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Journal of Management Research and Analysis


NEGATIVE WORKING CAPITAL – SIGN OF MANAGERIAL EFFICIENCY OR POSSIBLE BANKRUPTCY (A CASE STUDY OF HINDUSTAN UNILIVER LIMITED)


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Author Details: Ashok Kumar Panigrahi, Suman Kalyan Chaudhury

Volume : 2

Issue : 1

Online ISSN : 2394-2770

Print ISSN : 2394-2762

Article First Page : 35

Article End Page : 42


Abstract

Out of the total BSE 200 companies, 23 have negative working capital — their current liabilities or

payables are higher than current assets or receivables. This essentially means the companies do not have to deploy their own capital or borrow from banks to carry out their routine business activities. It is actually very good to have negative working capital because this entitles companies to earn relatively better returns on capital and equity. This also shows the operational efficiency of a company. But just this would not be enough. The companies should also have good fundamentals. Such companies are preferred by investors as they reward shareholders relatively better. The BSE 200 companies have an average returns on capital and shareholders’ funds at about 20 per cent, which is far less than the 32-35 per cent returns generated by companies with negative working capital. More important, the top ten companies with negative working capital have a dividend payout ratio of 62 per cent, which is far greater than the average 26 per cent of the BSE 200 companies.
All the studies on working capital generally states that for the improvement in profitability we should
manage our working capital effectively and most of the studies recommended to have good amount of working capital in the organization. All the researches on this topic conclude that the companies should avoid underinvestment in working capital if they want higher profit margins. With negative working capital there can be a danger of insolvency but it is not true forever. If the company is having a good image in the market and good relation with their creditors it can get the benefit from the negative working capital also. Hence, the question arises that having negative working capital is good for an organization or not and if a company is earning profit continuously with having negative working capital, can we say that it is a sign of managerial efficiency or there might be the chances of possible bankruptcy of the company? Keeping these views in mind, this research article explains the conceptual background of the negative working capital and how it affects profitability of the corporate. Leading FMCG Company Hindustan Uniliver Limited is taken as a case, to analyze the negative working capital and its impact on the profitability and earning capacity of the firms. Finally, it is found that the company’s profitability is more as compared to its peers and shareholders are getting more dividend and capital appreciation, which maximizes the shareholders’ value in the long run. 

Key Words: Working Capital, Profitability, Liquidity, Bankruptcy, Working Capital Cycle.