201 1

empirical analysis of capital structure & working capital management on profitability & shareholders value with reference to FMCG companies

An

Submitted by Submitted to

:-

Vishal Pandit Paresh Parmar

:- Prof. Sandhya Harkawat

An empirical analysis of Capital Structure & Working Capital Management on Profitability & Shareholders value with reference to FMCG Companies

Project Guide:
Prof. Sandhya Harkawat

Submitted by:
Vishal L. Pandit (53) Paresh C. Parmar (56)

S. K. PATEL INSTITUTE OF MANAGEMENT & COMPUTER STUDIES Gandhinagar, India

April 2011

CERTIFICATE
This is to certify that Mr. Vishal l. Pandit & Mr. Paresh C. Parmar of S.K. Patel Institute of management and Computer Studies, Gandhinagar has submitted their Grand Project titled, An empirical analysis of Capital Structure & Working Capital Management on Profitability & Shareholders value with reference to FMCG Companies in the year 2009-2011 in partial fulfilment of Kadi Sarva Vishwavidhyalaya requirements for the award of the title of Master of Business Administration.

Prof. Sonu V. Gupta Director in charge

Prof. Prakash chawla Coordinator

Prof. Sandhya Harkawat Project Guide

Date:

Place:

DECLARATION
We hereby, declare that the grand project titled, An empirical analysis of Capital Structure & Working Capital Management on Profitability & Shareholders value with reference to FMCG Companies is original to the best of our knowledge and has not been published elsewhere. This is for the purpose of the partial fulfilment of Kadi Sarva Vishwavidhyalaya requirements for the award of the title of Master of Business Administration.

Name: Vishal L. Pandit Paresh C. Parmar

Signature: __________________ __________________

PREFACE
Knowledge is the ocean that cannot be fathomed the deeper you go, the more you see its unbounded profundity. Change in occurring at an accelerated rate. Today is not like yesterday and tomorrow will not like be today. Todays market place is how to succeed in the dynamic environment that surrounds the corporate world today. M.B.A. is one of those professional courses which help students to keep pace the changing trends in business and its surrounding environment. The subject Practical Studies particularly helps the students to know the actual corporate world, the anxieties and stress associated with the job which cannot be understood sitting in a classroom. Complying with the objective the report is designed to develop the students understanding about the industry with the special emphasis on the development of skills in analyzing and interpreting practical problems through the application of theory, concepts & techniques of management.

ACKNOWLEDGEMENTS
Even for a very minute accomplishment the result is not the effort of a single person. Many persons stand besides the men while and without their acknowledgement the accomplishment is incomplete.

It is almost a ritual to begin the training report with an acknowledgement. This acknowledgement is not just an acknowledgement; it is heart full thanks to all those who made our project a great learning experience. We are very grateful to our director Prof. Sonu Gupta and to our summer project coordinator Prof. Samveg Patel for providing such a huge opportunity. Also to our mentor Prof.Sandhya Harkawat under whose blissful guidance, we were able to finish the report successfully. Finally, a special thanks to S K Patel College and staff for all their blessings and support. And also to our parents who (in their blessings) supported us working sincerely to prepare this report.

TABLE OF CONTENTS
Chapter No Particulars Title page Certificate Declaration Preface Acknowledgement Executive Summary Introduction Research Methodology a) Research Objective b) Scope of the study c) Research Design d) Types of Data e) Hypothesis Literature Review Theoretical aspects of the study Data Analysis & Findings Conclusion Bibliography Page No I Ii Iii IV V Vi 1

1) 2)

3) 4) 5) 6) 7)

EXECUTIVE SUMMARY
A study of working capital management and capital structure is a major importance to internal and external analysis because of its close relationship to current day-to-day operations of business. WCM refers to the management of working capital, or precisely to the management of current assets. A firms working capital consists of its investment in current assets, which include mostly short-term assets, cash and bank balance, inventories, receivable, and marketable securities. A company's reasonable, proportional use of debt and equity to support its assets is a key indicator of balance sheet strength. A healthy capital structure that reflects a low level of debt and a corresponding high level of equity is a very positive sign of investment quality. In the study of working capital and capital structure for profitability different ratios were use for analysis purpose. Earning per share, Debt equity ratio, Operating profit ratio were major important parameter taken for analysis purpose.

Following are the main study for working capital and capital structure
Working capital practice in FMCG companies in selected units

Working capital impact on profitability by comparing impact of dependent variable earning per share and operating profit to other different ratios. Capital structure impact to profitability indicator operating profit to earning per share. Individual companies performance based on indicator Earning per share to Debt equity ratio effect to individual company. By analysing the companys performance of selected 5 FMCG companies based on BSC index, we can know that there is impact to capital structure performance but more effect to working capital of those companies. So working capital play important role in the selected companies. Nestle played very well role in capital structure compare to other selected units. For working capital companies managed it very well in all companies. There was also made impact of dependent variable earning per share and operating profit to other different ratios.

There is no significant impact show between the operating profit to earning per share in the study.

INTRODUCTION
The selection of topic was based on interested in work in manufacturing company. So according to us it was seen that there is comparison make between theoretical and real market condition. We used secondary data for study purpose for this study. Working capital and capital structure are important parameter to Judge Companys performance. Working capital is the life blood and courage centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The working capital requirements should be met both from short term as well as long term sources of funds. Financing of working capital through short term sources of funds has the benefits of lower cost and establishing close relationship with banks. Financing of working capital through long term sources provides the benefits of reduces risk and increases liquidity. A company's capitalization (not to be confused with market capitalization) describes the composition of a company's permanent or long-term capital, which consists of a combination of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a company's capital structure is an indication of financial fitness.

