REVIEW OF THE LITERATURE

Dr. S.K. khartik titto Varghese, (2011) they found the profitability more or less depends upon
the
better utilization of resources and to manpower. It is worthwhile to increase production
capacity
and use advance technology to cut down cost of production and wage cost in order to increase
profitability, not only against the investment, but also for investors return points of view.
Eljelly (2004) elucidate, that efficient liquidity management involves planning and controlling
current assets and current liabilities in such a manner that eliminates the risk of inability to
meet
due short-term obligations and avoids excessive investment in these assets. The study found
that
the cash conversion cycle was of more importance as a measure of liquidity than the current
ratio
that affects profitability.
Vijayakumar and Venkatachalan (2003) In their study indicated a moderate trend in the
financial
position and the utilization of working capital, variations in working capital size should be
avoided attempts should also be made to use funds more effectively, by keeping an optimum
level of working capital. Because, keeping more current assets cause a reduction in profitability.
Hence, efforts should be made to ensure a positive trend in the estimation and maintenance of
the
working capital.
Shine and Soemen (1998) found that there is a strong negative relation between the cash
conversion cycle and corporate profitability for a large sample of listed American companies for
the 1975-1994 periods. IRJC
International Journal of Marketing, Financial Services & Management Research
Vol.1 Issue 10, October 2012, ISSN 2277 3622


www.indianresearchjournals.com
87

Saravanan (2001) made a study on working capital management in ten selected non-banking
financial companies. For this study the employed several statistical tools on different ratio is to
examine the effective management of working capital.
Marc Deloof (2003) stated that the companies have large amount of cash invested in working
capital. It can therefore be expected that the way in which working capital is managed will have
a significant impact on the profitability of companies.
This a significant negative relation between gross operating income and the number of days
accounts receivable, inventories and accounts payable of Belgian firm.
Asha (1987) of reserve bank of India had worked out the required norms and techniques for
evaluating the performance of public sectors banks. She has reinvaded the different techniques
adopted by different agencies and criteria for evaluating the banking performance. The
empirical
findings of her study shows a positive trend in terms of opening new branches deposits
mobilization and advances over a period.
Asha Sharma and R.B. Sharma2011, These attempts identify and study the movement of key
financial parameters and their relationship with profitability of textile industry. It is an attempt
to
and the study whether the key identified parameters move in a synchronous way going up and
coming down with basic profitability parameters. All three comparably profit-making
companies
have been taken as the sample for the study for the period of 2006to2010.
Aubry lyimo, Dr.Reubenj.L mwamakimbullah kiko F.S.Hamza, (2010) they found costs
resulting from poles being rejected, reworked or down-graded were the highest at the study
mill.
The cost of quality were so high and as a result they negatively affect the financial performance
of the mill.-cost of quality and its effect on companys profitability, the amount accrued from
costs of quality was too high to reject the null hypothesis which claimed that costs of quality
impacts negatively the profitability of the company. (P.value-0.4582)

Review of literature focuses on the earlier studies on financial performance. Thesestudies are
helpful in assessing the limitations, findings and suggestions involved in such studies.

A study by
Das
compares performance of Public Sector Banks for 3 years in the postreform period, 1992, 95, 98.
He notes that while there is a welcome increase in emphasis on non-interest income, Banks have
tended to show risk averse behavior by opting for relatively risk freeinvestments over risky
loans.
Manish Mittal and Aruna Dhade
made a comparative study on Profitability and productivity in Indian Banks. A five years period
(1999-00 to 2003-04) has been selected for evaluating the performance. In their study they found
that the improved profitability is the onlykey parameter for evaluating performance from the
shareholders point of view. Now it is up tothe bank management to decide how to strike a trade-
off between social and commercial bankingin order to improve market holdings and services and
play the role of governments agent at thesame time. In our study, we found that the public
sector banks are less profitable than the publicsector and foreign banks in terms of overall
profitability (Spread Burden ratio) but profitabilityis improving over the last 5 years. Foreign
banks top the list in terms of the net profitability. Non interest income of private sector banks
is higher as compared to public sector banks because private sector banks are offering more and
more fees based services to their differentcustomer categories (like commission, exchange
brokerage etc). There is a pressing need for introducing more services to the customer by the
public sector banks to have an advantage of competitive over private and foreign banks.Analysis
of the Efficiency and Profitability of the Japanese Banking System

prepared by
Elena Loukoianov.
The paper analyzes the efficiency and profitability of Japanese banks from2000-06. It uses a
non-parametric approach, the data envelopment analysis (DEA) to analyze banks cost and
revenue efficiency. One possible reason for the weak profitability of Japanese banks is their low
level of risk taking.

