bhel project abhinov singh

8/7/2019 BHEL Project Abhinov Singh

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A SUMMER TRAINING REPORT

ON

FINANCIAL STATEMENT

ANALYSIS

Submitted towards partial fulfillment for Award

Of the Degree of

MASTER OF BUSINESS ADMINISTRATION(FINANCE MANAGEMENT)

(SESSION-2009-10)

Submitted to: - Submitted by:-

Institute of Economics & Finance ABHINOV SINGHB.U., Jhansi MBA (FM) 3rd SEM.

Roll No = 01

INSTITUTE OF ECONOMICS AND FINANCEBUNDELKHAND UNIVERSITY,

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JHANSI (UP)

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PREFACE

Every management student has to undergo a practical

training in order to get an insight of the real life situation that

how the organization actually functions in the competitive

business environment . As a management student has only a

theoretical knowledge, which he / she get from the institution.

But in practice he don`t know how to apply this theoretical

knowledge can be practically applied and gets more benefits.

So the theoretical knowledge thus gained by the student

from the institution plays a major role in understanding various

matters and terms which are usually used in the organization.

With this objective in mind, I did my summer internshipfrom BHEL, Jhansi (U.P.), for the partial fulfillment of Master

Degree ofBusiness Administration (Financial Management).

The duration was six weeks.

During this period , I started my rotation, which is a part of

my training, I visited various department during this period. I

started my project on FINANCIAL STATEMENT

ANALYSIS : RATIO ANALYSIS of BHEL in order to

understand the whole procedure or the different types of

department as per their grade and entitlement.

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ACKNOWLEDGEMENT

I am highly indebted to all the executives of BHEL ,

Jhansi who have given me the their precious time and have

given their valuable guidance and important role in making me

able to do this vocational training and without whose help my

effort would not have taken the present from.

I am also thankful for the great support that Mrs. Seema S.

Rawal Dy. Manager (HR), who has given me opportunity to get

training in BHEL.

I have no word to express my gratefulness to my project

co-ordinatorMr. JANMEJAY SHARMA Sir for his inspiring

guidance, valuable help and angelic support for the completion

of my project on FINANCIAL STATEMENT ANALYSIS:

RATIO ANALYSIS of BHEL, Jhansi Unit.

I am also thankful to Mr. S.K. Bhattacharya , Mr. J.K.

VERMA , Mr. Sanjay Kumar , Mr. Bhaskar Chaturbedi

for their guidance and kind cooperation in providing us the

necessary facilities and suggestions.

I would like to extend my gratitude to the

management and staff of BHEL, Jhansi for their co-operation

during my training.

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DECLARATION

This is my original work, This project work has been conducted for

partial fulfillment of the degree of MASTER OF BUSSINESS

ADMNISTRATION (MBA) in BUNDELKHAND UNIVERSITY,

(INSTITUTE OF ECONOMICS AND FINANCE ), JHANSI.

This is completed with the help of managing staff of the BHARAT

HEAVY ELECTRICALS LIMITED (B.H.E.L.), JHANSI.

ABHINOV SINGH

MBA (FM) 3rdsem

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CONTENTS

RELEVANCE OF THE STUDY

RESEARCH METHODOLOGY

CHAPTER 1 : CORPORATE PROFILE OF

BHEL

INTRODUCTION

MANUFACTURING UNITS

OBJECTIVES

SWOT ANALYSIS

CHAPTER 2 : BHEL , JHANSI UNITS

SECTIONS OF BHEL

PRODUCT PROFILE OF BHEL, JHANSI

CUSTOMERS

COMPETITORS

FINANCIAL DEPARTMENTS

CHAPTER 3 : FINANCIAL STATEMENT

ANALYSIS

RATIO ANALYSIS INTERPRETATION

GUIDELINES OR PRECUATIONS

USE AND SIGNIFICANCE

LIMITATIONS

CLASSIFICATION

LIQUIDITY RATIO

LEVERAGE RATIO

ACTIVITY RATIO

PROFITABILITY RATIO

ANALYSIS AND INTERPRETATION

CHAPTER 4 :CONCLUSION

BHEL AT A GLANCE

CHAPTER 5 :APPENDIX

OPERATIONG RESULTS

BALANCE SHEET

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RELEVANCE OF THE STUDY

`Financial Analysis` also know as analysis and interpretation

of financial statement refers to the process of determining financial

strengths and weaknesses of the firm by establishing strategic relation

between the items of the balance sheet , profit and loss account and

other operative data . Analyzing financial statement, according to

Metcalf and Titard, is the process of evaluating the relationship

between component parts of the financial statement obtain a better

understanding of a firms position and performance.

The purpose of financial analysis is to diagnose the information

contained in financial statement so as to judge the profitability and

financial soundness of the firm. Just like doctor examines his patient

by recording his body temperature , blood pressure , etc . before

making his conclusion regarding the illness and before giving his

treatment , a financial analysis analyses the financial statements

with various tools of analysis before commenting upon the financial

health or weakness of an enterprise. The analysis and interpretation of

financial statement is essential to bring out the mystery behind the figures

in financial statements.

There are various devices of financial analysis. Here, for the purpose

of our project, we have concentrated on mainly one method of financial

analysis; i.e. RATIO ANALYSIS. We shall further see the effect and impact

of ratio analysis in the Jhansi unit of Bharat Heavy Electronic Limited

(BHEL).

The ratio analysis is one of the most powerful tools of financial

analysis. It is the process of establishing and interpreting various ratios

(quantitative relationship between figures and groups of figures). It is

with the help of ratio that the financial statement can be analysis more

clearly and decisions made from such analysis. This will help in

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predicting the general performance and feasibility of the company BHEL,

Jhansi unit.

RESEARCH METHODOLOGY

OBJECTIVE OF THE STUDY:

To know the ability of firm to meet its current obligation.

To measure the efficiency and effectiveness with which a firm

manages its resources and its assets.

PROCESS OF RESEARCH:

The proposed research process includes collection of data, analysis

of data, interpretation of data and deriving conclusion.

The collection involves secondary data collected from BHEL, Jhansiunit. The secondary data consists of the company records

(annual reports) ,internet as well as the book on the subjects by

different authors for the study on the particular issue.

