A STUDY ON Financial statement Analysis of Axis bank.doc

INTRODUCTION

Accounting is the process of identifying, measuring and communicating economic

information to present informed judgment and decision by users of the information. It involves

recording, classifying and summarizing various business transactions. The end products of the

business transaction are the financial statements comprising primarily the position statement or

the balance sheet and outcome of the summarizing process of accounting and are therefore the

sources of information on the basis of which conclusions are drawn about the profitability and

the financial position of the concern.

Financial statements are the basis for decision making by the management as well as all

the outsiders who are interested in the affairs of the firm such as investors, creditors, customers

and general public. The analysis and the interpretation of financial statements depend upon the

nature and type of information available in these statements i.e the balance sheet and income

statements of the business enterprise.

The analysis of financial statements is a process of evaluating the relationship between

component parts of financial statements to obtain a better understanding of the firm’s position

and performance.

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FINANCIAL STATEMENTS

Meaning of Financial Statements:

Financial statements are the source of the information on the basis of which conclusions

are drawn about the profitability and liquidity position of a business enterprise at the end of

financial year. They are the major means employed by firms to present their financial situation to

owners, creditors and the general public.

Financial statements are the end products of financial accounting, prepared by the

accountant that purport to reveal the financial position of the enterprise, the result of its recent

activities and an analysis of what has been done with the earnings.

According to John.N.Myer “The financial statements provide a summary of the accounts

of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a

certain date and the income statement showing the results of operation during a certain period”.

Financial statements are also called financial reports.

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Nature of Financial Statements:

Financial statements are prepared for the purpose of presenting a periodical review or

report by the management and deal with the state of investment in business and result achieved

during the period under review. According to the American institute of Certified public

Accountants the Financial Statements reflects, “A combination of recorded facts, accounting

conventions applied affects them materially”. This implies that data exhibited in the Financial

Statements are affected by recorded facts, accounting conventions and personal judgment.

Recorded Facts: The term-recorded fact means facts that have been in the accounting

books. Facts that have not been recorded in the financial books are not depicted in the

financial statements, however material they might be.

Accounting Convention: Accounting conventions imply certain fundamental accounting

principles, which have been sanctioned by long usage. For example on account of the

convention of conversation provision is made for expected losses but the real financial

position of the business may be much better than what has been shown by financial

statements.

Personal judgment: Personal judgment has also an important bearing on the financial

statement. For example, the choice of selection method of depreciation lies on the

accountant, similarly the made of amortization of fictitious assets also depends on the

personal judgment of the accountant.

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Importance of Financial Statements:

The financial statements are mirrors, which reflect the financial position and operating

strength or weakness of the concern (firm). These statements are useful to management,

investors, creditors, bankers, workers, government and public at large. The importance of

financial statements are:

a) As a report of Stewardship

b) As a basis for fiscal policy

c) To determine the legality at dividends

d) As guide to advice dividend action

e) As a basis for the granting of credit

f) As informative for prospective investors in an enterprise

g) As a guide to the value of investment already made

h) As an aid to government supervision

i) As a basis for price or rate regulation

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Need for the Study:

The performance of any organization is evaluated through their sales performance and

their profitability during the existence of the firm. Essentially my study, which is part of the

requirements to be fulfilled, aimed at, evaluation of the performance of “National Thermal

Power Corporation” is undertaken to find the gap between the target and achieved results of the

company. Its performance is evaluated by taking the past six year’s financial reports.

Objectives of the Study

The present study entitled “Financial statement analysis” is under taken with the

following objectives.

To study the composition of assets and liabilities of the NTPC

Limited.

To evaluate financial performance of NTPC Limited.

To study the overall position of NTPC Limited.

To draw conclusions and to suggest suitable measures, to

overcome problems, if any to improve its performance.

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RESEARCH METHODOLOGY

Data collections:

The data for present study is collected through secondary source the data has been

collected from the financial reports of the company for the last six years. The data also collected

from industry reports. The collected data is presented in one way and two way tables. The

statements like averages, percentages are used wherever necessary.

Data Methodology of Study:

The data of RAMAGUNDAM Thermal Power Station (NTPC) has been collected mainly

from secondary sources like:

1. The administrative officer of the RSTPS.

2. The annual report and other reports.

3. Discussion with senior manager/manager of finance, purchases and stores.

4. The NTPC library.

For the study the data collected from primary and secondary sources has been scrutinizes,

edited and presented in the form of tables and statements. The analysis of the data has been made

with the help of certain mathematical techniques like percentages, proportions etc, and ratio

analysis to draw conclusions.

In keeping view the objectives of the study the following methodology has been adapted:

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a) Sources of data:

To provide a better understanding of the topic by adding a practical dimension to the

same, practical illustration is very vital, such an exercise necessitates a great deal of data.

The requisite data, which has been collected and used, thanks to the co-operation

of the management, has two sources.

(i) Primary data: Most of such information has been collected from internal

interviews and discussions with various officials in the finance department of

Sagar Cements Limited.

(ii) Secondary data: Much of the information has been collected from the books

available and the annual reports maintained by the company facilitated the study.

b) Tools and Techniques applied:

The present study is basically based on “financial statement analysis” and for the purpose

of analysis and interpretations, here in the

(i) Comparative & Common size statements: Balance sheet & income statement in

which items are expressed in percentage rather than in absolute rupees.

(ii) Trend analysis: Computation of the percentage relationship that each statement

bears to the same item in the base year.

(iii) Ratio analysis: Uses of financial ratios to evaluate performance such as liquidity,

solvency and profitability.

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LIMITATIONS OF THE STUDY

The present study suffers from the following limitations.

1. The study is restricted to financial performance of the organization with no attention

given to production and marketing.

2. Financial Management covers topics like cost of capital, capital budgeting, financial

analysis, working capital, cash and inventory management etc. The study dealt with the

financial analysis of NTPC Limited only.

3. Comparative statements are computed from historical accounting records. So they

possess those limitations and weakness as accounting records posses.

4. Financial analysis and interpretation adopted technique of Ratio Analysis has got its own

Limitations. While making comparison of ratios no allowance for changes in general

price level is made. A change in price level can seriously affect the validity of

comparison of ratios computed for different time periods. It is not always possible to

make future estimations on the basis of the past, as it always does not come true.

5. In profit and loss account net profit is ascertained on the bases of historical costs.

6. Profit arrived by the profit and loss accounts is of interim nature. Actual profit can be

ascertained only after the firm achieves its maximum capacity.

7. The net income disclosed by the profit and loss account is not absolute but relative.

8. The profit and loss account does not disclose factors like quality of products, efficiency

of the management etc;

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9. The net income is the result of personal judgment and bias of accountants cannot be

removed in the matters of depreciation, stock valuation etc;

10. There are certain assets liabilities, which are not disclosed by the balance sheet. For

example, the most tangible assets of the company is its management force and

dissatisfied labor force is their liability, which are not disclosed by the balance sheet.

11. The book value of assets is shown as original cost less depreciation. But in practice the

value of the assets may differ depending upon the technological and economic charges.

12. The assets are valued in a balance sheet on a going concern bases. Some of the assets

may not be realize their value on winding up.

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PROFILE OF NTPC

Enery is an important parmeter In the over all economic development activity of any country. It

has become sysnonymous with progress in all fields of activities. Energy is the source and control of all

the things and actions of human beings and it is also a measure of everything. It is the key of indusry and

econonic growth. Planned development exploitation and utilization of the energy resources is a pre-

requisite for a speedy and balanced growth of the national economy. In general energy is one of the

prime inputs for such important branches of the national economy as industry, agriculture, transport,

and also for the domestic sector.

National Thermal Power Corporation popularly known as NTPC was formed on 7 th

November 1975 as a central electric generating company.

NTPC the Navaratna power giant today generates 1/4th of the total power in the

country and is ranked 9th largest thermal power generating company in the world. It has a

total generating capacity of 19,435MW.

NTPC a front-runner in the Indian Power Sector is one of the largest & the best power

utilities of the world, there by contributing to India’s emergence as one of the world’s leading

economies. The world rank, in its performance audit report on NTPC’s projects observed that

“NTPC record in plant construction, cost containment & operating efficiency has been

exceptional, while as an institution it has broken new ground in Organization & Management,

successfully navigated the transition from constructions to operating company & generally

coped quite well with the problems of rapid expansion.

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Two corporations The National Hydro Electric Power Corporation (NHPC) & National

Thermal Power Corporation (NTPC) were set in 1975-76 in the center sector as a step to

achieve the objectives. The company started functioning in March 1976 with the appointment

of a Chairman & Managing Director.

