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International Journal of Accounting and Financial Management Research (IJAFMR) ISSN 2249-6882 Vol. 3, Issue 3, Aug 2013, 1-12 © TJPRC Pvt. Ltd.

A STUDY ON FINANCIAL DISTRESS AND FIRM’S PERFORMANCE WITH REFERENCE TO TEXTILE INDUSTRIES IN TIRUPUR DIST A. JOHN WILLIAM & S. NAGAMANI Assistant Professor, Department of Management Studies, Karpagam College of Engineering, Coimbatore, Tamil Nadu, India

ABSTRACT This study is about “financial distress and firm performance” finance is the soul of whole organizations Financial distress is a loose term referring to various adverse situations a business or person faces. In the corporate setting, financial distress invariably translates into near-insolvency, bankruptcy, emergency-scenario borrowings and turnaround work. Simply put, a business facing financial distress generally faces a cash crunch, cannot repay -- or is having a hard time repaying -- its debts. A situation where a firm’s operating cash flows are not sufficient to satisfy current obligations and the firm is forced to take corrective action. Financial distress may lead a firm to default on a contract, and it may involve financial restructuring between the firm, its creditors, and its equity investors.

KEYWORDS: Financial Distress, Financial Performance, Bankruptcy, Debtor Creditor Relation INTRODUCTION Indian Textile sector grew by more than 5% in the last two fiscal years and is projected to grow at 16% by 2012.Being the second largest employer of Indians after agriculture, it currently employs 88 million people and is expected to generate another 17 million jobs by 2012. The gross value is the third largest of textile to both USA and Europe and exports grow by 24% in last fiscal year. They are likely to grow by 25% in the next 5 years increasing the Indian Textile Industry’s share in world textile market from 3% to 7%. Growth Opportunities Exist in Following Areas 

Medical textiles

Construction textiles

Packaging textiles

Home textiles( with fire-retarded fabric) The 11th five year plan (2007-2012) Table 1 S. No 1 2 3 4

Capabilities Growth rate (over the last fiscal year) Employment Gross value Export

2005-2006

2006-2007 (Estimated)

By 2012 (Projected)

8.2%

Above 8%

16%

88 million $9309.8 million $17.85 billion 19.24 billion Rs. 64,478 crores 5 Investment Rs. 1,50,600 crores. (Between 2004-2007) 6 Share in world market 3% Figures are provided by the ministry of Textiles, Govt. of India

105 million $115 billion $55 billion

7%


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Table 2: Textile Industry – Overview Item

Unit

2007-08

2008-09

2010-11

2011-12

(2012-13 Apr- Aug.)

1,673

1757

1761

1762

180

183

196

199

1,853

1940

1957

1961

183

174

173

173

1,247 5.05

1,260 5.18

1333 5.2

1336 3.12

2009-10

Spinning Mills No. 1,597 1,653 (Non-SSI) Composite Mills No. 176 177 (Non-SSI) Total No. 1,773 1,830 Exclusive Weaving No. 179 184 Mills (Non-SSI) Spinning Mills (SSI) No. No. 1,219 Powerloom Units Lakh No. 4.69 4.94 Figures are provided by the ministry of Textiles, Govt. of India

FINANCIAL STATEMENTS The financial statements of an enterprise present the summarized data of its assets, liabilities, and equity in the balance sheet and its revenues and expenditure in the income statement. The primary use of the financial statement is to evaluate past performance and predict future performance analysis and both of these are facilitated by comparison. The Following are the Main Objective of the Financial Performance Analysis 

Estimate the earning capacity of the firm.

To determine the debt capacity of the firm.

To decide about the future prospect of the concern. Thus financial performance analysis is the starting point for making before using any sophisticated and planning

procedures. It forms the very basic of any decision making.

REVIEW OF LITERATURE 

Virambhai (2010) textile industry productivity and financial efficiency focused on industry’s current position and its performance. It concluded the company/management should try to increase the production, minimize the cost and operating expenses, exercise proper control on liquidity position, reduction of power, fuel, borrowing funds, overheads, interest burden, etc.

Shruti Jhawar (2009) prescribed the Indian textile industry mission, vision, history of textile industry in addition; it discussed the case study of textile industry performance evaluation etc.

