A Comparative Analysis of the Impact of Current Assets and Fixed Assets on Working Capital of Textile Companies in India

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1 Volume 117 No , ISSN: (printed version); ISSN: (on-line version) url: ijpam.eu A Comparative Analysis of the Impact of Current Assets and Fixed Assets on Working Capital of Textile Companies in India 1 T. Narasimhaiah and 2 S.M. Chocka Lingam 1 Karpagam Academy of Higher Education, Coimbatore. 2 Department of Commerce, Karpagam Academy of Higher Education. Coimbatore. Abstract The current assets and fixed assets of the company are the total salable assets of the company, which are utilised for the operations of the company, a fixed asset to current asset ratio which forms part of the working capital has to be analysed to know the impact of assets on the company. Managing the working capital is life line of any company because; it has a huge significance on profitability and liquidity of the business concern. Therefore, any company will have to maintain an optimum favourable balance between the liquidity position and the profits of the company. There is no specific ratio as such to maintain the fixed assets and current assets, but the ratios can be divided on the basis of the certain policies discussed in this article. Textiles industry is the fastest growing industry in the world, the following study analyses the working capital management of top 5 NSE listed textile companies in India. The working capital management components are tested against the profitability measures with the use of various statistical tests and techniques to ascertain the relationship between Working Capital Management and Profitability of each company. The study reveals that there is a significant relationship between the Working Capital Management and Profitability in all the companies analysed. Keywords:Fixed assets, current assets, aggressive policy, conservative policy, average policy. 263

2 1. Introduction Working capital is an effective tool for the measurement of both the company's effectiveness and its short-term Financial Position. Liquidity and Profitability are the two faces of the same coin. Management of Working Capital contains greater balancing of working capital factors like -Debtors, Inventory, Payables and Other Fixed and Current Assets are efficiently for day to day business activities. Maintenance of optimum working capital balance is maintaining the minimum working capital and realizing the maximum possible returns. There is a greater relationship between firm s working capital and profits of the firm. The capability of the Company to earn profit can be considered as the ability of the company to maximize its profits. The primary objective of any firm is to maximize their profits. But, maintaining the liquidity of the firm is also an essential objective. The problem is that growing profits at the cost of liquidity can bring major and effective problems to the firm. Therefore, there must be a proper balance between these two objectives or goals of the firm. Therefore, there must be a proper balance between these two objectives or goals of the firm. Foregoing the opportunity cost of emphasising on one objective may not be a good decision. Profitability has to be achieved by having an optimum liquidity in the company. If the company focuses on profits, then in the long run the liquidity of the company will be hindered and all the day to day operations will be affected, in turn affecting the profitably. On the other hand, if liquidity is given more importance then there might be an increase in idle cash which hinders the profitability through investments. 2. Review of Literature Many earlier studies have shown that the relationship between Working Capital Management, Profitability, Liquidity, Risk and many other factors of a company in different environments. Philip (1996) - Studied the working capital and laid emphasis on appropriate presentation of information relating to the current assets and fixed assets. The non-current assets classification in the balance sheet is very ambiguous and may lead to different implications, therefore proper identification, classification and recoding of the assets and liabilities would lead to make better decisions in the field of working capital management. Thomas Krueger (2002) in his study on Working Capital Management stated that by optimum utilisation of the current assets, it is easy to raise short term funds and to also decrease the financing cost of the company. He also emphasised on the fact that the Working 264

3 Capital requirements of the companies change in accordance with the industry and size of business. Singh (2004) He studied that the Working Capital Management in Lupin laboratories and came to a conclusion that, if the current assets are more than the fixed assets, it means that a lot of finance is locked up in the current assets, therefore he went on to study the operating cycle of the company and found that the highest amount was locked by the debtors. He concluded that the reflection of the Working Capital of the company is in its operating cycle and fixed assets to current assets ratio. Ramudu and Rao (2008) He verified the various studies on Working Capital Management and its components, and found that, the Management as a whole would necessarily discuss each component of Working Capital and thus, exclusive studies on individual factors of Current Assets and Current Liabilities were found to be very less. A depth study into the survey indicated that, there are only a few studies available abroad and number of studies in India. The survey also reflect that, a few cases studied on individual components of automobile companies, which were present, but no attempt in India is made to study the Working Capital Management in any specific industry. 3. Statement of the Problem Working Capital Management of a firm is important for the following reasons: An optimum part of the investment is invested in the firm s current assets. Level of current assets will change quickly with the variation in sales. The various current assets are used to utilize the fixed assets. The Working Capital Management of a unit will have a greater impact on the firm s profitability. Hence, this study has been conducted to know the relationship between the fixed assets and current assets ratio of the firm with the profitability of the concern. It is assertive to ascertain the significance, as it can serve as an important tool to the managers of the company to have an optimum balance between the Profitability and Liquidity Position of the company. 4. Objectives The Objective of the study is to examine the relationship between the Working Capital Management efficiency and Profitability of the textile industry in India. To analyse the relationship between fixed assets and current assets of selected textile companies in India. To study the policies that are selected by each of the companies in relation to fixed assets and current assets. 265