With ambitious growth plans to become a 56,000MW power company by 2017, NTPC

the largest power utility of India has already diversified into hydro sector further initiatives

for greater organization transformation have been approved under “PROJECT DISHA”

NTPC was among the first Public Sector Enterprises to enter into a Memorandum of

Understanding (MOU) with the Government in 1987-88. NTPC has been placed under the

'Excellent category' (the best category) every year since the MOU system became operative.

Recognizing its excellent performance and vast potential, Government of the India has

identified NTPC as one of the jewels of Public Sector ‘Navratnas’ a potential global giant.

Inspired by its glorious past and vibrant present, NTPC is well on its way to realize its vision of

being “A world class integrated power major, powering India’s growth, with increasing global

presence”.

NTPC is committed to the environment, generating power at minimal environmental

cost and preserving the ecology in the vicinity of the plants. NTPC has undertaken massive a

forestation in the vicinity of its plants. Plantations have increased forest area and reduced

barren land.

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NTPC has also taken proactive steps for ash utilization. In 1991, it set up Ash Utilization

Division to manage efficient use of the ash produced at its coal stations. This quality of ash

produced is ideal for use in cement, concrete, cellular concrete, building material.

THE FINANCIAL PERFORMANCE :

The company’s market capitalization crossed One trillion and also generated 170.88

Bus during 2005-06 registering an increase of 7.40% over 2004-05. NTPC contributed 27.68%

electricity in the country during 2005-06.Provisional and un audited Net profit after tax for

the year 2005-06 is Rs.57,061 million as compared to Rs.58,070 million during the year 2004-

05. Capital Outlay for 2006-07 was set at Rs.113, 250 million. It has an interim dividend of

20% for the financial year 2005-06 amounting to Rs.16, 491 million.

NEW TECHNOLOGY INITIATIVES:

NTPC has adopted super critical technology for SIPAT-1 (3*660 MW) and Barh (3*660

MW) projects. As part of long-term capacity addition programme, NTPC plans to develop coal-

based thermal power projects with higher units sizes, machines along with integrated captive

mining. These power projects will have higher efficiency, assured fuel availability at lower

cost, lower project cost due to economy of scale and lower green house gas emissions.

The unique features include training facility at remote terminal at NTPC PMI-

NOIDA in addition to the main unit located at Sipat site. NTPC has taken steps to develop

roadmap for adopting ‘Clean Development Mechanism’. This shall help in earning ‘Citified

emission Reduction’ and will attract advanced technologies and investment into the country.

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Geographical Information System based mapping interface is being developed in

association with IIT-Delhi or integrating the topographical features with the environmental

monitoring data and mapping it around Kahalgaon STPP.

RESEARCH AND DEVELOPMENT:

R&D Center continued to provide scientific services to all the stations of NTPC and some

other utilities to increase their availabilities and reliability by way of carrying out health

assessment of the power plant components, carrying out failure analysis, condition

monitoring of various equipment, post- operational chemical cleaning of boilers, formulations

of chemical treatments etc.

In addition, R&D center worked for attaining self-sufficiency in overhauling and spares

parts development for gas turbines and also for the refurbishment of Gas Turbine

components.

ENERGY TECHNOLOGIES :

Energy Technologies, a new initiative for the development of new technologies with

focus on fundamental R&D, covering the entire energy spectrum has identified five important

destinations for itself and power sectors. These are:

I. Reduction in cost OF power,

II. ii) Resolving energy-carbon conflict,

III. iii) Strengthening the power delivery infrastructure,

IV. iv) Enabling digital society and Sustainable development.

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To achieve the first two destinations, a comprehensive programme of various new

technologies, has been formulated.

In its mission to create a world-class institute Energy Technologies is planning to establish

various specialist divisions, research labs and centers of excellence. Centers of Excellence in

Simulation & Modeling, Artificial intelligence, Computational Fluid Dynamics, Sensors and

Material science are being proposed.

CENTRE FOR POWER EFFICIENCY & ENVIRONMENT PROTECTION (CenPEEP) :

CenPEEP has been established in association with USAID to implement Greenhouse Gas

Pollution Prevention Project to reduce emission of Greenhouse gases per unit of energy

generated while increasing energy productivity. CenPEEP in its pursuit for improving

performance of power plants has created ‘Center of Excellence for Efficiency’. This Center will

monitor, evaluate and provide guidance to stations for achieving the goal of increased

efficiency and productivity. CenPEEP is also involved in acquisition, demonstration and

implementation of new techniques for performance improvement of Power Plants.

HUMAN RESOURSE MANAGEMENT:

NTPC takes pride in its highly motivated and trained Human Resource that has

contributed its best to bring NTPC to its present height. The total strength of employees of

the corporation stands at 23385 as on March 31,2005.

To induct talent and groom them into a dedicated cadre of power professionals

“Executive Trainee” Scheme was introduced in the year 1977 for recruitment in the

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disciplines of Mechanical Electrical, Civil, Control & instrumentation and now encompasses

Computer Science, Chemistry, HR and Finance disciplines inputs as well as a on-the-job

training.

The new recruits are also attached with senior executives under a systematic and formal

‘Mentoring System’ of the company to integrate them into the Culture of the company.

STATION-WISE GENERATION 20010-11

STATIONS CAPACITY (MW) Gen (MU) Gross

Northern Region 4780 33891

Singrauli 2000 15803

Rihand 1500 7989

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Unchahar 840 6781

Tanda 440 3318

National Capital Region 3152 22353

Dadri (Coal) 840 6831

Anta (Gas) 413 2785

Auraiya (Gas) 652 4118

Badri (Gas) 817 5457

Faridabad (Gas) 430 3162

Western Region 5653 41724

Korba 2100 stss 17049

Vindyhachal 2260 17821

Kawas (Gas) 645 2822

Jhanor Gandhr (Gas) 648 4032

Easrern Region 5900 35225

Kahalgaon 840 9701

Talcher – Kaniha 3000 16246

Talcher – Thermal 460 3196

Southern Region 3950 25917

Ramagundam 2600 17172

Simhadri 1000 8123

Rajiv Gandhi CCP (Gas) 350 622

Total 23435 159110

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NTPC ORGANISATION AND FUNCTIONS :

The organization design is one of the main factors, which ultimately determines the

effectiveness of an enterprise. The board of directors is the supreme policy making body,

which give the direction to the activities of the organization. The head of this board is the

Chairman and Managing Director who is also the full time Chief Executive of the company. The

members of this board are both full-time directors as well as senior level officers.

The basic divisions, which are accountable to CMD, are:

Technical and Engineering Division,

Corporate Commercial division,

Operation Services division,

Corporate Finance division,

Corporate Human Resource division,

Corporate Projects division,

Vigilance division.

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OBJECTIVES OF NTPC:

• To add generating capacity within prescribed time and cost.

• To operate and maintain power stations at high availability ensuring minimum cost of

generation. It has planned massive growth to make itself a 40,000 MW company.

• To maintain the financial soundness of the company by managing the financial Operations

in accordance with good commercial utility practices.

• To function as a responsible corporate citizen and discharge Social Responsibility, in

respect of environment protection and rehabilitation.

• To adopt appropriate human resources development policy leading to Creation of

team of motivated and competent power professionals.

• To develop R & D for achieving improved plant reliability.

CORPORATE OBJECTIVES :

To add generating capacity within prescribed time and cost.

To expand the constancy operations and to participate Ventures abroad.

To maintain the financial soundness of the company by managing the financial

operations in accordance with good commercial utility.

To development (R&D) for achieving improved plant reliability.

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To develop appropriate commercial policy leading to remunerative tariffs and

minimum receivables.

Implement strategic diversification in the areas of R&M, Hydro, LNG and non-

conventional and eco-friendly fuels and explore new areas like transmission,

information technology etc.

Make prudent acquisitions. Continuously develop competent human resources to

match world standards.

PRESTIGIOUS AWARDS WON BY NTPC:

US Environmental Protection agency’s “2003 Climate Protection Award”.

SCOPE Award for Excellence and Outstanding Contribution to the Public Sector

Management-Institutional Category 2000-01.

CII Award for Excellence in Infrastructure 2002.

Teri’s CORE-BCSD Corporate Social Responsibility Award.

“Business Today-Hewitt Associate Best Employer Survey 2002-03” has ranked NTPC

as the third best place to work among 220 major companies in India.

NTPC – CENPEEP received world climate technology award-2002 in recognition of

institute’s achievements in furthering the goal of Climate Technology Initiative.

Ramagundam project received National Safety Council of India’s Safety Award

“PRASHANSA PATRA” for developing and safety and health management systems.

NTPC Ramagundam has achieved first place in Raja-Bhasha Award in the year 2003.

NTPC has bagged Safety Innovation Award 2005.

