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INTRODUCTION
Accounting is the process of identifying, measuring and communication economic
information to present informed judgment and decision by users of the information. It
involves recording, classifying and summarizing various business transactions. The end
products of business transaction are the financial statements comprising primarily the
position statement or the balance sheet and outcome of the summarizing process of
accounting and are therefore the sources of information on the basis of which conclusions are
drawn about the profitability and the financial position of the concern.
Financial Statements are the basis of decision making by the management as well as the
outsiders who are interested in the affairs of the firm such investors, creditors, customers and
general public. The analysis and interpretation of financial statements depend upon the nature
and type of information available in these statements of the business enterprise.
The analysis of financial statements is a process of evaluating the relationship between
component parts of financial statements to obtain a better understanding of the firms position
and performance.
The big organization of NTPC to analysis the financial position of the organization in last
five years it in growth stage and improvement of financial position in year to year to taken
analysis to overall organization thats we using the financial statement analysis it give overall
position of company in last five years.
NEED FOR THE STUDY
Financial statements are the instruments to watch the performance of a business enterprise.
They highlight a managerial performance attesting managerial success or failure and the
flashing signals of impending difficulties. Ratio analysis as technique of analysing the
financial information contained in the balance sheet and profit and loss account for
meaningful understanding of the financial position and performance of firm.
In financial analysis a ratio is used as the index or yardstick for evaluating the financial
position and performance of a firm. The analysis is very useful for both the inside and outside
groups. They are interested in the results and relationships reported in the financialattachments.
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The analysis helps to make a qualitative judgement about the financial position and
performance. The ratio indicates a quantitative relationship, which can in turn be used to
make a qualitative judgement. It estimates the efficiency of enterprise and also compares an
enterprise with other similar undertakings. A comprehensive study of the performance of an
enterprise is possible through ratio. They help an analyst to find out liquidity, profitability,
leverage and efficiency. Since the photon energy systems limited is also expected to thrive on
its own performance, it is necessary to know with what efficiency it is working right now. So
that remedial measures can be suggested.
OBJECTIVES OF STUDY
The following are some of the obligations that are set for the study that was conducted on the
area of ratio analysis.
a. To find out the ability of firm to meet its current obligations.
b. To examine the solvency of the firm.
c. To assess the profitability position of the society.
d. The overall operating efficiency and performance of a firm.
e. To find out the financial position of the company through ratio analysis.
f. To evaluate the liquidity management through the ratios.
g. To see whether the firm has maintained adequate investment in current assets or not.
h. To analyse the financial position of the firm.
i. To compare the yearly performance of the various ratios.
j. To promote organizational benefits to a maximum standard.
SCOPE OF STUDY
As a tool of financial analysis, the ratios are of crucial significance. The importance of
ratio analysis lies in fact that it presents facts on a comparative basis. Ratios are used in
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credit analysis to judge the firms liquidity or debt paying ability, which is very useful to
creditors. In security analysis it is used to analyse the long-term profitability. The
financial analysis can be done through various techniques like ratios, funds flow and cost
volume profit relations; this study focuses only on the ratio analysis.
METHODOLOGY
The period selected for the study is five years from 2005-2006 to 2009-2010. The
Methodology adopted for this study includes both primary data and secondary data.
More than this, personal interviews are conducted with the finance manager and other
officials to elicit the necessary information. Interviews are very effective and they have
provided needed information particularly to complete this report discussions are held to
verify the data obtained from secondary sources.
PRIMARY DATA
Primary data will be through regular interaction with the officials of National Thermal
Power Corporation (Ramagundam Super Thermal Power Station). Ratio relationships will
be established basing on the theoretical available from the Finance Text Books.
SECONDARY DATA
A. Annual reports of the company from 2005-2006 to 2009-2010.
B. Financial statements of the company.
C. Collecting the relevant information for the standard textbooks and financial
magazines.
D. Required information is collected from lecturers, friends and internet.
LIMITATIONS OF THE STUDY
1. Change in price level from year to year.
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2. Working only with significant ratios.
3. The ratios are compared with the industry averages and only significant accounting
ratios are compared.
4. This study confined to five years which is from 2005-2006 to 2009-2010 only which
is related to quantitative information base.
5. The study is only for a period of two months; due to cost and time constraint this
study has been minimized to ratios management only.
The study is confined to changes in current assets and current liabilities only and is to be
compared with previous years to show the improvement in maintenance of current assets.
Overview of Organization
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Indias largest power company, NTPC was set up in 1975 to accelerate power development in
India. NTPC is emerging as a diversified power major with presence in the entire value chain
of the power generation business. Apart from power generation, which is the mainstay of the
company, NTPC has already ventured into consultancy, power trading, ash utilisation and
coal mining. NTPC ranked 341st in the 2010, Forbes Global 2000 ranking of the Worlds
biggest companies.NTPC became a Maharatna company in May, 2010, one of the only four
companies to be awarded this status.
The total installed capacity of the company is 34,194 MW (including JVs) with 15 coal based
and 7 gas based stations, located across the country. In addition under JVs, 5 stations are coal
based & another station uses naphtha/LNG as fuel. The company has set a target to have an
installed power generating capacity of 1, 28,000 MW by the year 2032. The capacity will
have a diversified fuel mix comprising 56% coal, 16% Gas, 11% Nuclear and 17%
Renewable Energy Sources(RES) including hydro. By 2032, non fossil fuel based generation
capacity shall make up nearly 28% of NTPCs portfolio.
NTPC has been operating its plants at high efficiency levels. Although the company has
17.75% of the total national capacity, it contributes 27.40% of total power generation due to
its focus on high efficiency.
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In October 2004, NTPC launched its Initial Public Offering (IPO) consisting of 5.25% as
fresh issue and 5.25% as offer for sale by Government of India. NTPC thus became a listed
company in November 2004 with the Government holding 89.5% of the equity share capital.
In February 2010, the Shareholding of Government of India was reduced from 89.5% to
84.5% through Further Public Offer. The rest is held by Institutional Investors and the Public.
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At NTPC,People before Plant Load Factoris the mantra that guides all HR related policies.
NTPC has been awarded No.1, Best Workplace in India among large organisations and the
best PSU for the year 2010, by the Great Places to Work Institute, India Chapter in
collaboration with The Economic Times.
