Working

Capital Management

Case: Sun Microsystems, Inc.1987 (A)

Sun Consolidated Statement of Income

Sun
Consolidated
Balance Sheet

Sun
Statement of
Changes in
Financial
PosiHon

Actual and PotenHal WorkstaHon Manufacturers

in 1987

Sun and Apollo Chronology

Sun Financial History

Sun Financial History

Apollo Financial History

Apollo Financial History

Sun and Apollo Stock Price

3/4/86 5/29/87

Q1-93
Q2-93
Q3-93
Q4-93
Average
Q1-94
Q2-94
Q3-94
Q4-94
Aevareg
Q1-95
Q2-95
Q3-95
Q4-95
Average
Q1-96
Q2-96
Q3-96
Q4-96
Average

DSI
40
44
47
55
47
55
41
33
33
41
32
35
35
32
34
34
36
37
31
35

DSO
54
51
52
54
53
58
53
53
50
54
53
49
50
47
50
47
50
49
42
47

DPO
46
55
51
53
51
56
43
45
42
47
45
44
46
44
45
42
43
43
33
40

CCC
48
40
48
56
48
57
51
41
41
48
40
40
39
35
39
39
43
43
40
41

DSI (Days Sales of Inventor) = Net Inventory / (Quarterly COGS/90)

DSO (Days Sales Outstanding) = Net Accounts Receivables / (Quarterly Sales/90)
DPO (Days Payables Outstanding) = Accounts Payables / (Quarterly COGS/90)
CCC = DSI + DSO - DPO

NegaHve Working Capital

Managerial
eciency

Can buy the

company at free
of cost

More control on
the customer
Sellers strength

ExcepHon free
cash ow prole

Factors Determining Working Capital

Nature of the
Industry

Demand of
Industry

Cash
requirements

Nature of the
Business

Manufacturing
Hme

Volume of
Sales

Terms of
Purchase and
Sales

Inventory
Turnover

Business
Turnover

Business Cycle

Current Assets
requirements

ProducHon
Cycle

Credit control

InaHon or
Price level
changes

Prot planning
and control

Cash reserves

OperaHon
eciency

Change in
Technology

Firms nance
and dividend
policy

Repayment
ability

Agtude
towards Risk

Financial RaHos
14-Mar 13-Mar 12-Mar 11-Mar 10-Mar 9-Mar
Debt-Equity Ratio
1.41 1.23 1.02 0.97 0.95 0.67
Long Term Debt-Equity Ratio
0.94 0.83 0.84 0.93 0.95 0.67
Current Ratio
0.72 0.77 0.87 1.08 1.27 1.22
Fixed Assets Turnove
1.54 2.21 2.51 2.46 1.95 2.09
Inventory Turnover
7.08 6.76
6.4 6.44 5.41 5.31
Debtors Turnover
8.03 10.53 11.85 11.34 8.12 10.17
Interest Cover Ratio
-0.34 1.47
3.7 5.24 6.35 2.3
PBIDTM (%)
2.05
6.7 9.14 10.15 10.59 8.07
PBITM (%)
-1.4 3.97 6.66 7.99 8.05 5.44
PBDTM (%)
-2.1
4 7.35 8.63 9.32 5.7
CPM (%)
-0.99
3.9 6.47 7.25 7.81 5.43
APATM (%)
-4.45 1.17 3.99 5.09 5.27 2.8
ROCE (%)
-1.96
8.1 16.62 19.99 14.92 10.46
RONW (%)
-15.1 5.38 20.37 25.29 19.06 8.97

8-Mar
0.38
0.35
1.2
3.31
7.97
20.34
9.36
9.76
7.82
8.92
7.07
5.13
26.08
23.48

7-Mar
0.41
0.36
1.34
3.6
8.59
17.9
21.96
9.25
7.47
8.91
6.98
5.21
27.77
27.07

6-Mar
0.62
0.62
1.5
3.02
8.39
13.97
12.13
10.03
7.99
9.37
7.35
5.3
24.18
25.86

5-Mar
0.64
0.64
1.54
2.55
9.09
11.31
12.68
10.12
7.89
9.5
7.79
5.55
22.04
25.02

Key RaHos
Debt-Equity Ratio
Long Term Debt-Equity Ratio
Current Ratio
Turnover Ratios
Fixed Assets
Inventory
Debtors
Interest Cover Ratio
PBIDTM ( %)
PBITM ( %)
PBDTM ( %)
CPM ( %)
APATM ( %)
ROCE ( %)
RONW ( %)

