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Ratio analysis in bhel

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Ratio analysis in bhel

  1. 1. A STUDY ON RATIO ANALYSIS INTRODUCTION Finance is viewed as the most important factor in every enterprise and it is provision of money at the time when it is required. Every enterprise whether big, medium or small needs finance to carry on its operations and to achieve its targets. Finance is so indispensable today that it is rightly said that it is the lifeblood of an enterprise. Without adequate finances, no enterprise can possibly accomplish its objectives. Capital required for a business can be classified under two main categories i.e., fixed capital and working capital. Fixed capital stands for the amount of capital which is required for long term to create production facilities through purchase of fixed assets such as plant, machinery, land and buildings etc, working capital refers to that part of the firms capital which is needed for financing short terms or current assets such as marketable securities, debtors and inventories etc, working capital in brief, is the amount of funds necessary to cover the cost of operating the enterprise. Just as circulation of blood is essential in the human body for maintaining life of a person, working capital is very essential to maintain the smooth running of a business. The modern thinking in financial management gives greater importance to management decision making and policy. Today, the financial manager is not in a passive role of score keeper of the accounting information and arranging funds. Whenever directed to do so. Rather, he occupies a key role in solving the complex management problems. He is not responsible for shaping the fortunes of the enterprise and is involved in the most vital management decision of allocation of resource G.K.C.E, SULLURPET 1
  2. 2. A STUDY ON RATIO ANALYSIS INDUSTRY PROFILE ELECTRONIC INDUSTRY Electronics is a branch of technology dealing with the motion and behavior of electrons. Although the term derives vacuum tube technology, it now encompasses the sold state circuits and devices used in computing and communications. HISTORY IN INDIA The Electronics Industry in India was nucleated in the late forties with the setting up of production base for radio receivers by a few private firms using foreign collaborations. In the initial stages, the production activities were mainly in the fields of consumer electronics and certain type of components. Two public sector units, namely BHEL and Indian Institute of Technology (IIT) both at Bangalore, were also manufacturing professional electronic items to meet the requirements of P&T. Introduction of transistor radio I early 60’s led to phase which witnessed steady growth in production of import substitutions, diversification of product range and entry into export market. Production of electronic equipment and components has come a long way since the days of radio receivers in the 1950’s. the electronics industry in India has grown with domestic demand, as a result of import substitution effort. During the 1970’s electronics industry in the country derived its strength as a labor-intensive industry. Production techniques had large manual labor content. Dispersal of industry was given an important place in the promotional policy framework and industry capacities were approved based on the estimated demand over the next five years. In the growth and development of this industry, emphasis was placed on indigenization of applications of electrons. While on the one hand, this had enabled development of largely decision consumer electronics industry (except from 1982 onwards when policy decision was taken to introduce color TV and resulted in import of CTV tubes and semiconductors G.K.C.E, SULLURPET 2
  3. 3. A STUDY ON RATIO ANALYSIS required for assembly), it is has generated enough demand of components to enable mass production using some degree of automation. PRODUCTION AND DEFENSE UNDERTAKING A substantial part of the defense stores needed by the services is now being developed and produced in the country. The responsibility for this has been entrusted to the Department of Defense Production and supplies, which organizes, directs and coordinates production of material and equipment required by the Armed Forces. It carries our its responsibility through the Directorate of standardization, Defense Research and Development (DRDO) and eight public sector undertakings. There are 36 ordinances, factories whose main thrust is aimed at meeting the twin objectives of modernization of the factories and increasing productivity. The need for self-reliance under lines the existence of ordinance factories. The factories widely dispersed over the length and breadth of the country on strategic consideration, necessarily function interdependently. The spectrum of technology leading to self reliance. The range of products in these factories include armored vehicles, sophisticated anti tank guns, anti-aircraft guns, field guns, self propelled guns, mounted guns, motors, small arms and their related ammunitions. In addition software items combat clothing, high attitude clothing, parachutes, and mountaineering equipment are also being manufacturing. There are Eight Public Sector enterprises under the department of defense production and supplies. These are 1. Hindustan Aeronautics Limited (HAL). 2. Bharat Electronic Limited(BHEL) 3. Bharat Earth Movers Limited(BEML) 4. Mozagan Dock Limited(MDL) 5. Garden Reach Ship Builders & Engineers Limited(GRS&E) 6. Goa Ship Yard Limited (GSL) 7. Bharat Dynamics Limited (BDL) 8. Misra Dhatu Nigam Limited (MIDHANI) G.K.C.E, SULLURPET 3
