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BHEL FINANCIAL ANLYSIS Liquidity ratios It helps in determining the ability of a firm to meet its short term obligations.

Following are 3 important liquidity ratios: 1. Current ratio Current Ratio = Current Asset / Current Liability y y y y Its a diagnostic tool which which measures whether a business has enough resources to pay over its bills over the next 12 months. Higher the ratio higher is the liquidity. Min. Expected even for a new unit in India = 1.33:1. If current ratio increases liquidity position of the company is good If current ratio decreases liquidity position is decreasing and financial health of the company is deteriorating.

Important note y A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.

BHEL ANALYSIS YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 Current Assets 19232 25239 33463 38743 44515 Current Liabilities 12554 17665 24241 28390 32515 Current Ratio 1.53 1.42 1.38 1.36 1.37

Over the last 5 years current ratio for BHEL has declined. In 2009 it increased but again in 2010 it decreased. The industrial average for capital goods industry is 1.33. thus the ratio indicates BHEL is in a sound financial position but since ratio has been declining mostly, it is a matter of concern.

2. Quick ratio Liquid Ratio = (Current Asset Inventory) / Current Liability y A better approach to measure the ability of a company to meet its short term liability is by excluding the inventory from the current asset. This is done because it is unlikely to turn inventory to cash immediately. It is thus a measure of how quickly a companys asset can be converted to cash. This ratio is also called the acid test and quick ratio. The minimum should be 1:1. This should not be too high as the opportunity cost associated with high level of liquidity could also be high. If quick ratio increases liquidity position is good If current ratio decreases liquidity position is decreasing

y y y

BHEL ANALYSIS Year 2005-06 2006-07 2007-08 2008-09 2009-10 y Current Assets 19232 25329 33463 38743 44515 Inventories 4543 5367 7040 9785 10699 Current Liabilities 12554 17665 24241 28390 32515 Quick ratio 1.17 1.13 1.09 1.02 1.04

The ideal quick ratio should be greater than 1. Over the last 5 years its above 1 which is a good sign but the decreasing trend is not good. However in 2010 current ratio increased by 0.02. Thus liquidity position of BHEL increased only during last year.

CASH RATIO Cash ratio= (Cash + Marketable securities)/Current Liabilities y Cash is the most liquid asset. So, its analysis becomes much of a concern for measuring the liquidity of a firm. The cash ratio should not be too high as the idol cash lying with the firm has a much higher opportunity cost. Whereas, if the cash ratio is too low, it is also a risky venture as firm may find it difficult to function in lack of funds for working capital.


YEAR 2005-06 2006-07 2007-08 2008-09 2009-10

Cash 7056 8543 10284 12449 15427

Current Liabilities 12554 17665 24241 28390 32515

Cash Ratio 0.56 0.48 0.42 0.43 0.47

Here cash ratio has been declining from 2006 to 2008 but increased during 2009 and 2010. The ratio is too high and hence BHEL has lot of idle cash lying in its accounts which can be used for other constructive activities.

LIQUIDITY RATIOS OF BHEL Name of the ratio Current ratio Quick ratio Cash ratio y 2005-06 1.53 1.17 0.56 2006-07 1.42 1.13 0.48 2007-08 1.38 1.09 0.42 2008-09 1.36 1.02 0.43 2009-10 1.37 1.04 0.47

We can conclude that liquidity position of BHEL has improved since the last year as indicated by the ratios calculated

Leverage ratios

Short term creditors like bankers and suppliers of material are concerned with the firms current debt paying ability. On the other hand long term creditors like debenture holders, financial institutions are concerned with firms long term financial strength. To judge the long term financial position of the firm,financial leverage ratios are calculated. The major leverage ratios are: 1. Debt ratio 2. Debt-equity ratio 3. Capital employed to net worth ratio

DEBT RATIO Debt Ratio = Debt/Total Assets

A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. If debt ratio is increasing more risky a creditor will perceive its exposure to that business. If debt ratio is decreasing credit available easily debt ratio of greater than 1 indicates that a company has more debt than assets, a debt ratio of less than 1 indicates that a company has more assets than debt.