4 5. Methodology of the Study Data Collection The data required for this study of listed textile companies in National Stock Exchange in India. This study is based on secondary data which is collected from annual reports of the companies. (Income statement and balance sheet). Study Period: Chosen study period ranging from to Top five Textile companies, which are selected in National Stock Exchange for the study. The list of those companies is as follows: Grasim Industries. Garden Silks. Pradeep Overseas. Fab India. Donear India. Statistical Tools and Techniques Analysis is done through the Excel software and Ratio Analysis. 6. Analysis Fixed assets and current assets ratios of 5 companies from are analysed. Current Assets and Fixed Assets can be studied to derive the level/proportion of current assets to the total assets of the company. If current assets are greater than the fixed assets, it means that a lot of funds are locked in the current assets and vice versa. Companies Grasim industries Garden silks Pradeep overseas Fab India Donear India Keeping the fixed assets at a constant at a given level, when the CA/FA ratio is higher it shows that the company is following a conservative policy for maintaining its current assets, and lower CA/FA ratio shows that the company is implementing an aggressive current assets policy. In terms of the positive and negative effects of each of the policies, the following terms are discussed. 1. Conservative policy high liquidity, low risk and low profitability. 2. Aggressive policy low liquidity, high risk and high profitability. 266

5 Conservative Policy Average Policy Level of Current Assets Aggressive Policy Fixed Assets Level O.P Grasim industries Garden silks Pradeep overseas Fab india Donear india fixed assets The above graph gives a detailed analysis of the policies chosen by each of the companies in the study ANOVA Test Groups Count Sum Average Variance Grasim Industry Garden Silks Pradeep Overseas Fab India Donear India

6 Sources Of Variation Between Groups Within Groups Total SS Gf MS F P-Value 1.87E-09 F Crit HO: there is no significant difference between the fixed assets and current asset ratio of the 5 textile companies. Since P Value is 1.87E-09 is < 0.05 level of significance, and also the F value is greater the F -Crit value, hence the null hypothesis is rejected. 7. Findings and Conclusion The various policies adopted by the companies, indicate that the amount of current assets that are maintained by the companies, as compared to the fixed assets. It s always better that there must be a perfect management of the fixed assets and utilisation of current assets in any company. Anova test shows that there is a significant difference between the fixed assets/current assets ratio among the five companies, it is clear that different companies adopted different working capital management policies. With its link to a company s profitability and stock returns, the current assets and fixed assets ratio is a powerful tool for examining the different aspects of the a company is being managed over time and in comparison with others within the same industry. Therefore, maintaining a ratio that is more suitable for the company is essential. Grasim industries and garden silks have similar conservative approaches, which gives returns but not safe for future. Hence it is suggested to follow average policy. 8. Conclusions The study has analyzed the fixed assets and current assets ratio and its relevance with the Working Capital Management of top five India textile companies. Some of the important financial tools like ratio analysis are used to measure the working capital policies of these companies. Based on the above analysis, it can be said that various companies in the same industry follow different Working Capital Management policies. 268

7 Company Name Grasim Industries Garden Silks Pradeep Overseas Fab India Donear India CA/FA Policies Aggressive Policy Aggressive Policy Conservative Policy Average Policy Average Policy The different analysis have identified the efficiency of Working Capital Management practices and are directed towards helping the finance managers in making the effective decisions related to Working Capital Management policies. The companies have to improve effective handling of inventor, accounts receivables and accounts payables. Because, these are important factors to increase the profitability of the companies. References [1] Pouraghajan A., Emamgholipourarchi M., Impact of working capital management on profitability and market evaluation: evidence from Tehran stock exchange, International Journal of Business and Social Science 3 (10) (2012). [2] Napompech K., Effects of Working Capital Management on the Profitability of Thai Listed Firms, International Journal of Trade, Economics and Finance 3 (3) (2012). [3] Muhammad M., Jan W.U., Ullah K., Working Capital Management and Profitability An Analysis of Firms of Textile Industry of Pakistan, Journal of Managerial Sciences 6 (2) (2012). [4] Ganesan V., An analysis of working capital management efficiency in telecommunication equipment industry, Journal of Rivier academic 3 (2) (2007), [5] Salauddin A., Profitability of Pharmaceutical companies of Bangladesh, The Chitagong University Journal of Commerce 16 (2001), [6] Shin H.H., Soenen L., Efficiency of working capital management and corporate profitability, Financial practice and education 8 (1998), [7] Ray S., Evaluating the impact of working capital management components on corporate profitability: evidence from Indian manufacturing firms, International Journal of Economic Practices and Theories 2 (3) (2012) [8] Rajesh, M., and J. M. Gnanasekar. "Congestion control in heterogeneous WANET using FRCC." Journal of Chemical and Pharmaceutical Sciences ISSN 974 (2015):

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