Working Capital Management Practice &

Performance Measurement
Based on 10 selected Companies from Textile Industry listed in DSE

September 02, 2012

Table of Contents
Topic

Page No.

Acknowledgement
Table of Content
Abstract
List of Abbreviation
1.0
Introduction
1.1
Origin of The Report
1.2
Objectives
1.3
Scope of The Report
1.4
Methodology
1.4.1
Report Design
1.4.2 Sources of Data
1.4.3 Data Collection
1.4.4 Data Analysis
1.5
Limitations

IV
VI
7
8
8
8
8
8
9
9
9
9

2.0

Literature Review

10

3.0

Working Capital Management Fundamental

3.1
Working Capital Management
3.2
Importance of Working Capital Management
3.3
Concept of Working Capital
3.4
Management of Working Capital
3.5
Concept of Operating Cycle
3.6
Factors influencing WC requirement
3.7
Working Capital Financing Policies
3.8
Sources of Working Capital Finance

13
13
14
15
17
17
19
20

Result and Analysis

4.1
Analysis of Textile Industrys W. Capital Management
4.2
Analysis of Working Capital Trend of TI
4.2.1 Current Assets Trend Analysis
4.2.2 Current Liabilities Trend Analysis
4.2.3 Working Capital Trend Analysis
4.3
Efficiency Analysis of TI
4.3.1 Working Capital Turnover Ratio
4.3.2 Debtors Turnover Ratio
4.3.3 Creditors Turnover Ratio
4.4
Analysis of Liquidity Position of TI
4.4.1 Current Ratio
4.4.2 Quick Ratio
4.4.3 Super Quick Ratio

21
21
21
24
25
27
27
30
32
33
34
37
40

Decisions and Recommendations

5.1
Decisions
5.2
Recommendations

42
43

4.0

5.0

Appendix
References

IV

Table of Tables
Sl. No.
1.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10

Name
List of Selected Companies and Year range
Relative share Percentage of Current Asset in TI (1995-2006)
Trend of Current Assets in Textile Industry (1995-2006)
Trend of Current liabilities in TI (1995-2006)
Working Capital Trend of TI per year (1995-2006)
Sales, Net Working Capital & Working Turnover Ratio in TI
Sales, Debtors & Debtors Turnover Ratio in TI
Debtors Average Collection Period
Current Assets, Current Liabilities & Current Ratio in TI
Current Assets, Inventory, Current Liabilities & Quick Ratio in TI
Cash and Marketable Securities, Current Liabilities & Quick Ratio in TI

Page No.
9
22
23
24
25
28
30
32
35
38
40

Table of Figures
Sl. No.
3.1
3.2
3.3
3.4
3.5

Name
Circulation System of Working Capital
Working Capital Management & Components
Duration of the Operating Cycle
Different policies regarding the level of investment in working
capital
Three approaches relative proportions of the long- and shortterm debt

Page No.
13
16
17
19
19

Table of Chart
Sl. No.
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16

Name
Relative share Percentage of Current Asset of Companies (1995-2006)
Relative Share of Current Assets in Textile Industry (1995-2006)
Trend of Current Assets in Textile Industry (1995-2006)
Trend of Current liabilities in TI (1995-2006)
Current Assets & Current Liabilities Comparison in TI (1995-2006)
Working Capital Trend over the periods (1995-2006)
WCTR of Selected Companies & Average Industry WCTR Comparison
Industry WCTR (1995-2006) & Average Industry WCTR Comparison
Companys DTR (1995-2006) & Average Industry DTR Comparison
Industry DTR (1995-2006) and Average Industry DTR Comparison
Industry CR (1995-2006) & Industry Average CR Comparison
Companys Avg. CR (1995-2006) & Industry Average CR Comparison
Industry QR (1995-2006) & Average Industry QR Comparison
Companys Avg. QR (1995-2006) & Average Industry QR Comparison
Industry SQR (1995-2006) & Average Industry SQR Comparison
Companys Avg. SQR (1995-2006) & Average Industry SQR Comparison

Page No.
22
23
24
25
26
26
28
29
31
31
35
36
38
39
41
41

ABSTRACT
Among all the problems of financial management, the problems of working
capital management have probably been recognized as the most crucial one. It
is because of the fact that working capital always helps a business concern to
gain vitality and life strength. The objective of this study is to critically evaluate
working capital management as practiced in the selected firms of the Textile
industry listed in DSE. To achieve this goal the study also examines the policy
and practices of Working Capital Management. But the study does not
examine the political and economic impacts on the working capital
management. For analysis MS excel is mainly is used through Average,
Standard Deviation, Co-efficient Variation formulas. From the result analysis
decisions are got that The Overall increase rate of current assets against
current liabilities is declining in TI due to various reasons govt. policy for
Business development, political situations etc. Overall increase rate of current
liabilities against current assets is upward sloping in TI cost of debt, increasing
cost of production etc. in Bangladesh and all over the world. As current
liabilities increase high than current asset in recent years the net working
capital is declining. Without some extreme figures the overall working capital
turnover is satisfactory. Some companies have high ratio may turn to negative
circumstances. The standard of Debtors Turnover is 8 times, is maintained by TI
in Bangladesh. Again some companies have high ratio may turn to negative
circumstances. Current Ratio Standard is 2:1 but due to some specific reasons
in textile industry the average current ratio (1995-2006) is 1.1. Considering
nature of business this ratio is satisfactory. Quick Ratio, How quickly a firm can
pay its current debts; in TI this ratio is .51. So, there may be little problem if firm
doesnt have good bank trust. From the analysis we can conclude that textile
firms operated in Bangladesh are less efficiently (except some specific
companies) deal with their liquidity preferences and investment criteria and
this is due to the competitive nature of this industry and political hindrances
(according to companies executives editorial). Recommendations to Govt.
Development for Business beneficial project should be continued and should
keep politics away from textile industry. Also have to ensure political issues like
Strike will affect textile industry. Companies should revised their working
capital policy specially in current assets maximizing, increase of cash in hand
etc.

VI

List of Abbreviation (Used in Report)

AHT
ASKM
CA
CL
CMS
CR
CTR
DC
DGL
DSE
DTR
MDSP
MKD
PTSM
QR
SSM
ST
SQR
TI

TSM
WC

WCM

WCTR

Al-Haj Textile
Apex Spinning & Knitting Mills
Current Assets
Current Liabilities
Cash and Marketable Securities
Current Ration
Creditors Turnover Ratio
Dulamia Cotton
Desh Garments Limited
Dhaka Stock Exchange
Debtors Turnover Ratio
Modern Dyeing & Screen Printing
Mithun Knitting & Dyeing
Prime Textile Spinning Mills
Quick Ratio
Safko Spinning Mills
Sonargaon Textile
Super Quick Ratio
Textile Industry
Tallu Spinning Mills
Working Capital
Working Capital Management
Working Capital Turnover Ratio

Chapter - One

Introduction

1.1 ORIGIN OF THE REPORT

As the curriculum of Business course we are given a report paper related to the
course with practical orientation. We are conducted by our course teacher, Dr. Sheikh
Abu Taher given to do this paper to find The Practice of Working Capital Management
in manufacturing industries. And we selected Textile Industry of Bangladesh. This
paper will help to understand and realize about the working capital management of
Textile industry with policies which they adapt.
1.2

OBJECTIVES

Objectives of this term paper are to find:

Working Capital Capacity
Working Capital Policy
Ratio Analysis of Working Capital Elements
Inventory Management
An Comparative analysis among Selected Companies
We are also willing to find the relationship between the theoretical and practical knowledge.

1.3 SCOPE OF THE REPORT

In the report we are guided by our course instructor by the information and the
proper way. In this project work we are asked to find the Practice of Working Capital
Management in manufacturing industries. Our scope is to include:

Working Capital Practice of Textile Industries

Comparative Analysis
Factors to consider

When we have to exclude these:

Comparatives analysis between different industries like Textile with
Pharmaceutical or Food Industry etc.
Spread of Data
1.4 METHODOLOGY
Report Methodology defines the ways of completing the report
paper: report design, data sources, collection and analysis
process.
1.4.1 RESEARCH DESIGN
Our research is a normative research along with some characteristics of descriptive
research. The report mainly focuses on Bangladesh Textile sectors to find out the
Working Capital Management, policies, and numerical results etc. of Textile Industry.

