Analysis of sources of woking capital


Cash is the lifeline of a company. Understanding a company's cash flow, it is essential to make investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).

Working capital refers to the cash a business requires for day-to-day operations i.e for financing the conversion of raw materials into finished goods, which the company sells for payment.

Analysts look at these items for signs of a company's efficiency and financial strength.


The working capital management precisely refers to management of current assets. A firm's working capital consists of its investment in current assets, which include short-term assets such as:

  • Cash and bank balance,
  • Inventories,
  • Receivables (including debtors and bills),
  • Marketable securities.

Working capital is commonly defined as the difference between current assets and current liabilities.

Significance of Working Capital Management

  1. The current assets of a typical manufacturing firm account for half of its total assets. For a distribution company, they account for even more.
  2. Working capital requires continuous day to day supervision. 3.Working capital has the effect on company's risk, return and share prices.


Sources of additional working capital include the following:

  • Existing cash reserves
  • Profits (when you secure it as cash!)
  • Payables (credit from suppliers)
  • New equity or loans from shareholders
  • Bank overdrafts or lines of credit.
  • Long-term loans


Tata Steel formerly known as TISCO and Tata Iron and Steel Company Limited, is the world's sixth largest steel company, with an annual crude steel capacity of 31 million tonnes. It is the second largest private sector steel company in India in terms of domestic production. Ranked 258th on Fortune Global 500, it is based in Jamshedpur, Jharkhand, India. It is part of Tata Group of companies.

Tata Steel is also India's second-largest and second-most profitable company in private sector with consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the year ended March 31, 2008.

Its main plant is in Jamshedpur, Jharkhand, with its recent acquisitions, the company has become a multinational with operations in various countries.

The registered office of Tata Steel is in Mumbai. The company is listed on Bombay Stock Exchange and National Stock Exchange of India, and employs about 82,700 people.

Financial Highlights - 97th Annual Report :

  • Highest ever production : 4.06 million tonnes
  • Steel sales : 3.96 million tonnes
  • Exports turnover increased by 14%
  • Record turnover of Rs. 12,069.62 crores
  • Profit After Tax increased by 72%
  • Net Working Capital reduced to Rs. 84.22 crores
  • Return of Equity : 46.3%
  • EVA spread of 8.98%


Tata Steel's vision is to be the global steel industry benchmark for Value Creation and Corporate Citizenship. Tata Steel India is the first integrated steel company in the world, outside Japan, to be awarded the Deming Application Prize 2008 for excellence in Total Quality Management.

CORPORATE SUSTAINABILITY:-Regarded globally as a benchmark in corporate social responsibility, Tata Steel's commitment to the community remains the bedrock of its hundred years of sustainability.

The Company, fully conscious of its responsibilities to the future generations, has always taken pro-active measures to ensure optimum utilization of natural resources. This is reflected in the ISO-14001 certification that all its operations have achieved for environment management.

Awards and Recognitions

  • Tata Steel India awarded the Deming Application Prize 2008 for excellence in Total Quality Management. It is the first integrated steel company in the world, outside Japan to get this award.
  • World Steel Dynamics has ranked Tata Steel as the world's best steel maker (for two consecutive years) in its annual listing in February 2006.
  • Tata Steel has been conferred the Prime Minister of India's Trophy for the Best Integrated Steel Plant five times.
  • It has been awarded Asia's Most Admired Knowledge Enterprise award five times in 2003, 2004, 2006, 2007 and 2008.


  1. To study the cash and receivable of TATA Steel.
  2. The main purpose of study is to have a better understanding of the concept "Working Capital Management".
  3. To understand the planning and management of working capital.
  4. To measure the financial soundness of the company by analyzing various ratios.
  5. To suggest ways for better management and control of working capital at the concern.



In analytical research - the fact & information already available & analysis of these to make an evaluation of project. So this is an analytical type research.


The project include secondary source of data. The data collected through these sources has organized, analyzed & interpret so as to draw conclusion & to arrive at appropriate recommendations.

