A PROJECT REPORT ON
FINANCIAL STATEMENT ANALYSIS
IN
BHARAT HEAVY ELECTRICALS LIMITED
(RAMACHANDRAPURAM,HYDERABAD-500032)
A Project Report submitted in partial fulfilment for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
BY
P.Mahesh
(1409-10-672-050)
MBA
UNDER THE GUIDANCE OF
MR. P.V.ARUN KUMAR
MANAGER(FINANCE & ACCOUNTS)
DVR PG INSTITUTE OF MANAGEMENT
KASHIPUR VILLAGE, SANGAREDDY MANDAL, MEDAK Dist - 502 285
ANDHRA PRADESH, INDIA.
2010-2012
ACKNOWLEDGEMENT
I express my sincere gratitude to management of
“BHARAT HEAVY ELECTRICALS LIMITED” for allowing me to
conduct the study in their organization.
My sincere thanks to sir P.V.ARUN KUMAR, Finance
Manager , BHEL, RAMACHANDRAPURAM for his guidance and
suggestions in completion of this project.
Finally, I would like to convey my special regards to my
parents and all my friends who helped me in carrying out this task.
P.MAHESH
DECLARATION
I hereby declare that the project report entitled
“FINANCIAL STATEMENT ANALYSIS OF BHARAT HEAVY
ELECTRICALS LIMITED” has been prepared by me during the year
2010-2012 in partial fulfilment of the degree of MASTER OF BUSINESS
ADMINISTRATION, OSMANIA UNIVERSITY.
I also declare that the project work is the result of my own
efforts and it hasn’t been submitted to any other university for the award of any
degree or diploma.
P.MAHESH
(1409-10-672-050)
PLACE:
DATE:
CONTENTS
CHAPTER 1
INTRODUCTION
OBJECTIVE OF THE STUDY
NEED AND IMPORTANCE OF STUDY
SOURCE OF THE DATA
METHODOLOGY
SCOPE OF THE STUDY
LIMITATIONS OF THE STUDY
CHAPTER 2
COMPANY PROFILE
CHAPTER 3
THEORETICAL FRAMEWORK OF
FINANCIAL STATEMENT ANALYSIS
CHAPTER 4
DATA ANALYSIS AND INTERPRETATION
CHAPTER 5
FINDINGS
CONCLUSION AND SUGGESTIONS
BIBILOGRAPHY
Analysis means establishing a meaningful relationship between
various items of the two financial statements with each other in such a way that
a conclusion is being drawn. By financial statements by means of two
statements
Profit and loss account or Income Statement
Balance Sheet or Position Statement
These are prepared at the end of a given period of time. They are
the indicators of profitability and financial soundness of the business concern.
The term financial analysis is also known as analysis and interpretation of
financial statements. It refers to the establishing meaningful relationship
between various items of the two financial statements i.e. Income statement and
Position statement. It determines financial strength and weakness of the firm.
Analysis of financial statements is an attempt to assess the efficiency and
performance of an enterprise. Thus, the analysis and interpretation of financial
statements is very essential to measure the efficiency, profitability , financial
soundness and future prospects of the business units. Financial analysis serves
the following purposes.
Measuring the Profitability
The main objective of a business is to earn a satisfactory return on
the funds invested in it. Financial analysis helps in ascertaining whether
adequate profits are being earned on the capital invested in the business or not.
It also helps in knowing the capacity to pay the interest.
Financial statements of the previous years can be compared and the
trend regarding various expenses, purchases, sales, gross profits and net profit
etc can be ascertained. Value of assets and liabilities can be compared and the
future prospects of the business can be envisaged.
Assessing the growth potential of the business
The trend and other analysis of the business provides information
indicating the growth potential of the business.
Comparative position in relation to other firms
The purpose of financial statements analysis is to help the
management to make a comparative study of the profitability of various firms,
engaged in similar businesses. Such comparison also helps the management to
study the position of their firm in respect of sales expenses, profitability and
utilising capital, etc.
Assess overall financial strength
The purpose of financial analysis is to assess the financial
strength of the business. Analysis also helps in taking decisions, whether funds
required for the purchase of the new machines and equipments are provided
from internal sources of the business or not if yes, how much? And also to
assess how much funds have been received from external sources.
To calculate the important financial ratio of the organisation as
a part of the ratio analysis thereby to understand the changes
the needs and trends in the firm’s financial position.
To assess the performance of B.H.E.L on the basis of earnings
and also to evaluate the solvency position of the company.
To identify the financial strengths and weaknesses of the
organization.
To give the appropriate suggestions to the investors. To help
them to make more informed decisions.
Need and importance of study
Financial performance of an enterprise will affect other types of
performance and also the productivity of finances is good, the productivity of
men and material would be good.
Moreover the study of non-economic and qualitative performance, which
studies the non economic factors like customer satisfaction, citizen satisfaction
etc.
Source of data
Three year annual report of BHEL from 2007-2010
Interaction with the related finance department.
METHODOLOGY
The study carried with the cooperation of the management who
permitted to carry on the study and provided the requisite data collected from
the following sources.
Primary data
Secondary data
PRIMARY DATA
The information collected directly without any reference is primary
data. In the study it is mainly through conversation with concerned officers or
staff members either individually or collectively. The data includes:
1. Conducting personal interview with the officers of the company.
2. Individual observation and inferences.
3. From the people who are directly involved with the transaction of
the firm.
Study has been taken from secondary sources i.e. published annual
reports of the company editing, classifying and tabulation of the financial data.
For this purpose performance data of BHEL for the years 2007-2008 to
2009-2010 has been used.
Scope of study
The scope and period of the study is being restricted to the following.
