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A SUMMER TRAINING REPORT
ON
FINANCIAL STATEMENT
ANALYSIS
Submitted towards partial fulfillment for Award
Of the Degree of
MASTER OF BUSINESS ADMINISTRATION(FINANCE MANAGEMENT)
(SESSION-2009-10)
Submitted to: - Submitted by:-
Institute of Economics & Finance ABHINOV SINGHB.U., Jhansi MBA (FM) 3rd SEM.
Roll No = 01
INSTITUTE OF ECONOMICS AND FINANCEBUNDELKHAND UNIVERSITY,
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JHANSI (UP)
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PREFACE
Every management student has to undergo a practical
training in order to get an insight of the real life situation that
how the organization actually functions in the competitive
business environment . As a management student has only a
theoretical knowledge, which he / she get from the institution.
But in practice he don`t know how to apply this theoretical
knowledge can be practically applied and gets more benefits.
So the theoretical knowledge thus gained by the student
from the institution plays a major role in understanding various
matters and terms which are usually used in the organization.
With this objective in mind, I did my summer internshipfrom BHEL, Jhansi (U.P.), for the partial fulfillment of Master
Degree ofBusiness Administration (Financial Management).
The duration was six weeks.
During this period , I started my rotation, which is a part of
my training, I visited various department during this period. I
started my project on FINANCIAL STATEMENT
ANALYSIS : RATIO ANALYSIS of BHEL in order to
understand the whole procedure or the different types of
department as per their grade and entitlement.
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ACKNOWLEDGEMENT
I am highly indebted to all the executives of BHEL ,
Jhansi who have given me the their precious time and have
given their valuable guidance and important role in making me
able to do this vocational training and without whose help my
effort would not have taken the present from.
I am also thankful for the great support that Mrs. Seema S.
Rawal Dy. Manager (HR), who has given me opportunity to get
training in BHEL.
I have no word to express my gratefulness to my project
co-ordinatorMr. JANMEJAY SHARMA Sir for his inspiring
guidance, valuable help and angelic support for the completion
of my project on FINANCIAL STATEMENT ANALYSIS:
RATIO ANALYSIS of BHEL, Jhansi Unit.
I am also thankful to Mr. S.K. Bhattacharya , Mr. J.K.
VERMA , Mr. Sanjay Kumar , Mr. Bhaskar Chaturbedi
for their guidance and kind cooperation in providing us the
necessary facilities and suggestions.
I would like to extend my gratitude to the
management and staff of BHEL, Jhansi for their co-operation
during my training.
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DECLARATION
This is my original work, This project work has been conducted for
partial fulfillment of the degree of MASTER OF BUSSINESS
ADMNISTRATION (MBA) in BUNDELKHAND UNIVERSITY,
(INSTITUTE OF ECONOMICS AND FINANCE ), JHANSI.
This is completed with the help of managing staff of the BHARAT
HEAVY ELECTRICALS LIMITED (B.H.E.L.), JHANSI.
ABHINOV SINGH
MBA (FM) 3rdsem
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CONTENTS
RELEVANCE OF THE STUDY
RESEARCH METHODOLOGY
CHAPTER 1 : CORPORATE PROFILE OF
BHEL
INTRODUCTION
MANUFACTURING UNITS
OBJECTIVES
SWOT ANALYSIS
CHAPTER 2 : BHEL , JHANSI UNITS
SECTIONS OF BHEL
PRODUCT PROFILE OF BHEL, JHANSI
CUSTOMERS
COMPETITORS
FINANCIAL DEPARTMENTS
CHAPTER 3 : FINANCIAL STATEMENT
ANALYSIS
RATIO ANALYSIS INTERPRETATION
GUIDELINES OR PRECUATIONS
USE AND SIGNIFICANCE
LIMITATIONS
CLASSIFICATION
LIQUIDITY RATIO
LEVERAGE RATIO
ACTIVITY RATIO
PROFITABILITY RATIO
ANALYSIS AND INTERPRETATION
CHAPTER 4 :CONCLUSION
BHEL AT A GLANCE
CHAPTER 5 :APPENDIX
OPERATIONG RESULTS
BALANCE SHEET
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RELEVANCE OF THE STUDY
`Financial Analysis` also know as analysis and interpretation
of financial statement refers to the process of determining financial
strengths and weaknesses of the firm by establishing strategic relation
between the items of the balance sheet , profit and loss account and
other operative data . Analyzing financial statement, according to
Metcalf and Titard, is the process of evaluating the relationship
between component parts of the financial statement obtain a better
understanding of a firms position and performance.
The purpose of financial analysis is to diagnose the information
contained in financial statement so as to judge the profitability and
financial soundness of the firm. Just like doctor examines his patient
by recording his body temperature , blood pressure , etc . before
making his conclusion regarding the illness and before giving his
treatment , a financial analysis analyses the financial statements
with various tools of analysis before commenting upon the financial
health or weakness of an enterprise. The analysis and interpretation of
financial statement is essential to bring out the mystery behind the figures
in financial statements.
There are various devices of financial analysis. Here, for the purpose
of our project, we have concentrated on mainly one method of financial
analysis; i.e. RATIO ANALYSIS. We shall further see the effect and impact
of ratio analysis in the Jhansi unit of Bharat Heavy Electronic Limited
(BHEL).
The ratio analysis is one of the most powerful tools of financial
analysis. It is the process of establishing and interpreting various ratios
(quantitative relationship between figures and groups of figures). It is
with the help of ratio that the financial statement can be analysis more
clearly and decisions made from such analysis. This will help in
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predicting the general performance and feasibility of the company BHEL,
Jhansi unit.
RESEARCH METHODOLOGY
OBJECTIVE OF THE STUDY:
To know the ability of firm to meet its current obligation.
To measure the efficiency and effectiveness with which a firm
manages its resources and its assets.
PROCESS OF RESEARCH:
The proposed research process includes collection of data, analysis
of data, interpretation of data and deriving conclusion.
The collection involves secondary data collected from BHEL, Jhansiunit. The secondary data consists of the company records
(annual reports) ,internet as well as the book on the subjects by
different authors for the study on the particular issue.
