CHAPTER II
Review of literature
Introduction
The review of literature guides the researcher for getting better understanding of methodology used, limitations of various available estimation procedures and database, and lucid interpretation and reconciliation of the conflicting results. Besides this, the review of empirical studies explores the avenue for future and present research efforts related to the subject matter. In case of conflicting and unexpected results, the research can take the advantages of knowledge of their researchers simply through the medium of their published works. A number of research studies have been carried out on different aspects of financial appraisal by the researchers, economists and academicians in India and abroad. Different author has analyzed working Capital and financial performance in different perspectives. A review of these analyses is important in order to develop an approach that can be employed in the context of the study of cement industry.
Rajeswari (2000) carried out a study on ‘Liquidity Management of Tamil Nadu Cements Corporation Ltd. Alangulam – A Case Study’. The analysis shows that the liquidity position of the Tamil Nadu Cements Corporation Ltd (TANCEM) was not stable. Regarding liquidity ratios, there were too much of liquidity in the year 1993-94 and 1994-95. A very high degree of liquidity was also made as idle assets earn nothing and affected profitability. During 1995-96 and 1996-97, liquidity ratios were below the standard ratio and TANCEM suffered from lack of liquidity. In the year 1997-98, liquidity ratio was just above the standard ratio. It was found that there was an unstable position in maintaining liquidity.
Dabasish sur. Joydeep and Prasenjit, Ganguly (2001) studied the ‘Liquidity Management in Private Sector Enterprises- A case study of Indian Primary Aluminum Industry’, for the period 1989-90 to 1996-97 using the data as HINDALCO and INDAL taken from the stock exchange official directory of the Mumbai stock exchange. The researcher concluded that the overall liquidity management at INDAL was better in terms of Efficiencies utilization of short term funds, whereas HINDALCO was unable to do so. It was observed that the liquidity and profitability were found to be positively correlated to a great extend in the both companies.
Shanmugam and Poornima (2001) study of 28 medium and large-scale spinning mills in Coimbatore industrial area (Tamil Nadu) revealed that effective working Capital Management is still most crucial in organization’s successes. The study reveals that most of the industries (10 mills) depended on production plans in Working Capital Planning leaving all norms aside. The budgetary control was found to be the widely applied criterion of working capital control. When the researcher interviewed the CEO of the sample companies, it has come out that every CEO spent majority of the time on working capital management, which in turn highlights the importance of working capital management.
Sivaram Prasad (2001) analysed working capital management in paper industry. The researcher found that the efficiency of the working capital clearly revealed underutilization and the rate of return on current assets was negative or insignificant for many years during the period of the study. Paper mills revealed a poor planning of cash balances during the period under study. Collection of debts, availability of working funds and uncertain cash flows were some of the major working capital problems encountered and the debts servicing capacity was also found to be sick and the firms were not able to serve their debt properly, consequently resulting in cash shortage problem. The result of correlation analysis indicated a close relationship between profitability and working efficiency emphasizing the need to exercise better control on working capital.
Nanda Kishore Sharma (2002) in his study, analysed the sources of working capital in cement industry in Rajasthan. The researcher identified the main sources as trade credit, bank credit, current provisions, short term borrowings and long-term sources as well. The findings supported the basic view that the working capital should be financed by long term sources while the short term should be used to meet the temporary working capital and the resultant problem in the case of mismatch in the seven companies out of ten companies in the state.
Nand Kishore Sharma (2002) in his study on Financial Appraisal of Cement Industry in India found the current and quick ratio showed a decreasing trend and also it varied from time to time. On comparing the current and quick ratio of cement industry, six companies were found to be higher than the average and four recorded lower than the average of industries. The average debt equity ratio was 51.34 percent. This ratio showed a decreasing trend in the first four years of study but after that it registered an increasing trend. The ratio of fixed assets to total debt always showed more than 100 percent, which indicated that the claims of outsiders were covered by the fixed assets of that organization. The return on capital employed recorded an average of 15.46 percent. This ratio varied from 2.76 percent to 21.80 percent during the period of study.
Deloof (2003) , discussed that most firms had a large amount of cash invested in working capital. It can therefore, be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable, inventories and accounts payable of Belgian firms. On the basis of these results he suggested that managers could create value for their shareholders by reducing the number of days' accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills.
Santanu and Santi Gopal Maji (2003) conducted a study on working capital management efficiency of the Indian cement industry. Objectives of the study were (i) to examine the efficiency of working capital management practices of the selected cement industry (ii) to test how fast the sample firms have been able to improve their respective level of efficiency in their working capital management with respect to a target level (industry average). They concluded that the Indian industry as a whole did not perform remarkably well during the period taken up for the study.
Satyanarayana Chary and Venkateshwarlu (2003) in their study made an attempt to examine the need, sources, components, estimation of working capital and its impact on profitability with special reference to Sri Venkata Narasimha Solvent Oils Limited for the period of six years from 1996-1997 to 2001-2002. The results of the study showed that the company has not utilized its long-term funds more effectively by investing them in fixed assets. Further, impact of the working capital and profitability ratios showed completely positive impact over the study period. The study suggested that correct estimation of working capital should be made and fluctuation in quantum of working capital in relation to sales should be avoided.
Ghosh and Maji (2004) in their paper they made an attempt to examine the efficiency of Working capital management of the Indian cement companies during 1992-1993 to 2001- 2002. For measuring the efficiency of working capital management, performance, utilisation, and overall efficiency indices were calculated instead of using some common working capital management ratios. Findings of the study indicated that the Indian Cement Industry, as a whole, did not perform remarkably well during this period.
