A Project Report Lalit[1]

7/30/2019 A Project Report Lalit[1]

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A PROJECT REPORT

FOR

FINANCIAL STATEMENT ANALYSIS OF BHEL

Submitted by

LALIT CHAUDHARY

(06711301710)

In partial fulfilment of requirements

For the reward of the degree

OF

BACHELOR OF BUSSINESS ADMINISTRATION

Under the supervision of

Ms. Sunmeet Kaur

BERI INSTITUTE OF TECHNOLOGY, TRAINING AND

RESEARCH

TIKRI KALAN, DELHI

(Affiliated to Guru Gobind Singh Indraprastha University)


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CHAPTER 1

INTRODUCTION


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INTRODUCTION

The project deals with the this project aims at studying Financial statement analysis of

BHEL. This project contains five sections. The first section contains the Objective of the

project and Research methodology. Second section Literature Review contains information

about the BHEL. During the process there are certain difficulties and barriers that are to

be overcomes Third section is the Company Profile which contains the information about the

company BHEL, its products, vision, mission etc. BHEL is one of the few The forth chapter

is the Finding and Analysis, which is shown with the help of pie charts, bar diagram. Fifth

chapter may contain the project limitation and conclusion and at last bibliography and

annexure. At last sections the 5 year balance sheet of BHEL

Analysis means establishing a meaningful relationship between various

items of the two financial statements with each other in such a way that a conclusion is being

drawn. By financial statements by means of two statements

Profit and loss account or Income Statement

Balance Sheet or Position Statement

These are prepared at the end of a given period of time. They are the indicators

of profitability and financial soundness of the business concern. The term financial analysis is

also known as analysis and interpretation of financial statements. It refers to the establishingmeaningful relationship between various items of the two financial statements i.e. Income

statement and Position statement. It determines financial strength and weakness of the firm.

Analysis of financial statements is an attempt to assess the efficiency and performance of an

enterprise. Thus, the analysis and interpretation of financial statements is very essential to

measure the efficiency, profitability , financial soundness and future prospects of the business

units. Financial analysis serves the following purposes.


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Measuring the Profitability

The main objective of a business is to earn a satisfactory return on the funds invested init. Financial analysis helps in ascertaining whether adequate profits are being earned on the

capital invested in the business or not. It also helps in knowing the capacity to pay the

interest.

Indicating the trend of achievements

Financial statements of the previous years can be compared and the trend

regarding various expenses, purchases, sales, gross profits and net profit etc can beascertained. Value of assets and liabilities can be compared and the future prospects of the

business can be envisaged.

Assessing the growth potential of the business

The trend and other analysis of the business provides information indicating the

growth potential of the business.

Comparative position in relation to other firms

The purpose of financial statements analysis is to help the management to make

a comparative study of the profitability of various firms, engaged in similar businesses. Such

comparison also helps the management to study the position of their firm in respect of sales

expenses, profitability and utilising capital, etc.

Assess overall financial strength

The purpose of financial analysis is to assess the financial strength of the

business. Analysis also helps in taking decisions, whether funds required for the purchase of

the new machines and equipments are provided from internal sources of the business or not if

yes, how much? And also to assess how much funds have been received from external

sources.


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OBJECTIVES OF THE STUDY


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OBJECTIVES OF THE STUDY

To calculate the important financial ratio of the organisation as a part of the ratio analysis

thereby to understand the changes the needs and trends in the firms financial position.

To assess the performance of B.H.E.L on the basis of earnings and also to evaluate the

solvency position of the company.

To identify the financial strengths and weaknesses of the organization.

To give the appropriate suggestions to the investors. To help them to make more

informed decisions.


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Literature review


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INTRODUCTION TO FINANCE STATEMENT:

Financial statement is that managerial activity which is concerned with the

planning and controlling of the firm financial resources. Though it was a branch of economic

till 1890 as a separate activity or discipline it is of recent origin. Still, as no unique body

knowledge of its own, and draws heavily on economics for its theoretical concepts even

today.

The subject of financial management is of immense interest both academicians

and practising manager. It is of great interest to academicians because the subject is still

developing. And there are still certain areas where controversies exist for which no

unanimous solutions have been reached as yet. Practicing manager are interested in this

subject because among the most crucial decision of the firm are those which relate to

finance and an understanding of the theory of financial management provides them with

conceptual and analytical insight to make those decision skilfully.

SCOPE:

Firms create manufacturing capacities for production of good, some provide

services to customers. They sell their goods or services to earn profit. They fund to acquire

manufacturing and other facilities. Thus the three most important activities of a business firm

are:

PRODUCTION

MARKETING

FINANCE


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FUNCTION:

The finance function form production, marketing and other functions. Yet the

function themselves can be readily identified. The function of raising funds, inverting them in

assets and distributing returns earned from assets to shareholder respectively. The finance

functions are:

Investment or long term asset mix decision

Financing or capital mix decision

Dividend or profit allocation decision

Liquidity or short term asset mix decision

OBJECTIVES OF THE FINANCIAL STATEMENT ANALYSIS :

1. To calculate the important financial ratio of the organization as a part of the ratio

analysis thereby to understand the change and treads in the firm financial position.

2. To access the performance of the Company on the basis of earnings and also to

evaluate the solvency position of the company.

3. To identify the financial strengths and weaknesses of the organization.

4. To give appropriate suggestion to the investors. To help them to make over,

5. Informed decision.


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Tools of financial statement Analysis

1. Ratios Analysis

Fundamental Analysis has a very broad scope. One aspect looks at the general

(qualitative) factors of a company. The other side considers tangible and measurable factors

(quantitative). This means crunching and analyzing numbers from the financial statements. If

used in conjunction with other methods, quantitative analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet, income

statement, and cash flow statement. It's comparing the number against previous years, other

companies, the industry, or even the economy in general. Ratios look at the relationships

between individual values and relate them to how a company has performed in the past, and

might perform in the future.