1. The scope is limited to the operations of the BHEL.
2. The information is obtained from the primary and secondary data was
limited to the BHEL.
3. The profit and loss, the balance sheet was on the last six years.
4.
Comparison analysis was done by comparison of sister units.
Limitations of study
1.
The study is confined to a period of last 4 years.
2.
As most of the data is from the secondary sources, hence the accuracy is
limited.
COMPANY PROFILE
The vital role played by the BHEL today in the country is the mark of
it continuous efforts to improve the service in the nation by consultancy,
manufacturing and offering services in power sector.
This success story of BHEL however goes back to 1956 when its first
plant was set up in BHOPAL. Three more major plants followed in
HARIDWAR, HYDERABAD and THIRUCHIRAPALLI flowed this. These
plants have been the core of BHEL’S efforts to grow and diversify and become
one of the most integrated power and industrial equipment manufacturers in the
world. The company now has 14 manufacturing units,8 service centres and 4
power sector regional centres, besides project sites spread all over India and
abroad.
BHEL manufactures over 180 products under 30 major product groups
and meets the needs of core sector like power, industry, transmission, defence,
telecommunications, oil business etc. Its products have established an enviable
reputation for high quality and reliability. This is due to the emphasis placed all
along on design, engineering and manufacturing to international standards by
acquiring and adopting some of the best technologies developed in its own R&D
centres. BHEL has acquired ISO 9000 certification for environments. BHEL
caters to the needs of different sectors by designing and manufacturing
according to the need of its client in power sector.
VISION:
A world class, innovation, competitive and profitable
engineering enterprise providing total business solutions.
MISSION:
To be the leading engineering enterprise providing quality
products system and services in the field of energy, transportation,
industry, infrastructure and other potential areas.
VALUES
:
1. Meeting commitments made to external and internal
customers.
2.
Faster learning, creativity and speed of response.
3. Respect for dignity and potential of individuals.
4. Loyalty and pride of the company.
5. Team playing.
6. Zeal to excel.
7. Integrity and fairness in all matters.
OBJECTIVES
To ensure a steady growth by enhancing the competitive edge of
BHEL in exiting business, new areas and international operation so as to fulfil
national expectations from BHEL.
PROFITABILITY:
To provide a reasonable and adequate return on capital employed,
primarily through improvements in operational efficiency, capacity utilization
and productivity and generate adequate internal resources to finance the
company growth. Confidence in providing increased value for this money
through international standards of product, quality, performance and superior
customer services.
TECHNOLOGY:
To achieve technology excellence in operations by development of
indigenous technologies to and efficient absorption and adaptation of imported
technologies to suit business needs and priorities and provide a competitive
advantage of the company.
IMAGE:
To fulfil the expectation which stock holders like government as
own employees, customers and the country at large have from BHEL.
The strength, weakness, opportunities and threats which are being experienced
by BHEL as a growing concern have been summarized up in the following lines.
STRENGTH’S
1. Vast pool of trained man power.
2. Excellent state of art facilities.
3. Good working atmosphere
4. Rapport between management and union.
5. Product manufactured international quality
6. Low labour cost and low manufacturing cost.
WEAKNESS
1. Excess man power
2. Slippage in delivery commitments
3. System implementation adequate
4. No financial package
5. Inadequate compensation package to employees.
OPPORTUNITIES
2. Liberalization has opened up the market
3. Navratna company status
4. Dominant player in domestic market.
THREATS
1. Liberalization–entry of MNC’S or private sector-more competition.
2. MNC’S taking away good employees with attractive packages.
3. Government taxation policy-against manufacturing sector.
4. Poor infrastructure.
PRODUCTS OF BHEL
BHEL manufactures a wide range of power plant equipments and also caters
to the industry sector.
1. Gas turbines
2. Steam turbines
3. Compressors
4. Turbo generators.
5. Pumps
6. Pulverizes
7. Switchgears
8. Oil rigs
9. Electrics for urban transportation system
10.Telecommunication.
THEORITICAL
FRAMEWORK
OF
FINANCIAL STATEMENT
ANALYSIS
INTRODUCTION TO FINANCE:
Financial statement is that managerial activity which is
concerned with the planning and controlling of the firm financial resources.
Though it was a branch of economic till 1890 as a separate activity or discipline
it is of recent origin. Still, as no unique body knowledge of its own, and draws
heavily on economics for its theoretical concepts even today.
The subject of financial management is of immense interest both
academicians and practising manager. It is of great interest to academicians
because the subject is still developing. And there are still certain areas where
controversies exist for which no unanimous solutions have been reached as yet.
Practicing manager are interested in this subject because among the most
crucial decision of the firm are those which relate to finance and an
understanding of the theory of financial management provides them with
conceptual and analytical insight to make those decision skilfully.
SCOPE:
Firms create manufacturing capacities for production of good, some
provide services to customers. They sell their goods or services to earn profit.
They fund to acquire manufacturing and other facilities. Thus the three most
important activities of a business firm are:
PRODUCTION
MARKETING
FINANCE
FUNCTION:
The finance function form production, marketing and other
functions. Yet the function themselves can be readily identified. The function of
raising funds, inverting them in assets and distributing returns earned from
assets to shareholder respectively. The finance functions are:
Investment or long term asset mix decision
Financing or capital mix decision
Dividend or profit allocation decision
Liquidity or short term asset mix decision.
OBJECTIVES OF THE STUDY:
1. To calculate the important financial ratio of the organization as a part of
the ratio analysis thereby to understand the change and treads in the firm
financial position.
2.
To access the performance of the BHEL on the basis of earnings and also
to evaluate the solvency position of the company.
3.
To identify the financial strengths and weaknesses of the organization.
