A Project Report on

EVALUATING FINANCIALS OF NHPC LTD THROUGH RATIO ANALYSIS

As a partial fulfillment for the award of MBA Degree

Submitted by:
Sudhir Thakur Roll No. 09MB07

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DECLARATION

I Sudhir Thakur hereby declare that this project is the record of authentic work carried out by me during the academic year 20102011 and has not been submitted to any other University or Institute towards the award of any degree.

Signature of the student

(Sudhir Thakur)

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Acknowledgement
The spirit of summer internship program lies in not merely doing the project but to get a firsthand experience of the industry and to prepare ourselves for tomorrows managerial needs. I wish to express my appreciation and thanks to all those with whom I have had the opportunity to work and whose thoughts and insights have helped me in furthering my knowledge and understanding of the subject. My sincere gratitude goes to my Project guide Mr. Manish Dhawan, without whose valued guidance, encouragement and inspiration the completion of this project would ever have been possible. I am also indebted to all the employees of NHPC for giving me valuable information during my project. It is my privilege to express my deep sense of gratitude towards my guide Mr. Manish Dhawan. I am also thankful to Mr. Sanjay Kumar (H.R Officer) for their kind cooperation in imparting summer training.

Sudhir Thakur

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Table of contents
Topics Page number

Executive Summary Introduction About NHPC Financial Ratio Analysis Data Analysis Findings and Conclusion Bibliography Appendix

5 7 15 28 67 80 86 87

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Executive Summary
India is the emerging giants of the world economy and international energy markets. Energy developments in India are transforming the global energy system by dint of their sheer size and their growing weight in international fossil-fuel trade. India is increasingly exposed to changes in world energy markets. The staggering pace of Indian economic growth in the past few years, outstripping that of all other major countries, has pushed up sharply their energy needs, a growing share of which has to be imported. The momentum of economic development looks set to keep their energy demand growing strongly. As they become richer, the citizen of India start using more energy to run their offices and factories and buying more electrical appliances and cars. These developments are contributing to a big improvement in their quality of life, a legitimate aspiration that needs to be accommodated and supported by the rest of the world. The consequences for India, the OECD and the rest of the world of unfettered growth in global energy demand are, however, alarming. If governments around the world stick with current policies the underlying premise of our Reference Scenario the worlds energy needs would be well over 50% higher in 2030 than today. China and India together account for 45% of the increase in demand in this scenario. Globally, fossil fuels continue to dominate the fuel mix. These trends lead to continued growth in energy-related emissions of carbon-dioxide (CO2) and to increased reliance of consuming countries on imports of oil and gas much of them from the Middle East and Russia. Both developments would heighten concerns about climate change and energy security. The challenge for all countries is to put in motion a transition to a more secure, lower-carbon energy system, without undermining economic and social development. Nowhere will this challenge be tougher, or of greater importance to the rest of the world, than in China and India. Vigorous, immediate and collective policy action by all governments is essential to move the world onto a more sustainable energy path. There has so far been more talk than action in most countries. Were all the policies that governments around the world are considering today to be implemented, as we assume in an Alternative Policy Scenario, the worlds energy demand
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and related emissions would be reduced substantially. Measures to improve energy efficiency stand out as the cheapest and fastest way to curb demand and emissions growth in the near term. But even in this scenario, CO2 emissions are still one quarter 4 World Energy Outlook 2007 above current levels in 2030. To achieve a much bigger reduction in emissions would require immediate policy action and technological transformation on an unprecedented scale. Both the Reference and Alternative Policy Scenario projections are based on what some might consider conservative assumptions about economic growth in the two giants. They envisage a progressive and marked slow-down in the rate of growth of output over the projection period. In a High Growth Scenario, which assumes that Chinas and Indias economies grow on average 1.5 percentage points per year faster than in the Reference Scenario (though more slowly than of late), energy demand is 21% higher in 2030 in China and India combined. The global increase in energy demand amounts to 6%, making it all the more urgent for governments around the world to implement policies, such as those taken into account in the Alternative Policy Scenario, to curb the growth in fossil-energy demand and related emissions.

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INTRODUCTION

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Introduction
Financial Management represents analytical approach to Corporate Finance decision making with special focus on the basic finance theory and its implication in the financial decision making process and policies. A systematic approach for attaining effective management performance is Financial Planning and Budgeting which indicates companys growth, performance, investment and requirement of fund during a given period of time which involves preparation of projected Balance sheet, Fund Flow Statement and Profit and Loss account using the past years financial data which helps the company to regulate its Funds Flow and achieve the targeted yield of return. The scope of finance in any Government owned or Public Sector undertaking (PSU) also include Fund Management, Budgeting, Capital Structure, Risk & Return, Working Capital Management, Cost Control, Asset Management etc. Normally PSUs have huge investment in current assets and hence working capital management assumes greater importance. Incidentally NHPC has got well established policies and practices of managing working capital.

Objective of the Study

This study is aimed at: To gain the overall idea about the organization.

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To gain a first hand knowledge about the structure and the functioning of the Finance department and the Return on Investment policy. To have an effective exposure of the actual working situation of NHPC, Nagwain To gain and enhance different managerial skills. To study the rules and practices implemented at NHPC, depending on the local environment and circumstances. To see the applicability and usability of theory which have been taught to us during the first year of the course. To find out the financial performance of the organization. To study the importance of finance in business. To study the future requirements of finance in business. To study the investment decisions based on the return. Depending on the studies as stated above suggest some new innovative ideas which may beneficial to the organization.

Methodology
The information was collected from various sources which are listed below: From the official documents. From records and manuals of different departments of the organization. From a close observation of the functioning of various departments of the organization. Last but not the least, knowledge, both negative and positive precipitated through informal discussions with the employees of different departments.

Research Methodology
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Plan of the Study A proper and systematic approach is essential in any project work. Proper planning should be done for conducting the data collection, completion and presentation of the project. Each and every step must be so planned that it leads to the next step automatically. This systematic approach is a blend of planning and organization and major emphasis is given to interdependence of various steps. Research Purpose The purpose of the research was to determine the various financial ratios by analyzing the various financial statements of NHPC and to do a detailed analysis of these various ratios so as to determine the various trends being followed by NHPC.

Scope and Limitations

Research Boundaries This study is based on the consolidated data of the organization.

Limitation of the study The time was a big constraint as the two months was a short span of time. As the respondents are on high designations, reaching them was hectic task.

Classification of Data
The data used for this study is Primary data and Secondary data. Primary data

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This includes the information collected mainly from the office. This has served as primary source of data for his study. Secondary data This includes the information gathered from various websites.

Sample size The sample size selected is of five years. Sampling Technique The sampling procedure employed for this project is judgmental sampling, a convenience sampling technique inwhich elements are based on the judgment of researcher. Statistical Analysis Information collected was classified and tabulated for further analysis. Calculations were done for the interpretation of the data e.g. Discount factor, Averages, etc. The report is covered with various data and tables on which the project has been carried out. Software tools used for the data analysis The software tool used for data analysis is MS WORD & MS EXCEL.

Limitation of the Study

The limitations faced during the summer course are: It was not possible to study various aspect of the organization in detail. Employees were apprehensive of secrecy of data and therefore hesitated in disclosing all the data regarding some of the points concerning to this study.

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As this is a general study, hypothesis could not be drawn. Some executives could not afford time because of their busy schedule.

Industry Analysis
Power is one of the most important factors for the growth of an economy, in particular, for a developing country like India where higher and improved standard of living depends upon the availability of adequate and reliable power at an affordable price. Unlike other commodities, the dynamics of supply and demand does not apply to power, as it cannot be stored. Public sector has taken a lead in power generation in India with the State and Union Governments generating about 52.50% and 34% of total installed capacity respectively. The participation of the private sector, which generates about 13.50% of power, has been increasing since the liberalization of the economy in 1991. As on 31st March, 2009, the total installed capacity of power in India was 1,47,965.41 MW out of which share of Thermal, Hydro and Nuclear was 93,725.24 MW (64.6%), 36,877.76 MW (24.7%) and 4,120 MW (2.9%), respectively and 13,242.41 MW (7.7%) was from Renewable energy sources. Hydro power is considered as clean power. However, during the last few years the share of hydro in the total installed capacity has gradually declined resulting in adverse hydro-thermal mix leading to many technical and operational abnormalities. Besides shortage of power (especially peak power) and adverse hydro-thermal mix, Indian Power scenario has been plagued with variety of problems over the years such as skewed tariff, poor and substandard distribution networks, high aggregate technical and commercial losses etc. Poor financial health of the SEBs has deterred private investors from making investments besides hindering the capacity of CPSUs to reinvest the profit earned out of sale of power generated.

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In the recent years, significant changes have been seen in power sector such as introduction of National Electricity Policy which envisages Power for all by 2012 and per capita availability of power to be increased to over 1000 units by 2011-12.