Ratio analysis is the method or process by which the relationship of items or group of

items in the financial statement are computed, determined and presented.

Ratio analysis is an attempt to derive quantitative measure or guides concerning the

financial health and profitability of business enterprises. Ratio analysis can be used both in

trend and static analysis. There are several ratios at the disposal of an annalist but their group

of ratio he would prefer depends on the purpose and the objective of analysis.

While a detailed explanation of ratio analysis is beyond the scope of this section, we will

focus on a technique, which is easy to use. It can provide you with a valuable investment

analysis tool.

This technique is called cross-sectional analysis. Cross-sectional analysis compares financial

ratios of several companies from the same industry. Ratio analysis can provide valuable

information about a company's financial health. A financial ratio measures a company's

performance in a specific area. For example, you could use a ratio of a company's debt to its

equity to measure a company's leverage. By comparing the leverage ratios of two companies,

you can determine which company uses greater debt in the conduct of its business. A


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company whose leverage ratio is higher than a competitor's has more debt per equity. You

can use this information to make a judgment as to which company is a better investment risk.

However, you must be careful not to place too much importance on one ratio. You obtain a

better indication of the direction in which a company is moving when several ratios are taken

as a group.

OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business organization-

A) Solvency-

1) Long term

2) Short term

3) Immediate

B) Stability

C) Profitability

D) Operational efficiency

E) Credit standing

F) Structural analysis

G) Effective utilization of resources

H) Leverage or external financing

FORMS OF RATIO:

Since a ratio is a mathematical relationship between to or more variables / accounting

figures, such relationship can be expressed in different ways as follows

A] As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 & the preference

share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is

20,00,000: 5,00,000 or simply 4:1.


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B] As a rate of times:

In the above case the equity share capital may also be described as 4 times that of

preference share capital. Similarly, the cash sales of a firm are

Rs. 12,00,000 & credit sales are Rs. 30,00,000. so the ratio of credit sales to cash sales can be

described as 2.5 [30,00,000/12,00,000] or simply by saying that the credit sales are 2.5 times

that of cash sales.

C] As a percentage:

In such a case, one item may be expressed as a percentage of some other item. For

example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs.

10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1] Calculation of ratio

2] Comparing the ratio with some predetermined standards. The standard ratio may be the

past ratio of the same firm or industrys average ratio or a projected ratio or the ratio of the

most successful firm in the industry. In interpreting the ratio of a particular firm, the analyst

cannot reach any fruitful conclusion unless the calculated ratio is compared with some

predetermined standard. The importance of a correct standard is oblivious as the conclusion is

going to be based on the standard itself.


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TYPES OF COMPARISONS

The ratio can be compared in three different ways

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare them with

the ratio or ratios of some other selected firm in the same industry at the same point of time.

So it involves the comparison of two or more firms financial ratio at the same point of time.

The cross section analysis helps the analyst to find out as to how a particular firm has

performed in relation to its competitors. The firms performance may be compared with the

performance of the leader in the industry in order to uncover the major operational

inefficiencies. The cross section analysis is easy to be undertaken as most of the data required

for this may be available in financial statement of the firm.

2] Time series analysis:

The analysis is called Time series analysis when the performance of a firm is

evaluated over a period of time. By comparing the present performance of a firm with the

performance of the same firm over the last few years, an assessment can be made about the

trend in progress of the firm, about the direction of progress of the firm. Time series analysis

helps to the firm to assess whether the firm is approaching the long-term goals or not. The

Time series analysis looks for (1) important trends in financial performance (2) shift in trend

over the years (3) significant deviation if any from the other set of data.

3] Combined analysis:

If the cross section & time analysis, both are combined together to study the behavior

& pattern of ratio, then meaningful & comprehensive evaluation of the performance of the

firm can definitely be made. A trend of ratio of a firm compared with the trend of the ratio of


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the standard firm can give good results. For example, the ratio of operating expenses to net

sales for firm may be higher than the industry average however, over the years it has been

declining for the firm, whereas the industry average has not shown any significant changes.

The combined analysis as depicted in the above diagram, which clearly shows that the ratio

of the firm is above the industry average, but it is decreasing over the years & is approaching

the industry average.

PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful conclusions, there are

certain pre-requisites, which must be taken care of. It may be noted that these prerequisites

are not conditions for calculations for meaningful conclusions. The accounting figures are

inactive in them & can be used for any ratio but meaningful & correct interpretation &

conclusion can be arrived at only if the following points are well considered.

1) The dates of different financial statements from where data is taken must be same.

2) If possible, only audited financial statements should be considered, otherwise there

must be sufficient evidence that the data is correct.

3) Accounting policies followed by different firms must be same in case of cross section

analysis otherwise the results of the ratio analysis would be distorted.

4) One ratio may not throw light on any performance of the firm. Therefore, a group of

ratios must be preferred. This will be conductive to counter checks.

5) Last but not least, the analyst must find out that the two figures being used to

calculate a ratio must be related to each other, otherwise there is no purpose ofcalculating a ratio.


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a) Some composite ratios study the relationship between the profits & the investments of

the concern. E.g. return on capital employed, return on proprietors fund, return on

equity capital etc.

b) Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios, dividend

payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in to liquidity

ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios.

1] Liquidity ratios:

It shows the relationship between the current assets & current liabilities of the concern

e.g. liquid ratios & current ratios.

2] Leverage ratios:

It shows the relationship between proprietors funds & debts used in financing the

assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietory ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known as Turnover

ratios & productivity ratios e.g. stock turnover ratios, debtors turnover ratios.