4. To give appropriate suggestion to the investors. To help them to make
over,
5. Informed decision.
SCOPE OF THE STUDY:
1.
The scope is limited to the operation in the BHEL.
2. The information obtained from the primary and secondary data was
limited to the BHEL
3. The key information performance indicated is taken from 2007-2010.
4. The profit and loss, the balance sheet was on the last 3 years.
5. Comparison analysis was done in comparison of the sister units.
LIMITATIONS OF STUDY:
1. The study is confined to a period of last 3 years.
2.
As most of the data is from secondary sources, hence the accuracy is
limited.
METHODOLOGY:
The study basically depends on:
1. PRIMARY DATA
2. SECONDARY DATA
PRIMARY DATA COLLECTION:
The information collected directly without any reference is primary data. In
the study it is mainly through conservation without concerned officers or staff
member either individually or collectively. The data includes.
1. Conducting personal interview with officers of the company.
2. Individual observation and inferences.
3. From the people who are directly involved with the transaction of the
firm.
SECONDARY DATA COLLECTION
Study has been taken from secondary sources i.e. published annual
report of the company. Editing. Classifying and tabulation of the
financial data for this purpose performance data of BHEL or the
yeary2007-2008 to 2009-2010 have been used.
INDEPTH ANALYSIS OF FINANCIAL ANALYSIS:
(A)DEFINITIONS:
The term “financial analysis” is also known as “analysis
and interpretation of financial statements”. It refers to the process of
determining financial strengths and weaknesses of the firm by establishing
strategic relationships between the items of the balance sheet, profit and loss
account and other operative data.
ACCORDING TO Mr. HARRY GUTTMANN:
“The first and most important functions of financial statements
are of course to those who control and direct the business to the end of security
the profits and maintaining sound financial conditions.”
(B)NATURE OF FINANCIAL STATEMENTS:
The term “financial statements” refers to the balance sheet
reflection the financial position of the assets, liabilities a capital of a particular
company during a certain period and profit and loss account showing the
operational results of the company during a certain period. Financial statements
are plain statements of informed opinion uncompromising in their truthfulness.
It is meant that with in the limits of accepted accounting principles and the very
human abilities of the persons preparing them they have to rely on judgements
and estimated divorced of prejudice.
(C)CONVENTIONS:
According to the American institute of certified public
accounts, financial statements reflect , “a combination of recorded facts
accounts conventions and personal judgements and the judgements and the
conventions applied affect them materially”, this implies that the exhibited in
the financial statements are affected by recorded facts, accounting conventions
personal judgements.
(D) USES AND IMPORTANCE OF FINANCIAL STATEMENTS:
The financial statements are mirrors which reflect the financial position and
operating strength’s or weaknesses of the concern. These statements are useful
to management, investors, creditors, bankers, workers, government and public at
large. George O May points of the following measure used of financial
statements:
As a basis for taxation.
As a basis for price or rate regulation
As a guide to the value of investment already made
As a basis for granting credit.
(E)LIMITATIONS OF FINANCIAL STATEMENTS:
Financial statements are essentially interim reports and hence
cannot be final because the actual gain or loss of a business can
be determined only efface it has put down its shutters.
They tend to give an appearance if finality and accuracy,
because they are expressed in exact money amount. Any value to
the amounts presented in the statement depends on the value
standards of the person dealing with them.
The balance sheet loses its functions as an index of current
economic realities due to the fact the financial statements are
compiled on the basis of historical costs while there is a market
decline in the value of the monitoring unit and the resultant rise
in prices. The problem has become more important especially
during the war and the post war period.
They do not give effort to many factors, which have a hearing on
financial conditions and operating results because they cannot be
stated in terms of money and are qualitative in nature. Such
factors are reputation and prestige of the business with the public
its credit rating the efficiency and loyalty of its employees and
integrity of the management.
Due to these limitations it is said that financial statements don’t
show the financial conditions of the business rather they show,
the position of financial accounting for a business.
(F)PARTIES INTERESTED IN FINANCIAL STATEMENTS:
Now a days the ownership of capital of many public companies
has become truly board based due to dispersal of shareholding, hence, the public
in general evinces interest in the financial statements. Apart from the
shareholders there are other persons and bodies who are also interested in
financial results disclosed by the annual reports of the companies. As already
mentioned, such persons and bodies include:
1. Potential investors
2. Creditors, potential suppliers or other doing business with the company.
3. Debenture holders
4. Credit institutions like bankers.
5. Employee customers who wish to make along standing contact with the
company.
6. Economic and investment analysis
7. Members.
(G)ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS:
Analysis and interpretation of financial statements are and attempt
to determine the significance and meaning of the financial statement data as so
that a forecast can be made of the prospects for future earnings ability to pay
interest, debt and maturities (current and long term) and profitability of a sound
dividend policy.
Financial analysis main function is pinpointing of the strength’s
and weaknesses of a business concerns by regrouping and analysis of figure
contained in financial statements by making comparison’s of various component
and by examine their content. The financial manager uses this as the basis to
plan future financial requirements by means of forecasting and budgeting
procedures.
The analysis of and interpretation of financial statements represents
the lost of the four measure steps of accounting viz.
Analysis of each transaction to determine the accounts to debited and
credited and the measurements and the valuation of each transactions to
determine the amounts involved.
Recording of the information in the journals. Summarization in largest
and preparation of work sheet.
Preparation of financial statements.
Analysis and interpretation of financial statements results in the
presentation of information that assets business managers, creditors and
investors. This requires a clear understanding of monitoring item of the
items.
The analysis must group that represents sound and unsound
relationships reflected by the financial statements. Those, the data is more
maintain full and it is placed in better perspective when it is provision and by
means of measurement, it’s relationship with others is established in terms of if
relative significance and it is ranked in terms of its relative significance. One
can achieve this by comparisons made between related items in the statements
series of years.