NTPC Limited bagged the IPMA (International Project Mngt Award).

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EXECUTIVE SUMMAR:

Why I have chosen NTPC to do project?

Being a power giant with huge manpower and being a public sector organization with

number of trade unions where they have major role and it also posses:

Navaratna status,

Core values,

Takes care of society,

It has CSR i.e., corporate social Responsibility,

Highly skilled people,

Welfare Activities,

Provides R & R i.e., Responsibilitation and Resettlement to the surrounding

People

RAMAGUNDAM – A LEGEND

Ramagundam (including Godavarikhani Town) is a city and municipality in the

Karimnagar district of northern Andhra Pradesh, India. It has a population of 236,623 (2001

census). The town Ramagundam gets its name from combination of two words (Rama +

Gundam). A famous temple of Hindu god Lord Rama is situated in old part of the town and

Gundam means water springs.

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Legend has it, in the age bygone, LORD RAMA traversing the banks of Godavari River

left his immortal footprints on a small hillock. Today his blessings lives on-enshrined in a small

immortal footprints that Ramagundam is considered as Manchester of India in light of the

companies around it.

Some of them are FCI (Fertilizer Corporation of India) , Kesoram Cement (Basanth

Nagar), NTPC (RSTPS-Ramagundam super thermal power station sourcing 2600 MW of

power 24/7), and APSEB unit (Ramagundam).

Around 24 units of coal mines belt in Godavarikhani stretching 25 km including

opencasts (state of the art proclainers) are used in these open coal mines.

There are many factories around this place that take the raw material from the coalmines and

prepare carbon derivatives.

River Godavari flowing through this region gave this a strategic location for all these

companies providing employment to more than 15,000 people.

Transport

Ramagundam is connected to major parts of the State through a well connected road,

Rajiv Rahadari (Freeway of Late Shri Rajiv Gandhi) in remembrance of Gandhi family and the

Party he hailed from (Congress I).

APSRTC is well connected across all communities of this region. Ramagundam is

connected through the South Central Railway which connects to all the four metropolitan

cities of India.

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Most of the trains passing through this route stop at Ramagundam. Ramagundam

Airport code is RMD. The nearest airport (other than unused RDM) is around 250 km

(Hyderabad-HYD) away and connected through Highway NH-7 via Karimnagar and Siddipet.

RAMAGUNDAM SUPER THERMAL POWER STATION (RSTPS)

November 14th 1978, suddenly the sleepy village RAMAGUNDAM became the scene

of hectic activities. Barricades Welcome arches were erected all along the road leading to

what is now the site of 2600 MW POWER STATION.

It is on this auspicious day of14th November 1978 the Honable Prime Minister of

INDIA Late. Shri.Morarji Desai laid the foundation stone for a MAMMOTH POWER STATION

IN SOUTHERN INDIA.

NTPC Ramagundam spread over 1000 acres of land, is considered to be one of the best

in the nation (among 24locations). Constructed at a cost of Rs.1762 crores, the station has

been one of the largest recipients of the WORLD BANK loan. its project implementation and

financial control has pause from the World Bank, Ramagundam can be considered as the

school for ‘Construction of Power Projects’.

NTPC is divided into 5 regions: Ramagundam falls in southern region along with

Simhadri and Kayankulam.

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NTPC Ramagundam unit with Approved and Installed capacity of 2600MW is the largest

Thermal Power plant powering South India’s growth. Ramagundam unit of NTPC credited

with ISO 14001 certified Super Thermal Power Station in our country.

This provides major chunk of power supply to Dadar Nagar Haveli, Daman & Dui, PGCIL

(Powergrid Corporation of India Limited). PGCIL has a capacity of 9500MW and expects to

grow into 30,000 MW by 2012 with a 16 billion USD investment. Less than 25% of the power is

provided to the State of Andhra Pradesh More than 38000 crores are invested to build this

massive organisation which provides employment to more than 6000. Recently 7th unit was

added (August 2004) with additional capacity of 500 MW.

NTPC Ramagundam has exemplary vision for the environment which includes

afforestation, monitoring environment impacts using NRSA satellite imaging services, Ash

pond treatment, Ash brick plants, awareness of environment to the local community NTPC has

gained accolades for its highest quality of disaster management policies.

RSTPS has less than 10 disturbances in 2005-2006 and non last more than a day.

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Chairman & Managing Director

Shri Arup Roy Choudhury

Board of directors

Sh. I.J.Kapoor, Shri A.K. Singhal Sri B.P. Singh Shri D.K. Jain,

(dept. commercial) finance projects technical

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Shri S. P. Singh Shri N.N.Misra

HR Operations

DISTRIBUTION OF POWER OF NTPC RAMAGUNDAM

S.No States Distributed Capacity in MW Percentage

01 Andhra Pradesh 580 27.619

02 Tamilnadu 470 22.381

03 Karnataka 345 16.429

04 Kerala 245 11.667

05 Goa 100 4.762

06 Pondicharry 50 2.381

07 Unallocated 310 14.762

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RSTPS ACHEVEMENT AND AWARDS :

• NTPC has been awarded the prestigious SCOPE AWARD 2004, for its exemplary

contribution in management of Public Sector Enterprise.

• BEST HR HEAD AWARD by Amity School of Business for its contribution to Corporate

Human Resource Management in August 2004.

• Greentech Safety Award 2004-05: NTPC won 9 Gold, 4 Silver, 1 Bronze award for

outstanding achievement in the field of safety and environment management.

• International Market Assessment India (IMA) has adjudged NTPC Chief Finance officer

of the year for excellence in Finance of Public Sector Undertaking for the year 2004.

RSTPS has bagged the Golden trophy, in Performance Excellence Award for the year

2003-04 instituted by Indian Institute of Industrial Engineering, in recognition of its

performance in financial achievement, Customer Satisfaction, Internal

processes,Innovation and learning, Strategy for development.

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RSTPS AT A GLANCE

Address: P.O. Jyothinagar, Dist. KarimNagar-505215, AndhraPradesh

Approved Capacity 2600 MW

Stage I: 3X200 MW

Installed Capacity Stage II: 3X500 MW

Stage III: 1X500 MW

Coal Source

i. South Godavari Coal Fields of Singrani Collieries for Stageii. Korba Coal Fields of SECL for Stage III

Water Source

Sri Ram Sagar Dam on Godavari river,D_83 Canal from

Pochampad Reservoir

Beneficiary States

Pondicherry, Goa, Kerala, Karnataka, Tamil Nadu, AP, PGCIL

(for HVDC)

Unit Sizes

Stage - I: 3x 200 MW

Stage -II: 3x 500 MW

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Units Commissioned

Unit -I 200 MW November 1983

Unit -II 200 MW May 1984

Unit -III 200 MW December 1984

Unit -IV 500 MW June 1988

Unit -V 500 MW March 1989

Unit -VI 500 MW October 1989

Units Commissioning

Schedule Unit -VII 500 MW August 2004

International IDA, IBRD loan, OPEC, KFW, EXIM Bank, Japan

POWER SECTOR

Energy is an important parameter in the overall economic development activity of any

country. It has become synonymous with the progress in all fields of activities.

Its standard of living in the words of DAGLI is as follows “it is said that the difference

between a starving Indian peasant and a prosperous American former is that behind his elbow

the Indian farmer has almost nothing while his American counterpart has thousands of horse

power.

Thus, it is energy, which is the dividing line between any subsistence economy and a

highly developed economy. India is poor and America is rich because America consumes

nearly 50 times as much energy as is consumed by India. Energy is at the heart of the modern

industrial society. It could also be an effective weapon in the battle against object poverty”.

There is a close correlation between energy consumption and level of economic

development. Energy means “capacity of doing work”. There are various sources of energy but

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in India the important sources are coal, hydroelectricity, oil and natural gas, nuclear fuels,

firewood and animal wastes.

Despite the development of various sources in the energy sector, the fact still remains

that low cost energy sources like fire wood, cattle dung and vegetable wastes account for as

much as 45 percent of energy consumption in the country.

DEVELOPMENT IN INDIA

Power development in India began in 1897 when a 200KW hydro station was first

commissioned at DARJEELING. In 1899, a first steam station was set-up in Calcutta with a total

capacity of 100KW. Thereafter, a series of hydro and steam power station were

commissioned. But the power development was not in a systematic and planned manner in

the country. Therefore to achieve the objective of promoting the co-ordination development

and rationalization of generation, transmission and distribution of electricity on a regional

basis throughout the country in the most efficient and economic way, the stateel ectricity

board (SEBs) was constituted in the various states of the country under the provisions of the

electricity (supply) act 1948.