Rakesh and Kulkarni (2012) analyzed the Gujarat textile industry working capital evaluation on selected five company for the eleven years and performed ratio analysis, descriptive statistics etc. The study concluded with all the company financial performance with sound effective as well as current and quick ratio, current asset on total asset, sales, turnover etc. are analyzed with the help of hypothesis and used ANOVA. In this research also researcher followed this attributes.

Ohlson (1980) used the Logit model and showed that size, financial structure(Total Liabilities to Total Assets), performance and current liquidity were best determinants of bankruptcy.

Zmijewski’s (1984) first applied the probit model to the firm failure prediction problem.

Nam, Kim, Park and Lee (2008) developed a duration model with time varying covariates and a baseline hazard


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function incorporating macroeconomic variables.

RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problems. According to Clifford woody, “research comprises defining and redefining problems, formulating hypothesis, or suggested solution, collecting, organizing and evaluating data, making deduction and researching conclusion, and at last carefully testing the conclusion to determine whether they fit to formulating hypothesis”.

STATEMENT OF THE PROBLEM Finance is one of the major element in the overall growth of economy. Finance is the life blood of economy activity a well-knit financial system directly contributes to the growth of the economy. Financial distress is a loose term referring to various adverse situations a business or person faces. In the corporate setting, financial distress invariably translates into near-insolvency, bankruptcy, emergency-scenario borrowings and turnaround work. The firm’s are facing financial distress because of inefficient management of working capital and resources. Financial distress is the big problem for the firms which will be resulted in reduction of firm’s profitability.

OBJECTIVES OF THE STUDY 

To study the firm’s Financial Distress.

To study the Debtors – Creditors relationship.

To study the Non Performing Asset.

To study the Financial Performance of the company.

RESEARCH DESIGN Data Description For this study, financial information for the period 2007–2012 was collected from sunrise textiles, Tirupur Data Collection Secondary data (annual report of the company)

STATISTICAL TOOLS USED 

Ratio analysis

Altman z score

Ratio Analysis Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting “Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication”. Classifications of Ratios Generally ratios are used for the purpose of assessing profitability, activity or operating efficiency and financial position of a concern. Based on the purpose the ratios are classified as


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Financial Ratios or Solvency Ratios

Turnover Ratios

Profitability Ratios

FINANCIAL OR SOLVENCY RATIOS Solvency or financial ratios include all ratios which express financial position of the concern. Financial ratios are calculated on the basis of items of the Balance Sheet. Therefore, they are also called as Balance Sheet ratios. The term financial position generally refers to short term and long term solvency of the business concern. The significant financial ratios are classified as short term and long term solvency ratios. They are as follows: 

Short Term Solvency Ratio 

Current ratio

Liquid ratio

Cash position ratio

Long Term Solvency Ratio 

Debt equity ratio

Proprietary ratio

Capital gearing ratio

TURNOVER RATIO 

Debtors turnover ratio

Creditors turnover ratio

Fixed asset turnover ratio

Capital turnover ratio

PROFITABILITY RATIOS 

Gross profit ratio

Operating profit ratio

Expenses ratio

Net profit ratio

Altman Z Score The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and


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balance sheet values to measure the financial health of a company.

SCOPE OF THE STUDY 

It helps to increase the profitability of the firm.

Established financial, cost and management accounting practices.

Helps to take strengthen strategic decision making.

Helps to identify long term profitability path way.

LIMITATIONS OF THE STUDY 

Since the study is based on the secondary data, the reliability of data is subject to window dressing.

The tools used for analysis are subject to its inherent limitations.

The study is confined to a short period of five years.

ANALYSIS AND INTERPRETATION Current Ratio This ratio explains the relationship between current assets and current liabilities of a business. According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio. Current Ratio = Current assets Current liabilities Table 3: Showing Current Ratio Years Current Assets Current Liabilities 2007-2008 44.40 1.09 2008-2009 81.02 52.38 2009-2010 13.41 1.30 2010-2011 6.9 1.22 2011-2012 20.86 2.56 Source: Annual reports (2007 – 2012)

Ratio 40.7 1.5 10.3 5.6 8.1

The year 2007-2008 resulted in highest ratio. The year 2010, 2011, 2012 having higher current asset then the current liabilities. The year 2009 witnessed a fall due to increase in current liability. The average rate maintained by the firm was 13.24.

