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I hereby declare that this project entitled "Ratio Analysis" is a benefited work carried out by me under the able
guidance of Mr.Ramanamurthy(Guest) Lecture of Krishna University Machilipatnam. This work is original & has
not been submitted either in part or in full for the award of any other degree.
I wish to acknowledge with deep gratitude for the valuable guidance received from my Lecture Mr.Ramanamurthy,
Who not only encouraged me but also took great pain in completing the project.
I also thank Mr.G.Sathi Raju, Senior Accounts Officer (Accounts) of APGENCO for giving me the opportunity to
undertake this Project work in his esteemed organization. APGENCO for his support and guidance.
Mr.Ramanamurthy
I wish to express my heartfelt in deftness’ to my parents, my brothers my friends for being with me all the way
through.
CONTENTS
I.COMPANY PROFILE:
• HISTORY OF APGENCO
• LANDMARKS AND ACHIEVEMENTS
• OUR VISION
• OUR MISSION
• CORE VALUES
II.RATIO ANALYSIS:
• INTRODUCTION
• NATURE OF RATIO ANALYSIS
• INTERPRETATION OF RATIO ANALYSIS
• USES AND SIGNIFICANCE OF RATIO ANALYSIS
• LIMITATIONS OF RATIO ANALYSIS
• CLASSIFICATION OF RATIO ANALYSIS
• LIQUIDITY RATIO
• SOLVENCY RATIO
• ACTIVITY RATIO
• PROFITABILITY RATIO
• PROFITABILITY RATIO IN RELATION TO INVESTMENT
• COMPANY PROFIT AND LOSS ACCOUNT
• COMPANY BALANCE SHEET
• ANALYSIS OF SHORT-TERM FINANCIAL POSITION
• ANALYSIS OF LONG-TERM SOLVENCY
III. CONCLUSIONS
IV. BIBLOGRAPHY
COMPANY PROFILE
HISTORY OF APGENCO:
When APSEB came into existence in 1959, APSEB started functioning with the objectives of maintaining the power
sector efficiently and economically simultaneously ensuring demand meets the supply.
During the last decade inadequate capacity addition and low system frequency operation of less than 48.5 Hz for more than
half a decade considerably reduced the power supply reliability.
The imbalance of the revenues against the cost of production, no significant reduction in technical losses and energy thefts,
high cost purchases from IPP's, other SEB's gradually worsened the financial position of APSEB.
Government of Andhra Pradesh realizing the declining tendency of the financial position of APSEB and
considering the Government of India's Liberalized policy for attracting private investment into power sector, set up a
high level committee in January 1995 to look into present working of the APSEB and suggest remedies for
improvement. The committee after detailed deliberations with all the concerned anfcd critical analysis submitted the
report in which it suggested some recommendations
Government of Andhra Pradesh considering the recommendations made by committee had embarked upon
the AP Electricity REFORMS ACT in 1998.As a sequel the APSEB was unbundled into Andhra Pradesh Power
Generation Corporation (APGENCO) & Transmission Corporation of Andhra Pradesh Limited (APTRANSCO) on
01.02.99. APTRANSCO was further unbundled w.e.f. 01.04.2000 into "Transmission Corporation" and four
"Distribution Companies" (DISCOMS).
Thus APGENCO was incorporated as a company under the provisions of Companies Act, on 29.12.1998.
According to the Andhra Pradesh Electricity Reforms Act, 1998, APGENCO commenced its business operations effective
from 1.2.1999 and according to the memorandum of Association APGENCO has to Acquire, Establish, Construct and
Operate Power generating stations.
OUR VISON:
• To be the best power utility in the country and one of the best in the world.
OUR MISSION:
• To generate adequate and reliable power most economically, efficiently and eco-friendly
• To spearhead accelerated power development by planning and implementing new power projects.
• To implement Renovation and Modernisation of all existing units and enhance their performance.
CORE VALUES:
• To proactively manage change to the liberalized environment and global trends
• To build leadership through professional excellence and quality
• To build a team based organization by sharing knowledge and empowering employees
• To treat everyone with personal attention, openness, honesty and respect they deserve
• To break down all departmental barriers for working together
• To have concern for ecology and environment.
RATIO ANALYSIS
Introduction:
Financial statements are prepared primarily for decision-making. They play a dominant role in setting the
framework of managerial decision. But the information provided in the financial statements is not an end in itself as
on meaningful conclusion can be drawn from these statements is of immense use in making decision through analysis
and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and
weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and
loss account. There are various methods or techniques used in analyzing financial statement, such as comparative
statements schedule of changes in working capital common-size percentages, funds analysis, trend analysis and ratio
analysis. The ratio analysis is the most powerful tool of financial analysis.
Meaning:
According to Accountant’s Handbook by Wixom, Kell and Bedford, a ratio “is an expression of the
quantitative relationship between two number” According to Kohler, a ratio is the relation , of one amount, a, to
another, b, expressed as the ratio of a to b; a : b(a is to b); or as a simple fraction, integer, decimal, fraction or
percentage. A ratio is a simple arithmetical expression of the relationship of one number to another. It may be
defined as the indicated quotient of two mathematical expressions. In simple language ratio is one number expressed
in terms of another and can be worked out by dividing one number to the other.
Ratios provide clues to the financial position of a concern. These are the pointers or indicators of financial
strength, soundness, position or weakness of an enterprise. One can draw conclusions about the exact financial
position of a concern with the help of ratios.
Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making certain decision. I
It involves four steps:
i (i) Selection of relevant data from the financial statements
ii Depending upon the objectives of the analysis.
iii
iv (ii) Calculation of appropriate ratios from the above data.
v (iii) Comparison of the calculated ratios with the ratios of the same firm
In the past, or the ratios developed from projected financial
Statements or the ratios of some other firms or the comparison with
the ratios of the industry to which the firm belongs.
(iv) Interpretation of the ratios.
The interpretation of ratios is an important factor. Thought calculation of ratios is also important but it is
only a clerical task whereas interpretation needs skill, intelligence and foresightedness. The inherent limitations of
ratio analysis should be kept in mind while interpreting them. The impact of factors such as price level changes,
change in accounting policies, window dressing etc should also be kept in mind when attempting to interpret ratios.
