1

1.1 INDUSTRIAL PROFILE

Engineering and capital goods industry in India faced a bullish trend in

the year 2000. It was expected that the industry would look up after being
battered by the years of recession. In Financial year 1999, engineering and
capital goods sector went up by nearly 11.5%.

This reaffirmed the performance in the sector. However, the euphoria

didn’t last long and FY2000 witnessed a sharp fall in the growth in the sector. In
FY2000 the index went up by just 5.4% (As per CMIE reported figures).

Engineering sector is inextricably linked to the performance of power

sector. Investments in power generation, distribution and transmission have
almost dried up, which is eventually reflected in the performance of
engineering companies.

Engineering goods demand is derived from the demand in

consumer products. Falling import barriers on consumer goods has resulted in
a sharp decline in the demand of capital goods. Apart from this the government
has curtailed capital expenditure so as to control the fiscal deficit

Nearly 70% of the revenues of most of the listed and unlisted engineering
companies come from the power sector. The demand may take the form of
other direct demand or a derived demand. In FY2000, the capacity addition in the
production capacity of power sector was 3433 MW.

According to the industry estimates we need almost 7.8% growth in the

installed capacity to cater to the needs of the economy growing at almost 6% p.a.
This translates into a capacity addition of 6768 MW with a base of installed
capacity as on March 31, 1999 and growth rate considered at 7%. We can easily
make out that the addition to the capacity is nearly 50% of the increase in
projected demand.
 2

Showdown in capacity additions is reflected in the overall power shortage,

which stood at nearly 7% in the month of November 2000. The most recent exit
from India is that of UK power Major Power Gen. However, we see this stage as a
transition phase of the power industry. Major reforms have been initiated at all
levels in India. Uniform regulatory framework, Electricity Bill 2000, is in place
and would soon be placed in the parliament for discussion. We expect that there
is a realization of the power crises and the bill would not face much difficulty in
arriving at the consensus.

The bill propounds more prominent role of the private sector in the
developing power infrastructure and removes most of the redundant bureaucratic
hurdles. This also allows a level playing field to the private power producer vis-à-
vis the public sector and also provides a room for better returns on capital
employed.

We feel that the bill would be passed in the next session of the Parliament.
This would result in a large-scale activity in the power sector. In a short term we
feel that the scenario may go from bad to worse but in medium to long term we
foresee a major activity in the sector. Some of the major beneficiaries would be
companies like BHEL, ABB, Siemens, Larsen & Turbo and also the companies in
the business of generation, distribution and transmission of power like TEC,
BSES, Ahmedabad Electricity and CESC.
 3

1.2 COMPANY PROFILE

Bharat Heavy Electrical Ltd., (BHEL) is the largest engineering and

manufacturing enterprise of its kind in India and is one of the leading
international companies in the field of power equipment manufacture. The first
plant of BHEL was set up at Bhopal in 1956, which signaled the dawn of the
Heavy Electrical Industry in India. In the early sixties, three more major plants
were set up at Haridwar, Hyderabad and Tiruchirappalli, which form the core of
the diversified range, systems and service the BHEL offers today.

BHEL range of services extends from project feasibility studies to after-sales-

service successfully meeting diverse needs through turnkey capability. The
company has 14 manufacturing units, 4 power sector regional centers, 8 service
centers and 18 regional offices besides project sites spread all over India and
abroad. The company has formed a Strategic Business Unit for Ceramics at
Bangalore. BHEL is today the largest engineering and manufacturing enterprise
of its kind in India, with a well recognized track record of performance, making
profits continuously since 1971 – 72 and paying dividends since 1976-77. BHEL
manufactures over 180 products under 30 major product groups and caters to
core sectors of the Indian economy viz., Power Generation and Transmission
Industry, Transportation, Telecommunication, Renewable Energy, etc.

The quality & reliability of its products is due to the emphasis on design,
engineering and manufacturing to international standards by acquiring and
adapting some of the best technologies from leading companies in the world,
together with technologies developed in its own R & D centers. BHEL has
acquired certifications to both ISO 9000 & ISO 14000 standards for its
operations and has also adopted the concepts of Total Quality Management.
BHEL has adopted Occupational health and safety standards as per OHSAS
• 18001. Two of its divisions have acquired certification to OHSAS 18001
standard and the other units are in the process of acquiring the same.
• BHEL’s operations are organized around three business sectors, namely
power industry including Transmission, Transportation, Telecommunication &
 4

Renewable Energy and International Operations. This enables BHEL to have a

strong customer orientation, to be sensitive to his needs and respond quickly to
the changes in the market.

VISION

• BHEL’s vision is to become a world class, innovative, competitive and

profitable engineering enterprise providing total business solutions. The company
is striving to give shape to this vision and fulfills the expectations from BHEL as a
‘Navrathna’ company.
• BHEL’s vision is to make a world – class engineering enterprise committed
to enhancing share holder value.
STRENGTH
The greatest strength of BHEL is its highly skilled and committed people.
Every employee is given an equal opportunity to develop himself and improve his
position. Continuous training and retraining, career planning, a positive work
culture and participative style of management have engendered development of a
committed and motivated work force leading to enhanced productivity and higher
levels of quality.

MISSION
BHEL mission is to be an Indian multinational engineering enterprise
providing total business solutions through quality products, system and service
in the fields of energy, transportation, infrastructure and other potential areas.

VALUES
• Zeal to excel and zest for change.
• Integrity and fairness in all matters.
• Respect for dignity and potential of individuals.
• Strict adherence to commitments.
• Ensure speed of response.
 5

• Foster learning, creativity and team work. Loyalty and pride in the
company.
 6

OBJECTIVES OF BHEL

1. GROWTH
To ensure a steady growth by enhancing the competitive edge of BHEL
in existing business, new areas and international operations so as to
fulfill national expectations from BHEL.
2. PROFITABILITY
To provide a reasonable and adequate returns on Capital Employed, primarily
through improvement in operational efficiency, capacity utilization and
productivity and generate adequate internal resources to finance the company’s
growth.
3. CUSTOMER FOCUS
To build a high degree of customer confidence by providing increased value for
his money through in international standards of product quality, performance
and superior customer service.
4. ORIENTATIONS
To enable each employee to achieve his potential, improve his capabilities,
perceive his role and responsibilities and participate and contribute positively to
the growth and success of the company. To invest in human resources
continuously and be alive their needs.
5. TECHNOLOGY
To achieve technological excellence in operations by development of
indigenous technologies and efficient absorption and adaptation of imported
technologies to suit business needs and priorities and provide a competitive
advantage to the company.
6. IMAGE
To fulfill the expectations which stake holders like Government as owner,
employees, customers and the country at large have from BHEL.
 7

BOILER AUXILIARIES PLANT, RANIPET

The boiler Auxiliaries Plant, a unit of BHEL located at Ranipet about 120 KMs
from the city of Chennai is one of the manufacturing divisions of BHELs. The
plant has recorded a turn over of around Rs.30807 lakhs during the financial
year 2001-02. The product profile of the unit caters to both power and industrial
sectors.

TECHNICAL COLLABORATION
BHEL, Ranipet had technical collaboration for boiler auxiliaries form leading
international players like erstwhile M/s. CE – APCo, USA, M/s. KKK, Germany
and M/s. Flakt industry, Sweden. Recently the company has extended its
business portfolio to non-conventional energy by supplying Wind Electric
Generators with the back up of M/s. Nordex A/S, Denmark. Another ongoing
partnership of the company is with M/s. Hamon Rothemuhle, Germany in the
field of Bag Filters.