13-Mar 12-Mar 11-Mar 10-Mar 9-Mar 8-Mar

0.5
0.55
0.64
0.78 0.78 0.67
0.42
0.46
0.59
0.78 0.78 0.66
0.65
0.85
1.13
1.11
2.3 2.88
1.36
8.37
49.76
5.18
26.83
22.95
22.4
15.84
11.96
11.41
9.43

1.6
8.4
55.73
6.12
34.95
31.84
29.75
21.21
18.1
14.53
13.51

1.41
9.07
74.29
6.63
39.68
36.09
34.24
25.11
21.52
16.14
16.36

1.26
8.16
49.98
4.42
34.58
30.53
27.67
20.57
16.53
13.57
14.19

1.47
8.82
45.52
5.91
36.43
32.8
30.88
23
19.38
17.23
21.88

1.37
8.99
37.77
8.61
39.79
36.03
35.61
24.88
21.12
23.27
25.97

Working Capital Analysis

NegaHve Working Capital

Liquidity Ratios (times)

Cash to current liabilities

Quick ratio
Current ratio
Current ratio (incl. mktbl. securites)
Debt to equity ratio
Interest cover

Airtel

Mar 2004
Mar 2005
Mar 2006
Mar 2007
Mar 2008
Mar 2009
Mar 2008 Mar 2009
0.80
1.39
1.54
1.69
1.54
1.39
0.04
0.13
1.39
2.12
2.05
2.22
1.98
1.84
0.39
0.46
1.79
2.47
2.49
2.69
2.48
2.44
0.54
0.63
1.79
2.47
2.49
2.69
2.48
2.44
0.65
0.74
0.12
0.11
0.08
0.04
0.01
0.04
0.32
0.28
58.68
252.85
8.42
10.18
5.16
1.60
34.40
39.53

Structure of current assets (%)

Inventories
9.11
Sundry debtors (outstanding less than six months) 15.46
Sundry debtors (outstanding over six months)
0.00
Bills receivable
0.00
Acccured income, lease rent & other receivables 17.11
Expenses paid in advance
7.88
Deposits
5.55
Sale of investments & other receivables
0.00
Cash & bank balance
44.90
Net w orking capital

11372.82

6.08
9.34
0.00
0.00
11.33
8.12
0.00
8.71
56.41

5.97
4.05
2.94
0.00
10.97
8.77
0.00
5.52
61.79

4.54
2.48
2.90
0.00
10.28
9.83
0.00
7.19
62.77

5.32
1.95
3.18
0.00
6.87
11.69
0.00
8.83
62.17

7.16
1.56
2.31
0.00
6.71
14.94
0.00
10.32
56.99

0.76
34.53
2.38
0.00
30.91
23.52
0.00
1.30
6.69

0.59
23.10
0.97
0.00
26.71
26.45
0.00
0.93
21.25

23114.96

29606.73

37468.01

38878.57

39439.52

-6482.01

-6148.58
59

Key RaHos
Debt-Equity Ratio
Long Term Debt-Equity Ratio
Current Ratio
Turnover Ratios
Fixed Assets Ratio
Inventory Ratio
Debtors Ratio
Interest Cover Ratio
PBIDTM (%)
PBITM (%)
PBDTM (%)
CPM (%)
APATM (%)
ROCE (%)
RONW (%)

2013 2012
2011
2010 2009 2008 2007 2006 2005 2004
2.45
2.1
2.01
2.03
1.77
1.69
1.64
1.5
1.47
1.46
2.26
1.92
1.88
1.96
1.72
1.62
1.58
1.44
1.44
1.46
0.52
0.73
0.78
0.69
0.69
0.59
0.5
0.57
0.81
1.28
0.18
25.71
8.7
3.23
90.39
64.12
70.52
59.46
33.19
9.03
17.03

