A

PROJECT REPORT

ON

“WORKING CAPITAL MANAGEMENT&

Ratio Analysis”

OF

Reliance Industries Limited

SUBMITTED TO

Mr. Anurag Mehrotra

SUBMITTED BY

Mr. Gaurav Sahu

ID. No. : LC0911SS10009ISBE-G

MBA I YEAR

2009-2011

IIPM, Lucknow

ACKNOWLEGEMENTACKNOWLEGEMENT

It is our pleasure to place on record my sincere gratitude towards Mr.

Manas AcharyaManas Acharya & Mr. Joginder Sharma,Joginder Sharma, RIL Limited, who spent

their precious time providing continuous ideas and expert guidance to our

Report work. It was their direction and encouragement at every moment and

step that motivated us to steer the research work confidently and successfully.

We are also thankful to our Venerable Dean Prof Amlan Ray, whose

encouragement, moral support provides the valuable guidance, which has been

a source of inspiration to us.

We especially thankful to Commercial staff & All Department that

have to provide me valuable guidance, which is helpful to fulfillment our

Project Report. We are also thankful to our friends who directly or indirectly

helped us lot.

Gaurav SahuGaurav Sahu

MBA (Finance)

Sr. No. Particulars

1

234

5

6

78910

Company Profile Introduction History Group Profile Vision & Mission Awards and honors

Basic Accounting TerminologyIntroduction of Working CapitalObjective Behind The Study

Types of Working Capital Principle of Working Capital Management

Factors Determining of Working Capital Sources of Working Capital

Methods of Calculation of Require of Working Capital

Working Capital Cycle Components Of Working Capital Management of Working Capital

Ratio AnalysisLyondell DealRIL, Barabanki DivisionBibliography

CONTENTSCONTENTS

Company Profile

Reliance Industries

“GROWTH IS LIFE”

Introduction

The Reliance Industries India group is India's largest private sector conglomerate. The Reliance Industries Limited was started by the legendary Late Dhirubhai H. Ambani. After a humble start in the late 1970's as a textile company its success skyrocketed and now covers almost all industry verticals.

Today, Reliance Industries generates revenues in excess of USD 22 billion and exports products worth USD 7 billion to more than 100 countries. The Reliance Industries Limited is a 'Fortune Global 500 company' and employs more than 25,000 professionals across the world. Reliance enjoys leadership in polyester yarn & fiber produce and is among the top 5 players in the world in major petrochemical products. Reliance Industries Limited holds largest Oil & Gas exploration area in India and has achieved 74 % success rate in terms of discoveries.

Reliance Industries India has been a pioneer in the equity culture cult and is highly respected for its corporate transparency, deep market penetration ability, innovations and above all for its ability to generate 'products & services' for all sections of the society.

Its guardianship for India Inc. stupendous growth has been felicitated with no of awards in areas like Quality, Energy Management, Health Safety & Environment, Exports and Retail & Franchising. It also bagged 'Golden Peacock Award' for Corporate Management in 2005-2006 and enjoys high corporate ranking in Fortune Global 500 Company.

History

From a humble textile company to Fortune 500 Company

The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 28 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India.

Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain.

Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products.

Group Profile

Major Subsidiaries - Reliance Petroleum Limited

Reliance Netherlands BV (including Trevira)

Reliance Retail Limited

Ranger Farms Private Limited

Retail Concepts and Services Private Limited

Reliance Retail Insurance Broking Limited

Reliance Dairy Foods Limited

Reliance Retail Finance Limited

Reliance Jamnagar Infrastructure Limited

Reliance Haryana SEZ Limited

Reliance Industrial Investment & Holdings Limited

Reliance Ventures Limited

Reliance Strategic Investments Limited

Reliance Exploration & Production - DMCC

Reliance Industries (Middle East) DMCC

Reliance Global Management Services (P) Limited

Major Associates - Indian Petrochemicals Corporation Limited

Reliance Industrial Infrastructure Limited

Vision & Mission

Mukesh Ambani, chairman of Reliance Industries Ltd, India’s largest private company, laid down a road map for business transformation and value creation for the company at its 35th annual general meeting. 

This has been a truly transformational year at Reliance Industries (RIL). The successful commissioning of the KG-D6 oil and gas production fields and the safe start-up of the world-class, complex refinery in the Special Economic Zone at Jamnagar catapults RIL into the league of integrated energy companies globally. RIL is now among the ten largest non-state owned refining companies and one of the largest deep water oil and gas operators in the world.

Through these path-breaking initiatives, RIL is set to radically change India’s energy landscape. Gas production from KG-D6 will double India’s indigenous production while the new refinery will make India a major supplier of ‘green-fuels’ to the world.

Over the years, our initiatives have enabled the enrichment of millions of lives in India. We focused on improving efficiency, leveraging on the quality of our assets and remaining nimble. This reflects the strength of our business model, robustness of our systems and processes, farsighted planning, meticulous execution and above all, our indomitable will to succeed.

While staying focused on our long-term strategy, we have remained committed to protecting our employees, ensuring their safety, supporting local communities and safeguarding the environment. Looking forward, we see exciting opportunities for growth in the energy sector.

At RIL, we have always invested aggressively into businesses of the future. Our recent investments in the oil and gas and refining businesses have created a strong growth platform. RIL is on its way to becoming a competitive, integrated, global energy company.

Awards and honors

Shri Mukesh Ambani was awarded the Defense India Excellence Award

2007. The Award is a salute to those who have made the country proud.

Shri Mukesh Ambani was conferred the Leadership Award for Global

Vision by the United States India Business Council.

Shri Mukesh Ambani was elected to be a member of the Honorary Fellows

of The Institution of Chemical Engineers, UK.

Dr. R. A. Mashelkar received 'Foreign Fellow' from Australian Academy

of Technological Sciences and Engineering (ATSE) in 2008.

RIL continues to be featured, for the fifth consecutive year, in the Fortune Global 500 list of 'World's largest corporations'; ranking for 2009 is as follows:

o Ranked 264th in terms of saleso Ranked 117th in terms of profits

RIL won the Golden Peacock Global Award for Excellence in Corporate

Governance for the year 2008.