Bardia (2004) conducted an empirical study on liquidity management of the largest public-sector company the Steel Authority of India Ltd. (SAIL). This study put emphasis on working capital management of the company. The results of Spearman’s rank correlation and Student’s t’ test revealed the significant positive association between the liquidity and the profitability of the company. Further Motaal’s comprehensive rank test and other Statistical techniques demonstrated the need for improvement in debt collections, maintenance optimum quick ratio, need for arrangement of short term finances to manage the short-term liquidity of the company.
Selvam et al., (2004) used the Z score analysis to find out the financial health of cement industry. They reveal that the financial performance of Indian cements was very unviable. The reasons for poor financial health are excess working capital, negative operating profit, failure to achieve the sales targets, excess debt and managerial incompetence of the unit.
Raghunatha Reddy and Kameshwari (2004) study on Working Capital Management practice in Pharma industry ‘ A case study on Cipla Ltd., in this it was found that a company invests its fund both for long term purpose and for short term operations. The concepts of gross and net working capital are different in this article. The fixed and variable entities of the working capital are highlighted. A careful decision by the management on the relative proportions of equity capital and borrowed capital to finance the current assets has been emphasized. An efficient working capital management was necessary for achieving both liquidity and profitability of the firm. A poor and inefficient management leading to a tie up of funds in idle assets reduces the liquidity and profitability of a company. The different analytical tools employed to monitor, review, and control the working capital, i.e., the length the operating cycle, the working capital ratios, and the liquidity position are discussed. The current ratio, quick ratio, net working capital position, and the working capital turnover ratio of the company have been found to be within or slightly fluctuating around the Indian Pharmaceutical industry standards.
Narware (2004) made an empirical study of National Fertilizer Ltd., on the interrelationship between Working Capital and Profitability with the help of ratio analysis. Simple mathematical tools like ratios, percentage and other statistical tools have been used in the study. Linear multiple regression model was applied to understand the influence of working capital on profitability of the company. The study enumerates that proportionate increase in the profitability of the company was considerably less than the decrease in its working capital.
Narware and Vivek Sharma (2004) The article decodes the empirical results of a study designed to examine and highlights the efficiency of liquidity management in Hindusthan Petroleum Corporation Limited. The article suggest that excessive liquidity position was bad, idle assets earn nothing and affect firm’s profitability. So, better management of company requires maintaining an efficient liquidity position.
Singh (2004) study on Working capital in Lupin Laboratories Ltd. attempted to assess the significance of management of working capital through working capital ratio and operating cycle. Having analyzed seven years data (1995 ‘ 2002), the researcher concluded that the liquidity position of the company was good, mean percentage of current assets was very high when compared to the percentage of net fixed assets and the operating cycle showed declining trend. The element wise analysis of working capital also revealed that trade debtors constituted the highest percentage of current assets followed by loan and advances, inventories and cash and bank balances. The study brought out the need for efficient management of debtors, the percentage of which was the highest.
Hamsalakshmi and Manicham (2005) , in their study on ‘Financial Performance of selected software companies’, examined liquidity, profitability and leverage position, of selected 34 software companies in India during the period 1997-98 to 2001-02 by using ratios, correlation and multiple regression analysis. The study revealed favourable liquidity and working capital position. They concluded that the companies rely on internal financing and the overall profitability position of the software companies showed a moderately increasing trend.
Adolphus (2005) has studied ‘Corporate Liquidity Management Practices of Nigerian Manufacturing enterprises’. This study has intended to investigate and subsequently improve the capability of corporate finance executives in handling acute liquidity shortages through optimal cash flow management within a risk return framework. This study was based on three models Viz, operating cycle, cash flow cycle and design of marketable securities portfolio. The study revealed that the finance manager in manufacturing enterprises have to redefine their strategy for managing anticipated and unanticipated financing gaps.
Renu Verma (2005) studied the impact of liquidity ratios on profitability. It showed both negative and positive association. Out of seven liquidity ratios, five ratios namely current ratio, acid test ratio, current assets to total assets ratio and inventory resource ratio showed negative association with profitability ratio. The remaining three ratios, namely working capital turnover ratio, receivable turnover ratio and the cash turnover ratio showed positive association with the profitability ratio. The profitability of the TISCO Ltd was significantly and positively influenced by inventory ratio, receivable turnover ratio and cash turnover ratio.
Filbeck and Krueger (2005) highlighted the importance of efficient working capital management by analysing the working capital management policies of 32 non-financial companies in USA. They found that working capital practices were significantly different over time.
Patel (2005) in his study entitled ‘Analysis of Working Capital – A case study of Colour-Chem Limited’ has tried to judge the working capital position of Colour-chem limited. The ratio analysis method and Altman’s ‘Z’ score model have been adapted moreover to support the findings statistical methods, viz.; student’s t-test and linear model analysis have been done. The objectives aimed at the company’s current position to meet its current obligation. The current and quick ratio gives the satisfactory picture. To examine how efficiently the firm uses its assets; the inventory turnover ratio shows a bright picture. It indicates the company efficiently utilizes its current assets. To examine the linear relationship between current assets and current liabilities, cost of goods sold and inventory, sales and inventory and finally working capital and sales the linear relationship exists. Altman model suggests that the company will never become sick in future (since ‘Z’ score is much greater that of ‘3’), if it will run in the same present trend.
Rehman (2006) , investigated the impact of working capital management on the profitability of 94 Pakistani firms listed at Islamabad Stock Exchange (ISE) during a period 1999 – 2004. He studied the impact of the different variables of working capital management including average collection period, inventory turnover in day, and average payment period and cash conversion cycle on the net operating profitability of firms. The researcher concluded that there was a strong negative relationship between working capital ratios and profitability of firms.
