The sector-wise mean values and standard deviation of different variables in the model during the period 1998 to 2007 are presented in the Table 7.1. Manufacturing firms on average has 52 days of Cash Conversion Cycle and 78 days of Net Trade Cycle with standard deviation of 141 and 101 days respectively. The firms have an Average Collection Period of 39 days, Inventory Turnover in Days of 78 days and Average Payment Period of 64 days. The sample firms have on average about 50% of the total assets in current form and sales growth of almost 17% annually while on average 62% of the assets are financed with debt. The higher financial debt ratio of average 62% is attributed to two major sectors having on average highest debt financing which include Textile and Sugar sectors where the debt financing is on average 75% and 72% respectively. The performance measure used in the analysis is Net Operating Profitability of the firms, which is on average 14% with a standard deviation of 0.12.
Table 7.1
Descriptive Statistics of Variables for different Manufacturing Sectors
Variables
The sample firms belong to different sectors and each sector has its own characteristics and policies, therefore, overall manufacturing sector has relatively high standard deviation for almost all the variables. The standard deviation is the highest for Energy sector for almost all the variables. This deviation for the energy sector might be explained as it consists of the firms from Oil & Gas sector, with a good performance in terms of working capital management and power sector firms rated as worst performers.
The individual components of working capital management including average collection period, inventory turnover in days and average payment period are also reflected in figure 7.1. The figure shows that the energy sector firms grant their customers 92 days for payment which is the longest period while the minimum time to collect money from account receivables is given for the firms in sugar sector.
Inventory turnover in days indicate that inventory is stored for the longest time period for synthetic & leather sector and also relatively higher for automobile & engineering, chemical pharmaceutical & fertilizer and food Vanaspati and PC product sectors.
These sectors were also among the laggard sectors in terms of inventory conversion period in the previous chapter. ITID also indicates that inventory is stored for the shortest time period in case of energy sector because this sector does not manufacture any item but most of the firms are trading concerns. This is again in confirmation with the result of inventory conversion period for the energy sector which was top in raking in previous chapter. In case of average payment period, it is the highest for the cement sector and relatively higher for the energy sector. It implies that Energy sector is taking more time to collect amount from receivables and therefore paying late to the suppliers. Average payment period is lowest in case of sugar & allied sector because sugar mills have to purchase the sugarcane for their whole year requirement at one time during the season of sugarcane and have to make quick payments to the sugarcane growers. ACP, ITID and APP are almost same for the paper & tobacco sector.
Figure 7.1
Comparative Working Capital Measures for different manufacturing sectors
0 20 40 60 80 100 120 140
Auto & Engineering Cement & Cermaics Chemical Pharma. & Fertilizer Energy Food Vanaspati & PC Product Paper & Tobacco Sugar & Allied Synthetic Jute & Leather Textile Sectlr
Sectors
No. of days
ACP ITID APP
The three components discussed above, jointly form Cash Conversion Cycle (CCC) and Net Trade Cycle (NTC) which are shown in Figure 7.2. Both CCC and NTC almost depict similar type of pattern for different sectors. Cash Conversion Cycle and Net Trade Cycle is the highest in case of Automobile & Engineering sector where CCC is on average 109 days and NTC is 118 days. CCC and NTC are also on higher side for chemical Pharmaceutical & Fertilizer and for Synthetic Jute & Leather sectors. Cash Conversion Cycle is at its minimum level for Cement and energy sectors. Oil and Gas sector in the energy sector and Cement sector are also among the leading sectors based on working capital management performance in the previous chapter.
Figure 7.2
Comparative CCC and NTC for Different M anufacturing Sectors
Auotmobile & Engineering Cement & Ceramics Chem.Pharma. &Fert. Energy Food Van & PC Product Paper & Tobacco Sugr & Allied Synthetic Jute & Leather Textile Sector
Sectors
No. of Days
CCC NTC
Mean values of Current Assets to Total Assets Ratio (CATAR), Current Liabilities to Total Assets Ratio (CLTAR) and Financial Debt Ratio (FDR) are shown in figure 7.3.
