FINANCIAL RATIO ANALYSIS 2010

¶Summer Training Project Report ¶ ON
Financial Ratio Analysis
At

TEHRI HYDRO DEVELOPMENT CORPORATION LTD (RISHIKESH, UTTRAKHAND)
Submitted in partial fulfillment for the Award of Degree of MASTER OF BUSINESS ADMINISTRATION (2008-10)
SUBMITTED TO: SUBMITTED BY: NITIN MALLA MBA 4TH SEM ROLL NO: 520850077

College Of Management Studies

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PREFACE
The conceptual knowledge acquired by management student is best manifested in the project and training they undergo. As a part of curriculum of MBA, I have got a chance to undergo practical training at THDC LTD RISHIKESH. The present project gives a perfect vent into my understanding of financial management. The project report entitled ´FINACIAL RATIO ANALYSISµ is based on the financial statements viz the income statement, the Balance sheet of the company. The report will provide all information regarding the FINANCIAL RATIO ANALYSIS and their importance in TEHRI HYDRODEVLOPMENT CORPORATION LTD RISHIKESH. I hope this report will be beneficial for my next batches and for those who are related to this topic.

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DECLARATION
I, Nitin Malla, hereby declare that the project titled ´FINANCIAL RATIO ANALYSISµ of THDC LTD; RISHIKESH is submitted in partial fulfillment to the requirement of my Master·s in Business Administration.

NITIN MALLA MBA 4TH SEM

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ACKNOWLEDGEMENT
I express my sincere thanks to the management of THDC LTD RISHIKESH, for giving me an opportunity to gain exposure on related to project under the guidance of Mr. K.K. SRIVASTAVA (dy. Manager Finance). I would also like to thank Mr. DILEEP Kr. DWIVEDI personnel officer (HRD). I am indebted to Mrs. Amrita Basu (project guide) to give me a wonderful opportunity to widen the horizons of my knowledge. I would like to thank her for her scholarly guidance, constant supervision and encouragement. It is due to her personal interest and initiative that the project work is published in the current form.

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POWER SECTOR IN INDIA The electricity sector in India is predominantly controlled by the Government of India's public sector undertakings (PSUs). Major PSUs involved in the generation of electricity include National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC) and Nuclear Power Corporation of India (NPCI). Besides PSUs, several state-level corporations, such as Maharashtra State Electricity Board (MSEB), are also involved in the generation and intrastate distribution of electricity. The Power Grid Corporation of India is responsible for the interstate transmission of electricity and the development of national grid. The Ministry of Power is the apex body responsible for the development of electrical energy in India. This ministry started functioning independently from 2 July 1992; earlier, it was known as The Ministry of Energy. The Union Minister of Power at present is Sushil kumar Shinde of the Congress Party, who took charge of the ministry on the 28th of May, 2009. India is world's 6th largest energy consumer, accounting for 3.4% of global energy consumption. Due to India's economic rise, the demand for energy has grown at an average of 3.6% per annum over the past 30 years. In March 2009, the installed power generation capacity of India stood at 147,000 MW while the per capita power consumption stood at 612 kWH. The country's annual power production increased from about 190 billion kWH in 1986 to more than 680 billion kWH in 2006. The Indian government has set an ambitious target to add approximately 78,000 MW of installed generation capacity by 2012. The total demand for electricity in India is expected to cross 950,000 MW by 2030. About 75% of the electricity consumed in India is generated by thermal power plants, 21% by hydroelectric power plants and 4% by nuclear power plants. More than 50% of India's commercial energy demand is met through the country's vast coal reserves. The country has also CASE STUDY OF THDC LTD Page 5

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invested heavily in recent years on renewable sources of energy such as wind energy. As of 2008, India's installed wind power generation capacity stood at 9,655 MW. Additionally, India has committed massive amount of funds for the construction of various nuclear reactors which would generate at least 30,000 MW. In July 2009, India unveiled a $19 billion plan to produce 20,000 MW of solar power by 2020. Electricity losses in India during transmission and distribution are extremely high and vary between 30 to 45%. In 2004-05, electricity demand outstripped supply by 7-11%. Due to shortage of electricity, power cuts are common throughout India and this has adversely effected the country's economic growth. Theft of electricity, common in most parts of urban India, amounts to 1.5% of India's GDP. Despite an ambitious rural electrification program, some 400 million Indians lose electricity access during blackouts. While 80 percent of Indian villages have at least an electricity line, just 44 percent of rural households have access to electricity. According to a sample of 97,882 households in 2002, electricity was the main source of lighting for 53% of rural households compared to 36% in 1993. Multi Commodity Exchange has sought permission to offer electricity future markets. HISTORICAL BACKGROUND The Tehri Dam & Hydro Electric Project had initially been accorded Investment Clearance by the Planning Commission in June, 1972 for implementation by the Government of U.P., with an installed generating capacity of 600 MW. The State Government commenced the construction of the Project in 1978. Subsequently, in 1983, the proposed Installed Capacity of the Project was increased by the State Government to 1000 MW. In view of the shortage of funds for implementation of the Project in the State sector, it was decided in Nov.,1986 to implement the Tehri project as a Joint Venture of the Govt. of India and Govt. of U.P. through financial and technical assistance from erstwhile USSR. In Nov.,1986, an agreement on economic and technical co-operation between the Govt. of India and Govt. of USSR was signed, which interallia included execution of the 2400 MW Tehri Hydro Power Complex comprising 1000 MW Tehri Dam & Hydro Power Plant, 400 MW Koteshwar Dam & Hydro Power Plant and 1000 MW Tehri Pumped Storage Plant. This agreement envisaged financing in the form of credit amounting to 1000 million Rubles from USSR. CASE STUDY OF THDC LTD Page 6