Chapter - One

Introduction

1.4.2 SOURCES OF DATA

It is a history based report so only secondary data have been used to prepare the
report.
Secondary data: Secondary data mainly comes from selected Companies
Annual reports. And others sources are research & report Papers, different
literature on working capital management, articles etc.
1.4.3 DATA COLLECTION
Annual reports of the following companies 1 are collected from DSE Data Archive:

Sl. No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Table 1.1: List of Selected Companies and Year range

Company Name
Year Range
Al-Haj Textile Mills
1996 2006
Apex Spinning & Knitting Mills
1996 2011
Desh Garments Limited
1996 2008
Dulamia Cotton
1996 2006
Mithun Knitting & Dyeing
1996 2006
Modern Dyeing & Screen Printing
1996 2006
Prime Textile Spinning Mills
1996 2006
Safko Spinning Mills
1996 2006 & 2011
Sonargaon Mills
1996 2006
Tallu Spinning Mills
1996 2006

Selected companies have at least 10 years data from DSE. Three companies (Bolded)
have more ranged data than others. All Companies are engaged in operation into the
Textile Industry.
1.4.5 DATA ANALYSIS
It is important to do analysis for better output and decisions with best application. In
this case, we take the help of MS Excel, Smart draw to bring out best result. Mainly
Ration Analysis System has taken to analyze data and fulfill the research objectives.
1.5 LIMITATIONS
As this report paper is historical data based so we faced some manual limitations:

Because management of DSE we didnt get most recent data up to 2012.

Short time for deep research work.
Balance sheet presentation method of selected companies is not adequate to
bring required information for research work.

See, appendix part for selected companies profiles

Chapter Two

Literature Review

2.1 LITERATURE REVIEW

In recent times there is no or rare research on the working capital management in
textile industries. But there are research papers on the manufacturing companies like
pharmaceutical industries in Bangladesh.
There is numerous works on this subject in the world. These research papers are done
in the context of manufacturing industries like textile, RMG, Pharmaceutical
companies etc.
While designing the report paper the following articles published in international
Journals, were reviewed i. This paper is presented on the basis of Current Assets &
liabilities management, Debtors and Creditors Management and liquidity
Management.
Sagan (1955) 1 perhaps the first theoretical paper on the theory of working capital
management, emphasized the need for management of working capital accounts and
warned that it could vitally affect the health of the company.
Chowdhury, A and Amin, M (2007) 2 The objective of this study is to critically evaluate
working capital management as practiced in the selected firms of the Pharmaceutical
industry. To achieve this goal the study also examines the policy and practices of cash
management, evaluate the principles, procedures and techniques of inventory
management, receivable management and payable management. But the study does
not examine the political and economic impacts on the working capital management.
From the analysis we can conclude that pharmaceutical firms operated in Bangladesh
are efficiently deal with their liquidity preferences and investment criteria and this is
due to the competitive nature of this industry.
Chakraborthy 3 has pointed out two issues, ViZ, the relationship of return on capital
employed to excessive or insufficient working capital and estimation of working
capital through relating operating cycle and operating expenses.
Islam M.R 4 suggested that the efficiency of the working capital of a firm depends to a
large extent, on the ability with which its working capital is managed and utilized.

John Sagan, Towards a Theory of Working Capital Management, The Journal of Finance, May
1955, pp. 121-129.
2

Working Capital Management Practiced In Pharmaceutical Companies Listed In Dhaka Stock Exchange,

A . C h ow dh u ry

an d M . A m in , BRAC University Journal, Vol. IV, No. 2, 2007, pp. 75-86

3

Chakraborthy S.K. Use of operating Cycle concept for better management of working capital, the
Economical and Political Weekly, August 1973, pp. 1769-2776.

10

Chapter Two

Literature Review

Holding period of components of current assets are concerned with measuring the
efficiency of the working capital management. Generally, the smaller the holding
period, the more efficiency is the use and the smaller the requirements of the
working capital. Also Islam observed that Cash is the blood of corporate body that
gives vitality and strength at a firm.
Gitman, Moses, and White 5 reveal that Lockboxes were widely used to accelerate the
collection process. Virtually all large firms use lockbox systems as do a large
percentage of smaller firms. This somewhat lower use by smaller firms is a reflection
of the costs versus the gains from lockbox systems. The survey says the primary tools
for the management of cash outflows are zero-balance accounts and centrally
controlled disbursing. Central control of disbursements is the major tool for about 70
percent of large firms. The vast majority of larger firms use zero-balance accounts,
although smaller firms use them less frequently.
R. Kamath, S. Khaksari, H. Meier, and J. Winklepleck (1985) 6 reveals that almost all
large firms invest surplus cash in money market instruments. The most popular
investment is commercial paper, certificates of deposit, repurchase agreements,
treasury securities, and bankers acceptances.
Rappaport and others survey 7 (1984, pp.45-64) indicates that a substantial number of
firms keep a stock of short-term investments for precautionary reasons. Another
conclusion was that many firms also borrow to address unanticipated cash needs,
either directly from banks or through the commercial paper market. The survey also
indicates that in general, quantitative and statistical models are in wide use in
working capital management. The models are in use by less than 10 percent against of
large firms. Further, smaller firms do not use them all.
Smith and Sell 8 indicate that 68% of the respondent firm used either cost balancing
models or computerized inventory control. The survey evidence reports that the
basic models of inventory management are widely used.

Islam, M.R. Working Capital Management of Paper Mils in Bangladesh-An Overall View, South Asian
Journal of Management, Vol. 7 & 9, issue no. 1 & 2, January Mar, January June, 2000, p. 87 & 1

See Gitman, Managerial Financial Management, 8th Edition, Thomson, 1998, pp. 350-390

see Kamath R., S. Khaksari, H Meier, and J. Winklepleck, Management of Excess Cash: Practices and
Development, Financial Management (Autumn 1985), pp. 70-77

Lawrence Gitman, D. Keith Forrester, and John R. Forrester, Maximizing Cash Disbursement Float,
Financial Management (summer 1976), p 15-24.
8

see Working Capital Management in Practices published in 1978

11

Chapter Two

Literature Review

Besley and Osteryoung9 revels that the vast majority of the firms sell output via trade
credit, 87% of the manufacturing firms reported that 91 to 100 percentages of their
sales are made on a credit basis.
N. Hill, W. Sartoris and D. Ferguson (1983) 10 survey revealed that the vast majority of
firms generally take the discount. In deciding whether to take the discount, the
primary criterion of most firms is the amount of the discount. This makes good
financial sense, since the amount of discount (along with the delay period from the
discount date to the due date) determines the cost of skipping as a source of
financing.
Hill, Sartoris and Fergusons 11 survey revealed three important factors that are
considered by firms in deciding whether to use this strategy; the value of using the
funds (that is the cost of the funds relative to other funding sources), the effects on
relationships with supplies and the impact on the firms credit rating.
Talat A. Abdul Q. Mahmood A. B. 12This paper analyzes the impact of working capital
management on firms performance in Pakistan for the period 1998 to 2007. The
results indicate that the cash conversion cycle, net trade cycle and inventory turnover
in days are significantly affecting the performance of the firms. Moreover, the
financial leverage, sales growth and firm size also have significant effect on the firms
profitability. The study also concludes that firms in Pakistan are following
conservative working capital management policy Furthermore, efficient Management
and financing of working capital (current assets and current liabilities) can increase
the operating profitability of manufacturing firms. For efficient working capital
management, specialized persons in the fields of finance should be hired by the firms
for expert advice on working capital management in the manufacturing sector.
Gitman & others 13 survey was that almost all-large firms prepare cash forecast.
i

Review process is only of summary and research result not the whole report or research reading.

See Besley and Osteryoung, Account Receivable Management, pp. 79-95

10

See N. Hill, W. Sartoris, and D. Ferguson, Corporate Credit and PayablePolicy: A Survey Size and
Industry Effects, paper presented at the Financial Management Associations 1983 Annual Meeting
11

See Hills, Sartoris Fergusons, Factoring Account Payable, Journal of Cash Management (March/April 1986),
Page 39
12

See Talat A. Abdul Q. Mahmood A. B. Working Capital Management and Corporate Performance of
Manufacturing Sector in Pakistan International Research Journal of Finance and Economics, ISSN
1450-2887 Issue 47 (2010) EuroJournals Publishing, Inc. 2010
http://www.eurojournals.com/finance.htm
13
Lawrence Gitman, D. Keith Forrester, and John R. Forrester, Maximizing Cash Disbursement Float,
Financial Management (summer 1976), p 15-24.

12

Chapter Three
3.1

Working Capital Management Fundamental

WORKING CAPITAL MANAGEMENT

Working capital (abbreviated WC) is a financial metric which represents operating

liquidity available to a business, organization or other entity, including governmental
entity. Along with fixed assets such as plant and equipment, working capital is
considered a part of operating capital. Net working capital is calculated as current assets
minus current liabilities. Working capital management is the management of the firms
short-term assets and liabilities, individually and in aggregate.
From the above, the following two aspects of working capital management emerge:
(1) To determine the magnitude of current assets or level of working capital and
(2) To determine the mode of financing or hedging decisions.