It reflects that the highest CATAR is for the Automobile & Engineering sector (0.65).
The Cement, Textile and Sugar sectors have the lowest ratio of (0.33), (0.38) and (0.38) respectively. Other sectors have around (0.50) ratio of current assets to total assets. The higher CATAR ratio indicates a lower degree of aggressiveness in working capital investment policy. Current Liabilities to Total Assets Ratio (CLTAR) is highest for Synthetic Jute & Leather sector, followed by the Textile, Sugar and Automobile sectors. The higher ratio of current liabilities to total assets ratio indicates the higher degree of aggressiveness in working capital financing policy. Textile and Sugar sectors have their CLTAR higher than CATAR therefore; both sectors have negative net working capital. Financial Debt Ratio (FDR) shows that the Textile and Sugar sectors have the highest debt utilization i.e. 75% and 72% respectively. Textile and Sugar sectors also have the negative working capital and used major portion of long term debt. These two sectors are also among the laggard sectors in terms of profitability. It implies that higher debt utilization results in lowering profitability of firms in these sectors.
Figure 7.3
Comparative CATAR, CLTAR and FDR for Different Manufacturing Sectors
0.000.10 0.20 0.30 0.40 0.50 0.600.70 0.80
Auotmobile & Engineering Cement & Ceramics Chem. Pharma. & Fertilizer Energy Food Vanaspati & PC Product Paper & Tobacco Sugr & Allied Synthetic Jute & Leather Textile Sector
Sectors
Ratio CATAR
CLTAR FDR
Figure 7.4 shows the Current Ratio (CR) and Gross Working Capital Turnover Ratio (GWCTR) for all nine groups of sectors. Paper & Tobacco has the highest CR followed by the energy sector whereas; Textile sector has the lowest CR which is less than one. CR for all other sectors ranges between 1.22 to 1.66 times. The GWCTR is highest for the Textile and Sugar sectors while it is lowest for the Synthetic Jute &
Leather sector. This ratio tells us that how effectively a firm manages its current assets to generate sales. The mean values for the size measured in terms of natural logarithm of sales in table 7.1 are highest for the Energy and Automobile &
Engineering sectors while lowest for Textile, Tobacco and Sugar sector. Similarly sales growth is highest for the Automobile & Engineering sector followed by Cement sector while lowest for chemical and Sugar sectors.
Figure 7.4 that the Food Vanaspati & Personal care product and Paper & Tobacco sectors have the highest profitability while the Sugar, Synthetic & Leather and Textile sectors are laggard in terms of profitability. The Sugar and Textile sectors were also among the laggard sectors in terms of net working capital and with higher debt utilization and
Auto & Engineering Cement & Cermaics Chemical Pharma. & Fertilizer Energy Food Vanaspati & PC Product Paper & Tobacco Sugar & Allied Synthetic Jute & Leather Textile Sector
Sector
NOP (%)
NOP
The above descriptive analysis summarizes that most of the results are in accordance with the working capital management performance analysis in the previous chapter. It shows that Sugar and Textile sectors are facing both liquidity and profitability problems with higher debt ratio, lower Current Ratio and also deficient in terms of
profitability. Inventory Turnover in Days is the lowest for the energy sector and this sector is also top in ranking with regards to inventory conversion period in previous chapter because this sector does not manufacture items but most of the firms are trading concerns. Energy sector is taking more time to collect amount from receivables and paying late to the suppliers. Average Payment Period is at maximum for the Cement sector and the lowest for Sugar & Allied sector. Cash Conversion Cycle and Net Trade Cycle almost depict similar pattern for different sectors. Cash Conversion Cycle and Net Trade Cycle is the highest for Automobile & Engineering sector. Engineering sector is also among the laggard sectors with reference to CCC and NTC in previous chapter.