These SEBs, were to enjoy the monopoly in respect of generation, transmission and

distribution of electricity in the country. The efficiency of working of power plant and their

maintenance have been unsatisfactory as a result of which the power generating capacity

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already created could not have been fully utilized. Power is the single factor, which changed

the way of living.

The National Thermal Power Corporation Limited, established on November 7 th 1975,

has become the most important infrastructure input for improving the standard of living to

meet the growing demand and to fulfill the needs of the country. Just in 29 years this

company has grown to be the largest producer of power in the country.

Keeping the significance of power supply in sight, N T P C has been chosen for the

purpose of the study as it has many units under its control. Ramagundam Super Thermal

Power Station (RSTPS) has been selected for the study.

PRESENT SCENARIO

Several measures have been taken in line with the Electricity Act, 2003. The National

Electricity Policy has been notified. Main targets of National Electricity Policy (NEP) are:

• Availability of electricity to all households in five years.

• Demand to be fully met by 2012.

• Minimum lifeline consumption of 1unit per household per day.

RECENT DEVELOPMENT

• In 2004-05, the economy has maintained the growth momentum despite a deficient

South west monsoon, hardening international prices of steel and extensive devastation

caused by Tsunami.

• He macroeconomic stability observed in recent years needs to be sustained and

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Strengthened. Further improvements in investment climate and augmenting

Infrastructure, especially electricity infrastructure are being given high priority.

POWER GENERATION IN INDIA:

SOURCE CENRTAL STATE PRIVATE TOTAL % SHARE

Coal 21417.51 36302.00 4414.38 62130.89 59.22

Gas 449.00 2661.70 4082.40 11163.1 1.64

Diesel 0 582.89 551.94 1134.80 1.08

Total thermal 25836.51 39546.59 9045.72 74428.82 7.94

Hydro 3049.00 22636.0 576.20 26261.22 25.03

Nuclear 2720.00 0 0 2720.00 2.59

Wind 0 62.86 1444.60 1507.46 1.44

Total 31605.50 62245.47 11066.52 104917.5 100

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REVIEW OF LITERATURE

According to JOHN.N.MYER “The financial statements provide a summary of the

accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as

on a certain date and the income statement showing the results of operation during a certain

period”.

Financial definition:

A written report which quantitatively describes the financial health of a company. This

includes an income statement and a balance sheet, and often also includes a cash flow statement.

Financial statements are usually compiled on a quarterly and annual basis.

Financial management definition:

Financial management refers to that part of the management activity which is concerned

with the planning and controlling of firms financial resources. It deals with finding out various

32

sources for raising funds for the firm. The sources must be suitable and economical for the needs

of the business and the most appropriate use of such funds also forms a part of financial

management.

Financial statement analysis:

Evaluation of a firm’s financial statements in order to assess the firm’s worth and its

ability to meet its financial obligations.

Types of Financial Statements:

Financial statements primarily compress two basic statements:

I) The position statement or balance sheet.

II) The income statement or profit & loss account.

I) The Position statement or Balance sheet:

The American Institute of certified public Accounts defines balance sheet as, “a

tabular statement of summary of balance (debits and credits) carried after actual and

constructive closing books of account and kept according to principles of

accounting”. The purpose of the balance is to show the resurgence that the company

has i.e. its assets and from where those resources come from i.e.: its liabilities and

investments by owners and outsiders.

33

The balance sheet is one of the important statements depicting the financial

strength of the concern. It shows on the one hand the properties that it utilizes and on

the other hand the owned by the concerned the liabilities and claims it owns to

owners and outsiders.

The balance sheet is prepared on a particular date. The right hand side shows

properties and assets. Normally there is no particular sequence for showing various

assets and liabilities. The companies Act, 1956 has prescribed a particular form for

showing assets and liabilities in the balance for the companies registered under this

act. These companies are also required to give figures for the previous year along

with h current year’s figures.

II) Income statement or Profit & Loss Account:

Income statement is prepared to determine the operational position of the concern.

It’s a statement of revenue earned and the expenses incurred for carrying that

revenue. If there is excess of revenue over expenditure it will show a profit and if

expenditure are more than the income then there will be a loss. The income

statement is prepared for a particular period, generally a year. When income

statement is prepared for the year ending on 31st march then all the revenues and

expenditure falling due in the year will be taken into account irrespective of

payment.

Analysis and Interpretation of Financial Statements:

Financial statements are indicators to two significant factors:

34

1) Profitability

2) Financial soundness.

Analysis and interpretation of financial statements therefore refers to such treatment of

the information contained in the income statement and the balance sheet so as to afford full

diagnosis of the profitability and the financial soundness of the business.

A distinction here can be made between the two terms and analysis and interpretation. The

term ‘analysis’ means methodical classification of the data given in financial statements. The

figure given in the financial statements will not help unless they are put in a simplified form. For

example all item ‘current assets’ are put at one place while all items relating to the ‘current

liabilities’ are put at another place. The term ‘interpretation’ means explaining the meaning and

significance of the data so simplified. Analysis and interpretation of financial statements

involves a study of relationship among various financial factors and to judge their meaning and

significance.

The financial analyst must understand the plans and policies of management, determine the

extent of analysis, reorganize data available as per requirements, establish relationship among

financial figures and make interpretation.

According to Myers, Financial statements Analysis is largely a study of the relationship

among the various financial factors in a business as disclosed by a single set of statement and a

study of the trend of these factors as shown the series of statements.

TYPES OF FINANCIAL ANALYSIS

35

Theoretical Framework of Financial Performance

Financial Performance:

Financial performance refers to a firm’s efficiency in acquiring funds and utilizing them

in order to attain its goal of maximizing owner’s wealth. The financial performance is measured

in terms of liquidity, solvency, operating efficiency and profitability.

Financial Analysis:

Financial Analysis involves identifying the reasons behind the results and financial

position of a business firm, which can controllable and uncontrollable ones or temporary and

permanent. Then the firm has to plan a corrective action against the controllable reasons while

the uncontrollable factors should be taken into account while planning for the future.

Analysis of Financial Statements:

36

Analysis of Financial statements can be defined as the process of evaluating the

relationship between component parts of a financial statement to obtain a better understanding of

a firm’s position and performance in a given industry. In other words, financial statement

analysis is the process of identifying the financial strengths and weaknesses of the firm by

analyzing the financial statements.

Importance of Financial Statements:

The information given in the Financial Statements is very useful to a number of parties. These

are the following:

1. Owners: The owners provide funds for the operations of a business and they want to

know whether their funds are being properly utilized or not. The financial statements

prepared from time to time satisfy their curiosity.

2. Creditors: Creditors (i.e. Suppliers of goods and services on credit, bankers and other

lenders of money) want to know the financial position of a concern before giving loans or

granting credit, the financial statements help them in judging such position.

3. Investors: Prospective investors, who want to invest money in firm, would like to make

an analysis of the financial statements of that firm to know how safe proposed investment

will be.

4. Employees: Employees are interested in the financial position of a concern they serve,

particularly when payment of bonus depends upon the size of the profits earned. They

would like to know the bonus being paid to them is correct so they become interested in

the preparation of correct profit and loss account.

37

5. Government: Central and State governments are interested in the financial statements

because they reflects the earnings for a particular period for purpose of taxation.

Moreover, these financial statements are used for compiling national accounts.

6. Research Scholars: The financial statements, being a mirror of the financial position of a

firm are of immense value to research scholars who wants to make a study into financial

operation of particular firm.

7. Consumers: Consumers are interested in the establishment of good accounting control

so that cost of production may be reduced with the resultant reduction of the prices of

goods they buy.

8.

1. According to Material Used:

External Analysis:

Outsiders who do not have access to the detailed internal accounting records of the

business firm do this analysis. These outsiders include investors, potential creditors, potential

sellers, government agencies, credit agencies, and the general public.

For financial analysis these external parties to the firm depend almost entirely on the

published financial statements. External analysis thus services only a limited purpose.

However, the changes in the government regulations requiring business firm to make

available more detailed information to the public through audited published accounts have

considerably improved the position of the external analysis.

Internal Analysis:

38

The analysis conducted by the persons who have access to the internal accounting records

of a business firm is known as internal analysis such an analysis can therefore be performed

by executives and employees of the organization. As well as government agencies, which

have statutory powers, vested in them, financial analysis that can be effected depending upon

the purpose to be achieved.

2. According to the Objective of the Analysis:

Horizontal Analysis:

Horizontal analysis refers to the comparisons of financial data of a company for several

years. The figures for this analysis are presented horizontally over a number of columns.

This type of analysis is also called dynamic analysis as it is based on the data from here

to here rather than on data of any one year. The horizontal analysis makes it possible to focus

attention on the items that have changed significantly during the period under review,

comparison of an item over several periods with a base may show attend deviation.