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CHAPTER. 1

CORPORATE

PROFILE

9

SOURCES OF DATA

SECONDARY DATA(Annual reports ,books, internet)

PRIMARY DATA( Not used)


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OF

BHEL

INTRODUCTION TO THE COMPANY

BHEL is the largest engineering and manufacturing enterprise in India in the

energy/infrastructure sector today. BHEL was established more than 40 years

ago when its first plant was set up in Bhopal ushering in the indigenous Heavy

Electrical Equipment industry in India, a dream that has been more than

realized with a well-recognized track record of performance.

BHEL caters to core sectors of the Indian Economy viz., Power Generation &

transmission, Industry, Transportation, Telecommunication, Renewable

Energy, Defense, etc. The wide network of BHELs 14 manufacturing

divisions, four Power Sector regional centers, over 100 project sites, eight

service centers and 18 regional offices, enables the company to promptly serve

its customers and provide them with suitable products, systems and services-

efficiently and at competitive prices.

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POWER GENERATION

Power generation sector comprises thermal, gas, hydro, and nuclear

power plant business. As on 31.3.2002, BHEL supplied sets account for

nearly 67,232 MW or 64 % of the total installed capacity of 1, 04,917

MW in the country, as against Nil till 1969-70.

INDUSTRIES

BHEL is a major contributor of equipment and systems to industries,

cement, sugar, fertilizer, refineries, petrochemicals, paper, oil and gas,

metallurgical and other process industries. The range of systems &

equipment supplied includes: captive power plants, co-generation plants,

DG power plants, industrial steam turbines, industrial boilers and

auxiliaries, waste heat recovery boilers, gas turbines, heat exchangers and

pressure vessels, centrifugal compressors, electrical machines, pumps,

valves, seamless steel tubes, electrostatic precipitators, fabric filters,

reactors, fluidized bed combustion boilers, chemical recovery boilers and

process controls.

TELECOMMUNICATION

BHEL also caters to Telecommunication Sector by way of small, medium

and large switching systems.

RENEWABLE ENERGY

Technologies that can be offered by BHEL for exploiting non-

conventional and renewable sources of energy include: wind electric

generators, solar photovoltaic systems, solar heating systems, solar

lanterns and battery-powered road vehicles.

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OIL AND GAS

BHELs products range includes Deep Drilling Oil Rigs, Mobile Rigs,

Work Over Rigs, Well Heads and X-Mas Trees, Choke and Kill

Manifolds, Full Bore Gate Valves, Mudline Suspension System, Casing

Support system Sub-Sea Well Heads, Block valves, Seamless pipes,

Motors, Compressor, Heat Exchangers etc.

INTERNATIONAL OPERATIONS

BHEL is one of the largest exporters of engineering products & services

from India, ranking among the major power plant equipment suppliers

in the world.

VISION, MISSION AND VALUES OF BHEL

VISION

A World-Class Engineering Enterprise Committed to Enhancing

Stakeholder Value.

MISSION

To be an Indian Multinational Engineering Enterprise providing

Total Business Solutions through Quality Products, Systems and

Services in the fields of Energy, Industry, Transportation,

Infrastructure and other potential areas.

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VALUES

Zeal to Excel and Zest for Change.

Integrity and Fairness in all Matters.

Respect for Dignity and Potential of Individuals.

Strict Adherence to Commitments.

Ensure Speed of Response.

Foster Learning, Creativity and Teamworks

Loyalty and Pride in the Company

MANUFACTURING UNIT

FIRST GENERATION UNITS

Bhopal : Heavy Electrical Plant.

Haridwar : Heavy Electrical Equipment Plant.Hyderabad : Heavy Electrical Power Equipment Plant.

SECOND GENERATION UNITS

Tiruchy : High Pressure Boiler Plant.

Jhansi : Transformer and Locomotive Plant.

Haridwar : Central Foundry and Forge Plant.

Tiruchy : Seamless Steel Tube Plant.

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UNITS THROUGH ACQUISTION & MERGER

Bangalore : Electronics Division,

Electro Porcelain Division.

NEW MANUFACTURING UNITS

Ranipet : Boiler Auxiliaries Plant.

Jagdish : Insulator Plant.

Govindwal : Industrial Valve Plant.

Rudrapur : Component and Fabrication Plant.

Bangalore : Energy Systems Division

BHEL is growing concern to meet the changing needs of the nation

has taken it beyond power into the total gamut of energy, industry and

transportation BHEL is able to offer a service in each of this fields. It;s

manufacturing capability is supported by a corporate R&D division at

Hyderabad works closely with the research and development cells at

various units and Welding Research Institute at Tiruchinapalli.BHEL OBJECTIVES

A dynamic organization is one which keeps its aim and adopts itself

to the changing environment .So here it is same with this concern i.e.

BHEL.

BHEL objectives have been redefined in the corporate plant for the

90`s. The objectives of BHEL are discussed below:-

BUSINESS MISSION

To maintain a leading position as a supplies of quality equipment

system and services in the conversion, transmission, utilization and

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conservation or energy for application in the areas or electric power,

transportation , oil and gas exploration and industries.

Utilization Company`s and resources to expand their business in the

allied and other priority sectors of the economy like defense,

communication and electronics.

GROWTH

To ensure a steady growth in the competitive era. In this

competitive market the company has to grow itself so as to make a

distinct entity from its competitors, as well as to explore itself

internationally.

PROFITABILITY

To provide a reasonable and adequate return on capital employed,

primarily through improvement in professional efficiency, capacity

utilization. High productivity generate adequate internal resources to

finance companys growth.

FOCUS

To build a high degree of customer confidence by providing

increased value for his money through international standards of the

product quality performance and superior customer service.

PEOPLE ORIENTATION

To enable each employee to achieve his potential, improve his

capabilities, perceive his role and responsibilities, participate and

contribute to the growth and success of the company.

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SWOT ANALYSIS OF BHEL

STRENGTHS

The company has 180 products under 30 major product groups

that caters the need of the core sectors like: power, industry,

transmission, transportation, defense, telecommunication and oil

business.

It has an ability to acquire modern technology and make it

suitable to the Indian conditions, which has been an exceptional

strength for the company.