QUICK RATIO Quick Ratio

=

Quick asset Current liabilities Table 4: Showing Quick Ratio Years Quick Assets Current Liabilities 2007-2008 44.40 1.09 2008-2009 81.02 52.38 2009-2010 11.6 1.30 2010-2011 6.75 1.22 2011-2012 11.19 2.56 Source: Annual reports (2007 – 2012)

Ratio 40.7 1.5 8.9 5.5 4.3


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The year 2007-08 recorded the highest of 40.7, because the current liability were reduced. The year 2009-10, 2010-11 witnessed a fall due to low sundry debtors. The average rate maintained by the firm was 12.18.

CASH RATIO This ratio is also called Super Quick Ratio. This is a variance of quick ratio. This ratio is calculated when liquidity is highly restricted in terms of cash and cash equivalents. This ratio measures liquidity in terms of cash and near cash items and short term current liabilities. An ideal cash position ratio is 0.75:1. Cash Ratio =

Cash and Bank Balances Current Liabilities Table 5: Showing Cash Ratio Years Cash and Bank Current Liabilities 2007-2008 3.64 1.09 2008-2009 7.59 53.38 2009-2010 7.63 1.30 2010-2011 1.22 1.22 2011-2012 0.34 2.56 Source: Annual Reports (2007 – 2012)

Ratio 3.3 0.14 5.8 1 0.13

The year 2009-2010 saw the highest rate of 5.8, because the cash and bank balance were high. The year 2011 both cash and bank balance and current liabilities were equal. The year 2009 and 2012 witnessed a fall due to increase in current liabilities. The average cash rate maintained by the firm was 2.07.

FIXED ASSET TO NETWORTH RATIO Fixed Asset to Net worth Ratio=

Fixed asset Net worth

Table 6: Fixed Asset to Net worth Ratio Years Fixed Assets Networth 2007-2008 2.42 30.79 2008-2009 3.03 31.73 2009-2010 42.36 37.65 2010-2011 42.7 39.43 2011-2012 42.95 40.52 Source: Annual Reports (2007 – 2012)

Ratio 0.08 0.1 1.13 1.08 1.06

The ratios are more then 100% on 2010, 2011 and 2012. For other years it falls because of decreases in fixed asset. The average fixed asset to net worth ratio maintained by the firm was 0.7.

DEBT EQUITY RATI Debt Equity Ratio=

Long term Loans Shareholder’s Funds or Net Worth Table 7: Debt Equity Ratio Years Long Term Loans Networth 2007-2008 45.79 30.79 2008-2009 31.73 31.73 2009-2010 58.58 37.65 2010-2011 60.29 39.43 2011-2012 74.2 40.52 Source: Annual Reports (2007 – 2012)

Ratio 1.49 1 1.58 1.53 1.83


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The year 2012 shows the highest value where the long term debt is larger than the shareholders fund. the year 2009 saw a equal ratio, which means the long term debt is equal to the shareholders fund. the average debt equity ratio maintained by the firm was 1.49.

PROPRIETARY RATIO Proprietary Ratio =

Proprietors Fund Total Assets Table 8: Prosperity Ratio Years Share Holders Funds Total Asset 2007-2008 30.79 45.79 2008-2009 31.73 31.73 2009-2010 37.65 59.58 2010-2011 39.43 60.29 2011-2012 40.52 74.2 Source: Annual Reports (2007 – 2012)

Ratio 0.67 1 0.63 0.65 0.54

The year 2008 and 2011 shows the highest proprietary ratio. In the year 2009 proprietors fund and total asset were equal. The year 2010 and 2012 shows a falling trend because increases in total asset value. The average proprietary ratio maintained by the firm was 0.70.

DEBTORS TURNOVER RATIO Debtor Turnover Ratio =

Net Credit Sales Debtors Table 9: Debtors Turnover Ratio Years Net Credit Sales Debtors 2007-2008 17.34 25.13 2008-2009 20.45 42.36 2009-2010 2010-2011 2011-2012 3.436 2.82 Source: Annual Reports (2007 – 2012)

Ratio 0.69 0.48 1.22

The year 2012 was the highest level in debtors turnover ratio this is due to decreases in debtors. The year 2007 and 2009 shows a decreasing trend, this is due to increases in credit sales. The average rate maintained by the firm was 0.478.