Comparative statements and trend percentages are two tools employed in horizontal analysis.

Vertical Analysis:

39

Vertical analysis refers to study of relationship of various in the financial statements of

one accounting period. In this type of analysis the figures form financial statements of a year

are compared with a base selected from the same year’s statements and the financial ratios

are the two tools employed in vertical analysis.

3. According to the Modus Operandi of Analysis:

Long-Term Analysis:

In the long-term analysis emphasis is given to stability and potential of the company.

Fixed assets, long-term debt structure and ownership interests are fully analyzed in the long-

term analysis. Long-term analysis is done to determine the solvency, stability and

profitability of the company.

Short- Term Analysis:

This type of analysis is used to determine the working capital requirement, profitability

etc; of the concern. In short run, an enterprise must have ample funds to meet its

requirements and sufficient borrowing capacity to meet its contingencies. Hence, current

40

assets and current liabilities are properly analyzed and liquidity position of the company is

determined.

LIMITATIONS OF FINANCIAL STATEMENTS ANALYSIS

1. The figures drawn from one year statements have limited use and value. Therefore, it’s

dangerous to depend solely on them for the purpose of decision making.

2. Analysis of financial statements is only a means and not an end in itself. Other factor

should be taken into account while making decisions regarding the operations of the

company.

3. Financial statements are historic in nature. Hence, entire dependence on these statements

for future planning may give misleading results.

4. The results of the financial statement analysis cannot form basis for the efficiency or

inefficiency of management. The ratios and other figures indicate only the probable state

of affairs of the company.

41

5. A variation in the accounting practices and policies followed over a period of time makes

the analysis difficult and inaccurate.

6. Sometimes, the financial statements are manipulated to conceal facts and show better

picture of the business, in such a case the limitations of the financial statements will be

reflected in the analysis as well.

7. The analysis of financial statements does not disclose factors like quality of product,

managerial efficiency etc;

8. Analysis generally ignores the difference in the nature of products, accounting

procedures, policies size and age of the firm etc; leading to inaccurate results.

9. A change in the value of money over a period of time reduces the importance and validity

of such analysis.

TECHNIQUES OF FINANCIAL ANALYSIS:

Among the techniques of financial analysis, the important tools of financial analysis are:

1. Comparative and Common size financial statements

2. Trend Analysis

3. Ratio Analysis

4. Fund Flow Analysis

5. Cash Flow Analysis

Common-Size Statement:

42

The common-size statement, balance sheet and income statement are shown in analytical

percentages. The figures are shown as percentages of total assets, total liabilities and total sales.

The total assets are taken as 100 and different assets are expressed as a percentage of the total.

Similarly, various liabilities are taken as a part of total liabilities.

These statements are also known as component percentage or 100 percent statements

because every individual item is stated as a percentage of the total 100. The shortcomings in

comparative and trend percentages where changes in items could not be compared with the totals

have been covered up. The analyst is able to assess the figures in relation to total values.

Trend Analysis:

The financial statement may be analyzed by computing trends of series of information

this method determines the direction upwards or downwards and involves the computation of the

percentage relationship that each statement item bears to the same item in base year. The figures

of the base year are taken as 100 and trend ratios for other years are calculated on the basis of

base year. The analyst is able to see the trend of figures, whether upward or downward.

For example, if sales figures for 2006 to 2007 are to be studied, then sales of 2006 will be

taken as 100 and the percentage of sales for all other years will be calculated in relation to the

base year i.e., 2006.

It helps in understanding the nature and rate of movements in various financial factors.

However, conclusions should not be drawn on the basis of single trend. Trends of related items

should be carefully studied. Due weight age should be extraneous factors such as government

policy, economic conditions etc., as they can affect the trend significantly.

43

Steps in computation of Trend Values:

1) Select one of the period for which financial statements are available as the base period.

2) The selected period should be a normal period.

3) Every item in the base period is taken as 100.

4) Trend value of each item for any other period:

Absolute value of the item for the period

= ------------------------------------------------------- × 100

Absolute value of the item in the base period

Funds Flow Analysis:

“A statement of sources of application of funds is a technical device designed to analyze

the change in the financial condition of a business enterprise between two dates”

Cash Flow Analysis:

Cash plays very important role in the entire economic life of a business. What blood is a

human body, cash is to business enterprises. It is very essential for a business to maintain an

adequate balance of cash.

Comparative Statement

The comparative financial statements are statements of the financial position at different

periods of time. The elements of financial position are shown in a comparative form so as to

given an idea of financial position at two or more periods. Two financial statements are prepared

in comparative from for financial analysis purpose. The comparative statement may show.

44

Absolute figures (Rupee amounts)

Change in absolute figures i.e. increase or decrease in absolute figures.

Absolute data in terms of percentages.

Increase or decrease in terms of percentages.

The financial data will be comparative only when same accounting principles are used in

preparing this (i) Balance sheet and (ii) Income Statement.

Comparative Balance Sheet:

The comparative balance sheet analysis is the study of the trend of the same items, group

of items and computed items in two or more balance sheets of the same business enterprise on

different dates. The changes in periodic balance sheet items reflect the conduct of a business.

The comparative balance sheet has two columns. A third column is used to show increase in

figures. The forth column may be added for giving percentages of increase or decrease.

Interpretation of comparative Balance Sheet:

While interpreting comparative balance sheet the interprets is expected to study the

following aspects.

Current financial position and liquidity position.

Long term financial position.

Profitability of the concern (firm).

Comparative Income Statements:

The income statements give the results of the operations of a business. The comparative

income statement gives an idea of the progress of a business over period of time. The change in

45

absolute data in money values and percentages can be determined to analysis the profitability of

the business. Income statements also have four columns. First two columns give figures of

various items for two years. Third and fourth columns are used to show increase or decrease in

figures in absolute amounts and percentages respectively.

Interpretation of Income Statements:

The analysis and interpretation of income statement with involve the following steps:

The increase or decrease in sales should be compared with the increase or

decrease in cost of goods sold. The amount of gross profit should be studied in the

first step.

The second step of analysis should be the study of operational profits.

The increase or decrease in net profit, which give an idea about the overall

profitability of the concern (firm).

An opinion should be formed about profitability of the concern and it should be

given at the end. It should be mentioned whether the overall profitability is good

or not.

RATIO ANALYSIS:

A ratio analysis is a statistical yardstick or mathematical expression that provides a

measure of relationship between two figures or amounts. Ratio is simply one number expressed

in terms of another.

The ratio analysis is one of the most powerful tools of financial analysis. It is the process

of establishing and interpreting various ratios (quantitative relationship between figures and

46

groups of figures). It is with the help of ratios that the financial statements can be analyzed more

clearly and decisions made from such analysis.

Ratio analysis is a technique of analysis and interpretation of financial statements. It is

the process of establishing and interpreting various ratios for helping in making certain decisions.

However, ratio analysis is not an end in itself. It is only means of better understanding of

financial strength and weakness of a firm. Calculation of mere ratios does not serve any purpose,

unless several appropriate ratios are analyzed and interpreted. There are a number of ratios which

can be calculate from the information given in the financial statements, but the analyst has to

select the appropriate from the same keeping in mind the objective of analysis.

Uses and Significance of Ratio Analysis

A) Managerial uses of ratio analysis:

1. Financial statements are prepared primarily for decision-making, but the information

provided in financial statements is not an end in itself and no meaningful conclusion

can be drawn from these statements alone. Ratio analysis helps in making decisions

from the information provided in these financial statements.

2. Ratio analysis is of much help in financial forecasting and planning. Planning is

looking ahead and the ratios calculated for a number of years work as a guide for the

47

future. Meaningful conclusions can be drawn for future from these ratios. Thus ratio

analysis helps in future forecasting and planning.

3. The financial strength and weakness of a firm are communicated in a more and easy

and understandable manner by the use of ratios. The information contained in the

financial statements is conveyed in a meaningful manner to the one for whom it’s

meant. Thus ratios help in communication and hence the value of the financial

statements.

4. Ratio analysis even helps in co-ordination which is of utmost importance in effective

business management. Better communication of efficiency and weakness of an

enterprise results in better co-ordination in the enterprise.

5. Ratio analysis even helps in making effective control of the business. Standard ratios

can be based upon performance of financial statements and variances or deviations, if

any, can be found by comparing the actual with the standards so as to take a

corrective action at the right time.

B) Utility to Shareholders/Investors:

An investor in the company will like to access the financial position of the

concern where he is going to invest. His first interest will be the security of his

investment and then a return in the form of dividend or interest. For the first purpose he

will try to access the value of fixed assets and the loans raised against them. The investor

will feel satisfied only if the concern has sufficient amount of assets.

