CHAPTER III METHODOLOGY

Size: px

Start display at page:

Download "CHAPTER III METHODOLOGY"

Leslie Fitzgerald
5 years ago
Views:

1 CHAPTER III METHODOLOGY This chapter deals with the methodology which comprises selection of the study area, types of data and information used, and tools used for analysis of data. The methodology adopted for evaluation of the objectives of the present study is described under following heading. 3.1 Location 3.2 Sources of data 3.3 Statistical analysis 3.1. LOCATION The present study was confined to the Vinay Industries Ltd. and Junagadh city of Junagadh district. Junagadh district is located in western Gujarat. The geographical location of Junagadh district is degree to degree North (Latitude) and degree to degree East (Longitude). The maximum temperature of this place is 42 degree centigrade and the minimum temperature is 10 degree centigrade. The total area of the district is 309 sq. km. As per 2011 census, the population of Junagadh district is lakh. There are six main rivers which flow through the district which are Ojhat, Uben, Hiran, Raval, Madhuvanti and Machhundri. The average rainfall of Junagadh district is 827 mm. The district is divided into 10 talukas of which major ones include Junagadh, Manavadar, Visavadar, Keshod, and Mendarada (Anon., 2017f). Vinay Industries Ltd. at Junagadh city was selected purposively for the study. Because Most of the groundnut oil mills and cotton oil refinery plant were situated in Junagadh district so it was a better location for study. Major crop produced in the district are cotton and oilseed crop. Most of the people of Jnugadh district preferred groundnut oil and cotton oil.

(Source: Anon., 2017g) Fig. 3.1. Location of Vinay Industries Ltd. 3.2. SOURCE OF DATA The data was collected from primary and secondary sources. 3.2.1. Primary Sources The primary data for processing cost of various items like raw materials, labour, storage cost etc.

15-16 were taken to find out net return and benefit cost ratio of cotton oil. 3.2.

2 (Source: Anon., 2017g) Fig Location of Vinay Industries Ltd SOURCE OF DATA The data was collected from primary and secondary sources Primary Sources The primary data for processing cost of various items like raw materials, labour, storage cost etc. was collected from processing unit. Cotton oil processing cost data of year were taken to find out net return and benefit cost ratio of cotton oil Secondary Sources The secondary data related to cotton oil sales, current assets, current liabilities, liquid assets, debtors etc was collected through directly from the company s annual reports. Fourteen year s ( to ) cotton oil sale data were taken to work out the compound growth rate of sales of cotton oil. Ten year s ( to ) working capital data were taken to analyze the efficiency of working capital management practices and effect of working capital management on profitability of the firm. 32

3 3.3. STATICAL ANALYSIS Tabular analysis and compound growth rate were used to satisfy processing cost and growth of cotton oil sale. Ratio analysis, correlation and regression were used to fulfill the objectives of efficiency of working capital management practices and effect of profitability of the firm Tabular Analysis The cost of processing in the cotton oil was analysed using the available data, from the Vinay Industries Ltd.. Various cost of processing in the cotton oil was calculated as under. Table 3.1. Economics of processing : cotton oil Fixed cost Depreciation on building Depreciation on machinery Salaries for permanent staff Interest on fixed capital Particulars Total Amount Other expenses like insurance and license fees Total Fixed Cost (TFC) Variable cost Raw material Storage cost Cost of tin Power charges Transportation charges Wages for casual labours Fuel charges Repairs and maintenance Miscellaneous charges Interest on working capital Taxes Total Variable Cost (TVC) Total Processing Cost (TPC) [TFC + TVC] Gross Return (GR) Net return (GR-TPC) Benefit cost ratio (GR/TPC) 33