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CHAPTER. 1
CORPORATE
PROFILE
9
SOURCES OF DATA
SECONDARY DATA(Annual reports ,books, internet)
PRIMARY DATA( Not used)
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OF
BHEL
INTRODUCTION TO THE COMPANY
BHEL is the largest engineering and manufacturing enterprise in India in the
energy/infrastructure sector today. BHEL was established more than 40 years
ago when its first plant was set up in Bhopal ushering in the indigenous Heavy
Electrical Equipment industry in India, a dream that has been more than
realized with a well-recognized track record of performance.
BHEL caters to core sectors of the Indian Economy viz., Power Generation &
transmission, Industry, Transportation, Telecommunication, Renewable
Energy, Defense, etc. The wide network of BHELs 14 manufacturing
divisions, four Power Sector regional centers, over 100 project sites, eight
service centers and 18 regional offices, enables the company to promptly serve
its customers and provide them with suitable products, systems and services-
efficiently and at competitive prices.
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POWER GENERATION
Power generation sector comprises thermal, gas, hydro, and nuclear
power plant business. As on 31.3.2002, BHEL supplied sets account for
nearly 67,232 MW or 64 % of the total installed capacity of 1, 04,917
MW in the country, as against Nil till 1969-70.
INDUSTRIES
BHEL is a major contributor of equipment and systems to industries,
cement, sugar, fertilizer, refineries, petrochemicals, paper, oil and gas,
metallurgical and other process industries. The range of systems &
equipment supplied includes: captive power plants, co-generation plants,
DG power plants, industrial steam turbines, industrial boilers and
auxiliaries, waste heat recovery boilers, gas turbines, heat exchangers and
pressure vessels, centrifugal compressors, electrical machines, pumps,
valves, seamless steel tubes, electrostatic precipitators, fabric filters,
reactors, fluidized bed combustion boilers, chemical recovery boilers and
process controls.
TELECOMMUNICATION
BHEL also caters to Telecommunication Sector by way of small, medium
and large switching systems.
RENEWABLE ENERGY
Technologies that can be offered by BHEL for exploiting non-
conventional and renewable sources of energy include: wind electric
generators, solar photovoltaic systems, solar heating systems, solar
lanterns and battery-powered road vehicles.
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OIL AND GAS
BHELs products range includes Deep Drilling Oil Rigs, Mobile Rigs,
Work Over Rigs, Well Heads and X-Mas Trees, Choke and Kill
Manifolds, Full Bore Gate Valves, Mudline Suspension System, Casing
Support system Sub-Sea Well Heads, Block valves, Seamless pipes,
Motors, Compressor, Heat Exchangers etc.
INTERNATIONAL OPERATIONS
BHEL is one of the largest exporters of engineering products & services
from India, ranking among the major power plant equipment suppliers
in the world.
VISION, MISSION AND VALUES OF BHEL
VISION
A World-Class Engineering Enterprise Committed to Enhancing
Stakeholder Value.
MISSION
To be an Indian Multinational Engineering Enterprise providing
Total Business Solutions through Quality Products, Systems and
Services in the fields of Energy, Industry, Transportation,
Infrastructure and other potential areas.
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VALUES
Zeal to Excel and Zest for Change.
Integrity and Fairness in all Matters.
Respect for Dignity and Potential of Individuals.
Strict Adherence to Commitments.
Ensure Speed of Response.
Foster Learning, Creativity and Teamworks
Loyalty and Pride in the Company
MANUFACTURING UNIT
FIRST GENERATION UNITS
Bhopal : Heavy Electrical Plant.
Haridwar : Heavy Electrical Equipment Plant.Hyderabad : Heavy Electrical Power Equipment Plant.
SECOND GENERATION UNITS
Tiruchy : High Pressure Boiler Plant.
Jhansi : Transformer and Locomotive Plant.
Haridwar : Central Foundry and Forge Plant.
Tiruchy : Seamless Steel Tube Plant.
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UNITS THROUGH ACQUISTION & MERGER
Bangalore : Electronics Division,
Electro Porcelain Division.
NEW MANUFACTURING UNITS
Ranipet : Boiler Auxiliaries Plant.
Jagdish : Insulator Plant.
Govindwal : Industrial Valve Plant.
Rudrapur : Component and Fabrication Plant.
Bangalore : Energy Systems Division
BHEL is growing concern to meet the changing needs of the nation
has taken it beyond power into the total gamut of energy, industry and
transportation BHEL is able to offer a service in each of this fields. It;s
manufacturing capability is supported by a corporate R&D division at
Hyderabad works closely with the research and development cells at
various units and Welding Research Institute at Tiruchinapalli.BHEL OBJECTIVES
A dynamic organization is one which keeps its aim and adopts itself
to the changing environment .So here it is same with this concern i.e.
BHEL.
BHEL objectives have been redefined in the corporate plant for the
90`s. The objectives of BHEL are discussed below:-
BUSINESS MISSION
To maintain a leading position as a supplies of quality equipment
system and services in the conversion, transmission, utilization and
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conservation or energy for application in the areas or electric power,
transportation , oil and gas exploration and industries.
Utilization Company`s and resources to expand their business in the
allied and other priority sectors of the economy like defense,
communication and electronics.
GROWTH
To ensure a steady growth in the competitive era. In this
competitive market the company has to grow itself so as to make a
distinct entity from its competitors, as well as to explore itself
internationally.
PROFITABILITY
To provide a reasonable and adequate return on capital employed,
primarily through improvement in professional efficiency, capacity
utilization. High productivity generate adequate internal resources to
finance companys growth.
FOCUS
To build a high degree of customer confidence by providing
increased value for his money through international standards of the
product quality performance and superior customer service.
PEOPLE ORIENTATION
To enable each employee to achieve his potential, improve his
capabilities, perceive his role and responsibilities, participate and
contribute to the growth and success of the company.
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SWOT ANALYSIS OF BHEL
STRENGTHS
The company has 180 products under 30 major product groups
that caters the need of the core sectors like: power, industry,
transmission, transportation, defense, telecommunication and oil
business.