48

Profitability ratios will be useful to determine profitability position. Ratio analysis

will be useful to the investor in making up his mind whether present financial position of

the concern warrants further investment or not.

C) Utility to Creditors:

The creditors or suppliers extend short-term credit to the concern. They are

interested to know whether financial position of the concern warrants their payments at a

specified time or not. The concern pays short-term creditors out of its current assets. If

the current assets are quite sufficient to meet current liabilities then the creditor will not

hesitate in extending credit facilities. Current and acid test ratios will give an idea about

the current financial position of the concern.

D) Utility to Employees:

The employees are also interested in the financial position of the concern

especially profitability. Their wage increases and amount of the make use of information

available in the financial statements. Various profitability ratios relating to gross profit,

operation cost, and net profit enable employees to put forward their viewpoint for the

increase of wages and other benefits.

Advantages of Ratio Analysis

1. Ratio analysis simplifies the understanding of financial statements.

2. Ratios bring out the inter-relationship among various financial figures and bring to light

their financial significance. Ratio analysis is a device to analyze and interpret the

financial health of the enterprise.

49

3. Ratios contribute significantly towards effective planning and forecasting. A study of a

trend in the past works as a helpful guide for the future.

4. Ratios facilitate inter-firm and intra-firm comparisons, thereby bringing out the strength

weakness, efficiency of their firms and their department.

5. Ratios serve as effective control tools. They also facilitate establishment of a standard

costing and budgeting control.

6. Ratios cater to the particular information need of a particular person depending upon his

interest in the business for which ratios are to be calculated. A creditor may be interested

in the liquidity ratios, while an investor may want to study profitability ratios.

Limitations of Ratio Analysis:

1) Ratio may not prove to be the ideal tool for inter-firm comparisons. The two firms may

adopt different accounting policies and hence the results might not be comparable.

50

2) A study of ratios in isolation, without studying the actual figure, may lead to wrong

conclusions. Ratios are only supplementary to and not substitutes for absolute figures.

3) Ratios can be as correct as the data on which they are based; if the original data is not

reliable then ratios will be misleading.

4) Ratio analysis suffers from each consistency. Ratios are defined differently by various

experts and hence are prone to manipulations.

5) In the absence of well accepted standards interpretation of ratio becomes subjective.

TYPES OF RATIOS

Ratios classified into five categories:

51

TYPES OF RATIOS CALCULATED FOR THE PRESENT STUDY

52

Balance sheet ratios Profit & Loss account

ratios

Inter statement

(balance sheet and P&L

a/c)

1. Current ratio 1. Gross profit ratio 1. Return on assets ratio

2. Quick ratio 2. Net profit ratio 2. Fixed asset ratio

3. Proprietary ratio 3. Inventory turnover

ratio

3. Creditors turnover

ratio

4. Debt-equity ratio 4. Expense ratio 4. Debtors turnover ratio

5. Operating ratio. 5. Working capital

turnover ratio

1. LIQUIDITY or SHORT-TERM SOLVENCY RATIOS:

These are the ratios which measure the short-term solvency or financial position of the

firm. These ratios are calculated to comment upon the short-term paying capacity of a

concern or the firm’s ability to meet its current obligations, the various liquidity ratios

are: current ratio, quick ratio.

A) Current ratio or Working capital ratio: Current ratio is the ratio of current assets and

current liabilities.

Current assets are the assets which can be converted into cash within one year

and include cash in hand cash at bank, bills receivables, net sundry debtors, stock

or raw material, finished goods and work in progress, prepaid expensed,

outstanding and accrued incomes and short-term or temporary investments.

53

Current liabilities are the liabilities which are to be paid within a period of one

year and include bills payable, sundry creditors, bank overdraft, outstanding

expenses, incomes received in advance, proposed dividend, provision for

taxation, unclaimed dividends and short term loan and advances repayable within

one year.

Current Assets

Current Ratio = ---------------------------------------

Current Liabilities

B) Quick Ratio: Quick ratio is the ratio of quick assets to current liabilities.

Quick assets are the assets which can be converted into cash very quickly without

much loss. All current assets except stock and prepaid expenses are quick assets.

All current liabilities are liabilities which are to be repaid within one year.

Quick Assets

Quick Ratio =----------------------------------------

Quick Liabilities

54

2. LEVERAGED or CAPITAL STRUCTURE RATIO or LONG-TERM SOLVENCY

RATIOS:

Long-term solvency ratios convey a firm’s ability to meet the interest costs and

repayments schedules of its long-term obligations e.g. debt equity and interest coverage ratio.

Leverage ratios show the proportions of debt and equity in financing of the firm. These ratios

measure the contribution of financing as compared to financing by outsiders.

A) Debt equity ratio: It reflects the relative claims of creditors and shareholders against the

assets of the business.

Debt usually refers to long-term liabilities.

Equity includes equity and preference share capital and reserves.

Long-term liabilities

Debt-Equity Ratio = ------------------------------

Shareholders fund

B) Proprietary ratio: It expresses the relationship between net worth and total assets.

Net worth = Equity Share Capital + Preference Share Capital + reserves and

surplus fictitious assets.

Total Assets = Fixed assets + Current assets (excluding Fictitious Assets)

Net Worth

Proprietary Ratio = ---------------------

Total Assets

55

C) Fixed assets ratio: This ratio indicates the mode of financing fixed assets. This is the

ratio of fixed assets to capital employed.

Capital employed = Equity share capital + Preference share capital + Reserves

and surplus + Long-term liabilities – Fictitious assets

Fixed Assets

Fixed Assets Ratio = ---------------------------

Capital Employed

D) Interest coverage ratio or debt Service ratio: This ratio indicates whether a business is

earning sufficient profits to pay the interest charges.

It is calculated as follows:

PBIT

Debt Service Ratio = -------------------------------

Fixed Interest charges

PBIT = Profit before Interest and Taxes.

56

3. ACTIVITY RATIOS or TURNOVER RATIOS:

An activity ratio measures the efficiency or effectiveness with which a firm manages its

resources or assets. They calculated the speed with which various assets, in which funds are

blocked up, get converted into sales. The significant activity or turnover ratios are:

A) Inventory Turnover ratio: Stock turnover ratio indicates the number of times the stock

has turned over into sales in a year. It is calculated as:

Cost of goods or sales

Inventory Turnover Ratio = --------------------------------

Average Stock

Cost of goods sold = sales – gross profit

Average stock = (Opening Stock + Closing Stock)/2

B) Debtors Turnover ratio: It expresses the relationship between debtors and sales.

It is calculated as:

Net credit sales

Debtors Turnover ratio = -----------------------------

Average Debtors

C) Creditors Turnover ratio: It expresses the relationship between creditors and purchases.

It is calculated as:

Net credit purchases

Creditors Turnover ratio = -----------------------------------

Average Creditors

57

D) Working capital turnover ratio: This ratio is used to know the efficient utilization of

fund. It is calculated as:

Cost of goods sold

Working capital turnover ratio = -------------------------------

Working Capital

4. PROFITABILITY RATIOS:

A profitability ratio measures the profitability of a concern. Generally they are

calculated either in relation to sales or in relation to investment.

A) General Profitability Ratios:

a. Gross Profit Ratio: It reveals of trading operations of the business. It is

calculated as:

Gross Profit

Gross Profit Ratio = ---------------------

Net Sales

Gross Profit = Net sales – cost of Goods sold

Net sales = Total sales – Sales returns

Cost of goods sold = opening stock + purchases + manufacturing expenses –

closing stock.

58

b. Net Profit Ratio: It expresses the relationship between expenses incurred for

running the resultant net sales. It is calculated as:

Operation Cost

Operating Ratio = -------------------------------

Net sales

Operating cost = cost of goods sold + office & administrative expenses + selling

expenses + distribution expenses.

B) Overall Profitability Ratios:

a. Return on Assets ratio: It is calculated as:

PAT

Return on Assets ratio = -----------------------------

Total Assets

Total assets do not include fictitious assets.

b. Return on Capital Employed: It is calculated as:

PBIT

Return on Capital Employed = ---------------------------

Capital Employed

PBIT = profit before interest and tax.