Jamnagar Manufacturing Division bagged the 'Refinery of the Year Award

for 2008', for second successive year from 'Petroleum Federation of India'.

Shri Mukesh Ambani received the American India Foundation's (AIF),

USA, 'The 2008 Annual Spring Gala Award' in 2008.

Shri Mukesh Ambani was conferred the Leadership Award for Global

Vision by the United States India Business Council.

Basic Accounting Terminologies

Introduction

Every human being consciously engages himself in some meaningful activity.

Although the measure of success may vary in each case one has to be careful and

cautious at every stage in his life. Bookkeeping and accountancy is a science, which

has attracted the attention all such human activities. Accounting enables a person to

assess the risk appropriate steps.

Account an account denotes a summarized record of transactions pertaining to one

person, one kind of asset, or one class of income, or one class of income or loss.

Assets properties of every description owned by a person will be called assets for

example land and building, plant and machinery, cash balance, bank balance etc.

Bad debts which are irrecoverable and written off from debtors A/C as a loss are

termed as bad debts.

Casting means the totaling of the books of account casting has to be done of the

ledger accounts and also of a journal.

Creditor a creditor is a person to whom we owe something. He is the person to whom

we have to pay.

Capital the dictionary meaning of the term capital is wealth capital is the total

account invested in business the capital of a business is the claim of the owner to the

business is the claim of the owner to the business.

Debtor is person who owes something he is the person who has to pay to other

person.

Drawing is the total amount withdrawn by a trader from his business for meeting

personal expenses. Trader becomes a debtor of business by the amount withdrawn by

him from business for private purpose.

Discount it is an allowance or a concession allowed by the receiver of benefit to the

giver of benefit. It is normally allowed to the customers, debtors, and retailers’ etc. the

discount may be classified in two ways.

1) Cash discount.

2) Trade discount.

Cash discount it is discount allowed to customer as an inducement to make payment

immediately. Cash discount is closely related to cash receipt and cash payment. When

cash is received, discount is allowed is a loss to a business while cash discount

received is a gain to him.

Trade discount it is an allowance made by a wholesaler to a retailer in order to

enable the retailer to sell the articles at list prices and earn a reasonable margin of

profit. The amount of trade discount is deducted from the invoice; therefore, it has no

connection as to the receipt and payment of cash. Hence, trade discount does not

appear in the books of accounts.

Entry the term entry refers to the recording of a transaction in the books of account.

It is the primary record of a transaction in the books called journal or any other

subsidiary journal.

Expenses the effort made by business to obtain the revenues are termed as expenses.

It is the amount spent on manufacturing and selling of goods and services.

Folio it means the page number of the book of original entry or of the ledger by

writing folio i.e. page number, one can easily find out on what page the original entry

is made and on what page the entry is made in the main book.

Goods commodities in which a trader deals are called as goods.

Insolvent a person is said to be insolvent when his liabilities are more than asset

Insolvency when the liabilities of a firm are greater than its assets, it is referred to

as insolvency indicating the liabilities of a business to meet all its liabilities. Such a

business firm is said insolvent.

Journal is the book 0f accounts in which business transaction are first recorded. It is

a book of prime entry or first entry.

Liabilities debts owed by a person are called liabilities. Liabilities represent the

total amount to creditors. Debts arise because, goods may be purchased out but

payment may not be made at the time of purchasing the goods. Therefore the total

amount payable to creditors will be the liabilities.

Narration it is a brief explanation or description on to a journal entry it is given on

the line just below the journal entry within the brackets.

Posting transaction entered in the original books of entry are also to be recorded in

the ledger on the basis of the entry made in the original book is called posting.

Purchases the goods bought for resale or manufacture and resale are called

purchases. Purchases may be classified as

1) Cash purchase

2) Credit purchase

Revenue it represent the accomplishment of the enterprise until the company has

been successful in selling its products, no revenue is realized. Revenue is the amount

that adds to the capital.

Sales the goods sold by a business for cash or on credit are called sales. The sales

may be classified as;

1) Cash sales

2) Credit sales

Solvent a person is said to be solvent when his assets are equal to or more than his

liabilities.

Stock goods unsold lying with a business on any given date is called as stocks.

Transactions a transaction are an exchange of money or moneys worth between

two parties. It is dealing between two parties. It is dealing between two or more

persons.

The transactions are classified on the basis of exchange of goods and service they

may be.

1) Barter transactions.

2) Monetary transactions.

Monetary transactions are classified in the two types.

1) Cash transactions.

2) Credit transactions.

Book keeping is defined as the process of analyzing, classifying and recording

transaction in a systematic manner to provide the information about the financial

affairs of the business concerns.

Accounting is a wider concept, which includes book keeping accounting, is

involved not only maintaining records, but also balancing of accounts, interrupting the

balances, preparation of summaries, drawing conclusions from the summaries

knowing the results of financial transactions etc.

Classification of accounts.

Accounts are classified in to four types

1) Personal accounts.

2) Real accounts.

3) Nominal accounts.

Personal accounts DEBIT THE RECIVER AND CREDIT THE GIVER

Real accounts DEBIT WHAT COMES IN AND CREDIT WHAT GOES OUT

Nominal accounts DEBIT EXPENSES AND LOSSES AND CREDIT GAINS OR

INCOMES.

Journal is derived from the French word “jour’ which means a day journal is the

book of original entry or primary entry. It is a book of daily record first of all the

business transactions are recorded in the journal and subsequently they are posted in

the ledger.

Ledger “a group of accounts is known as ledger” a ledger is the principle book of

account a journal is meant for passing the entries of business transaction. A ledger is a

bound book. It contains many pages, which are called folios. These pages are

consecutively numbered. For each account a separate page is kept. Every ledger has

an index. It is generally an alphabetic index one page is allotted for each alphabet. All

the accounts commencing with that particular alphabet are indicated on that particular

page only. The page number on which the particular account appears is shown in the

index.

Ledger posting

After the transaction has been analyzed into its debit and credit elements in a journal,

each such debit and credit elements must be transferred in a journal accounts. The

process of transfer of entries from journal to ledger account is called ledger posting.

