Financial Management

CCA II

Submitted by

Vaibhavi Rajput
MBA Sem II
B – 62

On Company

TCS
&
Mahindra CIE

Under the Guidance

Of

Dr. Purvi Shah

 Working Capital For TCS

I. Current Assets: -
a) Inventories
b) Financial Assets
i. Investments
ii. Trade Receivables
iii. Unbilled Receivables
iv. Cash & Cash Equivalents
v. Other Balance with Banks
vi. Loans Receivables
vii. Other Financial Assets
c) Income Tax Assets
d) Other Assets
II. Current Liabilities: -
a) Financial Liabilities
i. Borrowings
ii. Trade Payables
iii. Other Financial Liabilities
b) Unearned & Deferred Revenue
c) Income Tax Liabilities
d) Employee Benefit Obligations
e) Provisions
f) Other Liabilities

❖ Working Capital = Current Assets – Current Liabilities

Working Capital = 79194 – 24026
Working Capital = 55168

❖ Type of Working Capital: - Positive Working Capital

 • Working capital for Mahindra CIE LTD
Working Capital = Current Assets – Current Liabilities
Working Capital = 973.07 – 657.18
Working Capital = 318.89

Type Of Working Capital: - Positive Working Capital

• Cash conversion cycle of Mahindra CIE LTD.

1. Inventory Conversion Period = (Average Inventory / Cost of Goods Sold) * 365
days
❖ Average Inventory = (Opening Inventory + Closing Inventory) / 2
= (243.60+280.78)/2
= 262.19
Inventory Conversion Period= (262.19/1424.70) *365
= 67.17

2. Receivable Collection Period = (Average Trade Receivables / Credit Sales) *

365 days
❖ Average Trade Receivables= (Opening Trade Receivables + Closing Trade
Receivables) / 2
= (391.40+521.36)/2
= 456.38
Receivable Collection Period = (456.38/2894.52) *365
=57.54

3. Payable Deferral Period = (Average Trade Payables / Cost of Goods Sold) *

365 days
❖ Average Trade Payables=
(Opening Trade Payables + Closing Trade Payables)/2
= (301.70+387.71)/2
= 344.7
COGS = (COGS is considered into calculation because of unavailability of
credit purchases)
Payable Deferral Period= (344.705/1424.70) *365
=88.31
CASH CONVERSION CYCLE = Inventory Conversion Period + Receivable
Conversion Period - Payable deferral Period
= (67.17 + 57.54 – 88.31)
= 36.4 Days

OBSERVATIONS:

1. Active working capital management is an extremely effective way to increase

enterprise value. What’s considered a healthy working capital varies from
industry to industry – but in theory it should be as low as possible. A low
working capital is a strong indicator that your company is finding the right
balance between what you have on your shelves, the revenue you are
generating, the investments you are making in your future, and the debts you
owe. A high working capital can be a sign your business is booming, but it
can also mean you’re missing investment and growth opportunities.
2. The type of working capital calculated for the company is Net Working
Capital which amounts to 318.89 Cr. for the year ending March 31, 2019.
Regular working capital is one that is required by the firm to carry on its
operations effectively. The minimum amount of working capital to be
maintained in normal condition is called Regular Working Capital. Following
company has regular working capital.
3. The inventory conversion period is 67 days. The longer a company has to wait
to be paid, the longer that money is unavailable for investment elsewhere.
Here as the receivable collection period is 57 days, the company does not have
 to wait for a longer period of time to get back its cash. The payable deferral
period is 88 days. The company benefits by slowing down payment of trade
payables, because that allows it to make use of the money longer.
4. The cash conversion cycle is of 36 days. Generally, the lower this number is,
the better for the company. The CCC is one of several tools that can help you
evaluate management, especially if it is calculated for several consecutive time
periods and for several competitors. Decreasing or steady CCCs are good,
while rising ones should motivate you to dig a bit deeper. CCC is most
effective with retail-type companies, which have inventories that are sold to
customers. Consulting businesses, software companies and insurance
companies are all examples of companies for whom this metric is
meaningless.
 Ratios Calculations for Mahindra CIE LTD
Sr Ratios Interpretation
No.
A. Liquidity Ratios Liquidity refers to the ability of a firm
to meet its short-term financial
obligations when and as they fall due.
The main concern of liquidity ratio is to
measure the ability of the firms to meet
their short-term maturing obligations.
The greater the coverage of liquid
assets to short-term liabilities the better
as it is a clear signal that a company can
pay its debts that are coming due in the
near future and still fund its ongoing
operations. On the other hand, a
company with a low coverage rate
should raise a red flag for investors as
it may be a sign that the company will
have difficulty meeting running its
operations, as well as meeting its
obligations.