UNIT’S INSTALLED CAPACITY

In the power sector, BHEL, Ranipet was actively associated with the
enhancement of the installed capacity in the country, since the beginning of the
plant in 1982. The unit has established itself as a reliable single source for air
pollution control equipments, fans air preheaters and other accessories like
gates, dampers, louvers for power plants. BHEL, Ranipet has supplied ESP’s for
eighteen 500MW units, 148 units in the range of 200 MW to 250 MW, 65 units of
100 MW to 130 MW and 64 units of 12 MW to 80 MW.
 8

In addition, BAP has supplied ESP’s for 71 industrial boilers and around 100
ESP’s for other industrial applications. The air preheaters and fans supplied for
various 500 MW, 250 MW 200/210 MW and low rated units located at various
sites in the country are also performing to the utmost satisfaction of the
customers. Boiler auxiliaries have also been exported, for e.g. to Alarish in
Egypt. The unit is actively participating in few global renders and will be a strong
contender for boiler auxiliaries required for IPPs coming Up in India. In
desalination business BHEL, Ranipet has presence in India with eleven plants of
capacities ranging from 20 cubic meters per day to1 MGD at Ramanathapuram
district in Tamilnadu. The company is keen to expand its business in this area of
business.
The unit a shop floor area of around 93000 Sq.m. and has the state of the
art manufacturing facilities along with necessary inspection and testing facilities.
The manufacturing facilities include sophisticated CNC turning and machining
centers, vertical borers, metal forming machines like press brakes, rolling
machining centers, vertical borers, metal forming machines like press brakes,
rolling machines, sectional rolling machines, presses etc. the plant has modern
welding facilities, heat treatment facilities and has the capability to meet
stringent quality in fabrication and machining. The inspection and testing like
ultrasonic scanning, radiography and a modern metrology.
 9

BAP PRODUCT PROFILE

Fans
• Fans for steam generators and various industrial applications:
• Axial reaction fans of single stage and double stage type for clean air
application
• Axial impulse fans for clean air and flue gas applications
• Single and double suction type radial fans clean air dust laden hot gas
applications up to 400oC
Air Heaters
• Air heaters for steam generators and various industrial applications:
• Regenerative air heaters in s broad range of sized and capacities
• Tubular air heaters for steam generators and process industries, for
various duty conditions
Electrostatic Precipitators
• Dust collectors for steam generators and various industrial applications
• Electrostatic Precipitators in a broad range of sizes and capacities.
Maximum gas flow per precipitator up to 250 m3/sec and collection
efficiency up to 99.99%
• Electrostatic precipitators for recovery boilers to recover black particulate
for recycling.
Mechanical Separators
• Cyclone type mechanical separators for steam generators and industrial
applications.
• Coal / Ash Handling Equipment, Desalination Plants and Wind Electric
Generators.
 10

INTRODUCTION TO FINANCE & ACCOUNTS DEPARTMENT

The finance & Accounts Dept. of BAP, Ranipet is headed by SDGM. This
department is responsible for making the balance sheet and profit & loss
account of the plant. In order to make the flow of work in an easy and
efficient manner the department is classified into different sections which are
given below:

INDIGENOUS SUPPLIERS BILL PASSING SYSTEM

Integrated with PO master of Purchase Dept. for PO details and stores receipt
voucher (SRV) table and Day book (DB) Table of Stores Dept. (DTS) Direct to
site Table of material planning department for quality details.

FOREIGN SUPPLIERS BILL PASSING SYSTEM

Integrated with PO master of purchase dept. for PO details SRV table for
quality details, Bank payment advice slip (BPAS) for actual payment and
exchange Rate particulars, Regional Operating Division (ROD) debits for
freight, customs duty, Demurrage, port handling charges, forwarding agents
commission and other relevant charges.

MSA BILL PASSING SYSTEM

Integrated with PO Master, form issue position (IP) Material Accounting
statement (MAS) of MSA Dept. for PO, work order, Rate details and off cut and
scrap recovery.

FREIGHT BILL PASSING SYSTEM

Outward (shipping) bill system is integrated with loading advice slip (LAS) &
Goods consignment Note (GC) of shipping Dept. Site table of Commercial
Dept. and Rate Master for Distance, Customer, Weight, Estimation, Rate and
other relevant details.
 11

SRV PRICING SYSTEM

Integrated with PO Master & SRV Table for pricing without any manual input.
Posting to General Ledger (GL) and other subsidiary ledgers will be done
instantly along with pricing.

PRICED STORES LEDGER SYSTEM

Instant pricing and instant PSL & GL instantly on Dynamic Weighted Average
Rate basis as and when issue voucher are raised, provided sufficient stock I
available in PSL Adjustment (EAL) are automatically fed into system as and
when Adjustment SRVs (ASRVs) are raised by sections to adjust the cost
already booked against the work orders and also to rectify the PSL rate
master.

GENERAL LEDGER SYSTEM (GL)

GL system is a real time on-line system. Sectional ledgers, subsidiary
Ledgers, GL, section Trial balance (TB) and TB can be taken readily as and
when required. Inter unit statements, Balance Sheet, Link sheets & detailed
schedules can be taken from GL without any manual input. Fixed Assets
ledger & Depreciation calculation system is integrated with GL and all posting
to GL will be done automatically.

CASH AND BANK SYSTEM

Preparation of cash receipts are done through online system which is
integrated with GL system. Daily statements like cash receipts, payments,
unpaid, TA, cash balance with denomination, etc., are taken from GL system
without any manual intervention. Cheque printing, suppliers, cheque
forwarding memo with details, Dispatch Advice Slip, Bank Book, Bank JV
generation and necessary postings to GL are done thro on-line system without
any manual input by cheque section. The following two finance systems are
developed and maintained by information center
 12

PAY ROLL SYSTEM

It is integrated with P & A system. Payment of monthly salary and other
allowances, all monthly recoveries from salary, attendance maintenance,
employees’ personal details and other personal payments are taken care.
COSTING SYSTEMS
Turnover, WIP, FG & Limitation working is based on input from PSL & GL
system of finance Dept., Time Docket of production Dept., Design weight of
GMs of Engineering system, production Details of production system and
dispatch details of commercial Dept.,
SALES ACCOUNTING
Sales Accounting is one of the most important areas in Finance & Accounting
function. It is the sales function which creates valid claims on customers and
gives authority for collection of money from debtors and thus completing the
total business cycle and generation of surplus funds for growth.
PAYMENT TERMS
Payment terms are agreed upon with customers by the contracting agency
may vary from customer and nature of the contracts. The general payment
terms are An advance (generally 10%) is taken as advance money along with
the issuance of LOI. Normally a sum of 80-85% is taken as payment against
supplies upon submission of invoices. Generally an amount of 2-10% is
retained by the customer as retention money which is realized after the
performance guarantee test is done and the warranty period is over (Deferred
Debt.)
EXCISE DUTY
Excise Duty is the duty on manufacture and the duty liability is fastened
immediately after goods are manufactured; whether these are sold or not it is
immaterial. Such duty is paid at the time and place of removal.
SALES TAX
Sales Tax is an indirect tax charged on sale of goods for consideration. It can
be segregated as inter – state sale and intra – state sale.
 13

1.3 OBJECTIVE OF THE STUDY

Primary objective

• To determine the financial performance of the company through ratio

analysis.