59

Capital Employed = Share Capital + Reserves & surplus + Long term loan – Fictitious

Assets

c. Return on net worth: It is calculated as:

PAT

Return on net worth = --------------------------------

Net worth

Net worth = Share Capital + Reserves and Surplus

60

COMPARATIVE BALANCE SHEET ANALYSIS FOR THE YEAR 2009-10 TO 2010-11

Particulars 2009-2010

(Rupees)

2010-11

(Rupees)

Change

Amount

Percentage

(%)

Sources of funds share holders funds

Capital 82455 82455 - -

Reserves and Surpluses 361132 403513 42381 11.7

443587 485968 42381 9.6

Deferred revenue on account against

depreciation

4408 6567 2159 49.0

LOAN FUNDS

Secured Loans 57327 68229 10902 19.0

Unsecured Loans 144646 176615 31969 22.1

206381 251411 45030 21.8

Deferred tax liability (NET) 53224 54427 1203 2.3

Less: Recoverable 53223 54426 1203 2.3

1 1 - -

TOTAL 649968 737379 87411 13.4

APPLICATION OF FUNDS

FIXED ASSETS

Gross block 460396 507273 46877 10.2

Less: Depreciation 299501 250792 (48709) (16.3)

Net Block 160895 256481 95586 59.4

Capital work in progress 103999 128567 24568 23.6

61

Construction stores & advances 32341 39825 7484 23.1

297235 424873 127638 23.1

Investments 192891 160943 (31948) (16.6)

Current assets loan & advances

Inventories 23405 25102 1697 7.3

Sundry debtors 8679 12583 3904 45.0

Cash & Bank balances 84714 133146 48432 57.2

Other current assets 10161 10580 419 4.1

Loans & Advances 30287 40476 10189 33.6

157246 221887 64641 41.1

Less: Current liabilities and

provisions

Liabilities 49102 54221 5119 10.4

Provisions 12300 16042 3742 30.4

61402 70236 8861 14.4

Net Current Assets 95844 151624 55780 58.2

Total 649968 737379 87411 13.4

62

Interpretation:

1. The company balance sheet of the company during the year 2009-10 reveals that the

current assets have increased by 64641 i.e. 41.1%.

2. There is increase in current assets we can say the short term solvency of the company is

good.

3. The current liabilities have increase by 8861 i.e. 14.4%.

4. Fixed assets have increased by 127638 i.e. 42.9%

5. There is increase in share holder funds of company that is why we can say the long term

solvency of the company is good satisfaction.

63



(Rupees)

2009-10

(Rupees)

Change

Amount

Percentage

(%)


Capital 82455 82455 - -


417763 443587 25824 6.2


depreciation

3374 4408 1034 30.6

LOAN FUNDS

Secured Loans 44407 57327 12920 29.1

Unsecured Loans 26471 144646 118175 446.4

74252 206381 118175 177.9



1 1 - -

TOTAL 492015 649968 157953 32.1


FIXED ASSETS

Gross block 431062 460396 29334 6.8

Less: Depreciation 207914 299501 91587 44.1

Net Block 223148 160895 (62253) (27.9)


64


322433 297235 (25198) (7.8)

Investments 207977 192891 (15086) (7.3)


Inventories 17777 23405 5628 31.7

Sundry debtors 13747 8679 (5068) (36.9)



Loans & Advances 27052 30287 3235 12.0

129073 157246 28173 21.8


provisions

Liabilities 52306 49102 3204 6.1

Provisions 15161 12300 2861 18.9

67467 61402 6065 9.0


Total 492015 649968 157953 32.1

65

Interpretation:


current assets have increased by 28172 i.e. 22%.


good.


4. Fixed assets have decreased by -25198 i.e. -7.8%


solvency of the company is good satisfaction.

66



(Rupees)

2008-09

(Rupees)

Change

Amount

Percentage

(%)


Capital 78125 82455 4330 5.5


355501 417763 62262 17.5


depreciation

1591 3374 1783 112.1

LOAN FUNDS

Secured Loans 45844 44407 (1437) (3.1)

Unsecured Loans 108684 26471 (82213) (75.6)

156119 74252 (81867) (52.4)

Deferred tax liability (NET) 52280 50570 (1710) (3.3)

Less: Recoverable 82279 50569 (31710) (38.5)

1 1 - -

TOTAL 511620 492015 (19605) (3.8)


FIXED ASSETS

Gross block 400281 431062 30781 7.7


Net Block 212545 223148 10603 5.0


67


287498 322433 34935 12.2

Investments 173380 207977 34597 20.0


Inventories 17380 17777 397 2.3

Sundry debtors 4699 13747 9048 192.6


Other current assets 80023 9714 (70309) (87.9)

Loans & Advances 27275 27052 (223) (0.8)

135468 129073 (6395) (4.7)


provisions

Liabilities 65244 52306 12938 19.8

Provisions 15697 15161 536 3.4

80941 67467 (13474) (16.6)


Total 511620 492015 (19605) (3.8)

68

Interpretation:


current assets have increased by -6395 i.e. 4.7%.


good.


4. Fixed assets have decreased by 34935 i.e. 12.15%

5. There is an increase in capital that is 4330 i.e.5.5%..

69



(Rupees)

2007-08

(Rupees)

Change

Amount

Percentage

(%)


Capital 78125 78125 - -


315127 355501 40374 12.8


depreciation

271 1591 1320 487.1

LOAN FUNDS

Secured Loans 41226 45844 4618 11.2

Unsecured Loans 90931 108684 17753 19.5

132428 156119 23691 17.9



1 1 - -

TOTAL 447555 511620 64065 14.3


FIXED ASSETS

Gross block 366106 400281 34175 9.3


Net Block 198650 212545 13895 7.0


70


262513 287498 24985 9.5

Investments 36674 173380 136706 372.8


Inventories 17712 17380 (332) (1.9)

Sundry debtors 124349 4699 (119650) (96.2)



Loans & Advances 21475 27275 5800 27.0

194132 135468 (58664) (30.2)


provisions

Liabilities 32202 65244 (33042) (102.6)

Provisions 11648 15697 (4049) (34.8)

43850 80941 37091 84.6


Total 447555 511620 64065 14.3

71

Interpretation:


current assets have increased by 58664 i.e. 30.2%.


good.


4. Fixed assets have decreased by 24985 i.e. 9.5%


solvency of the company is good.

72

I. LIQUIDITY RATIOS

CURRENT RATIO:

YEAR Current Assets Current Liabilities Ratio

2006-07 160756 67324 2.39

2007-08 167799 48146 3.49

2008-09 194132 45850 4.23

2009-10 135468 80941 1.67

2010-11 159073 67467 2.36

Interpretation:

The above table shows that the liquidity position of the firm is very good. The current

assets increased on the whole from 2006-07 to 2008-09. This is because of continues increases in

sundry debtors and decreases in loans and advances. Though inventory and bank balance

fluctuated during these 5 years and the other current assets increasing by 2010. It also implies a

large part of the current assets is idle.

73

QUICK RATIO

YEAR Quick Assets Quick Liabilities Ratio

2006-07 142400 67320 2.12

2007-08 147655 48140 3.07

2008-09 176420 45850 3.85

2009-10 118080 80946 1.46

2010-11 145650 67467 2.16

Interpretation:

The above table shows that the liquidity position of the firm is very good. The quick

assets increased on the whole from 2006-07 to 2008-09. The company should make sure that it

should not increase its ratio more than 1 it’s not advisable the present position companies ratio

indicates normal liquidity position in the business.

74

II. LEVERAGED OR CAPITAL STRUCTURE RATIOS

DEBT & EQUITY RATIO:

YEAR Long term Liabilities Shareholders fund Ratio

2006-07 98047 258117 0.38

2007-08 115812 286453 0.40

2008-09 132157 315040 0.42

2009-10 138263 335501 0.41

2010-11 160878 417763 0.39

Interpretations:

From the above it is clear that shareholders fund is more than that of the long term debt.

So, we can infer that the firm assets are financed more by the internal funds rather than the

external funds by which it is using its resources more effective.

75

PROPRIETARY RATIO:

YEAR Net Worth Total Assets Ratio

2006-07 258117 423489 0.61

2007-08 280453 450411 0.62

2008-09 315040 493319 0.64

2009-10 355501 596346 0.60

2010-11 417763 659483 0.63

Interpretation:

As the total debt ratio represents relationship of the owner’s funds to total assets, higher

the ratio the better the solvency position of the firm. The above ratio shows that the 5 years ratios

more than 50%. So we consider that the long term solvency of the firm is satisfaction.

76

FIXED ASSETS RATIO:

YEAR Fixed Assets Capital Employed Ratio

2006-07 184450 174657 1.06

2007-08 177697 176781 1.01

2008-09 190019 198650 0.96

2009-10 188178 212545 0.89

2010-11 225069 223148 1.01

Interpretation:

This ratio indicates the mode of financing the fixed assets. A financially well managed

company will have its fixed assets financed by long term funds. Therefore the fixed assets ratio

should never be more than one. The ratio of 0.89 is considered ideal. Here the company’s ratio is

ideal in 2009-10 and then it increased in 2010-11, which indicates that the company reduced

financing the fixed assets by along term funds.

