turnover ratio, return on total assets, profit before tax ratio, operating profit ratio, net profit margin. Inventory Turnover and Conversion Period: A low inventory turnover ratio results in blocking of funds in inventory which may ultimately result in heavy losses. For the period 1 as shown in Table 3, the average inventory turnover ratio is times with a very low standard deviation of 0.94 and a low coefficient of variation of 7.58%. The average inventory conversion period is days for the above said period. For the period 2 as shown in Table 4, the average inventory turnover ratio is with a standard deviation of 3.15 and a coefficient of variation of 24.32% which is comparatively high to the above period. The average inventory conversion period is days. Year ITR Times ICP Days DTR Times DCP Days Table 3: Ratio Analyses of TVS Motor Company CR QR ROCE in % PBITM in % WCTR N.P. Margin in % Net Sales NWC N.P. No. of Days in Working Capital Operating Profit Average S.D C.V. % Table 4: Ratio Analyses of TVS Motor Company Average S.D C.V. % OPM Debtor turnover ratio and debt collection period: Higher the debtor turnover ratio, the better it is, since it would indicate that debts are being collected more promptly. For the period 1(as shown in Table 3) is having an increasing tendency during the period. Overall it is having an average of times with a low standard deviation of with coefficient of variation of 24.35%. For debt collection period we know that a decrease in period will result in quick recovery of funds from debtors. In the above said period average collection period is only 6.70 days i.e. the company recovers from his debtors within 7 days only.

5 International Journal of Management, MIT College of Management, Vol. 2, No. 2, August 2014, pp For the period 2 (as shown in Table 4) debtor turnover ratio is showing an increasing trend except for the year An increase in the period means blockage of funds and late recovery from the debtors. In the above said period the average collection period is days. Current ratio: For the period 1 as we can see in Table 3 it remains always below 1 and on an average it is with a very low standard deviation of 0.07 and a coefficient of variation of 8.78%. For the period 2 it is always above 1 as shown in Table 4. The overall average is 1.10 with a very low standard deviation of 0.05 and a low coefficient of variation of 4.67%. Quick ratio: For the period 1 as shown in Table 3 it remains below 0.45 with an overall average of 0.40 with a very low standard deviation of 0.03 and a coefficient of variation of 7.42%. For the period 2 as shown in Table 4 it also remains below 0.80 the overall average is 0.61 with a very low standard deviation of 0.13 and a coefficient of variation of 21.78%. Working capital turnover ratio: A high working capital turnover is considered good as it indicates that the company is generating good sales compared to the funds invested in operations, i.e., the company is very efficient. For the period 1 it remains always negative and overall it is (28.47) crores with a standard deviation of and a coefficient of variation of (39.22%) as shown in Table 3. For the years period 2 it remains always positive and overall it is crores with a standard deviation of and a coefficient of variation of 59.35% as shown in Table 4. Return on capital employed: Return on capital employed indicates the percentage of return on capital employed in the business and it can be used to show the overall profitability and efficiency of the business. For the period 1 it had a decreasing trend as shown in Table 3. It has an overall average of 27.25% with a low standard deviation of and a coefficient of deviation of 37.09%. For the period 2 it has an increasing trend except as shown in Table 4. It has an overall average of 6.24% only with a low standard deviation of 3.93 and a high coefficient of deviation of 62.94%. Profit before interest and tax margin: This indicator gives information on a company s earnings ability. For the period 1 it is having a decreasing trend with an overall average of 5.17% having a low standard deviation of 1.63 and a coefficient of variation of (as shown in Table 3). For the period 2 there is no clear trend initially it decrease and then starts increasing with an overall average of 0.68% only and having a low standard deviation of 1.65 and a very high coefficient of variation of (as shown in Table 4). Net Profit Margin: It is a very important tool for analysis, higher the net profit margin better for the company. For the period 1 it is having a decreasing tendency except for the year where a slightly increase has been noticed as shown in Table 3. Overall it is having an average of 4.43% with a very low standard deviation of 0.59 and a coefficient of variation of 13.36%. NET PROFIT MARGIN in %