4] Profitability ratios:

a) It shows the relationship between profits & sales e.g. operating ratios, gross

profitratios, operating net profit ratios, expenses ratios

b) It shows the relationship between profit & investment e.g. return on investment,

return on equity capital


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5] Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of the

outsiders to be paid out of such profit e.g. dividend payout ratios & debt service ratios.

BASED ON USER:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3] Ratios for management:

Return on capital employed, turnover ratios, operating ratios, expenses ratios

4] Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.


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1. LIQUIDITY RATIOS: it measures the short-term solvency of the firm. In a short period

of a firm should be able to meet all its short-term obligation i.e. current liabilities and

provisions. It is current assets that yield funds in the short period. Current assets are those,

which the firm can convert it into cash within one year or short run. Current assets should

not only yield sufficient funds to meet current liabilities as they fall due but also to enable

the firm to carry on its day-to-day activities.

The following are the important liquidity ratios:

1. Current ratio

2. Acid test/quick ratio.

3. Cash ratio

4. Net working capital ratio

1.Current ratio: Current ratio is the ratio of current assets to current liabilities. Current

assets are the assets that are expected to be realized in cash or sold or consumed during the

normal operating cycle of the business or with in one year, which ever is longer, they include


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cash in hand and bank, bills receivable, net sundry debtors, stock of raw materials, finished

goods and working in progress, prepaid expenses, outstanding incomes, assured incomes and

short term or temporary investments. Current liabilities are the liabilities that are to be repaid

within a period of one year. They include bills payable, sundry creditors, bank overdrafts,

outstanding expenses, income receivable in advance, proposed dividend, provision for

taxation, unclaimed dividends and short term loans and advanced repayable within one year.

Any instalment of long-term liability payable within the next 12 months is also current

liability.

CURRENT RATIO= CURRENT ASSETS/ CURRENT LIABILITIES

Generally 2 : 1 ratio is considered ideal for the company.

2. ACID TEST/QUICK RATIO: the acid test ratio is the ratio between quick current assets

and current liabilities and calculated by dividing the quick assets by current liabilities. Quick

assets mean those which can be converted into cash immediately by exclusion of inventory

and prepaid expenses from current assets.

Acid test Ratio=Quick assets/Current liabilities.

Generally 1: 1 ratio is considered to be ideal for the company.

3. CASH RATIO: The cash ratio is the ratio of cash and bank balance, it is calculated

dividing cash and bank balance by current liabilities.

CASH RATIO= Cash and Bank balances/Current liabilities.

Generally 1 : 2 ratio is considered to be ideal for a company.


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4. NET WORKING CAPITAL RATIO: Working capital ratio refers to comparing current

assets to current liabilities and serve as the liquidity reserve avail. To satisfy contingencies

and uncertainties. It is calculated by dividing net working capital by capital employed.

Net Working Capital Ratio = net working capital/capital employed.

Generally higher ratio is considered ideal for a company.

CAPITAL STRUCTURE/LEVERAGE RATIO: These ratios indicate the relative

interests of owners and creditors in a business by showing long term financial

solvency and measure the enterprises ability to pay the interest regularly and to repay

the principal on maturity or in pre-determined instalments at due dates.

The significant leverage ratios are:

1. Debt Equity Ratio

2. Proprietary Ratio

3. Capital Gearing Ratio.

4. Fixed assets Ratio

5. Interest coverage Ratio

6. Dividend Coverage Ratio

7. Debt Service coverage Ratio.

1.Debt Equity Ratio: It reflects the relative claim of creditors and shareholders against the

assets of the business. Debt usually refers to long-term liability. Equity includes equity and

preference share capital and reserves.

Debt Equity Ratio=long term liabilities/share holders funds.

Ideal debt equity ratio is 2 : 1


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2.Propreitary ratio: It expresses the relationship between the net worth and total assets. A

high proprietary ratio is indicative of strong financial position of business.

Proprietary ratio = Net worth/ Total Assets

Net worth = Equity share capital + fictitious Assets

Total assets= fixed assets + Current Assets

Generally higher the ratio the ideal it is.

2. Capital Gearing Ratio: A company is said to be highly geared if it has a high capital

gearing ratio and lowly geared if the capital gearing ratio is low. The extent of gearing

determined the future financial structure of the business. A company that is highly geared

will have to raise funds by issuing fresh equity shares, whereas a lowly geared company

would find it attractive to raise funds by way of term loans and debentures.

3. Capital Gearing Ratio = funds bearing fixed interest and fixed dividend/equity

share holders funds

Funds bearing fixed interest and capital=Debentures + term loans +preference .

share capital.

Equity share holder funds=Equity share capital +reserves-fictitious funds.

4.Fixed Assets Ratio: This ratio indicates the mode of financial the fixed assets. It is

calculated as

Fixed assets Ratio= Fixed assets/capital employed


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Capital employed= equity share capital + preference share capital +reserves + long term

Liabilities Fictitious Assets.

Generally a ratio of 0.67 : 1 is considered ideal for a company.

5.Interest Coverage Ratio: This ratio is called as debt service ratio. This ratio indicates

whether a business is earning sufficient profits to pay the interest charges. It is calculated as

Interest coverage ratio=PBIT/Fixed interest charges

PBIT=Profit before interest and taxes=PAT + Interest + Tax

Generally a ratio of around 6 is normally considered as ideal for a company.

6.Dividend coverage ratio: It indicates the ability of a business to pay and maintain the fixed

preference dividend to preference shareholders.

Dividend coverage ratio=PAT/Fixed preference dividend.

PAT= Profit After Taxes

7.Debt service coverage Ratio: It indicates whether the business is earning sufficient profits

to pay not only the interest charges, but also the instalments due to the principal amount. It is

calculated as

Debt service Coverage Ratio =(PBIT/Interest + Periodic Loan Installation)/(1- Rate of

income Tax)

Generally greater the ratio, the better is the servicing ability of company.


