Capital Structure Analysis of Public sector undertaking:-

A Case Study of BHEL Company

*Dr. S.K Khatik

**Ms.Uma Sharma

Abstract
The capital structure is the combination of debt and equity capital. The most of the Indian
company use both the forms of capital in their capital structure. BHEL also have debt and
equity capital in their capital structure. In this study we found that the capital mix ratio of
BHEL Ltd. is not adequate as per the well established capital structure concepts. BHEL
Company has employed less debt capital and more equity capital in their business. Although
company has a huge amount of profit and rate of return (r) which is greater than financial
cost. In this situation, company can take financial risk and increase their debt capital for
increasing earnings of the shareholders or firm. Presently, company has adopted conservative
approach in their capital structure rather than modern approach. In global financial market
there are various sources of capital which can be used by the company as it have cheaper rate
of interests. The debt capital is just like fat to the company, but it will be beneficial only if r is
greater than k hence BHEL Company have this position. A Company can increase the debt
capital up to 70% of the total capital in their business, if company is in a sound position. In
this perspective company should increase the debt capital or can use diversified sources to
finance. Solvency ratio, Proprietary ratio, Interest coverage ratio and other ratios related to
long term financing were rather satisfactory.

KEYWORDS :- Capital Structure, Debt, equity, EPS, Profitability.

* Professor & Head, Department of Commerce, Dean Faculty of Commerce, Chairman of Board of
Studies, Barkatullah University, Bhopal.

** Research Scholar, Assistant Professor, Career College, Bhopal.

Introduction

In the present context every firm needs to have adequate funds to run its operations. If the
funds are not properly managed by the firm then it will suffer loss. Capital structure plays a
very important role to run financial functions of the firm without difficulty. Capital Structure
is one of the most important pillar on which the financial structure of a firm stands. Capital
Structure is the combination of debt and equity capital. It is an important tool to control the
cost of capital (k0) of the firm. Capital Structure is the mix of different types of long term
securities such as common stock, preferred stock and long-term debt. The purpose of capital
structure is to maximize the wealth of the shareholders by minimizing cost of capital and this
is also called optimum capital structure. The financial structure plays a significant role in
evaluating or measuring the growth and stability of the firm. This study may mainly influence
the capital structure of BHEL Company. The equity capital includes paid-up capital, reserves
and surplus (retained earnings), share premium whereas debt capital comprises debenture and
long-term debt. Modigliani and Miller (1958) were the first authors who introduced the
concept of capital structure. Later on many authors came and share their views on capital
structure which were irrelevant in determining the value of the firm. Besides it many theories
of capital structure was propounded to explain the relationship between market value of the
firm and its capital structure decision.

Capital structure decision is one of vital decisions for the firm so that it can successfully deal
with the competitive environment. In common parlance the term financial structure is also
used sometimes in place of capital structure. At the time of formation of capital, capital
structure analysis is significantly helpful for the firm to take decisions related to long term
sources of finance. This research paper will try to analyze that how company is managing
capital structure for financing its operations.

Significance
Capital structure plays a significant role in creating the value of shareholders. A financial
manager should plan an optimum or ideal capital structure for the growth of the company as
well as to maximize the market value of the share. Capital structure is the medium to take all
relevant decisions related to debt financing on the other hand capital structure ratios are also
important to examine and analyze the financial statement of the company. According to many
thinkers, financing the assets is a crucial problem for every business but as per the rule there
should be a proper mix of debt and owners capital in financing the firm’s assets. In the
present context firms should focus on the optimization of its capital structure.

