Abstract— This study analyses the working capital impact on performance of the company for selected information technology companies in India during the period of 10 years from 2008 to 2017.This shows the comparative analysis on the selected company under study. This study measures the sensitivity on return on employed capital to the working capital changes in the company. Ultimately this study concludes some suggestion to the selected IT companies under study.

 

Keywords—Working capital, Return on capital Employed, Comparitive Analysis.

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I. INTRODUCTION

      India is a country which IT sector increases its contribution to GDP from 1.2% in 1998 to 7.5% in 2012. Country exports around US $99 billion in the form of IT task.

      This paper is made to analyze the poor performance areas of IT sectors and suggestions have been made to improve the financial performance of the IT sector. So that it can sustain in the current competing environment. Financial performance can be improved in many ways wiz effect utilization of capital employed in fixed assets, Effective utilization of the capacity involved in production etc. To attain growth and to maintain succession in the competitive and changing environment working capital management is important.

                                II. LITERATURE REVIEW

Many studies have been done throughout the world regarding the relation between profitability and working capital efficiency.

Chitta Ranjan and Aniruddha sarkar 1 examined the relation between Return of capital employed and working capital through key ratios for public sector oil and gas companies in India. This paper gives an essential idea about what are the parameters that a company should look while deciding its working capital management to maintain its profitability.

Bhayani 2 did a study on Gujarat Ambuja cements Limited, for measuring the effect of working capital on the profitability during 1993 to 2003. This paper gives the significant relationship between the working capital and profitability.

Singh and Pandey 3 did a study to examine the relation between working capital management and profitability of Hindalco Industries Limited and found a positive significant when there is an investment in current assets and risk is lower and thus profitability can be obtained.

Panigrahi 4 did a study on relationship of working capital with liquidity, Profitability and solvency of ACC limited for the period of 2001 to 2010 and found that the current assets are very important. The firm should maintain a proper working capital for medium as well as long term to escape from bankruptcy.

Goswami and Sarkar 5 analyzed an impact of working capital management on liquidity, profitability of SAIL for the period of 10 years (2000-01 to 2009-10) with the guidance of tools and techniques in statistics. This study concluded that from the 9 ratios that related to working capital management 5 ratios shows positive association while the rest 4 ratios showed negative association with the profitability.

Danuletiu 6 analyzed the effect of working capital management of companies which are located in alba county. The relationship was analyzed for 20 different companies between 2004 to 2008 and it showed a negative relationship between profitability and working capital management.

Sur and Rakshit 7done a study for the relationship between asset management and profitability in 25 different companies from Indian Industries. The study shows both positive and negative relationship between profitability and receivable turnover. The result shows that 47.7% of the variation on variability was due to variation on efficiency of management in receivables, management in inventory, management in operating assets for long term.

Goswami and sarkar 8 made a study to get knowledge into the conceptual side between liquidity and profitability and to measure the position of Airways companies in India during the period of 2000 to 2006. The article found out that the debtors management system and profitability position is negative in kingfisher airlines. The relationship between ITR and Profitability does not found to be in the accepted standards for Air India and Kingfisher. The relationship between QR and ROCE does not found to be in the accepted standards for both Jet Airways and Indian Airlines for the given period.

Sarkar 9 made a study to find the impact of liquidity management on the profitability of ONGC limited during the period of 2004 to 2010. The study concludes that from 8 ratios related to working capital management CATAR, CASR and ITR showed positive relation with the profitability and the other ratios like QR, CR, DTR, CTR found a negative relationship with the profitability ratio.

Mandal and Hossain 10 did a study to measure the impact of working capital management on liquidity and profitability for the period of 1999 to 2009. This study examines the correlation between profitability and position of liquidity. From the analysis so far it can be concluded that the working capital management is essential to sustain better production capacity, better liquidity and profitability for the IT sector in India.