RESEARCH METHODOLOGY
Objectives of the Study
1. To assess the impact of working capital on profitability. 2. To examine the combine effect of the ratios relating to working capital management and Companies s profitability indicator Earning Per Share. 3. To study the impact of capital structure on profitability & shareholders value of FMCG companies. 4. To show which company show better performance in working capital and capital structure compare to each other.

Scope of the study

We have selected 5 FMCG companies for our research. These 5 FMCG companies according to FMCG BSE index on bases of market capitalization.

BSE FMCG INDEX Company Name ITC HUL Nestle Dabur India Industry Cigarettes

01 Nov 15:34

Last Change % Mkt Cap Weight Price Chg (Rs cr) 171.60 0.45 -0.85 0.26 131,983.50 43.08 -0.29 63,996.53 20.89 1.62 34,181.30 11.16 -0.10 17,320.20 0.99 13,687.86 5.65 4.47

Personal Care 293.25 Food Processing Personal Care

3,545.20 56.35 99.50 -0.10 4.15

Godrej Consumer Personal Care 423.00

We have selected top 5 FMCG manufacturing companies based on market capitalization as on 1st Num. 2010.

We are going to analyze above companys capital structure and working capital position for the purpose of knowing the how they are managing these things and how it will affects to the profitability and shareholders value.

Data Collection
Secondary data: 1. 5 years Annual Reports of the companies. 2. Website of Capital Line

Data Analysis Tools

Ratio analysis. Average method. ANOVA(F test). Correlation. Regression Analysis.

Approach
Descriptive approach It is a kind of fact finding research in which we are trying to analyze capital structure and working capital position of companies.

Hypothesis
Following are the hypothesis to be tested
Ho1= Average ratios of inventory conversion period of companies do not differ

significantly.
Ho2= Average ratios of debtors conversion period of companies do not differ

significantly
Ho3= Average ratios of creditors conversion period of companies do not differ

significantly.
Ho4= Average ratios of cash conversion period of companies do not differ

significantly.
Ho5= There is no significant impact of dependable variable Operating profit

independent variable Earning per share.

 Ho6= There is no significant difference of dependent variable EPS to the debt equity

ratio of ITC.
Ho7= There is no significant difference of dependent EPS variable to debt equity ratio

of HUL.
Ho8= There is no significant difference of dependent variable EPS to debt equity ratio

of Nestle.
Ho9= There is no significant difference of dependent variable EPS to debt equity ratio

of Dabur.
Ho10= There is no significant difference of dependent variable EPS to debt equity

ratio of Godrej.

Literature review
1. Working Capital Management Practices A case study of Listed Manufacturing Companies in Sri Lanka(Journal of IPM Meerut Volume 11, January-June-2011)

ABSTRACT
A study of working capital management is a major importance to internal and external analysis because of its close relationship to current day-to-day operations of business. WCM refers to the management of working capital, or precisely to the management of current assets. A firms working capital consists of its investment in current assets, which include mostly short-term assets, cash and bank balance, inventories, receivable, and marketable securities. The goal of WCM if to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. Therefore, present study is initiated on working capital management practices. The results reveals that Aban Limied, and Lalu limited that manage their working capital more efficiently that other companies.

2.

Working capital and profitability

An empirical analysis by P.C.Narvare(Lecturer, Affiliated to Bakatullah university, Bhopal) ABSTRACT

Working capital management and profitability of the company disclosed both negative and positive association. Out of the nine ratios selected for the study three ratios, namely CTSR, WTR and DTR refistered negative correlation with the selected profitability ratio, RoI. The sloped of the ROI. Working capital limited of the company concluded the increase in the profitability of the company was less than the proportion to decrease in working cpital.

3. Behavioral Dimension of Cross-Sectoral Capital Structure Decisions: ISE (Istanbul Stock Exchange) Application Abstract
In our study, we tested whether average leverage level of sector and leverage level of sector leader are effective on capital structure decisions of selected firms and sectors listed in ISE. We depended on the Approach of Behavioral Finance to this matter as a supplementary approach of traditional finance to capital structure. In respect of its influence on leverage levels of the firms in four sector we addressed for the period of 19992006 (White Goods and Electronic, Banking, Cement, Paper and Packing), while sector averages are effective at a meaningful extent in white goods sector, it was seen that it affects leverage level of sector leader considerably. In the study we carried out by using panel data analysis method, when we consider the firms we addressed as a whole without discrimination in sector-specific terms, however, it was seen that both sector average and sector leader display a positive relation with leverage level of firms with a significance of 10%.

