PROFITABILITY ANALYSIS OF

NEPAL ELECTRICITY AUTHORITY (NEA)

A PROJECT WORK PROPOSAL

By:

RASHI GOYAL

T.U. Registration No. 7-2-0934-0072-2016

Applied College of Management & Education, Biratnagar

BBS 4th Year

Submitted to:

Management Research Committee

Faculty of Management

Tribhuvan University

Kathmandu

In partial fulfillment of the requirement for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Biratnagar, Nepal

December, 2019
 TABLE OF CONTENTS
Page No.

1.1 Background of the Study......................................................................................................1

1.1.1 Background.......................................................................................................1
1.1.2 Brief Introduction of Nepal Electricity Authority............................................1
1.2 Statement of Problem...........................................................................................................2
1.3 Objective of the Study..........................................................................................................2
1.4 Significances of the Study....................................................................................................2
1.5 Review of Literature............................................................................................................3
1.6 Research Methodology:.......................................................................................................4
1.6.1 Research Design....................................................................................................4
1.6.2 Population and Sample..........................................................................................5
1.6.3 Sources of Data.....................................................................................................5
1.6.4 Data collection Procedure.....................................................................................5
1.6.5 Tools and techniques of analysis...........................................................................5
1.7 Limitation of the Study........................................................................................................5
1.8 Organization of the Study....................................................................................................6
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1.1 Background of the Study

1.1.1 Background
Profitability is one of the finance topics among the studies of researchers and scholars.
Profitability is the ability of the firm to use its resources to generate revenues in excess of its
expenses. The primary goal of any organization is Profit Maximization. A Business that is not
profitable cannot survive in the competitive market. Conversely, a business that is highly
profitable has the ability to reward its owners with a large return on their investment. Thus,
“Profitability Analysis” may be an appropriate subject matter for project report writing.

Profitability is measured with income and expenses. Income is money generated from the
activities of the business however; money coming into the business from activities like
borrowings does not create income. Similarly, expenses are the cost of resources consumed
by the activities of the business however: Purchase of Fixed Assets, Repayment of Loan is
not an expense. Profitability Analysis measures the amount of Profit earned due to the
efficiency of any operation in a business. Among the components of Financial Statements,
Income Statement shows the profitability of the corporation. Gross Profit margin, Net Profit
margin, Return on Assets, Return on Equity, etc. are the main indicators of corporation's
profitability. The main objective of this study is to analyze the Profitability of Nepal
Electricity Authority.

1.1.2 Brief Introduction of Nepal Electricity Authority

The electricity market of Nepal is unbundled at the generation point. Under unbundled
market, more than one generation company can participate and generate power. This prevents
monopoly in the generation market. However, at the distribution and transmission level, the
market is bundled meaning there is only one party responsible for distribution and
transmission of the grid electricity. Currently, the electricity market is dominated by the two
institutions: Nepal Electricity Authority and Independent Power Producer. Furthermore, there
is an important trade that forms a huge component of the market and is called “Indo-Nepal
Power Trade”.
Nepal Electricity Authority popularly known as NEA was created on August 16, 1985
(Bhadra 1, 2042) under the Nepal Electricity Authority Act 1984, through the merger of the
Department of Electricity of Ministry of Water Resources, Nepal Electricity Corporation and
related Development Boards and is the parent generator and distributor of electric power
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under the supervision of the government of Nepal. The primary objective of NEA is to
generate, transmit and distribute adequate, reliable and affordable power by planning,
constructing, operating and maintaining all generation, transmission and distribution facilities
in Nepal's power system both interconnected and isolated.

1.2 Statement of Problem

The major problem of the study is presented by raising the following research question:
 What is the profitability position of Nepal Electricity Authority?
 How has profitability of Nepal Electricity Authority changed over the period of time?
 What are the factors of profitability of Nepal Electricity Authority?

1.3 Objective of the Study

The primary objective of the study is to analyze the Profitability Situation of Nepal
Electricity Authority. The specific objectives of this study are as follows:
 To measure the profitability position of Nepal Electricity Authority.
 To find the trend of profitability of Nepal Electricity Authority.
 To determine factors of profitability of Nepal Electricity Authority.
 To evaluate profitability ratios of Nepal Electricity Authority.

1.4 Significances of the Study

The main significance of the study is pointed out as below:
 To the Researcher: This study is an important part of fulfillment of academic
requirement of the researcher.
 To the Society: As Nepal Electricity Authority is the sole distributor of electricity within
the country, the society will get to know about the financial performance of their
electricity supplier.
 To the shareholders: Nepal Electricity Authority is fully owned by Nepal Government
till date. But, recently NEA has decided to 25% of its share to public. Thus, the
profitability analysis shall play a significant role as the shareholders wants to know about
the financial performance and profitability of the corporation.
 To the management: The corporation depends upon the management and management
depends upon the corporation. The managers are major decision makers thus they need to
know to about the profitability of the corporation and how to strengthen it.
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 To the Government: Nepal Electricity Authority is government owned entity, also is a

large tax payer of the government. The revenue of Government of Nepal is also
dependent on the profitability of NEA.
 To other researchers: This study will help as a literature to other researchers who seek
to find out research problem of same situation.

1.5 Review of Literature

Review of literature is one of the most significant parts of research. It will be better to review
some fundamental aspects of relevant literature before doing analysis. Review means
thinking again, studying the documents published or unpublished related to the field of
research. The review of literature is a crucial aspect of planning of the study.