Trial balance

After posting the transaction to respective ledger accounts they are balanced and then

a trial balance is drawn. A trial balance is a statement, which shows the list of

accounts showing debit balances and list of accounts showing credit balance. If

double entry principles are strictly followed the total of the entire debit balances must

agree with the total of all the credit balance.

Trade discount

The amount of trade discount is deducted from the bill itself. Therefore, a trade

discount does not appear in the books of accounts. If a trade discount is given in the

transaction, the amount of such a trade discount is deducted from the gross value of

purchase and only the net value (arrived at after allowing a trade discount) is recorded

in the purchase books.

Debit note

A debit note is sent to the supplier when the goods purchased from him are returned.

A debit note is a statement sent by the buyer to the supplier stating the full details of

the good returned. It is sent along with the goods. It intimates the supplier that his

account has been debited by the value of the good returned to him.

Credit note

A credit note is sent to the customers when we receive goods returned from them. It

gives the full details of the good returned by the customer. Credit notes are generally

is printed in red ink. Transaction is recorded in this book on the basis of credit notes.

Trial balance

The dictionary for accountants written is “ a list or abstract of the balance or of total

debits and total credits of the accounts in a ledger, the purpose being to determine the

equality of posted debits and credits and to establish a basic summary for financial

statements”.

Subsidiary books (sub division of journal)

If all the business transaction were recorded in one and the same journal, the journal

would be bulky and cumbersome. It would be very difficult to make clerks to work on

the same journal at one and the same time. Instead of recording all the transaction in

on and the same journal, they are recorded in separate journals meant for the purpose.

Therefore, in order to meet the requirements of modern business, the original journal is divided into the following

Purchase book

Sales book

Purchase return book

Sales return book

Cash book

Bills receivable book.

Bills payable book.

Journal proper.

Final accounts

The final accounts are prepared to find out the profit or loss and to know the financial

position of the business. These account consist of

The trading account

The profit and loss account

Balance sheet

Trading account

A trading account is prepared to find out the gross profit or gross loss in the

business done during the year. The gross profit is the difference between the cost

of goods sold and the sale proceed without any deduction of indirect expenses.

Hence, in the trading account it is necessary to include all items of expenses

directly affecting the cost of goods sold. The cost of goods sold includes the

purchase price of the good sold plus buying and bringing expenses and the

expenses of conversion of raw material into saleable finished goods.

Profit and loss account

Profit and loss account is another summary account, which is prepared after

preparation of trading account. Trading account does not disclose the net income

or loss. There are other expenses in order to ascertain the profit or not loss.

Balance sheet

A balance sheet is a statement of the financial position of a business on a given

date. It is a snapshot of the financial condition of the business. The balance sheet

is not account; it is only a statement showing asset and liabilities of the business.

It is important to note that the balance sheet always balances. The total value of

the assets is always equal to the capital and liabilities.

We can define balance sheet as “a statement of financial position of any

economics unit as at a given moment of time, its assets, at cost, depreciated cost or

another indicated value, its liabilities and its ownership equities”

IntroductionOf Working Capital

Meaning:

Working capital could be defined as the portion of assets used in current

operations. The movements of the funds from capital to income and profits and back

to working capital are one of the most important characteristics of the business. This

cyclical operation is concerned with utilization of the funds with the hope that will

return with an additional amount called income. If the operations of the company are

to run smoothly, a proper relationship between fixed capital and current capital has to

maintain.

Sufficiently liquidity is important and must be achieved and maintained to

provide that funds to pay off obligation as they arise.

The adequacy of cash and other current assets together with their efficient

handling, virtually determine the survival or demise of the company. A businessman

should be able to judge the accurate requirement of working capital and should be

quick enough to raise the enquired funds to finance he working capital needs.

Working capital is also called as net current assets, “it is the excess of current assets

over current liabilities.” All organization has to carry working capital. It is important

from the point of view of both liquidity and profitability. Poor management of

working capital means that funds that unnecessarily tied up in idle assets hence

educing liquidity and also reducing ability to invest in productive assets such as plant

and machinery. So affecting profitability.

The term working capital refers to current assets, which may be defined as:

i) Those which are convertible into cash or equivalents with the period of

one year and

ii) Those which are required to meet day to day operations,

The fixed as well as current assets, both requires investment of ‘Funds’. So the

management of working capital and fixed assets apparently seem to involve it type of

consideration but it is no so. The management of working capital involve different

concept and methodology than the techniques used in fixed assets management.

Objective behind the Study Of Working Capital &

Research Methodology

Working capital management is very important in modern business. The analysis

of working capital is also very useful for short-term management of funds. The

following are objective of study:

1) To make. Items wise analysis of the elements or component of working capital

to identify the items responsible for change in working capital.

2) To calculate working capital for Four Month.

Scope & Limitation of the Study

1. The Study is limited to Four Month projected performance of the

Company.

2. The data used in this study have been given commercial Manager. As

per the requirement and necessary some data are grouped and sub

grouped.

3. For making a clear-cut opinion, Ratio technique of financial

management has been used.

Data & Methodology of the Study:

The data of Reliance Industries Ltd. For the four Month used in this study

have been taken from company. Editing, classification and tabulation of the financial

data, which are collected from the above-mentioned sources, have been done as per

the requirement of the study.

Types of working capital

The type, kinds of a thing are depending upon the different utilization of

working capital. It prominently works in the direction of performing different

functions in different situation and in the context of divergent variables. So following

are some important types of working capital.

1) Net Working Capital:

Term Net working capital can be define in two way

i) It is the difference between current assets and current liabilities.

ii) Amount left for operational requirement.

2) Gross Working Capital:

Gross working capital means the total current assets.

3) Permanent Working Capital:

It is the minimum amount of the current assets, which are needs to conduct the

business even during the dullest season of the year. This amount varies from year

to year depending upon the growth of a company and stage of the business cycle

Net Working Capital Gross Working

Capital

Permanent Working capital

Temporary Working Capital

Types of Working Capital

Balance Sheet Working Capital

Cash Working Capital

Negative Working Capital

in which it operates. It is the amount of funds required to produce the goods and

services, which are necessary to satisfy demand at a particular point.