Sanjay and Bhayani (2006) in their study made an attempt to study the cost component of cement units under the study. For the purpose of analysis of cost component, all component cost has been calculated as percentage of sales. A study has been made by using data from financial statements of top five cement companies of India, viz, Gujarat Ambuja Cements Ltd. (GACL), Dalmia Cement Ltd. (DCL), Madras Cements Ltd. (MCL), Indian Cements Ltd. (ICL), and Shree Cements Ltd. (SCL). The data of total cost in various cement companies under study have been arranged and classified under the following heads: Raw materials and stores, salaries and wages, indirect wages, power and fuel, depreciation, administrative selling and distribution and other expenses and financial charges. They found out from their study that the most influencing factor in cost structure of cement industry is power and fuel cost. The portion of this cost out of the total cost was 21 percent, where the portion of raw materials cost and selling and distribution and other cost out of the total cost was 19.27 percent and 16.60 percent respectively. So, it can be concluded that to improve the profitability of units there was a need to give proper attention towards this cost by corporate. The closest view of analysis showed that the average cost in almost all elements of GACL was closer to the average of industry.
Misra and Mishra (2006) in his study on profitability, analysed the factors influencing the profitability of Sugar Industry. The factors that have assumed a direct bearing on profitability are: Growth in size, growth in volume of business, operating cost ratio, leverage, liquidity, receivables turnover, fixed assets turnover and age. Their conclusion revealed that the variations in profitability was caused by the factors, namely, operating cost ratio, liquidity ratio and fixed assets turnover ratio.
Rajendran and Ramesh (2006) in their study entitled ‘Liquidity management of Tamil Nadu Tourism Development Corporation (TTDC) Limited – An empirical study’ stated that the main objectives are 1) To assess the efficiency of the liquidity management of TTDC, 2) To examine and evaluate the liquidity position by taking measures of cash and bank, the data for the study have been collected from 1994-95 to 2003-04. The study covers mainly the following aspects of liquidity analysis 1) Analysing level of liquidity 2) analyzing liquidity ratio. Simple statistical techniques were applied in this study. The study concluded that the short-term liquidity was not at all satisfactory. The cash management of company was in poor position. Hence, the liquidity management of TTDC was very poor and not satisfactory.
Afza and Nazir (2007) investigated the relationship between the aggressive and conservative working capital policies for seventeen industrial groups with a large sample of 263 public limited companies listed at Karachi Stock Exchange during the period of 1998 – 2003. Using ANOVA test, the study found significant differences among their working capital investment and financing policies across different industries. Moreover, rank order correlation confirmed that these significant differences were remarkably stable over the period of six years of study. They found a negative relationship between the profitability measures of firms and degree of aggressiveness of working capital investment and financing policies using regression. They further investigated the impact of the degree of aggressiveness of working capital policies on profitability.
Teruel and Solano (2007) studied the effects of working capital management on the profitability of a sample of small and medium sized Spanish firms. They collected data of 8,872 small to medium sized enterprises (SMEs) covering the period 1996 – 2002. They tested the effects of working capital management on the profitability. They concluded that the profitability of firms will be improved by reducing inventories by decreasing the collection period. Shortening the cash conversion cycle.
Sam Luther (2007) analysed the Liquidity, Risk and Profitability. The relationship between liquidity and profitability has been measured by computing Spearman’s Rank correlation coefficient. An attempt has also been made to test whether the computed value of the correlation coefficient was significant or not by using ‘t’ test. The current asset to total assets ratio has also been used as the indicator of liquidity and Return on capital employed has been used for measuring the profitability indicator. In order to analyse the trade-off between risk and profitability, the risk analysis of working capital management has been done to assess the extent of current assets maintained by Madras Cements Limited. The study suggest that Madras Cements Ltd should formulate certain policies to control the working capital so as to meet any sort of financial distress which may occur in future.
Vunyale et al. (2007) investigated the determinants of working capital management in cement industry in India. The study covered the period of ten years from 1995-96 to 2005-06. The data were collected CMIE Prowess database. It is clear from the survey that companies with the better firm performance had better working capital performance efficiency and will keep their working capital requirements relatively in a low level.
Singh and Shishir Pandey (2008) attempted to study the working capital components and the impact of working capital management on profitability of Hindalco Industries Limited. They made an attempt to study the correlation between liquidity, profitability and profit before tax (PBT) of Hindalco. The study was based on secondary data collected from annual reports of Hindalco for the study period 1990 to 2007. The accounting ration, percentage and coefficient of correlation and regression were used to analyze the data.
Siva Reddy Kalluru and Shan Bhat (2008) examined the determination of profitability in Indian commercial banks. They measured bank profitability in terms of return on total assets (ROTA) and return on capital employed (ROCE). They concluded that the profitability of banks was affected not only by bank’s own characteristics but also by industry structural variables and macroeconomic variable. Bank ownership and political parties in power also played a vital role in determining bank profitability in India. However, the determinants of bank profitability varied significantly across the bank groups.
Sudipta Ghosh (2008) has conducted a case study in Liquidity Management of Tata Iron and Steel Company (TISCO). During the period of the study, it was found that the liquidity position of the company, on the basis of current ratio as well as quick ratio, was not satisfactory. It indicated that the share of current assets in total assets of the company, on an average, was 29.1 percent during the period of study. The fluctuation in the liquidity position over different years of the study period might be a point for investigation into the financial efforts of the company. It was suggested that to maintain overall control of liquidity position, the company should give special attention to the management of current assets. The researcher found that the degree of influence of liquidity on its profitability was low and insignificant.
