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.

1

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.

2

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.

3

• BHEL’s operations are organized around three business sectors, namely

power industry including Transmission, Transportation, Telecommunication &

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.

4

• Ensure speed of response.

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

company.

5

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.

6

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.

7

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.

8

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.

9

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.

10

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

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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.

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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.

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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.

14

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.

15

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.

16

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

17

Percentage of the total number of employees is as follows:

0.95* 100 = 95%

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

shareholders

Ratios for creditors Ratios for shareholders

Operating ratio Current ratio Return on Shareholder

Return on Investment Solvency ratio Dividends coverage ratio

Stock turnover yield Creditors turnover Dividends yields

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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.

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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.

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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

21

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

22

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:

23

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.

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:

24

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.

Working capital ratio=Sales/Net working capital.

Working capital is given by this relationship,

working capital=current assets-current liability.

25

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.

26

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

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.

27

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

YEARS CURRENT

ASSETS

CURRENT

LIABILITY

CURRENT

RATIO

2000 6162.75 3415.83 1.8

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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

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2000 2001 2002 2003 2004 2005 2006 2007 20080

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

CURRENT RATIO

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

30

Where Liquid assets=(current assets-inventory)

TABLE NO: 3.1.2 liquid ratio

Year

Current

assets

Current

liabilities

Inventory Liquid

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

31

FIGURE- 3.1.2

2000 2001 2002 2003 2004 2005 2006 2007 20080

0.2

0.4

0.6

0.8

1

1.2

1.4

LIQUID RATIO

LIQUID RATIO

32

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

33

FIGURE- 3.1.3

2000 2001 2002 2003 2004 2005 2006 2007 2008

-20

-15

-10

-5

0

5

10

15

20

GROSS PROFIT RATIO

GROSS PROFIT RATIO

34

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 Sold Gross profit

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

35

2000 2001 2002 2003 2004 2005 2006 2007 2008

-20

-15

-10

-5

0

5

10

15

20

GROSS PROFIT RATIO

GROSS PROFIT RATIO

FIGURE- 3.1.4

36

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

37

2000 2001 2002 2003 2004 2005 2006 2007 2008

-20

-15

-10

-5

0

5

10

15

20

GROSS PROFIT RATIO

GROSS PROFIT RATIO

38

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

Goods sold

Operating

Expenses

Cost of Goods

sold +

Operating

Expenses

Net sales Operating

Ratio

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

39

FIGURE – 3.1.6

2000 2001 2002 2003 2004 2005 2006 2007 20080

20

40

60

80

100

120

140

OPERATING RATIO

OPERATING RATIO

40

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

41

FIGURE – 3.1.7

42

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 fund Net worth

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

43

2000 2001 2002 2003 2004 2005 2006 2007 20080

5

10

15

20

25

30

Shareholder's fund

NET WORTH RATIO

44

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 Capital Return on Equity

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

45

FIGURE – 3.1.9

2000 2001 2002 2003 2004 2005 2006 2007 20080

200

400

600

800

1000

1200

ROEC

ROEC

46

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 Tax No. Of. Equity

Shares

Earnings Per 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

47

FIGURE – 3.1.10

2000 2001 2002 2003 2004 2005 2006 2007 20080

20

40

60

80

100

120

EPS

EPS

48

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

49

FIGURE – 3.1.11

TABLE NO: 3.1.

TABLE NAME: RETURN ON CAPITAL EMPLOYED

50

TABLE NO: 3.1.12 Table Showing Return on Capital Employed

Year Operating Profit Capital Employed Return on 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

51

FIGURE – 3.1.12

2000 2001 2002 2003 2004 2005 2006 2007 2008

-7000

-6000

-5000

-4000

-3000

-2000

-1000

0

1000

2000

ROCE

ROCE

Calculation of inventory turn over ratio:

Formula=cost of goods sold/inventory

52

Table:

Calculation of Inventory Turnover ratio:

Year Cost of Goods

Sold

Inventory Inventory

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

53

2000 2001 2002 2003 2004 2005 2006 2007 20080

0.5

1

1.5

2

2.5

3

3.5

4

4.5

INVENTORY TURNOVER RATIO

INVENTORY TURNOVER RATIO

Calculation of Inventory Conversion Period:

Inventory Conversion Period=No. of. days/Inventory

Turnover Ratio

54

Table: Inventory Conversion Ratio

Year No. of. Days Inventory

Turnover

Ratio

Inventory

conversion

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

55

2000 2001 2002 2003 2004 2005 2006 2007 20080

20

40

60

80

100

120

140

INVENTORY CONVERSION PERIOD

INVENTORY CONVERSION PERIOD

Debtor-turnover ratio:

56

Formula=Net Credit Sales/average trade debtors

Table:

Year Net credit

sales

Debtors Debtor-

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

57

2000 2001 2002 2003 2004 2005 2006 2007 20080

0.5

1

1.5

2

2.5

DEBTOR TURNOVER RATIO

DEBTOR TURNOVER RATIO

58

Average collection period:

Formula:

No.of.days/ debtor turnover ratio

Table:

Year No.of.days Debtor

turnover ratio

Average

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

59

2000 2001 2002 2003 2004 2005 2006 2007 20080

50

100

150

200

250

AVERAGE COLLECTION PERIOD

AVERAGE COLLECTION PERIOD

60

Creditor turnover ratio:

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

61

2000 2001 2002 2003 2004 2005 2006 2007 20080

0.2

0.4

0.6

0.8

1

1.2

CREDITOR TURNOVER RATIO

CREDITOR TURNOVER RATIO

62

Average Payment Period:

Formula:

No. of. Days/creditor turnover ratio.