THEORETICAL STUDY
Working Capital

ASPECTS

OF

THE

Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength. A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. There are two concepts of working capital: gross and net working capital. The term gross working capital, also referred to as working Capital, means the total current assets. The term net working capital can be defined in two ways: (i) the most common definition of net working capital (NWC) is the difference between current assets and current liabilities; and ii) alternate definition of NWC is that portion of current assets which is financed with long-term funds. The common Definition of NWC and its Implications NWC is commonly defined as the difference between current assets and current liabilities. Efficient working capital management requires that firms should operate with some amount of NWC, the exact amount varying from firm to firm and depending, among other things, on the nature of industry. The theoretical justification for the use of NWC to measure liquidity is based on the premise that the greater the margin by which the current assets cover the short-term obligations, the more is the ability to pay obligations when they become due for payment. The NWC is necessary because the cash outflows and inflows do not coincide. In other words, it is the non

synchronous nature of cash flows that makes NWC necessary. In general, the cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflows are, however difficult to predict. The more predictable the cash inflows are, the less NWC will be required. A firm, say an electricity generation company, with almost certain and predictable cash inflows can operate with little or no NWC. But where cash inflows are uncertain, it will be necessary to maintain current assets at a level adequate to cover current liabilities, that is there must be NWC Working capital means the funds (i.e.; capital) available and used for day to day operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence.

Factors that determine working capital

The working capital requirements of a concern depend upon a large number of factors such as Size of business Nature of character of business. Seasonal variations working capital cycle, operating efficiency Profit level, other factors.

Advantages of working capital

It helps the business concern in maintaining the goodwill. It can arrange loans from banks and others on easy and favorable terms. It enables a concern to face business crisis in emergencies such as depression. It creates an environment of security, confidence, and overall efficiency in a business. It helps in maintaining solvency of the business.

Disadvantages of working capital

Rate of return on investments also fall with the shortage of working capital. Excess working capital may result into over all inefficiency in organization. Excess working capital means idle funds which earn no profits. Inadequate working capital can not pay its short term liabilities in time.

Management of working capital

A firm must have adequate working capital, i.e.; as much as needed the firm. It should be neither excessive nor inadequate. Both situations are dangerous. Excessive working capital means the firm has idle funds which earn no profits for the firm. Inadequate working capital means the firm does not have sufficient funds for running its operations. It will be interesting to understand the relationship between working capital, risk and return. The basic objective of working capital management is to manage firms current assets and current liabilities in such a way that the satisfactory level of working capital is maintained, i.e.; neither inadequate

nor excessive. Working capital some times is referred to as circulating capital. Operating cycle can be said to be t the heart of the need for working capital. The flow begins with conversion of cash into raw materials which are, in turn transformed into work-in-progress and then to finished goods. With the sale finished goods turn into accounts receivable, presuming goods are sold as credit. Collection of receivables brings back the cycle to cash. The company has been effective in carrying working capital cycle with low working capital limits. It may also be observed that the PBT in absolute terms has been increasing as a year to year basis as could be seen from the above table although profit percentage turnover may be lower but in absolute terms it is increasing. In order to further increase profit margins, SSL can increase their margins by extending credit to good customers and also by paying the creditors in advance to get better rates.

CAPITAL STRUCTURE
Directors to make decision on capital structure should make a choice between debt and equity. Many studies were carried out on description of factors influencing capital structure decisions since Modigliani-Miller as an expression of a choice between debt and equity. As a result of these studies based on rationality within the framework of traditional finance, different theories were seen regarding description of capital structure in parallel with change in expectations and preferences of firm directors and shareholders.We may collect descriptions of traditional finance on formation of capital structure mainly in three groups: Trade-off Theory, Agency Theory and Pecking Order Theory. Trade-off Theory which was set forth by Myers (1984) refers to the necessity of establishing a balance between tax saving arising from debt, decrease in agent cost and bankruptcy and financial distress costs, since firms may not realize value maximization when they form a capital structure using only liabilities source or form a capital structure by using no liability. According to Trade-off Theory, firms should balance between costs in order to reach an optimal capital structure (Ghosh and Cai,2001). Agency Theory is a theory dealing with agent problems due to approach or interest differences between director and shareholders caused by distribution of firm cash flow. According to the theory, there are agency costs incurred to reduce agent problems in firms collected under the headings of monitoring costs, guaranty agreement costs and unavoidable losses cost (Chambers,Lacey, 1999). However, capital structure decisions are made reducing agency costs of equity by high leverage level and increasing market value of the firm for the purpose of decreasing agency costs (Berger Allen N.,Pati di Emillia Bonaccorsi, 2002). Another capital structure theory is Pecking Order Theory suggested by Myers and Majluf (1984). According to the Pecking Order Theory, capital structure of a firm is formed by focusing onorder of priority of different sources to meet financial requirements of firms (Frank and Goyal, 2007). For stock investors that favour companies with good fundamentals, a "strong" balance sheet is an important consideration for investing in a company's stock. The strength of a company'

balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital adequacy, asset performance and capital structure. The equity part of the debt-equity relationship is the easiest to define. In a company's capital structure, equity consists of a company's common and preferred stock plus retained earnings, which are summed up in the shareholders' equity account on a balance sheet. This invested capital and debt, generally of the long-term variety, comprises a company's capitalization, i.e. a permanent type of funding to support a company's growth and related assets. The combination of a company's long-term debt, specific short-term debt, common equity, and preferred equity; the capital structure is the firm's various sources of funds used to finance its overall operations and growth. Debt comes in the form of bond issues or long-term notes payable, whereas equity is classified as common stock, preferred stock, or retained earnings. Short-term debt such as working capital requirements also is considered part of the capital structure. The proportion of short-term and long-term debt is considered in analyzing a firm's capital structure. When people refer to capital structure, they most likely are talking about a firm's debt/equity ratio, which provides insight into how risky a company is. Usually a company financed heavily by debt poses greater risks because it is highly leveraged.