The concept of Corporate Social Responsibility is deeply ingrained in NTPC's culture.
Through its expansive CSR initiatives, NTPC strives to develop mutual trust with thecommunities that surround its power stations.
Diversified Growth
As per new corporate plan, NTPC plans to become a 75 GW company by the year 2017 and
envisages to have an installed capacity of 128 GW by the year 2032 with a well diversified
fuel mix comprising 56% coal, 16% gas, 11% nuclear energy, 9% renewable energy and 8%
hydro power based capacity.
As such, by the year 2032, 28% of NTPCs installed generating capacity will be based on
carbon free energy sources. Further, the coal based capacity will increasingly be based on
high-efficient-low-emission technologies such as Super-critical and Ultra-Super-critical.
Along with this growth, NTPC will utilize a strategic mix of options to ensure fuel security for
its fleet of power stations.
Looking at the opportunities coming its way, due to changes in the business environment,
NTPC made changes in its strategy and diversified in the business adjacencies along the
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energy value chain. In its pursuit of diversification NTPC has developed strategic alliances
and joint ventures with leading national and international companies. NTPC has also made
long strides in developing its Ash Utilization business.
Hydro Power: In order to give impetus to hydro power growth in the country and to
have a balanced portfolio of power generation, NTPC entered hydro power business
with the 800 MW Koldam hydro projects in Himachal Pradesh. Two more projects
have also been taken up in Uttarakhand. A wholly owned subsidiary, NTPC Hydro
Ltd., is setting up hydro projects of capacities up to 250 MW.
Renewable Energy: In order to broad base its fuel mix NTPC has plan of capacity
addition of about 1,000 MW through renewable resources by 2017.
Nuclear Power: A Joint Venture Company "Anushakti Vidyut Nigam Ltd." has been
formed (with 51% stake of NPCIL and 49% stake of NTPC) for development of
nuclear power projects in the country.
Coal Mining: In a major backward integration move to create fuel security, NTPC has
ventured into coal mining business with an aim to meet about 20% of its coal
requirement from its captive mines by 2017. The Government of India has so far
allotted 7 coal blocks to NTPC, including 2 blocks to be developed through joint
venture route.
Power Trading: 'NTPC Vidyut Vyapar Nigam Ltd.' (NVVN), a wholly owned
subsidiary was created for trading power leading to optimal utilization of NTPCs
assets. It is the second largest power trading company in the country. In order to
facilitate power trading in the country, National Power Exchange Ltd., a JV of
NTPC, NHPC, PFC and TCS has been formed for operating a Power Exchange.
Ash Business: NTPC has focused on the utilization of ash generated by its powerstations to convert the challenge of ash disposal into an opportunity. Ash is being used
as a raw material input by cement companies and brick manufacturers. NVVN is
engaged in the business of Fly Ash export and sale to domestic customers. Joint
ventures with cement companies are being planned to set up cement grinding units in
the vicinity of NTPC stations.
Power Distribution: NTPC Electric Supply Company Ltd. (NESCL), a wholly
owned subsidiary of NTPC, was set up for distribution of power. NESCL is activelyengaged in Rajiv Gandhi Gramin Vidyutikaran Yojana programme for rural
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electrification.
Equipment Manufacturing: Enormous growth in power sector necessitates
augmentation of power equipment manufacturing capacity. NTPC has formed JVs
with BHEL and Bharat Forge Ltd. for power plant equipment manufacturing. NTPC
has also acquired stake in Transformers and Electricals Kerala Ltd. (TELK) for
manufacturing and repair of transformers.
FUTURE CAPACITY ADDITIONS
NTPC has formulated a long term Corporate Plan up to 2017. In line with the Corporate Plan,
the capacity addition under implementation stage is presented below:
PROJECT STATE MW
Coal
1. NCTPP II ( 2 x 490) Uttar Pradesh98
0
2 Korba III ( 1 x 500) Chhattisgarh
50
0
3 Sipat I (3 x 660) Chhattisgarh198
0
4. Farakka III ( 1 x 500) West Bengal50
0
5.Indira Gandhi STPP- JV with IPGCL & HPGCL ( 3 x
500)
Haryana150
0
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6. Simhadri II ( 2 x 500)Andhra
Pradesh
100
0
7. Vallur I -JV with TNEB ( 2 x 500) Tamilnadu100
0
8. Vallur Stage-I Phase-II -JV with TNEB ( 1 x 500) Tamilnadu 500
9. Bongaigaon(3 x 250) Assam 750
10
.Mauda ( 2 x 500) Maharashtra
100
0
11
.Rihand III(2X500) Uttar Pradesh
100
0
12
.Vindhyachal-IV (2X500)
Madhya
Pradesh
100
0
13
.Nabinagar TPP-JV with Railways (4 x 250) Bihar
100
0
14
.Barh II (2 X 660) Bihar
132
0
15
.Barh I (3 X 660) Bihar
198
0
Hydro
1. Koldam HEPP ( 4 x 200)Himachal
Pradesh800
2. Loharinag Pala HEPP ( 4x 150) Uttarakhand 600
3.Tapovan Vishnu gad HEPP (4 x
130)Uttarakhand 520
Total1793
0
NTPC Electric Supply Company Ltd. (NESCL)
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The company was formed on August 21, 2002. It is a wholly owned subsidiary company of
NTPC with the objective of making a foray into the business of distribution and supply of
electrical energy, as a sequel to reforms initiated in the power sector.
NTPC Vidyut Vyapar Nigam Ltd. (NVVN)
The company was formed on November 1, 2002, as a wholly owned subsidiary company of
NTPC. The companys objective is to undertake sale and purchase of electric power, to
effectively utilize installed capacity and thus enable reduction in the cost of power. NVVN
NTPC Hydro Ltd. (NHL)
The company was formed on December 12, 2002, as a wholly owned subsidiary company of
NTPC with an objective to develop small and medium hydroelectric power projects of up to
250 MW.
Pipavav Power Development Co. Ltd. (PPDCL)
A memorandum of understanding was signed between NTPC, Gujarat Power Corporation
Limited (GPCL) and Gujarat Electricity Board (GEB) in 2004 for development of a 1000
MW thermal power project at Pipavav in Gujarat by forming a new joint venture company
between NTPC and GPCL with 50:50 equity participation. Pursuant to the decision of
Gujarat Government, NTPC Ltd. has dissociated itself from this company. PPDCL is under
winding up.