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The Government had also approved seeking the technical and financial assistance from the then USSR for implementing the Tehri Power Complex. However, with the disintegration of USSR, the financial assistance from USSR was not available. ABOUT THE CORPORATION THDC, a Joint Venture Corporation of the Govt. of India and Govt. of U.P., was incorporated as a Limited Company under the Companies Act, 1956, in July·88, to develop, operate and maintain the Tehri Hydro Power Complex and other Hydro Projects. The works were handed over to THDC in June 1989. The equity portion the Project is being shared by Govt. of India & Govt. of U.P in the ratio of 75:25. The Corporation has an authorized share capital of Rs.4000 cr. The Government approved the implementation of Tehri Dam and HPP Stage-I (1000 MW) in March, 1994, along with the essential works of Pumped Storage Plant and committed works of Koteshwar HEP. Other components of the Tehri Power Complex, viz., Koteshwar Project, and the Pumped Storage Plant, were envisaged to be taken up at a later stage. The Koteshwar HEP (400 MW) was approved for implementation by the Government in April·2000. Investment approval has been accorded by the Government in July·06 to the Tehri PSP(1000 MW), the first Pumped Storage Scheme in the Central sector which would utilize the Tehri & Koteshwar reservoirs as the requisite upstream & downstream reservoirs. Govt. of India has accorded Investment Approval for execution of 444 MW Vishnugad Pipalkoti Hydro Electric Project (VPHEP) on River Alaknanda in and Sarda Valleys in Uttarakhand, totaling to 760 MW. Govt. of Uttarakhand has accorded In-principle approval to allot Kishau Multi Purpose Project (600 MW) on river Tons, a tributary of Yamuna. Govt. of India has given approval for updation of DPR of the Project by THDC. THDC has entered into an MOU with Nuclear Power Corporation of India Ltd. (NPCIL) to synergize strengths and competencies for development of Hydro Power Projects including Pumped Storage Schemes in the country. Govt. of Maharashtra has allotted 2 PSPs namely Malshej Ghat (600 MW) & Humbarli (400MW) to the Joint Venture of THDC and NPCIL for updation of DPR and subsequent implementation subject to commercial viability. CASE STUDY OF THDC LTD Page 7 Aug· 2008. Govt. of Uttarakhand has also entrusted Hydro Projects to THDC in Bhagirathi, Alaknanda

FINANCIAL RATIO ANALYSIS 2010
Under India-Bhutan Co-operation in hydro Sector development , MOP has allotted two Projects namely Sankosh Multi Purpose Project (4060 MW) and Bunakha HEP (180 MW) in Bhutan for updation of DPR, and subsequent implementation on Intergovernmental Authority Model / JV with Bhutanese PSUs. The work of updation of DPRs has been taken up. THDC is also engaged in the engineering consultancy work for stabilization of Varunavat Parvat in Uttarkashi entrusted by Government of Uttarakhand. The work involves providing the complete engineering solution to the major hill stabilization problem and also supervising the execution of works at site. The Corporation has commissioned Tehri Dam and HPP Stage-I (1000 MW) during Xth plan. The Tehri Power Station is now fully operational.

Projects: location map

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THEORETICAL ASPECTS RATIO ANALYSIS Meaning and Definition of Ratio Analysis Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables. Ratio analysis is a very powerful analytical tool for measuring performance of an organization. The ratio analysis concentrates on the inter ² relationship among the figures appearing in the aforementioned four financial statement s. the ratio analysis helps the management to analyze the past performance of the firm . The ratio analysis allow interested parties like shareholders, investors, creditors , government and analysts to make an evaluation of certain aspects of a firm·s performance. Significance or Importance of Ratio Analysis  It helps in evaluating the firm·s performance. With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e. CASE STUDY OF THDC LTD Page 9

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whether the management has utilized the firm's assets correctly, to increase the investor's wealth. It ensures a fair return to its owners and secures optimum utilization of firm·s assets.  It helps in inter-firm comparison. Ratio analysis helps in inter-firm comparison by providing necessary data. An inter firm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line.  It simplifies financial statement. Yet another dimension of usefulness or ratio analysis, relevant from the View point of management is that it throws light on the degree efficiency in the various activity ratios measures this kind of operational efficiency. Limitations  Ratios are calculated from the financial statements which are affected by the financial bases and policies on such matters as depreciation and the valuation of stock .  Financial statements do not represent a complete picture of the business, but merely a collection of fact which can be expressed in monetary terms. These may not refer to both factors which affect performance.  Over use of ratios as controls on managers could be dangerous, in that management might concentrate more on simply improving the ratio than on dealing with the significant issues.  A ratio is a comparison of two figures, a numerator and a denominator. In comparing ratios it may be difficult to determine whether differences are due to changes in the numerator, or in the denominator or in both.  Ratios are inter-connected. They should not be treated in isolation. The effective use of ratios, therefore, depends on being aware of all these limitations and ensuring that, following comparative analysis, they are used to trigger point for investigation and corrective action rather than being treated as meaningful in them selves.  The analysis of ratios clarifies trends and weaknesses in performance as a guide to action as long as proper comparisons are made and the reasons for adverse trends or deviations from the norms are investigated thoroughly.

