Inspira- Journal of Modern Management & Entrepreneurship 74

ISSN : 2231–167 X, Volume 04 No. 02, April, 2014 pp. 74-80

MEASURING FINANCIAL HEALTH OF NTPC COMPANY OF

INDIA USING “Z” SCORE MODEL

Manish Kumar Jaiswal

Financial management is one of the most important areas in day-to-day

management of a company. Ratio analysis is one of the most easiest and proficient tool
to assess the financial soundness of a company. Financial position of the company can
be easily evaluated through its profitability, liquidity, solvency and activity ratios. This
paper analyses the financial health of NTPC Companies in India for five years from
2008-09 to 2012-13 by using Z-score, developed by Altman. The Z score is a measure of
a company’s health and it utilizes several key ratios for its formulation.
INTRODUCTION: COMPANY PROFILE & Z SCORE MODEL
National Thermal Power Corporation (NTPC):
National Thermal Power Corporation (NTPC) Limited is the largest power
generating public sector Company of India. NTPC Limited was set up in November,
1975 as a Government of India enterprise to plan, design, construct operation and
maintain super thermal power stations along with transmissions systems in various
parts of the country. It was introduced for the first time the gas based combined cycle
power generation technology in India. NTPC is ranked 11 in the list of top companies
of India in Fortune India 500 in 2011. At the present time the Government of India hold
89.5% of its paid-up capital and the balance of 10.5% being held with foreign
institutional investors, financial institutions, banks, and the general public. With a
current generating capacity of 36,014MW, NTPC embarked on plans to become a
75,000 MW company by 2017.
Z Score Model
Z score model was first developed by Edward Altman, professor of Finance,
Stern School of Business, Network University, to evaluate the financial health of a
company, on the basis of various ratios. The value calculated determines the likelihood
of a company to be bankrupt. The value calculated is termed as Z score. Five ratios net
working capital to total assets, retained earnings to total assets, earnings before interest
and tax to total assets, market value of equity to market value of debt and sales to total
assets are calculated from the financial statements and then are fitted to the formula
propounded by Altman. It is a linear equation where the ratios are multiplied by
certain coefficients or factors (devised by Altman), which are then added together to
determine the Z score. The formula given by Altman is:
Z = 1.2 x1 + 1.4x2 + 3.3 x3 + 0.6 x4 + 0.99 x5
Where:
Z = Score


Junior Research Fellow, Faculty of Commerce, Banaras Hindu University, Varanasi-221005
Measuring Financial Health of NTPC Company of India Using … 75

X1 = Net Working Capital / Total Assets

X2 = Retained Earnings / Total Assets
X3 = Earnings before Interest and Tax / Total Assets
X4 = Book Value of Equity / Book Value of Debt
X5 =Net Sales / Total Assets
The ratios are the widely used tool to measure the financial performance of a
company. There are four major ratios which define the complete financial position of a
company, viz.: liquidity ratio, activity ratio, solvency ratio and profitability ratio. The
liquidity ratio helps to measure the company’s ability to measure the company’s ability
to meet the short term obligations. The solvency ratio measures the debt service
capacity in the long run. The activity ratio determines the company’s ability to utilize
the assets in an efficient manner. The profitability ratio measures the profit bearing
capacity of a company. In the above formula, X1 gives the liquidity position to the total
capitalization, X2 measures the cumulative profitability overtime and leverages, X3
measures the operating performance and productivity of assets, X4 gives the long-term
solvency position and X5 gives the sales generating capacity of the assets.
Measurement of Financial Health
According to Altman, the following three situations are considered for studying
financial health of companies in India.
1. Below ‘Z’ score of 1.8, the company is considered to be in the bankruptcy Zone.
Its failure is certain and extremely likely and would occur probably within a
period of two years.
2. If a company has a ‘Z’ score between 1.8 and 2.99, its financial viability is
considered to be healthy. The failure in this situation is uncertain to predict.
3. Above ‘Z’ score of 2.99, the company is in a too healthy Zone. Its financial health
is viable and there is no risk of a fall.
TABLE: ALTMAN GUIDELINES Situation Z score Zones Remarks
S. No. Situation Z score Z score Zones Remarks
1. Below 1.8 Bankruptcy Zone Certain to fall
2. 1.8 – 2.99 Healthy Zone Uncertain to Predict
3. Above 2.99 Too Healthy Zone Not to fall
Source: Altman (1968)

