INTRODUCTION:
Working capital management deals with managing short-term finance of an organization. It is the value of current assets excess over current liabilities. Otherwise, it is the necessity of funds to meet daily expenses and operational expenditures. All kind of business requires finance to carry the operations and to achieve the objectives. The goal of working capital management is to make sure that the company is having the efficiency to run its operations with sufficient short-term assets. Proper working capital management will give higher returns in current assets than current liabilities. A poor management of working capital may results business failure. So, for every organization, working capital management plays an essential role.
Working capital is required when there is a time gap between production and cash realization. The needs are to purchase raw materials, to pay overhead expenses, to hold spare parts and finished goods, to meet selling and distribution expenses. Also working capital is required for repair and maintenance both for machinery as well as factory buildings.
Oil and gas sector is one of the main sectors in India. It is continuously influencing the economy of our country. Hindustan Petroleum Corporation limited is an oil and natural gas company headquartered at Mumbai. In this study I have investigated various working capital strategies adopted by HPCL and how it affects profitability.
LITERATURE REVIEW:
There is a significant relationship between profitability and working capital of companies in Indian steel industry. Current ratio, quick ratio, debtor’s turnover ratio and finished good turnover ratio are the four independent variables taken into consideration for this study. Return on asset has taken as dependent variable which is measures profitability of firm1.
There are two policies in working capital that is aggressive financing policy and aggressive investment policy. Both policies have positive impact with firm’s return on assets and negative impact on firm’s value. While aggressive financing policy has negative impact and aggressive investment policy has positive impact on net profit2.
It was found that in ACC cement company, there is a moderate relationship between working capital management and profitability of the firm3.
Average collection period, average payment period, inventory turnover days and cash conversion cycle have a significant negative relationship with profitability. The study is suggesting that, wealth of shareholders can be maximized by a well-formulated working capital management4.
The study focused on position of profitability, profit margin and ratio of expense in Hindustan Petroleum Corporation Ltd. It found that the current profitability position is good but for maintaining the profit in future HPCL have to make appropriate strategies5.
The study analyses the management of working capital in some selected Indian steel companies. Cash conversion cycle and operating cycle were used for measuring appropriate utilization of working capital. The study found that in determining the efficiency of working capital management, the size of the company plays an important role6.
OBJECTIVES:
· To analyze different components of working capital in HPCL
· To measure the financial soundness of the company by analyzing various working capital related ratios
· To analyze the impact of liquidity on net profit
· To suggest ways for better management and control of working capital at the concern
RESEARCH METHODOLOGY:
Hindustan Petroleum Corporation Limited (HPCL), one of the top public sector companies in India has been selected for this study. The study is based on secondary data. The data has been collected from the annual reports and accounts of HPCL for the past 10 years i.e. from 2009-10 to 2018-19. The data have been analyzed by using some financial ratios. Other tools used in this study are Pearson correlation and regression. For testing internal consistency, Cronbach’s alpha is used.
Dependent variable used for this study is Return on capital employed (ROCE) which is a measure of profitability.
Independent variables used are current ratio, quick ratio, inventory turnover ratio, debt to equity ratio, long-term debt to equity ratio and interest cover.
Table 1: Abbreviation and formula of variables
|
Variables |
Abbreviation |
Formula |
|
Dependent variable |
||
|
Return on capital employed |
ROCE |
|
|
Independent variables |
||
|
Current ratio |
CR |
|
|
Quick ratio |
QR |
|
|
Inventory turnover ratio |
ITR |
|
|
Debt to equity ratio |
DE |
|
|
Long-term debt to equity ratio |
LTDE |
|
|
Interest cover |
IC |
|
Analysis and Interpretations:
Ratio analysis:
For finding the liquidity position of HPCL ratio analysis is used.
Table 2: Ratio analysis
|
Year |
Current ratio |
Quick ratio |
Inventory holding period |
Inventory turnover ratio |
|
2009-10 |
0.90 |
0.31 |
43 days |
8.53 |
|
2010-11 |
0.99 |
0.37 |
45 days |
8.03 |
|
2011-12 |
0.86 |
0.41 |
40 days |
9.16 |
|
2012-13 |
0.88 |
0.50 |
30 days |
12.56 |
|
2013-14 |
1.12 |
0.59 |
30 days |
11.88 |
|
2014-15 |
1.16 |
0.62 |
24 days |
15.90 |
|
2015-16 |
1.03 |
0.55 |
26 days |
14.10 |
|
2016-17 |
0.95 |
0.41 |
32 days |
11.49 |
|
2017-18 |
0.79 |
0.39 |
28 days |
13.20 |
|
2018-19 |
0.76 |
0.40 |
25 days |
14.64 |
It could be seen from the table that, during the year 2009-10 current ratio was 0.9. Highest value of current ratio was in the year 2014-15 with the value 1.16 which indicates a healthy liquidity position. The next four years, current ratio has decreased. And in the year 2018-19 it reached the value 0.76. Which indicates that in the last four years, value of current assets is less than that of current liability.