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WEAKNESSES

PSU status is a big weakness for BHEL as it is subject to its rules

and regulation and is forced to carry a huge amount of labour

force, which is not able to retrench.

The company offers very stringent credit facilities to the customers

and this is a weakness when it is compared in the face of risingcompetition.

The company is vertically integrated, which could have been

avoided by outsourcing its components for power generation and

transmission. This could have reduced cost.

OPPORTUNITIES

The power sector reforms are expected to pick up in the near future

in India, which would directly benefit BHEL.

Increase in defense budget will increase the top line for the

company.

THREATS

Recently, the government has permitted the import of second hand

capital goods that are 10 year old without the need for license. This

move will definitely increase competitive pressure on BHEL.

CHAPTER. 2

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BHEL

JHANSI

UNIT

BHARAT HEAVY ELECTRICALS LIMITED:

JHANSI (UNIT)

A Brief Introduction

By the end of 5th five-year plan, it was envisaged by the

planning commission that the demand for power transformer would rise

in the coming years. Anticipating the countrys requirement BHEL

decided to set up a new plant, which would manufacture power and other

types of transformers in addition to the capacity available in BHEL

Bhopal. The Bhopal plant was engaged in manufacturing transformers of

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large ratings and Jhansi unit would concentrate on power transformer up

to 50 MVA, 132 KV class and other transformers like Instrument

Transformer s, Traction transformers for railway etc.

This unit of Jhansi was established around 14 km from the city on

the N.H. No 26 on Jhansi Lalitpur road. It is called second-generation

plant of BHEL set up in 1974 at an estimated cost of Rs 16.22 corers

inclusive of Rs 2.1 cores for township. Its foundation was laid by late

Mrs. Indira Gandhi the prime minister on 9th Jan. 1974. The commercial

production of the unit began in 1976-77 with an output of Rs 53 lacks

since then there has been no looking back for BHEL Jhansi.

The plant of BHEL is equipped with most modern manufacturing

processing and testing facilities for the manufacture of power, special

transformer and instrument transformer, Diesel shunting locomotives and

AC/DC locomotives. The layout of the plant is well streamlined to enable

smooth material flow from the raw material stages to the finished goods.

All the feeder bays have been laid perpendicular to the main assembly

bay and in each feeder bay raw material smoothly gets converted to sub

assemblies, which after inspection are sent to main assembly bay.

The raw material that are produced for manufacture are used only

after thorough material testing in the testing lab and with strict quality

checks at various stages of productions. This unit of BHEL is basically

engaged in the production and manufacturing of various types of

transformers and capacities with the growing competition in the

transformer section, in 1985-86 it under took the re-powering of DESL,

but it took the complete year for the manufacturing to begin. In 1987-88,

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BHEL has progressed a step further in under taking the production of AC

locomotives, and subsequently it manufacturing AC/DC locomotives

also.

SECTIONS OF BHEL JHANSI UNIT

BHEL has many departments, while production and administrative

departments are separate.

Broadly speaking BHEL has two-production categories-

1. Transformer section.

2. Loco section.

THE PRODUCT PROFILE OF BHEL

JHANSI UNIT

PRODUCTS RATINGS

1. Power Transformer up to 220KV Class 250

MVA

2. Special Transformer up to 110KV

3. ESP Transformer 100KV, 1400MA

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4. Fright Loco Transformer 3900 KVA to 5400 KVA

& 6500 KVA(3 phase)

5.ACEMU Transformer up to 1000 KVA to 25KV

(1 phase), 1385(3 phase)

6.Dry type Transformer up to 3150KVA

7.Bus Duct up to 15.75KV generating

Voltage

8.Instrument Transformer VT & CT up to 220KV

Class

9.Diesel Electric Locomotive up to 2600 HP 10.AC/

DC

10.Locomotive 5000HP

11.Over Head Equipment cum Test car

CUSTOMERS OF BHEL

DOMESTIC POTENTIALCUSTOMERS OF BHEL

NTPC

PGCIL

RAILWAY BOARD

TATA

HINDALCO

BALCO

NALCO21


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NHPC

AP TRANA COMPANY

UPPCL

UPCL

INTERNATIONAL CUSTOMERS OF BHEL

PPC GREECE

TNB MALAYSIA

PDO OMAN

BAKU STEEL CO. AZERBAIJAN

TCO KAZAKISTAN

NEPCO JORDON

GECOL LIBYA

BANGLADESH POWER DEVELOPMENT BOARD

SCHENIDER AUSTRALIA

NCC SAUDI ARABIA

REPUBLIC OF IRAQ COMMISSION OF

ELECTRICITY

CEACYPXIS

COMPETITORS OF BHEL

(A) IN POWER TRANSFORMERS

C.G.L.MUMBAI

ALSTON, NAINI ,ALLAHABAD

ABB , VARODA

EMCO , MUMBAI

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K.E.C. VIJAY

C.G.L. VOLT AMP

(C) BUS DUST

CONTROLS AND SWITCH GEAR POWER GEAR

NARMADA SWITCH GEAR

(D) INSTRUMENT TRANSFORMER

C.G.L.

TELK

ALSTON

ABB

FINANCE DEPARTMENT IN BHEL

JHANSI

A sound financial management is the crux of the efficient management of

a business enterprise and financial management on scientific and sound

lines is a prime consideration of BHEL. The Finance/Accounts

department of the company controls all the financial operation. That is

directed at improving profitability and internal resource generation

through optional utilization of men, material, tools and money.

According to the various function the Finance/Account Department is

divided into following section:-

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Price Store Ledger (PSL).

Supply Bills.

Cash.

Pay Section.

Books & Budget.

Cost Section.

Sales.

Miscellaneous & Revenue.

Internal Audit.

Provident Fund.

PRICE STORE LEDGER:-

PSL section is entrusted with the job of material pricing determination of

material consumption. PSL are used for the material accounting as wellas their financial accounting. The documents involved are:

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SRV - Store Receipt Voucher.

MIV - Material Issue Voucher.

SRN - Store Return Note.

MTV - Material Transformer Voucher.

RCDV - Receipt Cum Dispatch Voucher.

PASSING OF BILLS:-

The bills passing process starts after the account section gets the

purchase order, SRV`s and bills from suppliers. The accountant`s section

then makes payment. Terms of payment are of three kinds:

10% in advance payment.

