CHAPTER IV RESULTS AND DISCUSSION This chapter is devoted to presentation and interpretation of the results obtained through the analysis of the data. The collected data were critically analyzed using different analytical tools and the observations are presented under the following heads: 4.1. Processing Cost of Cotton Oil 4.2. Growth Rate of Cotton Oil Sale 4.3. Efficiency of Working Capital Management 4.4. Effect of Working Capital Management on Profitability of the Firm 4.1. PROCESSING COST OF COTTON OIL Total cost In accounting, the total cost includes in sum of fixed costs, variable costs and semi-variable costs. The total amount spent on a particular investment, commissions, fees, other transaction costs and taxes comes under any of the total cost like fixed costs, variable costs or semi-variable costs. Fixed cost Fixed cost does not varies with the level of output. It is the cost regarding business expenses that are not dependent on the level of goods or services produced by the business. This includes Depreciation, Investment interest, Housing rent and Insurances. Variable cost A variable cost is a corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases. Variable costs differ from fixed costs such as rent, advertising and office supplies, which tend to remain the same regardless of production output.
Results and Discussion Depreciation Depreciation may be defined as the decrease in value of a piece of property over a period of time. Company calculate deprecation by return down value method. Depreciation value is dependent on the life expectancy of the machine/property. Annual interest on investment is charged against the piece of equipment as an initial or guaranteed return to owners and investors, such as bond, stock, or mortgage holders with a contract rate of interest on the investment. Service and maintenance would include lubrication; wear out part replacement, repair, cleaning etc. of the machinery. These charges should be estimated accurately, since they are related directly on the basis of the production. Building cost is advisable to be included in fixed annual charge; this cost also depends on location and facilities available with the building. Benefit cost ratio A Benefit Cost Ratio (BCR) attempts to identify the relationship between the cost and benefits of a proposed project. Benefit cost ratios are most often used in corporate finance to detail the relationship between possible benefits and costs. Therefore, the project should be considered if the value is significantly > 1. If the BCR is equal to 1, the ratio indicates that the expected profits equal the costs. If a project's BCR is less than 1, the project's costs outweigh the benefits and it should not be considered. The economics of processing for the cotton oil is presented in table 4.1. The results indicated that total fixed cost of cotton oil was amounted to Rs. 87,46,144/- with the share of 23.30 per cent in total processing cost. Total variable cost of processing of cotton oil was Rs. 2,87,90,147/- with the share of 76.70 per cent in total processing cost. The highest variable cost was observed for raw materials ( Rs. 2,61,38,222 and 69.63 per cent) followed by taxes (Rs. 10,30,077 and 2.74 per cent) and power charges (Rs. 5,02,655 and 1.34 per cent) among different variable cost. The total cost of possessing was estimated to be Rs. 3,75,36,291/-. Gross and net returns were found to be Rs. 6,56,65,130 and Rs. 2,81,28,839 respectively. The benefit cost ratio observed 1.75 per cent. So, there is good relationship between cost and benefit and indicated benefit cost ratio show that project is viable. 40
Results and Discussion Table 4.1. Economics of processing: cotton oil Fixed cost Particulars Total Amount (Rs.) % share to the total cost Depreciation on building 11,50,752 3.07 Depreciation on machinery 66,29,403 17.66 Salaries for permanent staff 6,00000 1.60 Interest on fixed capital 1,13,196 0.30 Other expenses like insurance and 2,52,793 0.67 license fees Total Fixed Cost (TFC) 87,46,144 23.30 Variable cost Raw material 2,61,38,222 69.63 Storage cost 24,112 0.06 Cost of tin 34,591 0.09 Power charges 5,02,655 1.34 Transportation charges 2,49,530 0.66 Wages for casual labours 2,02,575 0.54 Fuel charges 2,28,327 0.61 Repairs and maintenance 1,46,752 0.39 Miscellaneous charges 1,33,136 0.35 Interest on working capital 1,00,170 0.27 Taxes 10,30,077 2.74 Total Variable Cost (TVC) 2,87,90,147 76.70 Total Processing Cost (TPC) [TFC + TVC] 3,75,36,291 100 Gross Return (GR) 6,56,65,130 Net return (GR-TPC) 2,81,28,839 Benefit cost ratio (GR/TPC) 1.75 41