It has an ability to acquire modern technology and make it
suitable to the Indian conditions, which has been an exceptional
strength for the company.
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WEAKNESSES
PSU status is a big weakness for BHEL as it is subject to its rules
and regulation and is forced to carry a huge amount of labour
force, which is not able to retrench.
The company offers very stringent credit facilities to the customers
and this is a weakness when it is compared in the face of risingcompetition.
The company is vertically integrated, which could have been
avoided by outsourcing its components for power generation and
transmission. This could have reduced cost.
OPPORTUNITIES
The power sector reforms are expected to pick up in the near future
in India, which would directly benefit BHEL.
Increase in defense budget will increase the top line for the
company.
THREATS
Recently, the government has permitted the import of second hand
capital goods that are 10 year old without the need for license. This
move will definitely increase competitive pressure on BHEL.
CHAPTER. 2
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BHEL
JHANSI
UNIT
BHARAT HEAVY ELECTRICALS LIMITED:
JHANSI (UNIT)
A Brief Introduction
By the end of 5th five-year plan, it was envisaged by the
planning commission that the demand for power transformer would rise
in the coming years. Anticipating the countrys requirement BHEL
decided to set up a new plant, which would manufacture power and other
types of transformers in addition to the capacity available in BHEL
Bhopal. The Bhopal plant was engaged in manufacturing transformers of
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large ratings and Jhansi unit would concentrate on power transformer up
to 50 MVA, 132 KV class and other transformers like Instrument
Transformer s, Traction transformers for railway etc.
This unit of Jhansi was established around 14 km from the city on
the N.H. No 26 on Jhansi Lalitpur road. It is called second-generation
plant of BHEL set up in 1974 at an estimated cost of Rs 16.22 corers
inclusive of Rs 2.1 cores for township. Its foundation was laid by late
Mrs. Indira Gandhi the prime minister on 9th Jan. 1974. The commercial
production of the unit began in 1976-77 with an output of Rs 53 lacks
since then there has been no looking back for BHEL Jhansi.
The plant of BHEL is equipped with most modern manufacturing
processing and testing facilities for the manufacture of power, special
transformer and instrument transformer, Diesel shunting locomotives and
AC/DC locomotives. The layout of the plant is well streamlined to enable
smooth material flow from the raw material stages to the finished goods.
All the feeder bays have been laid perpendicular to the main assembly
bay and in each feeder bay raw material smoothly gets converted to sub
assemblies, which after inspection are sent to main assembly bay.
The raw material that are produced for manufacture are used only
after thorough material testing in the testing lab and with strict quality
checks at various stages of productions. This unit of BHEL is basically
engaged in the production and manufacturing of various types of
transformers and capacities with the growing competition in the
transformer section, in 1985-86 it under took the re-powering of DESL,
but it took the complete year for the manufacturing to begin. In 1987-88,
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BHEL has progressed a step further in under taking the production of AC
locomotives, and subsequently it manufacturing AC/DC locomotives
also.
SECTIONS OF BHEL JHANSI UNIT
BHEL has many departments, while production and administrative
departments are separate.
Broadly speaking BHEL has two-production categories-
1. Transformer section.
2. Loco section.
THE PRODUCT PROFILE OF BHEL
JHANSI UNIT
PRODUCTS RATINGS
1. Power Transformer up to 220KV Class 250
MVA
2. Special Transformer up to 110KV
3. ESP Transformer 100KV, 1400MA
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4. Fright Loco Transformer 3900 KVA to 5400 KVA
& 6500 KVA(3 phase)
5.ACEMU Transformer up to 1000 KVA to 25KV
(1 phase), 1385(3 phase)
6.Dry type Transformer up to 3150KVA
7.Bus Duct up to 15.75KV generating
Voltage
8.Instrument Transformer VT & CT up to 220KV
Class
9.Diesel Electric Locomotive up to 2600 HP 10.AC/
DC
10.Locomotive 5000HP
11.Over Head Equipment cum Test car
CUSTOMERS OF BHEL
DOMESTIC POTENTIALCUSTOMERS OF BHEL
NTPC
PGCIL
RAILWAY BOARD
TATA
HINDALCO
BALCO
NALCO21
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NHPC
AP TRANA COMPANY
UPPCL
UPCL
INTERNATIONAL CUSTOMERS OF BHEL
PPC GREECE
TNB MALAYSIA
PDO OMAN
BAKU STEEL CO. AZERBAIJAN
TCO KAZAKISTAN
NEPCO JORDON
GECOL LIBYA
BANGLADESH POWER DEVELOPMENT BOARD
SCHENIDER AUSTRALIA
NCC SAUDI ARABIA
REPUBLIC OF IRAQ COMMISSION OF
ELECTRICITY
CEACYPXIS
COMPETITORS OF BHEL
(A) IN POWER TRANSFORMERS
C.G.L.MUMBAI
ALSTON, NAINI ,ALLAHABAD
ABB , VARODA
EMCO , MUMBAI
(B) DRY TYPE22
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K.E.C. VIJAY
C.G.L. VOLT AMP
(C) BUS DUST
CONTROLS AND SWITCH GEAR POWER GEAR
NARMADA SWITCH GEAR
(D) INSTRUMENT TRANSFORMER
C.G.L.
TELK
ALSTON
ABB
FINANCE DEPARTMENT IN BHEL
JHANSI
A sound financial management is the crux of the efficient management of
a business enterprise and financial management on scientific and sound
lines is a prime consideration of BHEL. The Finance/Accounts
department of the company controls all the financial operation. That is
directed at improving profitability and internal resource generation
through optional utilization of men, material, tools and money.
According to the various function the Finance/Account Department is
divided into following section:-
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Price Store Ledger (PSL).
Supply Bills.
Cash.
Pay Section.
Books & Budget.
Cost Section.
Sales.
Miscellaneous & Revenue.
Internal Audit.
Provident Fund.
PRICE STORE LEDGER:-
PSL section is entrusted with the job of material pricing determination of
material consumption. PSL are used for the material accounting as wellas their financial accounting. The documents involved are:
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SRV - Store Receipt Voucher.
MIV - Material Issue Voucher.