Hydro Scenario
India is blessed with immense amount of hydro-electric potential and ranks 5th in terms of exploitable hydro-potential on global scenario. As per assessment made by CEA, India is endowed with economically exploitable hydro-power potential to the tune of 1,48,700 MW of installed capacity. The basin wise assessed potential is as under:-

Basin/Rivers Indus Basin Ganga Basin Central Indian River system Western Flowing Rivers of southern India Eastern Flowing Rivers of southern India Brahmaputra Basin Total

Probable Installed Capacity (MW) 33,832 20,711 4,152 9,430 14,511 66,065 1,48,701

In addition, 56 number of pumped storage projects have also been identified with probable installed capacity of 94 000 MW. In addition to this, hydro-potential from small, mini & micro schemes has been estimated as 6,782 MW from 1,512 sites. Thus, in totality India is endowed with hydro-potential of about 2,50,000 MW. However, exploitation of hydro-potential has not been up to the desired level due to various constraints confronting the sector.

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In 1998, Government of India announced "Policy on Hydro Power Development" under which impetus is given to development of hydropower in the country. This was a welcome step towards effective utilization of our water resources in the direction of hydropower development. During October 2001, Central Electricity Authority (CEA) came out with a ranking study which prioritized and ranked the future executable projects. As per the study, 399 hydro schemes with an aggregate installed capacity of 1,06,910 MW were ranked in A,B & C categories depending upon their inter-se attractiveness. During May 2003, Govt. of India launched 50,000 MW hydro initiatives in which preparation of Pre Feasibility Reports of 162 Projects totaling to 50,000 MW was taken up by CEA through various agencies.

Hydro Potential
INDIA is endowed with economically exploitable and viable hydro potential assessed to be about 84,000 MW at 60% load factor (1,48,701 MW installed capacity). In addition, 6780 MW in terms of installed capacity from Small, Mini, and Micro Hydel schemes have been assessed. Also, 56 sites for pumped storage schemes with an aggregate installed capacity of 94,000 MW have been identified. However, only 19.9% of the potential has been harnessed so far.

Advantages of Hydro Power

A renewable source of energy - saves scarce fuel reserves. Non-polluting and hence environment friendly. Long life - The first hydro project completed in 1897 is still in operation at Darjeeling is still in operation. Cost of generation, operation and maintenance is lower than the other sources of energy.

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Ability to start and stop quickly and instantaneous load acceptance/rejection makes it suitable to meet peak demand and for enhancing system reliability and stability.

Has higher efficiency (over 90%) compared to thermal (35%) and gas (around 50%). Cost of generation is free from inflationary effects after the initial installation. Storage based hydro schemes often provide attendant benefits of irrigation, flood control, drinking water supply, navigation, recreation, tourism, pisciculture etc.

Being located in remote regions leads to development of interior backward areas (education, medical, road communication, telecommunication etc.)

ABOUT NHPC
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About NHPC
NHPC Limited (Formerly known as National Hydroelectric Power Corporation Ltd.), A Govt. of India Enterprise, was incorporated in the year 1975 with an authorized capital of Rs. 2000 million and with an objective to plan, promote and organize an integrated and efficient development of hydroelectric power in all aspects. Later on NHPC expanded its objects to include development of power in all its aspects through conventional and non-conventional sources in India and abroad. At present, NHPC is a Mini Ratna Category-I Enterprise of the Govt. of India with an authorized share capital of Rs. 1,50,000 Million . With an investment base of over Rs. 3,17,000 Million Approx., NHPC is among the TOP TEN companies in the country in terms of investment. Initially, on incorporation, NHPC took over the execution of Salal Stage-I, Bairasiul and Loktak Hydro-electric Projects from Central Hydroelectric Project Construction and Control Board. Since then, it has executed 13 projects with an installed capacity of 5175 MW on ownership basis including projects taken up in joint venture. NHPC has also executed 5 projects
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with an installed capacity of 89.35 MW on turnkey basis. Two of these projects have been commissioned in neighboring countries Nepal and Bhutan. Presently NHPC is engaged in the construction of 11 projects aggregating to a total installed capacity of 4622 MW. NHPC has added 1970 MW during the 10th Plan period and planned to add 5322 MW during 11th Plan period. 9 projects of 8481 MW are awaiting clearances/Govt. approval for their implementation. Detailed Projects report is being prepared for 7 projects of 5755 MW. Since its inception in 1975, NHPC has grown to become one of the largest organization in the field of hydro power development in the country. With its present capabilities, NHPC can undertake all activities from concept to commissioning of Hydroelectric Projects.

Corporate Vision of NHPC

A world Class, diversified & transnational organization for sustainable development of hydro power and water resources with strong environment conscience.

Corporate Mission
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To achieve international standards of excellence in all aspects of hydro power and diversified business.

To execute and operate projects in a cost effective environment friendly and socio economically responsive manner.

To foster competent, trained and multi-disciplinary human capital. To continually develop state of art technologies through innovative R& D and adopt best practices. To adopt the best practices of corporate governance and institutionalize value based management for a strong corporate identity. To maximize creation of wealth through generation of internal funds and effective management of resources.

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Power Stations (Projects Already Commissioned)

S No. 1 2 3 4 5 6 7 8 9 10 11

Project Baira Siul Loktak Salal Tanakpur Chamera - I Uri - I Rangit Chamera - II Indira Sagar

State Himachal Pradesh Manipur Jammu & Kashmir Uttarakhand Himachal Pradesh Jammu & Kashmir Sikkim Himachal Pradesh Madhya Pradesh

Total Capacity (MW) Year Of Commission 180 105 690 120 540 480 60 300 1000 280 390 1981 1983 1987 1992 1994 1997 1999 2004 2005 2005-06 2006-07

Dhauliganga - I Uttarakhand Dulhasti Jammu & Kashmir

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12 13

Omkareshwar Teesta - V TOTAL

Madhya Pradesh Sikkim

520 510 5175

2007 2008

Projects under Construction

11 projects having aggregate installed capacity of 4622 MW are under active construction. With the commissioning of these projects, NHPC would become a 9500 MW company likely by 2013.

S No. 1 2 3 4 5 6 7 8 9 10 11

Project Nimoo-Bazgo Chutak Kishanganga Sewa-II Uri-II Parbati-II Chamera-III Parbati-III Teesta Low Dam-III Teesta Low Dam-IV Subansiri Lower TOTAL

State Jammu & Kashmir Jammu & Kashmir Jammu & Kashmir Jammu & Kashmir Jammu & Kashmir Himachal Pradesh Himachal Pradesh Himachal Pradesh West Bengal West Bengal Arunachal Pradesh

Capacity 45 MW 44 MW 330 MW 120 MW 240 MW 800 MW 231 MW 520 MW 132 MW 160 MW 2000 MW 4622 MW

Projects under Government Clearance

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NHPC is actively pursuing clearances from Government of India for several hydro projects having aggregate capacity of 9631 MW. Out of these, seven projects with aggregate capacity of 5965 MW are planned to be implemented by NHPC on its own. Other projects are planned for implementation through Joint Venture route namely 66 MW Loktak Downstream with Govt. of Manipur, another three projects with aggregate capacity of about 2100 MW in Jammu & Kashmir with Govt. of Jammu & Kashmir and 1500 MW Tipaimukh Project in Manipur with SJVN Limited and Govt. of Manipur as partners.

S No. 1 2 3 4 5 6 7 8 9 10

Project Kotli Bhel-1A Kotli Bhel-1B Kotli Bhel-II Dibang Tawang-I Tawang-II Teesta-IV Loktak Downstream (JV)1 Pakal-Dul & Other Projects (JV)2 Tipaimukh (JV)3 TOTAL

State Uttarakhand Uttarakhand Uttarakhand Arunachal Pradesh Arunachal Pradesh Arunachal Pradesh Sikkim Manipur Jammu & Kashmir Manipur

Capacity 195 MW 320 MW 530 MW 3000 MW 600 MW 800 MW 520 MW 66 MW 2100 MW 1500 MW 9631 MW

Initial Public Offer (IPO)

The company launched its IPO (Initial Public Offer) in August, 2009 which was oversubscribed by almost 24 times. After successful conclusion of its IPO, NHPC became a listed company on both NSE & BSE w.e.f. 1st Sept 2009. The Company raised Rs 6038.55 crores through its IPO out of which Rs 4025.70 crores is available against sale proceeds of 10 percent fresh equity.

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NHPC Profile
Authorized Capital Value of Assets Paid Up Capital Projects Completed Projects Under Construction Projects Awaiting Clearances Projects Under Survey and Investigation Stage Joint Venture Projects Projects on Turnkey Basis Rs. 1,50,000 Million Rs. 3,17,000 Million Approx. Rs. 111,820 Million 31.03.2009 13 Nos. (5175 MW) 11 Nos. (4622 MW) 9 Nos. (8131 MW) 7 Nos. (5755 MW) 4 Nos. (3686 MW) 5 Nos. (89.35 MW)

Organization Structure

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SWOT Analysis of NHPC

A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

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The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection.

