Impact of Working Capital Management on Corporate Performance: An Empirical Analysis of selected IT firms in India

Transcription

1 Volume 118 No , ISSN: (on-line version) url: ijpam.eu Impact of Working Capital Management on Corporate Performance: An Empirical Analysis of selected IT firms in India Avinash. P and Dr. Rajiv Prasad School of Business Amrita Vishwa Vidyapeetham Coimbatore, India Abstract. Th is study analyses how corporate performs due to the impact of working capital management for selected Information nology companies for the period of 10 years from 2008 to 2017 in India. It is a comparative analysis of the selected companies under study. This study measures the reactivity of return on employed capital to the working capital vary in the different companies. This study found that the management of current assets is more important than other aspects of the working capital management. Firms in the IT sector should manage their current assets very carefully in order to enhance their profitability. Keywords: Working capital, Return on capital Employed, Co mparative Analysis. 1 Introduction Contribution of GDP by IT Sector in India has increased from 1.2% to 7.5%. Country exports around US $99 billion in the form of IT products and services. This paper analyzes the working capital management of some chosen companies of the IT sectors and its impact on their profitability. Based on this analysis some suggestions have been made to improve the financial performance of the IT sector. This would help the companies therein to compete better in the current competitive environment. Financial performance can be improved in many ways. For example, by more effective utilization of capital employed in fixed assets, better utilization of the production capacity, more efficient management of the working capital etc. Our focus is on the last stated item. 2 LITERATURE REVIEW Many studies have been done throughout the world regarding the relation between profitability and working capital efficiency. Chitta Ranjan and Aniruddha sarkar [1] examined the relation between return on capital employed and working capital through key ratios for Indian companies of public gas and oil sector. This paper gives an essential idea about the parameters that 51

2 2 a company should look at while deciding its working capital management policy in order to maintain its profitability. Bhayani [2] did an analyses on Gujarat Ambuja Cements Limited, for measuring the effect of working capital on its effectiveness during the period 1993 to These Analyses found a noteworthy relationship between the two. Singh and Pandey [3] did a study to examine the relation between working capital management and profitability of Hindalco Indus tries Limited and endow a positive noteworthy relationship between current assets and risk management and profitability. Panigrahi [4] did a study on ACC Limited to find a relationship between working capital with liquidity, profitability and solvency during the period of 2001 to 2010 and found that the current assets management is very important for all these three. The firm should maintain a proper working capital for medium as well as long term to escape from bankruptcy. Goswami and Sarkar [5] found the effect of working capital management on liquidity and profitability of SAIL during the period with the guidance of tools and techniques in statistics. This study concluded that from the 9 ratios that they took related to working capital management, 5 ratios showed positive association while the remaining 4 ratios showed negative association with profitability. Danuletiu [6] analyzed the impact of working capital management of companies which are located in Alba county. The relationship was analyzed for 20 different companies between the period 2004 to An uncooperative relationship was found between profitability and working capital management. Sur and Rakshit [7] did an analysis for the correlation between current assets management and profitability in 25 different companies from Indian Industries. The study shows both positive and uncooperative relationship between profitability and receivable turnover. The outcome shows that 47.7% of the variation on profitability was due to efficiency in management of receivables, inventory and the operating assets for the long term. Goswami and Sarkar [8] made a study to interpret the relation between liquidity and profitability of airline companies in India during the period of 2000 to 2006, and to assess their financial position. The article found out that the debtors management system and profitability is quite weak in Kingfisher airlines. The relationship between Inventory turnover Ratio (ITR) and profitability was not found to be of the accepted standards for both Air India and Kingfisher. The relationship between quick ratio (QR) and ROCE was not found to be of the accepted standards for both Jet Airways and Indian Airlines in the given period. Sarkar [9] made a analysis to find the result of liquidity management on the profitability of ONGC limited during the period 2004 to The study concludes that from 8 ratios related to working capital management Current Asset to Total Asset Ratio, Current Asset to Sales Ratio and Inventory Turnover Ratio showed positive relation with the profitability and the other ratios like Quick Ratio, Current Ratio, Debtor Turnover Ratio, Cash Turnover Ratio were found to have a uncooperative relationship with the profitability ratio. Mandal and Hossain [10] did a study to measure the effect of working capital management on liquidity and profitability of the IT sector during the period of