WORKING CAPITAL TURNOVER RATIO Working Capital Turnover Ratio =

Sales Working Capital

Table 10: Working Capital Turnover Ratio Years Sales Working Capital 2007-2008 43.36 43.31 2008-2009 51.12 28.64 2009-2010 73.25 12.11 2010-2011 9.58 5.68 2011-2012 8.59 18.3 Source: Annual Reports (2007 – 2012)

Ratio 1 1.78 6.04 1.68 0.46


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The highest working capital turnover happened in the year 2010. The year 2009 and 2011 saw a slight fall in working capital because of decreases in sales. The average working capital turnover ratio maintained by the firm was 2.19.

NET PROFIT RATIO Net Profit Ratio = Net Profit after Tax *100 Sales Table 11: Working Capital Turnover Ratio Years Net Profit Sales Ratio 2007-2008 1.08 43.36 2.5 2008-2009 1.04 51.12 2.03 2009-2010 2.47 73.25 3.3 2010-2011 1.27 9.58 13.2 2011-2012 1.21 8.59 14 Source: Annual Reports (2007 – 2012) The year 2012 shows the highest rate. The year 2008, 2009, 2010 shows a slight fall in net profit ratio. The year 2011 its get increased because of decrease in sales. The average rate maintained by the firm was 7.

OPERATING PROFIT RATIO Operating Profit Ratio =

Operating Profit

*100

Sales Table 12: Working Capital Turnover Ratio Years Operating Profit Sales 2007-2008 2.19 43.36 2008-2009 1.28 51.12 2009-2010 6.19 73.25 2010-2011 1.57 9.58 2011-2012 0.57 8.59 Source: Annual Reports (2007 – 2012)

Ratio 5 2.5 8.4 16.3 6.6

The year 2011 shows the highest operating profit rate. The year 2008, 2009 and 2012 witnessed the lowest rate, the fall is because of operating profit decreases. The average operating profit ratio maintained by the firm was 7.76.

RETURN ON INVESTMENT Return On Investment = Net Profit before Interest and Tax

*100

Capital Employed Table 13: Working Capital Turnover Ratio Net Profit Before Capital Interest AND Tax Employed 2007-2008 2.21 45.79 2008-2009 1.28 31.73 2009-2010 6.51 59.58 2010-2011 1.58 60.29 2011-2012 1.56 74.2 Source: Annual Reports (2007 – 2012) Years

Ratio 4.82 4 11 3 2

The year 2010 has the highest return on investment. The year 2009, 2011 and 2012 shows the lowest rate the fall is because of decreases in net profit. The average return on investment maintained by the firm was 4.96.


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ALTMAN Z SCORE The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company. Z' = 0.717T1 + 0.847T2 + 3.107T3 + 0.420T4 + 0.998T5 T1 = (Current Assets − Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities T5 = Sales/ Total Assets Zones of Discrimination Z' > 2.9 -“Safe” Zone 1.23 < Z' < 2. 9 -“Grey” Zone Z' < 1.23 -“Distress” Zone

2008 Z’ = (0.717*0.95) + (.847*0.02)+ (3.107*0.05)+ ( 0.42*0.3)+ (0.998*0.9) = 1.9 2009 Z’ = (0.717*0.9) + (.847*0.03)+ (3.107*0.04)+ ( 0.42*0.4)+ (0.998*1.6) = 2.6 2010 Z’ = (0.717*0.2) + (.847*0.044)+ (3.107*0.1)+ ( 0.42*0.3)+ (0.998*1.2) = 1.81 2011 Z’ = (0.717*0.1) + (.847*0.02)+ (3.107*0.02)+ ( 0.42*0.3)+ (0.998*0.1) = 0.4 2012 Z’ = (0.717*0.25) + (.847*0.01)+ (3.107*0.02)+ ( 0.42*0.2)+ (0.998*0.1) = 0.4 The year 2008, 2009 and 2010 was in Grey Zone because Z’ is more than 1.23 and less than 2.9. The year 2011 and 2012 was in Distress Zone Z’ is less than 1.23 because of decreases In sales level. Findings Based on the data complied from published annual reports of sunrise textiles, the following important findings were derived from study.