Kanti Bijlee Utpadan Nigam Limited, (formerly known as Vaishali Power Generating
Company Limited)
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To take over Muzaffarpur Thermal Power Station (2*110MW), a subsidiary company named
Vaishali Power Generating Company Limited (VPGCL) was incorporated on September 6,
2006 with NTPC contributing 51% of equity and balance equity was contributed by Bihar
State Electricity Board. This company was formed to renovate the existing unit and run the
plant. The second unit has been successfully re-synchronized on October 17, 2007 after 4
years of being idle. Renovation and modernization of the first unit is under progress. The
company was rechristened as Kanti Bijlee Utpadan Nigam Limited on April 10, 2008.
Bharatiya Rail Bijlee Company Limited (BRBCL)
A subsidiary of NTPC under the name of Bharatiya Rail Bijlee Company Limited was
incorporated on November 22, 2007 with 74:26 equity contribution from NTPC and Ministryof Railways, Govt. of India respectively for setting up of four units of 250 MW each of coal
based power plant at Nabinagar, Bihar. Investment approval of the project was accorded in
January, 2008.
New Business Development
NTPC, with a rich experience of engineering, construction and operation of over 30,000 MW
of thermal generating capacity, is the largest and one of the most efficient power companiesin India, having operations that match the global standards.
Commensurate with our countrys growth challenges, NTPC has embarked upon an
ambitious plan to attain a total installed capacity of 75,000 MW by 2017. Towards this end,
NTPC has adopted a multi-pronged strategy such as Greenfield Projects, Brownfield Projects,
Joint Venture and Acquisition route. Apart from this, NTPC has also adopted the
Diversification Strategy in related business areas, such as, Services, Coal Mining, Power
Trading, Power Exchange, Manufacturing to ensure robustness and growth of the company.
RESEARCH METHODOLGY
The methodology section is the blue print for researcher activity and specifies how the
investigator intents to study the policies and procedures of the industry. In other words, the
methodology section make explicit the study desire and constitutes the How to do it phase.
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The project study has been conducted by taping both primary and secondary data is likely to
play an important role for collecting the available data. I have put my best efforts to do this
research and collect the necessary information to analyze about the topic thoroughly.
OBJECTIVE OF THE STUDY
First of all, it was necessary to define objective which becomes helpful to define boundaries
so that the project can be concluded and can be completed on time with required and
expected output. This objective can be divided or classified according to its size and subjects.
So I define objective of my project and divided it in various sub parts so that each part can be
completed subsequently and simultaneously as needed.
SCOPE OF THE STUDY
One can gain insight about what changes are desirable and needed. Evaluation of schedules
of service charges of various banks helped in comparative analysis in the project. Evaluation
process can help in formulating the financial policies and studies the different alternative
sources, as it reveals the reduction in cost to the company. Scope can define the expectations
and limit them in analysis. It helps to find out that what we want to do and what we can. In
overall, scope of the study helps to limit expectations and give the idea and ways where we
can move on the path.
SOURCES OF DATA
In the project we also had to decide the sources of data as every data is not as freely available
every time. We need to identify our requirements and find out the source where we can
acquire from at right time. For timely completion with accuracy we need right sources of
data. These sources can be primary or secondary. Sometimes secondary sources need
confirmation through primary for assurance. As the world is being dynamic so secondary data
is not much reliable as well as each one can have their own views, perception so primary data
is also not 100% accurate. We have to balance and find out our requirement on our own
decisions according to need.
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ASSUMPTIONS
During the project we have to make some assumptions because of many reasons such as all
data is not available, some measurements are not possible, dynamic environments, volatile
situations etc. We make some hypothesis and during the research and analysis, make some
assumption with some relations to complete the project with expected output.
LIMITATION OF THE STUDY
In the study whatever, we want, is not possible. Our project can have some limitations
because of reason like dependence of many variables. Such limitations sometimes restrict us
but scope of the project gives us the guidelines at the same time. These limitations help in
setting up boundaries for others in taking conclusion with some assumptions.
I started with defining objective of my project, keeping in mind the objective of my summer
internship given in the curriculum and my own learning experiences during the project. I
learned various things in this duration apart from the study like work culture, organizational
behaviour, management processes etc.
PROFILE OF RAMAGUNDAM SUPER THERMAL POWER STATION
Address P.O. Jyothinagar, Dist. Karimnagar, Pin: 505215, Andhra
Pradesh.
Approved Capacity 2600 MW
Installed Capacity Stage I : 3*200 MW
Stage II : 3*500 MW
Stage III : 1*500 MW
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Location Ramagundam, Karimnagar, Andhra Pradesh
Coal Source (i) South Godavari Coal Fields of Singareni Collieries for
stage I & II
(ii) Korba Coal Fields of SECL for stage III
Water Source Sri Ram Sager Dam on Godavari River, D-83 Canal from
Pochampadu Reservoir
Beneficiary States Pondicherry, Goa, Kerala, Karnataka, Tamilnadu, AP, PGCIL
(for HVDC)
Approved Investment Rs. 2059.22 cr Stage I & II
Rs. 1818.46 cr Stage III
Unit Sizes Stage I: 3*200 MW
Stage II: 3*500 MW
Units Commissioned Unit I 200 MW November 1983
Unit II 200 MW May 1984
Unit III 200 MW December 1984
Unit IV 500 MW June 1988
Unit V 500 MW March 1989
Unit VI 500 MW October 1989
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Units Commissioning
Schedule
Unit VII 500 MW August 2004
International Assistance IDA
IBRD Loan
OPEC
KFW
EXIM Bank, Japan
SFD
RAMAGUNDAM STATION HIGHLIGHTS
1. Record haulage of coal in single day of 78720 MT on 29 June, 1998 Asianrecord.
2. Station recorded highest loading factor of 99.4% of the year 1999-2000.
3. Continuous run of VI unit (500 MW) for 406 days, third best in the world.
4. Ramagundam 500 MW Unit-7 (stage III) has successfully completed one
year of commercial operation on 25.03.06 without any tube leakage. The unit
generated 3802.492 MUs due to backing down, the deemed, PLF is 93.59 %.
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The unit also has achieved a continuous run of 97 days without tripping in the
first year of operation itself.
