International Journal of Agricultural

Science and Research (IJASR)

ISSN(P): 2250-0057; ISSN(E): 2321-0087
Vol. 6, Issue 1, Feb 2016, 177-182
TJPRC Pvt. Ltd.

FINANCIAL PERFORMANCE OF COCONUT OIL MILLS

IN WESTERN TAMIL NADU - RATIO ANALYSIS
N.DEEPA, M.MALARKODI & A.ROHINI
Assistant Professors, Department of Agricultural and Rural Management,
Tamil Nadu Agricultural University, Tamil Nadu, India
ABSTRACT
Ratio analysis was used to predict the financial performance of coconut oil mills in Western Tamil Nadu. The
study sample consisted of 40 coconut oil mills in Western Tamil Nadu and the data collected for five-year period from
2009-10 to 2013-14. The study analyzed the coconut oil mills financial statements with an objective to assess financial
performance of coconut oil mills. Oil mills were maintaining above standard level of liquidity ratios. Oil mills in inefficient
category had higher debt over its investments, which indicated the financial risk in future. Asset management was good in
efficient category. Oil mills were receiving 13.6 per cent of return for their investment as a whole. Regression results
revealed that working capital, total asset and efficiency of coconut oil mills significantly influenced the profit after tax

KEYWORDS: Coconut Oil Mills, Financial Performance, Liquidity, Leverage, Turn Over, Profitability, Ratio Analysis

Received: Jan 11, 2016; Accepted: Jan 19, 2016; Published: Jan 27, 2016; Paper Id.: IJASRFEB201626

INTRODUCTION

Original Article

(PAT).

Ratio analysis was used to evaluate various aspects of a companys operating and financial performance
such as its liquidity, solvency, profitability and activity. The trend of these ratios was studied to check whether they
were improving or deteriorating over time. Ratios were also compared across different companies in the same sector
to see how they stack up, and to get an idea of comparative valuations. Ratio analysis was considered as a
cornerstone of fundamental analysis. The balance sheet and profit and loss account of coconut oil mills for the
period of five years (from 2009-10 to 2013-14) were collected in order to perform the ratio analysis and to study the
financial performance.

MATERIALS AND METHODS

The sampling design, data collection and analytical frameworks are outlined in this section.
Sampling Design and Data Collection
The list of coconut oil mill was collected from Coconut Oil Mill Association and District Industries Centre
(DIC) for Western Zone (Tiruppur and Coimbatore) of Tamil Nadu. The list comprised of 126 coconut oil mills in
Tiruppur and 15 oil mills in Coimbatore districts. From that list, 40 coconut oil mills were selected by simple
random sampling method.
Five year period from 2009-10 to 2013-14 was considered for evaluating the financial performance and
efficiency of coconut oil mills in Western Tamil Nadu. The entire study profoundly relied on the interview schedule

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N.Deepa, M.Malarkodi & A.Rohini

(financial management practices) and secondary data (balance sheet, income statement and cash flow statement) from the
annual reports of the coconut oil mills.

RESULTS AND DISCUSSIONS

Classification of Coconut Oil Mills
Based on the Overall Working Capital Management Efficiency Index (EI
classified as efficient and inefficient category. Oil mills having EI

WCM

WCM),

more than one (EI

the coconut oil mills were

WCM

> 1) were classified as

efficient category and less than one (EI WCM < 1) were under inefficient category. The results are presented in Table 1.
Table 1: Classification of Coconut Oil Mills
S.No.
1
2

Category
Numbers
Percentage
Efficient Category
28
70
Inefficient Category
12
30
Overall
40
100
t stat = 7.627118; p = 2.08E-08 < 0.01

EI WCM
2.51
0.76
1.63

Among the 40 coconut oil mills, majority (70 per cent) of them belonged to efficient category, while the next were
in inefficient category (30 per cent). The results of unequal variance t-test (two sample) revealed that there was a
significant difference between efficient and inefficient category oil mills.
Financial Performance of the Coconut Oil Mills
Liquidity Ratio of Selected Coconut Oil Mills
Data on current assets and current liabilities were collected from the balance sheet of the coconut oil mills and the
results are furnished efficient (E) and inefficient category (IE) in Table 2.
Table 2: Liquidirtty Ratio of Selected Coconut Oil Mills
Ratios
Current Ratio
Absolute
liquid ratio