Kushwah Mathur and Ball (2009) conducted a study on working capital management on cement sector. The paper has tried to examine the source used by the companies to finance their working capital requirements and to analyse and evaluate the working capital management. The paper has also examined the liquidity position of the companies. In order to examine and analyse, secondary data of five companies was collected in cement sector i.e. ACC, Grasim, Ambuja, Prism and Ultra- Tech. Financial Statement of these companies were collected for the period of two years from 1st April, 2007 to 31st March 2009. Liquidity and activity ratios were calculated and analysed to check the working capital condition of these cement companies. The study shows that out of five cement companies, overall ACC has got the best working capital management.
Sathya (2009) carried out a study on Profitability and liquidity of cement companies in India. This study based on the secondary data from a sample of 30 cement companies. The analysis pragmatically reveals that, the factors, cost of production, investment in fixed assets and the sales have significant linear effect on the earnings before interest and tax of the selected cement companies during the study period. However, profitability of the selected cement companies in India during the study period was satisfactory. Similarly, the analysis of liquidity ratios reveals that, short term liquidity of the selected cement companies in India during the study period was satisfactory and it was noticed that, the short-term liquidity factors have not significantly influence the profitability of selected cement companies.
Janaki Ramudu (2010) has made a study "Working Capital Structure and Liquidity of Assets an Empirical Research on the Indian commercial vehicles industry". The researcher found that of all the current assets across the industry, inventories formed the highest percentage followed by trade receivables and loans and advances whereas cash and bank balances formed a very negligible part.
Vijayakumar (2011) study on ‘The Determinants of Profitability: An Empirical Investigation Using Indian Automobile Industry’. Determinants of profitability are analyzed using the techniques of ordinary least squares. It is evident from the results that size was the strongest determinants of profitability of Indian Automobile Industry followed by the variables vertical integration, past profitability, growth rate of assets and inventory turnover ratio. The study concluded that industry should consider all these possible determinants while considering its profitability.
Ganesan and Renugadevi (2011) ‘Working capital management and profitability measurement of Two software companies in India ‘the paper entitled to the role of working capital management policies on profitability of a company normally, it has been seen that if a company desires to take a greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. Therefore, a company should strike a balance between liquidity and profitability.
James Sunday (2011) proposed the appropriate and effectiveness of working capital management on the solvency and liquidity of SME’s. For the purpose of this study the standard working capital ratios were used to measure the effectiveness of working capital in the selected 8firms at Nigeria of Bolton Committee 1971 report has been considered. The firms show signs of over trading and illiquidity, of firms exhibit low debt recovery over credit payment. It was also revealed from this study that there is a poor liquidity in the small business unit in Nigeria. There is also poor record keeping system in most small firm which reduces the ability of the firm to monitor the proper flow of their working capital. From the study it was revealed that most Small business fail at most within 2 years, the strongest will fail within 6 years, while only few surviving ones remain. This study recommended that for SMEs to survive within Nigeria economy that they must design a standard credit policy and ensure good financial report and control system. They must give an adequate cognizance to the management of their working capital to ensure continuity of the growth and the solvency.
Saghir, Hashmi, and Hussain, (2011) carried out a study on the relationship between profitability and working capital management conducted among a sample of 60 textile companies listed in Karachi Stock Exchange for the period 2001-2006, showed a negatively significant relationship between return on assets (as a measure of profitability) and cash conversion cycle. It was also noted that profits could be maximised by proper management of cash conversion cycle.
Kulkanya Napompech (2012) in his article entitled ‘Effects of Working Capital Management on the Profitability of Thai Listed Firms’, investigated the Effects of Working Capital Management on the Profitability Thai Listed Firms. The tools used for analysis include Descriptive Statistics, Correlation analysis, and Regression analysis, Cash conversion cycle, Inventory conversion period, and Receivables collection period. The study revealed that there was negative relationship between the Gross operating profits, Inventory conversion period and the Receivables collection period. Managers were found to increase the profitability of their firms by shortening the cash conversion cycle, inventory conversion period, and receivables collection period.
Sathya (2012) studied on ‘Analysis of Composite Profitability Index of the Cement Companies in India’. The return of a business may be measured by studying the profitability of investment in it. Profitability may be defined as the ability of given investment to earn a return from its use. This study based on the secondary data from a sample of 30 cement companies, the study attempts to measure the composite profitability of a firm by a single index. The analysis shows that in order to rank the selected companies in terms composite profitability, ratio-wise scores have been aggregated and the firm getting the highest total score has been ranked as 1 and the firm securing the lowest total score has been ranked as 30.
Lalit Kumar Joshi and Sudipta Ghosh (2012) studied on ‘Working Capital Management of Cipla Limited: An Empirical Study’ The present paper examines the working capital performance of Cipla Ltd. during the period 2004-05 to 2008-09. Financial ratios are applied in measuring the working capital performance and statistical as well as econometric techniques are employed in order to assess the behavior of the selected ratios. The empirical findings reveal significant positive trend growth in most of the selected performance indicators. Further, the selected ratios show satisfactory performances during the study period. Motaals test also indicates significant improvement in liquidity performance during the said period. Finally, there exists significant negative relationship between liquidity and profitability, which indicates that Cipla Ltd. has maintained post optimal level of liquidity (i.e., excess liquidity) during the period under study.