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Classification of Ratios Different ratios are used for different purposes; these ratios can be grouped into various classes according to the financial activity. Ratios are classified into four broad categories:  Liquidity Ratio  Leverage Ratio  Profitability Ratio  Activity Ratio  Liquidity Ratio: Liquidity ratio measures the firms ability to meet its current obligations i.e. ability to pay its obligations and when they become due. Commonly used ratios are: (1) Current Ratio (2) Acid Test Ratio or Quick Ratio (1) Current Ratio: Current ratio is the ratio, which express relationship between current asset and current liabilities. Current asset are those which can be converted into cash within a short period of time, normally not exceeding one year. The current liabilities which are short- term and are maturing to be met. Current Ratio = Current Asset ÷Current liabilities (2) Acid Test Ratio or Quick Ratio: The acid test ratio is a measure of liquidity designed to overcome the defect of current ratio. It is often referred to as quick ratio because it is a measurement of firm's ability to convert its current assets quickly into cash in order to meet its current liabilities. Acid Test Ratio = (Current Asset ² Inventories) ÷ Current liabilities  Leverage or Capital Structure Ratio: Leverage or capital structure ratios are the ratios which indicate the relative interest of the owners and the creditors in an enterprise. These ratios indicate the funds provided by the long-term CASE STUDY OF THDC LTD Page 11

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creditors and owners. To judge the long term financial position of the firm following ratios are applied. (1) Debt - Equity Ratio (2) Total Debt Ratio (1) Debt - Equity Ratio: Debt-equity ratio which expresses the relationship between debt and equity. This ratio explains how far owned funds are sufficient to pay outside liabilities. It is calculated by following formula: Debt Equity Ratio = (Long Term + Short Term Debts + Current Liabilities) ÷ Net Worth

(2) Total Debt Ratio: This ratio explains how far owned and borrowed funds are sufficient to pay debt of a Firm. Total Debt Ratio = (Long Term + Short Term Borrowing + Current Liabilities) ÷ Capital employed  Profitability Ratios Profitability ratio are the best indicators of overall efficiency of the business concern, because they compare return of value over and above the value put into business with sales or service carried on by the firm with the help of assets employed. Profitability ratio can be determined on the basis of: 1. Sales 2. Investment (i) Profitability Ratios Related to Sales: (ii) Gross Profit to Sales Ratio (iii) Net Profit to Sales Ratio or Net Profit of Margin. (i) Gross Profit to Sales Ratio The gross profit to sales ratio establishes relationship between gross profit and sales to measure the relative operating efficiency of the firm to reflect pricing policy. CASE STUDY OF THDC LTD Page 12

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Gross Profit to Sales Ratio = (Sales - Cost of Goods Sold) ÷ Sale * 100 (iii) Net Profit Margin The net margin indicates the management's ability to earn sufficient profit on sales to earn sufficient profit on sales not only to cover all revenue operating expenses of the business, the cost of borrowed funds and the cost of goods or servicing, but also to have sufficient margin to pay reasonable comparison to shareholders on their contributions to the firm. Net Profit Margin Sales = Net profit after tax and interest * 100

Profitability Ratios Related to Investments: Return on Assets Return on Capital Employed Return on Assets: The profitability ratio here measures the relationship between net profit and assets. Return on Assets = Net Profit after ÷ Tax Fixed Assets

Return on Capital Employed: Return on Capital Employed = Net Profit after Taxes ÷ Total Capital Employed 

Activity Ratios or Efficiency Ratios: Activity ratio are sometimes are called efficiency ratios. Activity ratios are concerned with how efficiently the assets of the firm are managed. These ratios express relationship between level of sales and the investment in various assets inventories, receivables, fixed assets etc. The important activity ratios are as follows: CASE STUDY OF THDC LTD Page 13

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(1) Inventory Turnover Ratio (2) Debt Turnover Ratio (3) Average Collection Period Ratio (1) Inventory Turnover Ratio: Inventory Turnover Ratio (2) Debt Turnover Ratio: This ratio shows how quickly the debtors are converted into cash Debt Turnover Ratio = Total Sales ÷ Debtors = Raw Materials Consumed ÷ Average Stock of Raw Materials

(3) Average Collection Period Ratio This ratio indicates how quickly the inventory is converted into cash. Average Collection Period Ratio = Days in a Year ÷ Debtors Turnover

Parties Interested In Ratio Analysis

y Trade creditors Trade creditors are interested in firm's ability to meet their claims over a very short period of time. Their analysis will, there fore confine to the evaluation of the firm's liquidity positions.

y Suppliers of long-term debt Suppliers of long-term debt on the other hand are concerned with firm's long-term solvency and survival. They analysis the firms profitability over time, its ability to generate cash to be able to pay interest and repay interest and repay principal and the relationship between various source of funds. (Capital structure relationship). Long-term creditors do analyses the historical financial statements but they place more emphasis on the firm's projected financial statement to make analysis about its future solvency and profitability. CASE STUDY OF THDC LTD Page 14

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y Investors Investors who have invested their money in the firms share are most concerned about the firm steady growth in earning. As such, they concentrate on the analysis of the firm's present and future profitability. They are also interested in the firms financial structure of the extent it influence the firms earning ability and risk.

y Management An organization would be interested in every aspect of the financial analysis. It is their overall responsibility to see that the resources of the firm are used most effectively and efficiently and that the firm's financial condition is sound. So thus management employee financial analysis for the purpose of internal control and to better provide what capital supplier seeks in financial condition and performance from the business and from an internal control standpoint, management needs to take financial analysis in order to plan and control effectively.