(H)TYPES OF FINANCIAL STATEMENTS:
Financial statements primarily comprise two basic statements:
1.
The position statements of the balance sheet.
2. The income statements or the profit and loss account.
Accounting principles specify that a complete set of financial statements must
include:
2. An income statement
3. A statement of change in owners accounts.
4. A statement of changes in financial position.
BALANCE SHEET:
The balance sheet is one of the important statements
depicting the financial strength of concern. It shows the properties that are
owned on one hand and on the other hand the sources of the assets owned by the
concern and all the liabilities and claims it owes to owners and outsiders. The
balance sheet is prepared on a particular date. The right hand shows properties
and assets and the left hand shows liabilities.
INCOME STATEMENT OR PROFIT AND LOSS ACCOUNT:
Income statement is prepared to determine the operation position of the
concern. It is a statement of revenues. The income statement may be prepared in
the form of manufacturing account to find out the cost of the production in the
form of trading accounts to determine gross profit or loss, in the form of profit
and loss account to determine net profit or net loss.
STATEMENT OF CHANGES IN OWNERS EQUITY:
The term owners equity refers in the claims of the owners of the
business against the assets of the firm. It consist of two elements.
1. Paid up share capital i.e. the initial amount of funds invested by the
shareholders.
2. Retained earnings/reserves and surplus representing undistributed profits.
The statement of changes in owners equity simply shows
the beginning balance of each owners equity account, the reasons of
increases and decreases in each, and its ending balance. However, in most
cases the owners equity account changes significantly in retain earnings
and hence the statement of changes in owners equity becomes merely a
statement of retained earnings.
STATEMENT OF CHANGES IN FINANCIAL POSITION:
The basic financial statement i.e. the balance sheet and profit and loss
account and income statement of a business reveals the net effect of various
transactions on the operational position of the company. But there are many
transactions that do not operate through profit and loss account. Those for a
better understanding another statement of changes in financial position has to be
prepared to show the changes in assets and liabilities from the end of another
point of time. The statement of changes in financial position may take any of the
two forms. They are:
•
Funds statements
•
Cash flow statements
TOOLS OF FINANCIAL ANALYSIS USED IN THE STUDY:
MEANING OF COMPARATIVE STATEMENT:
The comparative financial statements are the statements of the
financial position of different periods; the elements of financial positions are
then in a comparative form to give idea of financial position of two or more
periods. The comparative statement may show:
•
Absolute figures
•
Changes in absolute figures i.e. increase or decrease in absolute figures.
•
Increase or decrease in terms of percentage.
COMPARATIVE BALACE SHEET:
It is a statement of financial position of a business at a specific
movement of time. It represents all assets owned by the business at a particular
movement of time and the claims of the owners and outsiders against those
assets at the time. It is a way they shape the financial condition of the business
at that time.
The important distinction between an income statement and
balance sheet is that the income statement is for a period where as balance sheet
is on a particular date.
COMPARATIVE INCOME STATEMENT:
The comparative income statement gives the results of the
operation of a business. The comparative income statement gives an idea of the
program of a business over a period of time. The changes in absolute data in
money values and percentages can be determined to analyze the profitability of
the business.
GUIDELINES FOR INTERPRETATION OF INCOME STATEMENT:
The analysis and interpretation of income statement will involve
the following steps:
1. The increase or decrease in sales should be compared with the
increase or decrease in cost of goods sold. An increase in sales will
not always mean an increase in profit. The profitability will
improve if increase in sales promotion and the control of operating
expenses.
2. The second step of analysis should be the study of operation profit.
The operating expenses such as office and administrative expenses.
Selling and distribution expenses should be deducted from gross
profit to find out operating profit which will result from the
increase in sales position and control of operating expenses.
3. The increase or decrease in net profit give an idea about overall
profitability of the concern, non-operating expenses such as interest
paid, loss from sale of assets, writing off to deferred expenses or
deducted from operational profit we get the figure of operating
profit.
4. An opinion should be formed about profitability of the concern and
it should be given at the end. This should be mentioned whether the
overall profitability is good or not.
COMMON SIZE STATEMENTS:
The common size statement, balance sheet and income statement
are shown in analytical percentages. The figures are shown as percentages of
total assets, total liabilities and total sales. The total assets are taken as of and
different assets are expressed as a percentage of the total.
1.
Common size balance sheet: A statement in which balance sheet items are
expressed as the ration of each asset to total assets and the ratio of each
liability is expressed as a ratio of total liabilities is called common sized
balance sheet.
2. Common size income statement: The items in income statement can be
shown as percentage of sales to show the relation of each item to sales. A
significant relationship can be established between item of income
statement and value of the sales. The increase in sales will certainly
increase selling expenses and not administrative are financial expenses.
TREND ANALYSIS:
Trend percentages:
The method of trend percentages in useful analytical device
for the management since y substitution of percentage for large amounts, the
clarity and readability are achieved.
Trend percentages are immensely helpful in making
comparative study of the final statements for several years. The method of
calculating trend percentages involves the calculation of percentage relationship
that each item bears to the same item in the base year. The earliest year may be
taken as base year. Each item of the base year is taken as 100 and on the basis
the percentage for each of the item of each year is calculated.
Least Square Method:
This method is widely used in practised. It is a mathematical
method and with the help of a trend line fitted to the data in such a manner by
using the actual figures of the study period, we have to calculate the trend values
for these periods. Based on this value we can easily forecast the values of the
future period. The method of least square may be used either to fit a straight line
trend or a parabolic trend. The straight line is represented by the equation
Y(C)=A+B(X).
ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT:
An attempt has been made to analyze and interpret the
financial statements of BHEL for the period of 2007-2010. These statements
were prepared on the basis of the data in the balance sheets and profit and loss
accounts of the BHEL for the above period.
RATIO ANALYSIS:
A ratio is a simple mathematical expression. It is a number
expressed in terms of another number, expressing the quantitative relationship
between the two, ratio analysis is the technique of interpretation of financial
statements with the help of various meaningful ratios. Ratios do not add to any
information that is already available, but they show the relationship between two
items in a more meaningful way.
Ratio analysis is a very important tool of financial analysis.
It is the process of establishing a significant relationship between the items of
financial statements to provide a meaningful understanding of the performance
and financial position of the firm. They help us to draw certain conclusions.
Comparison with related facts is the basis of ratio analysis. Ratios may be used
for comparison in any of the following ways.
1. Comparison of a firm with its own performance in the past.
2. Comparison of one firm with its own performance in the past.
3. Comparison of one firm with another firm in the industry.
4. Comparison of one firm with the industry as a whole.
5. Comparison of an achieved performance with pre-determined standards.
TYPES OF RATIOS
Liquidity ratio
Capital structure/leverage ratio
Profitability ratio
Activity ratio.
LIQUIDITY RATIOS:
it measures the short-term solvency of the
firm. In a short period of a firm should be able to meet all its
short-term obligation i.e. current liabilities and provisions. It is current
assets that yield funds in the short period. Current assets are those,
which the firm can convert it into cash within one year or short
run. Current assets should not only yield sufficient funds to meet
current liabilities as they fall due but also to enable the firm to carry
on its day-to-day activities.
The following are the important liquidity ratios:
1. Current ratio
2. Acid test/quick ratio.
3. Cash ratio
4. Net working capital ratio
1.Current ratio: Current ratio is the ratio of current assets to current liabilities.
Current assets are the assets that are expected to be realized in cash or sold or
consumed during the normal operating cycle of the business or with in one year,
which ever is longer, they include cash in hand and bank, bills receivable, net
sundry debtors, stock of raw materials, finished goods and working in progress,
prepaid expenses, outstanding incomes, assured incomes and short term or
temporary investments. Current liabilities are the liabilities that are to be repaid
within a period of one year. They include bills payable, sundry creditors, bank
overdrafts, outstanding expenses, income receivable in advance, proposed
dividend, provision for taxation, unclaimed dividends and short term loans and
advanced repayable within one year. Any instalment of long-term liability
payable within the next 12 months is also current liability.
CURRENT RATIO= CURRENT ASSETS/ CURRENT LIABILITIES
Generally 2 : 1 ratio is considered ideal for the company.
2. ACID TEST/QUICK RATIO: the acid test ratio is the ratio between quick
current assets and current liabilities and calculated by dividing the quick assets
by current liabilities. Quick assets mean those which can be converted into cash
immediately by exclusion of inventory and prepaid expenses from current
assets.
Acid test Ratio=Quick assets/Current liabilities.
Generally 1: 1 ratio is considered to be ideal for the company.
3. CASH RATIO: The cash ratio is the ratio of cash and bank balance, it is
calculated dividing cash and bank balance by current liabilities.
CASH RATIO= Cash and Bank balances/Current liabilities.
Generally 1 : 2 ratio is considered to be ideal for a company.
4. NET WORKING CAPITAL RATIO: Working capital ratio refers to
comparing current assets to current liabilities and serve as the liquidity reserve
avail. To satisfy contingencies and uncertainties. It is calculated by dividing net
working capital by capital employed.
Net Working Capital Ratio = net working capital/capital employed.
Generally higher ratio is considered ideal for a company.
CAPITAL STRUCTURE/LEVERAGE RATIO: These ratios indicate the
relative interests of owners and creditors in a business by showing long
term financial solvency and measure the enterprise’s ability to pay the
interest regularly and to repay the principal on maturity or in
pre-determined instalments at due dates.
The significant leverage ratios are:
1. Debt Equity Ratio
2. Proprietary Ratio
3. Capital Gearing Ratio.
4. Fixed assets Ratio
5. Interest coverage Ratio
6. Dividend Coverage Ratio
7. Debt Service coverage Ratio.
1.Debt Equity Ratio : It reflects the relative claim of creditors and shareholders
against the assets of the business. Debt usually refers to long-term liability.
Equity includes equity and preference share capital and reserves.
Debt Equity Ratio=long term liabilities/share holders funds.
Ideal debt equity ratio is 2 : 1
2.Propreitary ratio: It expresses the relationship between the net worth and total
assets. A high proprietary ratio is indicative of strong financial position of
business.
Proprietary ratio = Net worth/ Total Assets
Net worth = Equity share capital + fictitious Assets
Total assets= fixed assets + Current Assets
Generally higher the ratio the ideal it is.
3. Capital Gearing Ratio: A company is said to be highly geared if it has a high
capital gearing ratio and lowly geared if the capital gearing ratio is low. The
extent of gearing determined the future financial structure of the business. A
company that is highly geared will have to raise funds by issuing fresh equity
shares, whereas a lowly geared company would find it attractive to raise funds
by way of term loans and debentures.
Capital Gearing Ratio = funds bearing fixed interest and fixed dividend/equity . share holder’s funds
Funds bearing fixed interest and capital=Debentures + term loans +preference .
. share capital.
Equity share holder funds=Equity share capital +reserves-fictitious funds.
4.Fixed Assets Ratio: This ratio indicates the mode of financial the fixed assets.
It is calculated as
Fixed assets Ratio= Fixed assets/capital employed
Capital employed= equity share capital + preference share capital +reserves +
long term Liabilities – Fictitious Assets.