RATIO
Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations The Current Ratio formula is: Current Ratio = Current Assets/Current Liabilities Also known as "liquidity ratio", "cash asset ratio" and "cash ratio"

Quick Ratio
An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. The quick ratio is calculated as: Quick Ratio = Current Assets-Inventories/Current Liabilities Also known as the "acid-test ratio" or the "quick assets ratio".

Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced over a period.

Generally calculated as: Inventory Turnover = Sales/Inventory It may also be calculated as: Inventory Turnover = Cost of goods sold/Average inventory The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days".

Debtor turnover ratio or accounts receivable turnover ratio

It indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors Debtors Turnover Ratio = Total Sales / Debtors

Investment Turnover Ratio

Return earned on capital invested in a business. It equals: It can be calculated as Sales/Net worth + Long term Liabilities. A higher ratio indicates good use of the funds placed into the business

Fixed-Asset Turnover Ratio

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. The fixed-asset turnover ratio is calculated as: Fixed Assets Turnover = Net Sales/Net property,Plan,and Equipment

Asset Turnover
The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Formula: Asset Turnover = Revenue / Assets

Earnings per ShareEPS

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Calculated as: EPS = Net income-Dividends on preferred stock/Average Outstanding Shares

Operating Profit
The profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments (such as earnings from firms in which the company has partial interest) and the effects of interest and taxes. Also known as "earnings before interest and tax" (EBIT) Calculated as: Operating profit = operating revenue operating expenses When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Debt/Equity Ratio
A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. Calculated: D/E Ratio : Total liabilities/Shareholders Equity

Management of working capital practice ratios

Type of Ratios Explanations Calculation The Inventory conversion ICP is the time required to Average stock period(ICP) convert inventory into cash 365/Cost of sales Debtors Period(DCP) Conversion DCP is the time required to Average Debtors collect the cash from Net Credit Sales debtors. value*

*365/

Creditors period(CCP)

Conversion CCP is the length of time the Average Creditors firm is able to defer 365/Cost of Sales payments on various resource purchases. Cash Conversion Cycle CCC is the length of time (CCC) between a firms purchase of CCC=ICP+DCP-CCP inventory and the receipt of cash from accounts receivable

DATA ANALYSIS & FINDINGS

Working capital practice in the selected companies
A firms working capital consists of its investment in current assets, which include mostly short-term assets, cash and bank balance, inventories, receivable, and marketable securities. The goal of WCM if to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. Therefore, present study is initiated on working capital management practices.

Hypotheses
Ho1=Average ratios of inventory conversion period of companies do not differ

significantly.
Ho2=Average ratios of debtors conversion period of companies do not differ

significantly
Ho3=Average ratios of creditors conversion period of companies do not differ

significantly. Ho4=Average ratios of cash conversion period of companies do not differ significantly.

Results and discussions 1. The inventory conversion period(ICP)

The inventory conversion period of FMCG five companies is given below. YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 MEAN ITC 51 65 67 83 72 68 HUL 64 61 64 55 51 59 NESTLE 45 44 47 47 44 45 DABUR INDIA 39 40 43 45 47 43 GODREJ CONSUMER 60 64 76 64 37 60 MEAN 52 55 59 58 50 55

Source: calculated from the figures available in the balance sheets , profit and loss, income statements of the companies concerned. From the table it is found that the inventory conversion period of 2007-08 highest of 59 days and 2005-06 lowest of 52 days. The table indicate that Nestle and Dabur India were companies to hold inventory for lesser number of days than the yearly industry average holding period during the entire study period whereas, Itc, Hul, Godrej Consumer held its inventory for more than the yearly industry average holding during the entire study period which were much above the yearly industry average and the overall aggregate holding period of 55 days. Hence Nestle and Dabur India companies were efficient by holding the inventory lesser period that the overall industry aggregate holding period of 55 days.

The average ICP of selected companies have been compared using F-test and co relation tested by the following.
Ho1=Average ratios of inventory conversion period of companies do not differ

significantly. The significant level at 5%, F critical value (5,16) is 9.72 and result of F-test is 0.081 which indicates that inventory conversion period s null hypothesis is accepted. ICP period of companies do not differ significantly. There is negative relationship between ( -0.8972) industry mean and company mean.

2.

Debtors Conversion Period (DCP)

The Debtors conversion period of FMCG 5 companies is given below. DABUR INDIA 33 36 30 34 28 32 GODREJ CONSUMER 51 42 47 37 53 46

YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 MEAN

ITC 46 54 59 71 67 59

HUL 53 48 40 23 21 37

NESTLE 37 38 40 34 36 37

MEAN 44 44 43 40 41 42

Source: calculated from the figures available in the balance sheets , profit and loss, income statements of the companies concerned. It is seen that from the table the debtors conversion period companies varied between the highest of 44 days and lowest of 40 days and aggregate holding period was 42 days . The data in the table indicate that HUL, NESTLE, DABUR INDIA were companies to hold debtors for lesser number of days than the yearly industry average holding period during the entire study period whereas, ITC, GODREJ CONSUMER held its debtors for more than the yearly industry average holding during the entire study period. Hence HUL, NESTLE, DABUR INDIA companies were efficient by holding the debtors lesser period that the overall industry aggregate holding period of 42 days. The average DCP of selected companies have been compared using F-Test and correlation are tested by the following .