  4. 4. A STUDY ON RATIO ANALYSIS The BHEL was established in 1954 with a single unit at Jalahalli, Bangalore to develop the indigenous electronic industry. Since then, it has gone into leader in professional electronics with its eight more units. G.K.C.E, SULLURPET 4
  5. 5. A STUDY ON RATIO ANALYSIS COMPANY PROFILE BHEL is one of the pioneers in engineering industries in the world. The vital role played by BHEL today in the country is the mark of its continuous efforts to improve the service in the nation by consultancy, manufacturing and offering services in power sector. The success story of BHEL however goes back in 1956 when its first plant was setup in Bhopal. The three major plants in HARIDWAR, HYDERABAD AND THRICHIRAPALLI followed this. These plants have been the core of BHEL’S efforts to grow, diversify, and become one of the most integrated power and industrial equipment manufacturers in the world. The company now has 14 manufacturing units, 8 service centers and 4 power sectors regional centers, besides project sites spread all over India and abroad. BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, oil business etc. Its products have been established an enviable reputation for high quality and reliability. This is due to the emphasis placed all along on design, engineering and manufacturing to international standards by acquiring and adopting some of the best technologies developed in its own R&D centers. BHEL has acquired ISO 9000 certification for quality management and ISO 14001 certification for environment management. BHEL caters to the needs of different sectors by designing and manufacturing according to the needs of its clientele in power sector. ABOUT B.H.E.L RAMACHANDRAPURAM UNIT As a member of the prestigious “BHEL” family”, BHEL – Hyderabad has earned a reputation as one of its most important manufacturing units, contributing its lion’s share in BHEL Corporation’s overall business operation. The Hyderabad unit was setup in 1963 and started its operations with manufacture of turbo-generator sets and auxiliaries for 60 and 110 MW thermal utility sets. G.K.C.E, SULLURPET 5
  6. 6. A STUDY ON RATIO ANALYSIS Over the years it has increased its capacity range and diversified its operations to many other areas. Today, a wide range of products are manufactured in this unit, catering to the needs of variety of industries like fertilizers & chemicals, petrochemicals & refineries, paper, sugar, steel, etc., BHEL – Hyderabad unit has collaborations with world renowned MNCs like M/S General Electric, USA, M/S Nuovo pignone, etc. COMPANY’S VISION, MISSION AND VALUES VISION A world class, innovative, competitive and profitable engineering enterprise providing total business solutions. MISSION To be the leading engineering enterprise providing quality Products systems and services in the field of energy, transportation industry, infrastructure and other potential areas. VALUES  Meeting commitment made to external & internal customers.  Fosters learning, creativity & speed of response.  Respect for dignity & potential of individuals.  Loyalty and pride in the company.  Team playing.  Zeal to excel.  Integrity and fairness in all matters. History of Bharat Heavy Electricals Ltd. Bharat Heavy Electricals Ltd - Comp. was set up at Bhopal in the name of M/s Heavy electrical Indias limited in collaboration with AEI, UK. Subsequently, three more G.K.C.E, SULLURPET 6
  7. 7. A STUDY ON RATIO ANALYSIS plants were set up at Hyderabad, Hardwar & Trichy. The Bhopal Unit was controlled by company, the other three were under the control of Bharat Hevey Electricals Ltd. - The Company object is to manufacture of heavy electrical equipments. ---1972 - In July the Operations of all the four plants were integrated. ----1974 - In January Heavy electrical [Indias] Ltd was merged with BHEL. - For the manufacture of wide variety of products, the Comp. has developed technological infrastructure, skills & quality to meet the stringent requirements of power plants, transportation, petro chemicals, oil etc. - BHEL has entered into collaboration which are technical in nature. Under these agreements, the collaborators have transferred, furnished the information, documentation, including know-how relating to design, engineering, manufacturing assembly etc. captive power plant at a steel plant in West Bengal. -Bharat Heavy Electricals Ltd [BHELs]has informed that a Joint Venture agreement between the Comp. & NTPC Ltd has been singed on December 17, 2007 for Establishment & Operation of Joint Venture Comp. for taking up EPC business. 2008 - 2010 - Bharat Heavy Electricals Limited [BHELs], Trichy, has secured orders worth Rs 15,000 crore, its all-time high. BHEL, said the recent MoU with the TNEB for setting up two 800 Mw thermal power stations near Chennai had resulted in the power plant major bagging orders. -Bharat Heavy Electricals Ltd [BHELs] has informed that pursuant to order dated March 04, 2008 issued by Ministry of Heavy Industries & Public Enterprises, Department of Heavy Industry, Shri. K Ravi Kumar Director [Powers]/BHEL has been entrusted with additional charge of post of Chairman & Managing Director/BHEL w.e.f. March 01, 2008. - BHEL ties up with AP Genco for Vizag unit. G.K.C.E, SULLURPET 7