y y y y

BHEL ANALYSIS YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 y Debt 558 89 95 149 127 Total Assets 7859 8877 10869 10353 11999 Debt ratio 0.07 0.01 0.009 0.014 0.010

This ratio indicates, BHEL over the years has maintained as low leveraged firm which is good indication. Also the ratio has considerably decreased over the years. This indicates that BHEL has lenders who finance only 1% of net asstes

DEBT EQUITY RATIO Debt Equity ratio = Total liabilities/ Shareholders Equity y y y It indicates what proportion of debt and equity a company is using to finance its assets. It is a measure of companys financial leverage. Ratio greater than 1 means assets are mainly financed with debt, less than 1 means more equity provides a majority of the financing. If the ratio is high then the company is in a risky position-especially if interest rates are on rise. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.

BHEL Analysis Year 2005-06 2006-07 2007-08 2008-09 2009-10 Total debt 558 89 95 149 127 Net Worth 7301 8788 10774 12938 15917 D-E Ratio 0.07 0.01 0.008 0.01 0.008

Debt- Equity ratio has not changed considerably during last five years. However, this ratio shows that the owners contribution in funds is much higher than lenders contribution.

LEVERAGE RATIOS OF BHEL The following are the leverage ratios of BHEL for last 5 years: Name of the ratio Debt ratio Debt equity ratio 2005-2006 0.07 0.07 2006-2007 0.01 0.01 2007-2008 0.009 0.008 2008-2009 0.014 0.01 2009-2010 0.010 0.008

Profitability Ratios

Profit is the difference between the revenues and expenses over a period of time. Profit is the ultimate output of a company and it has no future if it fails to make sufficient profit. Profitability ratios ratios are calculated to measure the operating efficiency of a company. The profitability ratios are:
1. 2. 3. 4. 5. 6. 7.

Gross profit margin Net profit margin Expense ratio Return on equity ratio Earnings per share Dividends per share Payout ratio

Gross profit margin

Revenue - Cost of Goods Sold Revenue A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. This metric can be used to compare a company with its competitors. More efficient companies will usually see higher profit margins. This is very useful when comparing against the margins of previous years. If it increases- sales are increasing or cost of sales are decreasing It should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies

y y y y

BHEL ANALYSIS Year 2005-06 2006-07 2007-08 2008-09 2009-10 y Gross profit 2223 3545 3746 4184 6099 sales 14739 19058 21775 28504 34613 Gross profit margin 0.15 0.18 0.17 0.14 0.17

The ratio has increased since last year. This is a sign of good management and hence higher operating efficiency.

Net profit margin Net Profit Margin= Profit after Tax/ Sales y Net profit is obtained when operating expenses, interest and taxes have been subtracted from the gross profit. The Net Profit Margin ratio is measured by dividing profit after tax by sales Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. If a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.

BHEL ANALYSIS Year 2005-06 2006-07 2007-08 2008-09 2009-10 y PAT 1679 2414 2859 3138 4310 Sales 14739 19058 21775 28504 34613 Net Profit Margin 0.11 0.12 0.13 0.11 0.12 In %age 11 12 13 11 12

Net profit margin over the years has increased except in 2008. Increase in net profit implies company is doing well.

Operating expenses ratio Operating expenses ratio= Operating expenses/ operating income y The operating expense ratio is calculated by dividing a property's operating expense by its gross operating income. Investors using the ratio can further compare each type of expense, such as utilities, insurance, taxes and maintenance, to the gross operating income. If it is increasing expenses of the company are on rise.

BHEL ANALYSIS Year 2005-06 2006-07 2007-08 2008-09 2009-10 Operating expenses 11603 13999 16621 23581 27913 sales 14739 19058 21775 28504 34613 Operating ratio 0.78 0.73 0.74 0.82 0.80

From 2006 to 2008 the ratio was declining which implies high operational efficiency and good management. But in 2009 it touched 0.82 which is not a good sign. Thus expenses should be controlled by BHEL.