Singh (2012) investigated the relationship between working capital management and profitability in the firms belonging to IT and telecommunication industry in India. 11 firms were randomly selected, out of which, 05 belong to information technology industry and the remaining are from the telecommunication industry. The researcher took the return on capital employed as a measure of profitability. And other variables for studying working capital management were working capital turnover, current ratio, days' inventory outstanding, days' sales outstanding, days' payable outstanding and cash conversion cycle. The researcher collected financials of the companies for 12 years from 1999 to 2010. Therefore, in all, 132 firm year observations (after pooling cross section and time series data) were used for the study. The researcher carried out descriptive statistics and correlation analysis using SPSS. The results show a positive relationship between working capital turnover, current ratio, sales to total asset ratio and profitability. Day's inventory outstanding shows a negative relationship with profitability.
Sarbapriya Ray (2012) made an attempt to assess the relationship among working capital management components and the profitability for the Indian manufacturing firms using a sample of 311 Indian manufacturing firms through the periods of 1996/1997 to 2009/2010 and have studied the effect of different variables of working capital management including the average collection period, inventory turnover in days, average payment period, cash conversion cycle and current ratio, debt ratio, size of the firm and financial assets to total assets ratio on the net operating profitability of Indian firms. The result suggests a strong negative relationship between the measures of working capital management including the number of days accounts receivable and cash conversion cycle, financial debt ratio with corporate profitability.
Ashok Kumar Panigrahi, (2012) analysed the impact of working capital management on profitability of ACC Cement Company. The study is based on secondary data, data are collected from the websites money control as well company websites and study periods are for 10 years i.e. 1999-2000 to 2009-2010. The research methodology used in this paper is correlations coefficient, multiple correlation analysis and multiple regression analysis. The findings of this paper revealed few variables show a strong and positive correlation with the profit whereas some others do not have. The results show that there was moderate relationship between the efficiency of working capital and the profitability.
Gayathri (2012) carried out a research on Working Capital Management in Textile Industry during 2000-01 to 2010-11. For the purpose of analysis, the selected firms are classified into three size categories viz., small, medium and large based on average assets size over the study period. The researcher measured the efficiency of working capital with the help of correlation, multiple regression, trend analysis, path analysis and Z score analysis. The study found that excessive use of working capital, failure to earn adequate surplus to meet non-operating activities, failure to achieve the adequate sales are the reasons for the dismal performance of textile industry. The study concluded by suggesting that the selected spinning mills should try to use properly their operating assets, minimize their non-operating expenses, introduce a system of prompt collection of debts and investments in current assets to be reduced.
Mobeen Ur Rehman and Naveed Anjum (2013) This paper examines the impact that the running assets management on the profitability of Pakistan cement sector. Moreover, the study outlines the main factors that basically determine the working capital in the financials of Pakistan cement sector. To manage firm’ s liquid assets which is working capital management and to reach a desire equilibrium level among profitability and risk, figures was collected from Annual Reports and sample consist of 10 Pakistani cement Companies listed at KSE from 2003-2008. The association between working capital management and profitability was examined with correlation; regression analysis the result proved that there was inverse and positive association between working capital management and profitability in cement industry of Pakistan.
Natarajan Vallalnathan and Getachew Joriye (2013) in their study entitled, "Impact of Working Capital Management on the Profitability of Co-operative Unions in East Showa, Ethiopia", analyzed the impact of WCM on the profitability of cooperative unions in East Showa, Ethiopia. The study was mainly based on secondary data by using the financial statement of the unions during the period from 1999-2003. The results showed a significant positive relationship between the size of the unions and its profitability and positive relationship between debt used by the cooperative unions and its profitability.
Makori and Jagongo (2013) studied Working Capital Management and Firm Profitability: Empirical Evidence from Manufacturing and Construction Firms Listed on Nairobi Securities Exchange, Kenya. A negative relationship was detected between profitability and number of day’s accounts receivable and cash conversion cycle and a positive relationship between profitability and number of days of inventory and number of day’s payable for the period 2003-2012. Also, a significant relationship was found between profitability and financial leverage, sales growth, current ratio and firm size.
Vijayalakshmi and Nikhel Bansal (2013) This paper tries to identify the factors which determine the working capital requirement in Indian cement industry. A case study is performed on ACC cements, a company listed on both NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) of India. 12 years data (2000-2012) was considered for this study. A regression analysis was performed using WCR (working capital requirement) as dependent variable and growth in sales, size of the firm, performance, operating cash flow, operating efficiency, debt equity ratio, business indicator, price of raw materials as independent variables. It was found that only debt to equity ratio plays a significant role in determining working capital requirement of the firm.
Agha, (2014) examined the impact of working capital management on profitability in a listed pharmaceutical company in Karachi Stock Exchange, Pakistan for the period 1996-201. The study revealed that there was significant impact of working capital management on the profitability of the company, measured by return on assets. The independent variables consisted of accounts receivable turnover, creditors turnover, inventory turnover and current ratio.
Odhiambo (2014) studied the relationship between working capital management on profitability among 50 retail stores in Kenya. The study revealed a positive relationship between inventory turnover and profitability (return on assets); a negative association between average collection period and return on assets; a significant positive relationship between average payment period and return on assets and a positive relationship between debt ratio and profitability.
Madhavi (2014) studied on ‘Working Capital Management of Paper Mills’ for the period of 2001-02 to 2010-11. In the analysis of data standard statistical techniques like percentages and averages have been used. The study found out that the management of APPML must initiate necessary steps to utilize its idle cash and bank balances in attractive investments or to pay back in short term liabilities (current ratio). The low quick ratio may also have liquidity position, if it has fast moving inventories and was more satisfactory in SSPBL with APPML. Cash ratio was not satisfactory in APPML as compared to SSPBL and it needs the attention of the management to include effective utilization of cash and bank balance.
