chapter vi ratio analysis of financial performance of...

144

CHAPTER VI

RATIO ANALYSIS OF FINANCIAL PERFORMANCE OF

PUNJAB STATE ELECTRICITY BOARD

In the Chapter IV and Chapter V the operational performance of Punjab

State Electricity Board (PSEB) was evaluated on the basis of some

standardised parameters. It was observed that on some issues, an

improvement in the performance was reported in the post-reforms period. In

this chapter, the technique of ratio analysis has been adopted to measure the

financial performance of the PSEB on the basis of specific financial aspects.

Ratio analysis is the most powerful tool used for analysing the efficiency of

financial management of any business organisation. Various types of ratios

have been computed to analyse the short term as well as long term financial

position of the PSEB. Mathematically, a ratio shows the arithmetic

relationship between two or more selected variables. With the help of ratio

analysis one can determine the following:

The ability of a firm to meet its current obligations;

The solvency position of a business organisation ;

The usage efficiency of financial resources; and

The overall operating efficiency.

145

This Chapter is diveded into two sections. Section VI.1 analyses the short

term financial ratios. Various ratios such as current ratio, quick ratio, cash

ratio, working capital ratio, etc. have been discussed. In Section VI.2, key

financial ratios such as asset turnover ratio, profitability ratio, rate of return,

etc. have been used for evaluating the long term financial position.

VI.1: Short Term Financial Performance of the Utility

The short term financial position the overall financial and

administrative efficiency of a business organisation. Generally, two

techniques are commonly used to analyse the short term financial

performance. Liquidity Ratio Net Working Capital.

To measure the short term financial performance, various

figures related to the short term liquidity are calculated. These ratios indicate

the degree of liquidity of the organisation. Therefore, these ratios are defined

as liquidity ratios.

(A) Liquidity Ratio: Liquidity ratio establishes a relationship between

current assets including cash in hand to the current liabilities of the

organisation. It is also defined as a quick measure used for assessing the

liquidity position of an entity. It measures the ability of an organisation to

meet its current liabilities such as bills payable, short term bank loans,

income tax liability, etc. Current Ratio, Quick Ratio and Cash Ratio are the

146

most commonly used as liquidity ratios. The position of PSEB in

maintaining these ratios is explained below:

(i) Current Ratio: It examines the current position of the utility and

assesses the efficiency level achieved in using the current assets. In the other

words, it establishes the relationship between current assets and current

liabilities. Current resources include cash in hand and the assets which can

easily be converted into cash within a period of one year. These include

bank balance, loan and advances, sundry receivables, etc. Current liabilities

include the outstanding expenses which are incurred within one year. Bills

payable, short term bank loans, income tax liability, etc. are major

components of the current liabilities. The commonly used rule for the

current ratio is 2:1. It implies that the current assets of an organisation

should be twice the current liabilities. Only then, the entity is stated to be in

solvent position. Mathematically it is defined as:

Current ratio: Current assets/ Current liablities

The current ratio maintained by Punjab State Electricity Board (PSEB) is

presented in the Table 6.1.

147

Table 6.1 Current Ratio of Punjab Power Utility

(In Rs. Crore)

Fin Year Current Assets Current

Liabilities

Current Ratio

1996-97 1508 1201 1.26

1997-98 1827 1395 1.31

1998-99 2165 1660 1.30

2005-06 2759 2350 1.17

2006-07 2860 2590 1.10

2007-08 3428 3497 0.98

2008-09 3744 3899 0.96

2009-10 3849 4019 0.96

Source: Planning Commission Annual Report on SEBs, Oct. 2002

PSEB, Electricity Statistics (various financial years)

PSERC, Tariff Order (various financial years)

Annual statement of accounts of PSEB various years

The Table 6.1 revealed the current ratio of PSEB was 1.31 in the FY

1997-98, which is the highest during the study period. And after the FY

1997-98 that, it started declining, however it was reported above unity for

the period from FY 1996-97 to 2006-07. This shows a positive margin of

safety for creditors. However, it does not satisfy the condition of required

benchmark. It was reported even less than unity for the period from FY

2007-08 to 2009-10. It means that from 2007-08 onwards the utility had

availability of less than one rupee to discharge its liability for one rupee.

148

Hence the PSPCL needs to increase its current assets while reducing the

current liabilities.