2019 2018 2017

1. Current Ratio 1.48 2.44 1.19 The number of times that the short term
assets can cover the short term debts. It
indicates an ability to meet the short
term obligations as & when they fall
due. Higher the ratio, the better it is,
however but too high ratio reflects an
in-efficient use of resources & too low
ratio leads to insolvency. The ideal
ratio is considered to be 2:1.
2 Quick Ratio 1.05 2.01 0.86 Indicates the ability to meet short term
payments using the most liquid assets.
This ratio is more conservative than the
current ratio because it excludes
inventory and other current assets,
which are more difficult to turn into
cash. The ideal ratio is 1:1. Another
beneficial use is to compare the quick
ratio with the current ratio. If the
current ratio is significantly higher, it is
a clear indication that the company's
current assets are dependent on
inventory.
B. Profitability Ratios Profitability is the ability of a business
to earn profit over a period of time. The
profitability ratios show the combined
effects of liquidity, asset management
(activity) and debt management
(gearing) on operating results. The
overall measure of success of a
business is the profitability which
results from the effective use of its
resources.

1 Net profit Ratio 5.95 1.40 3.53 This ratio measures the ultimate
(%) profitability. Higher the ratio, the more
profitable are the sales.
2 Operating Profit 7.94 8.99 6.09 By subtracting selling, general and
/PBIT Margin administrative expenses from a
ratio company's gross profit number, we get
operating income. Management has
much more control over operating
expenses than its cost of sales outlays.
It Measures the relative impact of
operating expenses. Lower the ratio,
lower the expense related to the sales
3 Return on 3.62 0.84 1.70 This ratio illustrates how well
Assets(%) management is employing the
company's total assets to make a profit.
Higher the return, the more efficient
management is in utilizing its asset
base.
4 Return on Capital 6.68 7.07 3.67 This ratio complements the return on
Employed equity ratio by adding a company's debt
liabilities, or funded debt, to equity to
reflect a company's total "capital
employed". This measure narrows the
focus to gain a better understanding of
a company's ability to generate returns
from its available capital base. It is a
more comprehensive profitability
indicator because it gauges
management's ability to generate
earnings from a company's total pool of
capital

5 Return on 4.44 1.01 1.98 It expresses the relationship between

Shareholders’ net profit and Proprietors funds.
Funds/Net
worth(%)
C. Long Term Financial Position/ Solvency Ratios: The term solvency refers to the ability
of a concern to meet its ling tern
obligations. The long-term indebtness
of the firm’s ability to pay regularly
interest on long term borrowings,
repayment of the principal amount at
the maturity and security of their loans.
The long term solvency ratios indicate
a firm’s ability to meet the fixed
interest and costs and repayment
schedules associated with its long-term
borrowings. The two basic components
of this ratio is external equities
(outsiders funds) and internal equities
(Internal funds)

Outsider’s equity includes long term

funs, debentures, bonds, mortgages or
bills. The shareholders’ funds include
equity share capital, preference share
capital, capital reserves, revenue
reserves representation accumulated
profits and surpluses like Reserve for
Contingencies.

As a general rule there should be an

appropriate mix of owner’s funds and
outsider’s funds in financing the firm’s
assets. However the owners want to do
the business with the maximum of
outsider’s funds in order to take lesser
risk of their investments and to increase
their earnings per share by paying a
lower fixed rate of interest to the
outsiders.

The outsiders (Creditors) want the

shareholders that is the owners should
invest and risk their share of
proportionate investments. Therefor
interpretation of this ratio depends
primarily upon the financial policy of
the firm and upon the firm’s nature of
business.

Generally speaking a low debt equity

ratio is considered a favorable from the
long term creditors point of view
because a high portion of owners funds
provide a larger margin of safety to
 them. A high debt –equity ratio
indicates that the claims of outsiders
are greater than those of owners, may
not be considered good by the creditors
because it gives a lesser margin of
safety for them at the time of
liquidation of the firm.