 Ho2=Average ratios of debtors conversion period of companies do not differ

significantly The significant level at 5%, F critical value (5,16) is 9.72 and result of F-test is 0.0001 which indicates that inventory conversion period s null hypothesis is accepted. ICP period of companies do not differ significantly. There is positive relationship between ( 0.4811) industry mean and company mean.

3. Creditors conversion Period(CCP)

The creditors conversion period of FMCG 5 companies is given below. YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 MEAN ITC 61 69 77 92 86 77 HUL 118 121 125 99 102 113 NESTLE 56 58 58 55 52 56 DABUR INDIA 69 69 71 63 64 67 GODREJ CONSUMER 107 116 123 105 115 113 MEAN 82 87 91 83 84 85

Source: calculated from the figures available in the balance sheets, profit and loss, income statements of the companies concerned. It is clear that from the table the creditors conversion period of companies highest of 91 days in year 2007-08 and the lowest of 82 days in the year 2005-06 and aggregate holding period was 85 days . The data in table indicate that HUL, GODREJ CONSUMER were companies to hold creditors for higher number of days than the yearly industry average holding during the entire study period whereas, ITC, NESTLE, GODREJ CONSUMER held its creditors for less than the yearly industry average holding during the entire study period. Hence, we can say that on an average basis HUL, GODREJ CONSUMER were efficient by holding the creditors for higher number of days that the overall industry aggregate holding period of 85 days. The average CCP of selected companies have been compared using one-way ANOVA and are tested by the following.

 Ho3=Average ratios of creditors conversion period of companies do not differ

significantly. The significant level at 5%, F critical value (5,16) is 9.72 and result of F-test is 0.00181 which indicates that inventory conversion period s null hypothesis is accepted. ICP period of companies do not differ significantly. There is negative relationship between (-0.25891) industry mean and company mean.

4. Cash Conversion Cycle(CCC)

The cash conversion cycle of FMCG 5 companies is given below. YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 MEAN ITC 36 50 46 62 53 49 HUL -1 -12 -21 -21 -30 -17 NESTLE 26 24 29 26 28 27 DABUR INDIA 3 7 2 16 11 8 GODREJ CONSUMER 4 -10 0 -4 -25 -7 MEAN 14 12 11 16 7 12

Source: calculated from the figures available in the balance sheets, profit and loss, income statements of the companies concerned. From the table it is found that the CCC of companies were varied between the highest of 16 days and lowest of 7 days in the year and the aggregate holding period was 12 days. The data in table indicate that companies held cash conversion for lesser number of days 2007-08 and 2009-10 than aggregate overall average mean. Hence, HUL, DABUR INDIA, GODREJ CONSUMER companies were efficient by holding the cash lesser period compare with ITC and NESTLE. The average CCC of selected companies have been compared using F-test and correlation and are tested by the following.

 H0=Average ratios of cash conversion period of companies do not differ

significantly. The significant level at 5%, F critical value (5,16) is 9.72 and result of F-test is 0.0010 which indicates that inventory conversion period s null hypothesis is accepted. ICP period of companies do not differ significantly. There is positive relationship between (0.3781) industry mean and company mean.

FINDINGS WCM ensure a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. These involve managing the relationship between the short-term assets and its short-term liabilities. Following are results by which company performing well in different ratios. Type of Ratio ICP DCP CCP CCC Company name DABUR,NESTLE HUL,NESTLE,DABUR INDIA HUL, GODREJ CONSUMER HUL, DABUR, GODREJ CONSUMER

Working capital and profitability

In Conventional production function approach for determination of relationship between output and profit, fixed capital is taken in to account as explanatory variable amongst others, the role of working capital is ignored. It is therefore felt that there is the need to study the important role working capital in profit generating process. The impact of working capital has been examined by computing co-efficient of correlation and regression between profitability ratio and working capital.
Name of Company Current Ratio Quick Ratio Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio

Year 200506 200607 200708 200809 200910 200506 200607 200708 200809 200910 200506

1.25 1.33 1.36 1.42 0.92 0.7 0.73 0.68 0.92 0.84 0.66

0.57 0.58 0.56 0.61 0.39 0.33 0.34 0.25 0.51 0.46 0.28

3.82 3.76 5.51 5.26 6.04 8.57 8.02 7.2 9.26 8.99 9.87

18.22 20.79 20.43 21.32 24.31 22.12 25.42 31.41 41.83 29.24 87.32

6.43 6.05 5.51 5.26 6.04 9.97 9.27 8.2 9.26 8.99 12.02

ITC

HUL

NESTLE

DABUR INDIA

GODREJ CONSUMER

200607 200708 200809 200910 200506 200607 200708 200809 200910 200506 200607 200708 200809 200910