In 2009-10 quick ratio was 0.31 and in 2014-15 it reached its highest value of 0.62. After that the ratio has reduced and reached 0.4 in the year 2018-19. The interpretation is that, company is not maintaining sufficient liquid assets in terms of cash to meet its short-term obligations.
In 2009-10 it was 43 days which means that, the company was holding inventory on an average of 43 days. In 2018-19 inventory holding period is 25 days which indicated a better performance. Comparing to previous years, in2018-19 company is clearing stocks in fast.
In the year 20019-10 ITR was 8.53 and in 2018-19 it reached the value 14.64. The highest ITR was in the year 2014-15 with the value 15.9. It indicates how fast the company sells inventory. HPCL is maintaining high ITR which indicates that, the company’s inventory, sales, and costs are well coordinated and its inventory is liquid.
Correlation analysis
|
|
ROCE |
CR |
QR |
ITR |
DE |
LTDE |
IC |
|
ROCE |
1 |
|
|
|
|
|
|
|
CR |
-0.741 |
1 |
|
|
|
|
|
|
QR |
-0.581 |
0.396 |
1 |
|
|
|
|
|
ITR |
0.713 |
-0.543 |
-0.906 |
1 |
|
|
|
|
DE |
-0.937 |
0.637 |
0.422 |
-0.574 |
1 |
|
|
|
LTDE |
-0.707 |
0.727 |
0.627 |
-0.585 |
0.553 |
1 |
|
|
IC |
0.975 |
-0.738 |
-0.635 |
0.742 |
-0.892 |
-0.701 |
1 |
Fig.1: Correlation
From the above figure it is known that, ROCE has a positive correlation with ITR and IC. ROCE has a negative relationship with CR, QR, DE and LTDE.
There is a negative relationship between ROCE and CR. The coefficient is -0.741 which indicated that there is an accepted relationship between them.
The relationship between ROCE and QR is found negative with a coefficient of -0.581. It also denoting a weak relationship.
There is positive relationship between ROCE and ITR with coefficient of 0.713 which is significant. It indicates that, when the inventory turnover ratio increases, the profitability also increases.
The relationship between ROCE and DE is negative. The coefficient is 0.937 which indicates that the relationship is strong and significant. When the debt equity ratio decreases the profitability will be increased.
Regression analysis:
Regression analysis is used to examine the relationship between profitability and liquidity variables such as current ratio, quick ratio, inventory turnover ratio, debt equity ratio, long-term debt to equity ratio and interest cover.
Relation between ROCE and CR
Table 3: Relationship between ROCE and CR
|
Regression statistics |
|
|
R value |
0.741 |
|
R square value |
0.550 |
|
Adjusted R square |
0.490 |
|
Std. error |
4.826 |
|
P value |
0.014 |
Value of R is simple correlation and is 0.741. R square is 0.550 which means that ROCE can be explained in terms of CR in 55%. The sig value is 0.14 which is less than 0.05 which means the regression model statistically significantly predicts the outcome variable.
Therefore, alternative hypothesis accepted as there is significant relationship between ROCE and CR.
Relation between ROCE and QR
Table 4: Relationship between ROCE and QR
|
Regression statistics |
|
|
R value |
0.741 |
|
R square value |
0.550 |
|
Adjusted R square |
0.490 |
|
Std. error |
4.826 |
|
P value |
0.078 |
It is clear that R value is 0.581 which indicates the relationship between ROCE and QR is positive but it is weak. And the value of sig in ANOVA table is 0.078 which is greater than 0.05 as QR is insignificant in predicting the value of ROCE
Relation between ROCE and ITR
Table 5: Relationship between ROCE and ITR
|
Regression statistics |
|
|
R value |
0.741 |
|
R square value |
0.550 |
|
Adjusted R square |
0.490 |
|
Std. error |
4.826 |
|
P value |
0,021 |
Here the value of R is 0.713 and R2 is 0.508. Which means that ROCE can be explained 50.8% in terms of ITR. The sig value in ANOVA table is 0.021 which is less than 0.05 indicates that the regression model is statistically significant in predicting the independent variable.
So Null hypothesis is accepted as there is no significant relationship between ROCE and QR.
