POWER INDUSTRY: RATIO ANALYSIS A.

PROFITABILITY RATIOS:

The Profitability Ratios are calculated to measure the operating efficiency of the company. Beside management of the company, creditors and owner are also interested in the profitability of the firm. Creditors want to get interest and repayment of principal regularly. Owner wants to get a required rate of return on their investment.
1. Gross Profit Margin

GVK Powers JP Powers TATA Powers

0.2 0.15 0.1 0.05 0 2011 2010 2009

2011 0.09591259 0 0.05092671

2010 0.076747 0 0.046369

2009 0.151719 0 0.036356

gvk power jp power tata power

The Gross Profit Margin (GPM) reflects the efficiency with which management produces each unit of product. This ratio indicates the average spread between the cost of goods sold and the sales revenue. A high GPM is a sign of good management, it may be because of high sales or low cost of production. In Power sector we can see that in 2009, 2010 and 2011 the GPM of GVK Powers was highest which means that GVK Powers had higher sales than others and has efficiently managed its production of product.

2.

Net Profit Margin

GVK Powers JP Powers TATA Powers

2011 0.015898384 0 0.010208826

2010 0.010668 0 0.012334

2009 0.000603 0 0.005957

0.02 0.015 0.01 0.005 0 2011 2010 2009

gvk power jp power tata power

Net Profit Margin (NPM) ratio establishes a relationship between net profit and sales and indicates managements efficiency in manufacturing, administering and selling the products. This ratio is overall measure of the firms ability to turn each rupee sales into net profit. This ratio also indicates the firms ability to withstand adverse economic conditions. In Power Sector we can see that in 2009 and 2010 TATA Powers and in 2011 GVK Powers was having highest NPM among others and which mean that these firms were in a good condition and could withstand the adverse economic conditions.
3. Operating Expense Ratio

GVK Powers JP Powers TATA Powers

0.8 0.6 0.4 0.2 0 2011 2010 2009

2011 0.28335056 0.599534747 0.260051797

2010 0.278440 0.337497 0.233789

2009 0.38476 0.271486 0.217742

gvk power jp power tata power

Operating Expense Ratio explains the changes in the profit margin (EBIT to sales) ratio. This ratio is computed by dividing operating expenses, viz., cost of goods sold plus selling expenses and general and administrative expenses (excluding interest) by sales. A higher operating expenses ratio is unfavourable since it will leave a small amount of operating income to meet interest, dividends, etc. In Power Sector we can see that in 2009, 2010 and 2011 JP Powers was having higher Operating Expense Ratio, which is unfavourable because higher Operating Expense ratio will leave a small amount of operating income to meet interest, dividends, etc.

b. EARNINGS RATIO:
1. RETURN ON TOTAL ASSETS:

gvk power jp power tata power

2011 2010 2009 0.081964474 0.08128258 0.066203381

0.23 0.17 0.07 0.16 0.3 0.15

Graph:
0.4 0.3
gvk power

0.2 0.1 0 2011 2010 2009

jp power tata power

2. RETURN ON NET ASSETS: 2011 0.081964474

0.228589196 0.171223887

gvk power jp power tata power

2010 2009 0.08128258 0.066203381

0.068530038 0.161815358 0.296727194 0.149529901

Graph:
0.4 0.3 0.2 0.1 0 2011 2010 2009
tata power gvk power

jp power

Analysis: Here also ROTA and RONA are same which shows that the current liabilities are very less as compared to the current assets and as a result the liquidity of the firm is high. Also the firm has low return on both total assets and total liabilities. 3. RETURN ON EQUITY 2011 0.020921831
9.29084E-05 0.155541409

gvk power jp power tata power Graph:

0.2 0.15 0.1 0.05 0

2010 2009 0.03696129 0.030687699

0 0.173761568 0 0.138710525

gvk power jp power tata power

2011 2010 2009

Analysis: Return on equity for the power company shows that the return is very low for all the three companies as the profits the company has made are negligible in comparison to the shareholder's funds. For JP Power the profitability for this company is very low and as a result their return on equity is zero. 4. EARNINGS PER SHARE 2011 4.712512665
0.001828739 91.95119895

gvk power jp power tata power Graph:

100 80 60 40 20 0

2010 7.8045846
0 90.12769185

2009 5.42893726
0 58.6598916

gvk power

jp power

tata power

2011 2010 2009

Analysis: Since the net profit is very low for GVK power and JP power the earning per share is very low for both these companies. Since the share capital for both JP and GVK is much higher as compared to Tata power the earnings per share for Tata is higher as compared to the other two companies. 5. DIVIDEND PER SHARE 2011 0
0 12.51295883

gvk power jp power tata power Graph:

15

2010 0
0 12.01272704

2009 0
0 11.52935863

gvk power

10 5 0 2011 2010 2009

jp power

tata power

6. P/E 2011 5.506616501

23130.6975 14.46800058

gvk power jp power tata power Graph:

20 15 10 5 0

2010 2009 5.74021582 4.301025943

N/A 15.22950352 N/A 13.04639301

gvk power tata power

2011 2010 2009

Analysis: P/E ratio shows the ratio of price to earnings per share. Ideally this ratio should reflect the true picture of the shareholder earnings. For JP the P/E ratio is very large which in turn can be due to

two reasons namely, very high market price and very low EPS. Here this is caused due to very low EPS which is not a good signal to the prospective shareholders.