100% after receipt and acceptance.

Partial advance and the remaining after receipt and

acceptance.

PAY SECTION:-

It is assigned the job of payment of salaries and other personal.

Payment to employees it looks after provident fund, gratuity and bonuses,

insurance facilities extend to employees.

Employees leave encashment official travelling reimbursement and

this section deals other welfare expenses. It is entrusted with clearance of

medical claims.

CASH:-

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This section is responsible for banking of all money worth received

by the company from customer and disbursement of all authorized

payment on behalf of the company to suppliers, contractors in the form of

cheques, drafts, postal orders etc.

It is also concerned with the payment of salaries, wages and other

personal payment o employees. Cash section prepare these statements for

management information.

Daily Cash flow > Daily collection of sales.

Weekly Cash flow > Out flow During week.

Statement of pending bills of cash section status of margin money.

Monthly Cash inflow forecast for 3 months.

Operating result statement.

Statement of outstanding letter of credit & bank guarantee.

Daily bank transfer statement.

Bank reconciliation statement is also prepared. BHEL has centralized

Cash Credit System.

BOOKS & BUDGET:-

Journal ledger is the consolidated list of journal entries. As soon

as the journal voucher id received, the journal ledger is prepared. In the

journal ledger, receipt and expenditure both are recorded. This section

prepares section wise and monthly Trial Balance. After the preparation of

journal ledger, trail balance, p & l account and the balance sheet are

prepared yearly. Balance sheet is prepared in accordance with the

company`s act.

\ Two types of audit are done:-

Internal audit.

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Government.

BUDGET:

Budget is the target setting for operation.

Two types of budgets are prepared-(A)Revenue budget: it is consist of consolidated production

programmed & related expenses to carry out the program.

(B) Capital budget: it includes the fixed assets

Preparation of budget : it is done at three levels:

o Internal level: Each department sent the information about the

budgeted expense provided to department. It is necessary for

control.

o Corporate level: budget ofBHEL unit is sent to the corporate

office.

o Government level: Budget ofBHEL is also sent to government

office.

Management Information Report:

Three types of information report are generated:

o Internal for the unit

o For the corporate office

o For government

Every monthly information is generated regarding allocation of fund on

various aspects for each department and is sent to every department.

Information is generated mainly for control purpose. Other information

is:

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Cash flow

Inventory of finished goods

Inventory level

(Non moving & slow moving items)

CASH SECTIO:

This section is responsible for accounting and reporting of

costs. It determines the direct labour rates, engineering rates and

overhead recovery factors of manufacturing, engineering,

commercial and administration for cost estimation. The cost

accounting is done to record and collect cost for work order and

product level information. It prepares material, labour, overhead

and cost consumption statement. It furnishes cost report to

management about:

Profitability Product wise, Order wise

Variance Estimated and Actual cost

Performance Efficiency and Operating result

SALES SECTION:

The accounting of sales is done in this section. The activity of

this section starts when the commercial department issues a work

order. Work order part 2 (financial) summarize the financial terms

of the contracts. It contains the information like the name of

customer & consignee, description of goods to be produced and

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sold, sales tax, excise duty, liquidity damages, bank guarantee,

freight etc. with the part 2 W.O. details. As part from that

terms and conditions embodied in W.O. part 2 as regards adjustment of

advances, deferred debts and calculation of PVC. Excise duty and Sales

Tax must also be complies with it. Sales section submits the bills to the

customers as desired by commercial either direct or through Financial

such as banks.

This section does the necessary accounting for the bills raised:

money collected from customers in the form of advances or sale

proceeds.

MISCELLANEOUS AND REVENUE:

Miscellaneous wing of this section deals with the payment of

advance to employees going on office tour, payment to transporters,

welfare activities, security services, repair and maintenance, daily

wages, furniture, departmental and other petty expenses.

The revenue wing of this section with recovery of rent, electricity

and water charge for other facilities from the salary of the employees.

INTERNAL AUDIT:

BHEL is having its own team of internal auditors, who to

unearth the discrepancies in accounting, check periodically the

books of accounts as well as schedules forming part of accounts.

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EXPORT INCENTIVES: SALES TAX AND INCOME

TAX:

This section deals with export procedures of finished goods.

It is entrusted to get licenses for exports. It is also responsible for

claim of duty drawback and export incentives. This section also

looks the import of raw material that forms par to finished goods.

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CHAPTER. 3

FINANCIAL

STATEMENTANALYSIS

OF

BHEL, JHANSI

RATIO ANALYSIS31


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RATIO ANALYSIS

A ratio is a simple arithmetical expression of the relationship of the onenumber to another. It may be defined as the indicated quotient of two

mathematical expressions. According to Kohler, "a ratio is the relation of

the amount, a to another b, expressed as the ratio of a to b; a: b (a is to b);

or as a simple fraction, integer, decimal, fraction or percentage."

Ratio analysis is a technique of analysis and interpretation of

financial statements. It is the process of establishing and interpreting

various ratios for helping in making certain decisions. However, ratio

analysis not an end in itself. It is only a means of better understanding of

financial strengths weaknesses of a firm. A calculation of mere ratios

does not serve any purpose, unless several appropriate ratios are analyzed

and interpreted. There are a number of ratios which can be calculated

from the information given in the financial statements, but the analysts

has to select the appropriate data and calculate only a few appropriate

ratios from the same keeping in mind in objective of analysis.

The following are the four steps involved in the ratio analysis;

1. Selection of relevant data from the financial statements

depending upon the objective of the analysis.

2. Calculation of appropriate ratios from the above data.

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3. Comparison of the calculated ratios with the ratios of the same firm in

the past, or the ratios developed from projected financial statements or

the ratios of some other firms or the comparison with ratios of the

industry to which the firm belongs.

4. Interpretation of the ratios.

INTERPRETATION OF THE RATIOS

The interpretation of ratios is an important factor. Though calculation of

ratio is also important but it is only a clerical task where as interpretation

need skill, intelligence and foresightedness. The inherent limitation of

ratio analysis should be kept in mind while interpreting them. The impact

of factors such price level changes, change in accounting policies,

window dressing etc, should also be kept in mind when attempting to

interpret ratios.