  8. 8. A STUDY ON RATIO ANALYSIS SWOT ANALYSIS The strengths, weakness, opportunities and threats which are experienced by BHEL as a growing concern, have been summed up in the following lines. Strengths  Vast pool of trained manpower.  Excellent state of all factors.  Good working condition.  Rapport between management and union.  Products manufactured to international standards.  Low labor cost and low manufacturing cost. Weakness  Excess manpower.  System implementation inadequate.  No financial parlage.  Inadequate compensation payable to employees. Opportunities  Growing power sector machinery.  Liberalizations has opened up the market.  Navaratna company status.  Dominate players in domestic market.  Export potential growing. Threats • Liberalizations – Entry of MNC’s / private sector – More compensation. G.K.C.E, SULLURPET 8
  9. 9. A STUDY ON RATIO ANALYSIS • MNC wearing away good employees with good attractive salaries. • Govt. Taxation policy – against manufacturing sectors. • Dumping of goods. • Attractive credit policy by FFI and MNC. PRODUCT PROFILE BHEL manufactures a wide range of Power plant equipments and also caters to the industry sector. THE PRODUCTS PROFILE INCLUDES • Gas Turbines • Turbo generators • Pumps • Solar Water Heating Systems • Electrics for Urban Transportation System G.K.C.E, SULLURPET 9 Figure-1
  10. 10. A STUDY ON RATIO ANALYSIS GAS TURBINES BHEL - the largest Gas Turbine manufacturer in India, with the state-of-art facilities in all areas of Gas Turbine manufacture provide complete engineering in- house for meeting specific customer requirement. With over 100 machines and cumulative fired hours of over four million hours, BHEL has supplied gas turbines for variety of applications in India and abroad. BHEL also has the world’s largest experience of firing highly volatile naphtha fuel on heavy duty gas turbines. TURBO GENERATORS G.K.C.E, SULLURPET 10 Figure-2
  11. 11. A STUDY ON RATIO ANALYSIS BHEL presently has manufactured Turbo-Generators of ratings upto 560 MW and is in the process of going up to 660 MW. It has also the capability to take up the manufacture of ratings up to 1000 MW suitable for thermal power generation, gas based and combined cycle power generation as-well-as for diverse industrial applications like Paper, Sugar, Cement, Petrochemical, Fertilizers, Rayon Industries, etc. Based on proven designs and know-how backed by over three decades of experience and accreditation of ISO 9001, the Turbo-generator is a product of high- class workmanship and quality. Adherence to stringent quality-checks at each stage has helped BHEL to secure prestigious global orders in the recent past from Malaysia, Malta, Cyprus, Oman, Iraq, Bangladesh, Sri Lanka and Saudi Arabia. The successful completion of the various export projects in a record time is a testimony of BHEL's performance. PUMPS Figure-4 BHEL started manufacture of Pumps during the mid-sixties under technical collaboration with M/s Sigma Latin, Czechoslovakia, to meet the requirements of 60 MW, 110 MW and 210 MW thermal power stations, the scope of which was widened to meet the requirements of power plants up to 500 MW, with the help of another collaboration with M/s Weir Pumps, U.K. BHEL has also made some in-house G.K.C.E, SULLURPET 11 Figure
  12. 12. A STUDY ON RATIO ANALYSIS product development to gain spin off benefits from the above collaboration as well as to develop new pumps to meet the requirements of Combined Cycle Power plants. BHEL has undertaken a design up-gradation and retrofit of the existing 200 KHI Boiler Feed pumps Inside Stators with energy efficient hydraulics and cartridge design internals under technical tie-up with M/s Sulzer Pumps, Germany; and recommended the upgraded 200 KHI-S Boiler Feed pump to all customers of 110 MW & 210 MW Power Stations operating with the earlier Czech design for increase of pump availability and reliability and also considerable reduction in operational costs. SOLAR WATER HEATING SYSTEMS Figure-5 BHEL a pioneer in the field of design manufacturing and installation of solar water heating systems (SWHS) in the country till date have installed systems covering more than 74,000 m2 of absorber area of capacity over 37 Lakh liters per day. The largest over SWHS of 40000 LPD for space heating is in use at Dr. Willmar Schwab India Pvt. Ltd. Noida. Solar water heating systems are environmental friendly, pollution free equipments, harnessing the abundantly available Sun's energy. They find application at homes, hostels, hotels, and hospitals (swimming pool, bathing, washing, cleaning and cooking); in industrial process heating (Textile, Food processing, Pharmaceutical, G.K.C.E, SULLURPET 12