77

INTEREST COVERAGE/DEBT SERVICE RATIO:

YEAR EBIT Fixed Interest Ratio

2006-07 51656 10918 4.73

2007-08 46201 8680 5.32

2008-09 47456 9916 4.79

2009-10 92594 33697 2.75

2010-11 77837 16958 4.59

Interpretation:

The above ratio indicates that the firm covers a good deal of interest liability with the

operation profit of the firm. The ratio of the company is increasing every year. This indicates the

company is earning sufficient profits to pay the interest charges of the investors.

78

III. ACTIVITY OR TURNOVER RATIOS

INVENTORY RATIO:

YEAR Cost of Goods Sold Average Inventory Ratio

2006-07 14103 1975 7.14

2007-08 13830 1962 7.05

2008-09 15024 2096 7.17

2009-10 11250 1605 7.01

2010-11 10525 1512 6.96

Interpretation:

The ratio indicates the efficiency of the firm is selling its products or services. A high

ratio indicates efficient management of inventory. In the above ratio it indicated that the

inventory is getting converted into cash in the five years. This implies that the management of

inventory is satisfied.

79

DEBT TURNOVER RATIO:

YEAR Cost of Credit Sales Average Debtors Ratio

2006-07 18256 2186 8.35

2007-08 17952 2170 8.27

2008-09 17236 2109 8.17

2009-10 17025 2052 8.30

2010-11 16986 2053 8.27

Interpretation:

The debtor’s turnover ratio of 10-12 is considered to be ideal. A high ratio is indicative of

a sound credit management policy; this ratio has been fluctuating due to increase in sales and

debtors. The ratio as decreased in 2008-09 but again increased towards the ideal ratio.

80

CREDITORS TURNOVER RATIO:

YEAR Credit Purchase Average Creditors Ratio

2006-07 18256 5256 3.47

2007-08 17952 4896 3.67

2008-09 17236 4860 3.55

2009-10 17025 5012 3.40

2010-11 16986 4806 3.53

Interpretation:

The creditor’s turnover ratio is more indicates the firm is not able to get the best terms of

credit. A low creditor’s turnover ratio indicates the companies’ inability in meeting its

obligations in time. The company ratio is fluctuating and low but satisfactory in meeting its

obligations in time.

81

WORKING CAPITAL TURNOVER RATIO:

YEAR Sales Working Capital Ratio

2006-07 189450 93427 2.03

2007-08 177697 119651 1.49

2008-09 190019 148282 1.28

2009-10 188178 54527 3.45

2010-11 225069 61606 3.65

Interpretation:

From the above ratio it indicates that utilization of the working capital is not, so efficient

but is satisfactory, as it is turned over at least once in all the five years i.e. in the year 2009-09, it

turned to 3.45 which are satisfactory. In the year 2010-11 it is 3.65.

82

FIXED ASSETS TURNOVER RATIO:

YEAR Sales Fixed Assets Ratio

2006-07 189450 184657 1.03

2007-08 177697 176781 1.01

2008-09 190019 198650 0.96

2009-10 188178 212545 0.89

2010-11 225069 223385 1.01

Interpretations:

The above ratios indicate that the fixed asset turnover ratios are in the increasing trend,

which is satisfactory. It shows that there is a scope for increasing in production and sales with

effective use of fixed assets. But 2009-10 year the ratio is decreased to 0.89.

83

IV. PROFITABILITY RATIOS

GROSS PROFIT RATIO:

YEAR Gross Profit Sales Ratio

2006-07 51655 189450 0.27

2007-08 45700 179697 0.25

2008-09 38343 190019 0.20

2009-10 59080 188178 0.31

2010-11 60680 225069 0.26

Interpretation:

This ratio indicates the extent to which selling prices of goods per unit way decline

without resulting losses in operation of a firm. The higher the ratio the better the results. It lies

that the profitability of the firm is satisfactory and it is covering various operation expenses

without incurring losses.

84

NET PROFIT RATIO:

YEAR Net Profit Sales Ratio

2006-07 37338 189450 0.20

2007-08 35396 179697 0.20

2008-09 36078 190019 0.19

2009-10 52608 188178 0.28

2010-11 58070 225069 0.26

Interpretation:

The above ratio shows that the firm’s earning the constant returns over its sales.

The above table shows that the firm is earning profit over its Net sales, which is good for any

manufacturing concern.

85

OPERATING RATIO:

YEAR Operating Profit Sales Ratio

2006-07 51656 189450 0.27

2007-08 46201 179697 0.26

2008-09 47456 190019 0.25

2009-10 92594 188178 0.49

2010-11 77758 225069 0.35

Interpretation:

From the above table we can inter that more than 80% of the sale has been consumed by

the operating profit, only less than 20% is left to cover interest charges, income tax payments,

dividend and the retention of profits as a reserve.

86

OVERALL PROFITABILITY RATIOS

RETURN ON TOTAL ASSETS RATIO:

YEAR Profit After Tax Average Total Assets Ratio

2006-07 37338 211745 0.18

2007-08 35396 225205 0.16

2008-09 36075 246660 0.15

2009-10 52608 298173 0.18

2010-11 58070 329742 0.18

Interpretation:

With the help of above ratio we can inter that the return on assets is increasing from year

to year which is very good and it reflects that the resources are effectively utilized.

87

RETURN ON CAPITAL EMPLOYED RATIO:

YEAR EBIT Capital Employed Ratio

2006-07 51656 174657 0.30

2007-08 46201 176781 0.26

2008-09 47456 198650 0.24

2009-10 92594 212545 0.44

2010-11 77837 223148 0.35

Interpretation:

The above ratio indicate that the profit of the company is in increasing trend and the

capital employed is also increasing which helps in increasing the return on capital employed.

88

RETURN ON NET WORTH RATIO:

YEAR PAT Net worth Ratio

2006-07 37338 258117 0.14

2007-08 35396 280453 0.13

2008-09 36075 315040 0.11

2009-10 52608 355501 0.15

2010-11 58070 417763 0.14

Interpretation:

The higher the ratio the better it is. It indicates the return which the shareholders are

earning on their resources invested in the business. The investors of the company are earning

high level of returns which are increasing though slightly decreased in 2010-11.

89

CONCLUSIONS

The present study entitled “Techniques of financial analysis” in National Thermal Power

Corporation Ltd. Is taken up by me in partial fulfillment of the award of Degree of Master of

Business Administration. During my study, based on the data collected and presented the earlier

chapter the following observations were made.

1. The sales to assets ratio is reveals that except in 2007-08, in all the years it is more than I

indicating good sales position of the firm in the market.

2. During the study period the working capital position is found to be satisfactory. In last 2

years of study current assets are more than double to that of current liabilities.

3. The net profit is more in the last year i.e. 63.7% because of the reduced operation

expenses.

4. It is observed that the total assets are almost same during the same period with a slight

variation of 1% to 3%.

5. Over all the company current position is good but years 2005-06 & 2005-04 the company

current position not good.

6. The company paid to the dividend to shareholders in last year 2009-2010 it is the more

than the last 4 years company debt position is good.

7. The company equity capital in year 2005-06 is 78125 million’s but last 3 years capital is

82455 million’s is increase of 5.5%.

90

SUGGESTIONS

1. Company should maintain adequate liquidity.

2. To improve the liquidity position of the company it is suggested that the company shall

finance more in current assets or pay off part of current liabilities from long term funds.

3. Company should take the measure to promote its sales, which improves the profit of the

firm.

4. It should concentrate on long term funds. If long term funds are utilized for working

capital problem will not arise in future.

5. Company should maintain adequate reserves.

6. It should try to raise its owner equity to see that the interest burden (because of debt

capital) be reduced.

7. It should control the operating costs further and should also see that the cost of

production will be low.

8. A wise policy will be taken by the company to finance fixed assets by raising long term

funds.

9. Company should take some measure to increase the return on investment. It should try to

utilize the funds to the maximum extent.

10. Company should try to utilize its assets to extent.

91

BIBLIOGRAPHY

BOOKS:

Foster G, Financial Statements Analysis, Prentice-Hall, Englewood Cliff, 1986.

Helfert. EH Techniques for Financial Analysis, Irwin, Homewood, 1997.

M.Y.Khan and P.K Jain Financial Management, Tata McGraw-Hill.

R.K sharma and Shashi K.Gupta, Management Accounting, Sultan Chand & Sons, New

Delhi.

WEBSITES:

www.ntpc.co.in

www.ntpcindia.com

92

http://www.ntpcindia.com/

http://www.ntpc.co.in/

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