It represents the current assets, which are required on a continuing basis over the

year. It is maintain as the medium to carry on operation at any time. Permanent

working capital has following features:

i) It is classified on the basis of the time factor.

ii) Its size increase with the growth of the business.

iii) It constantly shifted from one asset to another and continues to remain in

the business process.

4) Temporary Working Capital:

It represents the additional assets, which are required at different times during

the operating year. Seasonal working capital is the additional amount of current

assets particularly cash, receivables, and inventory which is required during the

more active business seasons of the year. It is the temporary investment in the

current assets and possesses the following features:

a) It is not always gainfully employed, though is May also shift

from one asset to another as permanent working capital does.

b) It is particularly suited to business of seasonal on cyclical

nature.

5) Balance Sheet Working Capital:

The balance sheet working capital is one, which is calculated from the items

appearing in the balance sheet. Gross working capital, which is represented by the

excess of current assets over current liabilities, is example of the balance sheet

working capital.

6) Cash Working Capital:

It is one, which is calculated from the items appearing in the Profit and Loss

Account. It shows the real flow of money or value at a particular time and

considered to be most realistic approach in working capital management. It is the

basic of the operation cycle concept, which has assumed a great importance in

financial management in recent year. The reason is that the cash working capital

indicates he adequacy of the cash flow which is an essential pre-requisite of a

business.

7) Negative Working Capital:

It emerges when current liabilities exceeds current assets, such a situation is

absolutely theoretical and occurs when a firm is nearing a crisis of some

magnitude.

Principles of Working Capital

Management:

There are some principles of sound working capital management policy. They

are as follows:

1) Principle of Risk Variation:

Risk here refers to inability of a firm to meet its obligation when they become

due for payment. Large investment in current assets with less dependence on a short

term borrowing increase liquidity, reduces dependence on short term borrowing

increases liquidity, reduces risk.

2) Principle of Cost of Capital:

The various sources of rising of working capital finance have different cost of

capital and the degree of risk involved. A sound working capital management should

always try to achieve a proper balance between these two.

3) Principle of Equity position:

According this principle, the amount of working capital invested in each

component should be adequately justified by a firm’s equity position. Every rupee

invested in the current assets should contribute to the net worth of the firm.

4) Principle of Maturity of Payment:

This principle is concerned with planning he sources of finance for working

capital. According to this principle, a firm should make every efforts related to

maturity of payment & its flow of internally generated funds. Maturity pattern of

various current obligations is an impotent factor in risk assumptions and risk

assessment.

Factors determining working

capital

1) Nature or character of Business:

The working capital requirement of a firm basically depends upon the nature

of its business. Public utility undertaking like Electricity, Water Supply, and Railways

need very limited working capital because they offer cash sales only and supply

services, not products and as such no funds are tied up in inventories and receivables.

On the other hand trading and financial firms require less investment in fixed assets

but they have to invest large amount in current assets like inventories, receivables and

cash. So they need large amount of working capital.

2) Production cycle:

Another factor, which has a bearing on the quantum of working capital, is the

production cycle. The term ‘production or manufacturing cycle’ refers to the time

involved in the manufacturing of goods. It covers the time span between the

procurement of raw material and the completion of the manufacturing process leading

to the production of finished goods.

In other words, there is sometime gap before raw material becomes finished

goods. To sustain such activities that need for working capital is obvious. The longer

time span (production cycle) the large will be the tied up funds and therefore, larger is

working capital need and vice versa.

3) Production Policy:

In certain industry the demand is subject to wide fluctuations due to seasonal

variations. The requirement of working capital in such case, depend upon the

production policy. The production can be either kept steady by accumulating

inventories during slack period with a view to meet high demand during peak season

of the production could be curtailed during the slack season and increased during the

peak season. If policy is to keep production steady by accumulating inventories it will

require higher working capital.

4) Credit Policy:

The credit terms granted to customers have a bearing in the magnitude of

working capital by determining the level of book debts. The credit sales result in

higher book debs. Higher book debts mean more working capital. On the other hand,

if liberal credit terms are available from the supplies of goods trade needs less

working capital.

The working capital requirement of a business are thus, affected by term of

purchase and sale, and the ole given to credit by a company in its dealing with

creditors and debtors.

5) Growth and Expansion:

The working capital requirement of concern increases with the growth and

expansion of its business activities. Although, it is difficult to determine the

relationship between the growth in the volume of business and the growth in the

working capital of a business, yet it may be concluded that for normal rate of

expansion in the volume of business. We may have retained profits to provide for me

working capital but in fast growing concern, we shall require lager amount of working

capital.

6) Seasonal Variation:

In certain industry raw material is no available throughout the year. They have

to buy raw material in bulk during the season to ensure uninterrupted flow and

process them during the entire year. So a huge amount is blocked in form of row

material during the peak season, which gives more requirements for working capital

and less requirement during the slack season.

7) Earning Capacity:

Some firm have more earning capacity than others due to quality of the

products, monopoly condition etc. Such firms with high earning capacity may

generate cash profits from operations and contribute to their working capital.

8) Dividend Policy:

The dividend policy of a concern influences on the requirement of the working

capital. A firm that maintains a steady high rate of cash dividend irrespective of its

profits level needs more working capital than the firm that retains large part of its

profits and does not pay at high rate of cash dividend.

9) Other Factors:

Certain other factors such as operating efficiency, management ability,

irregularities in supply, import policy, assets structure, importance of labour, banking

facilities etc., also influence the requirement of working capital.

Sources of Working CapitalMainly there are two sources of working capital:

i. Permanent or Fixed working capital

ii. Temporary or variables working capital

In any concern, a part of the working capital investments are as investment in

fixed assets. This is so because there is always a minimum level of current assets,

which are continuously required by the enterprise to carry out its day-to-day business

operation and this minimum, cannot be expected to reduce at any time. This minimum

level of current assets need long term working capital, which is permanently blocked.

Similarly, some amount of working capital may be required to meet the seasonal

demands and some special exigencies such as rise in prices, strikes, etc. this gives rise

to short term working capital which is required for day to day transaction also.