A single ratio is itself does not convey much of sense. To make ratio

useful, they have to be further interpreted. For example, say, the current

ratio of 3:1 does not convey any sense unless it is interpreted and

conclusion is drawn from it regarding the financial condition of the firm

as to whether it is very strong, good, questionable or poor. The

interpretation of the ratios can be made in following ways;SINGLE ABSOLUTE RATIOS

Generally speaking one cannot draw any meaningful conclusion when a

single ratio is considered in isolation. But single ratio may be studied in

relation to certain rules of thumb which are based upon well proven

conventions as for example 2:1 is considered to be a good ratio for

current assets to current liabilities.

GROUP OF RATIOS

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Ratios may be interpreted by calculating a group of related ratios. A

single ratio supported by other related additional ratios becomes more

understandable and meaningful. For example, the ratio of current assets

to current liabilities may be supported by the ratio by liquid assets to

liquid liabilities to draw more dependable conclusions.

HISTORICAL COMPARISON

One of the easiest and most popular ways of evaluating the performance

of the firm is to compare its present ratios with the past ratios over a

period of time, it gives an indication of the direction of change and

reflects whether the firms performance and financial position has

improved, deteriorated or remained constant over a period of time. But

while interpreting ratios from comparison overtime, one has to be careful

about changes, if any, in the firms policies and accounting procedure.

PROJECTED RATIOSRatios can be calculated for future standards based upon the projected or

Performa financial statements. These future ratios may be taken as

standard for comparison and the ratios calculated on actual financial

statements can be compared with the standards ratios to find out variance,

if any. Such variances help in interpreting and taking corrective action for

improvement in future.

INTER-FIRM COMPARISON

Ratios of one firm can also be compared with the ratios of some selected

firms in the same industry at the same point of time. This kind of

comparison helps in evaluating relative financial position and

performance of the firm. But while making use of such comparison one

has to be very careful regarding the different accounting methods,

policies and procedures adopted by different firms.

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GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS

The calculations of ratios may not be difficult task but their use is not

easy. The information on which these are based, the constraints of

financial statements, objective for using them, the caliber of analyst, etc

are important factors which influence the use of ratios. Following

guidelines or factors may be kept in mind while interpreting various

ratios;

ACCURACY OF FINANCIAL STATEMENTS

The ratios are calculated from the data available in financial statements.

The reliability of ratios is linked to the accuracy of information in these

statements. Before calculating ratios one should see whether proper

concepts and conventions have been used for preparing financial of not.

These statements should also be properly audited by competent auditors.

The precautions will establish the reliability of data given in financialstatements.

OBJECTIVE OR PURPOSE OF ANALYSIS

The type of ratios to be calculated will depend on the purpose for which

these are required. If the purpose is to study current financial position

then ratios relating to current assets and current liabilities will be studies.

The purpose of user is also important for the analysis of ratios. A

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creditor, a banker, an investor, a shareholder, all has different objects for

studying ratios. The purpose or object for which ratios are required to be

studied should always be kept in mind for studying various ratios.

Different objects may require the study of different ratios.

SELECTION OF RATIOS

Another precaution in ratio analysis is the proper selection of appropriate

ratios. The ratio should match the purpose for which these are required.

Calculation of large number of ratios without determining their need in

the present context may confuse the things instead of solving them. Only

those ratios should be selected which can throw proper light on the matter

to be discussed.

USE OF STANDARDS

The ratios will give an indication of financial position only whendiscussed with reference to certain standards. Unless otherwise these

ratios are compared with certain standards one will not be able to reach at

conclusion.

The standards may be rule of thumb as in case of current ratio(2:1),

and acid-test ratio (1:1), may be industry standards, may be budgets or

projects ratios, etc. the comparison of calculated ratios with the standards

will help the analysts in forming his opinion about financial situation of

the concern.

CALIBER OF THE ANALYSTS

The ratios are only the tools of analysis and their interpretation will

depend on the caliber and competence of the analysts. He should be

familiar with various financial statements and the significance of

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changes, etc. A wrong interpretation may create havoc for the concern

since wrong conclusion may lead to wrong decisions. The utility of the

ratios is linked with the expertise of the analysts.

RATIOS PROVIDE ONLY A BASE

The ratios are only guidelines for the analysts; he should not base his

decisions entirely on them. He should study any other relevant

information, situation in the concern, general economic environment, etc.

before reaching final conclusion. The study of ratios in isolation may not

always prove useful. A businessman will not afford a single wrong

decision because it may have far reaching consequences. The

interpretator should use the ratios and may try to solicit any other relevant

information which helps in reaching a correct decision.

USE AND SIGNIFICANCE OF RATIO ANALYSIS

The ratio analysis is one of the most powerful tools of financial analysis.

It is used as a device to analyze and interpret the financial health of

enterprise. The use of ratios is not confined to financial managers only.

As discussed earlier, there are different parties interested in the ratio

analysis for knowing the financial position of a firm for different

purposes. The supplier of goods on credit, banks, financial institutions,

investors, shareholders and management all make use of ratio analysis as

a tool in evaluating the financial position or performance of a firm for

granting credit, providing loans or making investment in the firm. With

the use of financial analysis one can measure the financial condition of a

firm and can point out whether the condition is strong, good, questionable

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or poor. The conclusion can also be drawn as to whether the performance

of the firm is improving or deteriorating. Thus, ratios have wide

applications and are of immense use today.

MANAGERIAL USES OF RATIOS ANALYSIS

HELPS IN DECISION MAKING

Financial statements are prepares primarily for decision making. But the

information provided in financial statements in not an end in itself and no

meaningful conclusions can be drawn from these statements alone. Ratio

analysis helps in making decision from the information provided in these

financial statements.

HELPS IN FINANCIAL FORECASTING AND PLANNING

Ratio analysis is of much help in financial forecasting and planning.

Planning is looking ahead and the ratios calculated for the number of

years work as a guide for the future. Meaningful conclusion can be drawn

for future for these ratios.

HELPS IN COMMUNICATING

The financial strengths and weaknesses of a firm are communicated in a

more easy and understandable manner by the use of ratios. The

information contained in the financial statement is conveyed in a

meaningful manner to the one for whom it is meant. Thus, it helps to

enhance the value of the financial statement.