 Conceptual Review
Profit is necessary to survive in any business field for its successful operation and further
expansion. It measures management's overall effectiveness as shown by the returns generated
on investment. The financial analyst must attempt to understand whether the firm's profit is in
the rising trend. In the initial years of establishment of the firm, the profit will be in the lower
side, but slowly year by year, profit gradually starts to rise.
Profitability analysis indicates the efficiency with which the operations of the business are
carried; it measures the management's effectiveness as shown by the returns on sales or
investment. The Profitability Ratio gives answer to how effectively the corporation is being
managed. The measurement of profit can be given greatest weight since it is probably the best
indicator of overall efficiency. Also the profitability ratio mainly studies the earning power of
any corporation, which depicts the financial performance of the corporation. Profitability
Ratios also show how well companies use their existing assets to generate profit and value for
shareholders.
Higher ratio results are often more favorable, but ratio provides much more information when
compared to results from other, similar companies, the company's own historical performance
or the industry's average.
"Profitability is the end result of a number of corporate policies and decisions. It measures
how effectively the firm is being operated and managed. Owners and Managers of the firm
are interested to know the profit earning capacity of the firm. Particularly, owners are eager
to know their returns whereas managers are interested in their operating efficiency. So they
calculate profitability ratios because expectations of both owners and managers are evaluated
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in terms of profit earned by the firm. Besides owners and managers, creditors are also
interested to know the financial soundness of the firm. So creditors also use profitability
ratios". (Rajan B. Paudel, 2018)

"One of the Yardsticks of Measuring the efficiency of a firm is profitability. Ability to make
maximum profit from optimum utilization of resources by a business concern is termed as
profitability. The sustainability of a firm depends on income earned. Moreover, a firm should
earn sufficient profit on each rupee of sales to meet the operating expenses and to avail
returns to the owners. The profitability ratios are calculated to know the capability of a firm
in earning profit." (Yadav Raj Koirala, 2016)

The analyst must make an attempt to answer the following questions:

 What is the Gross Profit Margin?
 What is the Net Profit Margin?
 What is the Return on Assets?
 What is the Return on Equity?
In conclusion, it can be said that profitability ratio measure the success of the firm in earning
a net return on sales or on investment since profit is the ultimate objective of the firm.
Various profitability ratios are calculated to measure the operating efficiency of a business
enterprise.

1.6 Research Methodology:

This chapter deals the following titles:

1.6.1 Research Design

The research design tells us about the mode with which the entire project is prepared. The
present study is based on secondary sources of data and information and follows the
descriptive-cum-analytical research design. This study aims at portraying accurately upon the
profitability analysis of Nepal Electricity Authority.

1.6.2 Population and Sample

There are two major generation institutions that can generate electricity in Nepal namely:
Nepal Electricity Authority and Independent Power Producer. The researcher selected Nepal
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Electricity Authority to fulfill the purpose of this study using judgmental sampling basis. For
analysis purpose, financial statements only from preceding five years are used.

1.6.3 Sources of Data

The sources of data can be primary or secondary. This study is based on secondary source of
data. The Annual Reports of Nepal Electricity Authority, newspapers, library books, websites
and internet research were used to elicit secondary data.

1.6.4 Data collection Procedure

Data collection is the process of gathering and measuring information or targeted variables in
an established systematic fashion, to answer relevant questions and evaluate outcomes. The
data and information are collected from secondary sources, for which various publications of
Nepal Electricity Authority, newspapers, internet websites and other publications have been
used.

1.6.5 Tools and techniques of analysis

Simple statistical tools applied are:
 Mean,
 Pie charts,
 Bar diagram & Charts
The financial tools applied are:
 Gross Profit Margin
 Net Profit Margin
 Return on Assets
 Return on Equity
 Earnings Per Share

1.7 Limitation of the Study

This study, apart from its numerous advantages and benefit to various stakeholders with
genuine data, has its own exceptions and limitations which can be listed as follows:
 The study is made within limited data.
 The study is limited to a firm among various firms in the industry i.e. only
profitability of Nepal Electricity Authority is analyzed.
 Data of past five years (2071/72 to 2075/76) will only be used in this study.
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 The study will primarily be based on secondary data source which may lack
reliability.
 The study is based on past data.
 Data are collected from websites of the organization and other websites. Thus, they
might lack reliability.
 Research may not be free from human errors.

1.8 Organization of the Study

The study report is designed into three chapters which are as follows:

Chapter I- Introduction:
Chapter I deal with introduction part. It includes Background of the study, Objectives,
Statement of problem, Limitations, Organization of the study, Review of Literature and
Research Methodology.

Chapter II – Results and Findings:

In this chapter, we deal with Data Collection from various sources, presentation and analysis
of relevant data and major findings from the study.

Chapter III - Summary and Conclusion:

The last chapter is Summary and Conclusion. This chapter of the study presents summary,
conclusion extracted from the study.
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Bibliography

Rajan B. Paudel, K. J. (2018). Fundamentals of Financial Management. Kathmandu: Asmita

Books Publishers and Distributors (P) Ltd.
Yadav Raj Koirala, R. P. (2016). Accounting for Financial Analysis & Planning. Kathmandu:
Asmita Books Publishers & Distributors (P) Ltd.

Annual Report of Nepal Electricity Authority from 2070-71 to 2075-76.

Websites:
www.google.com
www.wikepedia.com
www.nea.org.np
www.studyfinance.com

Previous thesis from library: Applied College of Management and Education, Biratnagar