3 3 to This analysis examines the correlation between profitability and position of liquidity. From the analysis it was concluded that the working capital management is essential to sustain better production capacity utilization, better liquidity and profit a- bility for the IT sector in India. TABLE 1 VARIABLES Current Ratio Qucik Ratio Current Asset to total asset Ratio Current Asset to Sales Ratio Working capital to tunover Ratio Debtor Turonver Ratio Cash turnover Ratio DEFINITIO NS Current Assets / Current Liabilities (Current Assets Inventory) / Current Liabilities Current Assets / Total Assets Current Assets / Sales Sales / Working capital Sales / Account Receivable Sales / Cash 3 METHODOLOGY AND DATA This current study of relation between working capital management and perfo rmance of the IT sector companies in India is depend on the data collected from secondary sources. Data of 9 companies - Tata Consultancy services Ltd. (TCS), HCL nologies Ltd., Infosys Ltd., Mphasis Ltd., Oracle Financial Services, Polaris Consulting & Services Ltd., Mahindra Ltd., Wipro Ltd., and Mindtree were taken from the period 2008 to 2017 for this study. Data was collected from the Capitaline database. Linear regression was used to do the analysis. Ratios that have been taken for measu r- ing the working capital efficiency of these companies are Current Ratio (CR), Quick Ratio (QR), Current Assets to Total Assets Ratio (CATAR), Current Assets to Sales Ratio (CASR), Working Capital to Turnover Ratio (W CTR), Debtor Turnover Ratio (DTR) and Cash Turnover Ratio (CTR). The model of Return on capital employed is as follows: Roce=b0+b1*CR+b2*QR+b3*CATAR+b4*CASR+b5*WCTR+ b6*dtr+ b7*ctr. 53

4 4 where b 1, b 2, b 3, b 4, b 5, b 6, b 7 are the co-efficient of Current ratio (CR), Quick Ratio (QR), Current asset to total asset ratio (CATAR), Current asset to sales Ratio (CASR), Working capital to turnover Ratio (WCTR), Debtor turnover Ratio (DTR) and Cash turnover Ratio (CTR) respectively. Return on capital Employed is the d e- pendant variable (ROCE). 4 RESULTS AND DISCUSSIONS Current Ratio: Table 2 reveals the relationship between current ratio and ROCE. The coeff i- cients are 0.16, 0.1, 0.16, -0.5, -0.4, 0.4, -0.4, -0.4, 0.4 respectively for the companies under the study. The relationship is positive for TCS, HCL, Infosys, Mahindra and Mindtree and rest have a negative relationship. The relatively high coefficient values for most of these companies show that there is a important relation between current ratio and ROCE for most of the companies under the study. Thus there is a significant contribution by the current ratio management towards profitability of these companies. Quick Ratio: Table 3 reveals the relationship between quick ratio and ROCE. The coefficients are -0.17,.105, , , , , , , respectively for the companies under study. The relationship is positive for HCL, Mahindra and Mindtree, and the rest have a negative relationship. The coefficient values are quite high for most companies which show that there is an important association between quick ratio and ROCE. Hence there is a important contribution by quick ratio towards the profitability of concerned companies. Current Asset to Total Assets Ratio: Table 4 reveals the relationship between Current Assets to Total Assets Ratio and ROCE. The relationships are -0.13, 0.29, 0.18, 0.12, -0.07, 0.46, -.19, -2.87, 0.31 for the companies under the study. The relationship is positive for HCL, Infosys, Mphasis, Mahindra, Mindtree and the rest have a negative relationship. Again the relatively high coefficient values show that there is significant association between Current Asset to Total Asset Ratio and ROCE. Hence there is a significant contribution by current asset to total asset ratio towards the profitability of concerned companies. Most of the companies are doing well in this regard. Current Asset to Sales Ratio: Table 5 reveals the relationship between Current Assets to Sales Ratio and ROCE. The relationships are -0.20, -0.82, -0.19, -0.27, -0.12, -0.23, -0.14, -0.37, 0.13 for the companies under the study. The relationship is positive only for Mindtree and the rest have a negative relationship. These values are moderate and negative for most of the companies. This shows that there is a moderate relationship between Current Asset to Sales Ratio and ROCE for most of the companies. 54