VARIABLES

DEFINITIONS

Current Ratio

Current Assets / Current Liabilities

Qucik Ratio

   (Current Assets – Inventory) /  Current Liabilities

Current Asset to total asset Ratio

Current Assets / Total Assets

Current Asset to Sales Ratio

Current Assets / Sales

Working capital to tunover Ratio

Sales / Working capital

Debtor Turonver Ratio

 
Sales / Account Receivable

Cash turnover Ratio

Sales / Cash

 

TABLE 1

III. METHODOLOGY AND DATA

The study of relationship between working capital management and the performance of the Industry of IT sectors in India is mostly based on the data’s collected from the secondary sources. Companies such as Tata Consultancy services ltd(TCS),  HCL Technologies ltd, Infosys ltd, Mphasis ltd, Oracle financial services, Polaris Consulting & Services ltd, Tech Mahindra ltd, Wipro ltd, and Mindtree from the period of 2008 to 2017. Data is collected from the capitaline 2000 database package. Data Analysis is done through linear regression. Ratio’s that has been took for measuring the working capital efficiency are Current ratio (CR),  Quick Ratio (QR), Current asset to total asset ratio (CATAR), Current asset to sales Ratio (CASR), Working capital to turnover Ratio (WCTR), Debtor turnover Ratio (DTR) and Cash turnover Ratio (CTR).

The model of Return on capital employed is as follows:

 

Roce=b1*CR+b2*QR+b3*CATAR+b4*CASR+b5*WCTR+ b6*DTR+ b7*CTR.

       where b1, b2, b3, b4, b5,  b6, b7 are the co-efficient of Current ratio (CR),  Quick Ratio (QR), Current asset to total asset ratio (CATAR), Current asset to sales Ratio (CASR), Working capital to turnover Ratio (WCTR), Debtor turnover Ratio (DTR) and Cash turnover Ratio (CTR) respectively. Return on capital Employed is the dependant variable (ROCE).

 

IV. RESULTS

Current Ratio:

Table 2 reveals the relationship between current ratio and ROCE. The relationship are 0.16, 0.1, 0.16, -0.5, -0.4, 0.4, -0.4, -0.4, 0.4 for the companies under the study. The relationship is positive for TCS, HCL, Infosys, Tech Mahindra and Mindtree and rest have a negative relationship. These are values which show that there is a significant relationship between current ratio and ROCE. Hence there is a significant contribution by the current ratio towards the profitability of concerned companies. Mphasis has a high negative co-efficient which states that Mphasis has to concentrate more in current ratio.

Quick Ratio:

Table 3 reveals the relationship between quick ratio and ROCE. The Relationship are -0.17, .105, -0.844, -0.543, -0.399, -0.463, -0.371, -0.393, 0.369 for the companies under the study. The relationship is positive for HCL and Mindtree and rest have a negative relationship. These are values which show that there is a significant relationship between quick ratio and ROCE. Hence there is a significant contribution by quick ratio towards the profitability of concerned companies. Mphasis has a high negative co-efficient which states that Mphasis has to concentrate more in Quick ratio.

Current Asset to total Asset Ratio:

Table 4 reveals the relationship between current asset to total asset ratio and ROCE. The relationships are -0.13, 0.29, 0.18, 0.12, -0.07, 0.46, -.19, -2.87, 0.31for the companies under the study. The relationship is positive for HCL, Infosys, Mphasis, Tech Mahindra, Mindtree and rest have a negative relationship. These are values which show that there is significant relationship between current asset total asset ratio and ROCE. Hence there is a significant contribution by current asset to total asset ratio towards the profitability of concerned companies.

 

Current Asset to Sales Ratio:

Table 5 reveals the relationship between current asset to sales ratio and ROCE. The relationships are -0.20, -0.82, -0.19, -0.27, -0.12, -0.23, -0.14, -0.37, 0.13 for the companies under the study. The relationship is positive only for Mindtree and rest have a negative relationship. These are values which show that there is significant relationship between current asset to sales ratio and ROCE. Hence there is significant contribution by current asset to sales ratio towards the profitability of concerned companies.