A single ratio in itself does not convey much of the sense. To make ratios useful, they have to be further
interpreted.
The interpretation of the ratios can be made in the following ways:
(1) Single absolute Ratio: Generally speaking one cannot draw any meaningful conclusion when a single ratio
is considered in isolation. But single ratios may be studied in relation to certain rules of thumb which are based upon
well proven conventions.
(2) Group of Ratios: Ratios may be interpreted by calculating group of related ratios. A single ratio supported
by other related additional ratios becomes more understandable and meaningful.
(3) Historical Comparison: One of the easiest and most popular ways of evaluating the performance of the firm
is to compare its present ratios with the past ratios called comparison overtime. When financial ratios are compared
over a period of time, it gives an indication of the direction of change and reflects whether the firm’s performance
and financial position of time. But while interpreting ratios from comparison over time, one has to be careful about
the changes, if any, in the firm’s policies and accounting procedures.
(4) Projected Ratios: Ratios can also be calculated for further standards based upon the projected or proforma
financial statements. These future ratios may be taken as standard for comparison and the ratios calculated on actual
financial statements can be compared with the standards ratios to fin d out variances action for improvement in the
future.
(5) Inter-firm Comparison: Ratios of one firm can also be compared with the ratios of some other selected firms
in the same industry at the same point of time. This kind comparison helps in evaluating relative financial position
and performance of the firm. But while making use of such comparison one has to be very careful regarding the
difference of accounting methods, policies and procedures adopted by different firms.
USE AND SIGNIFICANCE OF RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to analyze and
interpret the financial health of enterprise.A ratio is known as a symptom like blood pressure, the pulse rate or the
temperature of an individual. It is with the help of ratio that the financial statements can be analysed more clearly
and decisions made from such analysis.
The use of ratio is not confined to financial managers only. As discussed earlier, there are different
parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. The
suppliers of goods on credit , banks, financial institutions, investors, shareholders and management all make use of
ratio analysis as a tool in evaluating the financial position and performance of a firm for getting credit, providing
loans or making investments in the firm. The conclusions can also be drawn as to whether the performance of the
firm is improving or deteriorating. Thus, ratios have wide applications and are of immense use today.
(1) Helps in decision-making: Financial statements are prepared primarily for decision-making. But the information
provided in financial statements is not as end in itself and no meaningful conclusion can be drawn from the
information provided in these financial statements.
(3)Helps in communicating: The financial strength and weakness of a firm are communicated in a more easy and
understandable manner by the use of ratios. The information contained in the financial statement is conveyed in
a meaningful manner to the one for whom it is meant. Thus, ratios help in communication and enhance the
value of the financial statements.
(4)Helps in co-ordination: Ratios even help in co-ordination which is of utmost importance in effective business
management. Better communication of the efficiency and weakness of an enterprise results in better co-
ordination in the enterprise.
(5) Helps in control: Ratio analysis also help in making effective control of the business. Standard ratios can be based
upon proforma financial statements and variances or deviations, if any, can be found by comparing the actuals
with the standards so as to take a corrective action at the right time. The weakness or otherwise if any, come to
the knowledge of the management which helps in effective control of the business.
(6)Other Uses: These are so many other uses of the ratio analysis. It is an essential part of the budgetary control
and standard costing. Ratios are of immense importance in the out the strength or weaknesses of a
firm.
The ratio analysis is one of the most powerful tools of financial management. Though ratios are simple to
calculate and easy to understand, they suffer from some serious limitations:
(2) Lack of Adequate Standards: There are no well-accepted standards or rules of thumb for all ratios which can
be accepted as norms. It renders interpretation of the ratios difficult.
(3) Inherent Limitations of Accounting: Like financial statements, ratios also suffer from the inherent
weaknesses of accounting records such as their historical nature. Ratios of the past are not necessarily true indicators
of the future.
(4) Change of Accounting Procedure: Change in accounting procedure by a firm often makes ratio analysis
misleading. e.g., a change in the valuation of methods of inventories from FIFO to LIFO increase the cost of sales and
reduces considerably the value of closing stock which makes stock turnover ratio to be lucrative and an unfavorable
gross profit ratio.
(5) Window Dressing: Financial statement can easily be window dressed to present a better picture of its
financial and profitability position to outsiders. Hence, one has to be very careful in making a decision from cal culet
from financial statements. But it may be very difficult for an outsider to know about the window dressing made by a
firm.
(6) Personal Bias: Ratios are only means of financial analysis and
not an end in itself. Ratios have to be interpreted and different people may interpret the same ratio in different ways.
(7) Uncomparable: Not only industries differ in their nature but also the firms of the similar business widely
differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.
(8)Absolute figures Distortive: Ratios devoid of absolute figures may prove distortive as ratio analysis is
primarily a quantitative analysis and not a quantitative analysis.
(9) Price Level Changes: While making ratio analysis, no considerations is made to the changes in price levels
and this makes the interpretation of ratios invalid.
(10) Ratios no Substitutes: Ratios analysis is merely a tool of financial statements. Hence, ratios become useless
if separated from the statements from which they were computed.
CLASSIFICATION OF RATIOS
Ratios
In view of the financial management or according to the tests satisfied, various ratios have been classified on
the next page.
(a) Liquidity Ratios: These are the ratios which measure the short-term solvency or financial position of a firm.
These ratios are calculated to comment upon the short-term paying capacity of a concern or the firm’s ability to meet
its current obligations. Various liquidity ratios are current ratio, liquid ratio and absolute liquid ratio. Further to see
the efficiency with which the liquid resources have been employed by a firm, debtors turnover and creditors turnover
ratios are calculated.
(b) Long-term solvency and leverage Ratios: Long-term solvency ratios convey a firm’s ability to meet the interest
costs and repayment schedule of its long-term obligations, e.g., Debt Equity ratios and interest Coverage Ratio.