Secondary objective
• To determine the profitability position of the company.
• To determine the liquidity position of the company.
 14

1.4 IMPORTANCE OF THE STUDY

“Finance may be defined as that administrative area or set of administrative
functions in an organization which relate with the arrangement of cash and
credit so that the organization may have the means to carry out its objective
as satisfactorily as possible”.
The main activities to the successful administration of finance in any
organization comprise financial planning, raising the needed funds, financial
analysis and control. Analysis of financial statement in a business deserves
much attention in carrying out finance function. It helps to regains
prospective analysis of operative period for the purpose of evaluating the
wisdom and efficiency of financial planning. Analysis of what has happened
should be of great value in improving the standards, techniques and
procedures of financial control involved in carrying out finance function.
FINANCIAL MANAGEMENT
Financial management is broadly concerned with the procurement and
effective utilization of funds by a business firm. Financial management
emerged as a distinct field of study at the turn of this century. Its evolution
may be divided into three broad phases.

The Traditional Phase and Modern Phase Finance theory, in general resist on
the premise that the goal of the firm to its equity shareholders. This means
that the goal of the firm should be to maximize of market value of its equity
shares the goals of maximization of shared as wealth, expressing the
shareholders point of view, several alternatives have been suggested,
maximization of earning per share, maximization of returns on equity etc.,
maximization of profit is not as inclusive goal as maximization of shareholders
wealth. It suffers from several limitations like profit is obscure term’s not a
proper guide to decision making. It should be expressed either on a per share
basis or in relation to investment etc.
 15

FINANCIAL ANALYSIS
The financial statement provides a summary of the account of a business
enterprise. To understand the financial performance and condition of a firm, its
stakeholders look at the three financial statements, Viz, the balance sheet, the
profit and loss account and the sources and uses of a funds statement.

BALANCE SHEET
It shows the financial position of the firm at the accounting period.

PROFIT AND LOSS ACCOUNT

It shows how the firm performed financially over the accounting period.

SOURCES AND USES OF FUNDS STATEMENT

It shows what have been the sources and uses of funds during the
accounting period.
 16

1.5 SCOPE OF THE STUDY

The study covers the annual report of BHEL for the 8 years from 31.03.2000to
31.03.2008. The study was undertaken by the researcher for the period of 60
days from 11.may.2007 to 10.July.2007.
 17

2.1 LITERATURE REVIEW

RATIO ANALYSIS
Ratio analysis is one of the techniques of financial analysis where ratios are
used as a yardstick for evaluating the financial condition and performance of
a firm. Analysis and interpretation of various accounting ratio gives a skilled
and experience analyst, a better understanding of the financial condition and
performance of the firm than what he could have obtained only through a
perusal of financial statements.

MEANING OF RATIOS
“Ratios are relationship express in mathematical terms between figures
which are connected with each other in some manner. Obviously, no purpose
will be served by comparing two sets of figures which are not at all connected
with each other”. Moreover, absolute figures are also unfit for comparison.
Ratios can be expressed in two ways;

TIMES
When one value is divided by another, the unit to express the Quotient is
termed as “Times”. For example, if out of 100 product is Employees 95% are
Finishing goods or product ratio can be expressed as

Follows:
95/100 = 0.95 times.

PERCENTAGE
If the quotient obtained is multiplied by 100, the unit of expression is termed
as “PERCENTAGE”. For instance, in the above example, the product ratio as a
Percentage of the total number of employees is as follows:
0.95* 100 = 95%
 18

CLASSIFICATION OF RATIOS.
Ratios are classified in several ways. Different approaches are used for classifying
ratios. There is no uniformity in classification by experts. They have adopted
different stand points for classifying ratios into various groups. Some of the
classifications are discussed below:
a) Classification of ratio by statements.
Under this method, ratios are classified on the basis of statements
from which the information is obtained for calculating the ratios. The only
statements which provide information are balance sheet and profit and loss
account.
b) Classification by users.
Under this classification the ratios are grouped on the basis of the parties
who are interested in making use of the ratios.
Ratios for management Ratios for creditors Ratios for shareholders
shareholders
Operating ratio Current ratio Return on Shareholder
Return on Investment Solvency ratio Dividends coverage ratio
Stock turnover yield Creditors turnover Dividends yields
 19

2.2 RESEARCH METHODOLOGY

RESEARCH DESIGN
Research Design stands for the framework of research. There are three types
of Research designs. They are: Exploratory research, Descriptive research and
Hypothesis testing research. The research design utilized in the study is
Analytical Research.

DATA COLLECTION

SECONDARY DATA
The study was based on secondary data. The data for the study were collected
from Budgeted formats, Flash results and Five years annual diary of the
company. Discussions with the Finance Department Executives were held to
collect some of the Information.

METHODS OF ANALYSIS
Analysis of Financial Performance constitutes applicability of a plethora of
tools. The researcher has selected the ratio analysis technique to find out the
financial Performance of the company. The Budgetary Analysis was prepared
to forecast the capacity utilization of the company.
 20

LIQUIDITY RATIO:
Liquidity ratio is the ability of a concern to meet its obligations as and when
these are due. The short term obligations are met by realizing the amounts from
current, floating and circulating assets. The current asset should be either liquid
or near liquidity.
All these asses should be convertible into cash for paying obligations of short-
term nature. Sufficiency and insufficiency of the current assets should be
assessed by comparing them with short-term liabilities. If current assets can pay
off current liabilities, then liquidity position will be satisfactory.On the other
hand if current liabilities may not be easily met out of current assets then

liquidity position will be not satisfactory.

TYPES OF LIQUIDITY RATIOS:

1.CURRENT RATIO
2.QUICK RATIO OR ACID RATIO OR LIQUID RATIO

CURRENT RATIO:
It is defined as the relationship between current assets and current
liabilities. It is also known as working capital ratio. The thumb rule or the
arbitrary standard for a current ratio is 2:1.
The formula to calculate current ratio is:
Current assets /current liabilities
QUICK RATIO OR ACID TEST RATIO OR LIQUID RATIO:
It is defined the relationship between the quick assets and current
liabilities. Assets which can be easily converted into cash is said to be
liquid.Inventories and prepaid expenses cannot be easily converted into
money and are excluded.so the ratio can explained as follows:
Current assets-(Inventories+prepaid expenses).so here goes the formula:
Liquid ratio:liquid ratio/current liabilities.
As a thumb rule or as a convention,1:1 is considered satisfactory for a
liquid ratio.
 21

PROFITABILITY RATIOS

Profit making is the main objective of business. Aim of every business concern is
to earn maximum profit in absolute terms and also in relative terms. Profit is to
be maximum in terms of risk undertaken and capital employed. Ability to make
maximum profit from optimum utilization of resources by a business concern is
termed as “profitability”. Profit is an absolute measure of earning capacity.
Profitability depends on sales, costs and utilization of resources. The following
are various ratios used to analyze profitability.
1. Gross profit ratio
2. Operating ratio
3. Operating profit ratio
4. Net worth ratio
5. Return on equity capital
6. EPS
7. Return on Capital Employed or return on capital employed.