E
3.79

IE
2.76

E
2.73

IE
4.65

E
2.51

IE
2.25

E
1.93

IE
3.35

E
2.01

IE
4.03

Category
Average
E
IE
2.59
3.41

0.80

1.03

0.90

0.98

0.80

0.66

0.48

0.65

0.52

0.74

0.70

2009-10

2010-11

2011-12

2012-13

2013-14

0.81

The current ratio of efficient and inefficient category oil mills were 2.59 and 3.41 respectively. Oil mills in both
the category exceeds the thumb rule of 2:1. The average absolute liquid ratio of efficient category was found to be 0.70,
which was slightly more than the standard level of 0.5:1. The ratio was 0.81 in inefficient category. Analysis revealed that
both category oil mills were maintaining above standard level.
Hence, it is suggested that the oil mills should go for short-term investments especially oil mills in inefficient
category to bring down their liquid assets to the required level.
Long-Term Financial Position of Coconut Oil Mills
The analysis of long-term financial position of the company is also known as the test of solvency. Leverage ratios
are used to test the solvency position of the company. Long-term financial position of coconut oil mills are presented in
Table 3.

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Financial Performance of Coconut Oil Mills in Western Tamil Nadu - Ratio Analysis

179

Table 3: Leverage Ratios of Coconut Oil Mills

Ratios
Debt Equity
Ratio
Proprietor ratio
Networth ratio
Current Asset
to Proprietor's
Fund

2009-10

2010-11

2011-12

2012-13

2013-14

Category
Average
E
IE

IE

IE

IE

IE

IE

3.89

3.99

3.31

4.44

3.76

4.06

2.27

3.82

2.40

3.79

3.12

4.02

0.28
2.36

0.19
2.17

0.34
1.64

0.23
1.69

0.34
1.37

0.33
1.27

0.41
1.19

0.39
0.69

0.36
0.67

0.22
0.83

0.34
1.44

0.27
1.33

2.74

2.18

2.59

2.74

2.19

3.25

1.99

3.03

2.40

3.08

2.38

2.86

Debt equity ratio indicated the relationship between the external equities or the outsiders funds to the internal
equities or shareholders funds. The debt-equity ratio of both the categories exceeded the thumb rule of 2:1. It indicated
that the coconut oil mills had more of debt finance rather than equity capital. The average debt-equity ratio of efficient
category oil mills was 3.12 and inefficient category oil mills were 4.02, which showed higher debt equity ratio and
revealed the risky financial position.
It is suggested from the proprietor ratio that coconut oil mills should improve their capital structure in such a way
that the proportion of shareholders contribution should be more rather than debt capital which inturn would improve the
financial position of the industry.
Networth ratio gives the relationship between fixed assets and shareholders fund, which measures the solvency of
a company. The ratio indicated the extent to which the owners' fund was frozen in the form of fixed assets, such as plant
and equipment, and the extent to which these funds were available for the company's operations i.e. for working capital.
Higher ratio (more than one) of coconut oil industry indicated that the owners funds were not sufficient to finance the
fixed assets and the coconut oil mills depended more on outsiders to finance the fixed assets.
Ratio of current assets to shareholders fund indicated that oil mills in both the category depended more on
outsiders fund (debt capital) rather than owners fund (equity capital) to invest in their current assets.
In summary, oil mills in efficient category were able to meet its long-term obligations associated with its longterm borrowings.
Turn Over Ratios or Activity Ratios
Turnover ratio was also referred as activity ratio or asset management ratio. This helps in measuring how
efficiently the firm employs the assets. The better the management of assets, the larger is the amount of sales and the
profits. They indicated the speed with which the assets were converted into sales.
Turn Over Ratios of Coconut Oil Mills
Voulgaris et al. (2000) defined total assets turnover as the ratio that expressed the number of times the firm
generated sales by utilizing their assets.
Fixed asset turnover ratio indicated that the efficiency of oil mills in efficient category to generate sales by
utilizing its fixed assets.
Total asset turnover ratio of efficient category was 2.69 followed by inefficient category (1.88). As compared to

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N.Deepa, M.Malarkodi & A.Rohini

average total asset turnover ratio, efficient category had the highest value, which indicated that the total assets were used to
generate the sales equivalent to three times of its value in a year.
Table 4: Turn Over Ratios of Coconut Oil Mills
2009-10