RATIO ANALYSIS Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. Ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. Financial ratios are usually expressed as a percent or as times per period. Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two variables. With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e. whether the management has utilized the firm's assets correctly, to increase the investor's wealth. It CASE STUDY OF THDC LTD Page 15

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ensures a fair return to its owners and secures optimum utilization of firm's assets. Ratio analysis helps in inter-firm comparison by providing necessary data. An inter firm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line. Yet another dimension of usefulness or ratio analysis, relevant from the View point of management is that it throws light on the degree efficiency in the various activity ratios measures this kind of operational efficiency. Liquidity Ratios Profitability Ratios Market Ratios Ratio Analysis Liquidity Ratios: Liquidity ratios measure a firm's ability to meet its current obligations. These include: Leverage Ratios Activity Ratios Statements of Cash Flow

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Current Ratio: Current Ratio = Current Assets / Current Liabilities This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses. Current assets are important to businesses because they are the assets that are used to fund day-today operations and pay ongoing expenses. Year Current asset Current liability Current ratio 2007 4707621 3037283 1.55 2008 7581431 3627890 2.09

2.09 2.5 2 1.5 2008 1 0.5 0 CURRENT RATIO 2007 1.55 2007 2008

Interpretation: The current ratio for the year 2007 & 2008 is 1.55 & 2.09 respectively, compared to standard ratio of 2:1 this ratio is lower which shows low short term liquidity efficiency at the same time holding less than sufficient current assets means insufficient use of resources. CASE STUDY OF THDC LTD Page 17

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Sales to Working Capital: Sales to Working Capital = Sales / Working Capital Sales to working capital give an indication of the turnover in working capital per year. A low working capital indicates an unprofitable use of working capital. Year Sales Working Capital Sales to Working 2007 4441588 1670338 2.66 2008 10947074 3953541 2.77

2.77

2.78 2.76 2.74 2.72 2.7 2.68 2.66 2.64 2.62 2.6

2007 2.66 2008 2008

2007

SALES TO WORKING CAPITAL

Interpretation: This liquidity ratio for the years 2007 & 2008 is 2.66 & 2.77, compared to standard ratio of 2:1.

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Working Capital: Working Capital = Current Assets ÷Current Liabilities A measure of both a company's efficiency and its short-term financial health. Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current (cash, accounts receivable and inventory). Also known as "net working capitalµ or the "working capital ratio". Year Current asset Current liability Working capital Interpretation:
3953541

assets

2007 4707621 3037283 1670338

2008 7581431 3627890 3953541

4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0 WORKING CAPITAL 2007 1670338 2008 2007 2008

It is very clear from the above calculations that the working capital of THDC is gradually increasing over d period of time, which shows good short term liquidity.

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Leverage Ratios: By using a combination of assets, debt, equity, and interest payments, leverage ratio's are used to understand a company's ability to meet it long term financial obligations. Leverage ratios measure the degree of protection of suppliers of long term funds. The level of leverage depends on a lot of factors such as availability of collateral, strength of operating cash flow and tax treatments. Thus, investors should be careful about comparing financial leverage between companies from different industries. For example companies in the banking industry naturally operates with a high leverage as collateral their assets are easily collateralized. These include:

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Time Interest Earned : TIE Ratio = EBIT / Interest Charges The interest coverage ratio tells us how easily a company is able to pay interest expenses associated to the debt they currently have. The ratio is designed to understand the amount of interest due as a function of company's earnings before interest and taxes (EBIT). This ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest cost. Year EBIT Interest charges TIE Ratio 2007 3304444 1995314 1.66
1.95

2008 7665197 3930222 1.95

1.95 1.9 1.85 1.8 1.75 1.7 1.65 1.6 1.55 1.5

2007 1.66 2008 2008

2007

TIE RATIO

Interpretation: As we can see from this ratio analysis that, tie ratio in 2007 is 1.66 as compared to 1.95 in 2008 which means that the firm can easily meets its interest burden even if EBIT and Tax suffer a considerable decline.

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Debt Ratio: Debt Ratio = Total Debt / Total Assets The ratio of total debt to total assets, generally called the debt ratio, measures the percentage of funds provided by the creditors. The proportion of a firm's total assets that are being financed with borrowed funds. The debt ratio is calculated by dividing total long-term and short-term liabilities by total assets. The higher the ratio, the more leverage the company is using and the more risk it is assuming. Assets and liabilities are found on a company's balance sheet. year Total debt Total asset Debt ratio 2007 43800338 91147208 .481 2008 43754589 97596187 .448

0.49 0.48 0.47

0.481 0.448 2007

0.46 0.45 0.44 0.43 DEBT RATIO 2007

2008

2008

Interpretation: Calculating the debt ratio, we came to know that company is mid leveraged one.