0.18
24.72
7.78
3.37
89.66
64.35
70.54
57.33
32.02
8.77
14.51

0.18
23.08
5.04
3.35
91.19
64.97
71.81
58.37
32.15
9.22
14.38

0.17
22.18
3.97
2.7
86.28
58.5
64.62
56.41
28.63
8.88
13.17

0.15
20.84
4.6
2.36
87.26
68.03
58.39
48.94
29.71
9.76
11.82

0.14
21.34
5.8
2.43
91.41
70.5
62.38
55.65
34.74
9.82
12.99

0.13
19.7
8.8
2.3
96.28
73.05
64.52
57.48
34.25
9.5
11.77

0.13
17.26
8.1
2.23
90.95
67.29
60.83
55.74
32.08
8.95
10.65

0.12
0.12
13.19 12.66
5.37
2.12
2.11
1.72
94.16 102.15
68.6 75.35
61.7 58.36
56.81 59.86
31.26 33.06
8.01
8.55
8.99
9.23

Investment V aluation Ratios

Face V alue
Dividend Per Share
Operating Profit Per Share ( Rs)
Net Operating Profit Per Share ( Rs)
Free Reserves Per Share ( Rs)
Bonus i n Equity Capital
Profitability Ratios
Operating Profit Margin(%)
Profit Before Interest A nd Tax Margin(%)
Gross Profit Margin(%)
Cash Profit Margin(%)
Adjusted Cash Margin(%)
Net Profit Margin(%)
Adjusted N et Profit Margin(%)
Return On Capital Employed(%)
Return On N et Worth(%)
Adjusted Return on N et Worth(%)
Return on A ssets Excluding Revaluations
Return on A ssets Including Revaluations
Return on Long Term Funds(%)
Liquidity A nd Solvency Ratios
Current Ratio
Quick Ratio
Debt Equity Ratio
Long Term Debt Equity Ratio
Debt Coverage Ratios
Interest Cover
Total Debt to Owners Fund
Financial Charges Coverage Ratio
Financial Charges Coverage Ratio Post Tax
Management Efficiency Ratios
Inventory Turnover Ratio
Debtors Turnover Ratio
Investments Turnover Ratio
Fixed A ssets Turnover Ratio
Total A ssets Turnover Ratio
Asset Turnover Ratio
Average Raw Material Holding
Average Finished Goods Held
Number of Days In Working Capital
Profit & Loss A ccount Ratios
Material Cost Composition
Imported Composition of Raw Materials Consumed
Selling Distribution Cost Composition
Expenses as Composition of Total Sales
Cash Flow Indicator Ratios
Dividend Payout Ratio N et Profit
Dividend Payout Ratio Cash Profit
Earning Retention Ratio
Cash Earning Retention Ratio
AdjustedCash Flow Times
Earnings Per Share
Book V alue

Mar ' 14

Mar ' 13

Mar ' 12

Mar ' 11

Mar ' 10

1
13
20.69
129.56
--
60.89

1
18.5
18.51
119.36
--
60.89

1
7.5
15.23
102.32
--
60.92

1
6.5
12.4
91.39
--
60.98

1
6.5
12.82
81.45
10.7
60.36

15.97
14.71
15.04
13.61
13.61
13.5
13.5
147.56
118.01
111.03
15.15
15.15
147.56

15.51
14.26
14.59
12.96
12.96
14.37
14.37
163.59
141.98
119.23
12.37
12.37
163.59