This paper presents the data on the level of profitability of Japanese banks and then examines the
level of risk taking of (i) four segments of the Japanese banking sector and (ii) banks in selected
industrial countries. The data, which are present in


terms of core profit, average return on assets (ROA), return on equity (ROE), and net
interestmargin, indicate the low level of profitability of Japanese banks.
P
rofitability in Banks: A Study

by CRISIL
According to a Credit Rating and Information Services of India (Crisil) study, Lower operating
expenses including rationalization of employee costs have improved the profitability of banks,
contrary to the popular perception that only trading profits helped the banking sector shore up
their bottom lines. The reduction in operating expenses was achieved through large-scale
voluntary retirement schemes implemented by public sector banks. Since this reduction
inoperating expenses seems sustainable, it promises a brighter future for the banking
sector.According to this study for private sector banks, the profitability improvement was
mainly because of the increase in treasury income and not due to any material reduction in
operatingexpenses. But since public sector and foreign banks account for over 80 per cent of the
totalassets of all scheduled commercial banks, a reduction in their core operating
expensescontributes significantly in improving the profitability of the entire Indian banking
sector
.



2.1 Literature Review
The review of literature gives a broad outlook of various research studies made in
the past and the details of such studies throw light on future studies to be made. It also
strengthens the theoretical base of the research study. Inthe present day economy, finance
is defined as the provision of money at the time when it is required. Every enterprise
whether big, medium or small it requires finance to carry on various business operations
and to achieve their predetermined goals. A basic definition of finance is a branch of
economies that deals with resource management. In simple laymans terms, finance is any
area of study that helps us get manage and invest money. Profitability is the efficiency of a
company or industry at generating earnings. Profitability is expressed in terms of several
popular numbers that measure one of two generic types of performances: how much they
make with what they have got and how much they make from what they take in.
Analysis of profitability of a business is performed by professionals who prepare reports
using ratios that make use of information taken from financial statements and other
reports. Liquidity is the ability of the firm to meet its current liabilities as they fall due.
Since liquidity is the basis of the continuous operations of the company, it becomes
necessary to determine the level of liquidity. While calculating current ratios, relatively
high current ratios indicate that the firm is liquid and its ability to pay its current
obligation in time and when they become due. The quick ratio establishes a relationship
between quick or liquid assets and current liabilities. Following is the relevant literature
reviews for the study.