5. Ramagundam Station achieved 47.94% (18.63 LMT) of Ash utilization during
the financial year against the target of 47% (18.20 LMT).
6. Ramagundam Station bagged Innovative Safety award for the year 2005
from Institution of Engineer.
7. Ramagundam Station bagged Best Management award from Govt. of AP for
the year 2004-05.
8. NTPC Ramagundam bagged Golden shield for the financial years 2000-01,
2001-02, 2002-03 & 2003-04 for outstanding performance in power
generation.
RATIO ANALYSIS
Ratio analysis is a powerful technique of financial analysis. To evaluate a firms financial
health, the financial analyst needs to evaluate various aspects of firms financial performance,
for this, tool which is frequently used is Ratio Analysis. It refers to the relationship expressed
in arithmetical terms between inter related figures. Accountants Handbook by Wixom,
Kellan Bedford defines, ratio is an expression of the quantitative relationship between two
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numbers. According to J. Batty, The term accounting ratios is used to describe significant
relationship between figures shown on a balance sheet, in a profit and loss account, in a
budgetary control system or in any other part of the accounting organization. Thus, it
expresses the relationship between two inter related figures in mathematical terms which
have a cause and effect relationship. Ratios are calculated because in this way we get a
comparison that may prove more useful than the raw numbers by themselves.
RATIOS CAN BE EXPRESSED IN THREE WAYS
(1) Proportion
In this, figures of the two items are used for computing the ratio as expressed in
common denominator. For example, the current asset of a business is Rs. 3, 60,000
and the current liabilities of a business are Rs. 1, 20,000, the ratio of current assets to
current liabilities is Rs.3, 60,000: Rs.1, 20,000 or simply 3: 1.
(2) Rate or Times
In this, ratio is expressed in the form of rate or times which is obtained by dividing
one item by another. For instance, in the above example, the current ratio can be
expressed as follows:
= Rs.3, 00,000 i.e., current assets are 3 times that of current liabilities.
Rs.1, 00,000
(3) Percentage
In this ratio is expressed in the form of percentage which is obtained by multiplying
the quotient by 100. For instance, in the above example, the current asset as a
percentage of the current liabilities is computed as follows:
= Rs.3, 00,000 * 100 = 300%
Rs.1, 00,000
The analysis and interpretation of financial statements with the help of ratios is called Ratio
Analysis. Ratio analysis, as a tool of financial analysis was suggested by Alexander Wall, an
e interpretation of financial statements.
The following are four steps involved in ratio analysis:
(a) Selection of the relevant data from the financial statements to suit the objective of the
analysis.(b) Calculation of appropriate ratios from the above data.
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(c) Comparison of the calculated ratios with the industry figures or industry norms or
ratios of the same firms in the past.
(d) Interpretation of the ratios.
INTERPRETATION OF RATIOS
The interpretation of the ratios is an important factor. It needs to be done properly. The
interpretation of ratios depends upon the scope of financial analysis and the available data
and ratios. The interpretation of the ratios can be done in the following ways:
(1) Single Absolute Ratio
A single ratio may convey some useful information about the company. For example,
ROI is very important ratio which conveys useful information about the profitability
of the company. However, one should avoid, making interpretation by considering
single ratio in isolation.
(2) Group of Ratios
A group of ratios is of much help to the analyst than a single ratio because the
interpretation of the group of ratios is more understandable and meaningful.
(3) Trend Ratios
In this case, a single ratio or group of inter related ratios are computed for a number
of years. The present ratios are computed with past ratio and used for interpretation.
When financial ratios are compared over a period of years, the analyst can study the
composition of change and determine whether there has been an improvement or
deterioration in firms financial condition and performance over time.
(4) Projected Ratios
Ratios calculated on actual financial data are used for comparison with the standard
ratios derived from the projected financial data to find out the variances. Such
variances are used for interpretation and taking corrective action in the future.
(5) Inter firm Comparison
Ratios of one firm can be used for comparing the performance of one firm with that of
another firm in the industry or with industry averages at the same point of time. Such
a conclusion gives insight into the relative financial condition and performance of the
firm. It also helps to identify any significant deviation from any applicable industry
average (or standard).
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How Ratios are useful in Business?
Help in decision-making:
The information provided in financial statements is not an end in itself and no meaningful
conclusion can be drawn from these statements alone. Ratio analysis helps in decision
making from the information provided in these financial statements.
Help in Financial Forecasting and Planning:
Ratio analysis is of much help in financial forecasting and planning. Planning is looking
ahead and the ratios calculated for a number of years work as a guide for the future.
Help in Communicating:
The financial strength and weakness of a firm are communicated in a more easy and
understandable manner by the use of ratios.
Help in Co-ordination:
Ratios even help in co-ordination, which is of utmost importance in effective business
management. Better communication of efficiency and weakness of an enterprise results in
better in co-ordination in the enterprise.
Help in Control:
Ratio analysis even helps in making effect control of the business. Standard ratios can be
based upon proforma financial statements and variances or deviations, if any, can be found by
comparing the actual with the standards so as to take corrective action at the right time
Utility to Creditors:
The creditors or suppliers extend short-term credit to the concern. They are interested to
know whether financial position of the concern warrants their payments at a specified time or
not. The concern pay short-term creditors out of its current assets are quite sufficient to meet
current liabilities then the creditors will not hesitate in extending credit facilities. Current and
acid test ratios will give an idea about the current financial position of the concern.
Other uses:
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It is an essential part of the budgetary control and standard costing. They have immense
importance in the analysis and interpretation of financial statements as they bring the strength
or weakness of a firm.
USES AND SIGNIFICANCE OF RATIO ANALYSIS
A) Managerial uses of ratio analyzes
1. Financial statements are prepared primarily for decision making, but the
information provided in financial statements is not an end itself and no meaningful
conclusion can be drawn from these statements alone. Ratio analysis helps in making
decisions from the information provided in these financial statements.
2. Ratio analysis is of much help in financial forecasting and planning. Planning is
looking ahead and the ratios calculated for a number of years work as a guide for the
future. Meaningful conclusions can be drawn for future from this ratio. Thus ratio
analysis helps in future forecasting and planning.
3. The financial strength and weakness of a firm are communicated in a more and
easy and understandable manner by the use of ratios. The information contained in the
financial statements is conveyed in meaningful manner to the one for whom its meant.