Suresh Babu and Chalam (2014) in his study entitled ‘A Study on the Working Capital Management Efficiency in Indian Leather Industry ‘ An Empirical Analysis’ This paper empirically investigates the relationship between the components of working capital and firms’ profitability of firms in Indian leather industry. The data was taken from secondary data source named as Center for Monitoring Indian Economy (CMIE) covering the period from 1997-98 to 2010-11 (14 years). The regression result shows that profitability has insignificant positive relationship of inventory conversion period and significant positive relationship of average collection period. Even though, average payment period and cash conversion cycle were significant negatively related to profitability. The results show that for overall leather industry, working capital management has significant impact on profitability of the firms.
Abdul Ghafoor Awan and Pervaiz Shahid (2014) analysed the impact of Working Capital Management on performance of cement sector in Pakistan. The duration of the study is from 2009 to 2013. The data used in this study was taken from the published financial statements of cement companies listed at Karachi Stock Exchange. Return on Equity (ROE) was used as the dependent variable in order to test the impact of Working Capital Management on firm’s profitability. Independent variables were, Inventory Turnover in Days (ITD), Cash Conversion Cycle (CCC), Quick Ratio, Current Ratio, Gross Working Capital, Average Payment Period (APP), Size of Firm, and Funds allocated by government in Public Sector Development Program. Panel Data method is used to study the impact of Working Capital Management on profitability of Cement sector of Pakistan. The relationship of Current Ratio is insignificant with ROE, but the relationship is not conclusive. This study clearly affirms that, firms in the cement industry in Pakistan have sufficient scope to improve their profitability by managing their working capital in more efficient ways. Especially, the inventory if handled proficiently can produce a significant positive impact on profitability of the firm.
Paul Aondona Angahar and Agbo Alematu (2014) empirically examined the impact of working capital management (Measured by: the number of days accounts receivable are outstanding-DAR, the number of days inventory are held-DINV, and the cash conversion cycle-CCC), on profitability (measured by return on assets-ROA) of Nigerian Cement Industry for a period of eight (8) years (2002-2009). Data from a sample of four (4) out of the five (5) cement companies quoted on the Nigerian Stock Exchange (NSE) were analysed using descriptive statistics and multiple regression analysis. The study found an insignificant negative relationship between the profitability (measured by ROA) of cement companies quoted on the NSE and the number of days accounts receivable are outstanding (DAR). The study also found a significant negative relationship between the profitability of these cement companies and the number of days inventory are held (DINV). The study finally revealed a significant positive relationship between the profitability and the cash conversion cycle (CCC). The study concludes that, the profitability of cement companies quoted on the NSE during the study period is influenced by DINV and CCC. The study therefore recommends that managers of these cement companies should manage their working capital in more efficient ways by reducing the number of days inventory are held to an optimal level in order to enhance their profitability as well as create value for their shareholders. Managers of Nigerian cement companies should also improve on their cash flows, through the reduction of their cash conversion cycle.
Azeez (2015) made an attempt to investigate on relationship between working capital management and profitability among the listed Nigerian manufacturing firms indicated that profit was significantly affected by inventory conversion period, but negatively and significantly influenced by cash conversion cycle.
Kruti Patel (2015) studied on impact of working capital management on profitability of Indian Oil Corporation. The study was based on secondary data and study period was 2009-10 to 2013-14. Pearson correlation, descriptive statistic and INM SPSS were applied as research methodology. The results show that there was significant negative correlation between working capital management and net profit and it also indicates that there was negative relationship between liquidity and profitability.
Poonam Gautam Sharma and Preet Kaur (2015) examine the impact of working capital management on profitability of Bharti Airtel Telecom Company. The study period was 2007-08 to 2014-15 and statistical and econometric tools were used for study. The results reveal that there was significant negative relationship between liquidity and profitability of the company and it also reveals that quick ratio, inventory turnover ratio, debtors turnover ratio of company shows satisfactory performance and current ratio of company was found not satisfactory.
Chemis Kiptoo Philip (2015) in his study made an attempt to examine the effect of working capital management variables including the Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of Sugar Manufacturing firms in Kenya. Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and financial assets to total assets ratio have been used as control variables. The study used secondary data collected from 8 Sugar Manufacturing firms in Kenya covering the period from 2008-2013. Using Pearson’s correlation and regression analysis, the study finds a significantly negative relationship between variables of the working capital management and profitability of Sugar Manufacturing firms in Kenya. It means that as the cash conversion cycle increases it will lead to decreasing profitability of the firm, and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. The study suggests that managers can create value for their shareholders by increasing their inventories to reasonable levels and also reducing accounts receivable period. It is further recommended that, scope for further research may be extended to the individual working capital components including cash, marketable securities and receivables.
Kavitha and Manimuthu, (2015) , in their study entitled ‘A Study on Working Capital Management with Special Reference to Birla Corporation Cement Ltd, Kolkata’. The period of the study was from 2009-10 to 2012-13. In the last year the inventory turnover has increased, this is good sign for the company. The company’s liquidity position was very good with regard to the investments in current assets there are adequate funds invested in it. The study suggest that care should be taken by the company not to make further investments in current assets, as it would block the funds, which could otherwise be effectively utilized for some productive purpose.
Mohamed Sindhasha and Mohamed Basheer (2015) in their article made an attempt to study the relationship between liquidity and profitability of India Cements Limited. The study has been carried out for ten years from 2006 to 2015.For the purpose of investigation purely secondary data is used. The data of India Cements Limited for the period from 2006 to 2015 used in this study have been taken from the selected sources i.e. published annual reports of company. The relationship between liquidity and profitability of India Cements Limited is determined by applying t-test. The profitability position of India Cements Limited has been showing improvement over the previous years. It has been possible due to a considerable increase in sales revenue of the company. Liquidity position of the company was best since both the liquidity ratio used were above their respective standards. The correlation between efficiency and profitability was the highest in this company which shows a high degree of positive correlation. Study shows that the overall performance of India Cements Limited has been quite satisfactory during the study period with certain variations like adverse economic conditions and competition.