  13. 13. A STUDY ON RATIO ANALYSIS Dyeing, Breweries, Metal Plating industries); Milk dairies and chilling plants; space heating in central air conditioning systems; pre-heating of boiler feed water. In the BHEL make Solar Collector, stabilized efficiency values up to 65% is assured under normal circumstances over a long period without degradation. ELECTRICS FOR URBAN TRANSPORTATION SYSTEM Figure-6 • 25 KV AC, 50 HZ, single phase, broad gauge/meter gauge, Electrical Multiple Units with DC Drives. • 1500V DC, broad gauge/meter gauge, Electric Multiple Units with DC Drives. • 25 KV AC/1500 VDC broad gauge Electrical Multiple Units with 3 phase drive. • Diesel Electric at Multiple Units • Metro Railway. • Tram Cars G.K.C.E, SULLURPET 13
  14. 14. A STUDY ON RATIO ANALYSIS Some of the other products manufactured by BHEL are: THERMAL POWER PLANT Steam turbines, boilers and generators of up to 500 MW capacities to manufacture boilers and steam turbines with super critical steam cycle parameters and matching generators up 660 MW unit facilities available for 1000MW size. HYDRO POWER PLANT Mini/Micro hydro sets Spherical, butterfly, rotary values auxiliaries for hydro station. BOILERS Heat recovery steam generators, pressure vessels chemical recovery boilers for paper industry ranging from capacity of 100 to 100t/day of dry solids. POWER DEVICES High power capacity silicon diodes, Thyristor devices and solar Photovoltaic cells. SYSTEM AND SERVICES Power generation system Transmission system Transportation system Industrial system PIPING SYSTEM G.K.C.E, SULLURPET 14
  15. 15. A STUDY ON RATIO ANALYSIS Constant load hangers clamp and hanger components, variable, spring hanger for power station up to 850 MW capacities combined cycle plants, industrial boilers and process industries. TRANSFORMERS Power transformers for voltage up to 400 KV HVDC transformers and reactors of up to + or – 500 KV CAPACITORS Power capacitors for industrial and power systems of up to 250 KVA rating for application up to 400 KV Coupling/CVVT capacitors for voltages up to 400 KV STUDY OBJECTIVES OF THE • To find out the cash fluctuations of liquidity,profitability position in the BHEL • To find out the different types of ratios in the BHEL company • To find out the financial performance & financial distributions of the BHEL • To examine the feasibility of present system of managing Working Capital turnover ratios in the Company • To find out the working capital turnover ratios to analyze from 2007 – 08 to 2011-12. SCOPE OF THE STUDY: The study is confirmed to the management of RATIO ANALYSIS in BHEL. Hyderabad. The main aim of the study is to asses the necessary of managing Current Assets and Current liabilities. NEED FOR STUDY G.K.C.E, SULLURPET 15
  16. 16. A STUDY ON RATIO ANALYSIS The most important functions of the business firm are production, marketing finance. It is very difficult to separate finance functions from production, marketing and other functions. The functions of raising funds, investing them in assets and distributing returns earned from assets to share holders are respectively known as financing, investing and dividend decisions. In doing so, a firm attempts to balance cash inflow and outflows. Finance function call for skillful planning control and execution of firm’s activities. Hence, the study is taken to analyze the firm’s activities through “RATIO ANALYSIS” RESEARCH METHODOLOGY The methodology to be followed here is –  Preparation of numeric data tables with data of accounting year wise factors of ratios with calculated ratios.  Graphical presentation of the ratios indicating changes.  Interpretation with the help of numeric and graphical presentation.  Opinion based on result on result of the analysis with conclusion. DATA COLLECTION Primary Data: Personal Interview was held with key personnel of finance department. Secondary Data: G.K.C.E, SULLURPET 16 DATA COLLECTION METHODS PRIMARY DATA SECONDARY DATA
  17. 17. A STUDY ON RATIO ANALYSIS Secondary data are those data, which were already prepared by some others. I have collected some more data from the following data i. From the Balance sheets and P&L accounts. ii. Published and unpublished manuals, records and files. Other information is gathered from the books mentioned in bibliography LIMITATIONS  As the time span of the study is only eight weeks gathering total information is not possible.  There is very less scope of gathering the confidential data as we are only vocational trainees.  During the project period as some executives were busy with their work they could not afford to give full information.  The analysis and interpretation of collected data is restricted to necessary information.  Working Capital standards pertains to relevant industry is also a limiting factor for comparative analysis.  The members of financial department are very busy with the audit work; hence they are not being able to spend more time for me. G.K.C.E, SULLURPET 17
  18. 18. A STUDY ON RATIO ANALYSIS THEORETICAL FRAME WORK RATIO ANALYSIS Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. Ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. Financial ratios are usually expressed as a percent or as times per period. Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables. With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e. whether the management has utilized the firm’s assets correctly, to increase the investor’s wealth. It ensures a fair return to its owners and secures optimum utilization of firm’s assets. Ratio analysis helps in inter-firm comparison by providing necessary data. An inter firm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line. Yet another dimension of usefulness or ratio analysis, relevant from the View point of G.K.C.E, SULLURPET 18