14.88
13.72
13.89
12.46
12.46
12.01
12.01
95.4
76.61
73.23
16.25
16.25
95.4

13.57
12.28
12.45
11.59
11.59
11.52
11.52
102.66
86.7
78.93
12.32
12.32
102.66

15.74
14.59
14.7
12.76
12.76
12.29
12.29
106.78
85.25
81.4
11.84
11.84
106.78

0.74
0.44
--
--

0.76
0.45
--
--

0.83
0.46
--
--

0.86
0.46
--
--

0.84
0.46
--
--

134.21
--
141.45
115.57

173.94
--
183.33
161.35

2,702.74
--
2,878.75
2,347.49

11,376.83
--
12,296.96
10,529.42

395.13
--
421.5
342.84

10.2
33.96
10.2
6.77
8.61
9.42

10.21
34.13
10.21
6.73
9.78
8.34

8.79
27.27
8.79
6.26
6.35
7.17

7.02
24.34
7.02
5.65
7.52
7.53

8.99
29.24
8.99
5.35
7.66
7.01

--
--
-36.35

--
--
-38.69

--
--
-25.37

--
--
-24.09

51.08
32.05
-22.62

52.18
8.07
--
1.95

52.82
10.59
--
2.53

52.9
12.53
--
2.24

53.28
19.13
--
7.23

50.67
18.61
18.35
7.31

72.69
68.1
22.74
27.91
--

105.35
99.18
-25.45
-16.81
--

60.22
55.7
37
41.92
--

61.17
55.82
32.81
39.2
--

64.39
59.42
32.57
38
--

17.88
15.15

17.56
12.37

12.45
16.25

10.68
12.32

10.09
11.84

Mar ' 14
Investment V aluation Ratios
Face V alue
Dividend Per Share
Operating Profit Per Share ( Rs)
Net Operating Profit Per Share ( Rs)
Free Reserves Per Share ( Rs)
Bonus i n Equity Capital
Profitability Ratios
Operating Profit Margin(%)
Profit Before Interest A nd Tax Margin(%)
Gross Profit Margin(%)
Cash Profit Margin(%)
Adjusted Cash Margin(%)
Net Profit Margin(%)
Adjusted N et Profit Margin(%)
Return On Capital Employed(%)
Return On N et Worth(%)
Adjusted Return on N et Worth(%)
Return on A ssets Excluding Revaluations
Return on A ssets Including Revaluations
Return on Long Term Funds(%)
Liquidity A nd Solvency Ratios
Current Ratio
Quick Ratio
Debt Equity Ratio
Long Term Debt Equity Ratio
Debt Coverage Ratios
Interest Cover
Total Debt to Owners Fund
Financial Charges Coverage Ratio
Financial Charges Coverage Ratio Post Tax
Management Efficiency Ratios
Inventory Turnover Ratio
Debtors Turnover Ratio
Investments Turnover Ratio
Fixed A ssets Turnover Ratio
Total A ssets Turnover Ratio
Asset Turnover Ratio
Average Raw Material Holding
Average Finished Goods Held
Number of Days In Working Capital
Profit & Loss A ccount Ratios
Material Cost Composition
Imported Composition of Raw Materials Consumed
Selling Distribution Cost Composition
Expenses as Composition of Total Sales
Cash Flow Indicator Ratios
Dividend Payout Ratio N et Profit
Dividend Payout Ratio Cash Profit
Earning Retention Ratio
Cash Earning Retention Ratio
AdjustedCash Flow Times
Earnings Per Share
Book V alue