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Debt to Equity Ratio: Debt to Equity Ratio = Total debt / Total Equity The debt to equity ratio is the most popular leverage ratio and it provides detail around the amount of leverage (liabilities assumed) that a company has in relation to the monies provided by shareholders. As you can see through the formula below, the lower the number, the less leverage that a company is using. The debt to equity ratio gives the proportion of a company (or person's) assets that are financed by debt versus equity. It is a common measure of the long- term viability of a company's business and, along with current ratio, a measure of its liquidity, or its ability to cover its expenses. As a result, debt to equity calculations often only includes long- term debt rather than a company's total liabilities. A high debt to equity ratio implies that the company has been aggressively financing its activities through debt and therefore must pay interest on this financing.

Year Total debt Total equity Debt to equity ratio Interpretation:

2007 43800338 44301952 .998

2008 43754589 50207563 .871

0.998 1 0.871 0.95 2007 0.9 0.85 0.8 2007 2008 2008

DEBT TO EQUITY RATIO

We can see from the calculation that ratio has been declining. CASE STUDY OF THDC LTD Page 23

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Total Capitalization Ratio: Total Capitalization Ratio = Long-term debt / long-term debt + shareholders' equity The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth. Long-term debt is divided by the sum of long-term debt and shareholders' equity. This ratio is considered to be one of the more meaningful of the "debt" ratios it delivers the key insight into a company's use of leverage. Year Long term debt Long term debt+ equity Total capitalization ratio 2007 43800338 93962152 .466
0.497

2008 43754589 88102290 .497

0.5 0.49 0.48 0.466 0.47 0.46 0.45 2007 2008 2007 2008

TOTAL CAPITALIZATION RATIO

Interpretation: As we can see from the calculation that there is gradual increase in the ratio from .466 in 2007 to .497 in 2008.

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Long term Assets versus Long term Debt: Long term Assets versus Long term Debt = Long Term Assets / Long Term Debts year Long term asset Long term debt LT assets/LT debts 2007 86431952 43800338 1.97 2008 90008611 43754589 2.06

2.06

2.06 2.04 2.02 2 1.98 1.96 1.94 1.92 LT ASSETS/LT DEBTS 2007 2007 1.97 2008 2008

Profitability Ratios: Profitability is the net result of a number of policies and decisions. This section of the discusses the different measures of corporate profitability and financial performance. These ratios, much like the operational performance ratios, give users a good understanding of how well the company utilized its resources in generating profit and shareholder value. The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. It is these ratios that can give insight into the all important "profit".

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Profitability ratios show the combined effects of liquidity, asset management and debt on operating results. These ratios examine the profit made by the firm and compare these figures with the size of the firm, the assets employed by the firm or its level of sales. There are four important profitability ratios that I am going to analyze: Net Profit Margin: Net Profit margin = Net Profit / Sales x 100 Net Profit Margin gives us the net profit that the business is earning per dollar of sales. This margin indicates the profit after all the costs have been incurred it shows that what % of turnover is represented by the net profit. An increase in the ratios indicates that a firm is producing higher net profit of sales than before. Year Net profit Sales Net profit margin 2007 1174809 4441588 26.45% 2008 3269869 10947074 29.87%

29.87%

30.00% 29.00% 28.00% 27.00% 26.00% 25.00% 24.00% NET PROFI MARGIN 2007 26.45% 2008 2007 2008

Interpretation: Here we can see that net profit margin have increased from 26.45% In 2007 to 29.87% in 2008

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Return on Equity (ROE): Return on Total Equity = Profit after taxation/ Total Equity x 10 Return on Equity measures the amount of Net Income earned by utilizing each dollar of Total common equity. It is the most important of the "Bottom line" ratio. By this, we can find out how much the shareholders are going to get for their shares. This ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. Year Profit after tax Total equity Return on total equity 2007 1174809 31296204 3.75% 2008 3235761 33003604 9.80%

9.80%

10.00% 8.00% 6.00% 3.75% 4.00% 2.00% 0.00% 2007 2008 2007 2008

RETURN ON TOTAL EQUITY

Interpretation: The return on equity was 3.75 in 2007 and 9.80 in 2008.

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Return on total assets: Net profit after tax/ Total Assets This ratio is computed to know the ¶Productivity of the Total Assets·. Year PAT Total assets Return on total assets 2007 1174809 91147208 1.29% 2008 3235761 97596187 3.32%

3.32%

3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2007 2007 1.29% 2008 2008

RETURN ON TOTAL ASSETS

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Return on net worth: Profit after tax / Net worth The ratio expresses the net profit in term of the equity share holders fund. The ratio is an important yardstick of performance for equity shareholders since it indicates the return on the funds employed by them. Year PAT Net worth Return on net worth 2007 1174809 44301952 .027 2008 3235761 50207563 .064

6.40%

7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2007 2.70% 2008 2007 2008

RETURN ON NET WORTH

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DuPont Return on Assets: DuPont Return on Assets = Profit after taxation x 100 Total Assets Year Profit after tax Total assets DuPont ROA 2007 1174809 91147208 1.29% 2008 3235761 97596187 3.32%

3.32%

3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% DU PONT ROA 2007 2007 1.29% 2008 2008

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Operating Assets Turnover: Operating Assets Turnover = Operating Assets x 100 Net Sales Year Operating assets Net sales Operating assets turnover Return on Operating Assets: Return on Operating Assets = Profit after Taxation x 100 Operating assets Year Profit after tax Operating assets 2007 1174809 75719410 2008 3235761 79107857 4.09% 2007 75719410 4441588 1704.78% 2008 79107857 10947074 722.64%