1) Gross profit ratio

This ratio is also known as gross margin or trading margin ratio.
Gross profit ratio indicates the difference between sales and direct costs. Gross
profit ratio explains the relationship between gross profit and net sales.
Gross profit ratio = Gross profit / Net sales * 100

A higher ratio is preferable, indicating higher profitability

 22

2) Operating ratio
This ratio indicates the relationship between total operating expenses and sales
Operating ratio = Cost of sales + Operating expenses / Net sales * 100
Operating ratio measures the amount of expenditure incurred in production sales
and distribution of output. I t indicates operational efficiency of the concern.
Lower the ratio more is the efficiency.
3) Operating profit ratio
It is the ratio of profit made from operating sources to the sales
usually shown as a percentage. It shows the operational efficiency of the firm and
is measure of the managements efficiency in running the routine operations of
the firm
Operating profit ratio = operating profit / sales * 100.
4) Return on Shareholder’s Fund:
It is also called as return on shareholder’s investment. This is also called as
Return on shareholders’s or proprietors fund.It is the relationship between net
profit(after interest and tax) and the proprietor’s funds.Its can be given as follows:
Return on shareholders’ investment=(net profit(after interest and
tax)/shareholder’s funds)*100.
Shareholder’s funds include equity share capital,preference share capital,free
reserves such as share premium,revenue reserve,capital reserve,retained
earnings and surplus,less accumulated losses,is any.
5.Return on equity capital:
Return on equity capital indicates the relationship between profits of a company
and its equity capital. It can be calculated as follows:
Return on equity capital=(net profit after tax)-preference dividend/equity share
capital(paid-up)*100.
6. EPS:
Earning per share is a small variation of return on equity capital and is
calculated by dividing the net profit after tax and the preference dividend by the
total number of equity shares. It is calculated using the formula
E.P.S=(net profit after tax-preference dividend)/no.of.equity shares
 23

7) Return on Investment
This ratio is called return on “Capital employed “. It measures the
sufficiency or otherwise of profit in relation to capital employed.
Return on Investment = operating profit / Capital employed * 100
The term operating profit means profit before interest and tax.

II) ACTIVITY OR EFFICIENCY RATIOS

These ratios are also called as performance ratios. These ratios highlight the
operational efficiency of the business concern. The ratios comprising this
category are calculated with reference to sales or cost of sales and expressed in
number of times.

A) Inventory Turnover Ratio:

This ratio is called stock velocity ratio. It is calculated to ascertain the efficiency
of inventory management in terms of capital investment. It shows the
relationship between the cost of goods sold and the amount of average inventory.
Stock turnover ratio is obtained by dividing the cost of sales by average stock.
Inventory turnover ratio = Cost of goods sold / Average inventory.
2.INVENTORY CONVERSION PERIOD:
It is the time required for company to convert its inventory into cash. The
lesser it takes to convert into cash the more profitable it is for the
company. It is calculated using the following formula.
Inventory Conversion Period=No. of. Days/inventory turnover ratio

B) Debtors turnover ratio:

Debtors turnover ratio is also called as receivables turnover ratio. A business
concern generally adopts different methods of sales. Goods are sold on credit
based on credit policy adopted by the firm.
Debtors turn-over ratio=net credit annual sales/average trade debtors.
 24

C)Average Collection Period:

It is the time taken by the debtors to pay back the amount they purchased using
the credit sales.The time taken by the debtors play a crucial role in the liquidity
position of a company.The sooner the money returned back, the better the
liquidity of the company. It is given by the following relation:
Average collection Period =No.of working days/Debtors turnover Ratio .

Creditor Turnover Ratio:

This ratio is also known as accounts payable. A business concern usually purchases raw materials,

services and goods on credit. The quantum of payables of a business concern depends upon its purchase

policy, the quantity of purchase and suppliers” credit policy. Creditors turnover ratio indicates the

number of times the payable rotate in a year.

Creditors turnover ratio= Net credit purchase/Average accounts payable or average

creditors

C)Average Payment Period;

It denotes the payment of the bills for the credit purchases.It can be calculated using

the following formula:

Average Payment Period=(No.of.working days or months)/creditors turnover Ratio.

D) Working capital ratio:

Working capital ratio measures the effective utilization of working capital. It also

measures the smooth running of business. The ratio establishes relationship between

cost of sales and working capital.

 25

Working capital ratio=Sales/Net working capital.

Working capital is given by this relationship,

working capital=current assets-current liability.

 26

III)LONG TERM SOLVENCY RATIOS:

The term solvency means the ability of the firm to meet its long term obligations. This

project employs 3 types of long term solvency ratios.They are as follows:

1.Debt-equity ratio.

2.Proprietary ratio.

3.Fixed Assets ratio.

1.Debt-Equity Ratio:

Debt-Equity ratio gives the relationship between the fund raised between debt and

equity. The most favorable ratio for debt and equity is 1:2. It is given by the following

formula.

Debt-equity ratio=Total debt/shareholder’s fund or Networth. Total debt includes long

term or short term bonds, mortgages etc. Shareholder’s fund includes the equity

share capital, preference share capital, all reserves and surpluses, sinking funds etc.

Its formula is given by,

Debt-equity ratio=outsiders fund or total debt/shareholder’s fund

2.Proprietary ratio:

This ratio represents the relationship of owner’s funds to total assets. The higher the

ratio or the share of the shareholders in the total capital of the company, better is the

long term solvency position of the company.

Proprietory ratio or Equity ratio=share holders funds/Total Tangible Assets

 27

3.Fixed Assets to long term funds ratio:

The ratio indicates the extends to which the total fixed assets are financed by the

long-term funds of the firm.

Fixed assets Ratio is given by the following formula.

Fixed assets Ratio=Fixed Assets(After depreciation)/Total long term funds.

2.3 LIMITATIONS OF THE STUDY

 Ratio analysis generally historical nature.

 Mishandling or misuse of ratios and using them without proper
context may lead the management to a wrong direction.
 28

3.1 ANALYSIS AND INTERPRETATION

PROFITABILITY RATIOS

TABLE NO: 3.1.1

TABLE NAME:CURRENT RATIO

FORMULA:
Current ratio = (Current assets/Current Liability) *100

TABLE: 3.1.1 CURRENT RATIO

YEAR CURREN CURRENT CURREN
S T LIABILIT T
ASSETS Y RATIO
2000 6162.75 3415.83 1.8
 29

2001 6542.03 3557.45 1.84

2002 7053.20 4228.50 1.67
2003 7196.26 4094.18 1.76
2004 8216.99 5339.66 1.54
2005 10281.11 7248.99 1.42
2006 12396.40 8905.14 1.39
2007 15982.40 11957.32 1.34
2008 19222.29 16632.97 1.16

INFERENCE

FIGURE-3.1.1
 30

CURRENT RATIO
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008

CURRENT RATIO

TABLE NO: 3.1.2

TABLE NAME: LIQUID RATIO

FORMULA:
Liquid Ratio or acid test ratio or quick ratio= (Liquid assets/current
liability)*100
 31

Where Liquid assets=(current assets-inventory)

TABLE NO: 3.1.2 liquid ratio

Current Current Inventory Liquid
Year assets liabilities ratio

2000 6162.75 3415.83 1766.28 1.3

2001 6542.03 3557.45 2034.74 1.3
2002 7053.20 4228.50 1994.23 1.2
2003 7196.28 4094.18 2001.06 1.3
2004 8216.99 5339.66 2103.88 1.1
2005 10281.11 7248.99 2916.11 1.0
2006 12396.40 8905.14 3744.37 1.0
2007 15982.40 11957.32 4217.67 1.0
2008 19222.29 16632.97 5736.40 0.8
 32