Strengths
The following are the primary competitive strengths of the company:

Established track record in implementing hydroelectric projects NHPC has a wide experience and expertise in project implementation which provides it

significant competitive advantages. At present the company has successfully managed the development and implementation of 13 hydroelectric projects, including two through its subsidiary, NHDC. It has a record of successfully completing projects that are located in geotechnically sensitive Himalayan terrain in inhospitable areas that are often difficult to access. The companys reputation as a successful and efficient project manager is a key advantage for securing projects. Long-term power purchase agreements with customers The company derives most of its revenues from sale of energy to SEBs / Power Departments and their successor entities, pursuant to long-term power purchase agreements. The allocation of power from different power stations to SEBs / Power Departments and their successor entities are done by the Ministry of Power, Government of India. The billings to state entities are currently secured through letters of credit pursuant to tripartite agreements entered into amongst the GoI, the RBI and respective State governments. In addition, the company can secure payment by regulating the power supply to the defaulting entity or recovery of payments can also be done directly through the GoI from the Central Plan Assistance of the concerned State Governments. At the time investment decisions made by the GOI on new projects, the company obtains the commitments from SEBs / Power Departments and their successor entities for purchase of power from the new projects.

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Strong operating performance The efficiency of the company is measured with reference to average capacity index /

plant availability factor (PAF) and generation targets achieved. The company extensively monitors and systematically renovates and modernizes its power stations, which increases the efficiency of the plants and equipment. These techniques offer the company competitive advantage in an industry where reliability and maintenance costs are a significant determinant of profitability. Competent and committed workforce The company has a competent and committed workforce. Its senior executives have extensive experience in the industry and many of them have been with the company for a significant portion of their careers. The skill, industry knowledge and operating experience of the senior executives of the company provide it with a significant competitive advantage as the company seeks to expand its existing markets and successfully enter new geographic areas. The company invests significant resources in employee training and development. In addition the uniform operational systems, processes and staff training procedures enable the company to replicate its high operating standards across all its projects and stations. Strong in-house design and engineering team The company has an in-house team for project design and its engineering capabilities range from the concept stage to the commissioning of the projects. This team is supported by international and domestic project consultants. The engineers of the company have specialized tunnel design experience and are able to design for variable and unpredictable geological conditions. The engineers have experience with a variety of specialized analysis, design and computer aided design (CAD) software applications and their innovative and fully-integrated approach brings a full complement of skills and knowledge to provide solutions to any given design problem.

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Opportunities
The deteriorating hydro-thermal mix, increase in peaking shortages, erratic frequency variations, problems in water management etc., has resulted in the policy makers turning their attention towards development of hydro power. Hydro power not only generates clean energy but also provides drinking water supply, irrigation, navigation, increased employment opportunities, industrial development and recreation facilities etc. to the region. The Government of India has made special emphasis for its development in the initiative for accelerated hydro power development. North Eastern India is blessed with huge untapped hydro potential of 58,971 MW and the development of hydro power is considered an excellent option to boost the economy for this underdeveloped part of the country.

Threats/ Risks / Weaknesses

The following are the Threats / Risks / Weaknesses in construction of Hydro power Projects: Environment & Forest clearances Stringent norms and cumbersome procedures for getting environment clearance, forest clearance and clearance from National Board for Wild Life (where ever applicable) leads to delay in obtaining clearance of projects, which may affect the capacity addition programme. Land Acquisition Most of the hydropower projects are located in hilly and difficult terrains which require large areas of land for infrastructure works as well as for projects components including submergence. The process of land acquisition is quite cumbersome and requires simplification of procedures. Geological Surprises

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Bulk of the balance hydro power potential is available in the Himalayan region. Geological surprises especially in underground works are common in this area which result in time and cost over-run. Inter-State River Disputes A number of Projects on rivers passing through different states have been held up due to Inter-State River disputes. Natural Calamities As Hydropower projects are located in hilly terrains, land slides, hill slope collapses and road blocks, flood and cloud burst cause severe set backs in construction schedules. Unexpected complexities The development of projects may be subject to unexpected complexities and delays, which may cause the actual costs of developing projects to differ significantly from estimates. Any change to CERCs tariff regulations may adversely affect cash flow and results of operations. Also the generation capacity may vary substantially because of variations in water flow due to climatic conditions, which may cause significant fluctuations in revenue and profits.

Risks & Concerns

As hydro power schemes are capital intensive and have long gestation period, availability of funds is always seen as one of the major constraint for exploitation of vast hydro power potential available in the Country. Water being the state subject, State Governments are demanding higher share of free power and other incentives, which lead to higher tariff.

Subsidiary Corporation

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Narmada Hydroelectric Development Corporation (NHDC) is a Joint Venture of NHPC and Government of Madhya Pradesh. NHDC has commissioned both 1000 MW Indira Sagar project and Omkareshwar HE Project (520 MW) and gives much needed power to the State. NHDC has changed its objects clause to include generation of power through conventional and non-conventional sources. NHDC has been allotted the construction of a thermal project in the state of Madhya Pradesh. The name of Narmada Hydroelectric Development Corporation Limited was changed to NHDC Limited on 24th June, 2009.

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Financial Ratio Analysis

Introduction
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Financial ratio analysis is a fascinating topic to study because it can teach us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy! Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In addition to ratio analysis being part of an accounting and business studies syllabus, it is a very useful thing to know anyway! The overall layout of this section is as follows: We will begin by asking the question, what do we want ratio analysis to tell us? Then, what will we try to do with it? This is the most important question, funnily enough! The answer to that question then means we need to make a list of all of the ratios we might use: we will list them and give the formula for each of them. Once we have discovered all of the ratios that we can use we need to know how to use them, who might use them and what for and how will it help them to answer the question we asked at the beginning? At this stage we will have an overall picture of what ratio analysis is, who uses it and the ratios they need to be able to use it. All that's left to do then is to use the ratios; and we will do that step- by-step, one by one.

Ratio Analysis
The term Ratio refers to the numerical and quantitative relationship between two items or variables. This relationship can be expressed as: o Percentages o Fractions
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o Proportion of numbers Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure to other relevant figure or figures. According to Myers , Ratio analysis of financial statements is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statements."

Advantages and Uses of Ratio Analysis

There are various groups of people who are interested in analysis of financial position of a company. They use the ratio analysis to work out a particular financial characteristic of the company in which they are interested. Ratio analysis helps the various groups in the following manner: o To workout the profitability: Accounting ratio help to measure the profitability of the business by calculating the various profitability ratios. It helps the management to know about the earning capacity of the business concern. In this way profitability ratios show the actual performance of the business. o To workout the solvency: With the help of solvency ratios, solvency of the company can be measured. These ratios show the relationship between the liabilities and assets. In case external liabilities are more than that of the assets of the company, it shows the unsound position of the business. In this case the business has to make it possible to repay its loans. o Helpful in analysis of financial statement: Ratio analysis help the outsiders just like creditors, shareholders, debenture-holders, bankers to know about the profitability and ability of the company to pay them interest and dividend etc. o Helpful in comparative analysis of the performance: With the help of ratio analysis a company may have comparative study of its performance to the previous
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years. In this way company comes to know about its weak point and be able to improve them. o To simplify the accounting information: Accounting ratios are very useful as they briefly summarize the result of detailed and complicated computations.

o To workout the operating efficiency: Ratio analysis helps to workout the operating efficiency of the company with the help of various turnover ratios. All turnover ratios are worked out to evaluate the performance of the business in utilizing the resources. o To workout short-term financial position: Ratio analysis helps to work out the short-term financial position of the company with the help of liquidity ratios. In case short-term financial position is not healthy efforts are made to improve it. o Helpful for forecasting purposes: Accounting ratios indicate the trend of the business. The trend is useful for estimating future. With the help of previous years ratios, estimates for future can be made. In this way these ratios provide the basis for preparing budgets and also determine future line of action.

Limitations of Ratio Analysis

In spite of many advantages, there are certain limitations of the ratio analysis techniques and they should be kept in mind while using them in interpreting financial statements. The following are the main limitations of accounting ratios: o Limited Comparability: Different firms apply different accounting policies. Therefore the ratio of one firm cannot always be compared with the ratio of other firm. Some firms may value the closing stock on LIFO basis while some other firms may value on FIFO basis. Similarly there may be difference in providing depreciation of fixed assets or certain of provision for doubtful debts etc.

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o False Results: Accounting ratios are based on data drawn from accounting records. In case that data is correct, then only the ratios will be correct. For example, valuation of stock is based on very high price, the profits of the concern will be inflated and it will indicate a wrong financial position. The data therefore must be absolutely correct. o Effect of Price Level Changes: Price level changes often make the comparison of figures difficult over a period of time. Changes in price affect the cost of production, sales and also the value of assets. Therefore, it is necessary to make proper adjustment for price-level changes before any comparison. o Qualitative factors are ignored: Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative factors, which may be important in decision making. For example, average collection period may be equal to standard credit period, but some debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis. o Effect of window-dressing: In order to cover up their bad financial position some companies resort to window dressing. They may record the accounting data according to the convenience to show the financial position of the company in a better way. o Costly Technique: Ratio analysis is a costly technique and can be used by big business houses. Small business units are not able to afford it. o Misleading Results: In the absence of absolute data, the result may be misleading. For example, the gross profit of two firms is 25%. Whereas the profit earned by one is just Rs. 5,000 and sales are Rs.20,000 and profit earned by the other one is Rs. 10,00,000 and sales are Rs. 40,00,000. Even the profitability of the two firms is same but the magnitude of their business is quite different.