Return on equity ROE = Profit after taxes/ Net Worth (Equity)

y y

The share holders equity will include paid-up share capital, share premium and reserves and surplus less accumulated losses. The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested If it is increasing- profits for the company are rising.

BHEL ANALYSIS Year 2005-06 20006-07 2007-08 2008-09 2009-10 y Profit after tax 1679 2414 2859 3138 4310 Net worth 7301 8788 10774 12449 15427 Return on equity 0.23 0.27 0.26 0.25 0.27

From 2007 to 2010 ROE did not change. This not favorable for investors as they expect higher return on equity

Earning per share EPS = Profit after tax /Number of shares outstanding

The profitability of the shareholders investment can also be measured by other ways. One such measure is to calculate the earnings per share (EPS). EPS is calculated by dividing the profit after taxes by the total number of ordinary shares outstanding. Earnings per share is 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-toearnings valuation ratio.

BHEL ANALYSIS Year 2005-06 2006-07 2007-08 2008-09 2009-10 PAT 1679 2414 2859 3138 4310 Number of shares 24.47 24.47 48.95 48.95 48.95 EPS 68.60 98.66 58.46 64.11 88.06

In 2008 bonus shares were issued. EPS has increased over the years, thus indicating good share price.

Dividends per share Dividends per share = Dividends distributed /Number of ordinary shares y y y The net profits after taxes belong to shareholders. But the income which they really receive is the amount of earnings distributed as cash dividends. If it is increasing companys management believes that growth can be sustained. If it is decreasing- either companys financial health is deteriorating or company needs cash for new opportunities

BHEL ANALYSIS Year 2005-06 2006-07 2007-08 2008-09 2009-10 Dividends 354 599 746 832 1140 Number of shares 24.47 24.47 48.95 48.95 48.95 DPS 14.46 24.47 15.25 16.9 23.2

Since bonus shares were issued in 2008, DPS for previous years cant be compared with that of 2008 to 2010. DPS ha been increasing which indicates shareholders share of profit is increasing over the years. Thus BHEL has succeeded in sustaining shareholders confidence.

Payout ratio Payout ratio= Dividends per share /Earnings per share

y y y

The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings. For example, a very low payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends. The lower the ratio, the more secure the dividend because smaller dividends are easier to pay out than larger dividends.

BHEL ANALYSIS Year 2005-06 2006-07 2007-08 2008-09 2009-2010 DPS 14.46 24.47 15.25 16.9 23.2 EPS 68.60 98.66 58.46 64.11 88.06 Payout ratio 0.21 0.24 0.26 0.26 0.26

DPS has remained constant over the years which imply that company is primarily focused on retaining its earnings rather than paying out more dividends.


Name of ratio Gross profit ratio Net profit ratio Operating expense Return on equity EPS DPS Payout ratio

2005-06 0.15 0.11 0.78 0.23 Rs 68.60 14.46 0.21

2006-07 0.18 0.12 0.73 0.27 98.66 24.47 0.24

2007-08 0.17 0.13 0.74 0.26 58.46 15.25 0.26

2008-09 0.14 0.11 0.82 0.25 68.11 16.9 0.26

2009-10 0.17 0.12 0.80 0.27 84.06 23.2 0.26

INFERENCES DRAWN FROM RATIO ANALYSIS OF BHEL By the method of Ratio analysis of financial statements of BHEL, following inferences can be drawn:


In spite of the global economic recession and financial turmoil, BHEL has continued generating tremendous profits. Profitability ratios indicate the firm has high operating efficiency backed by a strong management. BHEL is a capital goods manufacturing industry. In general, the industrial average of capital goods manufacturing industry for liquidity ratios is quite low. But BHEL has a sound liquid position as suggested by various liquidity ratios of BHEL. The firm is low on leverage. The owners contribution in funds is maximum. The leverage ratios indicate the firm is low on financial leverage. The firm has idol cash and bank balances which can be used for constructive purposes.