Generally a ratio of 0.67 : 1 is considered ideal for a company.
5.Interest Coverage Ratio: This ratio is called as “debt service ratio”. This ratio
indicates whether a business is earning sufficient profits to pay the interest
charges. It is calculated as
Interest coverage ratio=PBIT/Fixed interest charges
PBIT=Profit before interest and taxes=PAT + Interest + Tax
Generally a ratio of around 6 is normally considered as ideal for a company.
6.Dividend coverage ratio: It indicates the ability of a business to pay and
maintain the fixed preference dividend to preference shareholders.
Dividend coverage ratio=PAT/Fixed preference dividend.
PAT= Profit After Taxes
7.Debt service coverage Ratio: It indicates whether the business is earning
sufficient profits to pay not only the interest charges, but also the instalments
due to the principal amount. It is calculated as
Debt service Coverage Ratio =(PBIT/Interest + Periodic Loan Installation)/(1-
Rate of income Tax)
Generally greater the ratio, the better is the servicing ability of company.
PROFITABILITY RATIO: Profitability ratios measure the profitability of
a company. Generally they are calculated either in relation to sales or in
relation to investments. The various profitability ratios are discussed
under the following heads.
(A) GENERAL PROFITABILITY RATIO’S:
1.Gross Profit Ratio: Gross profit is one of the most commonly used ratios. It
reveals the result of trading operations of the business. In other words, it
indicates to us the profitability of the business. It is calculated as
Gross Profit Ratio=(Gross Profit/Net sales)*100
Net Sales=Total Sales- Sales Returns
Cost of Goods Sold=Opening Stock + Purchases + Manufacturing
expenses-closing Stock.
Generally the higher the ratio, the better will be the performance of the
company.
2.NET PROFIT RATIO: It indicates the results of overall operations of the firm.
While the gross profit ratio indicates the extent of profitability of core
operations. Net profit ratio tells us about overall profitability. It is called as
Net Profit Ratio=(Net Profit after Tax/Net Sales)*100
Generally higher the ratio, the more profitable to the company.
3.OPERATING RATIO: It expresses the relationship between expenses
incurred for running the business, and the resultant net sales. It is calculated as
Operating Ratio=cost of goods sold + Office and Administrative expenses +
selling and distribution Expenses.
Generally lower the ratio, the better it is to the company.
4.OPERATING PROFIT RATIO: It establishes the relationship between
operating profit and sales. It is calculated as
Operating Profit Ratio=(Operating Profit/Net Sales)*100
Generally higher the ratio, the better it is to the company.
5.EXPENSES RATIO: Expenses ratios are the ratios that supplement the
information given by the operating ratio. Each of the expense rations highlights
the relationship given by the particular expense and net sales. For example,
factory expenses ratio is of factory expenses to net sales any expenditure can be
shown as a ratio to sales. All such ratios fall under the broad head of expenses
ratios.
(B) OVERALL PROFITABILITY RATIOS:
1.RETURN ON CAPITAL EMPLOYED RATIO(ROCE) OR RETURN ON
INVESTMENT RATIO(ROD):
This ratio reveals the earning capacity of the capital employed in
the business. In other words, capital employed is permanent capital invested in
the business. It is also called capital and hence, the ratio is also known as return
on invested capital
ROCE= (Profit before interest and taxes/capital employed) *100
2. RETURN ON NET WORTH(RONW): It indicates the return, which the
shareholders are earning on their resources invested in the business. It is
calculated as
RONW=(Profit after Tax/Net Worth)*100
Generally higher the ratio, the better it is to the shareholders.
3.RETURN ON EQUITY CAPITAL: It expresses the return earned by the
owners of the business, after adjusting for debt and preference capital. It is
calculated as
RETURN ON EQUITY= PAT- Preference dividend/equity shareholders funds.
4.RETURN ON ASSETS RATIO(ROA): Return on assets reflects the return
earned by the firm for the company for the shareholders of the business on the
investment of all the financial resources committed to the business. It is
calculated as
ROA=PAT/TOTAL SALES
Generally higher the ratio, the better it is to the shareholders.
5.EARNINGS PER SHARE(EPS):
It is the earning accruing to the equity
shareholders on every share held by them. It is calculated as
EPS= PAT-Preference dividend/number of equity shares.
Generally the ratio, the better is the performance of the company.
6.Dividends per share (DPS): It is the amount of dividend payable to the holder
of one equity share. It is calculated as
DPS=Dividend on equity share capital/number of equity shares
Generally from investors point of view, the higher the ratio, the happier the
investor.
7.DIVIDEND PAY OUT RATIO: It is the ratio of dividend per share to earning
per share. It is calculated as
Dividend Pay Out Ratio=DPS/EPS
8.PRICE EARNING RATIO(P/E Ratio): It expresses the relationship between
market price of one share of a company and earnings per share of that company.
P/E Ratio=Market Price of Equity share/EPS
9.DIVIDEND YIELD RATIO: It expresses the relationship between dividend
earned per share and the market price per share. In other words, it expresses the
return on investment by purchasing a share in the stock market , without
accounting for any capital appreciation. It is calculated as
DIVIDEND YIELD RATIO- Dividend per share/Market price of share.
10.BOK VALUE: It is the fraction of the net worth of the business as depicted
in the balance sheet, which is attributable to one equity share of the business . it
is calculated as
BOOK VALUE=Equity share holders funds/number of equity shares.
Generally higher the book value of the share, the more strong the business is
assumed to be.
ACTIVITY RATIO: Activity ratios measures the efficiency or
effectiveness with which a firm managers its resources or assets. They
calculate the speed with which various assets, in which funds are blocked
up, get converted into sales. The significant activity or turnover ratios are
1.INVENTORY TURN OVER RATIO OR STOCK TURN OVER RATIO:
Stock turnover ratio indicates the number of items the stock has turned over into
sales in a year. It indicates to us the extent of stock required to be held in order
to achieve a desired level of sales.