FIGURE- 3.1.2

LIQUID RATIO
1.4

1.2

0.8

0.6

0.4

0.2

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

LIQUID RATIO
 33

TABLE NO: 3.1.3

TABLE NAME: GROSS PROFIT RATIO

.
FORMULA:
Gross profit ratio =Gross profit/net sales*100.
But since Gross profit is not available in the balance sheet, we can find
gross profit using cost of goods sold.
Cost of goods sold= inventory + purchases
Gross profit= sales – cost of goods sold

TABLE NO: 3.1.3 TABLE SHOWING COST OF GOODS SOLD

Year Inventories Purchases Cost of Goods
sold
2000 1766.28 3592.52 5358.8
2001 2034.74 3697.35 5732.09
2002 1994.23 4407.74 6401.97
2003 2001.06 4553.73 6554.79
2004 2103.88 5274.7 7378.58
2005 2916.11 5769.4 8685.51
2006 3744.37 8017.9 11762.29
2007 4217.67 10730.5 14948.17
2008 5736.40 16681.44 22417.84
 34

FIGURE- 3.1.3

GROSS PROFIT RATIO

20

15

10

5
GROSS PROFIT RATIO
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
-5

-10

-15

-20
 35

TABLE NO: 3.1.4

TABLE NAME: TABLE SHOWING GROSS PROFIT
.
FORMULA:
Gross Profit= sales-cost of goods sold

TABLE NO: 3.1.4 Table Showing Gross Profit

Year Sales Cost of Goods Gross profit
Sold
2000 6222.36 5358.8 863.56
2001 6026.18 5732.09 294.09
2002 6869.92 6401.97 467.9
2003 6999.3 6554.74 444.56
2004 8036.73 7378.58 658.15
2005 9639 8685.5 953.5
2006 13441.45 11762.29 1679.16
2007 17362.82 14948.17 2414.72
2008 19540.78 22417.84 -2877.06
 36

GROSS PROFIT RATIO

20

15

10

5
GROSS PROFIT RATIO
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
-5

-10

-15

-20

FIGURE- 3.1.4
 37

TABLE NO: 3.1.5

TABLE NAME: GROSS PROFIT RATIO

FORMULA:
Gross Profit Ratio=Gross profit/net sales*100

TABLE NO: 3.1.5 Gross Profit Ratio

Year Gross Profit Net Sales Gross Profit
Ratio
2000 863.56 6222.36 13.87
2001 294.09 6026.18 4.8
2002 467.9 6869.9 6.8
2003 444.56 6999.3 6.35
2004 658.15 8036.7 8.18
2005 953.5 9639 9.89
2006 1679.16 13441.45 12.49
2007 2414.72 17362.89 13.9
2008 -2877.06 19540.78 -14.7
 38

GROSS PROFIT RATIO

20

15

10

5
GROSS PROFIT RATIO
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
-5

-10

-15

-20
 39

OPERATING RATIO
TABLE NO: 3.1.6
TABLE NAME: OPERATING RATIO

FORMULA:
Operating Ratio = (Cost of goods sold + operating
expenses / net sales)

TABLE NO: 3.1.6 Operating Ratio

Year Cost of Operating Cost of Net sales Operating
Goods sold Expenses Goods sold Ratio
+ Operating
Expenses
2000 5358.8 211.17 5569.9 6222.36 89.5
2001 5732.09 520.6 6252.69 6026.18 103.7
2002 6401.97 356.68 6758.5 6869.9 98.3
2003 6554.79 532.98 7087.7 6999.3 101.2
2004 7378.58 888.8 8267.3 8036.7 102.8
2005 8685.5 1006.3 9691.8 9639 100.5
2006 11762.29 1216 12978.3 13441 96.5
2007 14948.17 887.5 15835.67 17362.89 91.2
2008 22417.84 1645.45 24063.29 19540.78 123.14
 40

FIGURE – 3.1.6

OPERATING RATIO
140

120

100

80 OPERATING RATIO

60

40

20

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 41

TABLE NO: 3.1.7

TABLE NAME: OPERATING PROFIT RATIO

FORMULA:
Operating Profit Ratio=Operating Profit/sales*100

TABLE NO: 3.1.7 Operating Profit Ratio

Year Operating Profit Sales Operating Profit
Ratio
2000 505 6222.36 8.1
2001 -342.36 6026.18 -5.6
2002 635.6 6869.9 9.25
2003 996.36 6999.3 14.2
2004 853.9 8036.7 10.6
2005 1303.3 9639 13.5
2006 2223.6 13441.4 16.5
2007 3545.20 17362.89 20.4
2008 3707.98 19540.78 18.97
 42

FIGURE – 3.1.7
 43

TABLE NO: 3.1.8

TABLE NAME: Return on Shareholder’s fund

FORMULA:Net Worth Ratio=Net Profit/Shareholders fund

Where shareholder’s fund = equity share capital + Preference

share capital + share premium, revenue reserves, retained
earnings and surplus.
Here preference share capital is 0.so shareholders fund is equal
to the sum of equity share capital and revenue reserves.

TABLE NO: 3.1.8 Return on Shareholder’s fund

Year Net Profit Shareholder’s Net worth
fund
2000 863.56 3598.6 23.9
2001 294.09 3830.3 7.6
2002 467.95 4469.5 10.4
2003 444.5 4803.6 9.2
2004 658.15 5295.9 12.42
2005 953.4 6026.8 15.8
2006 1679.16 7301.3 22.9
2007 2414.70 8788.2 27.47
2008 2859.34 10774.2 26.53

FIGURE– 3.1.8
 44

Shareholder's fund
30

25

20

NET WORTH RATIO

15

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 45

TABLE NO: 3.1.9

TABLE NAME: RETURN ON EQUITY CAPITAL

FORMULA: Return On Equity Capital=Net Profit-Preference share

capital/equity share capital (paid up)*100
Here preference share capital is zero.

TABLE NO: 3.1.9 Return On Equity Capital

Year Net Profit Equity Share Return on Equity
Capital Capital
2000 863.56 244.76 352.8
2001 294.09 244.76 120.15
2002 467.95 244.76 191.1
2003 444.51 244.76 181.6
2004 658.15 244.76 268.8
2005 953.4 244.76 389.5
2006 1679.16 244.76 686.04
2007 2414.7 244.76 986.55
2008 2859.34 489.52 584.1
 46

FIGURE – 3.1.9

ROEC
1200

1000

800
ROEC
600

400

200

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 47

TABLE NO: 3.1.10

TABLE NAME:

FORMULA: EARNINGS PER SHARE

EPS=(Net Profit After Tax-Preference dividend)/no. of . equity shares
Here preference dividend is zero
TABLE NO: 3.1.10 Earnings per Share
Year Net profit After No. Of. Equity Earnings Per
Tax Shares Share
2000 863.56 2447.60 35.28
2001 294.09 2447.60 12.01
2002 467.95 2447.60 19.11
2003 444.51 2447.60 18.16
2004 658.15 2447.60 26.88
2005 953.4 2447.60 38.95
2006 1679.16 2447.60 68.60
2007 2414.7 2447.60 98.65
2008 2859.34 4895.20 58.41
 48

FIGURE – 3.1.10

EPS
120

100

80
EPS
60

40

20

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 49

TABLE NO: 3.1.1

TABLE NAME: RETURN ON CAPITAL EMPLOYED

FORMULA:
Return on Capital employed=Operating profit/capital employed *100
Where capital employed=Total Assets-current Liability
TABLE NO: 3.1.11 Return on Capital Employed
Year Total Assets Current Liability Capital
Employed
2000 3839.36 3415.83 423.53

2001 4855.96 3557.45 1298.51

2002 5135.38 4228.50 906.88

2003 5334.76 4094.18 1240.58

2004 5835.96 5339.66 496.3

2005 6563.88 7248.99 -685.11

2006 7859.61 8905.14 -1045.5

2007 8877.59 11957.32 -3079.7

2008 10869.39 16632.97 -5763.5

 50

FIGURE – 3.1.11

TABLE NO: 3.1.