(ii)Quick Ratio: Quick ratio express the relationship between the quick

assets and the current liabilities. An asset is said to be liquid if it can be

converted into cash immediately without any loss to the value of the asset. It

includes cash, bank balance, loan and advances, receivables against supply

of power and sundry receivables.

Table 6.2 Quick Ratio Analysis for the Punjab Power Utility

(in crore)

Year Current

Assets

Inventories Quick

Assets

Current

Liabilities

Quick

Ratio*

1996-97 1508 189 1318 1201 1.10

1997-98 1827 275 1552 1395 1.11

1998-99 2165 217 1947 1660 1.17

2005-06 2759 484 2274 2350 0.97

2006-07 2860 496 2364 2590 0.91

2007-08 3428 423 3005 3497 0.85

2008-09 3744 470 3274 3899 0.84

2009-10 3849 546 3392 4019 0.82

Source; Annual statement of accounts of PSEB various years

Annual Revenue Requirement (ARR) Filed by PPDCL)

* Quick assets are calculated by deducting inventories from current assets

149

In other words, when inventories and rapid expenses are excluded

from current assets it become liquid assets since stock of products takes

more time to be converted in to cash than all other current assets. The

benchmark for the quick ratio is 1:1 means that quick asset of the institution

should be equal to its current liabilities as an organization has to meet its

current claims at a short notice .

Quick Ratio=Quick assets/current liabilities

It is clear from the Table 6.1 that the quick ratio was in the range of

0.82 to 1.17 in during pre-reforms period. But after the initiation of reform

process, it started reducing. The Table exhibited that the position of PSEB

became worse in post reforms period. In other words quick assets were more

than current liabilities in pre reform period. It was a sign of good financial

health but after reform period the position was reversed. Hence the utility

should take corrective measure to control it.

(iii) Cash Ratio: Cash ratio may be defined as the relationship between the

cash including bank balance to the current liabilities. It can be calculated

dividing cash & bank Balance by the current liabilities. It is deemed to be

satisfactory when it 0.5:1 or nearer to it.

Cash ratio=Cash& Bank balance/current liabilities

150

Table 6.3: Cash Ratio of the Power Utility of Punjab (in crore)

Year Cash & Bank

Balance

Current

Liabilities

Cash Ratio

1996-97 75 1201 0.06

1997-98 73 1395 0.05

1998-99 177 1660 0.10

2005-06 61 2350 0.02

2006-07 59 2590 0.02

2007-08 186 3497 0.05

2008-09 214 3899 0.05

2009-10 547 4019 0.14


It is evident from the table that, the position of cash ratio was quite

adverse over the period of the study. During the study period, the cash ratio

was found to be less than satisfactory level (0.5:1). Therefore, the utility

should take required steps such as smooth recovery of electricity dues to

ensure reasonable good cash ratio so that its liquidity position is improved.

Working Capital

Two concepts are commonly used for working capital. First is the

gross working capital which is equal to total current assets of the

organization and the second is net working capital. Net working capital is

calculated by subtracting current liabilities from total current assets. It may

151

be noted that current assets must be in excess of the current liabilities. Only

then, there will be net working capital otherwise there will be working

capital deficit.

(i) Gross working capital: Gross working capital may be defined as the

current assets that can be converted into cash within a short period. It

includes stock bill, receivables, cash and bank balance, loans and advances,

sundry receivables, inter-unit transfers, etc.

Table 6.4: Position of Gross Working Capital of PSEB

Particular Stocks Receivable

against sale

Cash Loan &

advances

Sundry

receivables

Working

capital

1996-97 190 (13) 419 (28) 75 (05) 197 (13) 628 (42) 1508 (100)

1997-98 275 (15) 501 (27) 73 (04) 115 (07) 863 (47) 1828 (100)

1998-99 217 (10) 664 (31) 177 (08) 107 (05) 999 (46) 2165 (100)

2006-07 497 (17) 1470 (51) 60 (02) 138 (05) 696 (24) 2860 (100)

2007-08 424 (12) 1438 (42) 187 (05) 475 (14) 905 (26) 3429 (100)

2009-10 546 (14 1699 (44 547 (14) 209 (05) 844 (22) 3849 (100)

Source; Annual statement of accounts of PSEB (various years)

Figures in the brackets represent the relative shares in the total working capital for a

particular financial year

As presented in the Table 6.4, in the pre-reforms period the sundry

receivables was the major component of the gross working capital which

was reported above 40% of total current assets. Receivable against supply of

power was reported as second major item of the gross working capital. It

was reported above 25%. However, in the post reform period the relative

share of receivables against supply of power increased drastically. This is

because of the improvements shown by PSEB in the collection efficiency.