Thus ratios helps in communication and hence the value of the financial statements.
i. Ratio analysis even helps in co ordination which is of utmost
importance in effective business management. Better communication
of efficiency and weakness of an enterprise results in better co
ordination in the enterprise.
ii. Ratio analysis even helps in making effective control of the business.
Standard ratios can be based upon performance of financial statements
and variances or deviations, if any, can be found by comparing the
actual with the standards so as to take a corrective action at the right
time.
B) Utility to shareholders / Investors
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An investor in the company will like to access the financial position of the concern
where he is going to invest. His first interest will be the security of his investment and
then a return in the form of dividend or interest. For the first purpose he will try to
access the value of fixed assets and the loans raised against them. The investor will
feel satisfied only if the concern has sufficient amount of assets.
Profitability ratios will be useful to determine profitability position. Ratio analysis
will be useful to the investor in making up his mind whether present financial position
of the concern warrants further investment or not.
C) Utility to creditors
The creditors or suppliers to extend short term credit to the concern. They are
interested to know whether financial position of the concern warrants their payments
at a specified time or not. The concern pays short term creditors out of its current
assets. If the current assets are quite sufficient to meet current liabilities the creditor
will not hesitate in extending credit facilities. Current and acid test ratios will give an
idea about the current financial position of the concern.
D) Utility to Employees
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The employees are also interested in the financial position of the concern especially
profitability. Their wage increases and amount of the make use of information
available in the financial statements. Various profitability ratios relating to gross
profit, operation cost, and net profit enable employees to put forward their viewpoint
for the increase of wages and other benefits.
ADVANTAGES OF RATIO ANALYSIS
1) Ratio analysis simplifies the understanding of financial statements.
2) Ratios bring out the inter relationship among various financial figures and bring to
light their financial significance. Ratio analysis is a device to analyze and interpret the
financial health of the enterprise.
3) Ratios contribute significantly towards effective planning and forecasting. A study of
a trend in the past works as helpful guide for the future.
4) Ratios facilitate inter firm and intra firm comparisons, there by bringing out the
strength weakness, efficiency of their firms and their department.
5) Ratios serve as effective control tools. They also facilitate establishment of a standard
costing and budgeting control.
6) Ratios cater to the particular information need of a particular person depending upon
his interest in the business for which ratios are to be calculated. A creditor may be
interested in the liquidity ratios, while an investor may want to study profitability
ratios.
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LIMITATIONS OF RATIO ANALYSIS
1) Ratio may not prove to be the ideal tool for inter firm comparisons. The two
firms may adopt different accounting policies and hence the results might not be
comparable. Similarly a change in accounting policies by a firm will make intra
firm comparisons meaningless.
2) A study of ratios in isolation, without studying the actual figure, may lead to
wrong conclusions. Ratios are only supplementary to and not substitutes for
absolute figures.
3) Ratios can be as correct as the data on which they are based; if the original data is
not reliable then ratios will be misleading.
4) Ratio analysis suffers from each consistency. Ratios are defined differently by
various experts and hence are prone to manipulations.
5) In the absence of well accepted standards interpretation of ratios becomes
subjective.
6) Ratios fail to reflect the impact of price level changes, and hence can be
misleading.
7) Ratios are only tools of quantitative analysis and fail to take into account the
quantitative aspects of a business.
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TYPES OF RATIOS
Ratios classified into four categories:
Liquidity Ratios:
Current Ratio
Quick Ratio
Absolute Quick Ratio
Activity Ratios / Turnover Ratios:
Stock Turnover Ratio
Debtors Turnover Ratio
Creditors Turnover Ratio
Other Turnover Ratio
Leverage Ratios / Solvency Ratios:
Capital Gearing Ratio
Debt Equity Ratio
Proprietary Ratio
Fixed Assets Ratio
Total Liabilities to Total Assets Ratio
Fixed Assets to Long Term funds RatioGeneral Profitability Ratios:
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Net Profit Ratio
Gross Profit Ratio
Operating Ratio
Expenses Ratio
Overall Profitability Ratios:
Return on Capital Employed
Return on Net worth
Return on Equity Capital
Return on Assets Ratio
Equity Ratio
Value added by Employee Ratio
Earnings per Share Ratio
TYPES OF RATIOS CALCULATED FOR THE PRESENT STUDY
1.Balance sheet ratios 2.Profit and Loss Account
Ratios
3.Inter statement
(balance sheet and P & L
a/c)
1.Current Ratio
2.Quick Ratio
3.Proprietary Ratio
4.Debt Equity Ratio
5 Fixed Asset Ratio
1.Gross Profit Ratio
2.Net Profit Ratio
3.Inventory Turnover Ratio
4.Expense Ratio
5.Operating Ratio
1.Return on Assets Ratio
2.Fixed Assets Ratio
3.CreditorsTurnover Ratio
4.Debtors Turnover
Ratio
5.Working Capital Turn
Over Ratio
1. LIQUIDITY OR SHORT TERM SOLVENCY RATIOS:-
These are the ratios which measure the short - term solvency or financial position of the firm.
These ratios are calculated to comment upon the short term paying capacity of a concern or
the firms ability to meet its current obligations, the various liquidity ratios are: Current ratio,
Quick ratio
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Current ratio or Working Capital Ratio:
Current ratio is the ratio of current assets and current liabilities
Current assets are the assets which can be converted into cash within one year and
include cash in hand and cash at bank, bills receivable, net sundry debtors, stock of
raw material, finished goods and work in progress, prepaid expenses, outstanding and
accrued incomes and short term or temporary investments.
Current liabilities are the liabilities which are to be paid within a period of one year
include bills payable, sundry creditors, bank overdraft, outstanding expenses, income
received in advance, proposed dividend, provision for taxation, unclaimed dividends
and short term loans and advances repayable within one year.
Current Ratio = Current Assets
Current Liabilities
Quick Ratio:
Quick ratio is the ratio of quick assets to current liabilities.
Quick assets are the assets which can be converted into cash very quickly
without much loss. All current assets, except stock and prepaid expenses are
also quick assets.
All current liabilities are liabilities which are to be repaid in one year.