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HELPS IN CO-ORDINATION

Ratios even help in co-ordination which is of utmost importance in

effective business management. Better communication of efficiency and

weaknesses of an enterprise result in better co- ordination in the

enterprise.

HELPS IN CONTROL

Ratio analysis helps in making effective control of the business. Standard

ratios can be based upon Performa financial statements and variances or

deviations, if any, can be found by comparing the actual with the

standards so as to take a corrective action at the right time. The

weaknesses, or otherwise, if any, come to the knowledge of the

management which helps in effective control of the business.

UTILITY TO THE SHAREHOLDERS

An investor in the company will like to access the financial position of

the concern where he is going to invest. His first interest will be the

security of his investment and then a return in the form of the dividend

and interest. For the first purpose he will try to assess the value of fixed

assets and the loans raised against them. The investor will feel satisfiedonly if the concern has sufficient amount of assets. Long term solvency

ratios will help him assessing financial position of the concern.

Profitability ratios, on the other hand, will be useful to determine

profitability position. Ratio analysis will be useful to the investors in

making up his mind whether present financial position of the concern

warrants further investment or not.

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UTILITY TO CREDITORS

The creditors or suppliers extend short-term credit to the concern. They

are interested to know whether financial position of the concern warrants

their payments at a specified time or not. The concern pays short-term

creditors out of its current assets. If the current assets are quite sufficient

to meet current liabilities then the creditors will not hesitate in extending

credit facilities. Current and acid-test ratios will give an idea about the

current financial position of the concern.

UTILITY TO EMPLOYEES

The employees are also interested in the financial position of the concern

especially profitability. The wage increases and amount of fringe benefits

are related to the volume of profits earned by the concern. The employees

make use of information available in financial statements. Various

profitability ratios relating to gross profit, operating profit, net profit, etc.

enable employees to put forward their viewpoint for the increase of

wages and other benefits.

UTILITY TO GOVERNMENT

The government is interested to know the overall strength of the industry.

Various financial statements published by industrial units are used to

calculate ratios for determining short-term, long-term and overall

financial position of the concerns. Profitability indexes can also be

prepared with the help of ratios. Government may base its future policies

on the bases of industrial information available from various units. The

ratios may be used as indicators of overall strength of public as well as

private sector. In the absence of the reliable economic information,

governmental plans and policies may not prove successful.

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LIMITATIONS OF RATIO ANALYSIS

The ratio analysis is one of the most powerful tools of financial

management. Though ratios are simple to calculate and easy to

understand, they suffer from some serious limitations.

LIMITED USE OF A SINGLE RATIO

A single ratio, usually, does not convey much of a sense. To make a

better interpretation a number of ratios to be calculated which is likely to

confuse the analyst than help him in making any meaningful conclusion.

LACK OF ADEQUATE STANDARDS

There are no well accepted standards or rules of thumb for all ratios

which can be accepted as norms. It renders interpretation of the ratios

difficult.

CHANGE IN ACCOUNTING PROCEDURE

Change in accounting procedure by a firm often makes ratio analysis

misleading, e.g., a change in the valuation of methods of inventories,

from FIFO to LIFO increases the cost of sales and reduces considerably

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the value of closing stocks which makes turnover ratio to be lucrative and

an unfavorable gross profit ratio.

WINDOW DRESSING

Financial statements can easily be window dressed to present a better

picture of its financial and profitability position to outsiders. Hence, one

has o be very careful in making a decision from ratios calculated from

such financial statements. But it may be very difficult for an outsider to

know about the window dressing made by a firm.

PERSONAL BIAS

Ratios are only a means of financial analysis and not an end in itself.

Ratios have to be interpreted and different people may interpret the same

ratio in different way.

UNCOMEPARABLE

Not only the industries differ in their nature but also the firms of similar

business widely differ in their size and accounting procedures, etc. It

makes of ratios difficult and misleading. Moreover, comparisons are

made difficult due to differences in definitions of various financial terms

used in the ratio analysis.

ABSOLUTE FIGURES DISTORTIVE

Ratios devoid of absolute figures may prove distortive as ratio analysis is

primarily a quantitative analysis and not a qualitative analysis.

PRICE LEVEL CHANGES

While making ratio analysis, no consideration is made to the changes in

price level and this makes the interpretation of ratios invalid.

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CLASSIFICATION OF RATIOS

43

RATIOS

PROFITABI

LITY

RATIO OR

INCOME

RATIOS

LIQUIDITY

RATIO

ACTIVITY

RATIO OR

TURNOVRE

RATIO

LEVERAGE

OR CAPITAL

STRUCTURE

RATIO


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A. WORKING CAPITAL RATIO OR

CURRENT RATIO =

CURRENTASSETS

CURRENT LIABILITY

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B. ASID TEST RATIO OR

QUICK RATIO =

LIQUID ASSETS

CURRENT LIABILITY

A. DEBT-EQUITY RATIO = DEBT

EQUITY

B. PROPRIETARY RATIO =EQUITY

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(DEBT+EQUITY

)

C. DEBT TO TOTAL FUND RATIO =

DEBT

(DEBT+EQUITY

)

A. STOCK OR INVENTORY TURNOVER

RATIO =46


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COST OF GOODS SOLD

AVERAGE STOCK

B. WORKIN CAPITAL TURNOVER

RATIO =

COST OF GOODS SOLD

WORKING CAPITAL

A. GROSS PROFIT RATIO =

GROSS PROFIT 100

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NET SALES

B. NET PROFIT RATIO =

NET PROFIT 100NET SALES

C. OPERATING RATIO =

(COST OF GOODS SOLD+OPERATING

EXPENSES) 100

NET SALES

A. LIQUIDITY RATIO:

Liquidity refers to the ability of the firm to meet its current liabilities.

The liquidity ratios, therefore, are also called Short Term Solvency

Ratios. These ratios are used to assess the short term financial position

of the concern. It includes two ratios:

1. Current Ratio or Working Capital Ratio.

2. Quick Ratio or Acid Ratio.

1. Current Ratio: This ratio explains the relationship between current

assets and current liabilities of a business. The formula for current ratio

is:

Current Ratio=Current Assets / Current Liabilities

SIGNIFICATION: According to accounting principles, a current ratio

of2:1 is supposed be an ideal ratio. If the current ratio is less than 2:1, it

indicates the lack of liquidity and shortage of working capital. But a

much higher, even though it is beneficial to the short term creditors, is not

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necessarily good for the company. A much ratio than 2:1 may indicate

the poor investment policies of the management.