The fixed proportion of working capital should be generally financed from the fixed

capital sources while the temporary or variable working capital equipment may be

met from the short term sources of capital.

Methods of Calculation of Required Working Capital

The methods of calculation of required working capital are as follows:

Working Capital Cycle:

The working capital cycle is also known as operating cycle. It refers to the

duration between the firm’s payment of cash for raw material, entering into

Sources of Working Capital

Long term Sources

Shares

Debentures

Public Deposits

Plugging back of Profits

Loans from Financial institution

Short Term sources

Commercial Banks

Indigenous Banks

Trade Creditors

Installment Credit

Advances

Account receivable

Credit

Accrued Expenses

Differed Income

Commercial Paper

production and inflow of cash from debtors and realization of receivables. Simply

speaking, operating cycle is the duration between the outflow of cash and inflow

of cash and this may be evidenced from the following working capital cycle.

The above and network diagram may offer a clear picture of a complete

working capital i.e. it is a cash phenomenon. In the diagram, raw material, stock refers

to material only. In work in process, components involve are raw material, wages, and

overhead more specifically manufacturing overheads. Finished stock consist

components of material, wages and overheads inclusive of factory, office and

administration and selling and distribution. Debtors include material, wages,

overheads and profits. Credit involves for the components of raw material, etc.

something a contingency margin is also given while estimating the working capital

requirement.

The operating cycle consists of him following events, which continues

throughout his life of a firm remaining engaged in commercial activities.

Avg. Stock of Raw Material

Receivables

Finished Goods

Raw Material Work In Process

Cash

1) Raw Material Holding Period =Avg. Cost of Consumption per day

Avg. Stock of Work in Process2) Work in Process Holding Period = Avg. Cost of Production per day

Avg. Stock of Finished Goods3) Finished Goods Holding Period = Avg. Cost of Goods Sold per day

Avg. Book Debt4) Receivables Collection Period = Avg. Credit Sales per day

Avg. Trade Creditors5) Creditors Collection Period = Avg. Credit Purchased per day

In the form of a simple equation working capital cycle or operating cycle can be represented as bellow:

O = R+W+F+D-C

Where, O = Operating Cycle (In Days)R = Raw Materials Holding Period

W = Work in Process Holding Period F = Finished Goods Holding Period

D = Receivables Collection Period C = Creditors Collection Period.

Total Operating CostWorking Capital Required =

Number of Operating Cycle

Components of Working Capital:

Current Assets:

i) Stock of Raw Material (for…month consumption)

ii) Work In Process (for…Month)a) Raw Materialsb) Direct Labourc) Overheads

iii) Stock of Finished Goods (for…month sales)

iv) Sundry Debtors or Receivables (for…month sales)

v) Payments in Advance (if any)

vi) Balance of Cash (required to meet day-to-day Expenses)

vii) Any Other (if any)

Less: Current Liabilities:

i) Creditors (for…month purchase of raw materials)

ii) Outstanding Expenses (for month)

iii) Others (if any)

Working Capital (CA – CL)

Add: Provision/ Margin for contingencies

Net Working Capital Required

Amount

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Management of working capital:

Working capital, in general practice, refers to him excess of current assets over

current liabilities. Management of working capital therefore, is concerned with

problems that arise in attempting to mange him current assets, current liabilities, and

interrelationship that exists between them. In other word it refers to all aspects of

administration of both current assets and current liabilities.

The basic goal of working capital management is to manage the current assets

and current liabilities of a firm in such way that a satisfactory level of working capital

is maintained, i.e. neither inadequate nor excessive. This is so because both

inadequate as well as excessive working capital position is bad for the business.

Inadequacy of working capital, may lead the firm insolvency and excessive working

capital implies idle funds, which earn no profit for the business. Working capital

management policies of the firm have a great effect on its profitability, liquidity and

structural health of the organization. In this context, working capital management is

three-dimensional nature:

1) Dimension I is concerned with the formulation of the policy with regard to

profitability, risk and liquidity.

2) Dimension II is concerned with the decision about his composition and level

of current assets.

3) Dimension III is concerned with the decision about his composition and level

of current liabilities.

This dimension aspect of his working capital has been more clearly and precisely Explain by the following diagram.

Profitability, Risk & Liquidity

Dimension I

Dimension III Dimension II

Composition & Level of current assets

Composition & level Of current Liabilities

Ratio Analysis

Absolute figures expressed in monetary terms in financial statements themselves are meaningless. These figures often do not convey much meaning unless expressed in relation to other figures. Thus, we can say that the relationship between two figures expressed in arithmetical terms is called a ‘ratio’.

Objects and Advantages of Ratio Analysis:-

Financial statements i.e. Profit & loss account & Balance sheet prepared at the end of the year do not always convey to the reader the real profitability & financial health of the business. They contain various facts & figures & it is for the reader to conclude, whether these facts indicate a good or bad managerial performance. Ratio analysis is the most important tool of analyzing these financial statements. It helps the reader in giving tongue to the mute heaps of figures given in financial statements. Some important objects & advantages are as follow:

• Helpful in analysis of financial statements• Simplification of accounting Data• Helpful in locating the weak spot of the Business• Fixation of Ideal Standards• Effective Control

Limitations of Ratio Analysis:-

Ratio analysis is a very important tool of financial analysis. But despite its being indispensable; the ratio analysis suffers from a number of limitations. These limitations should be kept in mind while making use of the ratio analysis.