Inventory Turn Over Ratio = Cost of Goods Sold/Average Stock
Cost of Goods Sold=Sales-Gross Profit.
Average Stock=(Opening Stock + Closing Stock)/2
2.DEBTORS TURN OVER RATIO: Debtors Turn Over Ratio expresses the
relationship between debtors and net credit sales. It is calculated as
Debtors Turn Over ratio= Net Credit Sales/Average Debtors.
Generally the ratio between 10-12 an ideal value for the company.
3.CREDITORS TURN OVER RATIO: Creditors turn over ratio expresses the
relationship between creditors and net credit purchases. It is calculated as
Creditors Turn Over Ratio= Net Credit Purchases/Average Creditors.
Generally the ratio 12 is an ideal for the company.
4.WORKING CAPITAL TURN OVER RATIO: This ratio is defined as
Working Capital Turn Over Ratio= Cost of Goods Sold/Working Capital
Working Capital=Current Assets- Current Liabilities.
Generally higher ratio indicates efficient utilization of firm’s funds.
5.Fixed Assets Turn Over Ratio:
It is Defined as ratio of Net Sales to the Fixed
Assets.
Generally the ratio of around 5 is considered ideal for the company.
6.TOTAL ASSETS TURN OVER RATIO: It is defined as ratio of Net Sales to
the Total Sales.
Generally higher the ratio, the greater is the ability of the firm to utilize the
investments in the business.
DATA ANALYSIS
AND
Current Asset Liability Ratio
year
current assets
current liability Ratios
2001-02
155792
73129
2.13
2002-03
166669
74427
2.23
2003-04
155652
84990
1.83
2004-05
192697
116644
1.65
2005-06
235062
143200
1.64
2006-07
276062
208869
1.32
2007-08
310002
243220
1.27
2008-09
453597
376332
1.2
2009-10
580804
397574
1.46
2010-11
771519
502024
1.54
0 100000 200000 300000 400000 500000 600000 700000 800000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11Current as set liabilities ratio Current A s set
Current as set liabilities ratio Current Liability
Current A s set Liability Ratio
Interpretation –The ideal ratio for the concern is 2:1 i.e. current assets doubled
for the current liabilities considered to be satisfactory. The current ratio of
BHEL is less than ! .Thus it has to maintain its efficient current assets.
Acid Test Ratio
Year
Liquid assets
Liquid liabilities Ratio
2001-02
898
73129
0.012
2002-03
1281
74427
0.017
2004-05
2094
116644
0.018
2005-06
4643
143200
0.032
2006-07
12
208869
0.00005
2007-08
14
243220
0.00003
2008-09
15
376332
0.00003986
2009-10
1475
397574
0.00371
2010-11
1415
502024
0.002818
0 100000 200000 300000 400000 500000 600000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Liquid Assets Liquid Liabilities RatiosAcid Test Ratio – Current Assets – Inventory / Current Liabilities
The ideal quick ratio is 1:1 which is considered satisfactory for the concern. The
company is maintaining the ratio above the standard norm , thus the
management of BHEL is label to meet its current obligations.
Net working capital
year
Net working
capital
Capital
employed
Ratios
2001-02
82663
90522
0.9131
2002-03
92242
99337
0.93
2003-04
70662
79114
0.8931
2004-05
76053
85026
0.894
2005-06
91862
102462
0.89
2006-07
67193
79459
0.84
2007-08
96410
107986
0.89
2008-09
77265
96894
0.797
2009-10
183230
207051
0.884
2010-11
269495
305907
0.881
0 50000 100000 150000 200000 250000 300000 350000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11Net working capital Capital employed Ratios
NET WORKING CAPITAL = NET WORKING CAPITAL / CAPITAL
EMPLOYED
A higher networking capital ratio indicates efficient utilization of working
capital . Therefore the company should concentrate more on working capital
management
Debt equity ratio
year
Total debt
Equity
Ratios
2001-02
497
3252
0.15
2002-03
573
3252
0.17
2003-04
386
3252
0.11
2004-05
513
3252
0.15
2005-06
1053
3252
0.32
2006-07
607
3252
0.18
2007-08
587
3252
0.18
2008-09
2566
3252
0.789
2009-10
2034
3252
0.62
2010-11
2265
3252
0.70
0 500 1000 1500 2000 2500 3000 3500 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Total debt Equity RatiosDebt Equity Ratio :
The debt equity ratio has been increasing over the years and it has been
maintained at a level of .62 for the financial year 2009-10
Fixed assets ratio
year
Fixed Assets
Capital
employed
Ratios
2001-02
7859
90522
0.07
2002-03
7095
99337
0.08
2003-04
8360
79114
0.07
2004-05
8896
85026
0.1
2005-06
10600
102462
0.1
2006-07
12347
79459
0.15
2007-08
9909
107986
0.09
2008-09
17699
96894
0.18
2009-10
22595
207051
0.11
2010-11
31830
305907
0.10
0 50000 100000 150000 200000 250000 300000 350000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Fixed assets Capital employed Ratios `
Fixed Assets Ratio = Fixed Assets / Capital Employed
Generally financially well managed company will have its fixed assets financed
by long term funds. There fore , the fixed assets ratio should never be more
than !.A ratio of .67 is considered ideal. The results for BHEL is much less at
0.11
Interest coverage ratio
year
PBIT
Interest
Ratios
2001-02
13500
3054
4.42
2002-03
13420
258
52.01
2003-04
15821
48
329.6
2004-05
33122
1105
29.97
2005-06
60867
682
89.24
2006-07
63290
2300
27.51
2007-08
68916
5870
11.74
2008-09
68478
6826
10.03
2009-10
86438
7101
12.17
2010-11
130330
8583
15.18
0 20000 40000 60000 80000 100000 120000 140000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 PBIT Interest Ratio
Interest Coverage Ratio.= PBIT/INTREST
Interest coverage ration of BHEL is not constant , from 2008-09 the ratio is10
as in 2009 -10 the ratio is 12.17, There is a random fluctuation in the ratio
Gross profit
year
Gross profit
Net sales
Ratios
2001-02
13500
153205
0.088
2002-03
13420
137838
0.097
2003-04
15821
174490
0.07
2004-05
33122
174668
0.189
2005-06
60867
267217
0.227
2006-07
63290
289241
0.218
2007-08
68916
310235
0.2224
2008-09
68478
414816
0.165
2009-10
86483
500342
0.172
2010-11
130330
665323
0.196
0 100000 200000 300000 400000 500000 600000 700000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Gross profit Net sales Ratio
Gross Profit = Gross /net sales
Generally the higher gross profit ratio , the better for the performance of the
concern .In BHEL , the company has started to increase from the year on year
which is a very good sign for the company.