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o Absence of standard university accepted terminology: There are no standard ratios, which are universally accepted for comparison purposes. As such, the significance of ratio analysis technique is reduced.

Users of Accounting Information

Now we know the kinds of questions we need to ask and we know the ratios available to us, we need to know who might ask all of these questions! This is an important issue because the person asking the question will normally need to know something particular. Of course, anyone can read and ask questions about the accounts of a business; but in the same way that we can put the ratios into groups, we should put readers and users of accounts into convenient groups, too: let's look at that now. The list of categories of readers and users of accounts includes the following people and groups of people: o Investors o Lenders o Managers of the organization o Employees o Suppliers and other trade creditors o Customers o Governments and their agencies o Public o Financial analysts o Environmental groups o Researchers: both academic and professional

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What do the Users of Accounts Need to Know?

The users of accounts that we have listed will want to know the sorts of things we can see in the table below: this is not necessarily everything they will ever need to know, but it is a starting point for us to think about the different needs and questions of different users. o Investors: To help them determine whether they should buy shares in the business, hold on to the shares they already own or sell the shares they already own. They also want to assess the ability of the business to pay dividends. o Lenders: To determine whether their loans and interest will be paid when due. o Managers: Might need segmental and total information to see how they fit into the overall picture. o Employees: Information about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities o Suppliers and other trade creditors: businesses supplying goods and materials to other businesses will read their accounts to see that they don't have problems: after all, any supplier wants to know if his customers o Customers: the continuance of a business, especially when they have a long term involvement with or are dependent on, the business Governments and their agencies the allocation of resources and, therefore, the activities of business. To regulate the activities of business, determine taxation policies and as the basis for national income and similar statistics

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o Local community: Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area o Financial analysts: They need to know, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on o Environmental Groups: Many organizations now publish reports specifically aimed at informing us about how they are working to keep their environment clean. o Researchers: Researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements

Which ratios will each of these groups be interested in? Interest Group
Investors Lenders Managers Employees Suppliers & other trade creditors Customers

Ratios to watch
Return on Capital Employed Gearing ratios Profitability ratios Return on Capital Employed Liquidity Profitability

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Governments & their agencies Local Community

Profitability This could be a long and Interesting list

Financial analysts Environmental groups pollution

Possibly all ratios Expenditure on antiMeasures

Researchers

Depends on the nature of their study

Classification of Ratios
Ratios may be classified in a number of ways to suit any particular purpose. Different kinds of ratios are selected for different types of situations. Mostly, the purpose for which the ratios are used and the kind of data available determine the nature of analysis. The various accounting ratios can be classified as follows:

Profitability ratios:
Gross profit ratio Net profit ratio Operating ratio Expense ratio Return on shareholders investment or net worth Return on equity capital Return on capital employed (ROCE) ratio
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Dividend yield ratio Dividend payout ratio Earnings Per Share Ratio Price earnings ratio

Liquidity ratios:
Current ratio Liquid /Acid test / Quick ratio

Activity ratios:
Inventory/Stock turnover ratio Debtors/Receivables turnover ratio Average collection period Creditors/Payable turnover ratio Working capital turnover ratio Fixed assets turnover ratio Over and under trading

Leverage ratios or long term solvency ratios:

Debt equity ratio Proprietary or Equity ratio Ratio of fixed assets to shareholders funds Ratio of current assets to shareholders funds Interest coverage or debt service ratio Capital gearing ratio

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Over and under capitalization

Gross profit ratio (GP ratio)

Gross profit ratio is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales.

Gross Profit Ratio = (Gross Profit / Net Sales) 100

Significance:
Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products. As the gross profit is found by deducting cost of goods sold from net sales, higher the gross profit better it is. There is no standard GP ratio for evaluation. It may vary from business to business. However, the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends.

Causes / reasons of increase or decrease in gross profit ratio:

It should be observed that an increase in the GP ratio may be due to the following factors. 1. Increase in the selling price of goods sold without any corresponding increase in the cost of goods sold. 2. Decrease in cost of goods sold without corresponding decrease in selling price. 3. Omission of purchase invoices from accounts. 4. Under valuation of opening stock or overvaluation of closing stock.

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On the other hand, the decrease in the gross profit ratio may be due to the following factors. 1. Decrease in the selling price of goods, without corresponding decrease in the cost of goods sold. 2. Increase in the cost of goods sold without any increase in selling price. 3. Unfavorable purchasing or markup policies. 4. Inability of management to improve sales volume, or omission of sales. 5. Over valuation of opening stock or under valuation of closing stock Hence, an analysis of gross profit margin should be carried out in the light of the information relating to purchasing, mark-ups and markdowns, credit and collections as well as merchandising policies.

Net profit ratio

Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as percentage.

Components of net profit ratio

The two basic components of the net profit ratio are the net profit and sales. The net profits are obtained after deducting income-tax and, generally, non-operating expenses and incomes are excluded from the net profits for calculating this ratio. Thus, incomes such as interest on investments outside the business, profit on sales of fixed assets and losses on sales of fixed assets, etc are excluded. Formula

Net Profit Ratio = (Net Profit / Net sales) 100

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Significance:
NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. This ratio also indicates the firm's capacity to face adverse economic conditions such as price competition, low demand etc. Obviously, higher the ratio the better is the profitability. But while interpreting the ratio it should be kept in minds that the performance of profits also be seen in relation to investments or capital of the firm and not only in relation to sales.

Operating RatioOperating ratio is the ratio of cost of goods sold plus operating expenses to net sales. It is generally expressed in percentage. It measures the cost of operations per dollar of sales. This is closely related to the ratio of operating profit to net sales.

Components:
The two basic components for the calculation of operat ing ratio are operating cost (cost of goods sold plus operating expenses) and net sales. Operating expenses normally include (a) Administrative and office expenses and (b) Selling and distribution expenses. Financial charges such as interest, provision for t taxation etc. are generally excluded from operating expenses. Formula

Operating Ratio =(Cost of goods sold +Operating expenses /Net Sales)100

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Operating ratio shows the operational efficiency of the business. Lower operating ratio shows higher operating profit and vice versa. An operating ratio ranging between 75% and 80% is generally considered as standard for manufacturing concerns.

Expense ratios
Expense ratios indicate the relationship of various expenses to net sales. The operating ratio reveals the average total variations in expenses. But some of the expenses may be increasing while some may be falling. Hence, expense ratios are calculated by dividing each item of expenses or group of expense with the net sales to analyze the cause of variation of the operating ratio. The ratio can be calculated for individual items of expense or a group of items of a particular type of expense like cost of sales ratio, administrative expense ratio, selling expense ratio, materials consumed ratio, etc. The lower the operating ratio, the larger is the profitability and higher the operating ratio, lower is the profitability. While interpreting expense ratio, it must be remembered that for a fixed expense like rent, the ratio will fall if the sales increase and for a variable expense, the ratio in proportion to sales shall remain nearly the same. Formula Following formula is used for the calculation of expense ratio:

Particular Expense = (Particular expense / Net sales) 100

Return on share holders investment

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It is the ratio of net profit to share holder's investment. It is the relationship between net profit (after interest and tax) and share holder's/proprietor's fund. This ratio establishes the profitability from the share holders' point of view. The ratio is generally calculated in percentage.

Components
The two basic components of this ratio are net profits and shareholder's funds. Shareholder's funds include equity share capital, (preference share capital) and all reserves and surplus belonging to shareholders. Net profit means net income after payment of interest and income tax because those will be the only profits available for share holders. Formula of return on shareholder's investment or net worth Ratio:

Return on share holder's investment = {Net profit (after interest and

tax)/ Share Holders fund}

100

Significance
This ratio is one of the most important ratios used for measuring the overall efficiency of a firm. As the primary objective of business is to maximize its earnings, this ratio indicates the extent to which this primary objective of businesses being achieved. This ratio is of great importance to the present and prospective shareholders as well as the management of the company.

Return on Equity Capital (ROEC) Ratio

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In real sense, ordinary shareholders are the real owners of the company. They assume the highest risk in the company. (Preference share holders have a preference over ordinary shareholders in the payment of dividend as well as capital. Preference share holders get a fixed rate of dividend irrespective of the quantum of profits of the company). The rate of dividends varies with the availability of profits in case of ordinary shares only. Thus ordinary shareholders are more interested in the profitability of a company and the performance of a company should be judged on the basis of return on equity capital of the company. Return on equity capital which is the relationship between profits of a company and its equity, can be calculated as follows: Formula of return on equity capital or common stock:

Return on Equity Capital = {Net profit after tax - Preference

dividend) / Equity share Capital} 100 Components
Equity share capital should be the total called-up value of equity shares. As the profit used for the calculations are the final profits available to equity shareholders as dividend, therefore the preference dividend and taxes are deducted in order to arrive at such profits.

Significance
This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Interpretation of the ratio is similar to the interpretation of return on shareholder's investments and higher the ratio better is.