Leverage Ratios show the proportions of debt and equity in financing of the firm. These ratios measure the
contribution of financing by owners as compared to financing by outsiders. The leverage ratios can further be
classified as: (i) Financial Leverage, (ii) Operating Leverage, (iii) Composite Leverage.
(c) Activity Ratios: Activity ratios are calculated to measure the efficiency with which the resources of a firm have
been employed. These ratios are also called Turnover Ratios because they indicate the speed with which assets are
being turned over into sales, e.g., Debtors turnover ratio or stock turnover ratio. The various activity or turn over
ratio have been named in the chart classifying the ratios.
(d) Profitability Ratios: These ratios measure the results of business operations or overall performance and
effectiveness of the firm. The various profitability ratios have been given in the chart exhibiting the classification of
ratios according to test. Generally, two types of profitability ratios are calculated (i) in relation to sales, and (ii) in
relation to investments.
Financial Classification in view of Financial Management or
Classification according to Tests
(A) 1. Current Ratio Financial Operating Composite 1. Inventory Turnover (A)In relation Sales
Ratio. 1. Gross Profit Ratio
The ratios have also been classified according to their significance or importance. Some ratios are more
important than others and the firm may classify them as primary and secondary ratios. The British Institute of
Management has recommended the classification of ratios according to importance for inter-firm comparisons. For
inter-firm comparisons, the ratios may classified as Primary Ratios and Secondary Ratios. The primary ratio is one,
which is of the prime importance to a concern: Thus return on capital employed is named as primary ratio. The
other ratios, which support or explain the primary ratio, are called secondary ratios, e.g., the relationship of
operating profit to sales or the relationship of sales to total assets of the firm.
Liquidity Ratio
These ratios measure the concern’s ability to meet short-term obligations as and when they become due.
These ratios show the short-term financial solvency of the concern. Usually the following two ratios are
calculated for this purpose.
1. Current Ratio
2. Quick Ratio
1. Current Ratio:
(a) Meaning: This ratio establishes a relationship between current assets and current liabilities.
(b) Objective: This objective of computing this ratio is to measure the ability of the firm to meet its short-term
obligations and to reflect the short-term financial strength/solvency of a firm.
(c) Components:
(i) Current Assets: Which mean the assets which are held for
their conversion into cash within a year.
(ii) Current Liability: Which mean the liabilities which are
expected to be matured within a year.
(d) Computation: This ratio is computed by dividing the current assets by the current liabilities. This ratio is
usually expressed as proportion 2:1.
Current Assets
(e) Formula: Current Ratio = --------------------------
Current Liabilities
(f) Interpretation: It indicates the amount of current assets available for each current liability. Higher the ratio,
greater the margin of safety for creditors and vice-versa. However, too high/too low ratio calls for further
investigation since the too high ratio may indicate the presence of idle funds and too low ratio may indicate the over
trading/under capitalization.
Traditionally, a current ratio of 2:1 considered to be a satisfactory ratio.
(g) Precaution: While computing and using the current ratio must be ensured, (a) that the quality of both
receivables (debtors and bills receivables) and inventory, has been carefully assessed and (b) that all current assets
and current liabilities have been properly valued.
2. Quick Ratio:
(a) Meaning: This ratio establishes a relationship between quick assets and current liabilities.
(b) Objectives: The objective of computing this ratio is to measure the ability of the firm to meet its short-term
obligations as and when due without relying upon the realization of stock.
(c) Components:
(i) Quick Assets: Which mean those current assets which can be converted into cash immediately or
at a short notice without a loss of value.
(ii) Current Liabilities: As stated above.
(d) Computation: This ratio is computed by dividing the quick assets by the current liabilities. This ratio is
usually expressed as proportione.g. 1:1.
Quick Assets
(e) Formula: Quick Ratio = --------------------------
Current Liabilities
(f) Interpretation: It indicates amount of quick asset available for meeting current liability. Traditionally, a
quick ratio of 1:1 is considered to be a satisfactory/ideal.
(g) Precaution: While computing and using the quick ratio, (a) that the quality of the receivables (debtors and bills
receivable) should be carefully assessed and (b) that all quick assets and current liabilities have been properly valued.
Solvency Ratios
These ratio show the long-term financial solvency and measure the enterprise’s ability to pay the
interest regularly and to repay the principal (i.e. capital amount) on maturity or in pre-determined installments at
due dates. Usually, the following ratios are calculated to judge the long-term financial solvency of the concern.
(1) Debt-Equity Ratio:
(c) Components:
(i) Long-term debts which mean long-term loans
(Whether secured or unsecured) e.g., Debtentures,
Bonds, loans, from financial institutions.
(ii) Shareholder’s funds which mean equity share capital plus
Preference share capital plus reserve and surplus minus
fictitious assets (e.g., preliminary expenses).
(d) Computation: This ratio is computed by dividing the long-term debts by the share holder’s funds. This ratio is
usually expressed as a proportion. e.g., 2:1.
Long-term Debts
(e) Formula: Debt-Equity Ratio = --------------------------
Shareholders’ Funds
Activity Ratios
These ratios measure the effectiveness with which a firm uses its available resources. These ratios are
called ‘Turnover Ratios’ since they indicate the speed with which the resources are being turned (or converted) into
sales. Usually the following turnover ratios are calculated.
(a) Meaning: This ratio establishes a relationship between net sales and capital employed.
(b) Objective: The objective of computing this ratio is to determine the efficiency with which the capital employed
is utilized.
(c) Components:
(i) Net sales which mean gross sales minus sales returns; and
(ii) Capital Employed which means Long-term Debt plus Shareholders funds.
(d) Computation: This ratio is computed by dividing the net sales by the capital employed. The ratio is usually
expressed as times.
Net Sales
(e) Formula: Capital Turnover Ratio = ------------------------
Capital Employed
(f) Interpretation: It indicates the firm’s ability to generate sales per rupee of capital employed. In general, higher
the ratio, the more efficient the management and utilization of capital employed.
(a) Meaning: This ratio establishes a relationship between net sales and fixed assets.
(b) Objective: The objective of computing this ratio is to determine the
Efficiency with which the fixed assets are utilized.