Figure 3.1: Circulation System of Working Capital

3.2

IMPORTANCE OF WORKING CAPITAL MANAGEMENT

Working capital is one of the important measurements of the financial position. The
words of H. G. Guthmann clearly explain the importance of working capital Working
Capital is the life-blood and nerve center of the business. In the words of Walker A
firms profitability is determined in part by the way its working capital is managed.
The object of working capital management is to manage firms current assets and
liabilities in such a way that a satisfactory level of working capital is maintained. If the
firm cannot maintain a satisfactory level of working capital, it is likely to become
insolvent and may even be forced into bankruptcy. Thus, need for working capital to run
day-to-day business activities smoothly cant be overemphasized.

13

Chapter Three

Working Capital Management Fundamental

Proper WCM is also importance because if there is excessive working capital then
dangers are as follows:
o Heavy investment in fixed assets may create situation of over capitalization.
o Reckless purchase of materials- results in dormant slow moving and obsolete
inventory and increase the cost due to mishandling, waste, theft, etc.
o Speculative tendencies - will hamper the image of a concern in future when
speculative loss may start.
o Liberal credit - increase size of accounts receivables, debts and wrong practices
will start, regarding delay in payments.
o Carelessness - Excessive working capital will lead to carelessness about costs
which will adversely affect the profitability.

Paucity of working capital is also bad and has the following dangers:
o Implementation of operating plans becomes difficult and a concern may not achieve
its profit target.
o It is difficult to pay dividend due to lack of funds.
o

Bargaining capacity is reduced in credit purchases and cash discount could not be availed.

o An enterprise loses its reputation when it becomes difficult even to meet day-to- day
commitments.
o
o

Operating inefficiencies may creep in when a concern cannot meet it financial promises.
A concern will have to borrow funds at an exorbitant rate of interest in case of need.

o Sometimes, a concern may be bound to sale its product at a much reduced rates to
collect funds which may harm its image.
So, avoiding excessive or paucity of working capital, importance of Working Capital
Management is beyond-question.

3.3

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital. These are:

1. Gross working capital (total current assets): The gross working capital, simply called
as working capital refers to the firms investment in current assets. Current assets are
the assets, which can be converted into cash within an accounting year or operating
cycle. Thus, gross working capital, is the total of all current assets. It includes:
1. Inventories (raw materials , work-in-progress, finished goods, others)
2. Trade debtors

14

Chapter Three
3.
4.
5.
6.

Working Capital Management Fundamental

Loans and advance

Cash and bank balances
Bills receivables.
Short-term investment

2. Net working capital (total current assets total current liabilities): Net working
capital refers to the difference between current assets and current liabilities. Current
liabilities are those claims of outsiders, which are expected to mature for payment
within an accounting year. Net working capital may be positive or negative. A positive
net working capital will arise when current assets exceed current liabilities and a
negative net working capital will arise when current liabilities exceed current assets
i.e. there is no working capital, but there is a working capital deficit. It includes:
1.
2.
3.
4.
5.
6.
7.
3.4

Trade creditors.
Bills payable.
Accrued or outstanding expenses.
Trade advances
Short term borrowings (commercial banks and others)
Provisions
Bank overdraft

Management of Working Capital

Management of working capital includes following major dimension:

Inventory Management:
Inventory includes all types of stocks. For effective
working capital management, inventory needs to be managed effectively. The level
of inventory should be such that the total cost of ordering and holding inventory is
the least. Simultaneously, stock out costs should also be minimized. Business,
therefore, should fix the minimum safety stock level, re-order level and ordering
quantity so that the inventory cost is reduced and its management becomes efficient.

Cash Management:
Cash is the most liquid current asset. It is of vital importance
to the daily operations of business. While the proportion of assets held in the form of
cash is very small, its efficient management is crucial to the solvency of the business.
Therefore, planning cash and controlling its use are very important tasks. Cash
budgeting is a useful device for this purpose.

15

Chapter Three

Working Capital Management Fundamental

Figures 3.2: Working Capital Management & Components

Receivables Management:

Given a choice, every business would prefer selling its produce on cash basis. However,
due to factors like trade policies, prevailing marketing conditions, etc., businesses are
compelled to sell their goods on credit. In certain circumstances, a business may
deliberately extend credit as a strategy of increasing sales. Extending credit means
creating a current asset in the form of Debtors or Accounts Receivable. Investment in
this type of current assets needs proper and effective management as it gives rise to
costs such as:
i.
Cost of carrying receivable (payment of interest etc.)
ii.
Cost of bad debt losses
Thus the objective of any management policy pertaining to accounts receivables would
be to ensure that the benefits arising due to the receivables are more than the cost
incurred for receivables and the gap between benefit and cost increases resulting in
increased profits. An effective control of receivables helps a great deal in properly
managing it. Each business should project expected sales and expected investment in
receivables based on various factors, which influence the working capital requirement. A
business should continuously try to monitor the credit days and see that the average
credit offered to clients is not crossing the budgeted period. Otherwise, the requirement
of investment in the working capital would increase and, as a result, activities may get
squeezed. This may lead to cash crisis.
16

Chapter Three
3.5

Working Capital Management Fundamental

CONCEPT OF OPERATING CYCLE

The duration of time required to complete the following sequence of events, in case of
manufacturing firm, is called the operating cycle:

Figures 3.3: Duration of the Operating Cycle

The length of cycle will depend on the nature of business. Non-manufacturing concerns, service
concerns and financial concerns will not have raw material and work-in-process so their cycle will
be shorter. Financial Concerns have a shortest operating cycle.

3.6

FACTORS INFLUENCING WORKING CAPITAL REQUIREMENT

Numerous factors can influence the size and need of working capital in a concern. So no
set rule or formula can be framed. It is rightly observed that, There is no precise way to
determine the exact amount of gross or net working capital for every enterprise. The
data and problem of each company should be analyzed to determine the amount of
working capital. Briefly, the optimum level of current assets depends upon following
determinants.
o Nature of business: Trading and industrial concerns require more funds for working
capital. Concerns engaged in public utility services need less working capital. In
addition, the investment varies concern to concern, depending upon the size of
business, the nature of the product, and the production technique.

17

Chapter Three

Working Capital Management Fundamental

o Production policy: In case of seasonal fluctuations in sales, production will fluctuate

accordingly and ultimately requirement of working capital will also fluctuate.
o Conditions of supply: If the supply of inventory is prompt and adequate, fewer funds
will be needed. But, if the supply is seasonal or unpredictable, more funds will be
invested in inventory. Investment in working capital will fluctuate in case of seasonal
nature of supply of raw materials, spare parts and stores.
o Seasonal Operations: It is not always possible to shift the burden of production and
sale to slack period. For example, in case of sugar mill more working capital will be
needed at the time of crop and manufacturing.
o Credit Availability: If credit facility is available from banks and suppliers on favorable
terms and conditions, less working capital will be needed. If such facilities are not
available more working capital will be needed to avoid risk.
o Credit policy of enterprises-- In some enterprises most of the sale is at cash and even
it is received in advance while, in other sales is at credit and payments are received
only after a month or two. Both policies affect WC Management.
o Growth and expansion-- The need of working capital is increasing with the growth
and expansion of an enterprise. It is difficult to precisely determine the relationship
between volume of sales and the working capital needs. The critical fact, however, is
that the need for increased working capital funds does not follow growth in business
activities but precedes it.
o Price level change with the increase in price level more and more working capital
will be needed for the same magnitude of current assets. The effect of rising prices
will be different for different enterprises.
o Circulation of working capital less working capital will be needed with the increase
in circulation of working capital and vice-versa. Circulation means time required to
complete one operating cycle.
o Volume of sale-- This is directly indicated with working capital requirement, with the
increase in sales more working capital is needed for finished goods and debtors, its
vice versa is also true.
o Liquidity and profitability-- There is a negative relationship between liquidity and
profitability. When working capital in relation to sales is increased it will reduce risk
and profitability on one side and will increase liquidity on the other side.
o Management ability Proper co-ordination in production and distribution of goods
may reduce the requirement of working capital, as minimum funds will be invested in
absolute inventory, non-recoverable debts, etc.

18

Chapter Three
3.7

Working Capital Management Fundamental

WORKING CAPITAL POLICIES

There are three policies which are used to finance and manage the working Capital
management. These three are:
(1) A matching funding policy is one which finances fluctuating current assets with short
term funds and permanent current assets and non-current assets with long-term
funds. The maturity of the funds roughly matches the maturity of the different types
of assets.
(2) A conservative funding policy uses long-term funds to finance not only non-current
assets and permanent current assets, but some fluctuating current assets as well. As
there is less reliance on short-term funding, the risk of such a policy is lower, but the
higher cost of long-term finance means that profitability is reduced as well.

