A Case study on Market Value Measures of

Butwal Hydropower Company and Chilime Hydropower

Company

(In Partial fulfillment of the requirement for the course Managerial Finance, BBA in
Management, May 2016)
Submitted by:
Anuradha Chaudhary (A14034) Submitted to: Prem Silwal
Nikita Dangol(A14065)
Subigya Palikhe(A14078)
Shradha Shakya(A14083)
Saloni Shrestha(A14087)

NEPAL COLLEGE OF MANAGEMENT

Acknowledgement

We would like to express our special appreciation and our deepest sense of gratitude
towards Nepal College of Management (NCM) for making us indulge in this
opportunistic research t to develop our researching and analyzing skill as well as
broadening our theoretical knowledge through practical learning from field work. This
report we have prepared is not only the result of our group effort but also could be
possibly with the immense help of people to whom we are very much thankful.

First of all, we are heartedly thankful towards Managerial finance teacher Prem Silwal for
his great advices and feedbacks which have made this report happen and also for giving
us this platform in a form of report to present our researching and analyzing skills.

We also owe gratitude towards our Principle Sir for his support which could make our
field visit possible. Also, lastly heartedly thankful towards Managers of Butwal and
Chilime Hydropower Company for providing us with invaluable information and help
without which this report wouldn’t have been completed
TABLE OF CONTENTS

1. INTRODUCTION...........................................................................................................1

1.1Background of the study.............................................................................................1

1.2 Statement of Problem.................................................................................................1

1.3 Objectives of the study...............................................................................................2

1.4 Organization of the study...........................................................................................2

2. Review of Literature........................................................................................................4

3. Research Methodology....................................................................................................5

3.1 Introduction................................................................................................................5

3.2 Research Design.........................................................................................................5

3.3Sample Selection.........................................................................................................5

3.4 Limitations:................................................................................................................6

4. Presentation and Analysis................................................................................................7

4.1 Introduction................................................................................................................7

4.3 Analysis for Butwal Power Company Ltd...............................................................10

4.4 COMPARISON BETWEEN EPS OF BUTWAL POWER COMPANY LIMITED

AND CHILIME HYDROPOWER COMPANY LIMITED..........................................12

5. SUMMARY AND CONCLUSION..............................................................................15

5.1 Summary and conclusion.........................................................................................15

Bibliography......................................................................................................................16

Reference:..........................................................................................................................17
 1. INTRODUCTION
1.1Background of the study
Market value ratios evaluate the economic status of your publicly-traded company in the
wider market place - in other words, whether your company's stock is overvalued,
undervalued or priced fairly. Although there are a wide variety of market value ratios in
use, the most popular include Price per share, Book value per share and the Price
earnings ratio. Potential and current investors use market value ratios to see how a
company's current share price stacks up to its various metrics. In addition, market value
ratios give management an idea of what the firm's investors think of the firm's
performance and future prospects. The price-earnings ratio is the current price of one
share of stock divided by the company's earnings. It measures how much investors are
willing to pay per dollar of current earnings. Higher P/E ratio has often taken to mean the
firm has significant prospects for future growth. Price-sales ratio is a valuation for stocks.
IT is calculated by dividing the company’s market cap by the revenue in the most recent
year or equivalently dividing the per-share stocks price by the per-share revenue. Price-
sales ratio vary greatly from sector to sector. So, they are most useful in comparing
similar stocks within a sector or sub-sector. Market to book ratio is used to measure by
how much percent market value is greater than book value. A value less than 1 could
mean that the firm has not been successful in creating value for its stockholders. The
market to book financial ratio equals the market value of the company divided by its
book value. Normally, a company's share value will be greater than its book value
because the share price takes into account investors' estimate of the profitability of the
company, how well it uses its assets and includes best guesses of the future value of the
company.

1.2 Statement of Problem

This report deals solely deals with finding out the market value of the two hydropower
companies under study namely Butwal hydropower Company and Chilime hydropower
company. For that purpose, the three most common measures/ ratios i.e. P/E ratio, P/S
ratio and market to book value ratio are used to determine the market value, economic
status, and company’s performance and future prospects. Market value measures are
considered very good to determine current/ future status of the companies. In terms of
P/E ratio, the higher the P/E ratio, higher the significant prospects for future growth.
Also, the lesser the P/S ratio (less than 1.0) is usually thought to be better
investment.Market to book ratio determines how much company’s share value is greater
than book value because the share price takes into accounts investor estimate of the
profitability of the company.