Agarwal, B.D; (2005)
1
Profitability is the measure of the amount by which a companys
revenues exceed its relevant expenses. Profitability ratios are used to evaluate
managements ability to create earnings from revenues generating bases within the
organization. As per Business dictionary.com profitability is the ability of a firm to
generate net income on consistent basis. It is often measured by price to earnings ratio.
Review of literature and theories on determinants of profitability explains that the
profitability determinants were basically divided into two main categories, namely the
internal determinants and the external determinants. The internal determinants include
management controllable factors such as liquidity, investment in securities, investment in
subsidiaries, loans, and overhead expenditure.
Robert S. Kaplan and David P Norton (1992)
2
argue that a comprehensive evaluation of
companys performance calls for looking at financial measures as well as operational
measures, which indeed drive financial measures
Woelfel C.J
3
quoted that, Analysis of financial statement is the systematic numerical
evaluation of the relationship between one fact with the other to measure the profitability,
operational efficiency and the growth potential of the business.
Metcalf and Titard
4
quoted that, Analyzing financial statement is a process of evaluating
the relationship between the component parts of financial statement to obtain a better
understanding of a firms position and performance.
R.M Srivastava
5
has defined as methods employed to examine the vertical as well as
horizontal relationship of different financial variables with a view to study profitability and
financial position of business is called tools of financial analysis.
In the words of J. Batty
6
,ratios can also assist management in its basic functions of
forecasting, planning, co-ordination, control and communication
Nelson A Tom and Miller Paul
7
quoted that Financial analysis is an individual matter and
value for a ratio which is perfectly acceptable for one company or one industry may not be
at all acceptable in case of another
Hunt, Williams and Donaldson
8
The ratio analysis is an aid to management in taking
correct decisions, but as a mechanical substitute for thinking and judgment, it is worse
than useless.
J.O.Horrigan
9
says From a negative viewpoint, the most striking aspect of ratio analysis is
the absence of an explicit theoretical structure.
Kaplan and Urwittz
10
found that, in general, a lower debt ratio, a higher interest coverage
ratio, a higher return on asset ratio, a larger size, a lower market risk, and a lower unique
risk had a favorable influence on bond rating.
Av.kiran
11
, Generally, the financial performance of banks and other financial institutions
has been measured using a combination of financial ratios analysis, benchmarking,
measuring performance against budget or a mix of these methodologies
Chien Ho, and Song Zhu
12
, 2004 showed in their study that most previous studies
concerning company performance evaluation focus merely on operational efficiency and
operational effectiveness which might directly influence the survival of a company.
A paper in the title of efficiency, customer service and financing performance among
Australian financial institutions
Elizabeth Duncan, and Elliott
13,
2004showed that all financial performance measures as
interest margin, return on assets, and capital adequacy are positively correlated with
customer service quality scores.
Bird and McHugh (1977)
14
adopt an efficient Shapiro-Wilk small-sample test for the
normality of financial ratios for an Australian sample of five ratios over six years. Like
Deakin they find in their independent study that normality is transient across financial
ratios and time.
Altman and Eberhar
15
(1994) reported the use of neural network in identification of
distressed business by the Italian central bank. Using over 1,000 sampled firms with 10
financial ratios as independent variables, they found that the classification of neural
networks was very close to that achieved by discriminant analysis. They concluded that the
neural network is not a clearly dominant mathematical technique compared to traditional
statistical techniques.
Gepp and Kumar
16
(2008) incorporated the time bias factor into the classic business
failure prediction model.
Altman (1968) and Ohlsons
17
(1980) models to a matched sample of failed and non-
failed firms from 1980s, they found that the predictive accuracy ofAltmans model
declined when applied against the 1980sdata. The findings explained the importance
ofincorporating the time factor in the traditional failureprediction models.
Campbell, J., J. Hilscher and J. Szilagyi,
18
(2008), says that determinants of
corporate failure and the pricing of financially distressed stocks whose failure probability,
estimated from a dynamic logic model using accounting and market variables, is high.
Since 1981, financially distressed stocks have delivered anomalously low returns.
Eljelly, A.
19
(2004) study empirically examines the relation between profitability and
liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample of
joint stock companies in Saudi Arabia. Using correlation and regression analysis the study
found significant negative relation between the firms profitability and its liquidity level, as
measured by current ratio.
Gepp, A. and K. Kumar
20
(2008) his study reveals that accurate business failure prediction
models would be extremely valuable to many industry sectors, particularly in financial
investment and lending. The potential value of such models has been recently emphasized
by the extremely costly failure of high profile businesses in both Australia and overseas,
such as HIH (Australia) and Enron (USA). Consequently, there has been a significant
increase in interest in business failure prediction from both industry and academia.
Ohlson, J.A,
21
(1980) selected nine independent variables that he thought should be helpful
in predicting bankruptcy, but provided no theoretical justification for the selection. (The
nine variables are described in the methodology section of this paper.) Ohlson then selected
industrial firms from the period 1970-1976 that had been traded on a US stock exchange
for at least 3 years. He ended up with 105 failed firms and 2000 non failed firms. Three
models were estimated: the first to predict failure within 1 year, the second to predict
failure within 2 years and the third to predict failure in 1 or 2 years. He then used a logistic
function to predict the probability of failure for the firms using each model.
Beneda
22
(2006) investigated returns, bankruptcies and firm distress for new US public
companies that issued IPOs from 1995 through 2002. Beneda found that the average first
year returns for IPO companies under-performed the market and that Ohlsons model was
effective in identifying companies that had a higher probability of bankruptcy and
financial distress and earned lower than average returns.
Padachi.K.
23
(2006)emphasized that the management of working capital is important to the
financial health of businesses of all sizes. This importance is hinged on many reasons, first,
the amounts invested in working capital are often high in proportion to the total assets
employed and so it is vital that these amounts are used in an efficient way.
Pandey I M (2005)
24
Ninth Edition Financial Management PP 517 - 544discusses the
theories, concepts, assumptions, and mechanics underlying valuation, investment,
financing, and dividend decisions and working capital management. It also discusses
sources and instruments of short-term and long-term finances, mergers and acquisitions,
international financial management and the interface between financial and corporate
policies. Importantly, the book helps students to relate theories and concepts to practice.