Figure 3.4: Different policies regarding the level of investment in working capital
(3) An aggressive funding policy uses short-term funds to finance not only fluctuating
current assets, but some permanent current assets as well. This policy carries the
greatest risk to solvency, but also offers the highest profitability and increases
shareholder value.

Figure 3.5: Three approaches relative proportions of the long- and short-term debt

19

Chapter Three
3.8

Working Capital Management Fundamental

Sources of Working Capital Financing

The following are the major sources of raising short-term funds:

Suppliers Credit

At times, business gets raw material on credit from the suppliers. The cost of raw
material is paid after some time, i.e. upon completion of the credit period. Thus, without
having an outflow of cash the business is in a position to use raw material and continue
the activities. The credit given by the suppliers of raw materials is for a short period and
is considered current liabilities. These funds should be used for creating current assets
like stock of raw material, work in process, finished goods, etc.

Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extend loans to businesses to
help them create necessary current assets so as to achieve the required business level.
The loans are available for creating the following current assets:
o
o
o
o

Stock of Raw Materials

Stock of Work in Process
Stock of Finished Goods
Debtors

Banks give short-term loans against these assets, keeping some security margin. The
advances given by banks against current assets are short-term in nature and banks have
the right to ask for immediate repayment if they consider doing so. Thus bank loans for
creation of current assets are also current liabilities.

Promoters Fund

It is advisable to finance a portion of current assets from the promoters funds. They are
long-term funds and, therefore do not require immediate repayment. These funds
increase the liquidity of the business.

20

Chapter Four
4.1

Result and Analysis

ANALYSIS OF TEXTILE INDUSTRYs Working Capital Management

With a view to appraise working capital and liquidity position of Textile Industry, the
analysis has been made from the point of view of short term creditors, efficiency in
the use of working capital, and investment in working capital. Short-term creditors
are primarily interested in liquidity position or the short term solvency of the firm
while, the management is interested in efficient utilization of available working
capital. The analysis throws the light on the following questions:
1. Will TI be able to pay its current obligations promptly?
2. Can TI effectively utilize the capital available?
3. Is the liquidity position of TI improving?
To evaluate the performance of working capital of TI and answer above questions,
three fold analyses are undertaken as shown under:
A) Analysis of Working Capital Trend in TI
B) Analysis of Working Capital Efficiency in TI
C) Analysis of Liquidity Position of TI
4.2

ANALYSIS OF WORKING CAPITAL TREND IN TI

The working capital trend analysis represents a picture of variations in current assets,
current liabilities and working capital of TI over a period of time. Trend Analysis is a
tool of financial analysis where changes are compared to the base year, keeping the
base year as 100. Such an analysis helps us to study upward / downward trends in
current assets and current liabilities and its effect on working capital. The following
analysis was carried out to find out working capital trend in TI
1. Current Assets Trend Analysis
2. Current Liabilities Trend Analysis
3. Working Capital Trend Analysis

4.2.1

Current Assets Trend Analysis

Current assets trend refers to the year to year change in current asset of a firm which
is shown in graph paper by line charts and bar diagram to show the overall trend
whether it is declining or increasing over the periods.
Current Assets trend also shows the growth rate on the basis of base year or previous
year.

21

Chapter Four

Result and Analysis

Table 4.1: Relative share Percentage of Current Asset in TI (1995-2006)

Company
Inventories
Debtors
Advance & Others
Cash
Al-Haj
62.42
1.72
32.96
2.9
Apex
35.25
46.99
9.05
8.72
Desh
64.60
19.64
9.20
6.57
Dulamia
61.57
28.14
9.20
1.09
Mithun
46.41
44.17
3.41
6.08
Modern
24.18
28.51
45.42
1.89
Prime
49.57
21.14
26.87
2.43
Safko
89.17
3.28
5.14
2.41
Sonargaon
69.89
17.8
8.68
3.63
Tallu
59.07
25.39
10.68
4.86
Chart 4.1: Relative share Percentage of Current Asset of Companies (1995-2006)

Table 4.1 and Chart 4.1 reveal that current assets in Textile industry in Bangladesh
include four main components. From above data, it is apparent that inventories
(stock in hand, stores and loose parts, material adjustment ledger, work in progress
etc.) have the biggest share in amount of current assets of the selected companies.
Debtors gained 2nd position in 6 companies (Apex, Desh, Dulamia, Mithun,
Sonargaon, Tallu) and Advance & Others are 2nd in 3 companies (Al-Haj, Modern,
Safko). But the cash portion of all the companies is lower except the Al-Haj textile.
These positions affect the industry average.

22

Chapter Four

Result and Analysis

In case of industry current assets from chart 4.2 relative share portions includes
Inventory, the highest portion of 53.22%, Debtors 24.78%, Advance & Others 18.37%
and Cash 3.63%. This pie chart shows that the selected companies are dependent on
Inventories highly, but their cash management is very low which may affect the
liquidity position of the companies.

Chart 4.2: Relative Share of Current Assets in Textile Industry (1995-2006)

Table - 4.2: Trend of Current Assets in Textile Industry (1995-2006)

Sl. No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

Total CA
1235.91
1437.05
1508.58
1343.44
1497.75
1932.78
2533.71
1780.81
2195.23
2690.98
2494.53
2912.50

Trend
100.00
116.27
122.06
108.70
121.19
156.39
205.01
144.09
177.62
217.73
201.84
235.66

Growth
16.27
05.79
- 13.36
12.49
35.20
48.62
- 60.92
33.53
40.11
- 15.89
33.82

Chart 4.3 reveals that current assets in TI show an increasing trend except in the year
1997-98, 2001-02 and 2004-05. It ranged between 108.70 per cent in the year 1997-98;
144.09 per cent in the year 2001-02 and 201.84 percent in the year 2004-05 with an
average trend of current assets to be 158.88.

23

Chapter Four

Result and Analysis

Chart 4.3: Trend of Current Assets in Textile Industry (1995-2006)

As presented in Chart 4.3 a sudden hype and down in the current assets is
encountered during the year 2001 and 2002 (48.62% increase because there was hype
of debtors in 3 major companies Apex, Tallu, Mithun, also hype in the level of cash in
3 companies when Tallu increase their inventories 202.2% and Prime increase their
advance and others share up to 160.6% with increase of cash 200%; but when 60.92%
decrease the main reason is that Prime textile decrease its advance and others
section to 1696.77% in comparison to last year).

4.2.2

Current Liabilities Trend Analysis

Table 4.3
Sl. No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Average

Trend of Current liabilities in TI (1995-2006)

Year
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06

Total
Trend
Growth
914.99
100.00
961.05
105.03
5.03
1244.57
136.02
30.99
1299.92
142.07
6.05
1438.55
157.22
15.15
1802.59
197.01
39.79
2353.12
257.17
60.17
1709.78
186.86
-70.31
2078.70
227.18
40.32
2631.28
287.57
60.39
2598.62
284.01
-3.57
2958.09
323.29
39.29
1832.61
200.29
20.30

24

Chapter Four

Result and Analysis

Chart 4.4: Trend of Current liabilities in TI (1995-2006)

Table 4.3 and Chart 4.4 reveal that current liabilities in TI show an increasing trend,
except in the year 2001-02 and 2004-05. It ranged between 100 per cent in the year
1995-96 and 323.29 per cent in the year 2004-05 with an average trend of current
liabilities to be 200.29.
As presented in Chart 4.4 current liabilities show a huge fall in the year 2001- 02
because during the year Prime Textile decreased current liabilities up to 243% than
past years, as a big mills in the industry, this decision affects the overall industry trend
of current liabilities. Prime Textile mainly decreased its Creditors policy up to 210% and
others things.

4.2.3

Working Capital Trend Analysis

Table 4.4: Working Capital Trend of TI per year (1995-2006)

Year
Current Assets Current Liabilities
Working Capital Trend
Growth
1235.91
914.99
1995
320.92
100
1437.05
961.05
1996
476
148.32
48.32
1508.58
1244.57
1997
264.01
82.27
-66.06
1343.44
1299.92
1998
43.52
13.56
-68.71
1497.75
1438.55
1999
59.2
18.45
4.89
1932.78
1802.59
2000
130.19
40.57
22.12
2533.71
2353.12
2001
180.59
56.27
15.70
1780.81
1709.78
2002
71.03
22.13
-34.14
2195.23
2078.7
2003
116.53
36.31
14.18
2690.98
2631.28
2004
59.7
18.60
-17.71
2494.53
2598.62
2005
-104.09
-32.43
-51.04
2912.5
2958.09
2006
-45.59
-14.21
18.23

25

Chapter Four

Result and Analysis

Chart 4.5: Current Assets and Current Liabilities Comparison in TI (1995 to 2006)

Chart 4.6: Working Capital Trend over the periods (1995-2006)

Table 4.4, Chart 4.5 and 4.6 reveals that, in TI, current liabilities are gradually
increasing over the periods; as a result the trend of working capital is downward
sloping because the amount of current is not increasing according to the increasing
rate of current liabilities.
Chart 4.6 reveals a downward sloping trend of working capital in TI, which is gone
under the positive line in 2005 and 2006. 1996, 2001 and 2003 periods shows the
increase trend of working capital and rest periods is in downward or moderate
positions. This zigzag line appeared because of the big companies liabilities and
working capital policy like Prime, Apex, Tallu etc.