5 5 Working capital turnover Ratio: Table 6 reveals the relationship between working capital turnover Ratio and ROCE. The relationships are 0.006, , 0.052, 0.065, 0.005, 0.003, 0.002, 0.043, for the companies under the study. The relationship is negative for HCL and Mindtree. The rest have a positive relationship. The coefficient values are quite low for most of the companies which shows that there is no notable connection between Working Capital Turnover Ratio and ROCE. The IT companies need not obsess over this ratio. Debtor Turnover Ratio: Table 7 reveals the relationship between Debtor turnover Ratio and ROCE. The relationships are -0.01, 0.04, 0.02, , 0.01, -0.10, -0.01, -0.01, 0.07 for the companies under the study. The relationship is positive for HCL, Infosys, Polaris, Mahindra and Mindtree. The rest have a negative relationship. The low values again show that there is no notable relation between Debtor Turnover Ratio and ROCE. Cash turnover Ratio: Table 8 reveals the relationship between cash turnover Ratio and ROCE. The relationships are , , -0.01, 0.003, , , , 0.445, for the companies under the study. The relationship is positive for Mphasis and Oracle. The rest have a negative relationship. The low values show that there is no notable association between Cash Turnover ratio and ROCE. Hence there is no significant contribution by Cash Turnover Ratio towards the profitability of concerned comp a- nies. TABLE 2 Current Ratio and ROCE TCS HCL Infosys Mphasis Polaris Mahindra Wipro Oracle Mindtree

6 6 TABLE 3 Quick Ratio and ROCE TCS HCL Infosys Mphasis Polaris Mahindra Wipro Oracle Mindtree TABLE 4 Current Asset to Total Asset TCS HCL Infosys Mphasis Polaris Mahindra Wipro Oracle Mindtree TABLE 5 Current Asset to Sales and ROCE TCS HCL Infosys Mphasis Polaris

7 7 Mahindra Wipro Oracle Mindtree TABLE 6 Working capital turnover Ratio and ROCE TCS HCL Infosys Mphasis Polaris Mahindra Wipro Oracle Mindtree TABLE 7 Debtor turnover Ratio and ROCE TCS HCL Infosys Mphasis Polaris Mahindra Wipro Oracle Mindtree

8 8 TABLE 8 Cash turnover Ratio and ROCE TCS HCL Infosys Mphasis Polaris Mahindra Wipro Oracle Mindtree CONCLUSIONS The study of association between profitability and key working capital ratios of the 9 companies taken for this study reveals both positive and negative correlation coefficients for different ratios for different companies during the period. From the 8 ratios used for the study only 4 viz. Current Ratio, Quick Ratio, Current Asset to Total Asset Ratio and Current Asset to Sales Ratio have a significant contribution towards the profitability 0f IT companies. This shows that the current assets management is very important for the enhanced profitability of IT sector. Investment in better current assets management can be recommended on the basis of this finding as all these 4 ratios are directly linked to current assets. 6 LIMITATIONS Future research can extend this study which was done for mostly large companies in the Indian IT sector to include other smaller companies to see if these findings can be generalized for the entire sector. 7 REFERENCES 1. Sarkar, C. R., & Sarkar, A. (2013). Impact of Working Capital Management on Corporate Performance: An Empirical Analysis of Selected Public Sector Oil & Gas Companies in India. International Journal of Financial Management, 3(2),

9 9 2. Bhayani, S. J. (2004). Working Capital and Profitability Relationship (A Case Study of Gujarat Ambuja Cements Ltd.). SCMS Indian Management, April-June, Singh, J. P., & Pandey, S. (2008). Impact of Working Capital Management in the Profitability of Hindalco Industries Limited. ICFAI journal of financial Economics, 6(4). 4. Panigrahi, A. K. (2014). Relationship of working capital with liquidity, Profitability and solvency: A case study of ACC limited. 5. Goswami, S., & Sarkar, A. (2011). Impact of working capital management on liquidity, profitability An empirical study with reference to sail. International Journal of Marketing and Management Research, 2(11), Danuletiu, A. E. (2010). Working capital management and profitability: a case of Alba county companies. Annales Universitatis Apulensis: Series Oeconomica, 12(1), Mallik, A., Sur, D., & Rakshit, D. (2005). Working capital and profitability: a study on their relationship with reference to selected companies in Indian pharmaceutical industry. GITAM journal of management, 3(2), Sarkar, A. & Goswami, S. (2012). An overview of Indian infrastructure sector- A case study of Air India & Kingfisher Airlines. Zenith International Journal of Business Economics & Management Research (ZIJBEMR), January, 2(1), Sarkar, A. (2011). Impact of liquidity management on profitability: A case study with reference to ONGC. Survey-IISWBM, July-December, 51, Mandal, A., & Hossain, I. (2010). Some aspects of working capital management in relation to liquidity, profitability and risk-a case Study of Bharat Petroleum Corporation Ltd. The Journal of the Institute of Public Enterprise,

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