  19. 19. A STUDY ON RATIO ANALYSIS management is that it throws light on the degree efficiency in the various activity ratios measures this kind of operational efficiency. Significance or Importance of Ratio Analysis  It helps in evaluating the firms performance With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e. whether the management has utilized the firm’s assets correctly, to increase the investor’s wealth. It ensures a fair return to its owners and secures optimum utilization of firms assets.  It helps in inter-firm comparison Ratio analysis helps in inter-firm comparison by providing necessary data. An inter firm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line.  It simplifies financial statement The information given in the basic financial statements serves no useful Purpose unless it s interrupted and analyzed in some comparable terms. The ratio analysis is one of the tools in the hands of those who want to know something more from the financial statements in the simplified manner.  It helps in determining the financial position of the concern Ratio analysis facilitates the management to know whether the firms financial position is improving or deteriorating or is constant over the years by setting a trend with the help of ratios The analysis with the help of ratio analysis can know the direction of the trend of strategic ratio may help the management in the task of planning, forecasting and controlling.  It is helpful in budgeting and forecasting G.K.C.E, SULLURPET 19
  20. 20. A STUDY ON RATIO ANALYSIS Accounting ratios provide a reliable data, which can be compared, studied and analyzed. These ratios provide sound footing for future prospectus. The ratios can also serve as a basis for preparing budgeting future line of action.  Liquidity position With help of ratio analysis conclusions can be drawn regarding the Liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. The ability to met short term liabilities is reflected in the liquidity ratio of a firm.  Long term solvency: Ratio analysis is equally for assessing the long term financial ability of the Firm. The long term solvency is measured by the leverage or capital structure and profitability ratio which shows the earning power and operating efficiency, Solvency ratio shows relationship between total liability and total assets.  Operating efficiency: Yet another dimension of usefulness or ratio analysis, relevant from the View point of management is that it throws light on the degree efficiency in the various activity ratios measures this kind of operational efficiency. Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables. There are four important categories of ratios related to the RATIO ANALYSIS of the firms. They are 1. Liquidity ratios 2. Leverage ratios 3. Profitability ratios 4. Activity ratios G.K.C.E, SULLURPET 20
  21. 21. A STUDY ON RATIO ANALYSIS 1. LIQUIDITY RATIOS It is extremely essential for a firm to be able to meet its obligations as they become due. Liquidity ratios measure the ability of the firm to meet its current obligations. The most common ratios, which indicate the extent of liquidity, are 1.A. Current ratio 1.B.Quick ratio 1.A.CURRENT RATIO The current ratio is calculated as per the following formula Current ratio = Current assets Current liabilities Current assets include cash and those assets, which can be converted into cash within a year. All obligations maturing within a year are included in current liabilities. As a conventional rule, a current ratio of 2:1 or more is considered satisfactory. The higher the current ratio, the greater the margin of safety. 1.B.QUICK RATIO An asset is quick or liquid if it can be converted into cash immediately without a loss of value. Cash is the most liquid asset. Other assets which are considered to be relatively liquid and included in quick assets are debtors and bills receivables and marketable securities. The ratio can be calculated by using the following formula Quick ratio = Quick assets Current liabilities G.K.C.E, SULLURPET 21
  22. 22. A STUDY ON RATIO ANALYSIS Generally a quick ratio of 1:1 is considered to represent a satisfactory current financial position. 2.LEVERAGE RATIOS The short term creditors like bankers and suppliers of raw material are more concerned with the firm’s current debt paying ability. On the other hand, long term creditors, like debenture holders, financial institutions etc., are more concerned with the firm’s long term financial strength. To judge the long term financial position of the firm, financial leverage or capital structure ratios are calculated. Leverage ratios may be calculated form the balance sheet items to determine the proportion of debt in total financing. The leverage ratios are calculated in two methods. Such as 2.A. Total debt ratio 2.B.Debt equity ratio 2.A. TOTAL DEBT RATIO Debt ratio is used to analyze the long term solvency of a firm. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. It may, therefore, compute the debt ratio by using following formula Debt Ratio = Total debt Total debt+Net worth 2.B. DEBT EQUITY RATIO From the total debt ratio which clears the percentage of lenders contribution to owner’s contribution or the relationship describing the lender’s contribution for each rupee of the owner’s contribution is called debt equity ratio. It can be calculated by using the following formula G.K.C.E, SULLURPET 22