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PROFITABILITY RATIO: Profitability ratios measure the profitability of a

company. Generally they are calculated either in relation to sales or in relation to

investments. The various profitability ratios are discussed under the following heads.

(A) GENERAL PROFITABILITY RATIOS:

1.Gross Profit Ratio:Gross profit is one of the most commonly used ratios. It reveals the

result of trading operations of the business. In other words, it indicates to us the profitability

of the business. It is calculated as

Gross Profit Ratio=(Gross Profit/Net sales)*100

Gross Profit=net sales-cost of goods sold.

Net Sales=Total Sales- Sales Returns

Cost of Goods Sold=Opening Stock + Purchases + Manufacturing expenses-closing Stock.

Generally the higher the ratio, the better will be the performance of the company.

2.NET PROFIT RATIO: It indicates the results of overall operations of the firm. While the

gross profit ratio indicates the extent of profitability of core operations. Net profit ratio tells

us about overall profitability. It is called as

Net Profit Ratio=(Net Profit after Tax/Net Sales)*100

Generally higher the ratio, the more profitable to the company.


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3.OPERATING RATIO: It expresses the relationship between expenses incurred for

running the business, and the resultant net sales. It is calculated as

Operating Ratio=cost of goods sold + Office and Administrative expenses + selling and

distribution Expenses.

Generally lower the ratio, the better it is to the company.

4.OPERATING PROFIT RATIO: It establishes the relationship between operating profit

and sales. It is calculated as

Operating Profit Ratio=(Operating Profit/Net Sales)*100

Generally higher the ratio, the better it is to the company.

5.EXPENSES RATIO: Expenses ratios are the ratios that supplement the information given

by the operating ratio. Each of the expense rations highlights the relationship given by the

particular expense and net sales. For example, factory expenses ratio is of factory expenses to

net sales any expenditure can be shown as a ratio to sales. All such ratios fall under the broad

head of expenses ratios.


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(B) OVERALL PROFITABILITY RATIOS:

1.RETURN ON CAPITAL EMPLOYED RATIO(ROCE) OR RETURN ON

INVESTMENT RATIO(ROD):

This ratio reveals the earning capacity of the capital employed in the business.

In other words, capital employed is permanent capital invested in the business. It is also

called capital and hence, the ratio is also known as return on invested capital

ROCE= (Profit before interest and taxes/capital employed) *100

2. RETURN ON NET WORTH(RONW): It indicates the return, which the shareholders are

earning on their resources invested in the business. It is calculated as

RONW=(Profit after Tax/Net Worth)*100

Generally higher the ratio, the better it is to the shareholders.

3.RETURN ON EQUITY CAPITAL: It expresses the return earned by the owners of the

business, after adjusting for debt and preference capital. It is calculated as

RETURN ON EQUITY= PAT- Preference dividend/equity shareholders funds.

Generally higher the ratio, the better it is to the company.

4.RETURN ON ASSETS RATIO(ROA): Return on assets reflects the return earned by the

firm for the company for the shareholders of the business on the investment of all the

financial resources committed to the business. It is calculated as

ROA=PAT/TOTAL SALES

Generally higher the ratio, the better it is to the shareholders.


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5.EARNINGS PER SHARE(EPS): It is the earning accruing to the equity shareholders on

every share held by them. It is calculated as

EPS= PAT-Preference dividend/number of equity shares.

Generally the ratio, the better is the performance of the company.

6.Dividends per share (DPS): It is the amount of dividend payable to the holder of one

equity share. It is calculated as

DPS=Dividend on equity share capital/number of equity shares

Generally from investors point of view, the higher the ratio, the happier the investor.

7.DIVIDEND PAY OUT RATIO: It is the ratio of dividend per share to earning per share. It

is calculated as

Dividend Pay Out Ratio=DPS/EPS

8.PRICE EARNING RATIO(P/E Ratio): It expresses the relationship between market price

of one share of a company and earnings per share of that company.

P/E Ratio=Market Price of Equity share/EPS

There is no ideal P/E ratio.


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9.DIVIDEND YIELD RATIO: It expresses the relationship between dividend earned per

share and the market price per share. In other words, it expresses the return on investment by

purchasing a share in the stock market , without accounting for any capital appreciation. It is

calculated as

DIVIDEND YIELD RATIO- Dividend per share/Market price of share.

10.BOK VALUE: It is the fraction of the net worth of the business as depicted in the balance

sheet, which is attributable to one equity share of the business . it is calculated as

BOOK VALUE=Equity share holders funds/number of equity shares.

Generally higher the book value of the share, the more strong the business is assumed to be.

ACTIVITY RATIO: Activity ratios measures the efficiency or effectiveness with

which a firm managers its resources or assets. They calculate the speed with which

various assets, in which funds are blocked up, get converted into sales. The significant

activity or turnover ratios are

1.INVENTORY TURN OVER RATIO OR STOCK TURN OVER RATIO: Stock turnover

ratio indicates the number of items the stock has turned over into sales in a year. It indicates

to us the extent of stock required to be held in order to achieve a desired level of sales.

Inventory Turn Over Ratio = Cost of Goods Sold/Average Stock

Cost of Goods Sold=Sales-Gross Profit.

Average Stock=(Opening Stock + Closing Stock)/2

Generally 8 is considered ideal ratio of the company.


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2.DEBTORS TURN OVER RATIO: Debtors Turn Over Ratio expresses the relationship

between debtors and net credit sales. It is calculated as

Debtors Turn Over ratio= Net Credit Sales/Average Debtors.

Generally the ratio between 10-12 an ideal value for the company.

3.CREDITORS TURN OVER RATIO: Creditors turn over ratio expresses the relationship

between creditors and net credit purchases. It is calculated as

Creditors Turn Over Ratio= Net Credit Purchases/Average Creditors.