Objectives of the Study:

 Evaluate the financial soundness of NTPC.
 Forecast the financial health of NTPC.
Review
Out of the innumerable studies available on the subject some of the most
appropriate studies have been: Maheswara reddy.D and Reddy C.R (2011), in their
study on “Application of Z score Analysis in evaluating the financial health of
pharmaceutical companies- A case study “. This study concluded that the overall
financial health of both the companies (Aubindo Datong Bio- Pharmacy limited and
Ranbaxy Laboratories Limited) was good. Suriamurthi and Velavan, (2010), He
conclude that the financial health of the E.I.D Parry Sugars Limited during the study
period (from 1998-99 to 2007-08) is healthy on their study on “Measuring Financial
Health of E.I.D Parry Sugar Limited using ‘Z’- Score Model – A Case Study”.
Dheenadhayalan.V (2008) in this study on “Financial Health of Steel Authority of
76 Inspira- Journal of Modern Management & Entrepreneurship : April, 2014

India Limited”. He concluded that the Z score of SAIL showed a rising trend and the
financial health of the SAIL was good. Khannadhasan (2007), concluded that the
financial health of Wendt India limited was good by applying the Z score model.
Johan (2006), used Z score to measure the financial performance of small business
firms in Kenya, and to determine the distress level through cyclical concept. Krishna
(2005) predicted the financial distress and insolvency of IDBI through Z score. Ben Mc
Clure (2004) through his work has advised investors to check the Z score of companies
from time to time to avoid bankruptcy situation.
Research Methodology
The study is based on secondary data collected from the audited Profit & Loss
A/c and Balance Sheet associated with schedules, annexure available in the published
annual reports of NTPC for the period of 5 years (i.e. from 2008-09 to 2012-13). For the
purpose of the study, Journals, Conference proceedings and other relevant documents
have also been consulted to supplement the data. The data had been analysed trough
Altman’s Z score model, for which a few ratios have been calculated through ratio
analysis.
Limitation
The study is completely based on secondary data of only one company and is
confined to a period of only 5 years (i.e. from 2008-09 to 2012-13).
Analysis and Findings
Table 1: Value of Z score Indicators
Z SCORE ANALYSIS – VALUES OF INDICATORS
Net Book Book
Retained EBIT
YEAR Working Total Assets Net Sales Value of Value of
Earnings
capital Equity Debt
2008-09 16,993 94,536.20 11,355.69 45,229.06 41,791.18 57,370.07 34,567
2009-10 16,710 1,02,115.60 12,694.39 49,233.88 46,168.67 62,437.42 37,797
2010-11 18,688 1,25,738.88 14,198.68 57,399.49 54,704.55 67,892.25 43,188
2011-12 17,971 1,40,837.80 14,628.48 64,514.79 61,002.20 73,291.17 50,279
2012-13 14,199 1,61,116.46 17,353.40 67,930.81 64,189.57 80,387.51 58,146

Source: Annual report of NTPC, 2008-09 to 2012-13.

Notes:
NET WORKING CAPITAL = QUICK ASSETS – CURRENT LIABILITIES
RETAINED EARNINGS = PROFIT BEFORE INTEREST AND TAX
TOTAL ASSETS = CURRENT ASSETS + FIXED ASSETS
BOOK VALUE OF EQUITY = NET WORTH
BOOK VALUE OF DEBT = BORROWINGS OF THE COMPANY
Table 2: Calculated value of ratios of the NTPC
CALCULATION OF RATIOS
Financial Ratios 2008-09 2009-10 2010-11 2011-12 2012-13
X1 NWC to Total Assets 0.17 0.16 0.14 0.12 0.08
X2 R.E to Total Assets 0.12 0.12 0.11 0.10 0.10
X3 EBIT Total Assets 0.47 0.48 0.45 0.45 0.42
X4 BVE to BVD 1.65 1.65 1.57 1.45 1.38
X5 Net Sales to Total Assets 0.44 0.45 0.43 0.43 0.39
Measuring Financial Health of NTPC Company of India Using … 77