4 3.3.2 Compound Annual Growth Rate (CAGR) Compound annual Growth Rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some element of the business, for example revenue, units delivered, registered users, etc. CAGR depicts that effect of volatility of periodic returns that can render arithmetic means irrelevant. It is particularly useful to compare growth rates from different data sets such as revenue growth of companies in the same industry and this method suggested by (Grover et. al.1996). Y= ab t Where, Y = Sale of cotton oil a = Constant/intercept t = Time variable b = Regression co-efficient The equation can be rewritten in logarithm form as follows: Log Y t = Log a + t Log b The present compound growth rate (g) will be calculated by using the relationship : g = (Antilog of log b 1 )*100 g = compound growth rate per annum in percent Ratio Analysis Ratio analysis is a tool which was used to carry out an evaluative analysis of information in the financial statements of the company. These ratios were calculated from current year figures and compared with past years ratios, other companies ratios and the industry ratios, which has enable to assess the performance of the company (Srinivas, 2012). 34

5 Current ratio Current ratio that measures the ability of a company to pay its current liabilities when they come due with only current assets. Current assets that can be converted in to cash within in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered as a quick assets. Current Ratio = Quick ratio Current Assets Current Liabilities Quick ratios analyze the ability of a company to pay off both its liquid liabilities as they become due as well as their long-term liabilities as they become current. Standard Quick ratio is 1:1. Higher quick ratios are more favorable for companies because it shows there are more quick assets than liquid liabilities. Quick Ratio = Liquid Assets Liquid Laibilities Debtor s turnover ratio Debtor turnover ratio is the relationship between net sales and average debtors. It is also called account receivable turnover ratio. Debtor s Turnover Ratio = Debtors +Bills Receivables Total Credit Sales No. of working days Inventory turnover ratio The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing Cost of Goods Sold (COGS) with average inventory for a period. This measures how many times average inventory is turned or sold during a period. Inventory Turnover Ratio = COGS Average Stock Working capital turnover ratio The working capital turnover ratio is referred as net sales to working capital. It indicates a company's effectiveness in using its working capital. A ratio of 1 is usually considered the middle ground. It's not risky, but it is also not very safe. This means 35

that the firm would have to sell all of its current assets in order to pay off its current liabilities. Working Capital Turnover Ratio = 3.3.3.6.

6 that the firm would have to sell all of its current assets in order to pay off its current liabilities. Working Capital Turnover Ratio = Return on assets ratio Sales Net Working capital The Return on Assets (ROA) ratio, often called the return on total assets, is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. ROA shows how efficiently a company can convert the money used to purchase assets into net income or profits. Net Income Return on Assets Ratio = 100 Average Total Assets Net profit margin ratio The net profit margin is intended to be a measure of the overall success of a business. A high net profit margin indicates that a business is pricing its products correctly and is exercising good cost control. Net Profit Margin Ratio = Correlation Net Profit Net Sales 100 Correlation is a statistical technique used to determine the degree to which two variables are related to each other. It is also called Pearson's correlation or product moment correlation coefficient. It is useful to analyze the effect of working capital management on profitability of the firm. Correlation coefficient is the degree of relation between two variables. Here, Karl Pearson s correlation will be used for correlation coefficient between return on assets, net profit margin and other independent variables (Bhatia and Barwal, 2015). Where, X = Independent variable Y = Dependent variable 36

7 Y 1 = Return on assets Y 2 = Net profit margin X 1 = Current ratio X 2 = Quick ratio X 3 = Debtors turnover ratio X 4 = Inventory turnover ratio X 5 =Working capital turnover ratio Regression Multiple linear regression analysis was used to know the effect of various variables on return on assets, net profit margin and was calculated on the basis of following formula: Y= α + b1x1 + b2x2 + b3x3+ b4x4+ b5x5 + ϵ Where, Y 1 = Return on Assets in t th year Y 2 = Net profit margin in t th year α = Constant X 1 = Current Ratio in t th year X 2 = Quick Ratio in t th year X 3 = Debtors Turnover Ratio in t th year X 4 = Inventory Turnover Ratio in t th year X 5 = Working Capital Turnover Ratio in t th year t = Year ϵ = Error Term 37

8 38 Methodology

CHAPTER III METHODOLOGY

CHAPTER III METHODOLOGY This chapter deals with the methodology adopted for evaluation of the objectives under the study. 3.1. LOCATION AND SELECTION OF AREA The present study was confined to the Govardhan