SRN - Store Return Note.
MTV - Material Transformer Voucher.
RCDV - Receipt Cum Dispatch Voucher.
PASSING OF BILLS:-
The bills passing process starts after the account section gets the
purchase order, SRV`s and bills from suppliers. The accountant`s section
then makes payment. Terms of payment are of three kinds:
10% in advance payment.
100% after receipt and acceptance.
Partial advance and the remaining after receipt and
acceptance.
PAY SECTION:-
It is assigned the job of payment of salaries and other personal.
Payment to employees it looks after provident fund, gratuity and bonuses,
insurance facilities extend to employees.
Employees leave encashment official travelling reimbursement and
this section deals other welfare expenses. It is entrusted with clearance of
medical claims.
CASH:-
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This section is responsible for banking of all money worth received
by the company from customer and disbursement of all authorized
payment on behalf of the company to suppliers, contractors in the form of
cheques, drafts, postal orders etc.
It is also concerned with the payment of salaries, wages and other
personal payment o employees. Cash section prepare these statements for
management information.
Daily Cash flow > Daily collection of sales.
Weekly Cash flow > Out flow During week.
Statement of pending bills of cash section status of margin money.
Monthly Cash inflow forecast for 3 months.
Operating result statement.
Statement of outstanding letter of credit & bank guarantee.
Daily bank transfer statement.
Bank reconciliation statement is also prepared. BHEL has centralized
Cash Credit System.
BOOKS & BUDGET:-
Journal ledger is the consolidated list of journal entries. As soon
as the journal voucher id received, the journal ledger is prepared. In the
journal ledger, receipt and expenditure both are recorded. This section
prepares section wise and monthly Trial Balance. After the preparation of
journal ledger, trail balance, p & l account and the balance sheet are
prepared yearly. Balance sheet is prepared in accordance with the
company`s act.
\ Two types of audit are done:-
Internal audit.
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Government.
BUDGET:
Budget is the target setting for operation.
Two types of budgets are prepared-(A)Revenue budget: it is consist of consolidated production
programmed & related expenses to carry out the program.
(B) Capital budget: it includes the fixed assets
Preparation of budget : it is done at three levels:
o Internal level: Each department sent the information about the
budgeted expense provided to department. It is necessary for
control.
o Corporate level: budget ofBHEL unit is sent to the corporate
office.
o Government level: Budget ofBHEL is also sent to government
office.
Management Information Report:
Three types of information report are generated:
o Internal for the unit
o For the corporate office
o For government
Every monthly information is generated regarding allocation of fund on
various aspects for each department and is sent to every department.
Information is generated mainly for control purpose. Other information
is:
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Cash flow
Inventory of finished goods
Inventory level
(Non moving & slow moving items)
CASH SECTIO:
This section is responsible for accounting and reporting of
costs. It determines the direct labour rates, engineering rates and
overhead recovery factors of manufacturing, engineering,
commercial and administration for cost estimation. The cost
accounting is done to record and collect cost for work order and
product level information. It prepares material, labour, overhead
and cost consumption statement. It furnishes cost report to
management about:
Profitability Product wise, Order wise
Variance Estimated and Actual cost
Performance Efficiency and Operating result
SALES SECTION:
The accounting of sales is done in this section. The activity of
this section starts when the commercial department issues a work
order. Work order part 2 (financial) summarize the financial terms
of the contracts. It contains the information like the name of
customer & consignee, description of goods to be produced and
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sold, sales tax, excise duty, liquidity damages, bank guarantee,
freight etc. with the part 2 W.O. details. As part from that
terms and conditions embodied in W.O. part 2 as regards adjustment of
advances, deferred debts and calculation of PVC. Excise duty and Sales
Tax must also be complies with it. Sales section submits the bills to the
customers as desired by commercial either direct or through Financial
such as banks.
This section does the necessary accounting for the bills raised:
money collected from customers in the form of advances or sale
proceeds.
MISCELLANEOUS AND REVENUE:
Miscellaneous wing of this section deals with the payment of
advance to employees going on office tour, payment to transporters,
welfare activities, security services, repair and maintenance, daily
wages, furniture, departmental and other petty expenses.
The revenue wing of this section with recovery of rent, electricity
and water charge for other facilities from the salary of the employees.
INTERNAL AUDIT:
BHEL is having its own team of internal auditors, who to
unearth the discrepancies in accounting, check periodically the
books of accounts as well as schedules forming part of accounts.
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EXPORT INCENTIVES: SALES TAX AND INCOME
TAX:
This section deals with export procedures of finished goods.
It is entrusted to get licenses for exports. It is also responsible for
claim of duty drawback and export incentives. This section also
looks the import of raw material that forms par to finished goods.
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CHAPTER. 3
FINANCIAL
STATEMENTANALYSIS
OF
BHEL, JHANSI
RATIO ANALYSIS31
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RATIO ANALYSIS
A ratio is a simple arithmetical expression of the relationship of the onenumber to another. It may be defined as the indicated quotient of two
mathematical expressions. According to Kohler, "a ratio is the relation of
the amount, a to another b, expressed as the ratio of a to b; a: b (a is to b);
or as a simple fraction, integer, decimal, fraction or percentage."
Ratio analysis is a technique of analysis and interpretation of
financial statements. It is the process of establishing and interpreting
various ratios for helping in making certain decisions. However, ratio
analysis not an end in itself. It is only a means of better understanding of
financial strengths weaknesses of a firm. A calculation of mere ratios
does not serve any purpose, unless several appropriate ratios are analyzed
and interpreted. There are a number of ratios which can be calculated
from the information given in the financial statements, but the analysts
has to select the appropriate data and calculate only a few appropriate
ratios from the same keeping in mind in objective of analysis.
The following are the four steps involved in the ratio analysis;
1. Selection of relevant data from the financial statements
depending upon the objective of the analysis.
2. Calculation of appropriate ratios from the above data.
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3. Comparison of the calculated ratios with the ratios of the same firm in
the past, or the ratios developed from projected financial statements or
the ratios of some other firms or the comparison with ratios of the
industry to which the firm belongs.