Quick Ratio = Quick Assets
Quick Liabilities
2. LEVERAGED OR CAPITAL STRUCTURE RATIO OR LONG TERM TERM
SOLVENCY RATIOS:
Long term solvency ratios convey a firms ability to meet the interest costs and the
repayments schedules of its long term obligations e.g., debt equity and interest coverage
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ratio. Leverage shows the proportions of debt and equity in financing of the firm. These
ratios measure the contribution of financing as compared to financing by outsiders.
(a) Debt equity ratio:
It reflects the relative claims of creditors and share holders against the assets of the
business.
Debt usually refers to long term liabilities
Equity includes equity and preference share capital and reserves.
Debt Equity Ratio = Long Term Liabilities
Shareholders fund
(b) Proprietary ratio:
It expresses the relationship between net worth and total assets.
Net Worth = Equity Share Capital + Preference Share Capital + Reserves
and Surplus Fictitious Assets
Total Assets = Fixed Assets + Current Assets (excluding Fictitious Assets)
Proprietary Ratio = Net Worth
Total Assets
(c) Fixed Assets Ratio:
This ratio indicates the mode of financing fixed assets. This the ratio of fixed assets to
capital employed.
Capital employed = Equity Share Capital + Preference Share Capital +
Reserves and Surplus + Long term Liabilities Fictitious Assets
Fixed Assets Ratio = Fixed Assets
Capital Employed
(d) Interest Coverage Ratio or Debt Service Ratio:
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This ratio indicates whether a business is earning sufficient profits to pay the interest
charges. It is calculated as follows:
Debt Service Ratio = PBIT
Fixed Interest Charges
PBIT = Profit before Interest and Taxes
3. ACTIVITY RATIOS OR TURNOVER RATIOS :
An activity ratio measures the efficiency or effectiveness with which a firm manages its
resources or assets. They calculated the speed with which various assets, in which funds
are blocked up, get converted into sales. The significant activity or turnover ratios are:
Inventory Turnover Ratio
Stock turnover ratio indicates the number of times the stock has turned over into sales in
In a year it is calculated as:
Inventory Turnover Ratio = Cost of Goods Sold or Sales
Average Stock
Cost of Goods Sold = Sales Gross Profit
Average Stock = (Opening Stock + Closing Stock) / 2
Debtors Turnover Ratio
It expresses the relationship between debtors and sales. It is calculated as:
Debtors Turnover Ratio = Net Credit Sales
Average Debtors
Creditors Turnover Ratio
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It expresses the relationship between creditors and purchases. It is calculated as:
Creditors Turnover Ratio = Net Credit Purchases
Average Creditors
Working Capital Turnover Ratio
This ratio is used to know the efficient utilization of fund. It is calculated as:
Working Capital Turnover Ratio = Cost of Goods Sold
Working Capital
4. PROFITABILTY RATIOS :
A profitability ratio measures the profitability of a concern. Generally they are calculated
either in relation to sales or in relation to investment.
General Profitability Ratios:
Gross Profit Ratio:
It reveals the result of trading operations of the business. It is calculated as:
Gross Profit Ratio = Gross Profit
Net Sales
Gross Profit = Net sales Cost of Goods Sold
Net Sales = Total Sales Sales Returns
Cost of Goods Sold = Opening Stock + Purchases + Manufacturing Expenses
Closing Stock
Net Profit Ratio:
It indicates the result of overall operations of the firm. While the Gross Profit ratio indicated
the extent of profitability of core operations, Net profit ratio tells us about overall
profitability. It is calculated as
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Net Profit Ratio = Net Profit after Tax
Net Sales
Operating Ratio:
It expresses the relationship between expenses incurred for running the business, and the
resultant net sales. It is calculated as
Operating Ratio = Operating Cost
Net Sales
Operating Cost = Cost of Goods Sold + Office and Administrative Expenses +
Selling Expenses + Distribution Expenses.
Operating Profit Ratio:
It establishes the relationship between operating profit and sales. It is calculated as:
Operating Profit Ratio = Operating Profit * 100
Net Sales
Overall Profitability Ratios:
Return on Capital Employed Ratio (ROCE) or Return on Investment:
This ratio reveals the earning capacity of the capital employed in the business. It is calculated
as
ROCE = PBIT
Capital Employed
PBIT = Profit before Interest and Tax
Capital Employed = Share Capital + Reserves and Surplus + Long Term Loan
Fictitious Assets
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 = PAT
Net Worth
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Net Worth = Share Capital + Reserves and Surplus
Return on Assets Ratio (ROA):
Return on Assets reflects the return earned by the firm for the shareholders of the business on
the investment of all the financial resources committed to the business.
ROA = PAT
Total Assets
Total Assets do not include fictitious assets
Dividend Pay-Out Ratio or Pay-Out Ratio:
Dividend pay-out ratio is calculated to find the extent to which earnings per share have been
retained in the business. It is an important ratio because sloughing back profits enables a
company to grow and pay more dividends in future.
Dividend Pay-out Ratio = Dividend per Equity Share
Earnings per Share
Price-Earnings Ratio or Pie Ratio (Earnings Yield Ratio):
Price Earnings Ratio is the ratio between market price per equity share and earnings per
share. The ratio is calculated to make an estimate of appreciation in the value of a share of a
company and is widely used by investors to decide whether or not to buy shares in a
particular company. The ratio is calculated as:
Price Earnings Ratio = Market Price per Equity Share
Earnings per Share
Earnings Yield Ratio:
This ratio also shows a relationship between earnings per share and market value of shares. It
can be calculated as follows:
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Earnings Yield Ratio = Earnings per Share * 100
Market Price per Ratio
Earnings per Share:
Earnings per share are a small variation of return on equity capital and are calculated by
dividing the net profit after taxes and preference dividend by the total number of equity
shares. Thus,
E.P.S. = Net Profit after Tax Preference Dividend
No. of Equity Share
The earnings per share is a good measure of profitability and when compared with E.P.S of
similar other companies, it gives a view of the comparative earnings or not earning power
of the company has increased.
Return on Equity Capital:
In real sense, ordinary shareholders are the real owners of the company. Ordinary
shareholders are more interested in the profitability of a company and the performance of a
company should be judged on the basis of return on equity capital of the company. Return on
equity capital, which is the relationship between profits of a company and its equity capital
can be calculated as:
Return on Equity Capital = Net Profit after Tax Preference Dividend
Equity Share Capital (Paid-up)
A small variation of the above ratio is to calculate return on shareholders total equity, which
is equal to the paid-up equity share capital plus reserves and surplus plus
Share premium minus accumulated losses, if any.