Return on Capital Employed Ratio (ROCE Ratio)

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The prime objective of making investments in any business is to obtain satisfactory return on capital invested. Hence, the return on capital employed is used as a measure of success of a business in realizing this objective. Return on capital employed establishes the relationship between the profit and the capital employed. It indicates the percentage of return on capital employed in the business and it can be used to show the overall profitability and efficiency of the business. Definition of Capital Employed: Capital employed and operating profits are the main items. Capital employed may be defined in a number of ways. However, two widely accepted definitions are "gross capital employed" and "net capital employed ". Gross capital employed usually means the total assets, fixed as well as current, used in business, while net capital employed refers to total assets minus liabilities. On the other hand, it refers to total of capital, capital reserves, revenue reserves (including profit and loss account balance), debentures and long term loans.

Calculation of Capital Employed: Method 1: If it is calculated from the assets side, It can be worked out by adding the
following: 1. The fixed assets should be included at their net values, either at original cost or at replacement cost after deducting depreciation. In days of inflation, it is better to include fixed assets at replacement cost which is the current market value of the assets. 2. Investments inside the business 3. All current assets such as cash in hand, cash at bank, sundry debtors, bills receivable, stock, etc. 4. To find out net capital employed, current liabilities are deducted from the total of the assets as calculated above.

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Gross capital employed = Fixed assets + Investments + Current

assets

Net capital employed = Fixed assets + Investments + Working capital* *Working capital = current assets current liabilities

Precautions For Calculating Capital Employed:

1. While capital employed is calculated from the asset side, the following precautions should be taken: 2. Regarding the valuation of fixed assets, nowadays it is considered necessary to value the assets at their replacement cost. This is with a view to providing for the continuing problem of inflations during the current years. Under replacement cost methods the fixed assets are to be revalued on the basis of their current market prices either by reference to reliable published index numbers, or on valuation of experts. When replacement cost method is used, the provision for depreciation should be recalculated since depreciation charged might have been calculated on original cost of assets. 3. Idle assets which cannot be used in the business should be excluded from capital employed. However, standby plant and machinery essential to the normal running of the business should be included. 4. Intangible assets, like goodwill, patents, trademarks, rights, etc. should be excluded. However, if they have sale value or if they have been purchased they may be included. Investments made outside the business should be excluded. 5. All current assets should be properly valued. Any excess balance of cash or bank than required for the smooth running of the business should be excluded.

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6. Fictitious assets, like preliminary expenses, accumulated losses, discount on issue of shares or debentures, advertisement, suspense account, etc. should be excluded. 7. Obsolete assets which cannot be used in the business or obsolete stock which cannot be sold should be excluded.

Method 2: Alternatively, capital employed can be calculated from the liabilities side of
a balance sheet. If it is calculated from the liabilities side, it will include the following items:

Share capital
Issued share capital (Equity + Preference)

Reserves and Surplus

General reserve Capital reserve Profit and Loss account Debentures Other long term loans Some people suggest that average capital employed should be used in order to give effect of the capital investment throughout the year. It is argued that the profit earned remain in the business throughout the year and are distributed by way of dividends only at the end of the year. Average capital may be calculated by dividing the opening and closing capital employed by two. It can also be worked out by deducting half of the profit from capital employed.

Computation of profit for return on capital employed:

The profits for the purpose of calculating return on capital employed should be computed according to the concept of capital employed used". The profits taken must be

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the profits earned on the capital employed in the business. Thus, net profit has to be adjusted for the following: Net profit should be taken before the payment of tax or provision for taxation because tax is paid after the profits have been earned and has no relation to the earning capacity of the business. If the capital employed is gross capital employed then net profit should be considered before payment of interest on long-term as well as short-term borrowings. If the capital employed is used in the sense of net capital employed than only interest on long term borrowings should be added back to the net profits and not interest on short term borrowings as current liabilities are deducted while calculating net capital employed. If any asset has been excluded while computing capital employed, any income arising from these assets should also be excluded while calculating net profits. For example, interest on investments outside business should be excluded. Net profits should be adjusted for any abnormal, non recurring, non operating gains or losses such as profits and losses on sales of fixed assets. Net profits should be adjusted for depreciation based on replacement cost, if assets have been added at replacement cost.

Formula of return on capital employed ratio:

Return on Capital Employed = (Adjusted net profits* / Capital employed)

100 *Net profit before interest and tax minus income from investments.

Significance of Return on Capital Employed Ratio

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Return on capital employed ratio is considered to be the best measure of profitability in order to assess the overall performance of the business. It indicates how well the management has used the investment made by owners and creditors into the business. It is commonly used as a basis for various managerial decisions. As the primary objective of business is to earn profit, higher the return on capital employed, the more efficient the firm is in using its funds. The ratio can be found for a number of years so as to find a trend as to whether the profitability of the company is improving or otherwise.

Dividend Yield Ratio:

Dividend yield ratio is the relationship between dividends per share and the market value of the shares. Share holders are real owners of a company and they are interested in real sense in the earnings distributed and paid to them as dividend. Therefore, dividend yield ratio is calculated to evaluate the relationship between dividends per share paid and the market value of the shares. Formula of Dividend Yield Ratio

Dividend Yield Ratio = Dividend per Share / Market Value Per Share

Significance of the Ratio:

This ratio helps as intending investor knows the effective return he is going to get on the proposed investment.

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Dividend Payout Ratio

Dividend payout ratio is calculated to find the extent to which earnings per share have been used for paying dividend and to know what portion of earnings has been retained in the business. It is an important ratio because ploughing back of profits enables a company to grow and pay more dividends in future. Formula of Dividend Payout Ratio: Following formula is used for the calculation of dividend payout ratio

Dividend Payout Ratio = Dividend per Equity Share / Earnings per Share

Retained Earning Ratio

A complementary of this ratio is retained earnings ratio. Retained earning ratio is calculated by using the following formula:

Retained Earning Ratio = Retained Earning Per Equity Share / Earning

Per Equity Share

Significance of the Ratio:

The payout ratio and the retained earnings ratio are the indicators of the amount of earnings that have been ploughed back in the business. The lower the payout ratio, the higher will be the amount of earnings ploughed back in the business and vice versa. A lower payout ratio or higher retained earnings ratio means a stronger financial position of the company.

Earnings per Share (EPS) Ratio

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Earnings per share ratio (EPS Ratio) are a small variation of return on equity capital ratio and are calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares.

Formula of Earnings per Share Ratio

Earnings per share (EPS) Ratio = Net profit after tax - Preference
dividend No. of Equity shares (common shares)

Significance:
The earnings per share is a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. EPS ratio calculated for a number of years indicates whether or not the earning power of the company has increased.

Price Earnings Ratio (PE Ratio)

Price earnings ratio (P/ E ratio) is the ratio between market price per equity share and earning per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether or not to buy shares in a particular company. Formula of P rice Earnings Ratio

Price Earnings Ratio = Market price per equity share / Earnings per
share

Significance of Price Earnings Ratio

Price earnings ratio helps the investor in deciding whether to buy or not to buy the shares of a particular company at a particular market price.
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Generally, higher the price earning ratio the better it is. If the P/E ratio falls, the management should look into the causes that have resulted into the fall of this ratio.

Current Ratio:
Current ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as "working capital ratio ". It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities. Formula

Current Ratio = Current Assets / Current Liabilities

Components The two basic components of this ratio are current assets and current liabilities. Current assets include cash and those assets which can be easily converted into cash within a short period of time, generally, one year, such as marketable securities or readily realizable investments, bills receivables, sundry debtors, (excluding provisions), inventories, work in progress, etc. Prepaid expenses should also be included in current assets because they represent payments made in advance which will not have to be paid in near future. Current liabilities are those obligations which are payable within a short period of tie generally one year and include outstanding expenses, bills payable, sundry creditors, bank overdraft, accrued expenses, short term advances, income tax payable, dividend payable, etc. However, sometimes a controversy arises that whether overdraft should be regarded as current liability or not. Often an arrangement with a bank may be regarded as permanent and therefore,

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it may be treated as long term liability. At the same time the fact remains that the overdraft facility may be cancelled at any time. Accordingly, because of this reason and the need for conversion in interpreting a situation, it seems advisable to include overdrafts in current liabilities.

Significance
This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firms financial stability. It is also an index of technical solvency and an index of the strength of working capital. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. An increase in the current ratio represents improvement in the liquidity position of the firm while a decrease in the current ratio represents that there has been deterioration in the liquidity position of the firm. A ratio equal to or near 2:1 is considered as a standard or normal or satisfactory. The idea of having doubled the current assets as compared to current liabilities is to provide for the delays and losses in the realization of current assets. However, the rule of 2:1 should not be blindly used while making interpretation of the ratio. Firms having less than 2:1 ratio may be having a better liquidity than even firms having more than 2:1 ratio. This is because of the reason that current ratio measures the quantity of the current assets and not the quality of the current assets. If a firm's current assets include debtors which are not recoverable or stocks which are slowmoving or obsolete, the current ratio may be high but it does not represent a good liquidity position.