152

(ii) Net working capital of the utility

Net working capital may be defined as the difference of total current

assets and total current liabilities. Therefore current assets must exceed the

current liabilities. Only then, the net working capital will be positive.

Otherwise, there will be negative working capital or working capital deficit.

Table 6.5: Trend of Net working Capital in PSEB ( in Rs. Crore)

Fin Year Current assets Current liabilities Net working capital

1996-97 1508 1201 307

1997-98 1828 1396 432

1998-99 2165 1661 505

2006-07 2860 2590 270

2007-08 3428 3497 (69)*

2009-10 3849 4019 (170)*

Source; Annual statement of accounts of PSEB

*Represents the negative working capital

Table 6.5 presents that net working capital is positive and shown

increasing trend in the pre reform period (FY 1996-97 to FY 1998-99).

However, the position of net working capital in post reform period was quite

reverse over the pre reforms period and was reported negative. The working

capital deficit was reported to be Rs. 170 core in the FY 2009-10 which is

not a good indicator of the financial health of the Utility. The utility should

focus more to increasing its current assets share, timely recovery of dues and

other charges and to reduce the unproductive expenditures.

153

VI.2 Long term Financial Performance

Long term financial position refers to the ability of the organisation to

repay its long term debts and interest liabilities. To measure the long term

financial position, a researcher should examine the structure of capital

formation of the organisation, capital employed and its various trends, ratios

such as asset turnover ratio, profitability ratio, rate of return, etc.

Capital formation of the Board

In the pre-reforms period, PSEB did not own any capital in the form

of equity. All the capital of the utility was in the nature of borrowings

mainly sources from the State Government. Section 12 (A) of the Electricity

supply Act 1948 empowered the respective state government to notify the

SEB as a body corporate with a capital not exceeding the limit of Rs.10

crore.

Analysis of fixed Assets

This is an important aspect of the long term financial position of the

utility. The investments in fixed assets involve commitments of funds for

long period in the future. Fixed assets may be in the form of net asset, capital

expenditure in progress, assets not in use, deferred expenses and

investments. The position of PSEB regarding fixed assets is as under:

154

Table 6.6: Fixed Assets of the Power Utility in Punjab

(In Rs crore)

Year Fixed Assets

1996-97 2948

1997-98 2954

1998-99 4001

2005-06 6243

2006-07 8643

2007-08 9006

2008-09 10339

2009-10 11562


It is clear from the Table 6.6 that the fixed assets of PSEB have been

showing increasing trend. The fixed asset was reported to be Rs. 2948 crore

in 1996-97 doubled in 1998-99 and in the post reform period and was Rs.

100339 crore in 2008-09.It is approximately five times higher than the level

in 1996-97.

Activity Ratio

Activity ratio involves the relationship between the sales and the

assets. It is calculated to examine the effectiveness of the assets utilization.

Several ratios are commonly uses to assess the efficient use of assets such as

inventory turn over ratio, debtors turn over ratio and assets turn over ratio.

Due to limited information we analysed only assets turn over ratio

155

Assets turn over ratio

Assets turn over ratio may be define as the relationship between the sales

and the assets. It is of two types fixed assets turn over ratio and current

assets turn over ratio.

1. Fixed assets turn over ratio

Fixed assets turn over ratio may be defined as a relationship between the

sales and the fixed assets. It can be computed dividing the sales by fixed

assets. Higher the ratio better the financial health of the utility

Fixed assets turn over ratio=sales/Fixed assets

Table 6.7: Fixed Assets Turn Over Ratio (In Rs. Crore)

Year Sales Fixed Assets Fixed assets

Turn over ratio

1996-97 2546 2948 0.86

1997-98 2860 2954 0.96

1998-99 3395 4001 0.84

2005-06 6701 6243 1.07

2006-07 7031 8643 0.81

2007-08 7913 9006 0.87

2008-09 8718 10339 0.84

2009-10 8339 11562 0.72


156

It is clear from the Table 6.7 that fixed assets turn over ratio showed

fluctuating trends during the period under consideration. It was reported

more than o.80 except 2009-10. It was reported in the range of 0.72 to 1.07

2. Current Assets Turn Over Ratio

Current assets turn over ratio is defined the relationship between current

asset and the sales.