2. Quick Ratio: It indicates whether the firm is in position to pay its

current liabilities within a month or immediate. The formula for quick

ratio is:

Quick Ratio=Liquid Assets / Current Liabilities

SIGNIFICATION: An ideal quick ratio is said to be 1:1. If it is more, it

is considered to be better. This ratio is a better test of short term financial

position of the company than the current ratio, as it considers only those

assets which can be easily and readily converted into cash.

B. LEVERAGE OR CAPITAL STRUCTURE RATIO :

Liquidity ratios analyse the short term solvency of a firm whereas the

long - term solvency of the firm can be examined by the help of leverage

ratios. Usually the long term lenders, debenture holders and financial

intuitions are interested in these ratios. With the help of these ratios they

want to judge the ability of a firm to pay the interest regularly as well as

repay the principal when due. It includes following ratios:

1. Debt - Equity Ratio.

2. Proprietary Ratio.

3. Debt o Total Fund Ratio.

1. Debt-Equity Ratio: According to this approach, this ratio expresses

the relationship between Long Term Debt and acquired by long term

borrowing in comparison to shareholder`s funds. It is calculated by the

formula:

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Debt-Equity Ratio=Debt / Equity

SIGNIFICATION: This ratio is calculated to assess ability of the firm

to meet its long term liabilities. Generally, debt-equity ratio of 2:1 is

considered safe.

2. Proprietary Ratio: This ratio indicates the proportion of total fund

provided by owners or shareholders. It is calculated as under:

Proprietary Ratio=Equity / (Debt + Equity)

SIGNIFICATION: This ratio should be 33% or more than that. In order

words, the proportion of shareholder funds to total funds should be 33%

or more.

3. Debt To Total Funds Ratio: This ratio is the variation of the debt-

equity ratio and gives the same indication as the debt-equity ratio. In this

ratio, debt is expressed in relation to total funds. That is both equity anddebt. It is calculated as under:

Debt to Total Fund Ratio=Debt / (Debt + Equity)

SIGNIFICATION: Generally, debt to total funds ratio of 0.67:1 (or

67%) is considered satisfactory. In other words, the proportion of long

term loans should not be more than 67% of total funds.

C. ACTIVITY RATIO OR TURNOVERE RATIO:

These ratios measure how well the resources at the disposal of the

concern are being utilized. These ratios are known as turnover ratios as

they indicate the rapidity with which the resources available to the

concern are being used to product sales. Some of the important activity

ratios are as follows:

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invested in it. The efficiency and the success of a business can be

measured with the help of profitability ratios. It is of following types:

1. Gross Profit Ratio.

2. Net profit Ratio.

3. Operating Ratio.

1. Gross profit Ratio: This ratio shows the relationship between gross

profit and sales. It can be calculated as:

Gross Profit Ratio = (Gross Profit/Net Sales) 100

SINIFCATION: The higher the gross profit ratio, the better it is. No

ideal standard is fixed for this ratio, but the gross profit ratio should be

adequate enough not only to cover the operating expenses but also toprovide for depreciation, interest in loans, dividends and creation of

reserves.

2. Net Profit Ratio: This shows the relationship between net profit and

sales. It can be calculated as:

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

SIGNIFICATION: This ratio measured the rate of net profit earned on

sales. It helps in determining the overall efficiency of the business

operations.

3. Operating Ratio: It measures the proportion of an enterprise`s cost of

sales and operating expenses in comparison to its sales. It can be

calculated as:

Operating Ratio = {(Cost Of goods Sold + Operating Expenses)}

100

SIGNIFICATION: It is a measurement of the efficiency and

profitability of the business enterprise. The ratio indicates the extent ofsales that is absorbed by the cost of goods sold and operating expenses.

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Lower the operating ratio, the better it is, because it will leave higher

margin of profit on sales.

ANALYSIS AND INTERPRETATION OF

RATIOS

LIQUIDITY RATIOS :

Current ratio

Current ratio = Current Assets / Current Liabilities

Year 2005-06

(Rs.)

2006-07

(Rs.)

2007-08

(Rs.)

2008-09

(Rs.)

2009-10

(Rs.)

Current

Assets

45537 60043 74386 88829 82766

Current

Liabilities

23961 28621 43540 60687 55521

Current

Ratio

1.9:1 2.1:1 1.7:1 1.5:1 1.5 : 1

Since the ratio is less than 2:1 it indicates lack of liquidity.

Quick Ratio

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Quick ratio = liquid assets / current liabilities.

Liquid assets = current assets (inventory + prepaid expenses)

Year 2005-06

(Rs.)

2006-07

(Rs.)

2007-08

(Rs.)

2008-09

(Rs.)

2009-10

(Rs.)Liquid

Assets

32294 41713 55095 64593 62583

Current

Liabilities

23961 28621 43540 60687 55521

Liquid

Ratio

1.3 : 1 1.5 : 1 1.3 : 1 1.1 : 1 1.1 : 1

Since the ratio is nearly equal to the ideal ratio 1:1, it shows assets are

quite solvent and can be easily converted into cash.

LEVERAGE / CAPITAL STRUCTURE RATIO

Debt equity ratio

Debt equity ratio = debt / equity

Debt = debentures + loans from bank

Equity = equity share capital + preference shares + reserves + P&L

Account preliminary expenses.

Year 2005-06(Rs.) 2006-07(Rs.) 2007-08(Rs.) 2008-09(Rs.) 2009-10(Rs.)

Debt 0 0 324 279 201

Equity 23862 33776 33373 31758 35190

Debt

equity

Ratio

0 0 0.009 : 1 0.009 : 1 0.005 : 1

Since this ratio is less than ideal ratio 2:1, it provides a better protection

to long term lenders as they are more secured in this case.

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Proprietary ratio

Proprietary ratio = equity / (debt + equity)

Year 2005-06

(Rs.)

2006-07

(Rs.)