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Hence, it is very important to compare the market value of the company’s from past to
present in order to have good future growth and suitable growth. It decides whether the
firm has sound and good market value or not. For that matter, this report has answered
following questions about market value measures of the hydropower companies in the
study and then has compared on the basis of three common ratios to come out with which
the hydropower company is better in terms of market value:

1. What is the market value per share?

2. Which company has better market value per share?
3. Which company is consistent in MVPS?
4. Does the market value ratio tend to fluctuate (i.e. increase or decrease)?
5. What is the average MVPS of 5 years?

1.3 Objectives of the study

The main objective of this study is to know the market value measures of Butwal and
Chilime Hydro power with the following specific objectives:

-To examine the market value ratio

-To know the price earnings ratio

-To test the price to sales ratio

-To examine the market to book ratio

1.4 Organization of the study

This report solely deals with analysis of market value per share of Chilime and Butwal
hydro power company. So focusing on computing and further analyses market value, the
chapters are thus sorted out in a following way.

The first chapter deals with background of MVPS along with raising issues and questions
related to with the topic followed by shading the overall purpose of the study.

Now, chapter two deals with what the scholars have viewed and then thus about MVPS in
their own terms giving inside knowledge about past theoretical background to further
create idea about the study.

2
Also chapter three has to do with from where the information were collected and what
was done with it along with mentioning what formula and techniques are applied in
further report aiding.

Again, chapter four contains tabulated and graphical details about computed MVPS of
the respected company along with interpreting and analyzing of their presentation.

Finally, the fifth chapter briefs about what the report is in gist and further informs about
analysis and the merit of the study.

3
2. Review of Literature
Market value measures are not necessary to be contained in financial statements. It is
because the market price of share depends upon the demand and interest of the investors.
As per our research, there are five market value determining ratios but we are discussing
three ratios only and they are PE ratio, Price to sales ratio and market to book value ratio.

In the process of determining the impact of these ratios on profitability (ROA) and
investors will to invest, we have come across the various points of views of authors.

According to Wan-Ting and Alexendra Wu) 2005,” PE ratio has a U-shaped relation
with ROE. Firms with higher forward PE ratios achieve lower ROE in the subsequent
years and the distribution of their realized ROE is more volatile and wide spread than
firma with lower forward PE ratios.”

According to Chan et al, 1998” PE ratio has a crucial role in the investment community.
This ratio reflects the market expectation of future growth and firm risk.”

According to Easton, 2004, “PE ratio can be used to estimate cost of equity capital.”

According to Basu, 1978, “PE ratio can be used to earn excess stock returns from the
glamour/value anomaly phenomenon.”

According to John Bajkowski, 1997 “As companies get larger, their price to sales ratios
normally get smaller. Once a firm reaches a large scale, it becomes increasingly difficult
for it to sustain above average growth rates.”

According to John Bajkowski, President of AAII,2009 “Using price sales ratio may lead
to better investment results than price to book value ratio or price earnings ratio. Price to
sales ratio may identify undervalued firms sooner than the price earnings approach and
avoid some of the accounting complications of the price earnings and price to book
ratios.”

According to Fama and French 1992,“There is strong positive book to market value
ratio effect, suggesting that firms with higher book to market value ratio have higher
expected average returns.”

According to Fama and French, 1986 “two variables, market equity (ME) and the ratio
of book equity and market equity (BE/ME) capture much of the cross section of average
stock returns. If stocks are priced rationally, systematic differences in average returns are
due to differences in risk.”

According to Chen and Zhang 1998, “book to market value ratio may capture three
types of risks: distress of firm, financial risk and riskness of cash flow.”

4
3. Research Methodology
3.1 Introduction
Research methodology is the systematic, theoretical analysis of the methods applied to a
field of study. The methods section describes the rationale for the application of specific
procedures or techniques used to identify, select, and analyze information applied to
understanding the research problem allowing the reader to critically evaluate a study’s
overall validity and reliability It basically deals with questions such as how the data had
been collected and what has been done with data and how data has been used as well as
analyzed and presented

3.2 Research Design

Our research is based on secondary sources information acknowledge through annual
reports of respective companies that we extracted from annual reports like Price per
share/EPS, M/B ratio= market value per share / book value per share, P/S ratio =
sales/outstanding share and later on these are put into formula accordingly. We also got
the help of graphs, tables to illustrate these data’s.