Results and Discussion 4.2. GROWTH RATE OF COTTON OIL SALE In this section an attempt has been made to analyze the Compound Annual Growth Rate (CAGR) of cotton oil sale in value term and quantity term. The data pertaining to it was accessed from the secondary source for a period of fourteen years (2002-03 to 2015-2016). The growth rate observed in quantity term was 16.26 per cent where, in value term it was 21.16 per cent. The different in growth rate was due to change in price of cotton oil. The price of cotton oil was Rs. 44 per kg. in the year 2002-03 and in year 2015-16, increase upto Rs. 63 per kg. All data are significant at 1 per cent level of significant and positive growth of cotton oil sale is observed. Table 4.2. Growth rate of cotton oil sale Year Sale (in Kg.) Amount 2002-03 57,655 25,74,422 2003-04 1,96,776 91,69,139 2004-05 2,42,420 1,02,47,424 2005-06 4,28,821 1,62,30,154 2006-07 9,83,820 4,42,62,159 2007-08 11,08,593 5,97,42,274 2008-09 7,77,567 4,36,73,516 2009-10 5,57,518 2,61,97,541 2010-11 7,31,521 4,02,27,606 2011-12 7,70,251 5,15,41,179 2012-13 7,74,416 5,52,54,600 2013-14 8,96,316 6,11,52,761 2014-15 9,96,964 6,47,99,052 2015-16 10,38,633 6,56,65,130 CAGR (%) 16.26*** 21.16*** *** = significant at 1% level of probability 42
Ratio Results and Discussion 4.3. EFFICIENCY OF WORKING CAPITAL MANAGEMENT 4.3.1. 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 was calculated from current year figures and then it was compared with past years ratios, other companies ratios and the industry ratios, which has enable to assess the performance of the company. 4.3.1.1. Current ratio 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2.30 2.91 3.83 1.28 1.31 1.27 1.32 1.23 1.18 1.17 Fig. 4.1. Current ratio from year 2006-07 to 2015-16 Current ratio measures the ability of a company to pay its current liabilities when it is due with only current assets. Current assets that can be converted into cash within in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered as a current assets. The standard current ratio is 2:1.The current ratio for ten years from 2006-07 to 2015-16 are calculated and presented in the above chart. From the above chart it is analyzed that the current ratio position in the company has increased from 2.30 to 3.83 in year 2006-07 to 2008-09 respectively and it has decrease suddenly in year 2009-10. From 2012-13 to 2015-16 it has decreased and continue in the subsequent 43
Ratio Results and Discussion years. From the above chart it is clear that the company has relatively low current ratio which is the indication that the company assets are not highly liquid and it s hard for the company to meet its liabilities in time as and when they are due. 4.3.1.2. Quick ratio 1.40 1.20 1.25 1.08 1.00 0.94 0.92 0.80 0.75 0.69 0.60 0.40 0.20 0.44 0.32 0.25 0.53 0.00 Fig. 4.2. Quick ratio from year 2006-07 to 2015-16 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. From the above chart it is clear that the quick ratio has increased from year 2007-08 to 2008-09, i.e. 0.92 to 1.25 respectively, and it is a decrease during 2009-10 i.e. 0.44 and again increased in year 2010-11. Quick ratio in the Year 2006-07 (0.94), 2007-08 (0.92) and 2012-13 (1.08) is considered as a proper Quick ratio, compared to rest of the years. From the above chart it is clear that the company has relatively low Quick ratio which is the indication of company assets are not highly liquid and it s hard for the company to meet its liabilities in time as and when they are due. 4.3.1.3. Debtor s turnover ratio Debtor turnover ratio is the relationship between net sales and average debtors. It is also called account receivable turnover ratio. 44
