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ASSIGNMENT OF ACCOUNTING FOR MANGERS ON Financial Ratio Analysis At National Thermal Power Corporation
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PREFACE
The conceptual knowledge acquired by management student is best manifested in the project and training they undergo. As a part of curriculum of MBA, We have got a chance to undergo practical training on NATIONAL THERMAL POWER CORPORTION. The present project gives a perfect vent into our understanding of financial management. The project report entitled FINACIAL RATIO ANALYSIS is based on the financial statements viz the Balance sheet of the company. The report will provide all information regarding the FINANCIAL RATIO ANALYSIS and their importance in NATIONAL THERMAL POWER CORPORTION LTD.
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The electricity sector in India is predominantly controlled by the Government of India's public sector undertakings (PSUs). Major PSUs involved in the generation of electricity include National Thermal Power Corporation (NTPC), National Hydroelectric Power
Corporation (NHPC) and Nuclear Power Corporation of India (NPCI). Besides PSUs, several state-level corporations, such as Maharashtra State Electricity Board (MSEB), are also involved in the generation and intra-state distribution of electricity. The Power Grid Corporation of India is responsible for the inter-state transmission of electricity and the development of national grid. The Ministry of Power is the apex body responsible for the development of electrical energy in India. This ministry started functioning independently from 2 July 1992; earlier, it was known as The Ministry of Energy. The Union Minister of Power at present is Sushil kumar Shinde of the Congress Party, who took charge of the ministry on the 28th of May, 2009. India is world's 6th largest energy consumer, accounting for 3.4% of global energy consumption. Due to India's economic rise, the demand for energy has grown at an average of 3.6% per annum over the past 30 years. In March 2009, the installed power generation capacity of India stood at 147,000 MW while the per capita power consumption stood at 612 kWH. The country's annual power production increased from about 190 billion kWH in 1986 to more than 680 billion kWH in 2006. The Indian government has set an ambitious target to add approximately 78,000 MW of installed generation capacity by 2012. The total demand for electricity in India is expected to cross 950,000 MW by 2030. About 75% of the electricity consumed in India is generated by thermal power plants, 21% by hydroelectric power plants and 4% by nuclear power plants. More than 50% of India's commercial energy demand is met through the country's vast coal reserves. The country has also invested heavily in recent years on renewable sources of energy such as wind energy. As of 2008, India's installed wind power generation capacity stood at 9,655 MW. Additionally, India Page 3
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THEORETICAL ASPECTS
Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables. Ratio analysis is a very powerful analytical tool for measuring performance of an organization. The ratio analysis concentrates on the inter relationship among the figures appearing in the aforementioned four financial statement s. the ratio analysis helps the management to analyze the past performance of the firm . The ratio analysis allow interested parties like shareholders, investors, creditors , government and analysts to make an evaluation of certain aspects of a firms performance.
Significance or Importance of Ratio Analysis It helps in evaluating the firms performance. With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e. whether the management has utilized the firm's assets correctly, to increase the investor's wealth. It ensures a fair return to its owners and secures optimum utilization of firms assets. It helps in inter-firm comparison. Ratio analysis helps in inter-firm comparison by providing necessary data. An inter firm comparison indicates relative position. It provides Page 5
Limitations Ratios are calculated from the financial statements which are affected by the financial bases and policies on such matters as depreciation and the valuation of stock . Financial statements do not represent a complete picture of the business, but merely a collection of fact which can be expressed in monetary terms. These may not refer to both factors which affect performance. Over use of ratios as controls on managers could be dangerous, in that management might concentrate more on simply improving the ratio than on dealing with the significant issues. A ratio is a comparison of two figures, a numerator and a denominator. In comparing ratios it may be difficult to determine whether differences are due to changes in the numerator, or in the denominator or in both. Ratios are inter-connected. They should not be treated in isolation. The effective use of ratios, therefore, depends on being aware of all these limitations and ensuring that, following comparative analysis, they are used to trigger point for investigation and corrective action rather than being treated as meaningful in them selves. The analysis of ratios clarifies trends and weaknesses in performance as a guide to action as long as proper comparisons are made and the reasons for adverse trends or deviations from the norms are investigated thoroughly.