Working capital turnover Ratio:

Table 6 reveals the relationship between working capital turnover Ratio and ROCE. The relationships are 0.006, -0.009, 0.052, 0.065, 0.005, 0.003, 0.002, 0.043, -0.009 for the companies under the study. The relationship is negative for HCL and Mindtree and rest have a positive relationship. These are values which show that there is no significant relationship between working capital turnover ratio and ROCE. Hence there is no significant contribution by working capital turnover ratio towards the profitability of concerned companies.

Debtor Turnover Ratio:

          Table 7 reveals the relationship between Debtor turnover Ratio and ROCE. The relationships are -0.01, 0.04, 0.02, -0.007, 0.01, -0.10, -0.01, -0.01, 0.07 for the companies under the study. The relationship is positive for HCL, Infosys, Polaris, Tech Mahindra and Mindtree and rest have a negative relationship. These are values which show that there is no significant relationship between Debtor turnover ratio and ROCE. Hence there is no significant contribution by Debtor turnover ratio towards the profitability of concerned companies.

Cash turnover Ratio:

                Table 8 reveals the relationship between cash turnover Ratio and ROCE. The relationships are -0.001, -0.011, -0.01, 0.003, -0.0002, -0.002, -0.006, 0.445, -0.0001 for the companies under the study. The relationship is positive for Mphasis and Oracle and  rest have a negative relationship. These are values which show that there is no significant relationship between Cash turnover ratio and ROCE. Hence there is no significant contribution by Cash turnover ratio towards the profitability of concerned companies.

TABLE 2

Current Ratio and ROCE

Company

Coefficients

Std Error

TCS

0.16

0.007

HCL

0.99

0.02

Infosys

0.16

0.01

Mphasis

-0.54

0.03

Polaris

-0.39

0.03

Tech Mahindra

0.46

0.06

Wipro

-0.37

0.01

Oracle

-0.39

0.06

Mindtree

0.36

0.04

 

TABLE 3

Quick Ratio and ROCE

Company

Coefficients

Std Error

TCS

-0.17

0.07

HCL

0.10

0.02

Infosys

-0.08

0.01

Mphasis

-0.54

0.03

Polaris

-0.39

0.03

Tech Mahindra

0.46

0.06

Wipro

-0.37

0.01

Oracle

-0.39

0.06

Mindtree

0.36

0.04

                                         

                                     TABLE 4

Current Asset to Total Asset and ROCE

Company

Coefficients

Std Error

TCS

-0.13

0.11

HCL

0.29

0.21

Infosys

0.18

0.17

Mphasis

0.12

0.41

Polaris

-0.07

0.15

Tech Mahindra

0.46

0.22

Wipro

-0.19

0.11

Oracle

-2.87

2.12

Mindtree

0.31

0.19

 

TABLE 5

Current Asset to Sales and ROCE

Company

Coefficients

Std Error

TCS

-0.20

0.10

HCL

-0.82

0.10

Infosys

-0.19

0.25

Mphasis

-0.27

0.07

Polaris

-0.12

0.17

Tech Mahindra

-0.23

0.51

Wipro

-0.14

0.08

Oracle

-0.37

0.29

Mindtree

0.13

0.51

                               

 

 

TABLE 6

Working capital turnover Ratio and ROCE

Company

Coefficients

Std Error

TCS

0.006

0.007

HCL

-0.009

0.002

Infosys

0.052

0.076

Mphasis

0.065

0.013

Polaris

0.005

0.003

Tech Mahindra

0.003

0.003

Wipro

0.002

0.002

Oracle

0.043

0.111

Mindtree

-0.009

0.013

 