Mahato and Jagannathan (2016) compared Profitability (ROA) with working capital management components, debt and current ratios among eight listed telecom industry in India and the results revealed a negative relationship between profitability and inventory conversion period, average collection period, cash conversion cycle and current ratio, and a positive relationship of return on assets to average payment period, debt ratio and firm size.
Mbawuni, and Nimako, (2016) conducted a study on the working capital management impact on profitability on five Petroleum retail firms in Ghana for the period 2008-2013 revealed that average payment period had a significant impact on profitability (ROA). It was also noted that the cash conversion cycle, average days of inventory and average day’s receivables did not have any significant relationship with financial performance of selected firms.
Shivakumar, and Babitha Thimmaiah (2016) in their study entitled ‘Working capital management – it’s impact on liquidity and profitability – A study of coal India ltd.’ The present paper makes an attempt to give a conceptual insight on working capital management and assess its impact on liquidity and profitability of Coal India Ltd. The liquidity and profitability tradeoff has become an important aspect for all the organizations. The attempt also has been made to test the liquidity and profitability position. For this correlation and spearman’s rank method has been applied. The correlation and spearman’s ranking method indicates weak correlation and negative relationship between liquidity and profitability. The Motaal’s test has also been applied to test the liquidity performance. It indicates liquidity position of the firm has improved over the study period.
Vanathi (2016) studied working capital management of E.I.D Parry (India) Limited in Tamil Nadu for the period starting from 2004-05 to 2013-14 with the help of ratio analysis. The researcher found that the share of cash and bank balance in the total amount of current assets in E.I.D Parry was very meagre which adversely affect the working capital position of the concern. The study also reveals that the current assets trend of the concern was favourable throughout the study period. But the current liability trend showed an enormous increase and it was not good for the concern. Hence the researcher suggest that the management has to take all possible steps to stop this growth in future.
Kasozi (2017) examined the influence of working capital management on profitability among 69 listed manufacturing firms of Johannesburg Stock Exchange for the period 2007-16 and concluded that the average collection period and the average payment period significantly, but negatively influenced the financial performance of the listed firms. It was also observed that a positive and statistically significant relationship existed between the number of days in inventory and profitability.
Navena Nesa Kumari and Victor Louis Anthuvan. (2017) , in their study entitled "A Study on The Impact of the Working Capital Management on the Profitability of the Leading Listed Automobile Companies in India (2006- 2012)." This study has been framed to show how efficient working capital management impacts the corporate profitability of 10 leading listed automobile sector in Chennai (India). The main source of secondary data was collected through Government reports, official records, journals, books, websites of Internet and financial statements, such as income statements, balance sheets of S&P CNX top 500 companies at NSE were collected for the period of 2006 ‘ 2012 from CMIE Prowess Database. From the study it has been found that among the working capital components, inventory turnover period is affecting the Net Operating profitability of automobile sector. It has been found that there was a negative relationship exists i.e., reduction in the inventory days will increase the company’s profitability. The study also suggests that the implementation of inventory models such as JIT, EOQ, FSN will reduce the overstocking of inventories in the automobile companies in India. So, the automobile firms should focus more on managing and reducing the Inventory turnover days in order to maximize profitability and to withstand the competitive environment.
Nguyen Hai Quang (2017) in his study examined the Impact of Working Capital Management to Business Efficiency of Association of Asia Pacific Airlines. The management of working capital plays an important role for the success of the business operations of the airline. The study was based on data from the financial statements of the airlines in the Association of Asia Pacific Airlines (AAPA) for the period of 2010-2015. The study results showed an opposite impact of day inventory outstanding and days of sales outstanding to profit before tax on assets; positive of current ratio to the profit before tax on assets and positive of financial leverage to profit before tax on equity. These results suggest that airlines need to rationalize supplies of aircraft spare parts inventory, increased the ability to recover cash from selling air transport products and strengthen collaborative relationships with suppliers in order to improve efficiency of working capital management, contribute to improve business efficiency.
Ruqsana Anjum (2017) had undertaken the study to evaluate the impact of working capital management on FMCG firm’s profitability in India for the period 2007-2016. For the said purpose the study has taken into account balanced panel data of 48 FMCG firms Listed on BSE -500 (based on market capitalization). The results of the study point towards the fact that most of the variables significantly modify the profitability of FMCG firms. The FMCG firms are in general facing issues with their payment and collection practices. Majority of the FMCG firms have large amounts of the cash invested in working capital management. Using ROA as a measure of profitability and CCC as a principle indicator of working capital management. The relationship has been examined using Panel data regression analysis. The findings of the study revealed that ICP, RCP and PDP had statistically negative significant relationship with profitability; this could be due to company/industry specific characteristics as majority of FMCG sales is on cash basis, whereas, CCC has positive statistically insignificant relationship with profitability.
Simranjeet Singh and Harwinder Kaur (2017) had undertaken the research study explores the relationship in the midst of Working Capital Management components and the profitability of steel manufacturing companies in India. The investigation is done putting down four different hypotheses. The sample units include 40 steel manufacturing companies operating in Indian market; the companies were selected using convenience random sampling. The variables were collected from 2004 to 2016. The relationship between variables have been established by framing the panel data and checked using descriptive analysis, Pearson correlation and regression line on E-Views 8 statistical software. The study results exhibit that there is a significant relationship between dependent variables (Net Profit and Return on Assets) and independent variables. It was found that receivables collection period, inventory holding period and Cash Conversion Cycle had symbolic impact on the profitability of companies.