26

Chapter Four

Result and Analysis

4.3 EFFICIENCY ANALYSIS OF TI

Efficiency analysis examines how efficiently different working capital components are
used in an enterprise. Working capital may have various components. Efficient
turnover of these components results into higher efficiency which in turn results into
higher profitability. In TI, to measure efficiency in the utilization of working capital
following ratios have been calculated:
1. Working Capital Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio

4.3.1

Working Capital Turnover Ratio

The working capital is required for the smooth running of day to day operations of
the business. Hence, it has utmost importance in analyzing business operation both
internally and externally. Inadequacy or mismanagement of working capital leads
towards business failure.
The working capital of a company is the life blood which flows through the veins and
arteries of the structure. as like the lacking or slowdown of blood results into a death,
the lacking or slowdown of working capital results into a death of financial body
(brain - management and muscles personnel) of a business and becomes just junk.
The Working Capital Turnover Ratio is one of the best measures to analyze the
efficiency of a firm in managing its working capital. It is figured as shown below:

The faster the working capital turnover, the lower is the total investment and is
greater the profit. However, a very high turnover of working capital may, in some
cases, denote deficiency of working funds for the given volume of business, which
ultimately adversely affects the profitability.
Working Capital Turnover Ratio analysis of selected companies and total industry is
given on the next page. Here analysis is based on average method to bring company
and industry output over the periods of 1995 2006.
This ratio actually denotes the efficiency of TI industry that how efficiently it is using
its working capital. But result may denote negative side.

27

Chapter Four

Result and Analysis

Table 4.5: Sales, Net Working Capital & Working Turnover Ratio in TI
Average, Standard Deviation & Co-efficient Variation Analysis

Companies WCTR Analysis

Co. Name
Al-Haj
Apex
Desh
Dulamia
Mithun
Modern
Prime
Safko
Sonargaon
Tallu

NWC
Sales (Millions)
197.54
35.06
672.77
0.24
115.99
-40.45
215.53
-38.92
229.6
17.14
17.62
2.60
916.24
73.86
285.57
-20.01
393.6
-39.75
684.65
61.64

WCTR
(Ratio)
0.79
94.56
-2.75
-76.49
1.85
-22.69
93.48
-20.19
4.23
11.7

Industry Average Analysis

Total
Sales
1951.96
2265.92
2286.73
2496.40
2879.89
3282.58
3647.70
3407.05
4192.84
5332.18

Total
NWC
320.83
475.95
-7.30
6.01
-44.16
45.85
16.91
14.41
28.54
-4.63

WCTR
6.08
4.76
-313.29
415.17
-65.22
71.59
215.74
236.43
146.92
-1150.99

Total
Sales
1954.96
2265.92
2286.73
2496.40
2879.89
3282.58
3647.70
3407.05
4192.84
5332.18

2005 5992.20
2006 7013.93
AVG. 3729.12
1613.20
SV
CV
43.26

-145.73
-89.74
51.41
173.86
338.18

-41.12
-78.15
- 46.01
394.41
857.29

5992.20
7013.93
3729.12
1613.20
43.26

Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

Chart 4.7: WCTR of Selected Companies and Average Industry WCTR Comparison

28

Chapter Four

Result and Analysis

Chart 4.8: Industry WCTR (1995-2006) and Average Industry WCTR Comparison

Working Capital Turnover Ratio of TI is presented in Table No. 4.5. In TI, the ratio
shows a very fluctuating trend. It ranged between 415.17 times in the year 1997-98
and (1150.99) in the year 2003-2004 with an average ratio of 46.01 times.
From above chart and table is very difficult to say whether it is good or bad in case
working capital turnover in TI. The average Turnover ratio 46.01 denotes very
dissatisfactory condition of Textile industry in Bangladesh. But if subtract the
extreme value of 415.17 and -1150.99 from the calculation it appears 18.74 times which
express very satisfactory turnover ratio for textile industry.
But here Standard Deviation and Coefficient Variation is respectively 394.41 and
857.29 which means there is huge dispersion between yearly working capital turnover
ratios. High ratio never means it is good, in some cases; denote deficiency of working
funds for the given volume of business, which ultimately adversely affects the
profitability.
When considering the trend, it is downward slopping in overall, but in last two years it
is in up from biggest fall in trend (2003-04).
As presented in the Chart 4.7 is showing the each companys working capital turnover
ratio over the periods 1995-2006. When Dulamia is lower than the industry average
and rest is higher. Prime and Apex Companys WCTR shows deviation from industry
average working capital Turnover ratio; thus it is showing the actual dispersion
among the companies in the industry.

29

Chapter Four
4.3.2

Result and Analysis

Debtors Turnover Ratio

The Debtors Turnover ratio is also termed as Debtors speed ratio. It indicates the
quickness in realization of sundry debtors. The main object of this ratio is to know
how much credit time is allowed and capital blocked in debtors.
Debtors turnover ratio also shows the effectiveness in collection of debts due.
Generally, higher ratio is the indication of efficient management of liquidity.
However, a firm should maintain a balance between the debtors outstanding and the
amount of interest incurred on the blocked funds. It is figured as shown below:

As in working capital turnover ratio, net sales are replaced by net revenue in debtors
turnover ratio also.

Table 4.6: Sales, Debtors & Debtors Turnover Ratio in TI

Average, Standard Deviation & Co-efficient Variation Analysis

Companies WCTR Analysis

Name
Al-Haj
Apex
Desh
Dulamia
Mithun
Modern
Prime
Safko
Sonargaon
Tallu

Avg. Sales
(Millions)
197.54
672.77
115.99
215.53
229.6
17.62
916.24
285.57
393.6
684.65

Industry Average Analysis

Avg. Debtors
(Millions)
DTR
2.38 148.53
78.09
8.06
5.99 24.96
30.89
7.96
59.22
4.91
2.29 12.42
150.37
6.93
4.52 129.55
19.9 21.82
132.93 49.24

Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
AVG
SV
CV

30

Total
Sales
(Millions)
1951.96
2265.92
2286.73
2496.40
2879.89
3282.58
3647.70
3407.05
4192.84
5332.18
5992.20
7013.93

Total
Debtors
(Millions)
DTR
206.56 9.45
271.43 8.35
246.06 9.29
191.55 13.03
300.48 9.58
339.76 9.66
417.18 8.74
574.02 5.94
799.17 5.25
991.50 5.38
596.54 10.04
904.72 7.75

3729.12
1613.20
43.26

486.58 8.54
282.49 2.23
58.06 26.07

Chapter Four

Result and Analysis

Chart 4.9: Companys DTR (1995-2006) and Average Industry DTR Comparison

Chart 4.10: Industry DTR (1995-2006) and Average Industry DTR Comparison

The coefficient variation in the ratio is 58.06, which indicates that there is 58.06 per
cent dispersion in the ratio of TI over the period.
It can The Debtors Turnover Ratio of TI has been presented in Table No. 4.10. In TI,
the ratio shows a fluctuating trend. It ranged between 5.25 times in the year 2002-03
and 13.03 in the year 1997-1998 with an average ratio of 8.54 times.
As presented in the Chart 4.10 though the ratio was decreasing, it shows fluctuating
trend during the whole study period. Moreover, it was too above the average ratio in
the initial 6 of 7 years. Then after, it was below the average ratio till the ending year
(except 2004-2005).