TABLE 7

Debtor turnover Ratio and ROCE

Company

Coefficients

Std Error

TCS

-0.01

0.01

HCL

0.04

0.01

Infosys

-0.02

0.03

Mphasis

-0.007

0.02

Polaris

0.01

0.007

Tech Mahindra

-0.10

0.07

Wipro

-0.01

0.01

Oracle

-0.01

0.08

Mindtree

0.07

0.03

 

                                          TABLE 8

Cash turnover Ratio and ROCE

Company

Coefficients

Std Error

TCS

-0.001

0.0004

HCL

-0.011

0.0079

Infosys

-0.017

0.0300

Mphasis

0.003

0.0009

Polaris

-0.0002

0.0012

Tech Mahindra

-0.002

0.0028

Wipro

-0.006

0.0031

Oracle

0.445

0.1235

Mindtree

-0.0001

0.0030

V. CONCLUSION

The study of Relationship between profitability and working capital key ratios of the concerned companies under study reveals both positive and negative correlation during the period. From the 8 ratio’s only 4 such as Current Ratio, Quick Ratio, Current Asset to Total Asset Ratio and Current Asset to sales Ratio have significant contribution towards the profitability in IT industry. These 4 ratios are directly linked to current assets. Current assets had been helpful to concerned companies in IT sector which has a significant relationship with the working capital. The company with proper current assets will have a good working capital which in turn will improve the ROCE of the company. HCL is the leading hardware manufacturers which tends them to have a higher inventory. That is one of the reasons for them to get lower coefficient in quick ratio. The major IT players like TCS, HCL, Infosys, Tech mahindra are having a better co-efficient when compare to other companies which shows that they are having good working capital management and also it shows that they concentrate on current assets properly. Investment in current assets will boost the financial situation of the concerned IT companies. This shows that IT sector in India should manage the current asset properly to sustain in the competitive environment.

VI. FUTURE RESEARCH

       Future research can extend this study apart from Indian IT Industries. Other determinants like Inventory turnover Ratio can also be considered to find out whether there is any significant relationship between the working capital and Profitability.

VII. REFERENCES

1     Sarkar, C. R., & Sarkar, A. (2013). Impact of Working Capital Management on Corporate Performance: An Empirical Analysis of Selected Public Sector Oil & Gas Companies in India. International Journal of Financial Management, 3(2), 17.

2     Bhayani, S. J. (2004). Working Capital and Profitability Relationship (A Case Study of Gujarat Ambuja Cements Ltd.). SCMS Indian Management, April-June, 98-111.

3     Singh, J. P., & Pandey, S. (2008). Impact of Working Capital Management in the Profitability of Hindalco Industries Limited. ICFAI journal of financial Economics, 6(4).

4     Panigrahi, A. K. (2014). Relationship of working capital with liquidity, Profitability and solvency: A case study of ACC limited.

5     Goswami, S., & Sarkar, A. (2011). Impact of working capital management on liquidity, profitability–An empirical study with reference to sail. International Journal of Marketing and Management Research, 2(11), 47-63.

6     Danuletiu, A. E. (2010). Working capital management and profitability: a case of Alba county companies. Annales Universitatis Apulensis: Series Oeconomica, 12(1), 364.

7     Mallik, A., Sur, D., & Rakshit, D. (2005). Working capital and profitability: a study on their relationship with reference to selected companies in Indian pharmaceutical industry. GITAM journal of management, 3(2), 51-62.

8     Sarkar, A. & Goswami, S. (2012). An overview of Indian infrastructure sector- A case study of Air India & Kingfisher Airlines. Zenith International Journal of Business Economics & Management Research (ZIJBEMR), January, 2(1), 35-48

9     Sarkar, A. (2011). Impact of liquidity management on profitability: A case study with reference to ONGC. Survey-IISWBM, July-December, 51, 20-31.

10  Mandal, A., & Hossain, I. (2010). Some aspects of working capital management in relation to liquidity, profitability and risk-A case Study of Bharat Petroleum Corporation Ltd. The Journal of the Institute of Public Enterprise, 56-79.

 

 

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