Anas Khan (2017) made an attempt to examine the impact of working capital management on the profitability of UltraTech Cement and India Cements. Return on capital employed (ROCE) is used as dependent proxy variable for the profitability and current ratio, debtors turnover ratio, and inventory turnover ratio were used as independent proxy variables for the working capital management. The findings show that there was a significant impact of working capital management on the profitability of UltraTech Cement but insignificant impact has been found on the profitability of India Cements.
Sandip Kumar Santra (2017) analysed the working capital trend of Ambuja Cement (listed in Nifty Fifty NSE index). The secondary data were collected from company`s website and moneycontrol.com for thirteen years and statistical analysis was done in Excel. Company maintained good liquidity position all throughout. Both CR and QR have positive relation with Price-Earnings Ratio (PER). This implies companies’ healthy liquidity position has reflected on its reputation to increase the market price of its shares.
Hassan Subhi Al-Abass (2018) made an attempt to examine the effect of Working Capital Management on Profitability of Cement Sector Listed Companies. The most important motive of this study was to measure the association among the profitability, measure by the return on equity, return on assets also by the components of working capital management that is days payable, days receivable, days inventory and cash conversion cycle. Sample size of 30 companies that is listed in the Pakistan stock exchange and the financial years is from 2001 to 2016 years. The companies were analyzed through regression. The results show significant results that the independent variable was impacted on the dependent variable.
Sathyamoorthi, (2018) in his study focused on the effect of working capital management on the profitability of the listed retail stores in Botswana Stock Exchange for the period 2012-2016. Financial statements of the listed Retail Stores were used as the main source of data. Return on Assets was used as the dependent variable to measure profitability and the components to measure working capital management comprised of Average Collection Period, Inventory Conversion Period, Average Payment Period, Cash Conversion Cycle, Debt, Current and Quick Ratios. Correlation analysis revealed that a few variables were significantly correlated with each other. Average Payment Period and Inventory Conversion Period were found to be positively and significantly correlated and Cash Conversion Cycle was significantly and positively correlated with Inventory Conversion Period. The regression results showed that only three variables out of the seven independent variables were statistically significant, namely Average Payment Period, Current Ratio and Quick Ratio. The remaining four variables were found to be statistically insignificant.
Samet Evci and Nazan ”ak, (2018) in their study entitiled "The Effect of Working Capital Management on Profitability in Emerging Countries: Evidence from Turkey" This study aims to reveal the tradeoff between working capital components and firm’s profitability by using the data of the firms listed on Borsa Istanbul Industry Index in Turkey. Annual data of 41 firms are used for the period 2005’2016 in the study. The working capital components and firm’s profitability tradeoff was examined via the fixed effects panel regression model. Dependent variable is defined as return on assets; independent variables are cash conversion cycle, inventory conversion period, and payables deferral period; and control variables are sales growth, the ratio of short-term financial debts to short-term debts, and the ratio of fixed assets to total assets. Findings show the existence of tradeoff working capital management profitability. A negative relationship exists between return on assets and payables deferral period, cash conversion cycle, the ratio of short-term financial debts to short-term debts, and the ratio of fixed assets to total assets while return on assets is positively related to inventory conversion period and sales growth.
Ajaya Kumar Panda (2018) in his study entitled ‘Working Capital financing and corporate profitability of Indian manufacturing firms’. The study was undertaken on a sample of 1,211 firms from 6 key manufacturing sectors of Indian economy from 2000 to 2016. The non-linear relationship between WCF and profitability was studied using two-step generalized model of moments(GMM) estimator. The study finds a convex relationship between WCF and profitability among firms in chemical, construction and consumer goods sectors. Firms in these sectors can finance larger portion of their working capital requirements through short-term debt without negatively impacting profitability. However, a concave pattern of relationship for firms in machinery, metal and textile industries implies increasing debt financing of working capital requirement would increase profitability for the firms who have financed lower portion of their working capital by short-term bank borrowing. But when a higher proportion of working capital requirements are already financed by short-term debt, a further increase in debt financing may impact profitability negatively. Moreover, the study finds that firms with high financial flexibility and high price-cost margin (except textile) can increase profitability by financing larger portion of working capital requirement through short-term debts and the continuation with risky WCF could increase profitability.
Uma Devi (2018) examined the impact of working capital on the profitability of Maruti Suzuki India ltd. 2012-13 to 2016 ‘ 17. The study was based on secondary data, it has been collected from the published annual reports of the company, books, journals, magazines newspapers and websites. The study concludes that there was a negative relationship between profitability and working capital of the company during the study period. The performance of the company is significantly increasing during the study period.
RATIONALE FOR THE PRESENT STUDY
The researcher has thoroughly reviewed the above mentioned earlier studies conducted in the area of working capital and profitability. These studies were related to various industries such as automobiles, banking, cement, information technology, paper, steel and sugar in India and abroad. Of these reviews, studies were conducted in cement industry in India related to the areas of financial health, liquidity position, profitability, working capital management. The findings on the effect of working capital management and firm’s performance or profitability of the researchers mentioned in the literature are fairly outdated and do not capture the latest working capital management practices of the concern. Moreover, no comprehensive indices were formed to analyze the payable management. Bearing this in mind, the researcher has made an attempt to examine the working capital management and profitability of the five-leading private sector cement companies in Tamil Nadu.
WORKING CAPITAL MANAGEMENT AND PROFITABILITY OF SELECTED CEMENT COMPANIES IN TAMIL NADU