Table 3: Value of coefficients and Z score of the NTPC

Z-Score of NTPC
YEAR 1.2X1 1.4X2 3.3X3 0.6X4 1.0X5 Z SCORE
2008-09 0.204 0.168 1.551 0.99 0.44 3.353
2009-10 0.192 0.168 1.584 0.99 0.45 3.384
2010-11 0.168 0.154 1.485 0.94 0.43 3.107
2011-12 0.144 0.140 1.485 0.87 0.43 3.069
2012-13 0.096 0.140 1.386 0.82 0.39 2.832

Findings of The Study

Net Working Capital to Total Assets (X1)
The ratio of net working capital to total assets depicts the liquidity position of
the company. The ratio (X1) ranges from was decreasing continuously from 0.17 to 0.08
(in table 2). It was highest in the year 2008-09 and lowest 2012- 13.
Fig 1: Graphical presentation of net working capital to total assets

Retained Earnings to Total Assets (X2)

The ratio of retained earnings to total assets indicates that the proportion of
fixed assets is financed by the retained earnings i.e. reserves. Retained earnings are the
free reserves and cheaper source of finance than debt. A low ratio in the analysis is
indicates that the growth is not a real growth, because the company is financed
through increasing debt, rather than of reinvesting profits. The ratio (X2) ranges from
0.10 to 0.12 in the table 2.
Fig 2: Graphical Presentation of Retained Earnings to Total Assets
78 Inspira- Journal of Modern Management & Entrepreneurship : April, 2014

Earnings Before interest and Tax to Total Assets (X3)

EBIT to Total Assets ratio is a common variant of the return on assets. This ratio
indicates the operating performance and productivity capacity of the assets. The ratio
(X3) ranges from 0.42 to 0.48 in the table 2. It was highest in the year 2009-10 and lowest
2012- 13.
Fig 3: Graphical presentation of EBIT to total assets

Book Value of Equity to Book Value of Dept (X4)

Book value of equity to debt is a common indicator of bankruptcy. It is a
measure which indicates how much the company’s assets can decline in value, before
the liabilities exceed the assets and the company becomes insolvent. The ratio (X4) of
NTPC ranges from 1.65 to 1.38 in table 2. It was highest in the year 2008-09 and lowest
2012- 13.
Fig 4: Graphical Presentation of Book value of Equity to Book Value of Debt

Net Sales to Total Assets (X5)

The sales are very important in measuring the overall performance of the
company since all the activities are directly or indirectly depends on the sales revenue.
The ratio (X5) ranges between 0.45 to 0.39 and it was highest in the year 2008-09 and
lowest 2012- 13 in the table 2.
Measuring Financial Health of NTPC Company of India Using … 79

Fig 5: Graphical Presentation of Book Value of Net Sales to Total Assets

Fig 6: Graphical presentation of Z score of NTPC

The figure 6 represents the Z score of NTPC (from table 3) is compared to the
lowest range 1.8 and highest range 3 of Altman’s Z score model. It can be seen that
NTPC has a viable financial position and it is going to have a sound financial
performance.
Conclusion
The Z-Score of NTPC based on Altman’s model of Z score is ranging from 2.832
to 3.384 during the period of the study. The lower Z-Score, the more likely a company
will be bankrupt. Z-Score lower than 1.8 indicates that bankruptcy is likely, while
scores greater than 3.0 indicates that bankruptcy is unlikely to occur in the next two
years. Companies that have a Z-Score ranging from 1.8 - 3.0 are in the gray zone
(Safety zone). From the above analysis, it can be concluded that Z-Score of NTPC over
a period of five years from 2008-09 to 2012-13 ranges from 2.8 to 3.3. Company has ‘Z’
score between 1.8 and 2.99; its financial viability is considered to be healthy and safe.
The failure in this situation is uncertain to predict. Finally, it can be concluded that the
overall financial health of NTPC is good, and it can be quoted as an investor friendly
company as will be having a sound financial performance in the future.
80 Inspira- Journal of Modern Management & Entrepreneurship : April, 2014

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