31

Chapter Four

Result and Analysis

Also be concluded that over the course of 12 years of study period from 1994-95 to
2005-06, the ratio has fallen from 9.45 to 7.75.
When considering time for debtors collection period the average days is 42 days
which is highest of 69 days and lowest is 28 days.
As a whole, from the Debtors Turnover Ratio, it may be concluded that during the
initial years the TI was efficiently managing its liquidity and revenue. However, it
continuously becomes worse over the time (except 2004-05).
In case of each company analysis Prime, Apex, Dulamia and Mithun was carrying
lower ratio than the industry average over the periods, when the rest is high above
the average.
The average debtors collection period for 10 companies is given below:

Table 4.7: Debtors Average Collection Period

Sl.
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Name
Al-Haj

Average Days

148.53

Apex

8.06

Desh

24.96

Dulamia
Mithun
Modern

Sonargaon

2.42 Highly Efficient

44.67 Moderately Efficient
14.42 Highly Efficient
45.23 Moderately Efficient

4.91

73.32 Moderately Efficient

6.93

Safko

Comment

7.96
12.42

Prime

Tallu

Debtors Turnover
Ratio

28.99 Highly Efficient

51.95 Moderately Efficient

129.55

2.78 Highly Efficient

21.82

16.50 Highly Efficient

49.24

7.31 Highly Efficient

From the table 4.7 reveal that the 10 companies high in a satisfactory position, when
the industry average collection period is 42 days which also indicates the efficient
management of credit in Textile industry.

4.3.3

Creditors Turnover Ratio

The Creditors Turnover ratio is also termed as Debtors speed ratio. It indicates the
quickness in realization of sundry debtors. The main object of this ratio is to know
how much credit time received by the firm from its trade creditors. Creditors
turnover ratio shows the breathing time received by the firm in terms of payment of

32

Chapter Four

Result and Analysis

credit purchase. Hence, the effectiveness lies in whether the firm is enjoying the
actual credit period promised by suppliers. It is calculated by dividing the amount of
purchases by creditors. Here it has been assumed that all of the purchases have been
made as credit purchases. It is figured as shown below:

Due to inappropriate financial statement information about creditors, conflicts with

our idea about creditors, we are unable to bring correct creditors turnover ratio.
But in general or normal analysis the creditors portion of current liabilities is
increasing in percentage of current liabilities so, the creditors turnover periods is
declining day by day in textile industry in Bangladesh.

4.4 ANALYSIS OF LIQUIDITY POSITION OF TI

Liquidity is a prerequisite for the very survival of a firm. The short-term creditors of
the firm are interested in the short-term solvency or liquidity of a firm. Liquidity
means the ability of an asset to be converted into cash without a significant price
concession. Liquidity has two dimensions: the time required for converting the asset
into cash and the certainty of the price realized.
The liquidity ratios measure the ability of a firm to meet its short-term obligations and
reflect the short-term financial strength/solvency of a firm. It is very important for a
firm to meet its current obligations as they become due.
Liquidity implies that funds are idle or they earn very little. A proper balance should
be maintained between two contradictory requirements liquidity and prodigality. A
firm suffers from lack of liquidity cannot meet its obligations in time, which results in
poor creditworthiness, lack of creditors confidence, closure of company due to legal
tangles. If a firm keeps higher level of liquidity, the firms fund will be unnecessarily
tied up in current assets, which earns nothing.
Therefore, a firm should maintain proper balance between lack of liquidity and high
liquidity. For analyzing liquidity position of TI, following ratios have been computed:

Current Ratio
Quick Ratio
Cash Ratio / Super Quick Ratio

33

Chapter Four
4.4.1

Result and Analysis

Current Ratio

The Current Ratio is one of the best known measures of financial strength. It is
figured as shown below:

The main question this ratio addresses is: "Does the business have enough

current assets to meet the payment schedule of its current debts with a
margin of safety for possible losses in current assets, such as inventory
Shrinkage or collectable accounts?"
Thus, current ratio measures firms short-term solvency. It indicates firms ability to
cover its current liabilities with its current assets. In a more specific manner, it
indicates the availability of current assets in Taka for every one Taka of current
liability. As such, higher the current ratio, the larger is the amount of Taka available
per Taka of current liability, the more is the firms ability to meet current obligations
and greater is the safety of funds of short term creditors. Thus, current ratio
measures margin of safety to the short-term creditors.
A current ratio of 2: 1 or more is considered satisfactory. But, whether or not a
specific ratio is satisfactory depends on the nature of the business and the
characteristics of its current assets and liabilities. The minimum acceptable current
ratio is obviously 1:1, but that relationship is usually playing it too close for comfort.
However, it may happen that the firm having higher current ratio may be struggling
to meet its obligations and in reverse firms having lower current ratio may be doing
well. This is because current ratio only measures total current assets and total current
liabilities and does not measure qualities of current assets and current liabilities. So
we cannot solely depend upon the current ratio. But at the same time we cannot
ignore it because it is the crude and- quick measure of the firms liquidity.
In case of textile industry, having a highest contribution in GDP they are getting
advantage on getting loan from bank and other institutions. So, when they are in
need of cash, they just getting it from creditors, ultimately their cash holding is lower
than other industry. And the cash ratio 1:1 or 1.5:1 is satisfactory.

The analysis current ratio of textile industry and selected companies are
in the following pages.

34

Chapter Four

Result and Analysis

Table 4.8: Current Assets, Current Liabilities & Current Ratio in TI

Average, Standard Deviation & Co-efficient Variation Analysis

Companies WCTR Analysis

Name
Al-Haj
Apex
Desh
Dulamia
Mithun
Modern
Prime
Safko
Sonargaon
Tallu

Average
CA
139.98
168.39
35.94
106.52
123.75
6.8
742.07
118.77
132.33
389.04

Average
CL
104.92
168.15
76.39
145.44
106.61
4.21
588.61
138.78
172.08
327.4

CR
1.41
1.03
0.39
0.74
1.15
2.11
1.48
0.87
0.93
1.38

Industry Average Analysis

Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
AVG
SV
CV

Total Current Total Current Current

Asset
Liabilities
Ratio
1235.91
914.99
1.35
1437.05
961.05
1.50
1508.58
1244.57
1.21
1343.44
1299.92
1.03
1497.754
1438.55
1.04
1932.78
1802.59
1.07
2533.71
2353.12
1.08
1780.81
1709.78
1.04
2195.23
2078.7
1.06
2690.98
2631.28
1.02
2494.53
2598.62
0.96
2912.5
2958.09
0.98
1963.61
1832.61
1.11
583.08
689.22
0.16
0.30
0.38
14.41

Chart 4.11: Industry CR (1995-2006) and Industry Average CR Comparison

35

Chapter Four

Result and Analysis

Chart 4.12: Companys Avg. CR (1995-2006) and Industry Average CR Comparison

The Current Ratio of TI has been presented in the Table No. 4.8. In TI, the Current
Ratio shows fluctuating trend. It ranged between 0.96 times in the year 2001-2002
and 1.5 times in the year 1996-1997 with an average ratio of 1.11 times.
The ratio shows decrease trend during the whole study period, except in the initial
two years. Moreover, the TI had not maintained the standard ratio of 2:1 times and
minimum ratio 1:1 and 1.5:1 during the whole study period.
Current ratio as presented in Chart 4.11 was below the average current ratio from
1997-98 up to the year 2005-2006. From the year 1995-97, it was above the average
current ratio till the end year. However, it was too below from standard current ratio
during whole study period.
As shown in Chart 4.10 the current ratio show a jump in the year 1995-1996 due to
current assets increased by 16.27% and current liabilities decreased by 5.04%. The
possible reasons are the increase in the current asset of Apex, Mithun, Safko and
Tallu spinning highly.
In case of each company analysis the highest ratio holder is Modern (2.11) because of
their low capital, they have low bank trust for credit granting to the mills and the
lowest is Desh 0.39 because over time periods its current liabilities increased 2.13
times than its current assets. The rest companies are in high or bit-low position than
industry average current ratio.
The standard deviation of industry current ratio is 0.16 and coefficient variation is
14.41 which indicate low variation and dispersion among year to year ratio and near to
constant growth (whether declining or increasing).

36

Chapter Four
4.4.2

Result and Analysis

Acid-Test (Quick) Ratio

The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best
measures of liquidity. It is figured as shown below:

The quick ratio measures firms current financial condition. It indicates a firms ability
to meet its current liabilities with its most liquid (quick) assets. The quick ratio is
calculated by dividing quick assets (current assets inventories) by current liabilities.
Quick assets are those current assets which can be converted into cash immediately
or at a short notice without diminution of value such as cash, marketable securities,
debtors, and bills receivables excluding inventories.
This is so, because it requires some time for converting into cash, added their values
tend to fluctuate.
Current liabilities include all obligations, which mature within a year such as creditors,
bills payable, accrued expenses, short-term bank loan, income tax liability and longterm debt excluding bank overdraft, all of which quickly mature in the current year.
This ratio serves as a supplement to the current ratio in analyzing liquidity. This ratio
is same as current ratio except it excludes inventories presumably the least liquid
portion of current assets. A quick ratio of 1: 1 is considered as satisfactory.
The Quick Ratio is a much more exact measure than the Current Ratio. By excluding
inventories, it concentrates on the really liquid assets, with value that is fairly certain.
It helps answer the question: "If all sales revenues should disappear, could the
business meet its current obligations with the readily convertible `quick' funds on
hand?"