LIQUIDITY RATIOS:
1. CURRENT RATIO:

GVK power JP power Tata power

2011 2010 1.99784 2.18447457

3.175469 1.231729 10.17558511 1.342734587

2009 3.15633
2.7682 1.165151

12 10 8 6 4 2 0 2011 2010 2009

gvk power jp power tata power

In 2010 the ratio is very high for JP power. But again the value has fallen in 2011. It is due to the major change in cash in hand. The decrease in 2011 is good because it is showing the use of cash which was unutilized in 2010. For GVK power the value was high in 2009 but has decreased during the subsequent years. For Tata power it is least varied showing a constant ratio.

2.

QUICK RATIO:

GVK Power JP Power Tata Power

2011 2010 1.88959 2.01086584

3.155321 1.113769 10.11787234 1.2156618

2009 2.82626
2.736798 1.017651

12 10 8 6 4 2 0 2011 2010 2009

gvk power jp power tata power

Since these are part of power industry where the inventory is very low the difference between CR and QR is very low.
D. TURNOVER RATIOS:
1. DEBTOR TURNOVER:

2011 gvk power jp power tata power

27.9777891429824 4.16018243 4.429242868

2010
27.1052112569218 4.317524884 5.465058467

2009
7.9953314659197 2.503068502 5.972151848

30 20 10 0 2011 2010 2009

gvk power jp power tata power

the value is highest for the gvk power among the selected values. but in 2009 all the companies had almost same value. the value has increased for the gvk power significantly from 2009 to

2011 showing the effecient management of credit. for jp and tata power it has increased from2009 to 2010 but not significantly and it decreased from 2010 to 2011 - that was also not very significant. 3. CREDITOR TURNOVER RATIOS: 2011 gvk power jp power tata power
0 0.0081522 1.338444475

2010
0 0.0211458 1.693565215

2009
0 0.0303184 2.019162765

2.5 2 1.5 1 0.5 0 2011 2010 2009

gvk power jp power tata power

for Tata power it has decreased, for JP power it is almost constant and for GVK it is 0 showing that there are no credit purchases. 3) INVENTORY TURNOVER RATIO: 2011 gvk power jp power tata power
32.5560081466395 13.38851267 13.91828287

2010
29.1985940246046 26.1556391 14.77192858

2009
6.81783208870785 41.83265306 13.87156036

50 40 30 20 10 0 2011 2010 2009

tata power jp power gvk power

for gvk it has been increasing over the years. for jp has decreased over the years, while for tata it has remained constant. increase is good as the effeciency of managing the inventory is increasing and vice versa for decrease. 4. ASSET TURNOVER RATIO: 2011 gvk power jp power tata power
0.42860980403569 0.261196297 0.690610123

2010
0.40655072213133 0.183098886 0.753298526

2009
0.28839256144999 0.69873828 0.811663256

1
gvk power

0.5 0 2011 2010 2009

jp power tata power

In this case it is lower than 1 for all the companies. It has decreased for JP and Tata from 2009 to 2011 while for GVK power it has increased. As we already know that the power companies are running in loses, the revenue generated is less and it is one of the major reasons for the low asset turnover ratio. It was also the period just after the recession had started and in general all the companies growth has slowed down. So the revenue for power will also decrease since power is one of the main requirements in the industry. The value of the asset turnover is increasing for the GVK. The value has initially decreased and then decreased for the JP power and we also know that the jp power was making losses during 2009 and 2010. The ratio is highest for Tata power consistently. E. SOLVENCY RATIOS: 2011 gvk power jp power tata power 2010 2009

0.0434 0.000532 0.092004

0.056 0 0.116219

0.04955 0 0.093007

0.15 0.1 0.05 0 2011 2010 2009

gvk power jp power tata power

Also as we can see in the case of power industry the solvency ratios are well below their accepted benchmark because the capital investment in power industry is very huge which in turn results into higher long term liabilities. Also a lot of power and fuel is required where in the short term liabilities are more and as a result the solvency ratio is less as compared to the benchmark of 20%.