Return on operating assets 1.55%

4.09%

4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

2007 1.55% 2008 2008

2007

RETURN ON OPERATIN ASSETS

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FINANCIAL RATIO ANALYSIS 2010
Operating assets= Cash & Bank Balance + prepaid expense + Fixed Assets 2008: 1052476 + 22653 + 78032728 = 79107857 2007: 388281 + 66656 + 75264473 = 75719410 Sales to Fixed Assets: This ratio is indicates that how much sales are contributed by investment in fixed Assets. Sales to Fixed Assets = Net Sales / Fixed Assets Year Net sales Fixed assets Sales to fix asset 2007 4441588 75264473 .059 TIMES 2008 10947074 78032728 .141 TIMES

0.141 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2007 0.059 2008 2007 2008

SALES TO FIXED ASSETS

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FINANCIAL RATIO ANALYSIS 2010
Activity Ratios: Activity ratio are sometimes are called efficiency ratios. Activity ratios are concerned with how efficiency the assets of the firm are managed. These ratios express relationship between level of sales and the investment in various assets inventories, receivables, fixed assets etc. Total Asset Turnover: Total Asset Turnover = Total Sales / Total Assets The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Year Total sales Total assets Total asset turnover 2007 4441588 91147208 .049 2008 10947074 97596187 .112

0.112

0.12 0.1 0.08 0.049 0.06 0.04 0.02 0 2007 2008 2007 2008

TOTAL ASSETS TURNOVER

Interpretation: The return on equity was .049 in 2007 and has increased to .112 in 2008 due to issue of long term debt. CASE STUDY OF THDC LTD Page 33

FINANCIAL RATIO ANALYSIS 2010
Debtors turn over ratio: Net credit sales/ debtors The ratio shows how many times sundry debtors turn over during the year. Year Net credit sales Debtors Debtor turnover ratio 2007 4441588 2492617 1.78 2008 10947074 4652777 2.35

2.35

2.5 2 1.5 2008 1 0.5 0 2007 1.78 2007 2008

DEBTOR TURNOVER RATIO

Interpretation: As we can see that higher the debtor turn over ratio the greater is the efficiency of credit management.

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FINANCIAL RATIO ANALYSIS 2010
Average collection period: 365/ Debtors turnover The average collection period represents the num of days worth of credit sales that is locked in sundry debtors. Year No of days Debtors turn over AVG collection period 2007 365 1.78 205 days 2008 365 2.35 156 days

250 200 150

156 205

2007 2008 2008

100 50 2007 0

AVG COLLECTION PERIOD

Interpretation: As we can see from the above calculation that the collection period in 2007 was 205 days which has reduced to 156 days in 2008

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FINANCIAL RATIO ANALYSIS 2010
Market Ratio: Market Value Ratios relate an observable market value, the stock price, to book values obtained from the firm's financial statements. Dividend per Share - DPS: Dividend per Share = Total amount of Dividend Number of outstanding shares Per share capital = 1000 per share Or No. of shares outstanding = share capital / 1000 Year Total amount of dividend Number of shares Dividend per shares 2007 2008 975000 32396 30.09

30.09 35 30 25 20 15 10 5 2007 0 2008 2007 2008

DIVIDEND PER SHARES

Interpretation: There is no dividend paid in 2007.

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FINANCIAL RATIO ANALYSIS 2010
Earning Per Share- EPS: Earning Per Share = Profit after Taxation / Number of Shares

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.

Year Profit after tax Number of shares Earning per share

2007 1174809 31296 37.5

2008 3235761 32396 99.88

99.88

100 80 60 40 20 0 EARNING PER SHARE 2007 2007 2008 2008

37.5

Interpretation: The EPS in 2008 is 99.88 as compared to 38.05 in 2007.

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FINANCIAL RATIO ANALYSIS 2010
Price / Earning Ratio: Price / Earning Ratio = Stock Price per Share Earning Per Shares The Price-Earnings Ratio is calculated by dividing the current market price per share of the stock by earnings per share (EPS). (Earnings per share are calculated by dividing net income by the number of shares outstanding.) The P/E Ratio indicates how much investors are willing to pay per dollar of current earnings. As such, high P/E Ratios are associated with growth stocks. (Investors who are willing to pay a high price for a dollar of current earnings obviously expect high earnings in the future.) In this manner, the P/E Ratio also indicates how expensive a particular stock is. This ratio is not meaningful, however, if the firm has very little or negative earnings. The Price-Earnings Ratio is calculated by dividing the current market price per share of the stock by earnings per share (EPS). (Earnings per share are calculated by dividing net income by the number of shares outstanding.) The P/E Ratio indicates how much investors are willing to pay per dollar of current earnings. As such, high P/E Ratios are associated with growth stocks. (Investors who are willing to pay a high price for a dollar of current earnings obviously expect high earnings in the future.) In this manner, the P/E Ratio also indicates how expensive a particular stock is. This ratio is not meaningful, however, if the firm has very little or negative earnings. Year Stock price per share EPS Price / Earning Ratio 2007 1000 37.5 26.67 2008 1000 99.88 10.01

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FINANCIAL RATIO ANALYSIS 2010

30 25 20 15 10 5

26.67 10.01 2007 2008 2008

2007 0

PRICE/ EARNING RATIO

Interpretation: The P/E ratio in 2007 was 26.66time n it has decreased to 10.01 in 2008 that·s alarming for the investors.