4. Interpretation of the ratios.
INTERPRETATION OF THE RATIOS
The interpretation of ratios is an important factor. Though calculation of
ratio is also important but it is only a clerical task where as interpretation
need skill, intelligence and foresightedness. The inherent limitation of
ratio analysis should be kept in mind while interpreting them. The impact
of factors such price level changes, change in accounting policies,
window dressing etc, should also be kept in mind when attempting to
interpret ratios.
A single ratio is itself does not convey much of sense. To make ratio
useful, they have to be further interpreted. For example, say, the current
ratio of 3:1 does not convey any sense unless it is interpreted and
conclusion is drawn from it regarding the financial condition of the firm
as to whether it is very strong, good, questionable or poor. The
interpretation of the ratios can be made in following ways;SINGLE ABSOLUTE RATIOS
Generally speaking one cannot draw any meaningful conclusion when a
single ratio is considered in isolation. But single ratio may be studied in
relation to certain rules of thumb which are based upon well proven
conventions as for example 2:1 is considered to be a good ratio for
current assets to current liabilities.
GROUP OF RATIOS
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Ratios may be interpreted by calculating a group of related ratios. A
single ratio supported by other related additional ratios becomes more
understandable and meaningful. For example, the ratio of current assets
to current liabilities may be supported by the ratio by liquid assets to
liquid liabilities to draw more dependable conclusions.
HISTORICAL COMPARISON
One of the easiest and most popular ways of evaluating the performance
of the firm is to compare its present ratios with the past ratios over a
period of time, it gives an indication of the direction of change and
reflects whether the firms performance and financial position has
improved, deteriorated or remained constant over a period of time. But
while interpreting ratios from comparison overtime, one has to be careful
about changes, if any, in the firms policies and accounting procedure.
PROJECTED RATIOSRatios can be calculated for future standards based upon the projected or
Performa financial statements. These future ratios may be taken as
standard for comparison and the ratios calculated on actual financial
statements can be compared with the standards ratios to find out variance,
if any. Such variances help in interpreting and taking corrective action for
improvement in future.
INTER-FIRM COMPARISON
Ratios of one firm can also be compared with the ratios of some selected
firms in the same industry at the same point of time. This kind of
comparison helps in evaluating relative financial position and
performance of the firm. But while making use of such comparison one
has to be very careful regarding the different accounting methods,
policies and procedures adopted by different firms.
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GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS
The calculations of ratios may not be difficult task but their use is not
easy. The information on which these are based, the constraints of
financial statements, objective for using them, the caliber of analyst, etc
are important factors which influence the use of ratios. Following
guidelines or factors may be kept in mind while interpreting various
ratios;
ACCURACY OF FINANCIAL STATEMENTS
The ratios are calculated from the data available in financial statements.
The reliability of ratios is linked to the accuracy of information in these
statements. Before calculating ratios one should see whether proper
concepts and conventions have been used for preparing financial of not.
These statements should also be properly audited by competent auditors.
The precautions will establish the reliability of data given in financialstatements.
OBJECTIVE OR PURPOSE OF ANALYSIS
The type of ratios to be calculated will depend on the purpose for which
these are required. If the purpose is to study current financial position
then ratios relating to current assets and current liabilities will be studies.
The purpose of user is also important for the analysis of ratios. A
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creditor, a banker, an investor, a shareholder, all has different objects for
studying ratios. The purpose or object for which ratios are required to be
studied should always be kept in mind for studying various ratios.
Different objects may require the study of different ratios.
SELECTION OF RATIOS
Another precaution in ratio analysis is the proper selection of appropriate
ratios. The ratio should match the purpose for which these are required.
Calculation of large number of ratios without determining their need in
the present context may confuse the things instead of solving them. Only
those ratios should be selected which can throw proper light on the matter
to be discussed.
USE OF STANDARDS
The ratios will give an indication of financial position only whendiscussed with reference to certain standards. Unless otherwise these
ratios are compared with certain standards one will not be able to reach at
conclusion.
The standards may be rule of thumb as in case of current ratio(2:1),
and acid-test ratio (1:1), may be industry standards, may be budgets or
projects ratios, etc. the comparison of calculated ratios with the standards
will help the analysts in forming his opinion about financial situation of
the concern.
CALIBER OF THE ANALYSTS
The ratios are only the tools of analysis and their interpretation will
depend on the caliber and competence of the analysts. He should be
familiar with various financial statements and the significance of
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changes, etc. A wrong interpretation may create havoc for the concern
since wrong conclusion may lead to wrong decisions. The utility of the
ratios is linked with the expertise of the analysts.
RATIOS PROVIDE ONLY A BASE
The ratios are only guidelines for the analysts; he should not base his
decisions entirely on them. He should study any other relevant
information, situation in the concern, general economic environment, etc.
before reaching final conclusion. The study of ratios in isolation may not
always prove useful. A businessman will not afford a single wrong
decision because it may have far reaching consequences. The
interpretator should use the ratios and may try to solicit any other relevant
information which helps in reaching a correct decision.
USE AND SIGNIFICANCE OF RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of financial analysis.
It is used as a device to analyze and interpret the financial health of
enterprise. The use of ratios is not confined to financial managers only.
As discussed earlier, there are different parties interested in the ratio
analysis for knowing the financial position of a firm for different
purposes. The supplier of goods on credit, banks, financial institutions,
investors, shareholders and management all make use of ratio analysis as
a tool in evaluating the financial position or performance of a firm for
granting credit, providing loans or making investment in the firm. With
the use of financial analysis one can measure the financial condition of a
firm and can point out whether the condition is strong, good, questionable
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or poor. The conclusion can also be drawn as to whether the performance
of the firm is improving or deteriorating. Thus, ratios have wide
applications and are of immense use today.
MANAGERIAL USES OF RATIOS ANALYSIS
HELPS IN DECISION MAKING
Financial statements are prepares primarily for decision making. But the
information provided in financial statements in not an end in itself and no
meaningful conclusions can be drawn from these statements alone. Ratio
analysis helps in making decision from the information provided in these
financial statements.
HELPS 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 the number of
years work as a guide for the future. Meaningful conclusion can be drawn
for future for these ratios.