TABLE NAME: RETURN ON CAPITAL EMPLOYED

 51

TABLE NO: 3.1.12 Table Showing Return on Capital Employed

Year Operating Profit Capital Return on
Employed Capital
Employed
2000 505 423.53 119.23
2001 -342.36 1298.51 -26.36
2002 635.6 906.88 70.08
2003 996.36 1240.58 80.31
2004 853.98 496.3 172.06
2005 1303.37 -685.11 -190.24
2006 2223.60 -1045.5 -212.68
2007 3545.20 -3079.7 -115.115
2008 3707.98 -5763.5 -64.33
 52

FIGURE – 3.1.12

ROCE
2000

1000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
-1000
ROCE
-2000

-3000

-4000

-5000

-6000

-7000

Calculation of inventory turn over ratio:

Formula=cost of goods sold/inventory
 53

Table:
Calculation of Inventory Turnover ratio:
Year Cost of Goods Inventory Inventory
Sold Turn Over
Ratio
2000 5358.8 1766.28 3.03
2001 5732.09 2034.74 2.81
2002 6401.97 1994.23 3.21
2003 6554.79 2001.06 3.27
2004 7378.58 2103.88 3.50
2005 8685.51 2916.11 2.97
2006 11762.29 3744.37 3.14
2007 14948.17 4217.67 3.54
2008 22417.84 5736.40 3.9
 54

INVENTORY TURNOVER RATIO

4.5

3.5

2.5 INVENTORY TURNOVER RATIO

1.5

0.5

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Calculation of Inventory Conversion Period:

Inventory Conversion Period=No. of. days/Inventory
Turnover Ratio
 55

Table: Inventory Conversion Ratio

Year No. of. Days Inventory Inventory
Turnover conversion
Ratio Period
2000 365 3.03 120.3
2001 365 2.81 129.56
2002 365 3.21 113.69
2003 365 3.27 111.42
2004 365 3.50 104.07
2005 365 2.97 122.54
2006 365 3.14 116.19
2007 365 3.54 102.98
2008 365 3.9 93.39
 56

INVENTORY CONVERSION PERIOD

140

120

100

80 INVENTORY CONVERSION PERIOD

60

40

20

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Debtor-turnover ratio:
 57

Formula=Net Credit Sales/average trade debtors

Table:
Year Net credit Debtors Debtor-
sales turnover ratio
2000 6834.36 4037.30 1.69
2001 6659.83 4171.30 1.59
2002 7561.46 4584.19 1.64
2003 7727.79 4075.78 1.89
2004 8893.17 4608.48 1.92
2005 10682.15 5972.14 1.78
2006 14739.46 7168.06 2.05
2007 19058.33 9695.82 1.96
2008 21775.30 11974.87 1.81
 58

DEBTOR TURNOVER RATIO

2.5

1.5
DEBTOR TURNOVER RATIO

0.5

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 59

Average collection period:

Formula:
No.of.days/ debtor turnover ratio
Table:
Year No.of.days Debtor Average
turnover ratio collection
Period
2000 365 1.69 216
2001 365 1.59 229
2002 365 1.64 221
2003 365 1.89 193
2004 365 1.92 189
2005 365 1.78 204
2006 365 2.05 176
2007 365 1.96 186
2008 365 1.81 201
 60

AVERAGE COLLECTION PERIOD

250

200

150
AVERAGE COLLECTION PERIOD

100

50

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Creditor turnover ratio:

 61

Formula:

Creditor turnover ratio=Net credit purchase/average creditors

Table:

Year Credit purchase average creditors credit turnover

ratio

2000 3592.52 3415.83 1.05

2001 3697.35 3557.45 1.03

2002 4407.74 4228.50 1.04

2003 4553.74 4094.18 1.1

2004 5274.7 5339.66 0.99

2005 5769.49 7248.9 0.8

2006 8017.92 8905.14 0.9

2007 10730.52 11957.32 0.9

2008 10945.04 16632.97 1.00

 62

CREDITOR TURNOVER RATIO

1.2

0.8
CREDITOR TURNOVER RATIO
0.6

0.4

0.2

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 63

Average Payment Period:

Formula:
No. of. Days/creditor turnover ratio.
Table:
Year No. of. Days Creditor Average
Turnover Payment
ratio Period
2000 365 1.05 348
2001 365 1.03 354
2002 365 1.04 351
2003 365 1.1 332
2004 365 0.99 406
2005 365 0.8 456
2006 365 0.9 405
2007 365 0.9 405
2008 365 1.00 365
 64

AVERAGE PAYMENT PERIOD

500
450
400
350
300
AVERAGE PAYMENT PERIOD
250
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 65

Net working capital ratio:

Formula:
Net working capital ratio=sales/net working capital
Where net working capital=current assets – current liabilities
Table: finding net working capital
Year Current Current Net working
Assets Liabilities Capital
2000 6162.75 3415.83 2746.96
2001 6542.03 3557.45 2984.7
2002 7053.20 4228.50 2824.7
2003 7196.28 4094.18 3102.1
2004 8216.99 5339.66 2877.3
2005 10281.11 7248.99 3032.12
2006 12396.46 8905.14 3491.26
2007 15982.40 11957.32 4025.08
2008 19222.29 16632.97 2589.32
 66

WORKING CAPITAL TURNOVER RATIO

8

5
WORKING CAPITAL TURNOVER
RATIO
4

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 67

FINDING NET WORKING CAPITAL TURNOVER RATIO

TABLE:
Year Sales Net Working Working
Capital Capital
Turnover
Ratio
2000 6222.36 2746.92 2.2
2001 6026.18 2984.58 2.01
2002 6869.92 2824.7 2.4
2003 6999.30 3102.1 2.25
2004 8036.73 2877.3 2.79
2005 9639.00 3032.12 3.17
2006 13441.45 3491.26 3.8
2007 17362.89 4025.08 4.3
2008 19540.78 2589.32 7.5

Long Term Solvency Ratios:

 68

1. Debt-Equity Ratio:
Formula=Total debt/Shareholders fund
Year Total debt Shareholder’s Debt-equity
fund ratio
2000 240.7 3598.68 0.06
2001 1025.60 3830.36 0.2
2002 665.78 4469.61 0.14
2003 531.09 4803.69 0.11
2004 540.03 5295.94 0.10
2005 536.98 6626.89 0.08
2006 558.24 7301.38 0.076
2007 89.33 8788.26 0.01
2008 95.18 10774.21 0.008
 69

DEBT EQUITY RATIO

0.25

0.2

0.15
DEBT EQUITY RATIO

0.1

0.05

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

2.Proprietary Ratio:
 70

Formula:
Shareholder’s fund/Total Asset
Years Shareholder’s Total Assets Proprietary
fund Ratio
2000 3598.68 3839.36 0.937
2001 3830.36 4855.96 0.78
2002 4469.61 5135.38 0.87
2003 4803.69 5334.76 0.900
2004 5295.94 5835.96 0.907
2005 6626.89 6563.8 1.00
2006 7301.38 7859.61 0.92
2007 8788.26 8877.59 0.9
2008 10774.21 10869.39 0.99
 71