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Current ratio of the company is showing a increasing trend. It shows a good liquid position, as the standard ratio is 2:1 and the company’s average current ratio is 13.24.

Universally accepted standard quick ratio is 1:1, but the company’s average ratio is 12.18 which is above the standard ratio.

The cash position ratio of the company is satisfactory because the standard ratio is 0.5:1, but the company’s average ratio is 2.07.

Debt equity ratio of the company is showing an increasing trend. It shows a good long term solvency position, as standard ratio is only 1:1 the company average ratio is 1.49.

From the calculations of the proprietary ratio is more than its standard ratio of 0.5, which means there is a no risk for company creditors.

Net profit ratio calculations show increasing operational efficiency of the company.

The working capital ratio is in fluctuated stage.

The fixed asset turnover ratio shows a decreasing trend. It shows that the management is not successfully utilizing fixed asset.

Fixed asset net worth ratio shows increasing trend in the fixed asset.

Altman z score shows that last two years(2011-2012) the company in distress zone. Comparing last two years with previous three years(2008,2009 & 2010) the company concentrated on productivity so, the produced more and sales were high. In last two years the company invested more in fixed asset and sales were reduced so the company was in distress zone.

SUGGESTIONS 

The working capital is in fluctuated stage. So, the firm should utilize working capital in efficient manner.

The main cause for increase in Non Performing Asset are Diversion of Funds – most of the funds are diverted for unnecessary expansion and diversion of business.

Internal Reasons - internal reasons like inefficient management, labour problem, marketing failure resulting in poor performance of the company.

External Reasons - recession in the economy, price rise, infrastructural problems.

To reduce NPA the firm have to overcome these cause to decrease NPA and increase their profitability.

Productivity is an average measure of the efficiency of production. The management should concentrate on its productivity to increase its profit margin.

The firm is facing distress due to low level of sales. If the firm utilize its all resources in efficient manner the productivity and sales will increase automatically the profitability of the firm will increase.

CONCLUSIONS The study reveals the financial distress and firm performance of the company from the past five years starting from 2007-08.The study will enable the company to plan for future and will act as a basis for research work on financial


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distress to be done in future.From this study, it is concluded that the firm facing distress because of increase in fixed asset and decrease in sales margin.“The higher the firm’s leverage, the higher its probability of financial distress” I conclude that the company’s overall financial performance was good, by reducing NPA , diversion of fund and effective utilization of resources the firm can overcome distress and raise its profitability to get a bright future.

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Dr.S.N. Maheshwari, Principles of Management Accounting,1998 Second Edition, Sultan Chand and Sons Publications.

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Hrishikes Bhattachaya, Working Capital Management, 2nd Edition, PHI learning private limited, New Delhi.

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Shruti Jhawar (2009), Recommending possible solutions to revive the Indian Textile

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of Management Studies and research, Mumbai. 10. Rakesh Kumar Manjhi and Kulkarni, S.R, (2012), Working Capital Structure and Liquidity Analysis: An empirical research on Gujarat Textiles Manufacturing Industry, Indian Journal of Finance, Vol-6 (8), pg: 25-35. 11. G.Vijayalashmi, Research Methods, 2008 MJP Publishers, Chennai. 12. Ohlson, J. A. (1980), "Financial ratios and the probabilistic prediction of bankruptcy", Journal of Accounting Research, 18, pp. 109-131. 13. Zmijewski, M. E. (1984), "Methodological issues related to the estimation of financial distress prediction models", Journal of Accounting Research, 22, pp. 59-86 14. Nam, C.W., T.S. Kim, N.J. Park and H.K. Lee (2008),“Bankruptcy prediction using a Discrete-Time Duration Model Incoprorating Temporal and Macroeconomic dependencies”, Journal of Forecasting, 27, pp. 493-506. 12. Published annual report of the company.


1 a study on financal distress full  

This study is about “financial distress and firm performance” finance is the soul of whole organizations Financial distress is a loose term...