HELPS IN COMMUNICATING
The financial strengths and weaknesses of a firm are communicated in a
more easy and understandable manner by the use of ratios. The
information contained in the financial statement is conveyed in a
meaningful manner to the one for whom it is meant. Thus, it helps to
enhance the value of the financial statement.
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HELPS IN CO-ORDINATION
Ratios even help in co-ordination which is of utmost importance in
effective business management. Better communication of efficiency and
weaknesses of an enterprise result in better co- ordination in the
enterprise.
HELPS IN CONTROL
Ratio analysis helps in making effective control of the business. Standard
ratios can be based upon Performa 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. The
weaknesses, or otherwise, if any, come to the knowledge of the
management which helps in effective control of the business.
UTILITY TO THE SHAREHOLDERS
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 the dividend
and interest. For the first purpose he will try to assess the value of fixed
assets and the loans raised against them. The investor will feel satisfiedonly if the concern has sufficient amount of assets. Long term solvency
ratios will help him assessing financial position of the concern.
Profitability ratios, on the other hand, will be useful to determine
profitability position. Ratio analysis will be useful to the investors in
making up his mind whether present financial position of the concern
warrants further investment or not.
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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 pays short-term
creditors out of its current assets. If the 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.
UTILITY TO EMPLOYEES
The employees are also interested in the financial position of the concern
especially profitability. The wage increases and amount of fringe benefits
are related to the volume of profits earned by the concern. The employees
make use of information available in financial statements. Various
profitability ratios relating to gross profit, operating profit, net profit, etc.
enable employees to put forward their viewpoint for the increase of
wages and other benefits.
UTILITY TO GOVERNMENT
The government is interested to know the overall strength of the industry.
Various financial statements published by industrial units are used to
calculate ratios for determining short-term, long-term and overall
financial position of the concerns. Profitability indexes can also be
prepared with the help of ratios. Government may base its future policies
on the bases of industrial information available from various units. The
ratios may be used as indicators of overall strength of public as well as
private sector. In the absence of the reliable economic information,
governmental plans and policies may not prove successful.
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LIMITATIONS OF RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of financial
management. Though ratios are simple to calculate and easy to
understand, they suffer from some serious limitations.
LIMITED USE OF A SINGLE RATIO
A single ratio, usually, does not convey much of a sense. To make a
better interpretation a number of ratios to be calculated which is likely to
confuse the analyst than help him in making any meaningful conclusion.
LACK OF ADEQUATE STANDARDS
There are no well accepted standards or rules of thumb for all ratios
which can be accepted as norms. It renders interpretation of the ratios
difficult.
CHANGE IN ACCOUNTING PROCEDURE
Change in accounting procedure by a firm often makes ratio analysis
misleading, e.g., a change in the valuation of methods of inventories,
from FIFO to LIFO increases the cost of sales and reduces considerably
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the value of closing stocks which makes turnover ratio to be lucrative and
an unfavorable gross profit ratio.
WINDOW DRESSING
Financial statements can easily be window dressed to present a better
picture of its financial and profitability position to outsiders. Hence, one
has o be very careful in making a decision from ratios calculated from
such financial statements. But it may be very difficult for an outsider to
know about the window dressing made by a firm.
PERSONAL BIAS
Ratios are only a means of financial analysis and not an end in itself.
Ratios have to be interpreted and different people may interpret the same
ratio in different way.
UNCOMEPARABLE
Not only the industries differ in their nature but also the firms of similar
business widely differ in their size and accounting procedures, etc. It
makes of ratios difficult and misleading. Moreover, comparisons are
made difficult due to differences in definitions of various financial terms
used in the ratio analysis.
ABSOLUTE FIGURES DISTORTIVE
Ratios devoid of absolute figures may prove distortive as ratio analysis is
primarily a quantitative analysis and not a qualitative analysis.
PRICE LEVEL CHANGES
While making ratio analysis, no consideration is made to the changes in
price level and this makes the interpretation of ratios invalid.
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CLASSIFICATION OF RATIOS
43
RATIOS
PROFITABI
LITY
RATIO OR
INCOME
RATIOS
LIQUIDITY
RATIO
ACTIVITY
RATIO OR
TURNOVRE
RATIO
LEVERAGE
OR CAPITAL
STRUCTURE
RATIO
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A. WORKING CAPITAL RATIO OR
CURRENT RATIO =
CURRENTASSETS
CURRENT LIABILITY
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B. ASID TEST RATIO OR
QUICK RATIO =
LIQUID ASSETS
CURRENT LIABILITY
A. DEBT-EQUITY RATIO = DEBT
EQUITY
B. PROPRIETARY RATIO =EQUITY
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(DEBT+EQUITY
)
C. DEBT TO TOTAL FUND RATIO =
DEBT
(DEBT+EQUITY
)
A. STOCK OR INVENTORY TURNOVER
RATIO =46
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COST OF GOODS SOLD
AVERAGE STOCK
B. WORKIN CAPITAL TURNOVER
RATIO =
COST OF GOODS SOLD
WORKING CAPITAL
A. GROSS PROFIT RATIO =
GROSS PROFIT 100
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NET SALES
B. NET PROFIT RATIO =
NET PROFIT 100NET SALES
C. OPERATING RATIO =
(COST OF GOODS SOLD+OPERATING
EXPENSES) 100
NET SALES
A. LIQUIDITY RATIO:
Liquidity refers to the ability of the firm to meet its current liabilities.
The liquidity ratios, therefore, are also called Short Term Solvency
Ratios. These ratios are used to assess the short term financial position
of the concern. It includes two ratios:
1. Current Ratio or Working Capital Ratio.
2. Quick Ratio or Acid Ratio.
1. Current Ratio: This ratio explains the relationship between current
assets and current liabilities of a business. The formula for current ratio
is:
Current Ratio=Current Assets / Current Liabilities
SIGNIFICATION: According to accounting principles, a current ratio
of2:1 is supposed be an ideal ratio. If the current ratio is less than 2:1, it
indicates the lack of liquidity and shortage of working capital. But a
much higher, even though it is beneficial to the short term creditors, is not
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necessarily good for the company. A much ratio than 2:1 may indicate
the poor investment policies of the management.