In case of Textile industry for the following reasons, companies always keep low ratio
quick assets:
1. High contribution to GDP, so high concentration from government
2. High Bank trust
3. Low volatile debtors collection period
4. Payment always Assured
For the above reasons, the minimum quick ratio should 1:1 and .75:1 in textile industry
in Bangladesh.

37

Chapter Four

Result and Analysis

Table 4.9: Current Assets, Inventory, Current Liabilities & Quick Ratio in TI
Average, Standard Deviation & Co-efficient Variation Analysis

Companies WCTR Analysis

Name
Al-Haj
Apex
Desh
Dulamia
Mithun
Modern
Prime
Safko
Sonargaon
Tallu

CA

Inv.

CL

139.98 89.06 104.92

168.39 52.66 168.15
35.94 24.84 76.39
106.52 64.72 145.44
123.75 52.02 106.61
6.8
1.93
4.21
742.07 346.7 588.61
118.77 105.71 138.78
132.33 98.67 172.08
389.04 208.65 327.4

Industry Average Analysis

CR

Year

0.51
0.67
0.15
0.28
0.62
1.4
0.76
0.09
0.29
0.5

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
AVG
SV
CV

TCA
1235.91
1437.05
1508.58
1343.44
1497.75
1932.78
2533.71
1780.81
2195.23
2690.98
2494.53
2912.50
1963.61
583.08
29.69

TI
662.13
811.31
919.86
848.2
872.13
889.17
1018.47
971.8
1102.01
1313.97
1529.92
1600.32
1044.94
291.54
27.90

TCL
914.99
961.05
1244.57
1299.92
1438.55
1802.59
2353.12
1709.78
2078.7
2631.28
2598.62
2958.09

0.63
0.65
0.47
0.38
0.43
0.58
0.64
0.47
0.53
0.52
0.37
0.44
1832.61 0.51
689.22 0.10
37.61 19.17

Chart 4.13: Industry QR (1995-2006) and Average Industry QR Comparison

38

QR

Chapter Four

Result and Analysis

Chart 4.14: Companys Avg. QR (1995-2006) and Average Industry QR Comparison

Quick ratio as presented in Table 4.9 the Quick Ratio also shows fluctuating trend. It
ranged between 0.37 times in the year 2004-2005 and 0.65 in the year 1995-1996 with
an average ratio of 0.51 times.
The Ratio shows decreasing trend in all, but there up-downs in the textile industrys
quick ratio. Moreover, the TI had not maintained more than the standard ratio of 1:1.
Quick ratio as presented in the Chart 4.13 was below the average quick ratio in 1995,
1996, 2000, 2001, 2003, 2004 and rest the years is lower than industry average.
As shown in Chart 4.9 the quick ratio show high ratio in the year in initial due to
increase in current assets increased (presented in the Current Ratio). The possible
reasons are discussed in previous section while explaining the trend of current assets
and current liabilities.
Among the selected companies Apex, Mithun, Modern and Prime has high quick ratio
than industry average, Al-Haj and Tallu has equal or nearest to industry average, other
four companies have lower than industry average.
Among the selected companies Modern has highest ratio of 1.4 and Safko has the
lowest ratio of 0.09.
The standard deviation of industry quick ratio over periods is 0.10 this means there is
minimum variation among different years and also denotes constant or near constant
growth in quick ratio. Coefficient of variation is 19.17, denotes low dispersion among
year to year quick ratio in textile industy.

39

Chapter Four
4.4.3

Result and Analysis

Cash Ratio/Super Quick Ratio

The cash ratio measures firms current financial condition. It indicates a firms ability
to meet its current liabilities with cash and those assets, which are equivalent to cash
such as trade investment or marketable securities. This ratio is the variation of quick
ratio. This ratio is most vigorous measure of liquidity position. However, it is not
widely used in practice. The cash ratio is calculated by dividing (cash + marketable
securities) by current liabilities. It is figured as shown below:

In textile industry, this cash ratio or super quick ratio is not practiced widely because
this ratio have minimum significance to measure textile companies liquidity position.
Companies many have low cash reserve but high inventory or others current assets
elements normally, in this case super quick ratio or cash ratio shows low liquidation
position of the companies which is insignificant.
So, this ratio is only for seeing the exact cash reserve of the selected companies that
how much cash, as a percentage of current assets against current liabilities they are
holding.
Table 4.10: Cash and Marketable Securities, Current Liabilities & Quick Ratio in TI
Average, Standard Deviation & Co-efficient Variation Analysis

Companies WCTR Analysis

Name
Al-Haj
Apex
Desh
Dulamia
Mithun
Modern
Prime
Safko
Sonargaon
Tallu

CMS
3.4
19.44
3.66
1.21
9
0.13
16.08
3
4.61
10.58

CL
104.92
168.15
76.39
145.44
106.61
4.21
588.61
138.78
172.08
327.4

Industry Average Analysis

SQR
0.03
0.09
0.03
0.01
0.07
0.03
0.05
0.02
0.03
0.08

40

Year
TCMS
TCL
TSQR
1995
96.8
914.99
0.11
1996
58.28
961.05
0.06
1997
25.78 1244.57
0.02
1998
34.85 1299.92
0.03
1999
24.83 1438.55
0.02
2000
26.74 1802.59
0.01
2001
66.14 2353.12
0.03
2002
56.21 1709.78
0.03
2003
65.48
2078.7
0.03
2004
132.05 2631.28
0.05
2005
121.36 2598.62
0.05
2006
145.67 2958.09
0.05
AVG
71.18 1832.61
0.04
SV
43.04
689.22
0.03
CV
0.60
0.38
75

Chapter Four

Result and Analysis

Chart 4.15: Industry SQR (1995-2006) and Average Industry SQR Comparison

Chart 4.16: Companys Avg. SQR (1995-2006) & Average Industry SQR Comparison

The Cash Ratio of TI has been presented in the table no 4.10 and Chart 4.15. In TI the
Cash Ratio ranged between 0.01 times in the year 2000 and 0.11 in the year 1995 with
an average ratio of 0.04 times. The Ratio shows fluctuating trend. It shows
decreasing trend up to the year 2000, then it is increasing up to study ends period
(2006). Cash ratio as presented in the chart 4.15 was below the average cash ratio
during the period of 1997 to 2003. It was higher to the average cash ratio in the year
1995, 996, 2004, 2005, and 2006.
The standard deviation is .03 which shows low variation in super quick ratio or cash
ratio in textile industry over the periods of 1995-2006.
In case of selected companies, Apex, Mithun, prime, Tallu have higher ratio than the
industry average and the rest are lower than the industry average. Apex has the
highest ratio of 0.09 and Dulamia has lowest ratio 0.01. The possible reasons are
discussed in previous section while explaining the trend of current assets and current
liabilities.
41

Chapter Five

Decisions & Recommendation

5.1 Decisions
From the annual report and its result analysis we got these decisions which is
important for selected companies having various effects on existing in the textile
industry, these are following:

1. Trend Analysis
a. Current Assets: The Overall increase rate of current assets against current
liabilities is declining in TI due to various reasons govt. policy for Business
development, political situations etc.
b. Current Liabilities: Overall increase rate of current liabilities against
current assets is upward sloping in TI cost of debt, increasing cost of
production etc. in Bangladesh and all over the world
c. Net Working Capital: As current liabilities increase high than current asset
in recent years the net working capital is declining.

2. Efficiency Analysis
a. Sales to Working Capital Turnover: Without some extreme figures the
overall working capital turnover is satisfactory. Some companies have high
ratio may turn to negative circumstances.
b. Sales to Debtors Turnover: The standard of Debtors Turnover is 8 times, is
maintained by TI in Bangladesh. Again some companies have high ratio
may turn to negative circumstances.

3. Liquidity Position
a. Current Ratio: Standard is 2:1 but due to some specific reasons in textile
industry the average current ratio (1995-2006) is 1.1. Considering nature of
business this ratio is satisfactory.
b. Quick Ratio: How quickly a firm can pay its current debts; in TI this ratio is
.51. So, there may be little problem if firm doesnt have good bank trust.
c. Super Quick Ratio or Cash Ratio: Though this ratio is not practiced and
accepted widely, the most liquid ratio of TI is .04, which very low than the
standard. But considering nature of business, credit policy and working
capital factors this ratio may be acceptable.