0.67 0.66 0.66 0.6 0.82 0.97 0.91 1.19 0.93 0.68 0.75 0.86 2.07 1.3

0.31 0.23 0.29 0.24 0.52 0.63 0.58 0.99 0.68 0.19 0.33 0.34 1.72 0.95

10.28 8.79 11.39 11.61 11.65 11.11 12.52 10.94 11.31 7.54 6.53 5.7 9.25 7.93

65.35 64.09 87.37 93.68 35.3 39.7 25.94 22.63 23.62 112.08 93.26 81.1 99.37 59.25 DEBT EQUITY RATIO

12.01 10.02 11.39 11.61 14.44 13.44 12.52 10.94 11.31 8.08 6.96 5.7 9.25 7.93 OPERATING PROFIT

NAME OF COMPANY

YEAR

FIXED ASSETS TURNOVER RATIO 2.31 2.42 1.59 1.44 1.58 8.47 9.3 9.8 7.81 5.35 5.61 5.77 6.1 3.2 3.24

TOTAL ASSETS TURNOVER RATIO 1.08 1.17 1.16 1.09 1.33 5.14 4.67 10.53 9.22 7.66 7.67 8.02 9.52 10.29 9.75

EARNINGS PER SHARE

2005-06 2006-07 ITC 2007-08 2008-09 2009-10 2005-06 2006-07 HUL 2007-08 2008-09 2009-10 2005-06 2006-07 NESTLE 2007-08 2008-09 2009-10

5.95 7.18 8.28 8.65 10.64 6.4 8.41 8.12 11.47 10.09 32.11 32.68 42.92 55.39 67.94

0.01 0.02 0.02 0.01 0.01 0.02 0.03 0.06 0.2 0 0.04 0.04 0.01 0 0

34.36 32.51 31.57 32.84 33.02 14.14 14.74 14.95 14.46 15.74 20.29 18.86 19.5 19.33 19.74

2005-06 DABUR INDIA 2006-07 2007-08 2008-09 2009-10 2005-06 GODREJ CONSUME R 2006-07 2007-08 2008-09 2009-10

7.3 8.51 4.67 4.84 4.31 11.82 9.47 4.6 4.18 4.73

2.94 4.3 3.98 2.81 3.44 14.31 5.01 4.18 1.84 1.53

3.3 2.92 3.67 4.32 4.99 21.47 5.4 6.56 6.29 8.05

0.05 0.05 0.03 0.19 0.14 0.06 1.02 0.89 0.12 0.01

17.9 17.45 18.6 18.33 19.17 21.1 20.01 22.27 15.54 21.47

ANALYSIS OF HYPOTHESIS
Ho1: There is no significant impact of dependable variable Earning per share to independent variable current ratios, Quick ratios, inventory turnover, debtor turnover, asset turnover, investment turnover, fixed assets turnover, total assets turnover.

Model Summary
Model 1 R 0.925 R Square 0.856 Adjusted R Square 0.796 Std. Error of the Estimate 7.8293

a Predictors: (Constant), total assests turnover, investment turnover, debtor turover, fixed assets turnover, Quick ratio, inventory turnover, current ratio

ANOVA
Model 1 Regression Residual Sum of Squares 6177.818 1042.055 df 7 17 Mean Square 882.54 5 61.297 F 14.398 Sig. 0

Total

7219.873

24

a Predictors: (Constant), total assests turnover, investment turnover, debtor turover, fixed assets turnover, Quick ratio, inventory turnover, current ratio b Dependent Variable: earning per share

Coefficients
Unstandardize d Coefficients Model B 1 (Constant) 12.164 current ratio -7.204 Quick ratio -5.872 inventory turnover -1.573 debtor turover 0.206 investment turnover 2.825 fixed assets turnover -4.657 total assests turnover 2.961 a Dependent Variable: earning per share Standardized Coefficients Beta -0.143 -0.111 -0.231 0.369 0.433 -0.772 0.639 t 0.517 -0.31 -0.25 -0.65 3.071 1.548 -5.28 3.388 Sig. 0.61 0.76 0.8 0.53 0.01 0.14 0 0

Std. Error 23.54 23.051 23.331 2.432 0.067 1.825 0.883 0.874

Findings
Here in significance level of F value in ANOVAs table is less than 0.05 which show there is accepted alternative hypothesis and by showing coefficient table we can see there is significant effect of debtor turnover , fixed assets turnover, total assets turnover effect. Following regression model can be made by this Y = a + bx = 12.164 -7.204x1-5.872x2-1.573x3+0.206x4+2.825x5-4.657x6+2.961x7 x1=current ratios, x2=quick ratios, x3=inventory turnover, x4=debtor x5=investment turnover, x6=fixed assets turnover, x7=total assets turnover By changing any value in above ratio we can see effect to EPS by this model. turnover,

Ho1: There is no significant impact of dependable variable Operating profit independent variable current ratios, Quick ratios, inventory turnover, debtor turnover, asset turnover, investment turnover, fixed assets turnover, total assets turnover.

Model Summary
Model 1 R 0.93 R Square 0.863 Adjusted R Square 0.806 Std. Error of the Estimate 2.8193

a Predictors: (Constant), total assests turnover, investment turnover, debtor turover, fixed assets turnover, Quick ratio, inventory turnover, current ratio

ANOVA
Model 1 Regression Residual Total Sum of Squares 847.986 135.126 983.111 df 7 17 24 Mean Square 121.141 7.949 F 15.24 Sig. 0

a Predictors: (Constant), total assests turnover, investment turnover, debtor turover, fixed assets turnover, Quick ratio, inventory turnover, current ratio b Dependent Variable: operating profit

Coefficients

Model 1 (Constant) current ratio Quick ratio inventory turnover debtor turover investment turnover fixed assets turnover total assests turnover

Unstandardized Coefficients B 26.303 15.651 -19.587 -1.026 2.19E-02 0.559 -0.967 -0.426

Std. Error 8.477 8.301 8.401 0.876 0.024 0.657 0.318 0.315

Standardized Coefficients Beta 0.842 -0.999 -0.409 0.106 0.232 -0.434 -0.249

Sig.