(c) Components:
(i) Net sales which means gross sales minus sales returns;
(ii) Net Fixed (operating) Assets which means gross fixed assets minus depreciation.
(d) Computation: This ratio is computed by dividing the net sales by the
net fixed assets. This ratio is usually expressed as ‘x’ number of times.
In the form of a formula, this ratio may be expressed as under:
Net Sales
(e) Formula: Fixed Assets Ratio = -------------------------
Net Fixed Assets
(a) Meaning: This ratio establishes a relationship between net sales and working capital.
(c) Components:
(i) Net sales which mean gross sales minus sales return and
(ii) Working capital which means current assets minus current liabilities.
(d) Computation: This ratio is computed by dividing the net sales by the working capital. This ratio is usually
expressed as.
Net Sales
(e) Formula: Working capital Turnover Ratio = ------------------------
Working Capital
(f) Interpretation: It indicates the firm’s ability to generate sales per rupee of working capital. In general, higher
the ratio, the more efficient the management and utilization of working capital and vice-versa.
(a) Meaning: This ratio establishes a relationship between cost of goods sold and average inventory.
(c) Components:
(i) Cost of Goods Sold which is calculated as under.
Cost of Goods Sold = Opening Inventory + Net purchases + Direct
Expenses – Closing Inventory
Or = Net sales – Gross Profit
(d) Computation: This ratio is computed by dividing the cost of goods sold by the average inventory. This ratio is
usually expressed as times.
(f) Interpretation: It indicates the speed with which the inventory is converted into sales, In general, a high ratio
indicates efficient performance since an improvement in the ratio shows that either the same volume of sales has
been maintained with a lower investment in stock, on the volume of sales has increased without any increase in the
amount of stock. However, too high ratio and too low ratio call for further investigation.
(g) Stock Velocity: This velocity indicates the period for which sales can be generated with the help of a stock
maintained and is usually expressed in days. This velocity may be calculated as follows:
Average Stock
Stock Velocity = ----------------------------------------------
Average Daily Costs of Goods Sold
(a) Meaning: This Ratio establishes a relationship between net credit sales and average trade debtors.
(b) Objective: The objective of computing this ratio is to determine the efficiency with which the trade debtors are
managed.
(c) Components:
(i) Net Credit Sales which mean gross credit sales minus
sales returns; and
(ii) Average Trade Debtors (including bills receivables) which are calculated as under:
Average Trade Debtors
= (opening Trade Debtors plus Closing Trade Debtors include
bill receivable Debtors)/ 2
(d) Computation: This ratio is computed by dividing the net credit sales
by average trade debtors. This ratio is usually expressed as times.
(f) Interpretation: It indicates the speed with which the debtors turnover on an average each year. In general, a
high ratio indicates the shorter collection period which implies prompt payments by debtors and a low ratio
indicates a longer collection period which implies delayed payments by debtors. However, too high ratio and
too low ratio calls to further investigation. The ideal ratio may be 8 to 10 terms
(g) Debt Collection Period (Average Collection Period or Debtors Velocity): This period shows an average period for
which the credit sales remain outstanding and measures the quality of debtors. It indicates the rapidity or
slowness with which the money is collected
from debtors. This period may be calculated as under:
(a) Meaning: This ratio establishes a relationship between net credit purchase and average trade creditors.
(b) Objective: The objective of computing this ratio is to determine the efficiency with which the creditors are
managed.
(c) Components:
(i) Net Credit purchases which mean gross credit purchases minus
Purchases returns; and
(ii) Average Trade Creditors (including bills payables) which are
d Calculated as under.
(d) Computation: This ratio is computed by dividing the net credit purchases by average trade creditors. This ratio
usually expressed as times:
(f) Interpretation: It indicates the speed with which the creditors turn over on an average each year. In general, a
high ratio indicates the shorter payment period which implies either the availability of less credit or earlier
payment period which implies either the availability of more credit or delayed payments.
(g) Debt Payment Period (or Creditors Velocity): This period shows an average period for which the credit
purchases remain outstanding or the average credit period actually availed of Debt Payment Period
Profitability Ratio:
These ratios measure management’s overall effectiveness as shown by the returns generated
on sales and investment. Usually two types of profitability ratio are calculated. The chart given below shows
the various types of profitability ratios.
Profitability Ratios
GrossInprofit Ratio
relation to sales Return on TotaltoAssets
In relation investment
Operating profit Ratio Return on Capital Employed
Net profit Ratio Return on Shareholders Fund
Operating Ratio [ or Return on Equity ]
Return on Equity
Shareholders funds
Profitability Ratio in Relation to Sales:
(a) Meaning: This ratio measures the relationship between gross profit
and net sales.
(c) Components:
(i) Gross Profit: Which is the excess of Net Sales over Cost of
Goods sold. Cost of Goods sold is calculated as under:
I. In the case of a Trading Concern:
(d) Computation: This ratio is computed by dividing the gross profit by the
net sales. It is expressed as percentage.
Gross Profit
(e) Formula: Gross Profit Ratio = ------------------ * 100
Net Sales
(f) Interpretation: (a) This ratio indicates on an average gross margin earned on a sale of Rs. 100, (b) the limit
beyond which the fall in sales prices will definitely result in losses, and (c) what portion of sales is left to
cover operating expenses and non-operating expenses, to pay dividend and to create reserves. Higher the
ratio, the more efficient the production and \ or purchase management. This ratio may be increased by
increasing sales or decrease cost or both.
(a) Meaning: This ratio measures the relationship between operating profits and net sales.
(b) Objective: The main objective of computing this ratio is determine the operational efficiency of the
management.
(c) Components:
(i) Operating Profit: Which is the excess of Gross profit over other operating expenses e.g. Office and
Administrative Expenses, Selling and Distribution Expenses?
(d) Computation: This ratio is computed by dividing the operating profit by the net sales. It is expressed as a
percentage.
Operating profit
(e) Formula: Operating Ratio = ------------------------ * 100
Net Sales
(f) Interpretation: This ratio indicates on an average operating margin earned on a sale of Rs. 100. Higher the
ratio, the more efficient is the operating management.