The present study is based on the secondary data that is annual reports of the respective
Hydro Power Companies selected for the study. Also, five yearly period commencing
from 2067/68 to 2071/72 of Butwal Hydro Power Company and three yearly period
commencing from 2069/70, 2070/71 and 2071/72 of Chilime Hydro Power Company has
been taken as a period to study the trend analysis.

For that, necessary information has been rightfully extracted from balance sheet as well
as income statement of respective hydropower companies. Furthermore, market value
measures of the hydropower companies are selected for study has been analyzed with
help of ratio analysis and various ratios and also further have been calculated along
statistical tools such as average, standard deviation and coefficient of varianceto interpret
and to compare the data. Also, the results of various market value ratios percentage are
illustrated through graphical, line graph to visualize the information.

3.3Sample Selection
Among all other hydro power companies in Nepal, only two hydropower companies were
randomly selected as sample in order to analyze the market value measures.

5
3.4 Limitations:
With all the methods applied in the study to find out the market value/position of
hydropower companies, there however are certain following limitations of this study:

 Small sample size of 2 hydropower companies may/may not represent all other
hydro power companies correct fully thus making study unreliable.
 Also, only 5 year is selected for study period which may not give picture on the
trend/patterns of market values of hydropower companies.
 All the hydropower companies are located in Kathmandu. Hence, inaccessibility
to hydropower companies located outside Kathmandu may not properly represent
the overall hydropower companies of Nepal.

 Only few techniques i.e. statistical tools are used to draw out the conclusion,
which may or may not give valid results.

 The data are collected only from secondary sources without some well-grounded
information survey/primary study which thus, may not provide actual/real picture
about the market value measures.

6
 4. Presentation and Analysis
“On market value measures of Chilime Hydropower and Butwal
Hydropower Companies”
4.1 Introduction
In this research paper, only three ratios: P/E ratio, Price-to-sales ratio and Market-to-book
value ratio have been analyzed. On the basis of the calculation of these ratios, we can
ascertain the interest of the investors in investing in these two companies as these ratios
shows relative aspect of market value of shares or equity (Po or ME) with earning per
share (EPS), sales per share and book value per share or equity.

Here are the formulas that we have used to calculate the required ratios.

EPS = Net income

Shares outstanding

P/E Ratio = Price per share

EPS

Price-to sales Ratio = Price per share

Sales per share

(Note; sales per share is calculated as total shares divided by number of outstanding
shares.)

Market-to-book value ratio = Market value per share

Book value per share

7
 (; Market value per share or price per share is taken from financial analysis of the annual
report. Book value per share is calculated as summation of common stock along with
reserve and surplus divided by number of outstanding shares.)

TABLE1: CHILIME HYDROPOWER COMPANY LIMITED

               
YEAR NET OUTSTAND EPS P/E M/B SALES P/S
INCOME ING RATIO RATIO RATI
O
    SHARES          
2069/70 965045806 17500000 55.14 25.29 4.08 968553507 25.2
2070/71 939675878 23000000 40.85 61.93 8.63 985003991 59.08
2071/72 853528644 27500000 31.03 54.23 6.38 1046082155 44.25
Average 919416776 15766666.6 42.34 47.15 6.36 999879884 42.84
STANDAR 58453766 5008326.4 12.123 19.318 2.275 40849014.3 16.983
D
Deviation
CV 0.063 0.317652 0.286 0.409 0.357 0.0408539 0.3964

As per the table 1, we can find out that net income in 2069/70 B S, 2070/71 B S and
2071/72 B S are Rs 96,50,45,806, Rs 93,96,75,878 and Rs 8,5,35,28,644 respectivey.Net
income seems to fall by Rs 2,53,69,928 and then by 8,61,47,234.

Similarly, number of outstanding shares was 1,75,00,000 in 2069/70 and in the following
two years it increased to 2,30,00,000 and 2,75,00,000 respectively. And in these
consecutive three years we have sales as Rs

Through calculation we found out that EPS of the company in 2069/70 B S, 2070/71 B S,
2071/72 B S are Rs 55.14, Rs 40.85 and Rs 31.03 respectively. Here. EPS is decreasing
per year.

P/E ratio measures how much investor are willing to pay per dollar of current earnings. In
2069/70 B S Chilime’s shares sells for 25.29 times earnings and in 2070/71 B S, it is
61.93 times and in 2071/72 B S,it is 54.23 times earnings. We can note that the firm has
significant prospects for future growth with higher P/E ratio.

In some cases companies will have negative earnings for extended periods. So their P/E
ratios are not meaningful. That is why some analysts prefer P/S ratio. In the three
consecutive year we have P/S ratio as 25.20 times, 59.08 times and 44.25 times
respectively.