3.103 1.886 -2.331 -1.171 0.907 0.851 -3.04 -1.353

0.006 0.077 0.032 0.258 0.377 0.407 0.007 0.194

a Dependent Variable: operating profit

Findings
Here in significance level of F value in ANOVAs table is less than 0.05 which show there is accepted alternative hypothesis and by showing coefficient table we can see there is significant effect of fixed assets turnover , quick ratio effect. Following regression model can be made by this Y = a + bx = 26.303 +15.651x1-19.587x2-1.026x3+2.191x4+0.559x5+0.967x6+0.426x7 a=constant, x1=current ratios, x2=quick ratios, x3=inventory turnover, x4=debtor turnover, x5=investment turnover, x6=fixed assets turnover, x7=total assets turnover By changing any value in above ratio we can see effect to Operating profit by this model.

Analysis for capital structure

Ho1: There is no significant impact of dependable variable Operating profit independent variable Earning per share.

Model Summary
Adjusted R Square 1 0.09 0.007 -0.036 a Predictors: (Constant), debt equity ratio Model R R Square Std. Error of the Estimate 6.5144

ANOVA
Model 1 Regression Sum of Squares 7.054 Df 1 Mean Square 7.054 42.437 F 0.166 Sig. 0.687

Residual 976.058 23 Total 983.111 24 a Predictors: (Constant), debt equity ratio b Dependent Variable: operating profit

Coefficients

Unstandardized Coefficients Model 1 B 21.371 -2.103

(Constant) debt equity ratio

Standardize d Coefficients Std. Error Beta 1.445 5.159 -0.085

Sig.

14.79 -0.41

0 0.69

a Dependent Variable: operating profit

Findings
Here in significance level of F value in ANOVAs table is more than 0.05 which show there is rejected alternative hypothesis and by showing coefficient table we can see there is no significant. Comparison of individual companys performance for capital structure Ho1: There is no significant difference of dependent variable EPS to the debt equity ratio of ITC.

Correlations
earning per share Pearson Correlation Sig. (1-tailed) N earning per share debt equity ratio earning per share debt equity ratio earning per share debt equity ratio 1 -0.21 . 0.37 5 5 debt equity ratio -0.214 1 0.365 . 5 5

Model Summary
R Model 0.2 1 0.046 -0.272 1.9737 R Square Adjusted R Square Std. Error of the Estimate Change Statistics R Square Change 0.046 F Change 0.14 df 1 1 df 2 3 Sig. F Change 0.73 0.764 DurbinWatson

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

ANOVA
Model 1 Regression Residual Total Sum of Squares 0.56 11.687 12.247 df 1 3 4 Mean Square 0.56 3.896 F 0.144 Sig. 0.73

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

Coefficients
Unstandardized Coefficients Model 1 (Con stant) debt equit y ratio B 9.1 -68.3 Std. Error 2.672 180.178 Standar dized Coeffic ients Beta t Sig. 95% Confidenc e Interval for B Lower Bound 0.592 -641.731

3.4 -0.21 0.3 8

0.042 0.73

Upper Bound 17.602 505.065

a Dependent Variable: earning per share Conclusion :- The value of F significant is more than 0.05 so there is accepted null hypothesis. So we can see that there is no impact show of EPS to the debt equity ratio ITC.

Ho1: There is no significant difference of dependent EPS variable to debt equity ratio of HUL.

Correlations
earning per share Pearson Correlation Sig. (1-tailed) N earning per share debt equity ratio earning per share debt equity ratio earning per share debt equity ratio 1 0.65 . 0.12 5 5 debt equity ratio 0.647 1 0.119 . 5 5

Model Summary
R R Square Adjusted R Square Std. Error of the Estimate Change Statistics R Square Change 0.65 0.419 0.225 1.7119 0.419 F Change 2.16 df1 1 df2 3 Sig. F Change 0.24 0.96 DurbinWatson

Model 1

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

ANOVA
R R Squar e Adjusted Std. Change DurbinR Error of Statistics Watson Square the Estimate R F df1 df2 Sig. F Square Change Change Change 0.225 1.7119 0.419 2.16 1 3 0.24 0.96

Model

0.6 5

0.419

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

Coefficients
Unstandardized Coefficients M od el 1 B (Constant) 7.925 Std. Error 1.012 10.682 0.647 Standar dized Coeffici ents Beta t Sig. 95% Confidence Interval for B Lower Bound 7.828 1.469 0 0.24 4.703 -18.298 Upper Bound 11.15 49.69

debt equity 15.698 ratio

a Dependent Variable: earning per share

Findings
The value of F significant is more than 0.05 so there is accepted null hypothesis. So we can see that there is no impact show of EPS to debt equity ratio to HUL.

Ho1: There is no significant difference of dependent variable EPS to debt equity ratio of Nestle.