Operating ratio
year
Operating cost Net sales
Ratios
2001-02
131006
153205
0.85
2002-03
116708
137838
0.84
2003-04
149823
174490
0.85
2004-05
136630
174668
0.78
2005-06
201962
267217
0.75
2006-07
221227
289491
0.76
2007-08
234677
310235
0.76
2008-09
338382
414816
0.81
2009-10
404647
500342
0.8
2010-11
524531
665323
0.79
0 100000 200000 300000 400000 500000 600000 700000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Operating cost Net sales Ratios
Operating Ratio : Operating Cost / Net Sales
Generally the lower the Operating Cost , the better for the concern. The ratio
should be below1 which is satisfactory for the concern.
Return on capital employed
year
PBIT
Capital
employed
Ratios
2001-02
13500
90522
0.149
2002-03
13420
99337
0.135
2003-04
15821
79114
0.199
2004-05
33122
85026
0.389
2005-06
60867
102462
0.594
2006-07
63290
79459
0.796
2007-08
68916
107986
0.638
2008-09
68478
96894
0.706
2009-10
86438
207051
0.417
2010-11
130330
305907
0.426
0 50000 100000 150000 200000 250000 300000 350000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 PBIT Capital employed Ratios
Return on Capital Employed = PBIT/Capital Employed
The higher the ROCE ratio , the better for the concern. The company has been
keeping up the good performance is increasing at the rapid phase which in turn
is a good sign for the company.
Debtors turnover ratio
year
Net credit sales
Average
debtors
Ratios
2001-02
153205
85001
1.8
2002-03
137838
81237
1.69
2003-04
174490
82829
2.1
2004-05
174668
112238
1.55
2005-06
267217
135322
1.97
2006-07
289491
177301
1.63
2007-08
310235
215291
1.44
2008-09
414816
287414
1.44
2009-10
500342
328201
1.53
2010-11
665323
537364
1.24
0 100000 200000 300000 400000 500000 600000 700000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Net credit sales Average debtors Ratio
Debtors Turnover Ratio = Net Credit Sales / Average Debtors
The BHEL`s debtor turnover ratio was below 2 .Its has bee increasing since
2008-09 from 1.44 to 1.53 in 2009-10, the increasing trend Implies the efficient
management of Debtor and credit sales.
Creditors turnover ratio
year
Net credit
purchases
Average
creditors
Ratios
2001-02
12060
29738
0.4
2002-03
16646
27610
0.6
2003-04
16350
20467
0.79
2004-05
16727
24225
0.81
2005-06
19656
39495
0.49
2006-07
21772
46452
0.48
2007-08
25459
54586
0.4664
2008-09
31900
58078 0.54926
2009-10
60293
88228
0.68
2010-11
65700
103305
0.64
0 20000 40000 60000 80000 100000 120000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Net credit purchases Average creditors Ratio
Creditors Turnover Ratio : Net Credit Purchases /Average Creditors
Interpretation : The BHEL`s creditors Turn Over Ratio is at 0.68 , it has been on
the increasing trend since past two financial years. The management should try
to reduce this by adopting proper payment policies.
Fixed asset turnover ratio
year
Net sales
Fixed assets
Ratios
2001-02
153205
7859
19.49
2002-03
137838
7095
19.42
2003-04
174490
8360
20.87
2004-05
174668
8896
19.63
2005-06
267217
10600
25.2
2006-07
289491
12247
23.63
2007-08
310235
9909
31.3
2008-09
414816
17699
23.43
2009-10
500342
22595
22.14
2010-11
665323
31830
20.90
0 100000 200000 300000 400000 500000 600000 700000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Net sales Fixed assets Ratio
Fixed Assets Turnover Ratio. = Net Sales / Fixed Assets
At high fixed assets turnover ratio indicates better utilization of the firms fixed
assets. A ratio around 5 is considered ideal for the concern .In BHEL it is more
than 22.This is a very good sigh for the company.
Total asset turnover ratio
year
Total debt
Equity
Ratios
2001-02
497
3252
0.15
2002-03
573
3252
0.17
2003-04
386
3252
0.11
2004-05
513
3252
0.15
2005-06
1054
3252
0.32
2006-07
607
3252
0.18
2007-08
587
3252
0.18
2008-09
2566
3252
0.78
2009-10
2034
3252
0.62
2010-11
2265
3252
0.70
0 500 1000 1500 2000 2500 3000 3500 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Total debt Equity Ratio