The secondary sources of data include books, annual report, and website of TATA Steel Company which contains the details which is helpful for making the report.


  1. This project will be a learning device for the finance student.
  2. Various methods of the working capital management are studied.
  3. This would be an effective tool for credit policies of the companies.
  4. This will show the liquidity position of the company and also how do they maintain a particular liquidity position.

Comparative analysis of sources of working capital of TATA STEEL:-

Cash is an important part of an organisation .It is not possible to run a business without cash. No doubt cash is a component of working capital. But it is the cause of formation of other current assets .

From the data given above it is estimated that Tata Steel has increased its cash balance in the year 2009 but when we compare it with base year it is quite low that is 2005 so with the help of other financial statements we can analyze that company has invested a lot of amount in fixed assets.

Investments in fixed assets also raised the loans of company . It is observed from the balance sheet that in 2005 amount of loan was only Rs 2234.96 crores but in 2009 it raised to Rs 5884.61 crores. A high rise is observed. Current assets are also in their highest figure in the current year. It shows us that company is approaching towards growth. Company is expanding its operations that is cash balance is reducing year after year.

Sundry debtors of the company have also increased from Rs.581.82 crore to Rs.635.98 crore. This increase for five years is not so much. So the company is showing good signs of growth.

Profitability position of the company is showing fluctuations and vary in every year. When comparison is done, year 2005 to 2006 there is decrease in the later year as compared to the former.It is Rs.6045.36 in 2005 and Rs.5937.58 crore in 2006. Then a continuous increase in shown in last three years.

Ratios that are given by the company shows that in current year company has shown a decreasing trend in every portion of the earning. Dividend payout ratio and earnings per share has also decreased even cash disbursements did not match previous year

Liquidity position of the company has shown a positive trend, it depicts that company has overcome its shortcomings of previous years. No doubt current ratio is less as compared to base year in the present year but when take into consideration the cash balances of the said years then it is quite healthy in year 2009.

Secured loans in the year 2005 are Rs.2468.18 crore. Then in 2006 this have decreased and went upto Rs.2191.74 crore. In the year 2007, it is Rs.3758.92 crore showing an increase and in 2008,it is Rs.3520.58 crore ,showing a decrease. In the year 2009, it is Rs.3913.05 crore, showing a further increase.So the company is showing a incease-decrease in secured loans in past 5 years.

Unsecured loans in the year 2005 are Rs.271.52 crore and then further goes on increasing for next consecutive two years and went upto Rs.5886.41 in 2007.But in 2008, it shows a decrease and is Rs.4501.11 crore. Then in 2009 ,have again increased and is Rs.23033.13 crore.


The sales turnover of the company have shown a regular increase from base year 2005 to year 2009.It was 14498.95 in 2005 and 24315.77 in 2009.Between the years also rise in sales turnover. The company is having good hold over it.

The expenses have also increased every year. In 2005 it was 8453.59 and went upto 15182.34 in 2009.Every it goes high and reached this much.

Earning per share was 62.75 in 2005 and 63.33 in 2006 and 72.71 in 2007.This is showing an increase in consecutive three years.In 2008 it came out to be 64.14, showing a decrease .In 2009, it is 71.18, showing a rise in earning per share as comparative to previous year.

The working capital is an important yardstick to measure the company's operational and financial efficiency. Any company should have a right amount of cash and lines of credit for its business needs at all times.

This study describes how the management of working capital takes place at TATA Steel.


In finance, a financial ratio or accounting ratio is a ratio of two selected numerical values taken from an enterprise's financial statements. There are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors.

Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures.

Liquidity ratios measure the availability of cash to pay debt.

Activity ratios measure how quickly a firm converts non-cash assets to cash assets.

Debt ratios measure the firm's ability to repay long-term debt.

Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.

Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.

Gross margin, Gross profit margin or Gross Profit Rate is the difference between the sales and the production costs . Gross margin can be defined as the amount of contribution to the business enterprise, after paying for direct-fixed and direct-variable unit costs, required to cover overheads (fixed commitments) and provide a buffer for unknown items. It expresses the relationship between gross profit and sales revenue.