Ratios
Fixed asset
turnover ratio
Total asset
turnover

2010-11

2011-12

2012-13

Category
Average
E
IE

2013-14

IE

IE

IE

IE

IE

3.90

3.89

4.49

4.58

9.71

8.26

13.08

6.23

15.52

10.99

9.34

6.79

1.81

1.46

2.42

1.84

2.82

1.95

3.00

2.18

3.42

1.98

2.69

1.88

In summary, turnover ratios (fixed and total asset) of efficient category were comparatively better than the
inefficient category. It indicated that the asset management was good in efficient category. Hence, it is suggested that the
oil mills in inefficient category have to improve their turnover ratios by investing their excess funds rather than keeping it
as idle.
Ali et al. (2011) conducted a comprehensive study about banks profitability in Pakistan, where they found
significant relation between asset management ratio, capital and economic growth with Return on Assets (ROA). The
operating efficiency, asset management and economic growth were significant with the Return on Equity (ROE).
Analysis of Profitability Ratio
Overall efficiency of the business is assessed through profitability ratios. Generally, profitability ratios are
calculated either in relation to sales or in relation to investment. The results are presented in Table 5.
Table 5: Profitability Ratio of Coconut Oil Mills
2009-10

Ratios
Net Profit
Ratio
Return on
Investment

2010-11

2011-12

2012-13

Category
Average
E
IE

2013-14

IE

IE

IE

IE

IE

0.041

0.025

0.048

0.030

0.053

0.030

0.059

0.035

0.051

0.032

0.050

0.030

0.074

0.037

0.116

0.055

0.149

0.059

0.177

0.076

0.174

0.063

0.136

0.057

Net Profit ratio establishes the relationship between the net profit after tax and sales. This indicates the efficiency
of the management in manufacturing, selling, administrative and other activities of the firm. The net profit ratio of efficient
category was 0.05, followed by inefficient category (0.03). As compared to annual average net profit ratio, efficient
category had the highest value, which indicated that the overall efficiency was good.
The return on investment of efficient category was 0.136, which indicated that those oil mills were receiving 13.6
per cent of return for their investment as a whole. About 5.7 per cent return on investment was noticed in inefficient
category, which was lesser than the annual average of all mills.
Effect of Working Capital, Total Assets and Efficiency on Profit after Tax (Pat) of Coconut oil Mills
The effect of working capital, efficiency and total assets on profit after tax of coconut oil mills was analyzed using
multiple regression analysis. Panel data for five years (2009-10 to 2013-14) was used for analysis. The results are
presented in Table 6.

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Financial Performance of Coconut Oil Mills in Western Tamil Nadu - Ratio Analysis

181

It is inferred from the R square value that 51.7 per cent of the variations in profit after tax was explained by the
independent variables included in the model. Among the three independent variables, working capital, total asset and
efficiency of coconut oil mills significantly influenced the profit after tax at 0.01 level.
Table 6: Effect of Working Capital, Total Assets and Efficiency on
Profit after Tax (PAT) of Coconut Oil Mills
Variables
(Constant)
WC
TA
Efficiency
R Square : 0.517;

Unstandardized Coefficients
B
2.923

Std. Error
1.698

Sig.

1.721

.008

.080**
.041**

.015
.008

5.357
4.794

.000
.000

1.002**

0.479

2.090

.000

Dependent Variable: Profit After Tax

** Regression is significant at the 0.01 level;

n=200

Efficiency had the greatest effect on profit after tax, one rupee increase in efficiency, holding total assets and
working capital constant resulted in 1.002 rupees0 increase in profit after tax. Effective utilization of financial resources
would reduce the cost of capital, which in turn would improve the profit after tax. Whereas one rupee increase in working
capital, holding efficiency and total assets constant, resulted in 0.080 rupee increase in profit after tax. Proper utilization of
working capital would reduce the dependence of debt capital, which in turn would improve the capital structure of the
coconut oil mills and maximize the profit in the long-run. Total assets had comparatively less effect on profit after tax, one
rupee increase in total assets holding working capital and efficiency constant, resulted in 0.041 rupee increase in profit after
tax. Increase in total assets would reduce the total cost and would improve the profit after tax. Deloof (2003) proved that
the way working capital managed had a significant effect on the overall performance of businesses.

CONCLUSIONS
It is concluded that both category oil mills were maintaining above standard level of liquidity ratios. Oil mills in
inefficient category had higher debt over its investments, which indicated the financial risk in future. Asset management
was good in efficient category. Hence, it is suggested that the oil mills in inefficient category have to improve their
turnover ratios by investing their excess funds rather than keeping it as idle. The return on investment of efficient category
was 0.136, which indicated that those oil mills were receiving 13.6 per cent of return for their investment as a whole.
Working capital, total asset and efficiency of coconut oil mills significantly influenced the profit after tax.
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Impact Factor (JCC): 4.7987

NAAS Rating: 3.53