Ratio Ratio Results and Discussion 6.00 5.00 4.00 3.00 4.44 4.19 4.88 3.19 3.34 2.00 1.00 1.54 0.68 0.27 1.29 1.69 0.00 Fig.4.3. Debtors turnover ratio from year 2006-07 to 2015-16 Figure 4.3 depicts the company s debtors turnover ratio from 2006-07 to 2015-16. Debtors turnover indicates the number of times debtors turnover each year. Generally, the higher the value of debtors turnover, the more efficient the management of the company. For Vinay Industries Ltd. this ratio is low and as a result their collection period is much higher. This means that there is a higher portion of credit sales which should be reduced. 4.3.1.4. Inventory turnover ratio 40 35 30 25 28.02 34.62 24.69 20 15 10 16 16.58 19.6 14.11 12.09 13.88 10.02 5 0 Fig. 4.4. Inventory turnover ratio from year 2006-07 to 2015-16 45
Ratio Results and Discussion The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. This measures how many times average inventory is turned or sold during a period. Figure 4.4 shows the inventory turnover ratio from 2006-07 to 2015-16. A high inventory turnover ratio is indicative of good inventory management. A low inventory turnover ratio implies excessive inventory levels than warranted by production and sales activities, or a slow-moving or obsolete inventory. From above chart it is analyzed that the inventory turnover ratio is increased from 28.02 to 34.62 in year 2006-07 to 2007-08 respectively. It is decreased to 24.69 in 2008-09 to 16.58 in 2010-11 and is remained constant in 2012-13 to 2015-16. This implys that the company does not any fix inventory policy. 4.3.1.5. Working capital turnover ratio 40.00 35.00 34.96 30.00 25.00 20.00 15.00 10.00 12.28 14.99 10.80 18.64 21.76 15.05 21.82 21.20 25.48 5.00 0.00 Fig. 4.5. Working capital turnover ratio form year 2006-07 to 2015-16 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 as a average ratio which is nor risky not very safe. This means that the firm would have to sell all of its current assets in order to pay off its current liabilities. 46
Ratio Results and Discussion Figure 4.5 depicts the working capital turnover ratio of the company from 2006-07 to 2015-16. From the above chart analysis of the working capital ratio indicates flucluative but increasing trend over a period of time. Hence, it can be infer that there is an efficient management of working capital in the company. 4.3.1.6. Return on assets ratio 8 7 6.79 6 5 4.42 4.44 4.65 4.82 4 3 2 3.35 2.19 3.39 3.23 2.94 1 0 Fig. 4.6. Return on assets ratio from year 2006-07 to 2015-16 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. Figure 4.6 depicts the return on assets ratio of the company from 2006-07 to 2015-16. Return on assets ratio highly fluctuated during the study period i.e. 2006-07 to 2011-12. This is mainly due to increase in net profit of the company which is due to the increase in sales of the company. So it was concluded that return on assets ratio was favorable for the company. 4.3.1.7. 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 47
Ratio Results and Discussion correctly and is exercising good cost control. 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.38 0.77 0.62 1.07 0.78 1.06 1.7 1.3 1.1 1.6 0.2 0 Fig. 4.7. Net profit margin ratio from year 2006-07 to 2015-16 Figure 4.7 depicts the net profit margin ratio of the company from 2006-07 to 2015-16. The graph indicates the fluctuation in net profit generated from net sales. The variation of net profit ratio for the first 6 years was observed, which indicates little inconsistency, while for the rest of the period (2012-13 to 2015-16) the variation of net profit was negligible, which shows the consistency of net profit earning of the company. 4.4. EFFECT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF THE FIRM 4.4.1. Correlation of Ratios Correlation coefficient was used to effect of working capital management on profitability of the firm. It shows the degree of relation between return on assets ratio, net profit margin ratio and other independent ratios like current ratio, quick ratio, debtors turnover ratio, inventory turnover ratio and working capital turnover ratio. Table 4.3 shows that There is highly positive correlation between debtors turnover ratio (0.82) and inventory turnover ratio (0.75), these are statistically significant at 5 and 10 percent level in net profit margin ratio. Correlation between net profit margin and other ratio are not statistically significant. The return on assets 48