6 International Journal of Management, MIT College of Management, Vol. 2, No. 2, August 2014, pp CORRELATION ANALYSIS Correlation analysis is the mathematical tool that is used to describe the degree to which one variable is linearly related to the other. It therefore, directed towards measuring the degree of association of the two variables. Net Profit For the period 2 it has a decreasing trend except for the year as shown in Table 4. Overall it is having an average of 1.36% only with a very low standard deviation of 0.56 and a coefficient of variation of 41.19%. Operating profit margin: Operating profit margin stands for the profit margin form the operations of the company higher the margin better for the company. Period 1 is showing a decreasing tendency (as shown in Table 3) with an overall average of 8.20% having a low standard deviation of 1.59 and a coefficient of variation of 19.39%. Period 2 is showing an increasing tendency except for the year (as shown in Table 4). The overall average is 3.28% with a low standard deviation of 1.41 and a coefficient of variation of 42.92%. Correlation Period 1 Period 2 Correlation between Net Profit and Current Ratio (0.917) (0.049) Correlation between Inventory Turnover Ratio and Net Profit Correlation between Numbers of Days in Working Capital and Net Profit (0.897) (0.19) Correlation between Net Working Capital and Net Profit (.833) Correlation between Net Working Capital and Net Sales Correlation between Net Working Capital and Profit before Interest and Tax Margin (.004) Correlation between Net Working Capital and Return on Capital Employed (.055) MAJOR FINDINGS OF THE STUDY On the basis of above analysis, certain findings are made which are as follows: Debt collection period for period 1 is only 6.70 days whereas for the period 2 it is days which is almost doubled. It means that the early recovery from debtor helps in the reduction of working capital for period one. Inventory collection period is almost same under both the periods which are about 29 days. The Current Ratio is constantly low as per the standard norms but for the period 1 it is below 1 whereas for period 2 it is above 1. The Quick Ratio of the company also noticed less than the standard level throughout the period of study. The Average Return on capital employed for period 1 is 27.25% which is comparatively more than three times to period 2 which is 6.24%. The profit before interest and tax margin was found 5.17% for the period 1 whereas it is only 0.68% for period 2. The net profit margin was found 4.43% for period 1 whereas it was only 1.36% for period 2 which is about only 1/3 as compare to period 1. The Average Net Profit was noticed crores for the years to whereas it was only crores for the years to The Operating Profit was noticed crores for period 1 whereas it was only crores for period 2 which is less than ¼ of period 1. The Operating Profit Margin was noticed 8.20% for period 1as compare to 3.28% for period 2. Correlation between Net Working Capital and Net Profit, Net Profit and Current Ratio, No. of Days in Working Capital and Net Profit are found to be highly negative and correlation between Inventory Turnover Ratio and Net Profit is found highly positive for period 1.

7 International Journal of Management, MIT College of Management, Vol. 2, No. 2, August 2014, pp CONCLUSION On the basis of the above findings we can concludes in period 1 the company s profitability and performance was batter as compare to period 2. As the company s average sales, average net profit and average operating profits, average net profit margin, and average return on capital are more in period 1 as compared to period 2. Correlation analysis also supporting this fact as we can see that there is high degree negative relation between Net profit and Current ratio which significantly indicates the increase in net profit with the decrease in current assets. The correlation between net working capital and net profit and numbers of days in working capital and net profit are also showing high degree negative relation which are supporting to the above conclusion. Thus from the above we can concludes that when the company was operating in the negative working capital zone perform better than the positive working capital zone so we can say that negative working capital can be a positive sign for success. LIMITATIONS OF THE STUDY The analysis and interpretation are based on secondary data contained in the published annual reports of Company for the period, so it is subject to all limitations that are inherent in the condensed published financial statements. Due to the limited time available the study has been confined for a period of 8 years only and which is further divided into two parts. The study of financial performance can be only a means to know about the financial condition of the companies. The study is unable to categories the loans and advances and fixed deposits into current and non-current. The study is also unable to consider the implicit cost of current liability. There can be some other factors except the working capital condition that can affects the profitability/ performance of the company for the above said period but the present study is unable to include those factors. The study holds good for TVS Company but it is applicable to other companies of same industry can t be said. The studies don t consider the whole industry and their trends regarding the working capital. ABBREVIATIONS USED = Gross Working Capital NWC = Net Working Capital C.L. & PROV. = Current Liabilities and Provisions ITR = Inventory Turnover Ratio ICP = Inventory Conversion Period DTR = Debtor Turnover Ratio DCP = Debt Collection Period CR = Current Ratio QR = Quick Ratio ROCE = Return On Capital Employed PBITM = Profit before Interest and Tax Margin WCTR = Working Capital Turnover Ratio OPM = Operating Profit Margin N.P. = Net Profit S.D. = Standard Deviation C.V. = Coefficient of Variation REFERENCES Chakraborty, S.K, (1976): Funds Flow and Liquidity Management Topics in Accounting and Finance, Chakraborty, S.K., Bhattacharya, K.K., Ghosh and S.K. & Rao, N.K. (ed), Kolkatta, Oxford University Press, pp., Sarkar, J.B. & Saha, S.N. (1987) Profitability Crisis & Working Capital Management in the Public Sector in India: A Case study, (May), Kolkatta, The Management Accountant, ICWAI, pp Jain, R.K Working Capital Management of State Enterprises in India. Jaipur: National Publishing House. Parasuraman, N.R. Working Capital Practices in Leading Pharmaceutical Companies A view of the Credit Policy and Profitability. The Management Accountant, 39(12), December 2004: Arun Kumar O.N. and T. Radharaman (2012), Analysis of effects is working capital management on Corporate profitability of Indian Manufacturing firms. International Jounal of Business Insights and Transformation, Vol.V, No. 1, Oct.-March Arora A.K. (2013). Negative Working Capital and its impact on Profitability A Case Study of Hindustan Unilever Ltd. The Management Journal The Journal for CMAs by the Institute of Cost Accountants of India, March 2013 pp Dabasish Sur and Kaushik Chakraborty (2011), Evaluating Relationship of Working Capital and Profitability: A Study of Selected Multinational Companies in the Indian Pharmaceutical Sectior, the IUP Journal of Management Research, Vol. X, No. 2, Official website of TVS Motor Company.