Current asset turn over ratio= Sales/ Current Asset

Table 6.8: current assets turn over ratio

Year Sales in crore Current

Assets in cr.

Current assets

Turn over ratio

1996-97 2546 1508 1.68

1997-98 2860 1827 1.56

1998-99 3395 2165 1.56

2005-06 6701 2759 2.42

2006-07 7031 2860 2.45

2007-08 7913 3428 2.30

2008-09 8718 3744 2.32

2009-10 8339 3849 2.16


The Table 6.8 presents that the current assets turn over ratio has improved

after the initiation of power sector reforms. It was reported to be 1.5 in the

FY 1998-99. It increased to 2.32 in the FY 2008-09. In the FY 2009-10, it

157

was reported to be 2.16. However, it was greater than 2.00 in the post

reforms period.

Profitability of PSEB

Main objective of the SEBs was to provide improved quality of

services to the consumers fulfilling the increasing demand for the energy.

An organisation is required to generation some profit margin for the survival

in the long run. Profit is defined as difference between the revenue realised

and expenses incurred over a period of time. An amendment was also made

in the Electricity Supply Act 1948 requiring the SEBs to generate a

minimum surplus of 3% on the capital employed in the business.

Profitability of an Organisation can be measured by calculating various

profitability ratios.

Profitability Ratio

It shows the relationship between the sale revenue and the profits of

the organisation. It has two types- Gross profit margin & Net profit margin

Gross profit may be defined as the total profit of the organisation and net

profit is calculated by subtracting operating expenses, Interest and taxes

from the gross profit.

158

Gross Profit Margin Ratio

Gross Profit margin ratio indicates the relationship between sale

revenue and the gross profit. It is calculated by dividing the gross profit by

sales revenue

Gross profit margin =sales –cost of good sold

Gross profit /sales

Table 6.9: Gross profit Ratio of PSEB

(in Rs. crore)

Year Sales Gross profit Gross profit Ratio

1996-97 2545 164 6%

1997-98 2860 44 1%

1998-99 3395 170 5%

2005-06 6701 78 1%

2006-07 7030 (1645) -23%

2007-08 7913 (1500) -18%

2008-09 8718 (1036) -12

2009-10 8339 (1301) -16


159

It is clear from the Table 6.9 that gross profit margin ratio of the

PSEB has been decreasing throughout the period under consideration. It

was 6% in 1996-97 but arrived at 1% in 1997-98. But after the reform

process, it has been declining continuously. It was 1% in 2005-06 but after

this it reached in worse position and there was a great loss of 23% in 2007-

08. It seems that the utility took various measures to control it but it was able

to reduce it merely by 5%. Moreover, there was a reported loss of 18% in

2007-08 and 12% in 2008-09. It again increased in 2009-10 and it was

reported to be 16% in 2009-10.

Net Profit Margin

Net profit is obtained when the operating expenses interest and taxes

are subtracted from gross profit. The net profit margin ratio is obtained by

dividing net profit to sales revenue

Profit after tax or net profit / sale

160

Table 6.10: Net Profit Ratio of PSEB

(In Rs. Crore)

Year Sales Net profit Net Profit Margin

Ratio

1996-97 2545 107 4%

1997-98 2860 49 2%

1998-99 3395 51 2%

2005-06 6701 13 0.1%

2006-07 7030 (1626) -23%

2007-08 7913 (1389) -18%

2008-09 8718 (1041) 12%

2009-10 8339 (1302) 16%


The table showed that net profit are showing decreasing trends during

the period under consideration. It was 4% in 1996-97 decreased in 1998-99

and reached 2%. But after the reform process it became negative and there is

a loss of 23% in 2006-07, which was a very dangerous position for the

Utility and the utility has taken remedial measure to control it and the loss in

2007-08 was 18%. The loss decreased in 2008-09and it was 12% but it again

increased and reached 16% in 2009-10.