8
M/B ratio compares the market value of the firm’s investment to their cost.In 2069/70 B
S, 2070/71 B S and 2071/2072 B S M/B ratio are 8.63 times, 6.38 times and 6.38 times
respectively. Hence, Chilime has been able to sustain its value in the market relative to its
cost.

As per the three year analysis of the company, we can find the mean of P/E ratio to be
57.15 and M/B ratio to be 6.36, and P/S ratio to be 42.84. Similarly, we have standard
deviation as 19.31 for P/E ratio, 2.27 for M/B ratio, and 16.98 for P/S ratio. Similarly for
the consistency we have calculated CV of P/E ratio as 0.409, M/B ratio as 0.3577, and
P/S ratio as 0.396.

GRAPH 1.1: CHILIME HYDROPOWER COMPANY

LIMITED

70

60

50

40
P/E RATIO
M/B RATIO
30
P/S RATIO

20

10

0
2069/70 2070/71 2071/72

In the above graph1.1 x-axis measures fiscal year and y-axis measures P/E,M/B &P/S
RATIOS. When we plot the ratios of three fiscal year from table 1 we get these above
curves. The blue curve shows P/E ratio, gray curve shows P/S ratio and orange curve
shows M/B ratio of Chilime Company.

9
4.3 Analysis for Butwal Power Company Ltd.

TABLE 2: BUTWAL POWER COMPANY LIMITED

YEAR NET OUTSTAND EPS P/E M/B P/S

INCOME ING RATI RATI RATI
SHARES
O O O
2067/6 3289700000 17000000 193.51 2.37 0.28 4.13
8
2068/6 4835030000 17000000 284.41 2.6 0.43 2.93
9
2069/7 2438840000 17000000 143.46 4.83 0.43 3.97
0
2070/7 3037680000 17000000 178.68 3.6 0.31 2.48
1
2071/7 4798290000 17000000 282.25 2.15 0.28 1.97
2
total 18399540000 85000000 1082.31 15.55 1.73 15.48
Averag
e 3679908000 17000000 216.462 3.11 0.346 3.096
Standard
Deviatio
n 1082826625 0 63.6957 1.10993 0.07765 0.93647
CV 0.294253722 0 0.29426 0.35689 0.22443 0.30248

Table 2 shows that Butwal hydropower company has net income of Rs

3,28,97,00,000, Rs 4,83,50,30,000, Rs 2,43,88,40,000, Rs 3,03,76,80,000 and Rs
4,79,82,90,000 in 2067/68, 2068/69, 2069/70, 2070/71 AND 2071/72 respectively.
However the number of outstanding shares remains constant with 17000000.
Similarly, EPS in the five consecutive years are Rs 193.51, Rs 284.41, Rs 143.46, Rs
178.68 and Rs 282.25 respectively.

P/E ratio in these five consecutive years is 2.37 times, 2.60 times, 4.83 times, 3.60
times and 2.15 times. Again M/B ratios are 0.28 times, 0.43 times, 0.43 times, 0.31
times and 0.28 times respectively. It implies that the company has not been successful
in creating value for its stockholders. Market value of the company seems to be
declining. Lastly, the consecutive P/S ratios are 4.13 times, 2.93 times, 3.97 times,
2.48 times and 1.97 times.

10
 As per the three year analysis of the company, tha average of P/E ratio is 15.55, M/B
ratio is 1.73, and P/S ratio is 15.48. Similarly, we have standard deviation for P/E ratio
to be 3.11, M/B ratio to be 0.346, and P/S ratio to be 3.096. Lastly, the CV for P/E
ratio is 1.109, M/B ratio to be 0.076, and P/S ratio to be 0.936.

GRAPH 2.1: BUTWAL POWER COMPANY LIMITED

P/E RATIO
3
M/B RATIO
P/S RATIO

0
2067/68 2068/69 2069/70 2070/71 2071/72

In the above figure2.1 x-axis measures fiscal year and y-axis measures P/E, M/B & P/S
RATIO. The blue, gray and orange curves show P/E,P/S &M/B ratio respectively.When
we plot ratios of five fiscal year from table 2 we get these above curves.