  23. 23. A STUDY ON RATIO ANALYSIS Debt equity ratio = Total debt Net worth 3.PROFITABILITY RATIOS The profitability ratios are calculated to measure the operating efficiency of the company. A company should earn profits to survive and grow over a long period of time. Profit is the difference between revenues and expenses over a period of time. We should continuously evaluate the efficiency of its company in terms of profit. Generally, two major types of profitability ratios are calculated 1. Profitability in relation to sales 2. Profitability in relation to investment 3.A. GROSS PROFIT MARGIN The first profitability ratio in relation to sales is the gross profit margin. It can be calculated as Gross profit margin = Sales – Cost of goods sold Sales This ratio indicates the average spread between the cost of goods sold and sales revenue. A high gross profit margin ratio is a sign of goods management. It is relative to the industry average implies the firm able to produce at relatively lower cost. A low gross profit margin may reflect higher cost of goods sold due to the firm’s inability to purchase raw materials at favorable terms, inefficient utilization of plant and machinery or over investment in fixed assets resulting higher cost of production. G.K.C.E, SULLURPET 23
  24. 24. A STUDY ON RATIO ANALYSIS 3.B. NET PROFIT MARGIN Net profit is obtained when operating expenses, interest and taxes are subtracted form the gross profit. The ratio is measured by using the following formula Net profit margin = Profit after tax (PAT) Sales This ratio is establishes a relationship between net profit and sales and indicates management’s efficiency in manufacturing, administering and selling the products. This ratio is the overall measure of the firm’s ability to turn each rupee sales into net profit. 3.C. RETURN ON INVESTMENT The term investment may refer to total assets or net assets. The conventional approach of calculating return on investment is to divide profit after tax by investment. ROI = EBIT (I-T) Net assets 4.ACTIVITY RATIOS Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called turnover ratios because they indicate the speed with which assets are being converted or turnover into sales. Following are the different activity ratios 4.A. Inventory turnover ratio 4.B. Debtors turnover ratio 4.C. Assets turnover ratio 4.D. Fixed assets turnover ratio 4.A. INVENTORY TURNOVER RATIO G.K.C.E, SULLURPET 24
  25. 25. A STUDY ON RATIO ANALYSIS This ratio indicates the efficiency of the firm in producing and selling its product. It is calculates as Inventory turnover ratio = Cost of goods sold Average work-in-progress 4.B DEBTORS TURNOVER RATIO Debtors are expected to be converted into cash over a short period and therefore are included in current assets. The liquidity position of the firm depends on the quality of debtors to a great extent. Debtors turnover ratio is calculated by using the following formula Debtors turnover ratio = Credit Sales Average debtors 4.C. ASSETS TURNOVER RATIOS Net assets turnover ratio = Sales Net assets Net assets include net fixed assets and net current assets minus current liabilities. A firm’s ability to produce a large volume of sales for a given amount of net assets is the most important aspect of its operating performance. Total assets turnover ratio = Sales Total assets 4.D) FIXED ASSETS TURNOVER RATIO: The numerator of this ratio is the sales for the period and the denominator is the balance in the net fixed assets account at the end of the year. This ratio is G.K.C.E, SULLURPET 25
  26. 26. A STUDY ON RATIO ANALYSIS supposed to measure the efficiency with which fixed assets are employed. A high ratio indicates a high degree of efficiency in assets utilization and a low ratio reflects inefficient use of assets. It is calculated by dividing sales with fixed assets. It is used to highlight the extent of utilization of the company’s plant equipment. Fixed assets turnover ratio = Sales Fixed assets DATA ANALYSIS & INTERPRETATION Current ratio:- The current ratio is calculated by dividing current assets by current liabilities. Current assets include cash and those assets, which can be converted into cash within a year, such as marketable securities, debtors and inventories. Current liabilities include creditors, bills payable, accrued expenses, short term bank loans etc. CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES Table 1:- YEAR CURRENT ASSETS CURRENT LIABILITIES RATIO 2007-08 174043233.6 80007395.82 2.17 2008-09 119472334.5 89258186.27 1.338 G.K.C.E, SULLURPET 26
  27. 27. A STUDY ON RATIO ANALYSIS 2009-10 85350227.24 81488065.33 1.047 2010-11 145292000 117086000 1.24 2011-12 158329780 78980214.39 2.01 Graph no.1:- Interpretation:- The normal standard of current ratio is 2:1. The company’s current ratio is more than the standard ratio in 2007-08, i.e. 1.24, 2008-09(2.01). in the remaining years 2007-08 (2.17), 2008-09(1.33) ,2009-10(1.04) the current ratio is lower than the standard ratio. G.K.C.E, SULLURPET 27