(a) Meaning: This ratio measures the relationship between net profit and net sales.
(b) Objective: The main objective of computing this ratio is to determine the overall profitability due to
various factors such as operational efficiency, trading on equity etc.
(c) Computation:
Net Profit
(e) Formula: Net Profit = ---------------- * 100
Net Sales
The figure of Net Profit may be taken either before tax or after tax.
(f) Interpretation: This ratio indicates on an average net margin earned on a sale of Rs. 100. Higher the ratio,
greater is the capacity of the firm to withstand adverse economic conditions and vice versa.
(a) Meaning: This ratio measures the relationship between operating cost and net sales.
(b) Objective: The main objective of computing this ratio is to determine the operational efficiency with which
production and / or purchase and selling operations are carried on.
(c) Components:
(i) Operating cost, which comprises (a) Cost of Goods Sold (b) other operating expenses, (e.g.
Administrative Expenses, Selling and Distribution Expenses, Interest on short-term loans, Discount
allowed and Bad Debts).
(d) Computation: This ratio is computed by dividing the operating cost by the net sales. This ratio is expressed
as a percentage.
Operating Cost
(e) Formula: Operating Ratio = ---------------------- * 100
Net Sales
(b) Objective: The objective of computing this ratio is to find our how efficient the total assets have been used by
the management.
(c) Components:
(i) Net profit before interest and Tax.
(ii) Total Assets (excluding fictitious assets e.g. preliminary expenses)
(d) Computation: This ratio is computed by dividing the net profit before interest and tax by total assets. This
ratio is expressed as a percentage.
(e) Formula:
Net profit before interest and tax
Return on Total Assets = -----------------------------------------*100
Total Assets
(f) Interpretation: This ratio indicates the firm’s ability to generate Profit per rupee of total assets. Higher the
ratio, the more efficient of utilization of total assets.
(a) Meaning: This ratio measures a relationship between net profit before interest and tax and capital employed.
(b) Objective: The objective of computing this ratio is to find out how efficiently the long-term funds supplied by
the creditors and shareholders have been used.
(c) Components:
(i) Net profit before interest and tax.
e (ii) Capital employed which refers to long term funds supplied
f by the long-term creditors and shareholders. It comprises
g the long-term debt and shareholder’s funds.
(d) Computation: This ratio is computed by dividing the net profit before interest and tax by capital employed. It
is expressed as a percentage.
(e) Formula:
Net Profit before Interest and Tax
Return on Capital Employed = ------------------------------------------ * 100
Capital Employed
(f) Interpretation: This ratio indicates the firm’s ability of generating profit per rupee of capital employed. Higher
the ratio, the more efficient the management and utilisation of Capital Employed.
(a) Meaning: This ratio measures a relationship between net profit after interest, and tax, and shareholder’s
funds.
(b) Objective: The objective of computing this ratio is to find out how efficiently the funds supplied by the equity
shareholders have been used.
(c) Components:
(i) Net profit after interest and Tax.
(ii) Shareholder’s funds which mean equity share capital plus
h preference share capital plus Reserves and surplus minus
i Fictitious assets.
(d) Computation: This ratio is computed by dividing the net profit after
interest and tax by shareholder’s funds. It is expressed as a
percentage.
(e) Formula:
Return on Shareholder’s Funds
Net Profit after Interest and Tax
= ---------------------------------------------- * 100
Shareholder’s Funds
(a) Meaning: This ratio measures a relationship between net profit after interest, tax, and preference dividend,
and equity shareholder’s funds.
(b) Objective: The objective of computing this ratio is to find out how efficiently the funds supplied by the equity
shareholders have been used.
(c) Components:
(i) Net profit after interest, tax and preference dividend.
(ii) Equity Shareholder’s funds which means Equity share capital
j plus Reserves and surplus minus Fictitious Assets.
(d) Computation: This ratio is computed by dividing the net profit after interest, tax and preference dividend by
shareholder’s funds. It is expressed as a percentage.
(e) Formula:
Return on Equity Shareholder’s Funds
Net Profit after Interest, Tax and Preference Dividend
= ------------------------------------------------------------------------- * 100
Equity Shareholder’s Funds
(f) Interpretation: This ratio indicates the firm’s ability of generating profit per rupee of equity shareholder’s
funds. Higher the ratio, the more efficient of utilisation of equity shareholder’s funds.
k
(i) Earning Per Share (EPS):
(a) Meaning: This ratio measures the earning available to an equity shareholder on a per share basis.
(b) Objective: The objective of computing this ratio is to measure the profitability of the firm on per equity share
basis.
(c) Components:
(i) Net Profit after Interest, Tax and Preference Dividend.
(ii) Number of Equity Shares.
(d)Computation: This ratio is computed by dividing the net profit after interest, and tax and preference dividend
by the number of equity shares. It is expressed as an absolute figure.
(e) Formula:
Earning Per Share
Net Profit after Interest, Tax and Preference Dividend
= ---------------------------------------------------------------------
Number of Equity Shares
(a) Meaning: This ratio measures how much out of earning made available as dividend to an equity
shareholders on a person basis.
(b) Objective: The objective of computing the ratio into measure dividend paid per equity share.
(c) Components:
1. Total amount of dividend payable.
2. Number of equity shares.
(d) Computation: This ratio is computed by dividing the dividend amount by number of equity shares.
(e) Formula:
Dividend per share
Total amount of dividend
= ----------------------------------
Number of equity shares
(b) Objective: The objective of this ratio is to measure how much times the earnings to cover the market price.
(c) Components:
1. Maintenance of equity share.
2. Earning per share.
Market price of equity
(d) Formula: Price Earning ratio = ------------------------------
EPS
(e) Interpretation: This ratio truly reflects the price current by quited in the market for each rupee of EPS. The
PE ratio better is for equity holders and vice-versa.
(b) Objective: The objective of computing this ratio is to find out how the proprietor’s have financed the
assets.
(c) Components:
(i) Total Assets.
(ii) Proprietor’s Funds (excluding fictitious assets like
l preliminary expenses).