• False accounting data gives False Ratios• Ratio Analysis becomes less effective due to price level changes.• Comparison not possible if different firms adopt different Accounting Policies.• Lack of proper Standards• Window-Dressing

Classification of Ratio Analysis:-

Ratios can be classified into the four categories as follows:- Liquidity Ratio Leverage or Capital Structure Ratio Activity Ratio Profitability Ratio or Income Ratio

Liquidity Ratio:- “Liquidity” refers to the ability of the firm to meet its current liabilities. These ratios are used to assess the short- term financial position of the concern. They indicate the firm’s ability to meet its current obligation out of current resources. It can be classified as follow:I. Current RatioII. Quick/Acid Test Ratio

Leverage or Capital Structure Ratio:- These ratios are calculated to assess the ability of the firm to meet its long – term liabilities as & when they become due. Leverage or Capital Structure ratios disclose the firm’s ability to meet the interest costs regularly & long – term indebtedness at maturity. It can be classified as follow:I. Debt Equity RatioII. Debt to Total Fund RatioIII. Proprietary RatioIV. Capital Gearing RatioV. Interest Coverage Ratio

Activity Ratio:- These ratios are calculated on the basis of ‘cost of sales’ or ‘sales’, therefore, these ratios are also called as ’Turnover Ratio’. These ratios indicate how efficiently the capital is being used to obtain sales; how efficiently the fixed assets are being used to obtain sales; and how efficiently the working capital and stock is being used to obtain sales. It includes the following:I. Stock Turnover or Inventory Turnover RatioII. Debtors or Receivable Turnover RatioIII. Average Collection PeriodIV. Creditors or Payables Turnover RatioV. Fixed Assets Turnover RatioVI. Working Capital Turnover Ratio

Profitability Ratio or Income Ratios:-

The main object of all the business concerns is to earn profit. Profit is the measurement of the efficiency of the business. Equity shareholders of the company are mainly interested in the profit ability of the company. Profitability ratios include the following:- Profitability Ratios based on sales:-a) Gross Profit Ratiob) Net Profit Ratioc) Operating Ratiod) Expenses Ratio

Profitability Ratios based on Investmenta) Return on Capital Employedb) Return on Shareholder’s Fundsc) Earning per Shared) Dividend per Share

Reliance Industries Ltd. Ratio Analysis

Industry

Diversified

Business Group

Ambani Group

Chairman

Mr. Mukesh D Ambani

BSE Code

500325 NSE Code

RELIANCE

ISIN No INE002A01018

Market Lot

1 Face Value

Rs. 10.00

Book Closure

21/10/2009

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

Adjusted E P S (Rs.)

100.13 93.80 87.29 65.37 52.52

Adjusted Cash EPS (Rs.)

133.14 127.14 121.84 89.78 79.68

Reported EPS (Rs.)

97.28 133.86 85.71 65.08 54.34

Reported Cash EPS (Rs.)

130.29 167.20 120.26 89.49 81.49

Dividend Per Share

13.00 13.00 11.00 10.00 7.50

Operating Profit Per Share (Rs.)

153.47 154.32 146.44 103.76 91.21

Book Value (Excl Rev Res) Per Share (Rs.)

728.22 554.41 440.10 324.11 270.43

Book Value (Incl Rev Res) Per Share (Rs.)

803.12 560.40 459.13 357.49 290.03

Net Operating Income Per Share (Rs.)

902.02 920.48 801.57 580.39 473.04

PER SHARE RATIOS

704.28 520.59 416.90 301.36 247.94

PROFITABILITY RATIOS

Operating Margin (%)

17.01 16.76 18.26 17.87 19.28

Gross Profit Margin (%)

13.35 13.14 13.95 13.67 13.54

Net Profit Margin (%)

10.65 14.45 10.64 11.13 11.25

Adjusted Cash Margin (%)

14.58 13.73 15.13 15.35 16.49

Adjusted Return On Net \Worth (%)

13.76 17.28 19.85 20.17 19.42

Reported Return On Net Worth (%)

13.36 24.66 19.49 20.08 20.09

Return On long Term Funds (%)

11.34 17.18 19.83 18.88 19.44

LEVERAGE RATIOS

Long Term Debt / Equity

0.59 0.35 0.32 0.36 0.40

Total Debt/Equity

0.64 0.46 0.45 0.48 0.49

Owners fund as % of total Source

60.77 68.38 68.76 67.37 66.72

Fixed Assets Turnover Ratio

1.01 1.29 1.13 0.95 1.20

LIQUIDITY RATIOS

Current Ratio 1.23 1.39 1.17 1.15 1.32

Current Ratio (Inc. ST Loans)

1.08 1.01 0.77 0.83 1.07

Quick Ratio 0.90 0.93 0.68 0.67 0.96

Inventory Turnover Ratio

12.92 10.57 10.65 9.60 10.87

PAYOUT RATIOS

Dividend payout Ratio (Net Profit)

14.49 9.80 13.75 17.52 15.73

Dividend payout 10.82 7.85 9.80 12.74 10.49

Ratio (Cash Profit)Earning Retention Ratio

85.92 86.01 86.50 82.56 83.72

Cash Earnings Retention Ratio

89.41 89.68 90.33 87.30 89.27

COVERAGE RATIOS

Adjusted Cash Flow Time Total Debt

3.53 1.97 1.64 1.75 1.69

Financial Charges Coverage Ratio

14.58 19.95 16.06 16.84 9.48

Fin. Charges Cov.Ratio (Post Tax)

12.56 21.90 13.90 14.95 8.64

COMPONENT RATIOS

Material Cost Component(% earnings)

76.98 73.86 72.32 73.86 71.93

Selling Cost Component

2.18 2.41 3.27 5.85 2.76

Exports as percent of Total Sales

61.22 56.80 52.40 38.10 36.02

Import Comp. in Raw Mat. Consumed

95.74 93.96 94.04 95.41 91.73

Long term assets / Total Assets

0.74 0.69 0.73 0.72 0.63

Bonus Component In Equity Capital (%)

30.61 33.14 34.57 34.58 34.58

Liquidity Ratio

Current Ratio:-

The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It is expressed as follow:-

Current Ratio = 1.23 It is important to note that a very high ratio of current assets to current liabilities may be indicative of slack management practices, as it might signal excessive inventories for the current requirement & poor credit management in terms of overextended accounts receivable. At the same time, the firm may not be making full use of its current borrowing capacity. Although there is no hard & fast rule, conventionally, a current ratio of 2:1 is considered satisfactory. The logical underlying the conventional rule is that even with a drop – out of 50% in the value of current assets, a firm can meet its obligations.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2009 2008 2007 2006 2005

Current Ratio

Current Ratio

The current ratio of the company is 1.23:1 that is less than 1.5:1. From the graph we find that, from the last three years the current ratio first rises & then decline.so we can say that the company’s short term financial position is not good.