  28. 28. A STUDY ON RATIO ANALYSIS 2. Quick ratio:- This ratio establishes a relationship between quick or liquid assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value cash is the most liquid assets, other assets are bills receivables, debtors and marketable securities. Inventories are considered to be less liquid. The ratio shows the assets which are immediately converted into cash to meet the short term obligations of the firm. QUICK RATIO = CURRENT ASSETS-(STOCK+PREPAID EXPENCES) CURRENT LIABILITIEs Table no. 2:- YEAR QUICK ASSETS CURRENT LIABILITIES RATIO 2007-08 101406887.1 80007395.82 1.267 2008-09 112520280.53 89258186.27 1.261 G.K.C.E, SULLURPET 28
  29. 29. A STUDY ON RATIO ANALYSIS 2009-10 65172524.29 81488065.33 0.799 2010-11 134132000 117086000 1.145 2011-12 93876746.86 78980214.39 1.188 Graph no.2:- Interpretation:- The normal standard of Quick Ratio is 1:1. In only one year the ratio decreased than the standard ratio, i.e. 0.799 in 2009-10. In remaining years 2008- 09(1.26),2008-09(1.21),2010-11(1.14),2011-12(1.18) the quick ratio maintains the ratio higher than the standard ratio. So the quick ratio is in a satisfied manner. G.K.C.E, SULLURPET 29
  30. 30. A STUDY ON RATIO ANALYSIS 3. Inventory turnover ratio:- The inventory turnover ratio measures how quickly the stock is converted into sales. It is the test of efficient inventory management. To measure the efficient, the ratio should be compared on the basis of trend analysis or with the level of other firms. The higher the ratio, the better is the performance of the company. A low ratio may indicate a slow moving inventory. INVENTORY TURNOVER RATIO = COST OF GOODS SOLD AVERAGE INVENTOR Table no.3:- YEAR COST OF GOOD SOLD AVERAGE INVENTORY RATIO 2007-08 227335354 45831224.04 4.96 2008-09 277429458 24784534.25 11.19 G.K.C.E, SULLURPET 30
  31. 31. A STUDY ON RATIO ANALYSIS 2009-10 296868782.6 12932762.7 22.95 2010-11 478057802.39 15046401.2 31.77 2011-12 70274871.73 37806516.57 1.85 Graph no.3:- Interpretation:- The above graph indicates the increasing trend of inventory turnover ratio from the years 2007-08(4.96),2008-09(11.19),2009-010(22.5),2010- G.K.C.E, SULLURPET 31
  32. 32. A STUDY ON RATIO ANALYSIS 11(31.77). It indicates the inventory is effectively converted into sales. But in the last year the inventory turnover ratio is decreased to 1.85 4. Fixed assets turnover ratio:- This ratio is supposed to measure the efficiency with which fixed assets are employed. A high ratio indicates a high degree of efficiency in assets utilization and a low ratio reflects inefficient use of assets. It is calculated by dividing sales with fixed assets. It is used to highlight the extent of utilization of the company’s plant equipment. FIXED ASSETS TURNOVER RATIO = SALES FIXED ASSETS Table no.4:- YEAR SALES FIXED ASSETS RATIO 2007-08 281649206 177111306.4 1.59 2008-09 256485255 179168799.9 1.43 2009-10 307770938.7 181315968 2.22 2010-11 567778000 190266000 2.98 2011-12 378800000 196150122.87 1.93 G.K.C.E, SULLURPET 32
  33. 33. A STUDY ON RATIO ANALYSIS Graph no.4:- Interpretation:- The fixed assets turnover ratio is higher in 2008-09, i.e. 2.3. And in the remaining years, the ratios are 1.377, 1.277, 1.432 and 1.616 for the years 2007-08, 2008-09, 2009-10 and 2010-11 respectively. G.K.C.E, SULLURPET 33
  34. 34. A STUDY ON RATIO ANALYSIS 5. Total assets turnover ratio: - Assets are used to generate sales. A firm should manage its assets efficiently to maximize sales. The relationship between sales and assets is called assets turnover ratio. Assets turnover ratio is computed by dividing sales with total assets. TOTAL ASSETS TURNOVER RATIO = SALES TOTAL ASSETS Table no.5:- YEAR SALES TOTAL ASSETS RATIO 2007-08 281649206 582554034.19 0.48 2008-09 256485255 602597207.23 0.42 2009-10 307770938.7 636378314.37 0.62 2010-11 567778000 644256581.33 0.88 2011-12 378800000 656875754.81 0.57 G.K.C.E, SULLURPET 34
  35. 35. A STUDY ON RATIO ANALYSIS Graph no.5:- Interpretation:- The total assets turnover ratio is high in the year 2007-08, i.e. 1.036. In the remaining years it is 0.655 in 2008-09, 0.592 in 2010-11, 0.633 in 2011-12 and 0.729 in 2010-11. It is better to improve the ratio by converting the total assets into sales. G.K.C.E, SULLURPET 35
  36. 36. A STUDY ON RATIO ANALYSIS 6. Working capital turnover ratio:- This ratio indicates whether or not working capital has been effectively utilized in making sales. In case a company can achieve higher volume of sales with relative small amount of working capital, it is an indication of the operating efficiency of the company. WORKING CAPITAL TURNOVER RATIO:- SALES NET WORKING CAPITAL Table no.6:- YEAR SALES NET WORKING CAPITAL RATIO 2007-08 281649206.8 94035837.79 2.95 2008-09 256485255.3 30214148.3 11.798 2009-10 402770938.7 3862161.91 104.286 2010-11 567778000 28206000 25.21 2011-12 378800000 79349565.61 6.034 G.K.C.E, SULLURPET 36
  37. 37. A STUDY ON RATIO ANALYSIS Graph no.6:- Interpretation:- The working capital turnover ratio is very peak in the year 2007-08, i.e. 104.28. and in the remaining years 2008-09(2.95),2009-10(11.7),2010- 11(25.2),2011-12(6.0) the working capital ratio is in the normal position. High turnover indicates the sign of over trading and puts the firm into financial difficulties. G.K.C.E, SULLURPET 37