Classification of Ratios
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(1) Current Ratio (2) Acid Test Ratio or Quick Ratio (3) Inventory Turnover Ratio(Finished goods) (4) Debtors Turnover Ratio (5) Creditors Turnover Ratio (6) Cash Flow From Opertions Ratio
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For the Year 2007-08 = 30,527.80 12,909 2.36 : 1 For the Year 2006-07 = 25,858.50 10,702.50 2.42 : 1
Interpretation:
For the Year 2010-11= 35,396.79 - 3,639.12 13,675.86 =2.32 : 1 For the Year 2009-10 =30,815.70 - 3,347.7 10,967.30 =2.50 : 1 For the Year 2008-09 = 30,925.30 3,243.4 10,688.70 =2.59 : 1
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Inventory Turn over Ratio= Cost of goods sold Average stock Average stock = Opening Stock+ Closing Stock 2 For the Year 2010-11= 42,293.69 3,493.41 =12Times For the Year 2009-10 =33,939.40 3,295.55 =12Times For the Year 2008-09 = 31,432.10 2,959.55 =11Times
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Inventory Ratio
12 10 8 6 4 2 0 2010-11 2009-10 2008-09 2007-08 2006-07 Inventory Ratio
Debtors turn over Ratio= Net Credit Sales Average Debtors For the Year 2010-11= 58,359.78 7,287.85 =8 Times
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(1) Debt - Equity Ratio: Debt-equity ratio which expresses the relationship between debt and equity. This ratio explains how far owned funds are sufficient to pay outside liabilities. It is calculated by following formula: Debt-Equity Ratio = Long Term Debt/Share holders Equity = Secured loan + unsecured loan Equity fund + Reserve & surplus For the year 2010-11 = 9,910.68+33,277.56 8,245.46+60,138.66 Page 14
For the year 2008-09 = 8,969.60+25,598.20 8,245.50+50,749.40 = 34,567.8 58,994.9 =0.58 : 1 For the year 2007-08 = 7,314.70+19,875.90 8,245.50+46,021.90 = 27,190.6 54,267.4 =0.50 : 1
=0.51 : 1
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Here, the Total Debt includes only two thing i.e. Secured loan & Unsecured loan. Total Debt= Secured Loan + Unsecured Loan Here, Debt-Equity Ratio (Based on Long term Debt) And the Debt-Equity Ratio (Based on External liability) will be same.
Debt to Total Capital Ratio = Long Term Debt Permanent Capital Long term Debt = Secured Loan + Unsecured Loan Permanent Capital= Share holders Fund + Long term Liability
9,910.68+33,277.56 8,245.46+60,138.66+9,910.68+33,277.56
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(4)Debt To Total Assets Ratio Debt to Total Assets Ratio means firms ability to payment of Interest to the lender of loans. It is calculated by following formula:
Debt to Total Assets Ratio = Total Debt Total Assets Total Debt = Secured + Unsecured loan Total Assets = Share holders fund + Total loan + Cerrent Liability
For the year 2008-09 = 8,969.60+25,598.20 93,562.70+10,688.70 = 34,567.8 1,04,251.4 =0.33 : 1 For the year 2007-08 = 7,314.70+19,875.90 81,458+12,909 = 27,190.6 94,367 =0.29: 1
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5)
Proprietary Ratio:
This Ratio gives information regarding proprietors fund to Total Assets proportion. It is calculated by following formula: Proprietary Ratio= Proprietors Fund . Total Assets- Misc.expenses Proprietors Fund = Equity + Reserve + P&L A/c - Miscellaneous expenses For the year 2010-11 = 8,245.46+60,138.66+9,102.59 1,58,767.41 = 77,486.71 1,58,767.41 =0.49 : 1
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=0.51: 1
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0.51 0.505 0.5 Proprietary Ratio 0.495 0.49 0.485 0.48 2010-11 2009-10 2008-09 2007-08 2006-07
Interpretation: The standard ratio is 1:1 and here it is average around 0.50:1. Means haft of the Toal Assets is proprorted by the proprietors fund.
This Ratio gives information regarding how many times is EBIT of the interest. It is calculated by following formula:
Interest Coverage Ratio = EBIT . Interest For the year 2010-11 = 12,754.23 2,149.08 =6 Times
Interpretation:
Here it is Average around 6-7 times of the Interest which shows good result of the company.