1 Proprietary Ratio 0.81 0.845 0.8551 This ratio measures the strength of the
financial structure of the company. A
high equity ratio reflects a strong
financial structure of the company. A
relatively low equity ratio reflects a
more speculative situation because of
the effect of high leverage and the
greater possibility of financial
difficulty arising from excessive debt
burden.
2 Debt- Equity 0.03 0.04 0.03 This ratio measures how much
Ratio suppliers, lenders, creditors and
obligors have committed to the
company versus what the shareholders
have committed.
This ratio indicates the extent to which
debt is covered by shareholders’ funds.
A ratio of 1:1 may be usually
considered to be satisfactory ratio, the
standard norm for some business is 2:1
3 Debt to total 0.003 0.169 1.01 This ratio measures the debt component
Capital employed of a company's capital structure, or
Ratio capitalization (i.e., the sum of long-
term debt liabilities and shareholders'
equity) to support a company's
operations and growth. A low level of
debt and a healthy proportion of equity
in a company's capital structure is an
indication of financial fitness.
A company too highly leveraged (too
much debt) may find its freedom of
action restricted by its creditors and/or
have its profitability hurt by high
interest costs. This ratio is one of the
more meaningful debt ratios because it
focuses on the relationship of debt
liabilities as a component of a
company's total capital base, which is
the capital raised by shareholders and
lenders.
4 Fixed Assets to 0.531 0.1887 0.18187 It indicates the extent to which
Proprietor’s shareholder’s funds are sunk into the
Funds ratio fixed assets. If the ratio is less than
100% it implies that owner’s funds are
more than total Fixed assets and a part
of working capital is provided by the
shareholders.. When this ratio is more
than 100% it implies that owner’s funds
are not sufficient to finance e the fixed
assets and the firm has to depend on
outsiders to finance the fixed assets.
5 Interest Coverage 13.10 16.00 11.23 It indicates the number of times interest
Ratio is covered by the profits available to
pay the interest charges. The interest
coverage ratio does not consider
payment of preference dividend and
repayment of loan installments. A
higher ratio is safer for the long term
creditors. The lower the ratio, the more
the company is burdened by debt
expense. When a company's interest
coverage ratio is only 1.5 or lower, its
ability to meet interest expenses may be
questionable.
D. Asset Management/ Operating performance These ratios look at how well a
Ratios: company turns its assets into revenue as
well as how efficiently a company
converts its sales into cash, i.e how
efficiently & effectively a company is
using its resources to generate sales and
increase shareholder value. The better
these ratios, the better it is for
shareholders.
1 Inventory 7.48 6.54 6.49 It measures the velocity of conversion
Turnover Ratio of stock into sales. A high inventory
turnover indicates efficient
management of Inventory. A low ratio
implies over investment in inventories,
dull business, poor quality of goods,
stock accumulation, slow moving
goods and low profits compared to total
investments. It indicates the number of
time the stock has been used during the
period. High ratio indicates that there is
a little chance of the firm holding
damaged or obsolete stock.
2 Debtors Turnover 6.34 7.02 6.85 Debtor’s velocity indicates the number
Ratio of times the debtors are tuned over
during a year. Higher the value of
 debtors turnover the more efficient is
the management of debtors/ sales.
3 Creditors 3.67 4.71 3.329
Turnover ratio
4 Fixed Assets 1.41 2.90 2.39 This ratio is a rough measure of the
Turnover ratio productivity of a company's fixed
assets with respect to generating sales.
High fixed assets turnovers are
preferred since they indicate a better
efficiency in fixed assets utilization.
5 Working Capital 0.109 0.35 0.054
Turnover Ratio
E. Market Test Ratios
1 Market Value to 1.62 2.66 2.79
Book Value Ratio
2 Price Earning 36.48 265.21 154.72 This ratio measures how many times a
(P/E) Ratio stock is trading (its price) per each
rupee of EPS. A stock with high P/E
ratio suggests that investors are
expecting higher earnings growth in the
future compared to the overall market,
as investors are paying more for today's
earnings in anticipation of future
earnings growth. Hence, stocks with
this characteristic are considered to be
growth stocks. Conversely, a stock with
a low P/E ratio suggests that investors
have more modest expectations for its
future growth compared to the market
as a whole.
3 Earning Yield 0.03 0.000 0.01
ratio
4 Dividend Payout 0.00 0.00 0.00 This ratio identifies the percentage of
ratio earnings (net income) per common
share allocated to paying
cash dividends to shareholders.
The dividend payout ratio is an
indicator of how well earnings support
the dividend payment.