  38. 38. A STUDY ON RATIO ANALYSIS 7. Interest coverage ratio:- This ratio is very important for the lenders point of view. It indicates whether the business would earn sufficient profits to pay periodically the interest charges. The higher the number, the more secure the lender is in respect of his periodical interest income. It is calculated as follows: REST COVERAGE RATIO = EBIT INTEREST CHARGE Table no.7:- YEAR EBIT INTEREST RATIO 2007-08 -16602435 2195337.51 -0.8 2008-09 4175100 3007655 0.2 2009-10 -11935835.3 10552222.9 8 -0.2 2010-11 55738197 8001000 0.6 2011-12 259934715 10552222.9 2 0.8 G.K.C.E, SULLURPET 38
  39. 39. A STUDY ON RATIO ANALYSIS Graph no.7:- Interpretation:- Interest coverage ratio should not decrease more than 1.5 times. If it decreases more than this it may cause the financial risk, and the ideal one is six to seven times. The interest coverage ratio of Sai global yarntex, ltd is negative in 2007-08 and 2008-09. It is 0.2in 2009-10 and 0.2 in 2011-12, 0.8 in 2009-10. The company should maintain the ratio in a standard manner to avoid the problem of financial risk. G.K.C.E, SULLURPET 39
  40. 40. A STUDY ON RATIO ANALYSIS 8. Gross profit ratio:- It is calculated by dividing the gross profit with sales. This ratio shows the profits relative to sales after the direct production costs are deducted. This ratio establishes the relationship between operating profit and sales to measure the relative operating efficiency of the company. GROSS PROFIT RATIO= GROSS PROFIT*100 NET SALES (Gross Profit = Net Sales - Cost of Goods Sold) Table no.8:- YEAR GROSS PROFIT OR LOSS SALES RATIO 2007-08 646651 281649206.8 0.016 2008-09 -24709650.88 256485255.3 -6.93 2009-10 100875904.7 402770938.7 0.20 2010-11 61725000 567778000 9.24 2011-12 65438368.28 378800000 13.66 G.K.C.E, SULLURPET 40
  41. 41. A STUDY ON RATIO ANALYSIS Graph no.8:- Interpretation:- The firm incurred gross loss in 2007-08 i.e.-6.93. And it got profits in 2008- 09(0.016), 2009-10(0.217), 2010-11(9.24) and 2011-12(13.66). The gross profit ratio of the firm is not satisfactory due to the fluctuations in the gross profit ratio. G.K.C.E, SULLURPET 41
  42. 42. A STUDY ON RATIO ANALYSIS 9. Net profit ratio:- This ratio is measured by dividing profit after tax by sales. It indicates management’s efficiency in manufacturing, administering and selling the products. The ratio is the overall measure of the firm’s ability. NET PROFIT RATIO= NET PROFIT BEFORE TAX*100 NET SALES Table no.9:- YEAR NET PROFIT/LOSS SALES RATIO 2007-08 -24132675.02 281649206.8 -6.323 2008-09 1107655.17 256485255.3 0.310 2009-10 72425688.91 402770938.7 0.144 2010-11 19742000 567778000 2.95 2011-12 25814892.16 378800000 5.391 G.K.C.E, SULLURPET 42
  43. 43. A STUDY ON RATIO ANALYSIS Graph no.9:- Interpretation:- The company incurred net losses in 2007-08(-6.323) and 2008-09(5.637) and got profits in 2009-10(0.31), 2010-11(2.95) and 2009-10(5.391). Hence it is satisfactorily in the year 2011-12 only. FINDINGS G.K.C.E, SULLURPET 43
  44. 44. A STUDY ON RATIO ANALYSIS • The efficiency of management at financial position of BHEL is good in 2007-2008 and 2008-09. • In 2007-08 there is increase in net working capital (75,136) compare with the previous year. It mean increasing the debt long-term source investing in current assets which leads to increase the expenditure i.e. interest, financial charges. • The overall liquidity position of BHEL is satisfactory. • BHEL securing the long-term debts through the issue of non convertible vidyut bonds. • The percentage of current assets, loans and advances to current liabilities increase from 115% in 2009-10 to 124% in 2010-11 and further increased to 170% in 2011-12. SUGGESTIONS G.K.C.E, SULLURPET 44
  45. 45. A STUDY ON RATIO ANALYSIS  Company should make efforts to utilize its fixed assets in an optimum manner.  The company should adopt effective operation research techniques to reduce cost of production.  The company should maintain enough reserves to expand the business.  The company must try for maintenances of proper current assets to possess the short time solvency.  The company has already taken action to reduce expenditure. Yet some more necessary steps need to be taken to reduce expenditure by the company head.  The company cash position is low. It is better to increase cash levels. CONCLUSION G.K.C.E, SULLURPET 45
  46. 46. A STUDY ON RATIO ANALYSIS Though the finance play the vital role in versatile field. Once should have enough conscious on each operation.  Different operating year shows the different growth in different areas. Hence each in flow and out flow of the company shows the efficiency of the management and maximum utilization of limited resources in an economical way.  It was a great experience in this company. According to my experience, it is a well established organization with entire production is undertaken with highest quality machinery’s.  It is a well build organization with great opportunity, good facilities, very well organized environmental control and most important safely measures for safety of employees.  However the success can be achieved through proper utilization of financial resources, more inventory turnover, and high liquidity, less cost of production and last but not least making a high volume of sales. G.K.C.E, SULLURPET 46
  47. 47. A STUDY ON RATIO ANALYSIS G.K.C.E, SULLURPET 47
  48. 48. A STUDY ON RATIO ANALYSIS G.K.C.E, SULLURPET 48

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