Generally the ratio 12 is an ideal for the company.

4.WORKING CAPITAL TURN OVER RATIO: This ratio is defined as Working Capital

Turn Over Ratio= Cost of Goods Sold/Working Capital

Working Capital=Current Assets- Current Liabilities.

Generally higher ratio indicates efficient utilization of firms funds.

5.Fixed Assets Turn Over Ratio:It is Defined as ratio of Net Sales to the Fixed Assets.

Generally the ratio of around 5 is considered ideal for the company.

6.TOTAL ASSETS TURN OVER RATIO:It is defined as ratio of Net Sales to the Total

Sales.

Generally higher the ratio, the greater is the ability of the firm to utilize the investments in the

business.


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IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management, ratios are of crucial significance. The importance

of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the

drawing of interference regarding the performance of a firm. Ratio analysis is relevant in

assessing the performance of a firm in respect of the following aspects:

1] Liquidity position,

2] Long-term solvency,

3] Operating efficiency,

4] Overall profitability,

5] Inter firm comparison

6] Trend analysis.

1] LIQUIDITY POSITION: -

With the help of Ratio analysis conclusion 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. A firm can be said to have the ability to meet its

short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing

debt usually within a year as well as to repay the principal. This ability is reflected in the

liquidity ratio of a firm. The liquidity ratio are particularly useful in credit analysis by bank &

other suppliers of short term loans.

2] LONG TERM SOLVENCY: -


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Ratio analysis is equally useful for assessing the long-term financial viability of a

firm. This respect of the financial position of a borrower is of concern to the long-term

creditors, security analyst & the present & potential owners of a business. The long-term

solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s

that focus on earning power & operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this respect. The

leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of

various sources of finance or if it is heavily loaded with debt in which case its solvency is

exposed to serious strain. Similarly the various profitability ratios would reveal whether or

not the firm is able to offer adequate return to its owners consistent with the risk involved.

3] OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint

of management, is that it throws light on the degree of efficiency in management &

utilization of its assets. The various activity ratios measures this kind of operational

efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the salesrevenues generated by the use of its assets- total as well as its components.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial position

of a firm, the management is constantly concerned about overall profitability of the

enterprise. That is, they are concerned about the ability of the firm to meets its short term as

well as long term obligations to its creditors, to ensure a reasonable return to its owners &

secure optimum utilization of the assets of the firm. This is possible if an integrated view is

taken & all the ratios are considered together.


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5] INTER FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but also serves as

a stepping-stone to remedial measures. This is made possible due to inter firm comparison &

comparison with the industry averages. A single figure of a particular ratio is meaningless

unless it is related to some standard or norm. one of the popular techniques is to compare the

ratios of a firm with the industry average. It should be reasonably expected that the

performance of a firm should be in broad conformity with that of the industry to which it

belongs. An inter firm comparison would demonstrate the firms position vice-versa its

competitors. If the results are at variance either with the industry average or with the those of

the competitors, the firm can seek to identify the probable reasons & in light, take remedial

measures.

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into account. In other

words, whether the financial position of a firm is improving or deteriorating over the years.

This is made possible by the use of trend analysis. The significance of the trend analysis of

ratio lies in the fact that the analysts can know the direction of movement, that is, whether the

movement is favorable or unfavorable. For example, the ratio may be low as compared to the

norm but the trend may be upward. On the other hand, though the present level may be

satisfactory but the trend may be a declining one.

ADVANTAGES OF RATIO ANALYSIS


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When comparing performance over time, there is need to consider the changes in

technology. The movement in performance should be in line with the changes in

technology.

Changes in accounting policy may affect the comparison of results between differentaccounting years as misleading.

Chapter 2

COMPANY PROFILE


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COMPANY PROFILE

BHARAT HEAVY ELECTRICALS LIMITED

The vital role played by the BHEL today in the country is the mark of it continuous efforts to

improve the service in the nation by consultancy, manufacturing and offering services in

power sector.

This success story of BHEL however goes back to 1956 when its first plant was set

up in BHOPAL. Three more major plants followed in HARIDWAR, HYDERABAD and

THIRUCHIRAPALLI flowed this. These plants have been the core of BHELS efforts to

grow and diversify and become one of the most integrated power and industrial equipment

manufacturers in the world. The company now has 14 manufacturing units,8 service centres

and 4 power sector regional centres, besides project sites spread all over India and abroad.

BHEL manufactures over 180 products under 30 major product groups and meets the needs

of core sector like power, industry, transmission, defence, telecommunications, oil business

etc. Its products have established an enviable reputation for high quality and reliability. This

is due to the emphasis placed all along on design, engineering and manufacturing to

international standards by acquiring and adopting some of the best technologies developed inits own R&D centres. BHEL has acquired ISO 9000 certification for environments. BHEL

caters to the needs of different sectors by designing and manufacturing according to the need

of its client in power sector.


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COMPANY VISION,MISSION and OBJECTIVE

VISION:

A world class, innovation, competitive and profitable engineering enterprise

providing total business solutions.

MISSION:

To be the leading engineering enterprise providing quality products systemand services in the field of energy, transportation, industry, infrastructure and other

potential areas.

VALUES:

1. Meeting commitments made to external and internal customers.

2. Faster learning, creativity and speed of response.

3. Respect for dignity and potential of individuals.

4. Loyalty and pride of the company.

5. Team playing.

6. Zeal to excel.

7. Integrity and fairness in all matters.


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OBJECTIVES

GROWTH:

To ensure a steady growth by enhancing the competitive edge of BHEL in exiting

business, new areas and international operation so as to fulfil national expectations from

BHEL.