Interpretation of the ratio is similar to the interpretation of return on shareholders investment
and higher the ratio, better it is.
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Current Ratio:
Year Current
Assets
Current
Liabilities
Ratio
2005-06 157245 61402 2.56
2006-07 221827 70263 3.16
2007-08 255488 79299 3.22
2008-09 309253 106886 2.89
2009-10 308157 107581 2.86
INTERPRETATION:
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The current is used to find out the ability of the business to pay off its short-term obligations.
The current ratio of 2:1 is reckoned as an ideal ratio. It means it is desirable to have Rs.2
worth of current assets for every rs.1 of current liability. It is due to the fact that the current
liabilities are fixed in nature, which are too paid in full. But the current assets may lose value
due to the unexpected market conditions which may result in unforeseen fall in the market
value of securities, inventories, bad debts etc. It is therefore necessary to keep more current
assets so that the company can meet its current obligations even if realisation from current
assets is reduced to half.
The ratio should be neither too high nor too low. A very high current ratio is also not
desirable since it means inefficient use of working capital. It may be due to piling up of
obsolete inventory, excessive cash, large amount of debtors due to inefficient collection
policy, etc. On the other hand, a low ratio indicates inability of the company to meet
adequately its short-term obligations.
The ratio should be interpreted as a qualitative measure and not a quantitative measure. The
adequacy of the current ratio is highly dependent on the composition of current assets. If a
large portion of the current assets comprise of slow and non-moving inventories, debtors
outstanding for a long term, the company may not be able to meet its short term obligations
even if the current ratio is higher than 2. There is also possibility of manipulation of current
ratio by postponing certain urgent payments or purchase of inventories, showing less
provision for bad and doubtful debts than required, etc.
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SUPER QUICK RATIO:
Super quick ratio establishes the relationship between the cash and the current liabilities.
Super Quick Ratio = Cash / Current Liabilities
YEAR CASH CURRENT
LIABILITIES
RATIO
2005-06 11000
0
61402 1.791473
2006-07 12204
5
70263 1.736974
2007-08 13584
5
79299 1.713073
2008-09 16271
6
106886 1.522332
2009-10 14459
5
107581 1.344057
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INTERPRETATION:
The super Quick Ratio is an indication that the firm is liquid and has ability to meet its
current liabilities in time. The above clearly indicates that the firm is highly liquid, as the
quick ratio for all the five years 1:1. This also indicated that the most of the liquid assets are
idle, which can be invested or invested elsewhere.
QUICK ASSETS:
YEAR CURRENT
ASSETS
CURRENT
LIABILITIES
RATIO
2005-06 157245 61402 2.56091
2006-07 221827 70263 3.157095
2007-08 255488 79299 3.221831
2008-09 309253 106886 2.893298
2009-10 308157 107581 2.864418
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INTERPRETATION:
It helps to assess the ability of the company to meet its obligation without waiting for much
time to liquidate its assets.
Ideal Quick / Liquid Ratio is 1:1
Thus, an organisation must have quick assets equivalent to 100% of its current liabilities.
However, the result of quick ratio should be interpreted carefully keeping in view the
composition of liquid assets.
DEBT-EQUITY RATIO:
YEAR LONG TERM
LIABILITIES
SHARE HOLDER
FUNDS
RATIO
2005-06 201195 449587 0.4475112006-07 244516 485968 0.503152
2007-08 271776 526386 0.516306
2008-09 345664 573701 0.602516
2009-10 377836 624375 0.605143
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INTERPRETATION:
It is very important ratio for the evaluation of the capital structure of the firm. It indicates a
margin of safety to the creditors. If the debt-equity is 1:2, it means that for every one rupee of
external liability, there is Rs.2 of shareholders funds i.e., creditors have a safety margin of
50%. Creditors normally prefer a lower debt equity ratio because it provides them greater
safety against possible loss in the case of liquidation of the organization. On the other hand,
owners may prefer a higher debt equity ratio if there are conditions favouring trading on
equity. Too high debt equity ratio implies that creditors may interfere in the affairs of the
business or put certain restrictive conditions on the operations of the business. There is the
risk of insolvency too. It is therefore, necessary to have a balanced composition of both the
owners equity and the outsider equity which depends on situation to situation. The ratio of
debt to equity will vary according to the nature of the business and variability of cash flows.
An Electrical Utility, with valuable cash flow will have a higher debt to equity ratio than a
Machine Tools, industry whose cash flows are far less stable.
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PROPRIETARY RATIO:
YEAR NET
WORTH
TOTAL
ASSETS
RATIO
2005-06 449587 717371 0.626715
2006-07 485968 807643 0.601711
2007-08 526386 893880 0.588878
2008-09 573701 1042514 0.550305
2009-10 624375 1124884 0.555057
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INTERPRETATION:
This ratio is quite significant for the creditors of business. With the help of this ratio, it can be
ascertained in what proportion owners have provided funds for investment in assets of
business. The higher the ratio, the more profitable it is for the creditors and the lesser is the
dependence on external funds. If the ratio is low, the creditors can be suspicious about the
repayment of their debt which indicates greater risk to the creditors. The higher the ratio, the
better it is. A ratio below 50% may be quite alarming for the creditors. The greater the
percentage financing provided by shareholders equity, the larger is the cushion of protection
for the firms creditors.
FIXED ASSETS RATIO:
YEAR FIXED
ASSETS
CAPITAL
EMPLOYED
RATIO
2005-06 230895 449587 0.513571
2006-07 256481 485968 0.527773
2007-08 260937 526386 0.495714
2008-09 329377 573701 0.574127
2009-10 347613 624375 0.556738
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INTERPRETATION:
This ratio is quite significant for the creditors of business. With the help of this ratio, it can be
ascertained in what proportion owners have provided funds for investment in assets of
business. The higher the ratio, the more profitable it is for the creditors and the lesser is the
dependence on external funds. If the ratio is low, the creditors can be suspicious about the
repayment of their debt which indicates greater risk to the creditors. The higher the ratio, the
better it is. A ratio below 50% may be quite alarming for the creditors. The greater the
percentage financing provided by shareholders equity, the larger is the cushion of protection
for the firms creditors.