2. Quick Ratio: It indicates whether the firm is in position to pay its
current liabilities within a month or immediate. The formula for quick
ratio is:
Quick Ratio=Liquid Assets / Current Liabilities
SIGNIFICATION: An ideal quick ratio is said to be 1:1. If it is more, it
is considered to be better. This ratio is a better test of short term financial
position of the company than the current ratio, as it considers only those
assets which can be easily and readily converted into cash.
B. LEVERAGE OR CAPITAL STRUCTURE RATIO :
Liquidity ratios analyse the short term solvency of a firm whereas the
long - term solvency of the firm can be examined by the help of leverage
ratios. Usually the long term lenders, debenture holders and financial
intuitions are interested in these ratios. With the help of these ratios they
want to judge the ability of a firm to pay the interest regularly as well as
repay the principal when due. It includes following ratios:
1. Debt - Equity Ratio.
2. Proprietary Ratio.
3. Debt o Total Fund Ratio.
1. Debt-Equity Ratio: According to this approach, this ratio expresses
the relationship between Long Term Debt and acquired by long term
borrowing in comparison to shareholder`s funds. It is calculated by the
formula:
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Debt-Equity Ratio=Debt / Equity
SIGNIFICATION: This ratio is calculated to assess ability of the firm
to meet its long term liabilities. Generally, debt-equity ratio of 2:1 is
considered safe.
2. Proprietary Ratio: This ratio indicates the proportion of total fund
provided by owners or shareholders. It is calculated as under:
Proprietary Ratio=Equity / (Debt + Equity)
SIGNIFICATION: This ratio should be 33% or more than that. In order
words, the proportion of shareholder funds to total funds should be 33%
or more.
3. Debt To Total Funds Ratio: This ratio is the variation of the debt-
equity ratio and gives the same indication as the debt-equity ratio. In this
ratio, debt is expressed in relation to total funds. That is both equity anddebt. It is calculated as under:
Debt to Total Fund Ratio=Debt / (Debt + Equity)
SIGNIFICATION: Generally, debt to total funds ratio of 0.67:1 (or
67%) is considered satisfactory. In other words, the proportion of long
term loans should not be more than 67% of total funds.
C. ACTIVITY RATIO OR TURNOVERE RATIO:
These ratios measure how well the resources at the disposal of the
concern are being utilized. These ratios are known as turnover ratios as
they indicate the rapidity with which the resources available to the
concern are being used to product sales. Some of the important activity
ratios are as follows:
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invested in it. The efficiency and the success of a business can be
measured with the help of profitability ratios. It is of following types:
1. Gross Profit Ratio.
2. Net profit Ratio.
3. Operating Ratio.
1. Gross profit Ratio: This ratio shows the relationship between gross
profit and sales. It can be calculated as:
Gross Profit Ratio = (Gross Profit/Net Sales) 100
SINIFCATION: The higher the gross profit ratio, the better it is. No
ideal standard is fixed for this ratio, but the gross profit ratio should be
adequate enough not only to cover the operating expenses but also toprovide for depreciation, interest in loans, dividends and creation of
reserves.
2. Net Profit Ratio: This shows the relationship between net profit and
sales. It can be calculated as:
Net Profit Ratio = (Net Profit/Net Sales) 100
SIGNIFICATION: This ratio measured the rate of net profit earned on
sales. It helps in determining the overall efficiency of the business
operations.
3. Operating Ratio: It measures the proportion of an enterprise`s cost of
sales and operating expenses in comparison to its sales. It can be
calculated as:
Operating Ratio = {(Cost Of goods Sold + Operating Expenses)}
100
SIGNIFICATION: It is a measurement of the efficiency and
profitability of the business enterprise. The ratio indicates the extent ofsales that is absorbed by the cost of goods sold and operating expenses.
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Lower the operating ratio, the better it is, because it will leave higher
margin of profit on sales.
ANALYSIS AND INTERPRETATION OF
RATIOS
LIQUIDITY RATIOS :
Current ratio
Current ratio = Current Assets / Current Liabilities
Year 2005-06
(Rs.)
2006-07
(Rs.)
2007-08
(Rs.)
2008-09
(Rs.)
2009-10
(Rs.)
Current
Assets
45537 60043 74386 88829 82766
Current
Liabilities
23961 28621 43540 60687 55521
Current
Ratio
1.9:1 2.1:1 1.7:1 1.5:1 1.5 : 1
Since the ratio is less than 2:1 it indicates lack of liquidity.
Quick Ratio
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Quick ratio = liquid assets / current liabilities.
Liquid assets = current assets (inventory + prepaid expenses)
Year 2005-06
(Rs.)
2006-07
(Rs.)
2007-08
(Rs.)
2008-09
(Rs.)
2009-10
(Rs.)Liquid
Assets
32294 41713 55095 64593 62583
Current
Liabilities
23961 28621 43540 60687 55521
Liquid
Ratio
1.3 : 1 1.5 : 1 1.3 : 1 1.1 : 1 1.1 : 1
Since the ratio is nearly equal to the ideal ratio 1:1, it shows assets are
quite solvent and can be easily converted into cash.
LEVERAGE / CAPITAL STRUCTURE RATIO
Debt equity ratio
Debt equity ratio = debt / equity
Debt = debentures + loans from bank
Equity = equity share capital + preference shares + reserves + P&L
Account preliminary expenses.
Year 2005-06(Rs.) 2006-07(Rs.) 2007-08(Rs.) 2008-09(Rs.) 2009-10(Rs.)
Debt 0 0 324 279 201
Equity 23862 33776 33373 31758 35190
Debt
equity
Ratio
0 0 0.009 : 1 0.009 : 1 0.005 : 1
Since this ratio is less than ideal ratio 2:1, it provides a better protection
to long term lenders as they are more secured in this case.
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Proprietary ratio
Proprietary ratio = equity / (debt + equity)
Year 2005-06
(Rs.)
2006-07
(Rs.)
2007-08
(Rs.)
2008-09
(Rs.)