Correlations
earning per share Pearson Correlation earning per share debt equity ratio Sig. (1-tailed) earning per share debt equity ratio N earning per share debt equity ratio 1 -0.901 . 0.018 5 5 debt equity ratio -0.901 1 0.018 . 5 5

Model Summary
R R Square Adjuste Std. Error Change d R of the Statistics Square Estimate R Square F Change Change 0.812 13 df1 1 df2 3 DurbinWatson Sig. F Change 0.04 1.636

Mode l 1

0.9

0.812

0.749

7.7117

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

ANOVA

Model 1 Regression Residual Total

Sum of Squares 770.751 178.409 949.16

df 1 3 4

Mean Square 770.751 59.47

F 12.96

Sig. 0.037

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

Coefficients
Unstandard ized Coefficient s B (Constant) 58.4 Standa rdized Coeffi cients Beta t Sig. 95% Confidence Interval for B Lower Upper Bound Bound 43.018 73.78 -1276.09 -78.6

Model 1

Std. Error 4.834 188.145

12.08 -0.901 -3.6

0 0.04

debt equity -677.333 ratio

a Dependent Variable: earning per share

Findings:
The value of F significant is less than 0.05 so there is rejected null hypothesis. So we can see that there is impact show of EPS to debt equity ratio of NEstleI. Following regression model can be made by this Y = a + bx = 58.400-677.33x1 a=constant, x1=debt equity ratio By changing any value in above ratio we can see effect to EPS by this model to NESTLE.

Ho1: There is no significant difference of dependent variable EPS to debt equity ratio of Dabur.

Correlations
earning per share Pearson Correlation earning per share debt equity ratio Sig. (1-tailed) earning per share debt equity ratio N earning per share debt equity ratio 1 0.76 . 0.068 5 5 debt equity ratio 0.76 1 0.068 . 5 5

Model Summary
R R Squar e Adjusted R Square Std. Change Error of Statistic the s Estimate R Square Change 0.6185 0.578 DurbinWatson F Chan ge 4.11 df1 1 df2 3 Sig. F Change 0.14 2.527

Model 1 0.7 6 0.578 0.437

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

ANOVA
Model 1 Regression Residual Total Sum of Squares 1.572 1.148 2.72 Df 1 3 4 Mean Square 1.572 0.383 F 4.11 Sig. 0.14

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

Coefficients
Unstandar dized Coefficien ts M od el 1 B (Constant) debt equity ratio 3.009 9.03 Std. Error 0.494 4.454 0.76 Standardi zed Coefficien ts Beta 6.086 2.027 0.01 0.14 t Sig. 95% Confide nce Interval for B Lower Bound 1.436 -5.146

Upper Bound 4.583 23.21

a Dependent Variable: earning per share

Findings
The value of F significant is more than 0.05 so there is accepted null hypothesis. So we can see that there is no impact show of EPS to debt equity ratio of DABUR.

Ho1: There is no significant difference of dependent variable EPS to debt equity ratio of Godrej.

Correlations
Pearson Correlation earning per share debt equity ratio Sig. (1-tailed) earning per share debt equity ratio N earning per share debt equity ratio earning per share 1 -0.498 . 0.197 5 5 debt equity ratio -0.498 1 0.197 . 5 5

Model Summary
R R Square Adjuste dR Square Std. Error of the Estimate Change Statistics R Square Change 0.5 0.248 -0.003 6.739 0.248 F Change 0.99 df1 df2 Sig. F Chang e 0.39 0.898 DurbinWatson

Model

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

ANOVA

Model 1 Regression Residual Total

Sum of Squares 44.884 136.243 181.127

df 1 3 4

Mean Square 44.884 45.414

F 0.988

Sig. 0.39

a Predictors: (Constant), debt equity ratio b Dependent Variable: earning per share

Coefficients
Unstandard ized Coefficient s B (Constant) debt equity ratio 12.413 -6.807 Standardize d Coefficient s Beta t Sig. 95% Confidence Interval for B Lower Bound -0.844 -28.598

Mode l 1

Std. Error 4.166 6.847

Upper Bound 25.67 14.98

2.98 -0.498 -0.99

0.06 0.39

a Dependent Variable: earning per share

Findings
The value of F significant is more than 0.05 so there is accepted null hypothesis. So we can see that there is no impact show of EPS to debt equity ratio of GODREJ CONSUMER.

CONCLUSION
In todays scenario, even common man is an investor for them it is crucial decision whether to relay on tips, trends or perception or ratio analysis; which ratios should consider and which should be ignored. By using ratios of different companies we can concluded following results For working capital practice following companies played important role Type of Ratio ICP DCP CCP CCC Company name DABUR,NESTLE HUL,NESTLE,DABUR INDIA HUL, GODREJ CONSUMER HUL, DABUR, GODREJ CONSUMER

For Working capital impact on profitability by comparing impact of dependent variable earning per share and operating profit to other different ratios companies played important and vital role. They were performing well in working management performance. They were managing it very well.

For Capital structure impact to profitability indicator operating profit to earning per share. Companies were have no significant relation between these two variable. We can see that overall impact of FMCG s 5 companies were no such impact to earning per share by operating profit.

For Individual companies performance based on indicator Earning per share to Debt equity ratio effect to individual company Nestle played an vital role on it.

Bibliography
Journal of Financial and Strategic Decisions, Vol.9, No.2, pp.55-67. The Journal of Finance, Vol.XLIV, No.1, pp.19-40. www.bseindia.com www.capitalline.com