Justification of the research study-

Capital structure decision is to make an optimum mix of debt and equity capital. Debt capital
is classified into three categories which are as follows – short term debt, medium term debt
and long term debt. Equity capital is also known as owner’s capital. The financial risk faced
by the company may be posed by the mix of debt and equity capital. The reason behind the
statement is that it is compulsory to pay interest but dividend is not compulsory to give on
share capital which affects risk associated with the company. A company can employed more
debt capital if r is greater than k, here r means rate of return and k means cost of capital. If the
company is not having r more than k then this situation will lead to losses and also increase
the financial risk of the company. BHEL Ltd. have both the capitals i.e. debt and equity
capital in their business. Hence we have analyzed that does the company have adequate
capital mix? And we also analyzed financial risk of the company. The profitability position of
the company also gets affected by the proportion of debt capital. Hence debt capital is also
essential for the organization but up to what extent company should employ debt capital? It is
the question. Thus we have selected Capital structure analysis of BHEL for this research.

About the Company

Bharat Heavy Electrical limited (BHEL) was established in 1964 and headquarter is in New
Delhi. BHEL is an Indian state –owned integrated power plant equipment manufacturer and
operates as engineering and manufacturing company based in New Delhi India. BHEL is the
seventh largest power equipment manufacturer in the world. In the financial year 2012-13 has
been a defining year for Bharat Heavy Electricals Limited (BHEL) as it has become a
‘Maharatna’ company, crossed the Rs.500,000 Million turnover mark and achieved the
highest ever addition of 10,340 MW to India’s electricity generation capacity. The company
has been earning profits continuously since 1971-72 and paying dividends since 1976-77.The
mission of BHEL Company is providing sustainable business solution in the fields of energy,
industry and infrastructure. In the current year 2012-2013 BHEL company recorded its
highest – ever turnover of Rs.50156 crores.

Review of literature:
The paper examined the literature relevant to the study. The literatures under review were
collected from various journals, articles and from the text books.
Dr. S.k khatik (2013), this study emphasized on the capital structure pattern and policy of
BPCL ltd and examine the relationship between profitability and capital structure of the
company. To analyze the capital structure of the BPCL, the author applied the statistical
techniques such as mean growth rate and coefficient of variation. According to him company
can employed the debt capital up to 70% of the total capital, if rate of return is greater than
cost of capital.
Ivo Welch (The Journal of international review of finance, Brown University, 11.1.2011)
In this study the author tries to examine the two common problems in capital structure
research. According to him it is not clear that non –financial liabilities should be considered
debt or they should never be as equity. The author also focuses on the components of the
balance sheet of large publicly traded corporations and examines the importance of cash in
measuring the leverage ratios.
Slim and Fathi (2010) investigated the impact of operating and financial leverage on firm
value among non- financial USA firms. The findings revealed that operating leverage and
business risk could explain the variations in the return and the value of the firm. The
degree of financial leverage was found to be having greater impact on the value of the firm.
Farhat et al (2009) test the trade-off and the pecking order models under a range of
institutional environments. They find that civil law countries follow the pecking order model
and rely more on internally generated funds. Based on the empirical results, they believe the
common law countries follow the trade-off theory and in India, being a common law country,
the firms follow trade-off theory.
Ali. K Ozdagli (2009) presented a dynamic model to test the relationship between
financial leverage, corporate investment and stock returns of various companies. The
study revealed that financial leverage significantly affects investments and business risk in
turn. However though the financial leverage could explain the major share of the value
premium, it is found out that the investment decisions could equally get influenced by various
external factors.
De Jong et all (2008) analyzed the importance of firm specific and country specific factors in
the leverage choice of firms across 42 countries. They found that firm specific determinants
differ across countries whereas earlier studies suggested that the determinants have an equal
impact. They also looked at direct country specific determinants like capital formation, rule
of law, stock market development, bond market development, etc. They found positive
relationships between tangibility, liquidity and leverage. They found non-significant inverse
relationships between leverage and size, profitability, tax and risk. One of the possible
reasons why they did not have strong results for India was because they had only 226
observations.
Irina and Maria (2008) study focused on the capital structure decision in the BRIC Countries.
It was not a country-specific study with a focus on India. The authors applied a multistage
research model to a set of large non-financial firms from Russia, Brazil and China. They
found, like previous studies, that the impact of determinants of capital structure differs within
national samples. They showed that when comparing large-scale Russian firms’ to Brazilian
firms the opposite impact was noticed in terms of the influence of tangibility of assets and the
firm size. At the same time, they found similar influences of determinants between Chinese
firms and Brazilian firms.
Bhaduri (2002) studied the factors affecting capital structure in the Indian corporate sector.
He modeled the economic effects accounting from restructuring costs in attaining an optimal
capital structure. He also presented empirical evidence to show that factors such as growth,
cash flow, size and product/industry characteristics affect the choice of optimal capital
structure. The main finding of this study is that capital structure choice in India is affected by
factors such as growth, cash flow, size, and product and industry characteristics. The results
also confirm the existence of restructuring costs in attaining an optimal capital structure. The
model suggests a differential cost of restructuring for long-term and short-term borrowing.
However, the available data in Bhaduri‘s study did not allow for the introduction of more
variables in this model. We expand Bhaduri‘s (2002) study by using an extended set of
variables and a much larger data set to build a stronger model for capital structure
determinants. We also confirm some of the results provided in Bhaduri‘s study.
The Theoretical foundation of our study is based upon the capital structure studies undertaken
prior to our study and utilizes the knowledge gained from the existing literature in the
empirical corporate capital structure domain with special reference to India.