(d) Computation: This ratio is computed by dividing the total assets by proprietor’s Funds. It is expressed as
aproportion.
Total Assets
(e) Formula: Proprietory Ratio = -----------------------------
Proprietor’s Funds
Proprietor’s Funds mean the shareholder’s Funds.
(f) Interpretation: This ratio indicates the extent to which the asset of the firm have been financed out of
proprietor’s funds
ANDHRA PRADESH POWER GENERATION CORPORATION
LIMITED
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH 2006
(Rupees in lakhs)
PARTICULARS Sched Current Year Previous Year
ule
INCOME
Revenue 16 388868.06 417255.56
Other Income 17 12076.07 400944.13 12046.38 429301.94
EXPENDITURE
Cost of Generation and Purchase of 18 205641.06 215658.24
Power
Operation,Maintenance,Adm, and General 19 38335.65 48844.80
Expenses
Sub-total 243976.71 264503.04
Interest and Finance Charges 20 72194.07 316170.78 81947.83 346450.87
Depreciation 71414.34 74291.78
TOTAL 387585.12 420742.65
Profit before prior period items 13359.01 8559.29
Prior Period Items 21 (74.98) (380.20)
Extar Ordinary Items 37.83
Profit before tax 13396.16 8939.49
Current tax 1237.85 700.97
Deferred Tax 5659.55 3074.72
Fringe Benefit Tax 72.39
Tax for previous years 122.43
Net Profit after Tax 6303.94 5163.80
Add: Brought forward loss (20385.71) (25549.51)
Balance Carried to Balance Sheet (14081.77) (20385.71)
Earnings per Share (Basic & Diluted) 2.99 2.45
(Face value of Rs.100 per Share)
Accounting Policies and Notes to 22
Accounts
In terms of our report of even date For and on behalf of the Board
attached
I. SOURCES OF FUNDS
Shareholders funds
Share Capital 1 210680.01 210680.01
Reserves and Surplus 2 0.00 210680.01 0.00 210680.01
Loan Funds
Secured Loans 3 240454.95 203552.90
Unsecured Loans 4 321062.57 343062.93
Employee Related funds 5 448683.79 1010201.31 448670.85 995286.68
Fixed Assets 6
Gross Block 1407623.38 1403970.7
8
Less: Depreciation 587979.89 516851.96
819643.49 887118.82
Capital work in progress 7 149300.13 968943.62 63108.33 950227.15
INCOME
Revenue 16 417255.56 408494.51
Other Income 17 12046.38 429301.94 12440.87 420935.38
EXPENDITURE
Cost of Generation and Purchase of Power 18 215658.24 202342.65
Operation,Maintenance,Adm, and General Expenses 19 48844.80 52420.93
Sub-total 264503.04 254763.58
Interest and Finance Charges 20 81947.83 346450.87 92418.49 347182.07
Depreciation 74291.78 72362.46
TOTAL 420742.65 419544.53
Profit before prior period items 8559.29 1390.85
Prior Period Items 21 (380.20) 198.75
Profit before tax 8939.49 1192.10
Provision for tax 700.97 91.64
Deferred Tax liability 3074.72 54.59
Net Profit after Tax 5163.80 1045.87
Add: Brought forward loss (25549.51) (39626.42)
Less: Past Deferred Tax asset 0.00 13031.04
Balance Carried to Balance Sheet (20385.71) (25549.51)
Earnings per Share (Basic & Diluted) 2.45 0.50
(Face value of Rs.100 per Share)
ANDHRA PRADESH POWER GENERATION CORPORATION LIMITED
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH 2003
PARTICULARS Schedule Current Year Previous Year
INCOME
Revenue from Sale of power 16 409613.09 396128.65
Other Income 17 8751.75 418364.84 6667.64
402796.29
EXPENDITURE
Cost of generation and power 18 205753.56 217402.61
Operation, Maintenance, Adm,& 60804.45
General Exp 19 56153.99
Sub-Total 261907.55 278207.06
Less: Expenses Capitalised 21a 2645.27 259262.28 1081.33 277125.73
Interest and Finance Charges 20 88666.88 88496.56
Less: Interest Capitalised 21b 3263.99 85402.89 7457.66
Depreciation 67341.97 81038.90
49137.15
Profit before prior period items 6357.70 (4505.49)
1.SOURCES OF FUNDS:
II.APPLICATION OF FUNDS:
Fixed Assets 6
Gross Block 1323428.40 1177633.13
Less: Depreciation 375221.47 304420.52
948206.93 87321.61
Capital work in progress 7 51885.86 1000092.79 166752.20 1039964.81
Quick Assets
Quick Ratio = --------------------------
Current Liabilities
Outsiders Funds
Debt-Equity Ratio = ---------------------------
Shareholders’ Funds
Funded Debt
Funded Debt to Total Capitalisation Ratio = --------------------------- * 100
Total Capitalisation
Shareholders Fund
Proprietory Ratio = ----------------------------
Total Assets
References:
1. Management Accounting – R.K.Sharma Shashi, K.Gupta, Kalyani Publishers (1991).
2. Management Accounting – Made Gowda, Himalaya Publishing House (1997).
3. Fundamentals of Information Technology – Chetan Srivastava, Kalyani Publishers.
4. A First Course in Computers – Sanjay Saxena, Vikas publishing House PVTLTD, 2003
Edition.
5. Electronic Commerce – Greenstein and Feinman, Tata McGraw Hill Publishing Company
LTD, New Delhi Fourth Reprint 2001.
ANDHRA PRADESH POWER GENERATION
CORPORATION LIMITED
I. ACCOUNTING
POLICIES
1 Basis of
Accounting
1.1 The Corporation prepares its accounts on accrual basis under historical cost
convention as per the Generally Accepted Accounting Principles. The
Corporation is governed by the Electricity Act 2003, therefore, the provisions of
the said act read with the rules thereunder prevails wherever the same have
been inconsistent with the provisions of the Companies Act 1956.
2 Use of
Estimates
3 Fixed
Assets
3.2 In case of commissioned assets, where final settlement of bills with contractors
is yet to be effected, capitalization is done on provisional basis subject to
necessary adjustment in the year of final settlement.