Mar ' 13

10
50
141.89
696.33

Mar ' 11

Mar ' 10

89.45

89.45

10
45
129.11
674.46
198.77
89.45

20.37
18.82
19.48
16.41
16.41
15.55
15.55
47.92
33.75
33.75
332.04
332.04
47.92

18.17
16.69
17.35
15.42
15.42
14.63
14.63
53.51
38.51
38.51
273.08
273.08
53.51

19.14
18.06
18.39
15.33
15.33
15.11
15.11
64.24
49.72
47.99
208.77
208.77
64.24

19.78
18.57
19.03
15.71
15.71
19.8
19.8
67.57
68.01
51.42
169.69
169.69
69.67

21.19
19.78
20.03
16.2
16.2
14.23
14.23
59.01
58.14
61.53
202.4
202.4
59.19

0.8
0.67
0.01
0.01

0.88
0.74
0.01
0.01

0.88
0.72
0.02
0.02

0.8
0.71
0.07
0.03

0.69
0.55
0.46
0.45

9,454.16
0.01
9,820.71
6,986.57

7,901.43
0.01
8,205.07
5,940.89

177.33
0.02
183.98
142.72

2,093.39
0.07
2,167.34
2,051.12

421.06
0.46
443.88
308.56

31.5
25.31
31.5
4.94
2.08
2.12

31.43
33.59
31.43
5.22
2.51
2.83

30.97
49.66
30.97
5.75
3.19
3.43

32.8
51.77
32.8
4.85
3.14
3.46

28.87
37.41
28.87
3.5
2.77
3.07

-23.69

-11.9

5.97
9.44
-10.29

5.58
9.18
-26.24

7.91
9.13
-41.29

70.91
4.25

73.81
4.64

72.72
4.06
2.71
27.74

69.3
3.59
3.23
27.67

34.65
33.4
54.17
56.33
0.12
115.42
169.69

33.98
31.46
67.89
70.15
0.69
117.69
202.4

--

10
45
125.63
691.07

Mar ' 12

--

--
--

--
--

39.52

32.83

74.7
4.4
1.38
33.95

44.6
42.26
55.4
57.74
0.02
112.08
332.04

42.78
40.59
57.22
59.41
0.02
105.18
273.08

43.34
41.31
55.1
57.27
0.03
103.81
208.77

--

--

10
40
112.47
568.54
158.97
89.45

10
40
173.02
816.49
190.09
78.91

NegaHve
WC

ACC

Castrol
India

Colgate-
Palm.

Dabur India

Glaxo.
Pharma

Hero Honda
Motor

ITC

Nestle India

..

Low Cost
CompeHtors
Shorter Product Life
Cycles
Greater Product
SegmentaHon
CompeHng for Capital
in Global Markets

Greater
Need for
WC

WC Financing Policies

Matching

Aggressive policy =
highest return = greatest
risk

Conserva6ve policy =
least risk = lowest return

Aggressive

Conserva1ve

Ongoing
Liquidity

Inow and Ou<low of Cash

Liquidity
ProtecHve
Liquidity

Ability to Adjust Rapidly to unforeseen

Cash Demands

Level ProducHon
Eliminates overHme wage
costs

Savings in direct labour

Can postpone the need for

addiHonal investments in
xed assets

Avoid overloading or Under

loading of producHon
facility

Financing an o-season
inventory build-up (may
exceed available short term
sources)

Liquidity risk

Fad risk (risk of

redundancy)
Price risk of inventory

As a banker will you be

willing to increase the line
of credit to nance the level
produc6on?

Protability vs. liquidity

- Write o of 10% of peak

inventory would wipe out
projected savings

Commigng funds to
inventory in an amount will
greatly exceed the rms
equity

Inventory build up prior to

selling season

Peak bank borrowings

under level producHon plan
far exceeds the present
credit lines

Produce equal amounts

each month to meet annual
sales forecast

Cash ouolows during year

with liple cash inow

Seasonal
ProducHon
OverHme premiums -
reduced prots

Seasonal expansion and

contracHon of work force
Recruitment diculHes
Training costs
Quality control costs

Higher Direct Costs

Sub contracHng

Approaches full capacity

under seasonal producHon

Making Seasonal
ProducHon
EecHve>>

Receivables be sold or
assigned as collateral for a
bank loan (loan demanded
may be almost equal to or
higher than receivables)

Sales terms be changed to

induce quick collecHon
from customers (Should
provide limited benet as
receivable growth lags the
inventory peak)

Demand long term credit

from suppliers (sHll may not
be possible beyond 90
days)

Machinery was idle ~9

months
Subject to heavy use there
arer

Accelerated producHon
schedules frequent set
up changes in the
machinery

Current assets expand and

shrinks

Successive absorpHon and

release of cash

Backlog Orders

Seasonal nancing
requirements

Bulge in receivables during

collecHon lag arer the
peak sales

Seasonal producHon holds

projected bank borrowings
comfortable within the
open line of bank credit

Raw materials purchased

shortly before sales occur

Lower inventories

Idle plant, laid-o workers

in slow season

ProducHon boplenecks in
busy season

Structure and Flow of Working Capital