Limitations of Current Ratio

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This ratio is measure of liquidity and should be used very carefully because it suffers from many limitations. It is, therefore, suggested that it should not be used as the sole index of short term solvency. 1. It is crude ratio because it measures only the quantity and not the quality of the current assets. 2. Even if the ratio is favorable, the firm may be in financial trouble, because of more stock and work in process which is not easily convertible into cash, and, therefore firm may have less cash to pay off current liabilities. 3. Valuation of current assets and window dressing is another problem. This ratio can be very easily manipulated by overvaluing the current assets. An equal increase in both current assets and current liabilities would decrease the ratio and similarly equal decrease in current assets and current liabilities would increase current ratio.

Liquid or Liquidity or Acid Test or Quick Ratio

Liquid ratio is also termed as "Liquidity Ratio, Acid Test Ratio" or "Quick Ratio". It is the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due.

Components:
The two components of liquid ratio (acid test ratio or quick ratio) are liquid assets and liquid liabilities. Liquid assets normally include cash, bank, sundry debtors, bills receivable and marketable securities or temporary investments. In other words they are current assets minus inventories (stock) and prepaid expenses. Inventories cannot be termed as liquid assets because it cannot be converted into cash immediately without a loss of value. In the same manner, prepaid expenses are also excluded from the list of liquid assets because they are not expected to be converted into cash. Similarly, Liquid liabilities means current liabilities i.e., sundry creditors, bills payable, outstanding expenses, short term advances, income tax payable, dividends payable, and bank
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overdraft (only if payable on demand). Some time bank overdraft is not included in current liabilities, on the argument that bank overdraft is generally permanent way of financing and is not subject to be called on demand. In such cases overdraft will be excluded from current liabilities.

Formula of Liquidity Ratio

Liquid Ratio = Liquid Assets / Current Liabilities

Significance: The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It measures the firm's capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio. Liquid ratio is more rigorous test of liquidity than the current ratio because it eliminates inventories and prepaid expenses as a part of current assets. Usually a high liquid ratio an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low liquidity ratio represents that the firm's liquidity position is not good. As a convention, generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory. Although liquidity ratio is more rigorous test of liquidity than the current ratio, yet it should be used cautiously and 1:1 standard should not be used blindly. A liquid ratio of 1:1 does not necessarily mean satisfactory liquidity position of the firm if all the debtors cannot be realized and cash is needed immediately to meet the current obligations. In the same manner, a low liquid ratio does not necessarily mean a bad liquidity position as inventories are not absolutely non-liquid. Hence, a firm having a high liquidity ratio may not have a satisfactory liquidity position if it has slow-paying debtors. On the other hand, a firm having a low liquid ratio may have a good liquidity position if it has a fast moving inventory.
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Though this ratio is definitely an improvement over current ratio, the interpretation of this ratio also suffers from the same limitations as of current ratio.

Absolute Liquid Ratio

Absolute liquidity is represented by cash and near cash items. It is a ratio of absolute liquid assets to current liabilities. In the computation of this ratio only the absolute liquid assets are compared with the liquid liabilities. The absolute liquid assets are cash, bank and marketable securities. It is to be observed that receivables (debtors/accounts receivables and bills receivables) are eliminated from the list of liquid assets in order to obtain absolute4 liquid assets since there may be some doubt in their liquidity.

Formula of Absolute Liquid Ratio

Absolute Liquid Ratio = Absolute Liquid Assets / Current Assets

This ratio gains much significance only when it is used in conjunction with the current and liquid ratios. A standard of 0.5:1 absolute liquidity ratio is considered an acceptable norm. That is, from the point of view of absolute liquidity, fifty cents worth of absolute liquid assets are considered sufficient for one dollar worth of liquid liabilities. However, this ratio is not in much use.

Inventory Turnover Ratio or Stock Turnover Ratio (ITR)

Stock turnover ratio and inventory turnover ratio are the same. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average

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inventory during a particular period. It is expressed in number of times. Stock turnover ratio / Inventory turnover ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.

Components of the Ratio

Average inventory and cost of goods sold are the two elements of this ratio. Average inventory is calculated by adding the stock in the beginning and at the end of the period and dividing it by two. In case of monthly balances of stock, all the monthly balances are added and the total is divided by the number of months for which the average is calculated. Formula of Stock Turnover/Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of goods sold / Average inventory at

cost Generally, the cost of goods sold may not be known from the published financial statements. In such circumstances, the inventory turnover ratio may be calculated by dividing net sales by average inventory at cost. If average inventory at cost is not known then inventory at selling price may be taken as the denominator and where the opening inventory is also not known the closing inventory figure may be taken as the average inventory.

Inventory Turnover Ratio = Net Sales / Average Inventory at Cost Inventory Turnover Ratio = Net Sales / Average inventory at Selling
Price

Inventory Turnover Ratio = Net Sales Inventory

Significance of ITR
Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually a high inventory turnover/stock velocity indicates efficient management of inventory because
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more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. A low inventory turnover ratio indicates an inefficient management of inventory. A low inventory turnover implies over-investment in inventories, dull business, poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits as compared to total investment. The inventory turnover ratio is also an index of profitability, where a high ratio signifies more profit; a low ratio signifies low profit. Sometimes, a high inventory turnover ratio may not be accompanied by relatively a high profit. Similarly a high turnover ratio may be due to under-investment in inventories. It may also be mentioned here that there are no rule of thumb or standard for interpreting the inventory turnover ratio. The norms may be different for different firms depending upon the nature of industry and business conditions. However the study of the comparative or trend analysis of inventory turnover is still useful for financial analysis

Debtors Turnover Ratio or Receivables Turnover Ratio

A concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. The volume of sales can be increased by following a liberal credit policy. The effect of a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors (or receivables). Trade debtors are expected to be converted into cash within a short period of time and are included in current assets. Hence, the liquidity position of concern to pay its short term obligations in time depends upon the quality of its trade debtors.

Definition

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Debtors turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year.

Formula of Debtors Turn over Ratio

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

The two basic components of the ratio are net credit annual sales and average trade debtors. The trade debtors for the purpose of this ratio include the amount of Trade Debtors & Bills Receivables. The average receivables are found by adding the opening receivables and closing balance of receivables and dividing the total by two. It should be noted that provision for bad and doubtful debts should not be deducted since this may give an impression that some amount of receivables has been collected. But when the information about opening and closing balances of trade debtors and credit sales is not available, then the debtors turnover ratio can be calculated by dividing the total sales by the balance of debtors (inclusive of bills receivables) given and formula can be written as follows.

Debtors Turnover Ratio = Total Sales Debtors

Significance of the Ratio This ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm.

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Average Collection Period Ratio:

The Debtors / Receivable Turnover ratio when calculated in terms of days is known as Average Collection Period or Debtors Collection Period Ratio. The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash.

Formula of Aver age Collection Period

Average collection period = (Trade Debtors No. of Working Days) / Net

Credit Sales

Significance of the Ratio This ratio measures the quality of debtors. A short collection period implies prompt payment by debtors. It reduces the chances of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors.

Creditors / Accounts Payable Turnover Ratio:

This ratio is similar to the debtors turnover ratio. It compares creditors with the total credit purchases. It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include both sundry creditors and bills payable. Same as debtors turnover ratio, creditors turnover ratio can be calculated in two forms, creditors turnover ratio and average payment period.

Formula
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Creditors Turnover Ratio = Credit Purchase / Average Trade Creditor

Average Payment Period

Average payment period ratio gives the average credit period enjoyed from the creditors. It can be calculated using the following formula:

Average Payment Period = Trade Creditors / Average Daily Credit

Purchase

Average Daily Credit Purchase = Credit Purchase / No. of working days in

a year
Or

Average Payment Period = (Trade Creditors No. of Working Days) /

Net Credit Purchase
(In case information about credit purchase is not available total purchases may be assumed to be credit purchase.)

Significance of the Ratio

The average payment period ratio represents the number of days by the firm to pay its creditors. A high creditors turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhances the credit worthiness of the company. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors.

Working Capital Turnover Ratio

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Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio represents the number of times the working capital is turned over in the course of year and is calculated as follows: Formula of Working Capital Turnover Ratio

Working Capital Turnover Ratio = Cost of Sales / Net Working Capital

The two components of the ratio are cost of sales and the net working capital. If the information about cost of sales is not available the figure of sales may be taken as the numerator. Net working capital is found by deduction from the total of the current assets the total of the current liabilities. Significance: The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation.

Fixed Assets Turnover Ratio

Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio measures the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets. The ratio is calculated by using following formula:

Fixed Assets Turnover Ratio = Cost of Sales / Net Fixed Assets

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Debt to Equity Ratio

Debt-to-Equity ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company.