Gross margin= Net Sales - Cost of Sales+ annual sales return

Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income. For a retailer it will be their markup over wholesale. Larger gross margins are generally good for companies, with the exception of discount retailers. They need to show that operations efficiency and financing allows them to operate with tiny margins.

ANALYSIS:-In 2006, it is 51% and in 2009 it is 53.90.So the company is able to convert raw materials into income, with greater efficiency.


In business, operating margin is the ratio of operating income divided by net sales, usually presented in percent.

It is a measurement of what proportion of a company's revenue is left over, before taxes and other indirect costs, after paying for variable costs of production as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, such as interest on debt.

ANALYSIS:-The operating margin of the company in 2006 is 33.6%, in 2007 it was 34.7%,showing a minor increase and in 2008 it was 37.50,showing a high rise.So the company is able to pay its fixed costs easily.

Profit margin all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.

The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss.

Profit margin is an indicator of a company's pricing policies and its ability to control costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.

ANALYSIS:-The company is having 23% in 2006 and then it was 24.10% in 2007 and 23.80% in 2008. Thus in 2008, it decreased showing a low margin of safety i.e decline in sales, less profit.

Return on assets (ROA) percentage shows how profitable a company's assets are in generating revenue.

ROA can be computed as:

This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control. Its a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets.

ANALYSIS:- In 2006,the return on assets is 35% .Then it decreased in 2007 and went upto 23.8% and then again in 2008 it went upto 15.7% ,showing further decrease. As companies need large investments in initial stages, so the working capital requirement goes on decreasing in subsequent years.


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 compares a firm's current assets to its current liabilities. It is expressed as follows:

A current ratio of assets to liabilities of 2:1 is usually considered to be acceptable

The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. Acceptable current ratios vary from industry to industry. If a company's current assets are in this range, then it is generally considered to have good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets.

Low values for the current or quick ratios (values less than 1) indicate that a firm may have difficulty meeting current obligations. Low values, however, do not indicate a critical problem. If an organization has good long-term prospects, it may be able to borrow against those prospects to meet current obligations. Some types of businesses usually operate with a current ratio less than one.

ANALYSIS:-After analysing the data, the current ratio in 2007 was upto the mark i.e 2.In other years the ratio was less than 1.So the company might be borrowing, to meet its current obligations.


The Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.

Generally, the acid test ratio should be 1:1 or better, however this varies widely by industry. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).

ANALYSIS:-According to thumb rule,it must be 1:1. but in 2007, it was 2.4. this means the company is having high liquidity.But in other year's it is less than 1.


  1. The working capital position of the company is sound and the various sources through which it is funded are optimal.
  2. The company has used its dividend policy, purchasing, financing and investment decisions .
  3. The various ratios calculated are an indicator as to the fact that the profitability of the firm and sales are on a rise and also the deletion of the inefficiencies in the working capital management.
  4. The firm has not compromised on profitability despite the high liquidity is commendable.


  1. The comparisons cannot be done with other companies unless and until the data of other companies is available on the same subject.
  2. Only the printed data about the company will be available and not the back-end details.
  3. Future plans of the company will not be disclosed.
  4. Lastly, due to shortage of time it is not possible to cover all the factors and details regarding the subject of study.
  5. The latest financial data could not be reported as the company's websites have not been updated.


The management of working capital plays a vital role in running of a successful business. So, things should go with a proper understanding for managing cash, receivables and inventory.

TATA Steel is managing its working capital in a good manner, but still there is some scope for improvement in its management. This can help the company in raising its profit level by making less investment in accounts receivables and stocks etc. This will ultimately improve the efficiency of its operations.


Following are few recommendations given to the company in achieving its desired objectives:

  1. The business runs successfully with adequate amount of the working capital but the company should see to it that the cash should not be tied up in excessive amount of working capital.
  2. The over purchasing function should be avoided as it could lead to liquidity problems.


  • Financial management(2008) by I M PANDEY
  • Financial management (2008) by M.Y KHAN


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