A Study on Impact of Components of Working Capital on Profitability: A Case Study of Ambuja Cements.

Abstract

Working capital is required for managing the day to day expenses of the company and it shows company’s ability in managing its current liabilities by using its current assets. Working capital is the difference between current assets and current liabilities. Positive working capital helps the company to manage its short term financing requirements. Working capital comprises current assets like Inventory, Debtors, Short term investments and cash balance; and current assets like payables etc. A study on working capital management throws light on how company’s profitability gets affected, as to run the company successfully, not only fixed assets, even current assets play commendable role. Therefore working capital management can be considered as one of the very important concept to be studied and analyzed. In the present scenario time value of money concept plays an important role i.e., a rupee received today is more valuable than a rupee received tomorrow; keeping in view the companies should plan about their investment on fixed assets as return on investment on fixed assets takes long time and also company should have adequate funds to maintain its day to day requirements otherwise it has to raise funds to meet its day to day requirements. Therefore company should always need to have a tradeoff between investment on fixed assets and working capital. The purpose of this study is to know how working capital affects company’s profitability and a relationship between working capital management and firm profitability and to identify the variables that most affect profitability. The results of this study show that only inventory turnover ratio and Average payment period have strong correlation with profit which indicates that only these components of working capital affect firm’s profitability. And also study has been made to analyze the liquidity position of the company using liquidity ratios and the results show that overall liquidity position of Ambuja cements is good and also company has maintained positive working capital i.e. excess of current assets over current liabilities year on year (except during 2009-10).