Formula of Debt to Equity Ratio

Debt Equity Ratio = External Equities / Internal Equities

Or

[Outsiders funds / Shareholders funds] As a long term financial ratio it may be calculated as follows: Total Long Term Debts / Total Long Term Funds
Or

[Total Long Term Debts / Shareholders Funds]

Components
The two basic components of debt to equity ratio are outsiders funds i.e. external equities and share holders funds, i.e., internal equities. The outsiders funds include all debts / liabilities to outsiders, whether long term or short term or whether in the form of debentures, bonds, mortgages or bills. The shareholders funds consist of equity share capital, preference share capital, capital reserves, revenue reserves, and reserves representing accumulated profits and surpluses like reserves for contingencies, sinking funds, etc. The accumulated losses and deferred expenses, if any, should be deducted from the total to find out shareholder's funds Some writers are of the view that current liabilities do not reflect long term commitments and they should be excluded from outsider's funds. There are some other writers who suggest that current liabilities should also be included in the outsider's funds to calculate debt equity

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ratio for the reason that like long term borrowings, current liabilities also represents firm's obligations to outsiders and they are an important determinant of risk. However, we advise that to calculate debt equity ratio current liabilities should be included in outsider's funds. The ratio calculated on the basis outsider's funds excluding liabilities may be termed as ratio of long-term debt to share holders funds. It means that for every four dollars worth of the creditors investment the shareholders have invested six dollars. That is external debts are equal to 0.66% of shareholders funds.

Significance of Debt to Equity Ratio

Debt to equity ratio indicates the proportionate claims of owners and the outsiders against the firms assets. The purpose is to get an idea of the cushion available to outsiders on the liquidation of the firm. However, the interpretation of the ratio depends upon the financial and business policy of the company. The owners want to do the business with maximum of outsider's funds in order to take lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders. The outsiders creditors) on the other hand, want that shareholders (owners) should invest and risk their share of proportionate investments. A ratio of 1:1 is usually considered to be satisfactory ratio although there cannot be rule of thumb or standard norm for all types of businesses. Theoretically if the owners interests are greater than that of creditors, the financial position is highly solvent. In analysis of the longterm financial position it enjoys the same importance as the current ratio in the analysis of the short-term financial position.

Proprietary or Equity Ratio

This is a variant of the debt-to-equity ratio. It is also known as equity ratio or net worth to total assets ratio. This ratio relates the shareholder's funds to total assets. Propri etary / Eq uity ratio indicates the long-term or future solvency position of the business.

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Formula of Proprietary/ Equity Ratio:

Proprietary or Equity Ratio = Shareholders funds / Total Assets

Components Shareholder's funds include equity share capital plus all reserves and surpluses items. Total assets include all assets, including Goodwill. Some authors exclude goodwill from total assets. In that case the total shareholder's funds are to be divided by total tangible assets. As the total assets are always equal to total liabilities, the total liabilities, may also be used as the denominator in the above formula. Significance This ratio throws light on the general financial strength of the company. It is also regarded as a test of the soundness of the capital structure. Higher the ratio or the share of shareholders in the total capital of the company better is the long-term solvency position of the company. A low proprietary ratio will include greater risk to the creditors.

Fixed Assets to Proprietor's Fund Ratio:

Fixed assets to proprietors fund ratio establish the relationship between fixed assets and shareholders funds. The purpose of this ratio is to indicate the percentage of the owner's funds invested in fixed assets.

Fixed Assets to Proprietors Fund = Fixed Assets / Proprietors Fund

The fixed assets are considered at their book value and the proprietor's funds consist of the same items as internal equities in the case of debt equity ratio. Significance

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The ratio of fixed assets to net worth indicates the extent to which shareholder's funds are sunk into the fixed assets. Generally, the purchase of fixed assets should be financed by shareholder's equity including reserves, surpluses and retained earnings. If the ratio is less than 100%, it implies that owners funds are more than fixed assets and a part of the working capital is provided by the shareholders. When the ratio is more than the 100%, it implies that owners funds are not sufficient to finance the fixed assets and the firm has to depend upon outsiders to finance the fixed assets. There is no rule of thumb to interpret this ratio by 60 to 65 percent is considered to be a satisfactory ratio in case of industrial undertakings.

Current Assets to Proprietor's Fund Ratio

Current Assets to Proprietors' Fund Ratio establish the relationship between current assets and shareholder's funds. The purpose of this ratio is to calculate the percentage of shareholders funds invested in current assets.

Current Assets to Proprietors Funds = Current Assets / Proprietors Fund

Significance Different industries have different norms and therefore, this ratio should be studied carefully taking the history of industrial concern into consideration before relying too much on this ratio.

Capital Gearing Ratio

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Closely related to solvency ratio is the capital gearing ratio. Capital gearing ratio is mainly used to analyze the capital structure of a company. The term capital structure refers to the relationship between the various long-term form of financing such as debentures, preference and equity share capital including reserves and surpluses. Leverage of capital structure ratios is calculated to test the long-term financial position of a firm. The term "capital gearing" or "leverage" normally refers to the proportion of relationship between equity share capital including reserves and surpluses to preference share capital and other fixed interest bearing funds or loans. In other words it is the proportion between the fixed interest or dividend bearing funds and non fixed interest or dividend bearing funds. Equity share capital includes equity share capital and all reserves and surpluses items that belong to shareholders. Fixed interest bearing funds includes debentures, preference share capital and other longterm loans.

Formula of capital gearing ratio

Capital Gearing Ratio = Equity Share Capital / Fixed Interest Bearing

Funds

Significance of the ratio Capital gearing ratio is important to the company and the prospective investors. It must be carefully planned as it affects the company's capacity to maintain a uniform dividend policy during difficult trading periods. It reveals the suitability of company's capitalization.

Debt Service Ratio or Interest Coverage Ratio

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Interest coverage ratio is also known as debt service ratio or debt service coverage ratio . This ratio relates the fixed interest charges to the income earned by the business. It indicates whether the business has earned sufficient profits to pay periodically the interest charges. It is calculated by using the following formula. Formula:

Interest Coverage Ratio = Net Profit before Interest and Tax Fixed
Interest Charges

Significance of debt service ratio The interest coverage ratio is very important from the lender's point of view. It indicates the number of times interest is covered by the profits available to pay interest charges. It is an index of the financial strength of an enterprise. A high debt service ratio or interest coverage ratio assures the lenders a regular and periodical interest income. But the weakness of the ratio may create some problems to the financial manager in raising funds from debt sources.

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DATA ANALYSIS

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Sales

Sales
3000 2500 2000 1500 1000 500 0

199900 1216

200001 1314

200102 1350

200203 1325

200304 1414

200405 1582

200506 1662

200607 1970

200708 2301

200809 2698

Sales

*All figures in Crores

From the above graph we can clearly see that the sales at NHPC have more than doubled in the last 10 years and increased at a rate of more than 17% in the last three years as shown above in the graph and the sales were almost stagnant from the year 2000 to 2004 mainly because no new projects were commissioned during this period.

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Net Profit After Tax

Net Profit After Tax

1200

1000

800 600

400

200

0 Net Profit After Tax

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 401 443 471 511 621 685 743 925 537 1075

*All figures in Crores

Net profit has consistently increased over last 10 years and is more than doubled (2.7 times). From the above graph we can easily point out that there is a sharp decline in profit in the year 2007-08 and the reason behind this is that from the balance sheet we have observed that the company has done more investments in acquiring the assets plus there is a sharp increment in the employees cost, selling and administrative expenses which is the main reason behind the decline in the profit of the company.

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Net Fixed Assets

Net Fixed Assets

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Net Fixed Assets 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 6724 6613 6587 6609 6460 8728 10228 10093 17377 17644

*All figures in Crores

We can see from the above graph that the Net Fixed asset of the NHPC has grown significantly. A significant portion of asset growth has been contributed as because huge amount is invested to acquire the fixed assets. We can also observe that there is a sharp increment in the net fixed assets in 2007-08 and that could be because of more investment into long term assets. Company has invested consistently in acquiring fixed assets. Fixed assets have also more than doubled in the last 10 years.

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Dividend Paid

Dividend Paid
350 300 250 200 150 100 50 0 Dividend Paid

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 15 30 50 75 120 140 223 278 300 325

*All figures in Crores

Company has given dividend to its shareholders on regular basis and has increased substantially over the period of last 10 years and therefore NHPC has a reputed name in the market which was proved when its IPOs were highly oversubscribed by the customers in the year 2009.

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Shareholders Fund

Shareholders' Equity
20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Reserves & Surplus

Reserves & Surplus

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 1690.6 2139.1 5188.2 2598.5 3065.7 3594.27 4168.49 4709.89 5367.05 6093.34 6798.13 11207 11182.5 11182.5 6345.7 7240.61 8629.03 9933.27 10576.1

Shareholders' Equity 4446.2

*All figures in Crores

As we can see from the above graph that the equity share capital has remained almost constant after the year 2004-05 but reserve & surplus is increasing constantly year after year. It shows that company is continuously adding through retained profit in its reserves & surplus amount. Here huge amount is kept as a reserve which shows the strength of the company. In other word we can say that financial condition of the company is sound and good.