PROPRIETARY RATIO
1.2

0.8
PROPRIETARY RATIO
0.6

0.4

0.2

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 72

FIXED ASSETS RATIO:

FORMULA=Long Term Shareholder’s Fund/Fixed Assets
Where Long term shareholder’s fund=Net worth + Total debt
Year Long Term Fixed Assets Fixed Assets
Shareholder’s Ratio
Fund
2000 3598.38 3839.36 1
2001 3830.36 4855.96 1
2002 4469.61 5135.38 1
2003 4803.67 5334.76 1
2004 5295.94 5835.97 1
2005 6026.89 6563.88 1
2006 7301.38 7859.61 1
2007 8788.26 8877.59 1
2008 10869.39 10869.39 1
 73

FIXED ASSETS RATIO

1.2

0.8
FIXED ASSETS RATIO
0.6

0.4

0.2

0
2000 2001 2002 2003 2004 2005 2006 2007 2008
 74

Trend Analysis:
Trend Projection Equation:y=a + bx
Years X Sales X2 XY
Turnover(Y)
2000 -4 6834.36 16 -27337.44
2001 -3 6659.83 9 -19979.49
2002 -2 7561.46 4 -15122.92
2003 -1 7727.79 1 -7727.79
2004 0 8893.17 0 0
2005 1 10682.12 1 10682.12
2006 2 14739.46 4 29478.92
2007 3 19058.33 9 57174.99
2008 4 21775.30 16 87101.2
2009 5
Mean=11547.9 ∑x=60 ∑xy=114269.59
8

Trend projection equation :

Y=a+bX
Where , X = Independent Variable (year)
Y= Dependent Variable (turnover)
a, b - constants
 75

To find out the values of a & b,

b = ∑ xy / ∑x2
b=114269.59/60
b=1904.5
a=11547.98
Projection of sales:
Turnover for year 2009 when x=5
y=11547.98 + 1904.5(5)
=21070.48
Turnover for year 2010 when x=6
Y=11547.98 + 1904.5(6)
=22974.98

REGRESSION ANALYSIS: (sales Vs Net Profit Before Tax)

The future net working capital is predicted through the
regression analysis with the help of the projected sales .
Year Turnover(X) PBT(Y) XY X
s
2000 568.88 568.88 3887930.7 46708476.6
2001 -486.2 -486.2 -3238009.3 44353335.6
2002 390.22 390.22 2950632.9 57175677.33
2003 825.31 825.31 637782.4 59718738.28
2004 610.51 610.51 5429369.2 79088472.65
2005 1263.07 1263.07 13492303.2 114108328.6
2006 2260.92 2260.92 33324739.9 217251681.1
2007 3739.58 3739.58 712701497.7 363219942.4
2008 4437.09 4437.09 96618965.88 474163690.1
∑x=103931.8 ∑y=13609.3 ∑xy=230113904. ∑x=145578834
5 8 6 3
 76

Regression equation :
Y = a + bX
Where, X = Independent Variable (year)
Y= Dependent Variable (turnover)
a, b – constants

To find out the values of a & b,

ƩY = n a + b ∑X
∑XY = a ∑X + b ∑X2
Where n is the number of years and n=9 in this table.
By substitution of values we find,
a=-1952.2
b=0.3
so
Projected PBT:
For the year 2009,when X=21070.48
Y=a + bx
Y=-1952.2 + 0.3*21070.48
Y= -1952.2 + 6321.1
=4368.9
For the year 2010, when X=22974.98
Y=a + bx
 77

= -1952.2 + 0.3 * 22974

=4940.3

REGRESSION ANALYSIS: (sales Vs NWC)

The future net working capital is predicted through the
regression analysis with the help of the projected sales.
Year Turnover( Net XY X
s x) working
Capital(Y)
200 6834.36 2746.92 18773440.17 46708476.60
0
200 6659.83 2984.58 19876795.42 44353335.62
1
200 7561.46 2824.70 21358856.06 57175677.33
2
200 7727.79 3102.10 23972377.36 59718738.28
3
200 8893.17 2877.33 25588584.84 79088472.64
4
200 10682.15 3032.12 32389560.66 114108328.62
5
 78

200 14739.46 3491.26 51459287.12 217251681.09

6
200 19058.33 4025.08 76711302.92 363219942.38
7
200 21775.30 2589.32 56383219.8 474163690.09
8
∑X= ∑y=27673. ∑xy=32651342 ∑x=145578834
103931.8 41 4.3 2.7
5

Regression equation:
Y = a + bX
Where, X = Independent Variable (year)
Y= Dependent Variable (turnover)
a, b – constants

To find out the values of a & b,

ƩY = n a + b ƩX

ƩXY = a ƩX + b ƩX2

The values of a and b are as follows,

a=2843.9
b=0.02

Hence Y=2843.9 + 0.02X

Projection for year 2009(X=21070.48)
 79

Y=2843.9 + 0.02*21070.48
Y=3265.30
Projection for year 2010(X=22974.98)
Y=2843.9 + 0.02* 22974.98
Y=3303.39

REGRESSION ANALYSIS: (sales Vs debtors)

The future debtors is found through the regression analysis
with the help of the projected sales.

Year Turnover(X Debtors(Y) XY X

s )
200 6834.36 4037.30 27592361.63 46708476.60
0
200 6659.83 4174.30 27800128.37 44353335.62
1
200 7561.46 4584.19 34663169.32 57175677.33
 80

2
200 7727.79 4075.78 31496771.93 59718738.28
3
200 8893.17 4608.48 40983996.08 79088472.64
4
200 10682.15 5972.14 6379295.3 114108328.62
5
200 14739.46 7168.06 105653333.6 217251681.09
6
200 19058.33 9695.82 184786137.2 363219942.38
7
200 21775.30 11974.87 260756386.7 474163690.09
8
∑x=103931 ∑y=56290. ∑xy=7775275 ∑x=14557883
.85 94 80.2 42.7

Regression equation :
Y = a + bX
Where, ƩY = n a + b ∑X
ƩXY = a ∑X + b ∑X2

Where n is the number of years which is 9 here.

To find a and b:
a=480.56
b=0.5
Projection of year 2009:
X=21070.48
Y= a + bx
= 480.56 + 0.5*21070.48
 81

=480.56 + 10535.24
=11015.8
Projection for year 2010:
X=22974.98
Y=a + bx
=480.56 + 0.5 * 11487.49
=11968.05
 82

3.5 ECONOMIC VALUE ADDED (STERN STEWART APPROACH)

EVA is the is the economic profit generated after the cost of invested
capital. It is the surplus left after making an appropriate charge for the
capital employed in business. Fortune magazine has called it “todays
hottest financial idea and getting hotter” and management guru Peter
Drucker referred to it as a measure of total factor productivity. EVA
incorporates the opportunity cost of invested capital that is not realized by
traditional accounting measures.
Rise in EVA:
EVA will rise if the operating efficiency is improved, if the value adding
investments are made, if uneconomic activities are curtailed and if the
cost of capital is reduced. In more specific terms , EVA rises when
 The rate of return of the existing capital increases because of
improvement in operating performance. This means that the
operating profit increases without infusion of additional capital in
the business.
 Additional capital is invested in projects that earn a rate of return
greater than the cost of capital.
 Capital is withdrawn from activities that earn inadequate returns.
 The cost of capital is lowered by altering financing strategy.