11
4.4 COMPARISON BETWEEN EPS OF BUTWAL POWER
COMPANY LIMITED AND CHILIME HYDROPOWER COMPANY
LIMITED

300

250

200

EPS OF BUTWAL POWER COMPANY

150 EPS OF CHILIME HYDROPOWER
COMPANY
Series3

100

50

0
2069/70 2070/71 2071/72

In the above graph x-axis measures fiscal year and y-axis measures earning per share
(EPS).In fiscal 2069/70 EPS of Butwal co and Chilime co are 143.46 and 55.14
respectively. Similarly in fiscal year 2070/71and 2071/72 EPS of Butwal co and Chilime
co are 178.68, 282.25 and 40.85, 31.03 respectively. The upward sloping curve shows
EPS of Butwal Company which shows yearly increment in EPS and the downward
sloping curve shows EPS of Chilime Company which shows yearly decrement in EPS.
From this figure, we can conclude that the EPS of Butwal Company is more than Chilime
Company.

COMPARATIVE ANALYSIS
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 Graph 3: Market value ratios of Chilime hydropower company ltd.

R 70
61.93
60 59.08
A 54.23

50
T 44.25

40
I P/E ratio
M/B ratio
30 P/S ratio
25.29 25.5
O
20

S 10 8.63
6.38
4.08

0
2069/70 2070/71 2071/72

Graph 4: Market value ratios of Butwal hydropower company ltd.

6
R
5 4.83
A
3.97
T 4
3.6

P/E ratio
I 3
2.48
M/b ratio
P/S ratio
2.15
O 2
1.97

S 1
0.43 0.31 0.28
0
2069/70 2070/71 2071/72 YEAR IN BS

From the comparison of the market value ratios of Chilime hydropower and Butwal
hydropower, we can see that P/E ratio of Butwal hydropower seems to be in declining
trend whereas of Chilime seems to be increasing in initial year and decreasing in the

13
current year. Similarly, M/B ratio of Butwal hydropower seems to be increasing slightly
whereas of Chilime, it is increasing in the first year to second year and decreasing from
second year to third year. Lastly, P/S ratio of Butwal hydropower seems to be in
declining trend whereas of Chilime, it is increasing rapidly and decreasing moderately.

This information implies that Chilime hydropower is not able to add its value for the
invitation of potential investors for investment as all the market value measures seems to
be falling. However, the Chilime hydropower scream shows that it is operating for
building value of the company for its investors as the market value measures are not as
declining as of Butwal hydropower. Therefore, there is better future prospect growth rate
for Chilime hydropower company Ltd. than that of Butwal hydropower company ltd.

14
5. SUMMARY AND CONCLUSION
5.1 Summary and conclusion

In this report, Chilime Hydropower Company limited and Butwal Power Company
limited are compared. The main issue of this report is to make trend analysis on market
value measures of both company. For this we have analyzed P/E ratio, M/B ratio and P/S
ratio of different fiscal year of both company. By analyzing these data it is found that
Chilime Hydropower Company limited has more P/E, M/B and P/S ratio compared to
Butwal Hydro Power Company. But Chilime Hydro Power Company limited has low
EPS compared to Butwal Hydro Power Company. Hence, both the companies need to
improve their long term strategies. However by referring this report Chilime Hydro
Power Company limited is better than Butwal Hydro Power Company limited.

In Conclusion, the price earnings ratio, market to book value ratio and price to sales ratio
of Chilime Hydro Power Company limited is greater than Butwal Hydro Power
Company. Similarly, the earning per share of Butwal Hydro Power Company is more
than Chilime Hydro Power Company. Thus, the both companies need to improve their
performance in respective areas where deviation occurs. As per the analysis, we have
discussed the consistency of Chilime Hydropower Company limited is more regarding
market value of its shares rather than that of Butwal hydropower company Limited.

15
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Value ratio and financial statement variables VOL 7

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Journal Of business and economics research December 2007

Vol 10

John Bajkowski, president of AAII, the first cut, low price to sales ratio stocks, Vol 1

Wayne A.Thorp , CFA, a top line approach :the price to sales ratio scream, Vol 4

Jeffrey Puontiff, Lawrence DSchall, book to market ratio as predictor of market returns
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Eugene F.Fama and Kenneth B.French, size and book to market factors in earnings and
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16
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Mocciaro Li Destri A., Picone P. M. & Minà A. (2012), Bringing Strategy Back into
Financial Systems of Performance Measurement: Integrating EVA and PBC, Business
System Review, Vol 1. Issue 1. Pp.85-102

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2154117

Federal Register Vol. 55, No. 163, August 22, 1990. This definition used by the
International Association of Assessing Officials for tax assessment purposes

http://www.bpc.com.np/index.php?option=com_page&task=details&id=1

http://www.chilime.com.np/about.html, accessed on May 1

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