42

Chapter Five

Decisions & Recommendation

5.2 Recommendations
Textile industry is the most important and one of the highest contributors to the
countrys GDP in every year. So, this sector should be given more priority by the
government, also the companies should develop its policy according to changing
customer behavior, cost and profit functions. So, recommendations are chosen both
for the companies and govt. According to the above decisions these
recommendations are chosen by the researchers which may effects good in textile
industry:

Recommendation to the Companies

Though nature of business affects working capital policy, but there should
be plus net working capital amount in an operating cycle to run business
more efficiently.
Among current assets portions in Textile industry in Bangladesh cash
portion should be increased for reducing risk, high interest cost; this cash
can be used for short-term investment within an operating cycle.
Sales to Working Capital Turnover ratio is highly unsatisfactory for overall
(because of extreme years figures) which should be taken into concern.
Overall business efficiency may be reformulated to reduce small amount of
cost functions.

Recommendation to the Government

The overall development for Business beneficial project should be
continued like transportation, export and import obstacles, and help for
market expansion in new market etc.
Rules and regulation for the development of textile industry and proper
implementation
Volatility of political situation is the main reasons of some small and
medium companys low profit earning in some years which bring negatives
effect in the Economy. So, the political parties should keep political away
from textile industry. Also have to ensure political issues like Strike will
affect textile industry.
By considering these recommendations textile industry may get better working
capital management position.

43

Appendix: Selected Companies Profile

Apex spinning and knitting Mills Limited

Name
Head Office

: Apex Spinning and Knitting Mills Limited (ASKML)

: Rupayan Golden Age, 5th & 6th Floor, 99, Gulshan Avenue,
Gulshan, Dhaka-1212, Bangladesh
Factory
: Mouza-Chandora, P.O. Shafipur, District-Gazipur, Bangladesh
Founded
: 1990
Listed
: DSE and CSE
Type
: 100% export oriented,
Production capacity : About 15 million pieces of garments per year.
Markets
: North America, EU countries and the South East Asia.
Business
: Circular Knitting, Dyeing, Finishing and Knit Garments
Products
: Pique Polo-shirts, Jersey Polo-shirts, Bubble knit Polo-shirts, Golf
shirts, Sweat shirts, Hooded Sweat shirts, Polo shirts, Sweat Pants,
Basic Tee-shirts, Track suits, Tank Tops, Big Tee-shirts, Heavy Teeshirts, Jogging Suits, Turtle Neck Tee-shirts, Jackets, Underwear,
Children wear, men wear, babies wear etc.

DESH Garments Ltd.

Name
Founded
Type
Listed
Partners
Award
Markets

: Desh Garments Limited

: 27th December, 1977
: 100% Export Oriented RMG Industry (First in Bangladesh)
: DSE (Dhaka Stock Exchange)
: Daewoo of South Korea
: Presidents National Award (2 times) and
Grand Prix for Commercial Quality in Europe (1988)
: USA, Canada, Europe and South Asia

Dulamia Cotton Spinning Mills Ltd.

Name
Incorporated
Markets
Factory
Employees
Production capacity

: Dulamia Cotton Spinning Mills Limited

: 28th February, 1987
: Domestic
: Dagonbhuiyan, Feni
: About 900 workers, staff and officers
: About 75, 00,000 pounds (lbs) of 100% cotton yarn per annum

44

Al-Haj Textile Ltd.

Name
Incorporated
Types

: Al-Haj Textile Limited

: March 03, 1961
: Private Limited Company (Incorporated as)
Public Limited Company (October 07, 1967)
: 19, Dilkusha C/A, Dhaka 1000
: Ishurdi, Pabna
: Cotton Yarn
: Domestic and Foreign

Office
Factory
Products
Market

Mithun Knitting and Dyeing (CEPZ) Limited

Office
Corporate Office

: Post Office Para, Chuadanga

: Sena Kalyan Bhaban, Suite No. 904, 9th Floor, 195, Motijheel C/A
Dhaka 1000, Bangladesh
Factory
: Plot No. 44-46, Sector 4, Chittagong EPZ, Bangladesh
Incorporated
: 1991
Operation
: September, 1993
Type
: Public limited Company
Listing Date
: DSE in June, 1994 and CSE in June, 2001
Business
: Circular Knitting, Dyeing, Finishing and Knit Garments
Products Range
: Single Jersey, Interlock, Rib, French Terry, Flat Knit, Collar & Cuff,
Rib with Lycra etc, and Knit Garments of all Sorts
Production Capacity : 5.7 M.T Fabrics and 5000 Pcs. Garments per day
Authorized Capital : Tk. 100,000,000
Employees
: 478 (2007)
Suppliers
: Italy, Sweden, Korea, China, Singapore, Hong Kong, Japan

Prime Textile Spinning Mills Limited

Incorporated
Business
Type
Production Capacity
Office
Factory
Employees

: 22nd June, 1989

: Export Knit/Woven Cotton & Mixed Yarn
: Public Limited Company
: 10,274,528 kg
: Kadamtali, Shyampur, Dhaka
: Nandalalpur, Pagla, Narayanganj
: 1799 (2007)

45

Modern Dyeing and Screen Printing Limited

Incorporated
Type
Office
Factory
Business

: 22 August, 1981
: Public Limited Company
: 82, Motijheel C/A, 3rd Floor, Dhaka 1000
: 271, Tejagaon Industrial Area, Dhaka 1209
: Service in Dyeing, Printing and Finishing of all types of Clothes

SAFKO Spinning Mills Limited

Incorporated
Type
Listed
Factory
Office
Business

: 20 June, 1994
: Public Limited Company
: DSE
: Nayapara, Shyamnagar, Madhabpur, Habiganj
: House # 43, Road# 7, Block # G, Banani, Dhaka 1213
: Cotton Yarn, Polyester, Cotton, Blended Yarn, Synthetic Yarn or
Other Yarn for sale and export purpose

Sonargaon Textiles Limited

Factory
Product
Incorporated
Business Commencement
Authorized Capital
Paid Up Capital
Capacity
Commercial Production
Employees

: Rupatoli, Barisal
: Cotton Yarn
: 21.12.1985
: 21.12.1985
: Tk. 50.00 Crore
: Tk. 9.92 Crore
: 14,400 Spindles (Initial) 71,136 Spindles & 672 Rotors (2007)
: 14.03.1993
: 1817 (2007)

Tallu Spinning Mills Limited

Incorporated
Type
Operation
Factory
Capacity
Products
Employees
Corporate Office

: 20 July, 1985
: Public Limited Company
: 1989
: Uzirpur, Chuadanga
: 51,528 spindles and 896 rotors
: Cotton Yarn
: 1288 (2007)
: Suite # 904, Senakalyan Bhaban, Motijheel C/A, Dhaka 1000

46

REFERENCE
Al-Haj Textile Mills, Financial Statements 1996-2006, DSE, Dhaka.
Apex Spinning & Knitting Mills, Financial Statements 1996-2006, DSE, Dhaka.
Desh Garments Limited, Financial Statements 1996-2006, DSE, Dhaka.
Dulamia Cotton, Financial Statements 1996-2006, DSE, Dhaka.
Mithun Knitting & Dyeing, Financial Statements 1996-2006, DSE, Dhaka.
Modern Dyeing & Screen Printing, Financial Statements 1996-2006, DSE, Dhaka.
Prime Textile Spinning Mills, Financial Statements 1996-2006, DSE, Dhaka.
Safko Spinning Mills, Financial Statements 1996-2006, DSE, Dhaka.
Sonargaon Mills, Financial Statements 1996-2006, DSE, Dhaka.
Tallu Spinning Mills, Financial Statements 1996-2006, DSE, Dhaka.
S. C. Kuchhal (1993), Financial Management An Analytical and Conceptual
Approach, Chaitanya Publishing House, Allahabad,
M.H.B. Abd El-Motaal, Working Capital: Its role in the short-run Liquidity Policy of
Industrial Concerns, Accounting Research, Vol.IX, 1958, p.266
Chowdhury, A. and Amin, M. M. (2007) Working Capital Management Practiced
In Pharmaceutical Companies Listed In Dhaka Stock Exchange, BRAC University
Journal, Vol. IV, No. 2, 2007, pp. 75-86
A Case Study of GSTRC: Working Capital Analysis, Working Capital
Management, Ch-05, p. 1-51 retrieved from
www.google.com/search/working_capital_management.pdf on 12 July, 2012: 5pm.
Working Capital Management, Ch-14, p. 145-153, retrieved from
www.google.com/search/working_capital_management.pdf on 12 July, 2012: 5pm.
John Walkenbach (2010) Excel 2010 Formulas, Wiley Publishing, Inc., Indianapolis,
Indiana.
http://en.wikipedia.org/wiki/working_capital_management/, 12 July, 2012 5.15pm
http://en.wikipedia.org/wiki/textile_industry_in_Bangladesh/, 14 July 2012, 4.00pm
http://www.banglapedia.com/search/textile_industry_in_Bangladesh, 14 July 2012

47