The EVA is given by

i. EVA = NOPAT - c* X CAPITAL
ii. EVA = CAPITAL ( r-c*)
iii. EVA = [PAT +INT (1-t)] – c* CAPITAL
iv. EVA = PAT – KE EQUITY

Where ,
 83

NOPAT – net operating profit after tax

c* - cost of capital
CAPITAL - economic book value of the capital employed
r – return on capital ( NOPAT/ CAPITAL)
PAT – profit after tax
INT – interest expense of the firm
t – marginal tax rate of the firm
kE – cost of equity
EQUITY –equity employed in the firm

CALCULATION OF NOPAT:
NOPAT represents the total pool of profit available to provide a cash
return to all the financial contributors of capital to the company. NOPAT is
the operating profits of the firm adjusting taxes to the cash basis. Taxes
are adjusted to account for the interest costs which are tax deductable
and essentially create a tax savings for the company. These tax savings
can be used to invest in other projects that could generate further
operating profit. Consequently, any tax savings from the interest costs,
operating lease costs and other adjustments must be accounted for an
adjusted from the tax amount that is reported. NOPAT is given by

NOPAT = EBIT *(1- tax rate)

CALCULATION OF NOPAT:
Year EBIT (1-0.35) NOPAT
2000 505 0.65 328.25
2001 -342.36 0.65 -222.534
2002 635.6 0.65 413.14
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2003 996.36 0.65 647.634

2004 853.98 0.65 555.087
2005 1303.37 0.65 847.19
2006 2223.60 0.65 1445.34
2007 3545.20 0.65 2304.38
2008 3707.98 0.65 2410.18

COST OF CAPITAL:
The cost of capital is the combined rate of return required by both
shareholders and lenders. It is the minimum acceptable return on
economic investment as a cut- off rate required for value creation. It
includes the following components:
 Cost of Equity
 Cost of Preference Shares
 Cost of Debt

COST OF EQUITY :
This component of cost of capital is more abstract as it is based
upon alternative investment yields of comparable risk. This depicts how
much compensation do investors require over and above the return
provided by government bonds to compensate them for bearing the risk.
KE = (Dividend paid / Equity capital)*100
Year Dividend paid Equity Capital Ke(%)
2000 73.43 244.76 30
2001 73.43 244.76 30
2002 97.9 244.76 39.9
2003 97.9 244.76 39.9
2004 146.86 244.76 60
2005 195.81 244.76 8.0
2006 354.9 244.76 144.99
2007 599.66 244.76 244.99
2008 746.52 489.52 152.5
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COST OF DEBT:
This component gives the after tax rate the business would have to
pay in the current market to obtain new long term debt capital.

KD=( Interest charges / total debt)

Year Interest charges Total debt Kd(%)
2000 23.7 240.7 9.84
2001 43.76 1025.60 4.26
2002 96.98 665.78 14.56
2003 54.78 531.09 10.31
2004 60.08 540.03 11.12
2005 81.41 536.98 15.16
2006 58.75 558.24 10.52
2007 43.33 89.33 48.50
2008 35.42 95.18 37.21
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PROPORTION OF EQUITY & DEBT

Year Proportion of Equity Proportion of debt
2000 0.5041 0.4958
2001 0.1926 0.8073
2002 0.2688 0.7311
2003 0.3154 0.6845
2004 0.3118 0.6881
2005 0.3130 0.6869
2006 0.3048 0.6951
2007 0.7326 0.2673
2008 0.8372 0.1628

WACC = (cost of equity * proportion of equity) + (cost of preference

share * proportion of preference capital ) + (pre tax cost of debt (1-tax rate)
* proportion of debt capital)
Preference capital is equal to zero here.

Calculation of WACC:
 87

Year Wacc(%)
2000 18.29
2001 8.01
2002 17.67
2003 17.20
2004 23.68
2005 31.81
2006 48.95
2007 185.92
2008 131.61

Capital Employed:
Years Capital Employed
2000 147.03
2001 156.49
2002 182.61
2003 196.26
2004 216.37
2005 246.24
2006 298.31
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2007 359.06
2008 220.1

Year NOPAT WACC Capital

Employed
2000 328.25 18.29 147.03
2001 -222.534 8.01 156.49
2002 413.14 17.67 182.61
2003 647.634 17.20 196.26
2004 555.087 23.68 216.37
2005 847.19 31.81 246.24
2006 1445.34 48.95 298.31
2007 2304.38 185.92 359.06
2008 2410.18 131.61 220.1
 89

EVA = NOPAT - (WACC X CAPITAL)

Year EVA
2000 -2362.27
2001 -1477.47
2002 -2814.47
2003 -2729.57
2004 -4570.58
2005 -6987.43
2006 -13157.64
2007 -65170.45
2008 -26557.98
 90

EVA
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
-10000

-20000

-30000 EVA

-40000

-50000

-60000

-70000
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3.3 SUGGESTIONS

 The unit may forecast selling and distribution expenses

approximately and then enters into the contract with the
customers, so that company need not incurred the distribution
expenses from its sources.
 The company shall concentrate on networking capital.
 92

3.4 CONCLUSIONS

Bharat Heavy Electrical Limited has been performing well in the

capital and engineering goods industry Boiler Auxiliaries plant being one
of the unit of BHEL, has been showing an increasing trend in its
profitability position for the past 19 years which depicts a good sign.
 93

ABSTRACT OF THE BALANCE SHEET AS ON 2001-02 to 2005-06

2001-02 2002-02 2003-04 2004-05 2005-06
Particulars Actual Actual Actual Actual Actual
(In lakhs) (In lakhs) (In lakhs) (In lakhs) (In
lakhs)
Total Turnover 30807 32961 38848 54441 81909
Gross Turnover 32284 33528 40499 60684 83773
Net Turnover 27634 28232 33340 51216 72907
Value added 10814 10675 11014 11916 16807
PBIT 2918 2040 1574 2116 5751
PBT 2823 2041 1587 2140 5788
Consumption 14127 15154 19316 35222 50818
Gross Block 10529 10751 10993 11153 11520
Net fixed Assets 3442 3139 3021 2763 2618
Closing stock 4696 5255 8848 16893 20758
Sundry debtors 2783 2872 3026 2870 3508
Sundry 5216 5573 6337 7992 9858
creditors
Current Assets 8213 8892 13740 20913 25515
Current 7567 7293 9846 14517 26743
Liabilities
Capital 4434 4919 5910 9191 8401
employed
Operating 21802 22768 28253 45476 63349
Expenses
Operating Profit 5832 5464 5087 5740 9558
Admn. 2899 3295 3360 3450 3610
Expenses
Selling 110 128 140 150 160
Expenses
Personnel 5782 6312 6956 7280 7997
Payments
No. of 2212 2187 2120 2094 2080
Employees(In
thousands)
 94

Physical 40718 43543 53877 72934 105904

Turnover
Purchases 14566 15713 21391 38707 56130
Cost of Sales 24811 26191 31753 49076 67119

BIBLIOGRAPHY

1. Cost and Management Accounting - T.S.Reddy,

Y.HariPrasadReddy;
Reprint 2003 Published by
Margham publications,
Chennai-600 017.

2. Financial and Management Accounting - T.S.Reddy Y.Hariprasad

Reddy;
Second edition
Published by Margham
publications, chennai-600 017.

3. Financial Management - Khan& Jain; Thirteenth

Edition-1996
Published by Chaitaya Publications,
Chennai-600 023.

4. Business Research Management - Cooper & Schindner

publications.
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