Table:

Year No. of. Days Creditor

Turnover

ratio

Average

Payment

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

63

2000 2001 2002 2003 2004 2005 2006 2007 20080

50

100

150

200

250

300

350

400

450

500

AVERAGE PAYMENT PERIOD

AVERAGE PAYMENT PERIOD

64

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

Assets

Current

Liabilities

Net working

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

65

2000 2001 2002 2003 2004 2005 2006 2007 20080

1

2

3

4

5

6

7

8

WORKING CAPITAL TURNOVER RATIO

WORKING CAPITAL TURNOVER RATIO

66

FINDING NET WORKING CAPITAL TURNOVER RATIO

TABLE:

Year Sales Net Working

Capital

Working

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

67

Long Term Solvency Ratios:

1. Debt-Equity Ratio:

Formula=Total debt/Shareholders fund

Year Total debt Shareholder’s

fund

Debt-equity

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

68

2000 2001 2002 2003 2004 2005 2006 2007 20080

0.05

0.1

0.15

0.2

0.25

DEBT EQUITY RATIO

DEBT EQUITY RATIO

69

2.Proprietary Ratio:

Formula:

Shareholder’s fund/Total Asset

Years Shareholder’s

fund

Total Assets Proprietary

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

70

2000 2001 2002 2003 2004 2005 2006 2007 20080

0.2

0.4

0.6

0.8

1

1.2

PROPRIETARY RATIO

PROPRIETARY RATIO

71

FIXED ASSETS RATIO:

FORMULA=Long Term Shareholder’s Fund/Fixed Assets

Where Long term shareholder’s fund=Net worth + Total debt

Year Long Term

Shareholder’s

Fund

Fixed Assets Fixed Assets

Ratio

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

72

2000 2001 2002 2003 2004 2005 2006 2007 20080

0.2

0.4

0.6

0.8

1

1.2

FIXED ASSETS RATIO

FIXED ASSETS RATIO

73

Trend Analysis:

Trend Projection Equation:y=a + bx

Years X Sales

Turnover(Y)

X2 XY

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

74

Mean=11547.

98

∑x=60 ∑xy=114269.5

9

Trend projection equation :

Y = a + b X

Where , X = Independent Variable (year)

Y= Dependent Variable (turnover)

a, b - constants

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.

75

Years Turnover(X) PBT(Y) XY X

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=103931.85 ∑y=13609.38 ∑xy=230113904.6 ∑x=1455788343

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

76

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

= -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.

Yea

rs

Turnover

(x)

Net

working

Capital(Y

)

XY X

77

200

0

6834.36 2746.92 18773440.17 46708476.60

200

1

6659.83 2984.58 19876795.42 44353335.62

200

2

7561.46 2824.70 21358856.06 57175677.33

200

3

7727.79 3102.10 23972377.36 59718738.28

200

4

8893.17 2877.33 25588584.84 79088472.64

200

5

10682.15 3032.12 32389560.66 114108328.62

200

6

14739.46 3491.26 51459287.12 217251681.09

200

7

19058.33 4025.08 76711302.92 363219942.38

200

8

21775.30 2589.32 56383219.8 474163690.09

∑X=

103931.8

5

∑y=27673

.41

∑xy=3265134

24.3

∑x=14557883

42.7

Regression equation:

Y = a + bX

Where, X = Independent Variable (year)

Y= Dependent Variable (turnover)

78

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)

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

79

REGRESSION ANALYSIS: (sales Vs debtors)

The future debtors is found through the regression analysis

with the help of the projected sales.

Yea

rs

Turnover(

X)

Debtors(

Y)

XY X

200

0

6834.36 4037.30 27592361.63 46708476.60

200

1

6659.83 4174.30 27800128.37 44353335.62

200

2

7561.46 4584.19 34663169.32 57175677.33

200

3

7727.79 4075.78 31496771.93 59718738.28

200

4

8893.17 4608.48 40983996.08 79088472.64

200

5

10682.15 5972.14 6379295.3 114108328.62

200

6

14739.46 7168.06 105653333.6 217251681.09

200

7

19058.33 9695.82 184786137.2 363219942.38

200

8

21775.30 11974.87 260756386.7 474163690.09

80

∑x=10393

1.85

∑y=56290

.94

∑xy=7775275

80.2

∑x=14557883

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

=480.56 + 10535.24

=11015.8

Projection for year 2010:

X=22974.98

Y=a + bx

=480.56 + 0.5 * 11487.49

=11968.05

81

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:

82

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 ,

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:

83

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

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

84

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

85

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

86

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:

Year Wacc(%)

2000 18.29

87

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

88

2005 246.24

2006 298.31

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

89

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

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

90

2006 -13157.64

2007 -65170.45

2008 -26557.98

2000 2001 2002 2003 2004 2005 2006 2007 2008

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

EVA

EVA

91

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

Particulars

2001-02

Actual

(In

lakhs)

2002-02

Actual

(In

lakhs)

2003-04

Actual

(In

lakhs)

2004-05

Actual

(In

lakhs)

2005-

06

Actual

(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

94

Sundry

creditors

5216 5573 6337 7992 9858

Current Assets 8213 8892 13740 20913 25515

Current

Liabilities

7567 7293 9846 14517 26743

Capital

employed

4434 4919 5910 9191 8401

Operating

Expenses

21802 22768 28253 45476 63349

Operating

Profit

5832 5464 5087 5740 9558

Admn.

Expenses

2899 3295 3360 3450 3610

Selling

Expenses

110 128 140 150 160

Personnel

Payments

5782 6312 6956 7280 7997

No. of

Employees(In

thousands)

2212 2187 2120 2094 2080

Physical

Turnover

40718 43543 53877 72934 105904

Purchases 14566 15713 21391 38707 56130

Cost of Sales 24811 26191 31753 49076 67119

BIBLIOGRAPHY

95

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.

96

97