2009-10
(Rs.)Equity 23862 33776 33373 31758 35391
Equity +
debt
28682 36439 40907 39922 44896
Proprietary
ratio
0.83 : 1 0.93 : 1 0.82 : 1 0.79 : 1 .79 : 1
The ratio indicates the sound financial position of the company from the
long term point of view, because it means the firm is less dependent on
the external sources of finance.
Debt to total fund ratio
Debt to total fund ratio = debt / (debt + equity )
Year 2005-06
(Rs.)
2006-07
(Rs.)
2007-08
(Rs.)
2008-09
(Rs.)
2009-10
(Rs.)
Debt 0 0 324 279 201
Debt +
equity
28682 36439 40907 39922 44896
Debt to
total fund
ratio
0 0 0.008 : 1 0.007 : 1 0.004 : 1
This means that the firm is not too much dependent on outside loans for
its existence.
ACTIVITY / TURNOVER RATIO
Stock turnover ratio
Stock turnover ratio = cost of goods sold / average stock.
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Cost of goods sold = total sales gross profit
Average stock = (opening stock + closing stock) / 2
Year 2005-06
(Rs.)
2006-07
(Rs.)
2007-08
(Rs.)
2008-09
(Rs.)
2009-10
(Rs.)
Cost ofgoods sold
39232 46324 61318 63816 70716
Average
stock
13243 15787 18811 21764 22210
Stock
turnover
ratio
3 : 1 3 : 1 3.3 : 1 3 : 1 3.2 : 1
It indicates that the stock is selling quickly. The goods can be sold at a
lower margin of profit and even then the profitability may be quite high.
Working capital turnover ratio
Working capital turnover ratio = cost of goods sold / working capital.
Working capital = current assets current liabilities.
Year 2005-06
(Rs.)
2006-07
(Rs.)
2007-08
(Rs.)
2008-09
(Rs.)
2009-10
(Rs.)
Cost of
goods sold
39232 46324 61318 63816 70716
Working
capital
21576 31423 30846 28144 27245
Working
capitalturnover
ratio
1.8 : 1 1.8 : 1 2 : 1 3.5 : 1 2.6 : 1
This ratio shows the efficiency of the working capital and the quick
turnover of capital assets.
PROFITABILITY RATIO
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GROSS PROFIT RATIO
Gross profit ratio = (gross profit / net sales) * 100
Net sales = total sales excise duty.
Year 2005-06(Rs.)
2006-07(Rs.)
2007-08(Rs.)
2008-09(Rs.)
2009-10(Rs.)
Gross
profit
2814 3951 1250 1555 2048
Net sales 38258 48137 57227 61527 65694
Gross
profit
ratio
7.4 % 8.2 % 2.2 % 2.5 % 3.1 %
It is fluctuating in nature. An increase in the ratio shows the goodposition of company but in subsequent years, there is a decline in the
ratio, showing the adverse position of the company.
Net profit ratio
Net Profit Ratio = (net profit / net sales) * 100
Year 2005-06
(Rs.)
2006-07
(Rs.)
2007-08
(Rs.)
2008-09
(Rs.)
2009-10
(Rs.)
Net profit 2592 3611 1004 1508 2005
Net sales 35258 48137 57227 61527 65694
Net Profit
ratio
6.8 % 7.5 % 1.8 % 2.5 % 3.1 %
An increase in the ratio over the previous years show an improvement in
the overall efficiency and profitability of the company , while a decreasein this ratio denotes a vice versa condition.
Operating ratio
Operating ratio = {(cost of goods sold + operating expenses) / net sales}
* 100
Operating expenses = direct material + expenses on sub contract +transfer in services + power and fuel.
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Year 2005-06
(Rs.)
2006-07
(Rs.)
2007-08
(Rs.)
2008-09
(Rs.)
2009-10
(Rs.)
Cost of
goods
sold+
operating
expenses
64663 80748 101146 102913 110769
Net sales 38258 48137 57227 61227 65694
Operating
ratio
1.69 : 1 1.67 : 1 1.76 : 1 1.67 : 1 1.69 : 1
Since the operating ratio is fluctuating in nature, this shows that the profit
is also fluctuating.
CHAPTER. 4
CONCLUSION
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BHEL AT A GLANCE
Bharat Heavy Electricals limited, INDIAs state run energy
equipment maker, has taken over engineering firm Bharat Heavy Plate
and Vessel Limited. BHEL said in a press statement.
When I was going through all the departments I saw the word 5 S which
means:-
SERI :- Stands for easy classification
SETAN :- Stands for proper storage
SESO :- Stands for cleanliness and clarity
SECATSU :- Stands for stage wise standardization
SETSUKE :- Stands for self discipline
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THOUGHTS CONCERNING BHEL
ENERGY saved, POWERearned
Companies cannot guarantee EMPLOYMENT, only customer can
CREATIVITY is a natural extension of our enthusiasm
Wastage ofTIME , reduces the PRODUCTION
If you do not make the CHANGES in your company , the
CUSTOMERwill change you.
FINDINGS SUGGESTIONS
1. Current ratio is less than 2:1 it 1. Current assets should
be Indicates lack of liquidity. Increased & decrease
current liabilities.
2. Quick ratio is nearly equal to the 2. There is no need to
change Ideal ratio 1:1. anything.
3. Debt equity ratio is less than ideal 3. It should be less as it
ratio 2:1 . provides lender moresecurity.
4. The proprietary ratio indicates the 4.Firm should be less
sound financial of the company from. dependent on external
sources of finance.
5. Debt to total fund show sound 5.Firm should be less
financial position. dependent on externalsources of finance
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6. Stock turnover ratio indicates that the 6.The good can be sold at
stock is selling quickly. a lower margin of profit
and even then
profitability may be
quite high.
7. Working capital ratio shows the 7.There should be quick
efficiency of the working capital. turnover of capital assets.
8. Gross profit ratio is fluctuating in 8.Increase the ratio.
nature.
9. Net profit ratio is fluctuating in nature. 9. Increase the ratio.
10. The operating ratio is fluctuating in 10. Increase the ratio.
nature.
CHAPTER. 5
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APPENDIX