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Total Cashflow Coverage Ratio = EBIT + Depreciation . Interest For the year 2010-11 = 12,754.23+2,485.69 2,149.08 =7 Times
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Interpretation: Here, this Ratio is average around 7-8 times shows good position of the firm.
Profitability Ratios
Profitability ratio are the best indicators of overall efficiency of the business concern, because they compare return of value over and above the value put into business with sales or service carried on by the firm with the help of assets employed. Profitability ratio can be determined on the basis of: 1. Sales 2. Investment
The gross profit to sales ratio establishes relationship between gross profit and sales to measure the relative operating efficiency of the firm to reflect pricing policy. Gross Profit to Sales Ratio = (Sales - Cost of Goods Sold) Sale * 100 Page 25
Interpretation: Here, the gross profit margin is average around 29%. Which shows the companys earning capacity. It is good for the firm.
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Operating Profit ratio = Operating profit *100 Net Sales For the year 2010-11 = 15,796.31 *100 58,359.78 =27.06%
Interpretation: Here, the operating profit ratio is average around 29%. Which shows the good position of the firm.
Interpretation: Here, the pretax profit ratio is average around 23.50% for the last five years. The firm shows good result, but it declined during last year ie 2010-2011.
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Interpretation: The net profit ratio tends to decline every year, the company should make effort to improve it. But the average for the last 5 years shows good result of the firm.
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Operating expense ratio = administrative expenses + selling expense *100 Net Sales
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Interpretation: The operating expense ratio was average around 2% during last four years but suddenly it become 4.88% during the previous year i.e 2010-2011. The ratio shows how many percent the firm spent on operating expense for selling that unit.
*100
Interpretation: Page 35
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Interpretation: Here, the selling expense ratio is average around 0.13% during last pervious year i.e 2009-2010 but it become more than double during year 2010-2011
9) Operating ratio:
Operating ratio =
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Operating ratio
108.00% 106.00% 104.00% 102.00% 100.00% 98.00% 96.00% 94.00% 92.00% 90.00% 88.00% 2010-11 2009-10 2008-09 2007-08 2006-07
Operating ratio
Interpretation: Here the figure shows declining in this ratio. So, firm should try to improve this ratio for the better running of business.
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Interpretation:
Return on asset =
Return on assets
7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2010-11 2009-10 2008-09 2007-08 2006-07 Return on assets
Interpretation:
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Particular Net fixed asset (+) Current asset Total (-) Current liability Capital employed
2011 39,064.75
2010 34,575
2009 32,937.7
2008 26,093.7
2007 25,525
35,396.79
30,815.7
30,925.3
30,527.8
25,858.8
74,461.54 13,675.86
65,390.7 10,967.3
63,863 10,688.7
56,621.5 12,909
51,383.8 10,702.50
60,785.68
54,423.4
53,174.3
43,172.5
40,681.3
=23.73%
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Interpretation:
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Interpretation:
14) Return On Equity Funds: Return On Equity Funds = Net profit after tax preference divident *100 AverageOrdinaryl shareholders equity
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Earning per share = Net profit available to equity holders No of equity holders outstanding
8,201.30 824.55
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Interpretation:
Cash earning per share = Cash+Net profit available to equity holders Page 47
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Interpretation:
Interpretation:
Dividend per share = Divident paid to ordinary shareholders No of ordinary shareholders Page 50
29,683 8,245.46
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Interpretation:
Dividend pay out ratio= Total Divident paid to equity shareholders * 100 Total net profit
Interpretation:
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=1.09 times For the year 2007-08 = 24,656.7 25,929.50 =0.95 times
21,648.9 25,102
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Interpretation:
Raw Material Turnover = cost of raw material Average raw material inventory
Interpretation:
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Stock In Process Turnover = cost of goods manufactured Average work in progress inventory
28232.30 1527+1772 2
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Interpretation:
365 13 times
Interpretation:
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=0.25 times For the year 2007-08 = 24,656.7 1,15,580.45 =0.21 times
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Interpretation:
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=0.56 times For the year 2007-08 = 24,656.7 51,986.1 =0.47 times
Interpretation:
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Particular Net fixed asset (+) Current asset (+) Investment Total Assets (-) Current liability Capital employed