Quick Ratio:-

Quick ratio indicates whether the firm is in a position to pay its current liabilites within a month or immediately. It is expressed as follows:

Quick Ratio = Quick Assets

Current Liabilities

Quick ratio = 0.90

The acid – test ratio is a rigorous of a firm’s ability to service short – term liabilities. The usefulness of the ratio is the fact that it is widely accepted as the best available test of the liquidity position of the firm. That means the acid – test ratio is superior to the current ratio.

This interpretation of the liquidity position of the firm needs modification in the light of the quick ratio. Generally speaking, an acid- test ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims.

The quick ratio of the company is 0.90:1 which is less than 1:1. From the graph also we find that from the last three years the ratio first rise then decline. So we can say that the company is not in the position to pay its current liabilities instantly.

Activity Ratio

Inventory Turnover Ratio:-

In business management, the Inventory turnover is an equation that measures the number of times inventory is sold or used over in a period such as a year. The equation equals the cost of goods sold divided by the average inventory. Inventory turnover is also known as inventory turns, stock turnover.

The formula for inventory turnover:

Inventory Turnover Ratio= 12.9

A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or shortages.

The Inventory Turnover ratio of the company is 12.9. From the graph we find that from the last three years the ratio is increasing. It is a good sign for the company. From the graph we can say that the management is using the stock efficiently.

Fixed Assets Turnover Ratio:-

This formula is used for calculating this ratio:

Fixed Assets Turnover Ratio = Cost of goods sol

Net fixed Assets

Net Fixed Assets = Fixed Assets - Deprecation

Fixed Assets Turnover Ratio = 1.01

This ratio is of particular importance in manufacturing concerns where the

investment in fixed assets is quite high. This ratio reveals how efficiently the fixed

assets are being utilized. Compare with the previous year, if there is increase in this

ratio, it will indicate that there is better utilization of fixed assets. If there is a fall in

the ratio, it will show that fixed assets have not been used as efficiently, as they have

been used in the previous year.

From the graph we find that, from the last three years the ratio had first increase then

decrease. So we can say that the company is not using its assets properly.

Profitability Ratio or Income Ratio

Profitability Ratios based on sales:-

Gross Profit Ratio:-

First some basic profitability equations:

Gross Profit Margin =Gross Profit

* 100Turnover

Remember:

Turnover = Sales

Gross Profit = Turnover - Cost of Sales

Gross Profit Ratio = 13.35

The gross profit margin ratio tells us the profit a business makes on its cost of sales, or

cost of goods sold. It is a very simple idea and it tells us how much gross profit per

turnover our business is earning.

Here are a few examples of the gross profit margins from different businesses:

  Leisure

&

Hotels

International

Airline

Manufacturer Retailer Discount

Airline

Refining Pizza

Restaurants

Accounting

Software

Gross

profit

9.64% 5.62% 35.14% 11.41% 27.46% 11.99% 47.52% 89.55%

From the table we find that gross profit ratio should be more than 11.99%.The Gross Profit ratio of the company is 13.35.From the graph we find that, from the last three years the ratio first decrease then increase. So we can say that the company is doing good.

Net Profit Ratio:-

Net Profit Margin =Net Profit

* 100Turnover

Remember:

Net Profit = Gross Profit - Expenses

Net Profit ratio= 10.65%

The net profit margin ratio tells us the amount of net profit over turnover of a business

has earned. That is, after taking account of the cost of sales, the administration costs,

the selling and distributions costs and all other costs, the net profit is the profit that is

left, out of which they will pay interest, tax, dividends and so on.

Here are a few examples of the net profit margins from the same businesses we saw in

the gross profit margin section:

  Leisu

re &

Hotel

s

Internation

al Airline

Manufacturer Retailer Discount

Airline

Refining Pizza

Restaura

nts

Accounti

ng

Software

Net

Profit

7.36% 4.05% 10.48% 1.63% 10.87% 12.63% 7.55% 27.15%

A high net profit margin would ensure adequate return to the owners as well as enable a firm to withstand adverse economic conditions when selling price is decling, cost of production is rising & demand for the product is falling.

A low net profit margin has the opposite implications. However, a firm with a low margin, can earn a high rate of return on investments if it has a high inventory turnover. The net profit ratio of the company is 10.65%. From the graph we also find that, from the last three years the net profit ratio first rise then decline but company has a high inventory turnover ratio. So we can say that the company is in a good position.

Operating Ratio:-

This ratio measures the proportion of an enterprise’s cost of sales and operating expenses in comparison to its sales:

Operating Ratio=Cost of Goods sold + Operating Expenses*100

Net Sale

Operation ratio = 17.01%

‘Operating ratio’ & ‘operating profit ratio’ are inter – related. Total of both these ratios will be 100. A rise in ‘Operating Ratio’ will lead to a similar amount of decline in ‘Operating Profit Ratio’ & vice – versa. Operating ratio is a measurement of the efficiency and profitability of the business enterprise. The ratio indicates the extent of sales that is absorbed by the cost of good sold and operating expenses. Lower the operating ratio, the better it is, because it will leave higher margin of profit on sales.

The operating ratio of the company is 17.01. From the graph we find that, from the last three years the ratio first decline then increase. So the company’s operating profit ratio is less from the last year because its operating ratio increase. So we can say that company is not in a good position.

Profitability Ratios based on Investment:-Earning Per Share:- This ratio can be expressed as follows: EPS = Net profit available to equity shareholders/No. of ordinary shares outstanding EPS = 97.28 EPS is a widely used ratio. Yet, EPS as a measure of profitability of a firm from the owner’s point of view should be used cautiously as it does not recognize the effect of increase retention of earnings. It does not necessarily follow that the firm’s profitability has improved because the increased profits to the owners may be the effect of an enlarged equity capital as a result of profit retentions, though the number of ordinary shares outstanding still remains constant.