PROFITABILITY:

To provide a reasonable and adequate return on capital employed, primarily

through improvements in operational efficiency, capacity utilization and productivity and

generate adequate internal resources to finance the company growth. Confidence in providing

increased value for this money through international standards of product, quality,

performance and superior customer services.

TECHNOLOGY:

To achieve technology excellence in operations by development of indigenous

technologies to and efficient absorption and adaptation of imported technologies to suit

business needs and priorities and provide a competitive advantage of the company.

IMAGE:

To fulfil the expectation which stock holders like government as own employees,

customers and the country at large have from BHEL.


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SWOT ANALYSIS OF BHEL

The strength, weakness, opportunities and threats which are being experienced by BHEL as a

growing concern have been summarized up in the following lines.

STRENGTHS

1. Vast pool of trained man power.

2. Excellent state of art facilities.

3. Good working atmosphere

4. Rapport between management and union.

5. Product manufactured international quality

6. Low labour cost and low manufacturing cost.

WEAKNESS

1. Excess man power

2. Slippage in delivery commitments

3. System implementation adequate

4. No financial package

5. Inadequate compensation package to employees.


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OPPORTUNITIES

1. Growing power sector machinery

2. Liberalization has opened up the market

3. Navratna company status

4. Dominant player in domestic market.

THREATS

1. Liberalizationentry of MNCS or private sector-more competition.

2. MNCS taking away good employees with attractive packages.

3. Government taxation policy-against manufacturing sector.

4. Poor infrastructure.


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PRODUCTS OF BHEL

BHEL manufactures a wide range of power plant equipments and also caters to the

industry sector.

1. Gas turbines

2. Steam turbines

3. Compressors

4. Turbo generators.

5. Pumps

6. Pulverizes

7. Switchgears

8. Oil rigs

9. Electrics for urban transportation system

10. Telecommunication.


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Chapter 3

Research methdology


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METHODOLOGY:

The study basically depends on:

1. PRIMARY DATA

2. SECONDARY DATA

PRIMARY DATA COLLECTION:

The information collected directly without any reference is primary data. In the study it is

mainly through conservation without concerned officers or staff member either individually

or collectively. The data includes.

1. Conducting personal interview with officers of the company.

2. Individual observation and inferences.

3. From the people who are directly involved with the transaction of the firm.

SECONDARY DATA COLLECTION

Study has been taken from secondary sources i.e. published annual report of the

company. Editing. Classifying and tabulation of the financial data for this purpose

performance data of BHEL or the yeary2006-2007 to 2011-2012 have been used.


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Chapter 4

Data analysis and interpretation


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Current Ratio

year current assets current liability Ratios

2006-07 276062 208869 1.32

2007-08 310002 243220 1.27

2008-09 453597 376332 1.2

2009-10 580804 397574 1.46

2010-11 771519 502024 1.54

Interpretation The ideal ratio for the concern is 2:1 i.e. current assets doubled for the current

liabilities considered to be satisfactory.The current ratio of BHEL is less than 1 .Thus it has

to maintain its efficient current assets.


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Acid Test Ratio

Year Liquid assets Liquid liabilities

2006-07 12 2088692007-08 14 243220

2008-09 15 376332

2009-10 1475 397574

2010-11 1415 502024

Acid Test Ratio Current Assets Inventory / Current Liabilities

The ideal quick ratio is 1:1 which is considered satisfactory for the concern. The company is

maintaining the ratio above the standard norm , thus the management of BHEL is label to

meet its current obligations.


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Net working capital

year Net working capital Capital employed Ratios

2006-07 67193 79459 0.84

2007-08 96410 107986 0.89

2008-09 77265 96894 0.797

2009-10 183230 207051 0.884

2010-11 269495 305907 0.881

NET WORKING CAPITAL = NET WORKING CAPITAL / CAPITAL EMPLOYED

A higher networking capital ratio indicates efficient utilization of working capital . Therefore

the company should concentrate more on working capital management


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Debt equity ratio

year Total debt Equity Ratios

2006-07 607 3252 0.182007-08 587 3252 0.18

2008-09 2566 3252 0.789

2009-10 2034 3252 0.62

2010-11 2265 3252 0.7

Debt Equity Ratio :

The debt equity ratio has been increasing over the years and it has been maintained at a level

of .62 for the financial year 2009-10


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Fixed assets ratio

year Fixed Assets Capital employed Ratios

2006-07 12347 79459 0.152007-08 9909 107986 0.09

2008-09 17699 96894 0.18

2009-10 22595 207051 0.11

2010-11 31830 305907 0.1

Fixed Assets Ratio = Fixed Assets / Capital Employed

Generally financially well managed company will have its fixed assets financed by long term

funds.There fore , the fixed assets ratio should never be more than !.A ratio of .67 is

considered ideal.The results forBHEL is much less at 0.1


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Interest coverage ratio

year PBIT Interest Ratios

2006-07 63290 2300 27.512007-08 68916 5870 11.74

2008-09 68478 6826 10.03

2009-10 86438 7101 12.17

2010-11 130330 8583 15.18

Interest Coverage Ratio.= PBIT/INTREST

Interest coverage ration of BHEL is not constant , from 2008-09 the ratio is10 as in 2009 -10

the ratio is 12.17, There is a random fluctuation in the ratio


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Gross profit

year Gross profit Net sales Ratios

2006-07 63290 289241 0.218

2007-08 68916 310235 0.2224

2008-09 68478 414816 0.165

2009-10 86483 500342 0.172

2010-11 130330 665323 0.196

Gross Profit = Gross /net sales

Generally the higher gross profit ratio , the better for the performance of the concern .In

BHEL , the company has started to increase from the year on year which is a very good sign

for the company.