Warren and Shelton (1971)
25
applied financial simulation8 to simulate future
financial statements of a firm, based on a set of simultaneous equations. Financial
simulation approach makes it possible to incorporate both the uncertainty of the future
and the many interrelationships between current assets, current liabilities and other
balance sheet accounts. The strength of simulation as a tool of analysis is that it permits the
financial manager to incorporate in his planning both the most likely value of an activity
and the margin of error associated with this estimate. Warren and Shelton presented a
model in which twenty simultaneous equations were used to forecast future balance sheet
of the firm including forecasted current assets and forecasted current liabilities.
Agarwal (1983)
26
also studied working capital management on the basis of sample of
34 large manufacturing and trading public limited companies in ten industries in private
sector for the period 1966-67 to 1976-77. Applying the same techniques of ratio analysis,
responses to questionnaire and interview, the study concluded the although the working
capital per rupee of sales showed a declining trend over the years but still there appeared a
sufficient scope for reduction in investment in almost all the segments of working capital.
An upward trend in cash to current assets ratio and a downward trend in cash turnover
showed the accumulation of idle cash in these industries.
Misra(1975)
27
studied the problems of working capital with special reference to six
selected public sector undertakings in India over the period 1960-61 to 1967-68.
Analysis of financial ratios and responses to a questionnaire revealed somewhat the
same results as those of NCAER study with respect to composition and utilization of
working capital. In all the selected enterprises, inventory constituted the more
important element of working capital. The study further revealed the overstocking of
inventory in regard to its each component, very low receivables turnover and more
cash than warranted by operational requirements and thus total mismanagement of
working capital in public sector undertakings.
Appavadhanulu(1971)
28
recognizing the lack of attention being given to investment in
working capital, analyzed working capital management by examining the impact of
method of production on investment in working capital. He emphasized that different
production techniques require different amount of working capital by affecting goods-
in-process because different techniques have differences in the length of production
period, the rate of output flow per unit of time and time pattern of value addition.
Different techniques would also affect the stock of raw materials and finished goods,
by affecting lead-time, optimum lot size and marketing lag of output disposals. He,
therefore, hypothesized that choice of production technique could reduce the working
capital needs. He estimated the ratio of work-in-progress and working capital to gross
output and net output in textile weaving done during 1960, on the basis of detailed
discussions with the producers and not on the basis of balance sheets which might
include speculative figures. His study could not show significant relationship between
choice of technique and working capital. However, he pointed out that the idea could
be tested in some other industries like machine tools, ship building etc. by taking more
appropriate ratios representing production technique correctly.
Lambrix and Singhvi(1979)
29
adopting the working capital cycle approach to the
working capital management, also suggested that investment in working capital could
be optimized and cash flows could be improved by reducing the time frame of the
physical flow from receipt of raw material to shipment of finished goods, i.e.
inventory management, and by improving the terms on which firm sells goods as well
as receipt of cash. However, the further suggested that working capital investment
could be optimized also (1) by improving the terms on which firms bought goods i.e.
creditors and payment of cash, and (2) by eliminating the administrative delays i.e. the
deficiencies of paper-work flow which tended to extend the time-frame of the
movement of goods and cash.
Warren and Shelton (1971)
30
applied financial simulationto simulate future financial
statements of a firm, based on a set of simultaneous equations. Financial simulation
approach makes it possible to incorporate both the uncertainty of the future and the
many interrelationships between current assets, current liabilities and other balance
sheet accounts. The strength of simulation as a tool of analysis is that it permits the
financial manager to incorporate in his planning both the most likely value of an
activity and the margin of error associated with this estimate. Warren and Shelton
presented a model in which twenty simultaneous equations were used to forecast
future balance sheet of the firm including forecasted current assets and forecasted
current liabilities. Current assets and current liabilities were forecasted in aggregate by
directly relating to firm sales. However, individual working capital accounts can also
be forecasted in a larger simulation system. Moreover, future financial statements can
be simulated over a range of different assumptions to portray inherent uncertainty of
the future.