161

Return on capital employed

Return on capital employed measures the profit earned by a utility on

its capital base. Return on capital employed represents net surplus/ deficit

after prior period adjustments plus interest charges to profit and loss account

less interest capitalised in the SEBs. Hence, the return on capital employed

and its ratio to capital employed has been calculated. The ratio represents

how efficiently the capital is being utilized to generate revenue.

The higher the ratio the more efficient use of capital employed.

Return on Capital employed / Capital employed *100

Table 6.11: Return on capital Employed in Percentage

Year Return on capital

employed

Capital

employed

Return on capital

employed in %

1996-97 (239) 3255 (7.3)

1997-98 (290) 3386 (8.5)

1998-99 (339) 4506 (7.5)

2004-05 (2841) 10521 (27)

2005-06 966 9824 9.83

2006-07 (742) 8912 (6.86)

2007-08 (526) 5937 (4.48)

2009-10 28 14214 .20

Annual Statement of Accounts 1996-97, 1997-98, 2006-06, 2007-08,2008-

09, 2009-10

162

The Table 6.11 presents that during most of the period under

consideration there was a negative value of return on capital employed all

this indicates ineffective working and low level of capital employed. Only in

2009-10 there was a positive value of return on capital employed which

means that in 2009-10 PSEB made larger investment of capital and got

positive return.

Therefore, the ratios analysis provides us a concrete idea about the

financial position of the PSEB. It reveals that the position of the utility in the

terms of current ration was satisfactory up to some extent in the pre reform

period because current ratio was reported in the range of 1.10:1 to 1.31:1.

However, it was not very acceptable because it could not satisfy the required

benchmark of current ratio which is 2:1. However, after the reform process it

declined further. In the year 2007-08, the current ratio was less than 1:1

which reveals a worse position for of the PSEB. Hence, the utility should

take remedial measure to control it.

The position of the Utility in terms of quick ratio was better in pre

reform period because quick ratio was in the rage of 1.85:1 to 1.17:1 in that

period. It satisfied the specified benchmark for the quick ratio is 1:1 but after

the reform process it was less than1:1 and was reported in the range of

0.85:1 to 0.97:1 that was not acceptable for the financial health of the utility.

163

The position of the utility in term of cash ratio was better in pre

reform period in spite of post reform period because cash ratio was equal to

its benchmark (.05:1) in this period but in the post reform period in FY

2005-06 and 2006-07 it was 0.02:1 which was a worse position for the utility

but after taken remedial measure by the utility it again reached 0.5:1 in

2007-08.

Gross working capital showed increasing trend all over the period

under consideration. Net working capital also shows increasing trend in all

the three years of pre reform period but after the reform process, it decreased

and became negative in 2007-08.That is not fair for the financial health for

the Utility. Hence the utility should take initial steps to increase in its cash

position and tried to reduce it current liabilities.

Fixed assets of the utility has been showing increasing trend in pre

reform period as well as in post reform period was 2948 crore in 1996-97

and doubled in 1998-99 approx. 5 times in post reform period in 2009-10.

Fixed assets turn over ratio was in the range of 0.72 to 1.07 throughout the

period under consideration in the pre reform period it was more than 0.8.

Current assets turn over ratio was in the better position in post reform

period than pre reform period. It was 1.50 in pre reform period and after

reform it was greater than 2.00.

164

Gross profit margin ratio showed decreasing trend in the pre reform

period. It was 6% in 1996-97 reached 1%in 1997-98but again increased and

reached 5% in 1998-99, but after the reform process it became negative and

there was a net loss of 23% in 2007-08 then the utility had taken remedial

measure to control it but succeed only 5% and there was a loss of 18%in

2007-08 and 11% in 2008-09but the loss again increased in 2009-10and

reached 16%.

Net profit showed a decreasing trend during the period under

consideration. It was 4% in 1996-97decreaed and reached 2% in 1998-99.

But after the reform process it became negative and there was a loss of 23%

in 2006-07 which was a very dangerous position for the Utility. Then PSEB

took remedial measures to control it and the loss has decreased in 2008-09

and reached 12% but it again increased in 2009-10 and reached 16%.

Interest and finance charges were between 12% to 28% in total sale

and 18% in total expenditure. Net capital was negative in 2006-07that is

why Capital employed was decreased in that year. Return on capital

employed was negative all over the period under consideration expect 2009-

10.

chapter vi ratio analysis of financial performance of...

Documents