As a profitability ratio, the EPS can be used to draw inferences on the basis of (i) its trends over a period of time (ii) comparison with the EPS of other firms & (iii) comparison with the industry average. From the graph we found that the profit available to the equity shareholders on a per share basic is going down. Dividend per Share:-Dividend per Share is the dividend paid to the shareholders on a per share basis. In other words, DPS is the net distributed profit belonging to the shareholders dividend by the number of ordinary shares outstanding. That is:

DPS = Dividend paid to ordinary shareholders/Number of ordinary shares outstandingDPS = 13.0

The Dividend per Share would be a better indicator than Earning per Share. Like the earning per share, the dividend per share also should not be taken at its face value as the increased dividend per share may not be a reliable measure of profitability as the equity base may have increased retention without any change in the number of

outstanding shares. From the graph we found that from the last three years the DPS first increase then since last two years the dividend per share is constant.

Leverage or Capital Structure Ratio

Debt – Equity Ratio:- The D/E ratio is an important tool of financial analysis to appraise the financial structure of a firm. It has important implication from the view-point of the creditors, owners & the firm itself. The ratio reflects the relative contribution of creditors & owners of business in its financing. A high ratio shows a large share of financing by the creditors of the firm; a low ratio implies a smaller claim of creditors. The D/E ratio indicates the margin of safety to the creditors.This ratio can be expressed as follows:D/E Ratio = Long–term debt/ Shareholders’ equity D/E Ratio = 0.59

If the D/E ratio is high, the owners are putting up relatively less money of their own. It is danger signal for the creditors. A high debt-equity ratio has equally serious implications from the firm’s point of view also. A high proportion of debt in the capital structure would lead to inflexibility in the operations of the firm as creditors would exercise pressure & interfere in management. A low debt – equity ratio has just the opposite implications. To the creditors, a relatively high stake of the owners implies sufficient safety margin & substantial protection against shrinkage in assets. From the graph we find that, from the last three years th debt-equity ratio is increasing.

Lyondell Deal

Len Blavatnik led Lyondell Basell is claiming RIL’s $12Bn now $13.5 Bn valuation as too low.

Len bought Basell Polyolefins from Royal Dutch Shell and BASF for $5.7Bn in August 2005.

In 2007, it bought Lyondell Chemical Company for $12.7Bn, hence making the total investment close to $19Bn.

Lyondell’s buyout was majorly funded by debt from a consortium of lenders which included Merrill Lynch, Goldman Sachs, Citigroup, ABN-Amro and UBS among others.

Demand for products suddenly collapsed in the second half of 2008 and the company was unable to pay fees and interest totaling $281Mn on a bridge loan due on 19th Dec’09.

The US unit of Lyondell Basell filed for Chapter 11 bankruptcy protection in Jan'09 to facilitate a restructuring of its $26Bn debt.

During bankruptcy, Lyondell Basell added further burden to its existing debt by obtaining $8Bn in debtor-in-possession (DIP) financing to fund continuing operations.

The DIP financing included two credit agreements: a $6.5Bn term loan (comprising $3.25Bn in new loans and a $3.25Bn roll-up of existing loans) and a $1.62Bn asset-based lending facility.

Lyondell has submitted a restructuring plan which involved LBI repaying its $8Bn bankruptcy loan in full and giving an equity stake in the new firm to lenders, including sponsors of the $2.8Bn rights offering.

Law firm Milbank Tweed Hadley & McCloy is representing the lenders group.

What is Reliance offering?

RIL is offering about $13.5Bn for Lyondell Basell which posted $50.7Bn in sales last year, valuing Lyondell 1/4th of sales.

The petrochemical company has $27.1Bn of assets and $19.3Bn of debt, according to its bankruptcy filing.

RIL also made a statement recently that it will not buy Lyondell’s debt.

RIL has enough resources to buy Lyondell. It has $4 Bn of cash, $8 Bn of treasury stock.

Will the transaction go through if the debt is left out?

Whether the asset will sell or not is tied up to what debtors get out of it.

Earlier in 2008, Citigroup sold $1.9 Bn of its Lyondell loan to Apollo Management at about 85 cents to a dollar, the prices of which tumbled to 44 cents to a dollar just after the crash.

If we consider a pricing of 75 cents to dollar for the Lyondell debt which currently stands at $26Bn, the cost of debt alone would be about $19Bn.

We wonder if RIL were to go for a $10Bn loan - which Wall street will syndicate - how they would like to syndicate a loan that pays them back their bad debt with haircuts...

Lyondell Basell which employs more than 17000 people generates about 34% of its revenue from fuels, 30% from chemicals and 35% from plastics.

RIL, Barabanki Division

Barabanki Manufacturing Division located near Lucknow, Uttar Pradesh, is spread over 106 acres. It manufactures Black Fibre.

Barabanki Manufacturing Division (formerly known as India Polyfibres Limited) was commissioned in January, 1987 by RPG Group with technical collaboration from M/s. Du Pont, USA to manufacture 15,000 MT per annum of Commodity Polyester Staple Fibre.

In 1999, the Company started producing Dope Dyed Black Polyester Staple Fibre. Necessary changes & modifications in the Plant & Machinery were carried out to undertake test / trial runs for ascertaining technical viability, determine modifications & additional equipment required for sustained operations and simultaneously adheres with the desired quality levels.

It is for the first time that Black Fibre has been produced by continuous process on PTA route anywhere in the world. Today Barabanki Manufacturing Division is the largest producer of Dope Dyed Black Polyester Staple Fibre in the world and about 20 % of it is exported.

In 2003, company further developed a new product named as Dope Dyed Super Black Polyester Staple Fibre & Tow.

In 2004, further capacity of 10,000 MT per annum was added by installing an extrusion based Spinning Plant. With this addition the present installed capacity of Barabanki Manufacturing Division is 40,000 MT per annum

In 2006, a new product "Dope Dyed Navy Blue PSF" was added in its product portfolio. Few more colors like Dope Dyed Dark Grey, Sky Blue, Parrot Green, Chocolate Brown, Renol Red and Coffee Brown can be easily manufactured.

Steam is now generated through Husk boiler at low cost.

Total number of employees are nearly 500 (50% are on contract basis).

Bibliography

1. Book about Excise Manual

- By R. K. Jain

2. Annual Report of Reliance Industries Limited

3. Financial Management by

-

- Khan & Jain

- S. N. Maheshwari

4. www.ril.com