Results and Discussion ratio has negative relationship with current ratio (-0.17), debtors turnover ratio (-0.29) and inventory turnover ratio (-0.004). The net profit margin also negatively correlated with current ratio (-0.64) and quick ratio (-0.35). The meaning of the positive relation is, with increase in debtors turnover ratio and inventory turnover ratio, net profit margin ratio also increase and vice versa. Other ratios are not statically significant. This implies that the inventory and debtors turnover ratio highly affects the net profit of the company than other ratios. Table 4.3 Correlation of ratios Correlation coefficient (r) Ratio Return on assets ratio Net profit margin ratio Current ratio -0.1720-0.6413 Quick ratio 0.0558-0.3511 Debtors turnover ratio -0.2979 0.8279** Inventory turnover ratio -0.0040 0.7593* Working capital turnover ratio 0.3158 0.5666 ** = significant at 5% level of probability * = significant at 10% level of probability 4.4.2. Factors Influencing Return on Assets Ratio To study the effect of working capital management on profitability of the firm, regressing analysis was carried out using time series data for the period of 2006-07 to 2015-16, which is presented in table 4.4.of various ratios, viz. current ratio, liquid ratio, debtors turnover ratio, inventory turnover ratio and working capital turnover ratio explain about 71 per cent change in Vinay Industries Ltd s return on assets during 2006-07 to 2015-16. The coefficients for two variables, inventory turnover ratio and working capital turnover ratio, are statistically significant. With 10 per cent increase in inventory turnover ratio, 0.25 per cent return on assets ratio increases. With 5 per cent increase in working capital turnover ratio, 0.32 per cent return on assets ratio 49
Results and Discussion increases. The coefficient for inventory turnover ratio and working capital turnover ratio are positive and significant, which indicates the importance of proper management in the working capital management. Current ratio, quick ratio and debtors turnover ratio is non significant, thus it does not affect return on assets ratio up to certain extent as other ratios. 4.4. Factors influencing return on assets ratio Sr. No. Factors Coefficients p-value 1 Intercept -6.61 0.18 2 Current ratio (x 1 ) 0.74 0.60 3 Quick ratio(x 2 ) 2.30 0.38 4 Debtors turnover ratio(x 3 ) -1.18 0.11 5 Inventory turnover ratio(x 4 ) 0.25* 0.10 6 Working capital turnover ratio(x 5 ) 0.32** 0.05 7 R 2 0.71 8 Adjusted R 2 0.36 9 Observations 10 ** = significant at 5% level of probability * = significant at 10% level of probability 4.4.3 Factors Influencing Net Profit Margin Ratio To study the effect of working capital management on profitability of the firm, regressing analysis was carried out using time series data for the period of 2006-07 to 2015-16, which is presented in table 4.5. of various ratios, viz. current ratio, liquid ratio, debtors turnover ratio, inventory turnover ratio and working capital turnover ratio explain about 83 per cent changes in Vinay Industries Ltd. s net profit margin ratio during 2006-07 to 2015-16. The coefficients for two variables, debtors turnover ratio and working capital turnover ratio, are statistically significant. With 5 per cent increase in working capital 50
Results and Discussion turnover ratio, 0.04 per cent net profit margin ratio increases. The coefficient for working capital turnover ratio is positive and significant, which indicates the importance of proper management. in the working capital management. Debtors turnover ratio s coefficient value is negative means with increase in debtors turnover ratio there is decrease in net profit margin ratio. Current ratio, quick ratio and inventory turnover ratio is non significant, thus it does not affect net profit margin ratio up to certain extent as other ratios. 4.5. Factors influencing net profit margin ratio Sr. No. Factors Coefficients P-value 1 Intercept 0.41 0.47 2 Current ratio (x 1 ) 0.31 0.13 3 Quick ratio(x 2 ) 0.15 0.64 4 Debtors turnover ratio(x 3 ) -0.28** 0.02 5 Inventory turnover ratio(x 4 ) -0.007 0.65 6 Working capital turnover ratio(x 5 ) 0.04** 0.05 7 R 2 0.93 8 Adjusted R 2 0.83 9 Observations 10 ** = significant at 5% level of probability 51
52 Results and Discussion