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NHPC Key Financial Ratios

------------------- in Rs. Cr. ------------------Mar '05 10.00 0.15 1.02 1.54 0.00 -Mar '06 10.00 0.22 1.00 1.58 -0.02 -Mar '07 10.00 0.25 1.19 1.68 4.29 -Mar '08 10.00 0.27 1.50 2.30 4.32 -Mar '09 10.00 0.29 1.59 2.43 5.44 --

Investment Valuation Ratios

Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital

Profitability Ratios
Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%) Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds(%) 66.57 38.82 49.43 50.88 50.88 37.08 37.08 5 4.66 4.7 2.91 2.91 5.12 63.21 38.04 46.51 51.61 51.61 37.63 37.63 4.72 4.66 4.7 2.96 2.96 4.8 70.76 46.64 55.33 58.95 58.95 41.4 41.4 5.77 5.58 6.2 3.36 3.36 5.77 65.2 40.77 47.94 45.95 45.95 33.22 33.22 6.18 5.81 5.47 3.11 3.11 6.18 65.3 37.96 46.26 52.62 52.62 32.42 32.42 6.13 5.98 6.82 3.04 3.04 6.3

Liquidity And Solvency Ratios

Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio 1.04 0.97 0.48 0.48 0.86 0.77 0.45 0.45 0.57 0.48 0.45 0.45 0.88 0.74 0.58 0.62 0.74 0.85 0.68 0.67

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------------------- in Rs. Cr. -------------------

Debt Coverage Ratios

Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax

Mar '05 3.38 0.48 4.14 3.84

Mar '06 3.8 0.45 4.73 4.47

Mar '07 6.16 0.45 7.26 6.24

Mar '08 2.78 0.58 3.48 3.37

Mar '09 3.68 0.68 4.68 4.14

Management Efficiency Ratios

Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Number of Days In Working Capital 15.76 3.05 15.76 0.13 0.07 0.13 14.58 11.13 5.27 11.13 0.13 0.07 0.13 -50.91 6.48 8.32 6.48 0.15 0.08 0.15 -304.3 3.6 8.04 3.6 0.12 0.09 0.12 -82.67 80.93 8.47 80.93 0.13 0.09 0.13 -95.76

Profit & Loss Account Ratios

Material Cost Composition Selling Distribution Cost Composition 0.48 -0.74 -0.34 0.38 0.23 0.27 0.32 0.3

Cash Flow Indicator Ratios

Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio Adjusted Cash Flow Times Earning per Share Book Value 23.25 17.04 76.93 83.05 7.48 0.73 15.56 34.23 25.11 66.06 75.04 7.03 0.73 15.62 34.93 26.58 68.52 75.47 5.72 0.83 14.8 34.95 24.24 62.86 74.73 7.17 0.9 15.45 35.36 23.86 69.01 78.21 7.01 0.96 16.08

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Leverage ratio/Capital structure ratio

Debt Equity Ratio

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Debt Equity Ratio

2004-05 0.48

2005-06 0.45

2006-07 0.45

2007-08 0.58

2008-09 0.68

From the above graph we can easily point out that the debt equity ratio of NHPC remained almost constant up to the year 2006-07 but afterwards there is a sharp rise in the debt-equity ratio from 2007-08 to 2008-09. From the above data we conclude that the company has less debt it can also pay off the current obligations very easily.

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Liquidity Ratio

Current Ratio
1.2

0.8

0.6

0.4

0.2

0 Current Ratio

2004-05 1.04

2005-06 0.86

2006-07 0.57

2007-08 0.88

2008-09 0.74

From the above graph we can easily point out that there is a clear decline in the current ratio of 2008-09 as compare to the 2004-05. Company may have adapted nominal working capital policy. As a conventional rule a current ratio of 2:1 is considered satisfactory. The company has not so high liquidity because of low value of current ratio. The company may have to fulfill its short term liabilities through the long term funds.

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Quick Ratio
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Quick Ratio 2004-05 0.97 2005-06 0.77 2006-07 0.48 2007-08 0.74 2008-09 0.85

From the above graph we can easily point out that there is a clear decline in the quick ratio in 2006-07 as compare to the year 2004-05 however it has increased subsequently to a satisfactorily level since then. As a conventional rule a quick ratio of 1:1 is considered satisfactory. The company has not so high liquidity because of nominal value of current ratio but the quick ratio is satisfying in the year 2008-09. Thus NHPC has the capacity to pay off its current obligations immediately the short term liability.

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Profitability ratio

Return on Capital Employed

7 6 5 4 3 2 1 0 Return on Capital Employed

2004-05 5

2005-06 4.72

2006-07 5.77

2007-08 6.18

2008-09 6.13

As NHPC plans significant capacity ramp up in coming years and aim to reach at 20,000 MW capacity by 2020, it will continue to generate lower ROCEs (then stipulated 15.5% on operational projects) as projects under construction will not generate any return till they are operational. It will generate more than 14% ROCE only when all its projects are operational or if there is any change in government policy where in under construction projects too become eligible for regulated return.

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Earning per Share

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Earning per Share 2004-05 0.73 2005-06 0.73 2006-07 0.83 2007-08 0.9 2008-09 0.96

The EPS of NHPC is not as good as its competitors & low as compared to industry average. This is mainly because of long gestation period and huge capital cost involved in construction projects, couple of NHPCs construction projects are at the stage commissioning.

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FINDINGS & CONCLUSION

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FINDINGS OF THE STUDY

Analysis of Profitability Ratios
PM or Return on Assets, has increased as compared to last year. This gives company more buffer to drop in sales prices. As pricing of electricity in our Country is more in the hand of Govt, it is important to maintain a good profit margin. Asset Turnover ratio of company is very low, it simply means that company has invested lot of amount in acquiring assets. Company is not generating sale, even equal to 1 rupee of invested amount. This also means that company is spending lot of amount in maintaining assets. Although, it may help in generating huge profits & sales in future, lot of new projects of this company will be functional in the coming years. ROI is low, but has improved from the last year. And will keep on improving as more & more projects of the company will become operational. At present, this gives bad picture on the performance of the company. Company has given more return on the shareholders value, as compared to ROI or AT, this has also doubled from the previous years %. NHPC has to come up in a big way to meet its shareholders expectations. EPS of the NHPC is not that great, but company has managed to improve earning (1 Rs per share) from the previous year.

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Analysis of the Liquidity Ratios

The company has more assets than its liabilities & this means company can implement new processes or procedures to improve its productivity, without worrying much about its liabilities. NHPC can take independent decisions. Also company can pays its debt very efficiently & quickly. Company is not that able to convert debtor into cash, but has improved from the past year. NHPC's debtors remained outstanding on average which is 44 to 45 days, which is quite high. NHPC's Clients are State/Govt run electricity boards the only reason behind the high debt collection period, although, it has improved from 50 days to 43 days. Company is efficiently managing its inventories; which means company is very much able to meet its operational needs. But the inventory piling is increased as compared to previous years, which has to be controlled.

Analysis of the Solvency Ratios

These ratios have increased, that means company has decided to raise more money through debt as instead of shareholders equity, but the ratio is still manageable, as it is still under control. And high assets in hand ensure that company is able to pay its debt. This ratio is also under controlled, as company is very much conservative in taking debt or liabilities. Although liabilities of the company have increased over the last year, company is well positioned to improve its capex by raising debt in future. This is bit alarming, as the margin between income & its liability to meet interest expense is not that great. Company has to improve this figure by improving sales from new operations (commissioning new plants) & in turn profit.

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Analysis of the Cash Flow Indicator Ratios

As compared to Industry Average, NHPC has 10% more profit margin than industry average & quite more than its peers. This gives edge to company to win over input cost's behavior and recession. NHPC can very well take care of its operating expenses. The EPS of NHPC is not as good as its competitors & low as compared to industry average. This may be because, major of its installed asset is yet not functional & NHPC will be commission more plants in coming future.

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CONCLUSION
There is a huge crisis over energy in the world especially in the field of electricity. India is also victim of the same condition. In spite of several efforts taken by the governments in this regard, there are enormous possibilities. NHPC is a key organization in India as far as the supply of power is concerned. After successfully conducting this project work, it can be said that the financial health of NHPC is sound enough and it appears positive in accordance with its balance sheets and profit & loss A/c which are available to me.

LEARNING OUTCOMES
After doing this project and working in an esteemed organization I learnt: To analyze financial statements (in the context of information provided in the accounts and corporate report) to comment on performance and position. To calculate and interpret the whole range of accounting ratios. To prepare a concise report on the results of an analysis of financial statements. To prepare and interpret inter-firm comparisons. To organize and manage own finances and activities responsibly and effectively. To develop the necessary characteristics including: o ethics; o punctuality; o thoroughness;

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o orderliness; o accuracy; and o Neatness and present ability. To deal confidently with the basic demands of an accounting occupation manually and/or electronically. To describe the financial status of enterprise based on analysis of financial statement. To assess the current and projected financial strength of a business using financial statements. To describe the ways in which financial data are used.

SUGGESTIONS
Regulatory commission should work properly. They should try to minimize the cost, so that general customer should meet the cost easily. Company should try to get ultra mega power plant project. They should try to improve the operational efficiency and financial performance of state utilities. Company has sound data system from where they can start the cost cut methods at different measures to improve their performance. The human resource can be optimizing to a certain extent for increasing profitability.

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BIBLIOGRAPHY
REFERRED BOOKS
Financial Management - I M. Pandey Management Accountancy - Pillai & Bagavati Management Accounting Sharma & Gupta

INTERNET SITES

www.nhpcindia.com www.indiabudget.nic.in www.ercap.org www.wikipedia.com www.myiris.com www.nwda.gov.in www.moneycontrol.com

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APPENDIX

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