RETURN ON INVESTMENTS:
YEAR PBIT CAPITAL
EMPLOYED
RATIO
2005-06 83719 523572 12.46
2006-07 10766
8
564331 13.89
2007-08 12053
0
588868 14.07
2008-09 11355
7
641834 14.29
2009-10 126944
695725 13.97
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INTERPRETATION:
The above ratio indicates that the profit of the company is in increase trend and the capital
employed is also increasing which helps in increasing the return on capital employed.
RETURN ON NET-WORTH:
YEAR PAT NET
WORTH
RATIO
2005-06 58202 449587 12.94566
2006-07 68647 485968 14.12583
2007-08 74148 526386 14.08624
2008-09 82013 573701 14.29543
2009-10 87282 624375 13.9791
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INTERPRETATION:
The higher the ratio the better it is. It indicates the return which the shareholders are earning
on their invested in the businesses. The investors of the company are earning high level of
return which is increased though slightly decreased in 2009-10.
RETURN ON TOTAL EMPLOYED:
YEAR PAT TOTAL ASSETS RATIO
2005-06 58202 717371 0.081132
2006-07 68647 807643 0.084997
2007-08 74148 893880 0.082951
2008-09 82013 1042514 0.078668
2009-10 87282 1124884 0.077592
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INTERPRETATION:
With the help of the above ratio we can inter that the return on total employed is decreased
from year to year which is bad and its reflects that the resources are effectively utilized.
RETURN ON TOTAL ASSETS:
YEAR PAT TOTAL
ASSETS
RATIO
2005-06 58202 717371 8.1132
2006-07 68647 807643 8.4997
2007-08 74148 893880 8.2951
2008-09 82013 1042514 7.8668
2009-10 87282 1124884 7.7592
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INTERPRETATION:
The higher the book value of a share, the more strong the business is assumed to be. The
book value should not be below the paid up value of one share.
EARNINGS PER SHARE:
YEAR PAT-PREFERENCE
DIVIDEND
NUMBER OF EQUITY
SHARES
EPS
2005-06 31877 8245464400 3.866
2006-07 38366 8245464400 4.653
2007-08 40384 8245464400 4.898
2008-09 47313 8245464400 5.738
2009-10 50674 8245464400 6.146
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INTERPRETATION:
The comparison of the EPS of the firm with that of the industry average and the earnings per
share of other firms helps in assessing the profitability of the firm on per share basis. It helps
in determining the market value of the share and the capacity of the company to pay dividend
to its equity shareholders.
WORKING CAPITAL TURNOVER RATIO:
YEAR CURRENTASSETS
CURRENTLIABILITIES
WORKINGCAPITAL
2005-06 157245 61402 95843
2006-07 221827 70263 151564
2007-08 255488 79299 176189
2008-09 309253 106886 202367
2009-10 308157 107581 200576
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INTERPRETATION:
The higher the Working Capital Ratio, the lower is the investment in the working capital and
greater is the contribution to sales. However, high working capital ratio also implies a risky
proportion for the firm and low net working in relation to the sales volume
RETURN ON EQUITY CAPITAL:
YEAR PAT-PREFERENCE
DIVIDEND
NUMBER OF EQUITY
SHARES
EPS
2005-06 31877 8245464400 3.866
2006-07 38366 8245464400 4.653
2007-08 40384 8245464400 4.898
2008-09 47313 8245464400 5.738
2009-10 50674 8245464400 6.146
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SWOT ANALYSIS OF NTPC
STRENGTHS:
NTPC is diversified company manufacturing electricity.
The company is having its own power plant, thus reducing dependence on RSEB.
Computerize plants having less dependence on work force.
Quality improvement program at anta plant improves the quality of product.
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WEAKNESSES:
Wet process of cement production consumes high power cost.
Budgetary control is not implicated properly. Actual performance is very far from
budgeted estimates.
The plant is not gas based, thus manufacturing costs are high.
NTPC have different joint ventures and having a plant in different part of the country.
NTPC produces power with hydel energy, coal energy, as well as gas power plant.
OPPORTUNITIES:
Govt. infrastructure efforts provide good fortune for power industry. .
NTPC is emerging power plant industry in country.
THREATS:
Number of growing competitors.
Overall growth of Indian economy is very less comparison to other developing
countries...
CONCLUSION
The present study entitled Techniques of Ratio Analysis in NTPC Ltd. Is taken up by me in
partial fulfilment of the award of Degree of Master of Business Administration. During my
study, based on the data collected and presented the earlier chapter the following observations
were made.
In past five years the company equity capital is 82455 million it is notchanged.
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In past five years current ratio has decreased. During 2005-06 it has 2.56, but
in 2007-08 it has increased to 3.22, during 2009-10 it has decreased to 2.86.
It is observed that the total assets are almost increased from year to year.
Over all the company current position is good.
In past year 2009-10 the return on capital employed is 13.97, but in past four
years it has increased twice.
SUGGESTIONS:
Company should maintain adequate liquidity.
To improve the liquidity position of the company it is suggested that the
company shall finance more in current assets or pay off pert of current
liabilities from long term funds.
Company should take the measure to promote its sales, which improves the
profit of the firm
It should concentrate on long term funds. If long term funds are utilized for
working capital problem will not raise in future.
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Company should maintain adequate reserves.
It should try to raise its owner equity to see that the interest burden (because of
debt capital) be reduced.
It should control the operating costs further and should also see that the cost of
production will be low.
A wise policy will be taken by the company to finance fixed assets by raising
long term funds.
Company should take some measure to increase the return on investment. It
should try to utilize the funds to the maximum extent.
Company should try to utilize its assets to the fullest extent.
BIBILOGRAPHY:
Khan. MY, and Jain. PK, Financial Management, Tata McGraw Hill.
Sharma. R.k, and Shashi K. Gupta, Management Accounting, Sultan Chand and Sons,
New Delhi.
Dr. Sakshi Vasudeva, Accounting for Business Managers, Himalaya Publishing
Limited, Mumbai.
Trivedi R.P and Manoj Trivedi, Management Accounting, Pankaj Publishing Limited,
Hyderabad.
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Pandey I.M, Financial Management, Vikas Publishing House, Mumbai.