2.2. Works Cited
1. Agarwal, B.D ; (2005) Advanced financial accounting, New Delhi; Pitambar Publishing
Company
2. Robert S. Kaplan and David P Norton, The Balanced Scorecard Measures That Drive
Performance, Harvard Business Review, January- February 1992.
3. Woelfel C.J, An introduction to Financial Accounting p.578
4. Metcalf and Titard, Principles of Accounting, p.157
5. R.M Srivastava, Financial Decision- Making p.47
6. Batty, Management Accounting,p.413
7. Nelson A Tom and Miller Paul. Modern Management Accounting (1977)
8. Hunt, Williams and Donaldson, Basic Business Finance, (1971), p.116
9.Maheshwari S N, Principles of Management Accounting, SN Chand & Sons, New
Delhi.
10. J.O.Horrigan, A Short History of Financial Ratio Analysis, The Accounting review,
Vol.43, (April 1968), 284-94
11. R.S.Kalpan and G.UrwittzStatistical Models of Bond Ratings: A Methodological
Inquiry, Journal of Business, vol. 52, (April 1979), 232-262.
12. Avkiran, N.K. (1995), Developing an instrument to measure customer service quality in
branch banking, International Journal of Banks Marketing, Vol.12 No. 6, pp.10-18.
13. Chien T., Danw S.Z. (2004), Performance measurement of Taiwan commercial banks,
International Journal of Productivity and Performance management, Vol. 53, NO. 5,
pp.425-434.
14. Elizabeth D., Greg Elliot (2004), Efficiency, customer service and financial performance
among Australian financial institutions, International Journal of Bank marketing,
Vol.22, No.5, pp. 319-342.
15. Bird, R.G., and McHugh A.J. (1977), "Financial ratios - an empirical study", Journal
Of Business Finance and Accounting 4/1, 29-45.
16. Altman, E., 1968. Financial ratios, discriminant analysis and the prediction of
Corporate bankruptcy. J. Finance, pp.: 589-609.

17.Altman, E.I. and A.C. Eberhart, 1994. Do seniority provisions protect bondholder
Investments. J. Portfolio Manage, summer, 20(4): 179-194.
18. Campbell, J., J. Hilscher and J. Szilagyi, 2008. In search of distress risk. J. Finance.
63(6): 2899-2939
19. Eljelly, A., 2004. Liquidity-profitability trade off: An empirical investigation in
Emerging market. Int. J. Comm. Manage., 14(2): 48-58.
20. Gepp, A. and K. Kumar, 2008. The role of survival analysis in financial distress
Prediction. Int. Res. J. Finan. Econ., 16: 13-34.
21. Ohlson, J.A., 1980. Financial ratios and the probabilistic prediction of bankruptcy.
J. Account. Res., 18(1): 109-131.
22.Padachi, K., 2006. Trends in working capital management and its impact on firms
Performance: An analysis of Mauritian small manufacturing firms. Int. Rev.
Bus.Res., 2(2): 45-56
23. Beneda, Nancy (2007). Performance and distress indicators of new public companies.
Journal of
Asset Management, Volume 8, Number 1, 24
24. Pandey I M (2005) Ninth Edition Financial Management PP 517 544
25. J. M. Warren and J. P. Shelton, A Simultaneous Equation Approach to
Financial Planning, Journal of Finance, Volume 26, December 1976, pp.
1123-1142
26. N.K. Agarwal, Management of Working Capital, Sterling Publication Pvt.
Ltd., New Delhi, 1983

27. V. Appavadhanulu, Working Capital and Choice of Techniques, Indian Economic
Journal, July-
Sept. 1971, Vol. XIX, pp. 34-41.

28. Ram Kumar Misra, Problems of Working Capital (With Special Reference to Selected
Public
Understandings in India), Somalia Publications Private Limited, Mumbai, 1975.
29. R. J. Lambrix and S.S. Singhvi, Managing the Working Capital Cycle, Financial
Executive, June
1979, pp.32-41.

30. J. M. Warren and J. P. Shelton, A Simultaneous Equation Approach to Financial
Planning,
Journal of Finance, Volume 26, December 1976, pp. 1123-1142.