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Operating ratios

year

Operating

cost Net sales Ratios2006-07 221227 289491 0.76

2007-08 234677 310235 0.76

2008-09 338382 414816 0.81

2009-10 404647 500342 0.8

2010-11 524531 665323 0.79

Operating Ratio : Operating Cost / Net Sales

Generally the lower the Operating Cost , the better for the concern.The ratio should be

below1 which is satisfactory for the concern.


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Debtors turnover ratio

year Net credit sales Average debtors Ratios

2006-07 289491 177301 1.632007-08 310235 215291 1.44

2008-09 414816 287414 1.44

2009-10 500342 328201 1.53

2010-11 665323 537364 1.24

Debtors Turnover Ratio = Net Credit Sales / Average Debtors

The BHEL`s debtor turnover ratio was below 2 .Its has bee increasing since 2008-09 from

1.44 to 1.53 in 2009-10, the increasing trend Implies the efficient management of Debtor and

credit sales.


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Creditors turnover ratio

year Net credit purchases Average creditors Ratios

2006-07 21772 46452 0.48

2007-08 25459 54586 0.4664

2008-09 31900 58078 0.5493

2009-10 60293 88228 0.68

2010-11 65700 103305 0.64

Creditors Turnover Ratio : Net Credit Purchases /Average Creditors

Interpretation : The BHEL`s creditors Turn Over Ratio is at 0.68 , it has been on the

increasing trend since past two financial years.The management should try to reduce this by

adopting proper payment policies.


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Fixed asset turnover ratio

year Net sales Fixed assets Ratios

2006-07 289491 12247 23.632007-08 310235 9909 31.3

2008-09 414816 17699 23.43

2009-10 500342 22595 22.14

2010-11 665323 31830 20.9

Fixed Assets Turnover Ratio. = Net Sales / Fixed Assets

At high fixed assets turnover ratio indicates better utilization of the firms fixed assets. A ratioaround 5 is considered ideal for the concern .In BHEL it is more than 22.This is a very good

sigh for the company.


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Total asset turnover ratio

year Total debt Equity Ratios

2006-07 607 3252 0.182007-08 587 3252 0.18

2008-09 2566 3252 0.78

2009-10 2034 3252 0.62

2010-11 2265 3252 0.7

Total Assets Turnover Ratio : Net Sales / Total Assets

The Total Assets turnover ratio of the BHEL is below 1 . This shows greater ability of the

firm to utilize the investment in the business


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FINDINGS

1. The ideal ratio for the concern is 2:1 i.e. current assets doubled for the current

liabilities considered to be satisfactory. The current ratio of BHEL is less than ! .Thus

it has to maintain its efficient current assets.

2. The ideal quick ratio is 1:1 which is considered satisfactory for the concern. The

company is maintaining the ratio above the standard norm , thus the management of

BHEL is label to meet its current obligations.

3. A higher networking capital ratio indicates efficient utilization of working capital .

Therefore the company should concentrate more on working capital management

4. The debt equity ratio has been increasing over the years and it has been maintained at

a level of .62 for the financial year 2009-10

5. Generally financially well managed company will have its fixed assets financed by

long term funds. There fore , the fixed assets ratio should never be more than !.A ratio

of .67 is considered ideal. The results for BHEL is much less at 0.11

6. Interest coverage ration of BHEL is not constant , from 2008-09 the ratio is10 as in

2009 -10 the ratio is 12.17, There is a random fluctuation in the ratio


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7. Generally the higher gross profit ratio , the better for the performance of the

concern .In BHEL , the company has started to increase from the year on year which

is a very good sign for the company.

8. Generally the lower the Operating Cost , the better for the concern. The ratio should

be below1 which is satisfactory for the concern.

9. The higher the ROCE ratio , the better for the concern. The company has been

keeping up the good performance is increasing at the rapid phase which in turn is a

good sign for the company.

10. The BHEL`s debtor turnover ratio was below 2 .Its has bee increasing since 2008-09

from 1.44 to 1.53 in 2009-10, the increasing trend Implies the efficient management

of Debtor and credit sales.

11. The BHEL`s creditors Turn Over Ratio is at 0.68 , it has been on the increasing trend

since past two financial years. The management should try to reduce this by adopting

proper payment policies.

12. At high fixed assets turnover ratio indicates better utilization of the firms fixed assets.

A ratio around 5 is considered ideal for the concern .In BHEL it is more than 22.This

is a very good sigh for the company.


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2. The Net Working Capital of BHEL is good for almost in range for each and every

year. It is always in the ideal ratio for every organization.

3. The BHEL is using the moving average method in valuation of stock.

4. The debtors constitute nearly 50% of the Total Current Assets. For the Company it is

difficult to manage the accounts receivables. The company should collect debts as

quickly as possible.

5. The company has to exercise cost of control and cost of reduction techniques to

increase its profitability.

6. The debtors turn over ratio in 2005-2006 is 1.97. the ratio has increased than previous

years except for 2003-2004, which had 2.10. the decreasing ratio shows the inefficient

management. They should concentrate more on the collection of the debts.

7. The return on investment ratio of the BHEL is 59.40 in 2005-2006. It has increased

when compared to previous years ratios. It is beneficial to investors who are

interested to know the profits earned by the company.

8. The investment in loans and advances should be minimized to possible extent.

9. Effective internal control system should be established. So that it can have control

over all aspects of the company.