2011 39064.75
2010 34575
2009 32937.7
2008 26093.7
2007 25525
35396.79
30815.7
30925.3
30527.8
25858.8
75,839.08
69,230.5
67,157.8
58,979.7
56,775.6
=0.51 times For the year 2007-08 = 24,656.7 57,877.65 =0.43 times
Interpretation:
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32,402.13 30,726.55
=1.05 times For the year 2007-08 = 24,656.7 28,193.3 =0.87 times
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Interpretation:
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32,402.13 24,441.6
=1.33 times For the year 2007-08 = 24,656.7 19,720.3 =1.25 times
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58359.78 86806.38
48,221.32 80,197.8
=10.10%
44,126.08 77,846.8
=9.24 % For the year 2007-08 = 7,366.70 *100 37,050.10 * 37,050.10 71,888.7
=10.25 %
Earning Power
10.40% 10.20% 10.00% 9.80% 9.60% 9.40% 9.20% 9.00% 8.80% 8.60% 2010-11 2009-10 2008-09 2007-08 2006-07
Earning Power
Interpretation:
Return on equity=
=9.82%
=8.72 %
=8.93 %
=8.02 %
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Return On Equity
Interpretation:
SUMMARY
Financial Statement Analysis is a method used by interested parties such as investors, creditors, and management to evaluate the past, current, and projected conditions and performance of the firm. This report mainly deals with the insight information of the two mentioned companies. In the current picture where financial volatility is endemic and financial intuitions are becoming popular, when it comes to investing, the sound analysis of financial statements is one of the most important elements in the fundamental analysis process. At the same time, the massive amount of numbers in a company's financial statements can be bewildering and intimidating to many investors. However, through financial ratio analysis, I tried to work with these numbers in an organized fashion and presented them in a summarizing form easily understandable to both the management and interested investors. It is required by law that all private and public limited companies must prepare the financial statements like, income statement, balance sheet and cash flow statement of the particular accounting period. The management and financial analyst of the company analyze the financial statements for making any further financial and administrative decisions for the betterment of the Page 71
Conclusion and Findings I analyzed the financial statement of National Thermal Power Corporation The analysis is as follows: The liquidity position of the company is not up to the standard, is below the industrial average in 2007, but it has improved a little in 2008 and is near the industrial average. There is a considerable rise in the working capital of the company from 2007 to 2008 which shows good liquidity position of the company. Leverage ratio indicates the high risk associated with the company. Leverage ratio helps in helps in assessing the risk arising from the use of debt capital. As we can see that in both the years debt to equity ratio is slightly below the industrial average. Profitability ratio is good as the earnings have increased for its share holders from 26% to almost 30%. The profitability ratio is high because of the low financial charge. Activity ratio of the company is not that efficient, as we can see that the debtor turnover ratio has increased but is not as much as company would have expected. The average collection period is also late. Company did not pay any dividend in 2007. EPS has also jumped from a mere Rs37 to almost Rs 100. Book value per share is the indication of the net worth of the corporation. It is somehow similar to the earning per share, but it relates to stockholders equity to the number of shares outstanding, so we can say net worth of the company is good. Page 72
RECOMMENDATIONS
As I have realized that the National Thermal Power Corporation is doing well since its inception. It is quite difficult to give any suggestion to such a corporation but still no one is perfect, There is always a room for improvement so I will recommend the following suggestions for NTPC LTD: Employee training must be introduced on continuous basis so that the employees have the understanding of the latest development especially with its customers. As observed the company has an Internal Audit system wherein external Chartered Accountant Firms appointed to carry out periodic audits of the different units of the Corporation. In my opinion, the scope and coverage of internal Audit needs to be enhanced in order to make it proportionate with the size of the business. As seen from the physical verification there is a great deal of mismanagement of resources and it must be avoided, as it decreases the profit. Company should hire fresh graduates. As the combination of experienced and fresh talent can produce better results and will improve the efficiency of the management. As the company is not a listed company. The company has implemented DPE guidelines. The company has to make continuous efforts to maintain transparency, disclosures and fairness in dealing with stakeholders. Aggressive publicity campaign must be introduced by the company about there new project, as there is little awareness about there new projects. The vigilance department of the corporation has to improve the level of transparency for implementing the proper system of E- tendering.
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