4 Capital Work in
Progress
4.1 Employee cost, Administrative & General expenses incurred for the year are
apportioned on estimated percentage basis to Capital Work-in-Progress.
4.2 Claims for price variation/exchange rate variation in case of contracts are
accounted for on acceptance.
5 Impairment of
Assets
5.1 The Company evaluates the impairment of losses on the fixed assets whenever
events or changes in circumstances indicate that their carrying amounts may not
be recoverable. If such assets are considered to be impaired the impairment loss
is then recognised for the amount by which the carrying amount of the assets
exceeds its recoverable amount, which is the higher of an asset's net selling
price and value in use. For the purpose of assessing impairment, assets are
grouped at the smallest level for which, there are seperately identifiable cash
flows.
6 Assets taken on
Lease
6.1 For assets taken on lease prior to 1-4-2001 and for assets taken under
operating lease, lease rentals payable are charged to Profit and Loss Account.
7 Foreign Currency
Transactions
7.1 Foreign currency transactions are initially recorded at the rates of exchange
ruling at the date of transaction.
7.2 Foreign currency loans/deposits, liabilities are reported with reference to the
rates of exchange ruling at the year-end and the difference resulting from such
translation as well as due to payment/discharge of liabilities in foreign currency
related to Fixed assets is adjusted in their carrying cost in respect of foreign
currency transactions entered before 1-4-2004 and that related to current assets
is recognised as revenue/expenditure during the year.
8 Investment
s
8.1 Long-term Investments are carried at cost. Any decline in the value of the said
investments, other than a temporary decline, is recognised and charged to Profit
and Loss Account.
8.2 Current Investment are carried at lower of cost or fair market value.Mutual funds
are valued at cost or net asset value.
9 Inventories
10 Provisions and
Contingencies
10. The Company creates a provision when there is a present obligation as a result
1 of a past event that probably requires an outflow of resources and where a
reliable estimate can be made of the amount of the obligation. A disclosure for a
contingent liability is made when there is a possible obligation or a present
obligation that probably will not require an outflow of resources or where a
reliable estimate of the amount of the obligation can not made.
11 Income
Recognition
11. Sale of power is accounted for based on guidelines laid down under APERC
1 Orders dated 10th April 2003, 15th March, 2004 and 16th October 2007 and
Inter-state Sale of Power is based on interstate agreement with the
Government of Orissa. Interest on delayed payements by DISCOMS is
accounted on receipt basis.
11. Revenue from O&M Contracts and others is accounted for based on the
2 agreements/arrangements with the parties concerned.
12 Expenditur
e
12. Expenditure is accounted for on the accrual basis and provision is made for all
1 known losses and liabilities unless stated otherwise.
12. Transit, Windage and Handling Loss of coal along with normal loss due to
2 carpeting of coal is charged off to revenue.
13 Depreciatio
n
13. Depreciation is provided on pro-rata basis in the year in which the asset is
2 become available for use.
13. Where the cost of depreciable assets has undergone a change during the year
3 due to increase/decrease in long term liabilities on account of exchange
fluctuation, price adjustment, change in duties or similar factors, the unamortized
balance of such asset is depreciated prospectively over residual life determined
on the basis of the rate of depreciation.
13. Internal electrical wiring, fittings etc., are treated as part of buildings and as such
4 depreciation applicable to buildings is charged thereon.
14 Research and
Development
14. Research and Development expenditure is charged to the Profit and Loss
1 account in the year of incurrence. The expenditure on fixed assets relating to
Research and Development is treated in the same way as other fixed assets.
15 Government
Grants
15. Grants related to revenue is shown as a credit in the profit and loss statement
1 under the heading 'Other Income' and Grants related to specific assets are
reduced from the gross value of the asset on completion of works in arriving at
the book value.
16. Liability for pension grautity, leave/benefits encashment and medical benefits is
1 provided based on actuarial valuation made at the end of the year which is
computed using projected unit credit method. Gains/losses arising out of acturial
valuation are recognised in the profit and loss account as income/expense.
16. The company makes defined contributions to the Regional Provident Fund
2 Commissioner under the provisions of E P F & M P Act for provident fund and
pension for the employees who recruited or after 1-2-1999. The Company has
no further obligation beyond the monthly contributions.
16. The contributions made by the employees for General Provident Fund are
3 credited to APGENCO General Provident Fund Trust. The Company has
obligation to make good the shortfall if any between the return from the
investment of the Trust and the notified interest rate.
16. The contributions made by the employees towards Group Insurance Scheme
4 are carried over under the head ‘Employee Related Funds’.
18 Borrowing
cost
18. Borrowing cost (Interest etc.) that is directly attributable to the acquisition,
1 construction or production of a qualifying asset is capitalised as part of the cost
of that asset. The borrowing cost incurred on funds borrowed generally and used
for the purpose of obtaining a qualifying asset, is capitalised applying a
capitalisation rate on weighted average basis. Other borrowing costs are
recognised as an expense in the period in which these are incurred.
19 Prior Period
Items
20 Taxes on Income
20. Provision is made for deferred tax for all timing differences arising between
1 taxable income and accounting income at currently enacted or substantially
enacted tax rates.
20. Deferred tax assets are recognised only if there is reasonable certainty that they
2 will be realised and are reviewed for the appropriateness of their respective
carrying values at each Balance Sheet date.
II NOTES TO THE
ACCOUNTS
21 The financial statements have been prepared in accordance with the Schedule
VI of the Companies Act 1956 to the extent applicable and the necessary details
have been disclosed in the said statement as per Part I & II of the Schedule.
22. The Secured loans of Rs. 3398.87 lakhs (Previous Year Rs.5166.73 lakhs) taken
1 under the transfer scheme are being continued as per the old terms and
conditions on which such loans are agreed by the erstwhile APSEB and
therefore no fresh charge has been created under the provisions of the
Companies Act 1956.
23 Employee related
funds
23. In terms of the scheme, the liability of provident fund, pension and gratuity fund
1 of the pensioners and the employees of the erstwhile APSEB based on the
actuarial valuation which includes current employees of APTRANSCO and
DISCOMs was transferred to the Corporation as long term debt and the same
was substituted by issue of bonds in May 2002.