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Last 5 year Balance sheet of BHEL

Balance Sheet of Bharat HeavyElectricals

------------------- in Rs. Cr. -------------------

Mar '11 Mar '10 Mar '9 Mar '8 Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds

Total Share Capital 489.52 489.52 489.52 489.52 489.52

Equity Share Capital 489.52 489.52 489.52 489.52 489.52

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 24,883.69 19,664.32 15,427.84 12,449.29 10,284.69

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Networth 25,373.21 20,153.84 15,917.36 12,938.81 10,774.21

Secured Loans 0.00 0.00 0.00 0.00 0.00

Unsecured Loans 123.43 163.35 127.75 149.37 95.18

Total Debt 123.43 163.35 127.75 149.37 95.18

Total Liabilities 25,496.64 20,317.19 16,045.11 13,088.18 10,869.39

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Application Of Funds

Gross Block 9,729.62 8,049.30 6,579.70 5,224.43 4,443.03


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Less: Accum. Depreciation 5,409.83 4,648.82 4,164.74 3,754.47 3,462.21

Net Block 4,319.79 3,400.48 2,414.96 1,469.96 980.82

Capital Work in Progress 1,324.63 1,762.62 1,550.49 1,212.70 658.47

Investments 461.67 439.17 79.84 52.34 8.29

Inventories 13,444.50 10,963.03 9,235.46 7,837.02 5,736.40Sundry Debtors 26,336.13 27,354.62 20,688.75 15,975.50 11,974.87

Cash and Bank Balance 6,671.98 1,430.15 865.08 1,950.51 1,511.02

Total Current Assets 46,452.61 39,747.80 30,789.29 25,763.03 19,222.29

Loans and Advances 14,217.32 13,267.07 4,801.24 4,616.67 7,366.17

Fixed Deposits 0.00 8,200.00 8,925.00 8,364.16 6,875.00

Total CA, Loans & Advances 60,669.93 61,214.87 44,515.53 38,743.86 33,463.46

Deffered Credit 0.00 0.00 0.00 0.00 0.00

Current Liabilities 33,638.01 31,469.58 28,097.73 23,415.10 16,632.97

Provisions 7,641.37 15,030.37 4,417.98 4,975.58 7,608.68

Total CL & Provisions 41,279.38 46,499.95 32,515.71 28,390.68 24,241.65

Net Current Assets 19,390.55 14,714.92 11,999.82 10,353.18 9,221.81

Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00

Total Assets 25,496.64 20,317.19 16,045.11 13,088.18 10,869.39

Contingent Liabilities 2,424.33 2,324.26 2,538.13 2,546.25 1,673.19

Book Value (Rs) 103.67 411.71 325.16 264.32 220.10

Consolidated Balance Sheet of

Bharat Heavy Electricals ------------------- in Rs. Cr. -------------------


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Mar '11 Mar '10 Mar '9 Mar '09

12 mths 12 mths 12 mths 12 mths

Sources Of Funds

Total Share Capital 489.52 489.52 489.52 489.52

Equity Share Capital 489.52 489.52 489.52 489.52

Share Application Money 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00

Init. Contribution Settler 0.00 0.00 0.00 0.00

Preference Share Application Money 0.00 0.00 0.00 0.00

Employee Stock Opiton 0.00 0.00 0.00 0.00

Reserves 24,913.54 19,665.56 15,406.46 12,433.22

Revaluation Reserves 0.00 0.00 0.00 0.00

Networth 25,403.06 20,155.08 15,895.98 12,922.74Secured Loans 242.99 0.00 1.83 0.00

Unsecured Loans 125.83 270.17 146.47 166.56

Total Debt 368.82 270.17 148.30 166.56

Minority Interest 4.97 0.00 0.00 0.00

Policy Holders Funds 0.00 0.00 0.00 0.00

Group Share in Joint Venture 0.00 0.00 0.00 0.00

Total Liabilities 25,776.85 20,425.25 16,044.28 13,089.30

Mar '12 Mar '11 Mar '10 Mar '09

12 mths 12 mths 12 mths 12 mths

Application Of Funds

Gross Block 9,877.47 8,344.13 6,857.13 5,500.84

Less: Accum. Depreciation 5,334.61 4,734.43 4,248.76 3,836.47

Net Block 4,542.86 3,609.70 2,608.37 1,664.37

Capital Work in Progress 1,739.20 2,202.77 1,552.82 1,157.41

Investments 5.94 11.30 5.94 5.94

Inventories 13,525.48 11,017.49 9,283.78 7,891.99

Sundry Debtors 26,530.53 27,510.46 20,792.61 16,071.53Cash and Bank Balance 6,734.33 1,449.52 888.56 1,955.87

Total Current Assets 46,790.34 39,977.47 30,964.95 25,919.39

Loans and Advances 14,351.94 5,674.64 4,672.00 4,591.05

Fixed Deposits 0.00 8,256.88 8,967.86 8,373.59

Total CA, Loans & Advances 61,142.28 53,908.99 44,604.81 38,884.03

Deffered Credit 0.00 0.00 0.00 0.00

Current Liabilities 33,965.31 31,690.97 28,285.14 23,628.28

Provisions 7,688.12 7,620.36 4,444.88 4,994.17

Total CL & Provisions 41,653.43 39,311.33 32,730.02 28,622.45

Net Current Assets 19,488.85 14,597.66 11,874.79 10,261.58


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Minority Interest 0.00 0.00 0.00 0.00

Group Share in Joint Venture 0.00 0.00 0.00 0.00

Miscellaneous Expenses 0.00 3.82 2.36 0.00

Total Assets 25,776.85 20,425.25 16,044.28 13,089.30

Contingent Liabilities 2,117.68 2,574.31 2,548.22 2,584.45

Book Value (Rs) 103.79 411.73 324.73 263.99

BIBILOGRAPHY

Books and references

1. Khan M.Y, Jain P.K., (2010), Financial Management, 3rd edtion, McGraw Hill

Education.

2. Maheshwari S.N., (2009), Financial Management- Principles and Practice, 9th

Edition Sultan Chand & Son.

Websites


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1. http://www.bhel.com/financial_information/index.php

2. http://www.studyfinance.com/lessons/workcap

News paper

1. Economics times

2. Times of india

A Project Report Lalit[1]

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