Relation between ROCE and DE
Table 6: Relationship between ROCE and DE
|
Regression statistics |
|
|
R value |
0.741 |
|
R square value |
0.550 |
|
Adjusted R square |
0.490 |
|
Std. error |
4.826 |
|
P value |
0.000 |
R value between ROCE and DE is 0.937 and R square is 0.878. It denotes that ROCE can be explained in terms of debt equity ratio at the rate of 87.8%. These are strongly correlated. Sig value is 0 as debt equity is more significant in predicting the value of ROCE.
Therefore, alternative hypothesis accepted as there is a significant relationship between ROCE and DE
Relation between ROCE and LTDE
Table 7: Relationship between ROCE and LTDE
|
Regression statistics |
|
|
R value |
0.741 |
|
R square value |
0.550 |
|
Adjusted R square |
0.490 |
|
Std. error |
4.826 |
|
P value |
0.022 |
From the regression analysis, it is clear that R value is 0.707. Sig value is 0.022 which is less than 0.05. So, the regression model is accepted since LTDE can be used to predict the value of ROCE.
Alternative hypothesis is accepted as there is significant relationship between ROCE and LTDE.
Relation between ROCE and IC
Table 8: Relationship between ROCE and IC
|
Regression statistics |
|
|
R value |
0.741 |
|
R square value |
0.550 |
|
Adjusted R square |
0.490 |
|
Std. error |
4.826 |
|
P value |
0.000 |
This table provides the R and R2 values. The R value represents the simple correlation and is 0.873. ANOVA table indicates that the regression model predicts the dependent variable significantly well as sig value 0 which is less than 0.05.
Alternate hypothesis is accepted since there is a significant relationship between ROCE and interest coverage ratio.
FINDINGS:
· The purpose of this study is to know the relationship between working capital management and profitability.
· Regression method is used to analyze the relationship between independent variables and dependent variable. Linear regression method is used with SPSS software for the study. The result from the regression analysis shows that ROCE which is used as dependent variable in the study has significant relationship with CR, QR, ITR, DE, LTDE and IC.
· The correlation analysis result shows that ROCE has negative relationship with CR, QR, DE and LTDE. It implies that when these variables are higher, the ROCE will be lower and vice versa. The analysis also shows that ROCE has a positive relationship with ITR and IC, which shows that when these variable increases ROCE also increases and vice versa.
CONCLUSIONS:
This study reveals that, the main objective of HPCL is earning profit at the same time providing services to the society. However, after analyzing the financial performance it is found that company’s ability to meet its day to day expenditures and short-term obligations is not satisfactory.
The results are showing that, there is a significant relationship between liquidity and profitability. However, the management should emphasize both growth of working capital and effective management of fixed capital.
Regression analysis of this study is showing that the profitability of the firm is influenced by various liquidity ratios, which indicates that different components of working capital are influencing the profitability differently. This study will help the financial managers to make decisions regarding the investment from different providers of capital.
From the study it can be concluded that, for ensuring better productivity, profitability and liquidity, working capital management can be used. Also found that, both profitability and liquidity are two concepts which are closely related with each other and it will affect financial health of a company.
Suggestions for better management of Working capital in HPCL:
· For a company’s success, working capital management plays a vital role. So, HPCL is need to improve its working capital strategies.
· The unforeseen events and market fluctuations should be taken into consideration by the firm to cover the unforeseen demands of working capital.
· Effort should be made to reduce the current liabilities at the same time increase the current assets.
· The management have to maintain adequate level of working capital along with fixed capital in order to minimize the company’s risk which will affect profitability.
SUGGESTIONS FOR FUTURE RESEARCH:
Further research can be carried on the study of working capital management by overcoming the limitations of the current work. This study used ROCE as the measure of profitability. There are other measures of profitability to find the relationship between liquidity and profitability.
The future study can compare the working capital strategies with that of other oil and natural gas industries in India.
REFERENCES:
1. Paul, P. and Mitra, P., 2018. Analysis of the Effect of Working Capital Management on Profitability of the Firm: Evidence from Indian Steel Industry. Asia-Pacific Journal of Management Research and Innovation, 14(1-2), pp.32-38.
2. Dey, S.K. and Sharma, D., 2018. Impact of Working Capital Management Policies on Firms' Earnings and Value: Empirical Evidence from Indian Manufacturing Companies. Siddhant-A Journal of Decision Making, 18(1), pp.80-90.
3. Impact of Working Capital Management on Profitability-A Case Study of ACC Ltd, Asian Journal of Management, Vol. 3, No. 4, pp. 210-218
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Received on 11.08.2020 Modified on 09.11.2020
Accepted on 19.12.2020 ©AandV Publications All right reserved
Asian Journal of Management. 2021; 12(2):164-168.
DOI: 10.52711/2321-5763.2021.00025