2007-08

(Rs.)

2008-09

(Rs.)

2009-10

(Rs.)Equity 23862 33776 33373 31758 35391

Equity +

debt

28682 36439 40907 39922 44896

Proprietary

ratio

0.83 : 1 0.93 : 1 0.82 : 1 0.79 : 1 .79 : 1

The ratio indicates the sound financial position of the company from the

long term point of view, because it means the firm is less dependent on

the external sources of finance.

Debt to total fund ratio

Debt to total fund ratio = debt / (debt + equity )

Year 2005-06

(Rs.)

2006-07

(Rs.)

2007-08

(Rs.)

2008-09

(Rs.)

2009-10

(Rs.)

Debt 0 0 324 279 201

Debt +

equity

28682 36439 40907 39922 44896

Debt to

total fund

ratio

0 0 0.008 : 1 0.007 : 1 0.004 : 1

This means that the firm is not too much dependent on outside loans for

its existence.

ACTIVITY / TURNOVER RATIO

Stock turnover ratio

Stock turnover ratio = cost of goods sold / average stock.

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Cost of goods sold = total sales gross profit

Average stock = (opening stock + closing stock) / 2

Year 2005-06

(Rs.)

2006-07

(Rs.)

2007-08

(Rs.)

2008-09

(Rs.)

2009-10

(Rs.)

Cost ofgoods sold

39232 46324 61318 63816 70716

Average

stock

13243 15787 18811 21764 22210

Stock

turnover

ratio

3 : 1 3 : 1 3.3 : 1 3 : 1 3.2 : 1

It indicates that the stock is selling quickly. The goods can be sold at a

lower margin of profit and even then the profitability may be quite high.

Working capital turnover ratio

Working capital turnover ratio = cost of goods sold / working capital.

Working capital = current assets current liabilities.

Year 2005-06

(Rs.)

2006-07

(Rs.)

2007-08

(Rs.)

2008-09

(Rs.)

2009-10

(Rs.)

Cost of

goods sold

39232 46324 61318 63816 70716

Working

capital

21576 31423 30846 28144 27245

Working

capitalturnover

ratio

1.8 : 1 1.8 : 1 2 : 1 3.5 : 1 2.6 : 1

This ratio shows the efficiency of the working capital and the quick

turnover of capital assets.

PROFITABILITY RATIO

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GROSS PROFIT RATIO

Gross profit ratio = (gross profit / net sales) * 100

Net sales = total sales excise duty.

Year 2005-06(Rs.)

2006-07(Rs.)

2007-08(Rs.)

2008-09(Rs.)

2009-10(Rs.)

Gross

profit

2814 3951 1250 1555 2048

Net sales 38258 48137 57227 61527 65694

Gross

profit

ratio

7.4 % 8.2 % 2.2 % 2.5 % 3.1 %

It is fluctuating in nature. An increase in the ratio shows the goodposition of company but in subsequent years, there is a decline in the

ratio, showing the adverse position of the company.

Net profit ratio

Net Profit Ratio = (net profit / net sales) * 100

Year 2005-06

(Rs.)

2006-07

(Rs.)

2007-08

(Rs.)

2008-09

(Rs.)

2009-10

(Rs.)

Net profit 2592 3611 1004 1508 2005

Net sales 35258 48137 57227 61527 65694

Net Profit

ratio

6.8 % 7.5 % 1.8 % 2.5 % 3.1 %

An increase in the ratio over the previous years show an improvement in

the overall efficiency and profitability of the company , while a decreasein this ratio denotes a vice versa condition.

Operating ratio

Operating ratio = {(cost of goods sold + operating expenses) / net sales}

* 100

Operating expenses = direct material + expenses on sub contract +transfer in services + power and fuel.

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Year 2005-06

(Rs.)

2006-07

(Rs.)

2007-08

(Rs.)

2008-09

(Rs.)

2009-10

(Rs.)

Cost of

goods

sold+

operating

expenses

64663 80748 101146 102913 110769

Net sales 38258 48137 57227 61227 65694

Operating

ratio

1.69 : 1 1.67 : 1 1.76 : 1 1.67 : 1 1.69 : 1

Since the operating ratio is fluctuating in nature, this shows that the profit

is also fluctuating.

CHAPTER. 4

CONCLUSION

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BHEL AT A GLANCE

Bharat Heavy Electricals limited, INDIAs state run energy

equipment maker, has taken over engineering firm Bharat Heavy Plate

and Vessel Limited. BHEL said in a press statement.

When I was going through all the departments I saw the word 5 S which

means:-

SERI :- Stands for easy classification

SETAN :- Stands for proper storage

SESO :- Stands for cleanliness and clarity

SECATSU :- Stands for stage wise standardization

SETSUKE :- Stands for self discipline

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THOUGHTS CONCERNING BHEL

ENERGY saved, POWERearned

Companies cannot guarantee EMPLOYMENT, only customer can

CREATIVITY is a natural extension of our enthusiasm

Wastage ofTIME , reduces the PRODUCTION

If you do not make the CHANGES in your company , the

CUSTOMERwill change you.

FINDINGS SUGGESTIONS

1. Current ratio is less than 2:1 it 1. Current assets should

be Indicates lack of liquidity. Increased & decrease

current liabilities.

2. Quick ratio is nearly equal to the 2. There is no need to

change Ideal ratio 1:1. anything.

3. Debt equity ratio is less than ideal 3. It should be less as it

ratio 2:1 . provides lender moresecurity.

4. The proprietary ratio indicates the 4.Firm should be less

sound financial of the company from. dependent on external

sources of finance.

5. Debt to total fund show sound 5.Firm should be less

financial position. dependent on externalsources of finance

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6. Stock turnover ratio indicates that the 6.The good can be sold at

stock is selling quickly. a lower margin of profit

and even then

profitability may be

quite high.

7. Working capital ratio shows the 7.There should be quick

efficiency of the working capital. turnover of capital assets.

8. Gross profit ratio is fluctuating in 8.Increase the ratio.

nature.

9. Net profit ratio is fluctuating in nature. 9. Increase the ratio.

10. The operating ratio is fluctuating in 10. Increase the ratio.

nature.

CHAPTER. 5

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APPENDIX

bhel project abhinov singh

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