23. 100% pension paid to the pensioners of the erstwhile APSEB and 74% of the
2 gratuity and pension including commutation paid to the employees of the
erstwhile APSEB on the date of the scheme have been charged to
interest/repayment on pension and gratuity bonds for the year as per the terms
of the bonds.
23. Provident Fund Bonds carry floating rate of interest on par with the rate of
3 interest on General Provident Fund. The present rate of interest is 8% per
annum.
24. Amount due to small scale industrial undertakings for the period of more than
1 30 days is Rs.Nil. The Company is in the process of identifying the Micro, Small
and Medium enterprises as defined under " The Micro, Small and Medium
Enterprises Development Act 2006." However based on the information so far
available with the Company, the liability for delay in payments, if any, is not likely
to be significant.
25 Inventory
26 Balances
27. The Company has also filed Aggregate Revenue Requirement (ARR) for the
1 financial years 2006-07,2007-08 and 2008-09 before the Andhra Pradesh
Electricity Regulatory Commission (APERC). Pending APERC's decision
thereon, Revenue from sale of Power is accounted for prudently and recognition
of which is deferred wherever it is not confirmed.
27. The Government of Andhra Pradesh has notified a scheme transferring the
2 existing trading functions from APTRANSCO to the four DISCOMS with effect
from 9th June 2005. For the purpose of smooth transition to this new
arrangement, the Government placed an institutional arrangement called "AP
Power Co-ordination Committee (APPCC) and other sub-committees" for
effective co-ordination in DISCOMS. The Corporation issued power bills to
APPCC instead of DISCOMS as per the transitional arrangement.
28 Transfer Scheme
Balances
28. The value of the assets, properties, liabilities, obligations, proceedings and
1 personnel relating to generation stations of erstwhile Andhra Pradesh State
Electricity Board was acquired from the Government of Andhra Pradesh in
pursuance of Andhra Pradesh Electricity Reform Act 1998 and the (Transfer
Scheme) Rules 1999 framed thereunder and accounted for in the books of the
Corporation in terms of G.O. Ms. No.9 dated 29-1-1999 and G.O. Ms. NO. 11
dated 31-1-2000 issued by the Government of Andhra Pradesh. As per
aforesaid notification, the value of movable and shared assets with other
corporation is subject to change if any, based on the report of the committee
constituted therefor.
28. The break up details under each head and sub-head towards the value of
2 current assets and current liabilities as per the transfer scheme have not been
furnished. The same have been reconciled and reviewed. An amount of Rs.
37171 lakhs has been identified as not payable and credited to the profit and
loss account for the year and is shown as other income.
Rs. in
lakhs
Current Year Previous Year
29 Fixed
Assets
29. The fixed assets do not include assets acquired on sale-cum-lease basis from
1 various Financial Institutions whereon the lease rent paid for the year is charged
to revenue
27999 27999
29. Plant and Machinery includes the value of Air Conditioning Plants at various
2 units which were transferred and vested with the Corporation under the transfer
scheme. The gross value and depreciation thereon are not segregated in the
absence of break up details under the transfer scheme. The value thereof,
however, is insignificant.
29. Deprecation for the year is capitalised and transferred to the incidental
3 expenditure during construction under the head 'Capital Work in Progrees in the
Schedule-7 Capital Work in Progress.
52 38
30 Provisions and
Contingencies
30. Other Money for which the Corporation is contingently liable - Lease rent
4 payable for in next 12 months
475 475
31 Employee related
benefits
31. During the year, the Company has recognised Rs. In lakhs
2 the following amounts in the Profit and Loss
Account:
31. State Plans
2.1
a) Employees' Provident Funds Scheme 462.62
1995
b) Empoyees' Pension Sheme 194.59
1995
c) Employees' Deposit Linked Insurance 23.59
Scheme, 1976
31. The discount rate of 8.5% is assumed, which is determined by reference market
3 yield as on the Balance Sheet date on government bonds. The estimate of
future salary increases, considered in acturial valuation, take account of inflation,
seniority, promotion and other relevant factors.
31. Reconciliation of the present value of the defined obligation and the fair value of
5 the plan assets as per the acturial valuation report
31. Cost recognised for the period ( Included under Schedule 19 (b) Employee cost
6 as per the acturial valuation report
32 Related Party
Disclosures
32. Andhra Pradesh Power Development Company Limited is a Joint Venture
1 (Special Purpose Vehicle) with M/s IL & FS Limited to undertake development
works of Krishnapatnam Thermal Power Project (2X800 MW) and Karimnagar
Gas Power Project (2X1000 MW).The Company holds 50% of paid up capital in
the Joint Venture.
Deputation of Employees 3 1
33 Directors'
Remuneration
33. Remuneration to the
1 Directors:
Salari 47.25 45.13
es
Other 8.22 5.76
benefits
Total 55.47 50.89
34 Auditors'
Remuneration
34. Auditors'
1 Remuneration:
Statutory 3.50 3.00
Audit
Limited 0.75 0.75
Review
Tax Audit 0.60 0.60
Other 2.25 0.25
Services
Service Tax 0.60 0.54
thereon
Out of pocket 1.55 1.55
expenses
Total 9.25 6.69
35 Deferred
Tax
35. As per Accounting Standard (AS -22) on accounting for Taxes on income issued
1 by ICAI, the deferred tax asset as on 31st March, comprises of the following:
36 Additional
Information:
36. Licensed Capacity Not
1 applicable
39.50
36. The value of loss of coal in transit, shrinkage, windage 5490 4005
10 etc.,
Less: Issues (including devolutions and inter 5871 21309 6907 21045
store drawals)
36. The fuel, material (Stores spares etc.,) consumed - 100% 100%
12 indigenous
(V.
Jawahar)
Partne
r
M.No.
23489
Place: B.S.Mohan Kumar G.
Hyderabad Adinarayana
Date: 29.07.08 F.A. & Company Secretary
CCA(A/cs)