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FINANCIAL RATIO ANALYSIS 2010
Dividend Payout Ratio: Dividend Payout Ratio = Dividend per Share / Earning per Share: The percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. The dividend payout ratio is an indicator of how well earnings support the dividend payment. Year Dividend per share EPS Dividend payout ratio 2007 2008 30.09 99.88 .301

0.301 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2007 2008 2007 2008

DIVIDEND PAYOUT RATIO

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FINANCIAL RATIO ANALYSIS 2010
Dividend Yield: Dividend Yield = Dividend per Share / Share Price

Financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. A stock's dividend yield is expressed as an annual percentage and is calculated as the company's annual cash dividend per share divided by the current price of the stock. The dividend yield is found in the stock quotes of dividend-paying companies. Investors should note that stock quotes record the per share dollar amount of a company's latest quarterly declared dividend. This quarterly dollar amount is annualized and compared to the current stock price to generate the per annum dividend yield, which represents an expected return. Year DPS Share price Dividend yield 2007 0 2008 30.09 1000 .0301

0.301 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 DIVIDEND YEILD 2007 2008 2007 2008

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FINANCIAL RATIO ANALYSIS 2010
Book Value per Share: Book Value per Share Share Capital This is defined as the Common Shareholder's Equity divided by the Shares Outstanding at the end of the most recent fiscal quarter. It is the Indication of the net worth of the corporation. Somewhat similar to the earnings per share, but it relates the stockholder's equity to the number of shares outstanding, giving the shares a raw value. Comparing the market value to the book value can indicate whether or not the stock in overvalued or undervalued Year Shareholder·s equity Share capital Book value P/E share 2007 44301952 31296204 1.42 2008 50207563 32396204 1.55 = Shareholders' Equity

1.55

1.55 1.5 2007 1.45 1.4 1.35 2007 1.42 2008 2008

BOOK VALUE PER SHARE

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FINANCIAL RATIO ANALYSIS 2010
Statement of Cash Flow: Cash flow ratios indicate liquidity, borrowing capacity or profitability. This section of the financial ratio looks at cash flow indicators, which focus on the cash being generated in terms of how much is being generated and the safety net that it provides to the company. These ratios can give users another look at the financial health and performance of a company. Operating Cash Flow to Total Debt: Operating Cash Flow to Total Debt = Operating Cash Flow/Total Debt This coverage ratio compares a company's operating cash flow to its total debt, which, for purposes of this ratio, is defined as the sum of short-term borrowings, the current portion of long- term debt and long-term debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability To carry its total debt. Year Operating cash flow Total debt debt 2007 3170123 43800338 2008 7216396 43754589 .165

Operating cash flow to total .072

0.165

0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

0.072 2008

2007 2008

2007

OPERATING CASH TO TOTAL DEBT

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FINANCIAL RATIO ANALYSIS 2010
Operating Cash Flow per Share: Operating Cash Flow per Share = Operating cash flow / Total Shares Year Operating cash flow Total shares shares 2007 3170123 31296 2008 7216396 32396 222.76

Operating cash flow to total 101.30

222.76

250 200 150 100 50 2007 0 101.3 2008 2007 2008

OPERATING CASH TO TOTAL SHARES

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FINANCIAL RATIO ANALYSIS 2010
Trend Analysis: A firm's present ratio is compared with its past and expected future ratios to determine whether the company's financial condition is improving or deteriorating over time. Trend analysis studies the financial history of a firm for comparison. By looking at the trend of a particular ratio, one sees whether the ratio is falling, rising, or remaining relatively constant. This helps to detect problems or observe good management.

TREND ANALYSIS OF THDC LTD FOR THE YEAR 2007 & 2008

Performance A)liquidity ratio Current ratio Sales capital Working capital to

2007

2008

trend

1.55

2.09 2.77 3953541

Higher liquidity in 2008 Increase in 2008 Higher liquidity in 2008

Working 2.66 1670338

B)leverage ratio Time interest earned Debt ratio Debt to equity ratio Total ratio CASE STUDY OF THDC LTD Page 45 1.66 .481 .998 1.95 .448 .871 .497 Higher in 2008 Minimum difference in leverage There is a slight drop in leverage capitalization .466 Higher in 2008

FINANCIAL RATIO ANALYSIS 2010
LT/ Long term debt C) Profitability ratio Net profit margin Return equity(ROE) Return on asset Return on net worth DuPont assets Operating turnover Return on operating 1.55% assets Sales to fix asset D)Activity ratio Total asset turnover .049 .112 2.35 156 days Higher efficiency in 2008 Debtor turnover ratio 1.78 Average period E ) Market ratio DPS EPS PE Ratio Dividend payout 37.5 26.67 30.09 99.88 10.01 .301 No dividend paid in 2007 Increase in EPS in 2008 Decreased in 2008 No DP ratio in 2007 Page 46 collection 205 days Increased in 2008 Collection period decreased in 2008 .059times .141times 4.09% assets 1704.78% 722.64% Lower efficiency in 2008 Higher efficiency in 2008 Slight change in 2008 return 1.29% .027 on 1.29% 3.32% .064 3.32% Higher ROA in 2008 Higher in 2008 Higher in 2008 26.45% on 3.75% 29.87% 9.80% Profitability increased in 2008 Increase in 2008 1.97 2.06 Increase in leverage

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FINANCIAL RATIO ANALYSIS 2010
ratio Dividend yield Book value per share 1.42 .301 1.55 .165 222.76 Good perception Operating cash flow .072 to Total debt Operating cash flow 101.30 to Total shares Increased in 2008 Increased in 2008 market

SUMMARY Financial Statement Analysis is a method used by interested parties such as investors, creditors, and management to evaluate the past, current, and projected conditions and performance of the firm. This report mainly deals with the insight information of the two mentioned companies. In the current picture where financial volatility is endemic and financial intuitions are becoming popular, when it comes to investing, the sound analysis of financial statements is one of the most important elements in the fundamental analysis process. At the same time, the massive amount of numbers in a company's financial statements can be bewildering and intimidating to many investors. However, through financial ratio analysis, I tried to work with these numbers in an organized fashion and presented them in a summarizing form easily understandable to both the management and interested investors. It is required by law that all private and public limited companies must prepare the financial statements like, income statement, balance sheet and cash flow statement of the particular accounting period. The management and financial analyst of the company analyze the financial statements for making any further financial and administrative decisions for the betterment of the company. Therefore, I select this topic, so that I have done some solid financial analysis that will certainly help the management of review their performance and also assist the interested people like investors and creditors. As a financial analyst it is important that a financial decision be made by analyzing the financial statements of the company. It is the primary responsibility of the financial managers or financial analyst to manage the financial matters of the company, by evaluating the

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FINANCIAL RATIO ANALYSIS 2010
financial statements. I am also providing some important suggestions and opinions about the financial matters of the business. CONCLUSION AND RECOMMENDATION Conclusion and Findings I analyzed the financial statement of TEHRI HYDRO DEVELOPMENT CORPORATION LTD. The analysis is as follows:  The liquidity position of the company is not up to the standard, is below the industrial average in 2007, but it has improved a little in 2008 and is near the industrial average.  There is a considerable rise in the working capital of the company from 2007 to 2008 which shows good liquidity position of the company.  Leverage ratio indicates the high risk associated with the company. Leverage ratio helps in helps in assessing the risk arising from the use of debt capital. As we can see that in both the years debt to equity ratio is slightly below the industrial average.  Profitability ratio is good as the earnings have increased for its share holders from 26% to almost 30%. The profitability ratio is high because of the low financial charge.  Activity ratio of the company is not that efficient, as we can see that the debtor turnover ratio has increased but is not as much as company would have expected. The average collection period is also late.  Company did not pay any dividend in 2007. EPS has also jumped from a mere Rs37 to almost Rs 100.  Book value per share is the indication of the net worth of the corporation. It is somehow similar to the earning per share, but it relates to stockholder·s equity to the number of shares outstanding, so we can say net worth of the company is good.  The operating cash flow of the company is also good.

RECOMMENDATIONS CASE STUDY OF THDC LTD Page 48

FINANCIAL RATIO ANALYSIS 2010
As I have realized that the Tehri Hydro Development Corporation LTD is doing well since its inception. It is quite difficult to give any suggestion to such a corporation but still no one is perfect, There is always a room for improvement so I will recommend the following suggestions for THDC LTD:  Employee training must be introduced on continuous basis so that the employees have the understanding of the latest development especially with its customers.  As observed the company has an Internal Audit system wherein external Chartered Accountant Firms appointed to carry out periodic audits of the different units of the Corporation. In my opinion, the scope and coverage of internal Audit needs to be enhanced in order to make it proportionate with the size of the business.  As seen from the physical verification there is a great deal of mismanagement of resources and it must be avoided, as it decreases the profit.  Company should hire fresh graduates. As the combination of experienced and fresh talent can produce better results and will improve the efficiency of the management.  As the company is not a listed company. The company has implemented DPE guidelines. The company has to make continuous efforts to maintain transparency, disclosures and fairness in dealing with stakeholders.  Aggressive publicity campaign must be introduced by the company about there new project, as there is little awareness about there new projects.  The vigilance department of the corporation has to improve the level of transparency for implementing the proper system of E- tendering.

GLOSSARY Acid test ratio Also called the quick ratio. The ratio of current asset minus inventories, accrual and prepaid item to current liability. Analytical This is auditor-speak for finding the percentage difference from the current year revenue balance to the prior year balance. Ignore the awkward phrase. It·s a great exercise as it can help you find large swing from one year to next year.

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FINANCIAL RATIO ANALYSIS 2010
Balance sheet A statement of financial position of business at a specified moment of time. Balance sheet ratio Ratio calculated on the basis of figures of balance sheet only. Composite ratio Ratio based on figures of profit and loss account as well as balance sheet. They are also known as inter- statement ratio. Financial ratio Critical evaluation of data given in the financial statements. Financial ratio Ratio disclosing the financial position or solvency of the firm. They are also known as solvency ratios. Accounting ratio It is the relationship expressed in mathematical terms between two accounting figures related with each other. Financial statement An organized collection of data according to logical and consistent accounting procedures conveying an understanding of some financial aspects of business firm. Interpretation Explaining the meaning and significance of the financial data. Profitability ratio Ratio which reflects the final results of the financial data. Turnover ratio Ratio measuring the efficiency with which the assets are employed by a firm. They are also known as Activity ratio or Efficiency ratios.

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