Objectives of the study

This study aims to fulfill the following objectives:-

 To examine the capital structure of BHEL company.

 To analyze the relationship between debt and equity capital.
  To find out the significant relationship among EBIT and EBT.

Hypothesis of the study:

H01: There is no significant difference between debt and equity capital of BHEL Ltd.
H02: There is no significant difference between EBIT and EBT capital of BHEL Ltd.
Company

Research Design

The researcher makes an attempt to analyze the capital structure of BHEL Company. This
study is based on the secondary data, which are collected from the annual report budget,
statistical report and other published documents. This research is an empirical type of
research and its micro in nature.

Limitations

Every research has its own limitations due to which this study is also having some
constraints.

 Non availability of sufficient literatures.

 This research study is based on the secondary data collected from the annual report of
BHEL ltd. Company.
 The reliability and authenticity of secondary data based on the audit of BHEL
Company.

 Classification and tabulation of data according to requirement of the study.

 This study covers limited time period from 2003-2012.

Analysis of Capital Structure of BHEL Ltd

Capital structure of the company is made by debt and equity capital, Debt capital means
borrowing capital and it has classified into three categories short term, medium term and long
term borrowings. Equity capital means owners’ capital. The profitability position of the
company is not only depends on financial costs i.e. interest and dividend. Interest is always
given on borrowing capital and also essential to pay to lenders, while dividend is given on
share’s capital and it is not essential to pay to the shareholders. Generally every company has
debt and equity capital in their business but the Proportion to the capital mix will depend
upon profitability position of the business. By analysis of capital structure we can easily
decide capital mix ratio on the basis of r and k. If r is greater than k then company should
employ more debt capital because this situation has less financial risk. The financial risk of
the company will also reduced the operating profit as well as net profit of the company. for
example: suppose a company register huge amount of EBIT but after paying the interest
profits come down to a little amount. In this study we have analyzed the debt and equity
position, EBIT and EBT position, solvency position, proprietary fund position and interest
coverage ratios of the company. All these ratios will help to deciding the capital mix for
BHEL Ltd.

Debt-equity Ratio:-

Debt –equity ratio is helpful to measure how much debt financing has been used in the firm.
Debt capital is also known as outsiders fund or borrowing capital where as equity capital
known as shareholders fund or owners fund of the firm. As per the theories, there should be a
proper mix of debt and equity funds in financing the firm’s assets.

Debt-Equity Ratio= Total debt

Total equity
Table no.1 (Rs. in Crores)
Year Debt Equity Debt-Equity Ratio
2003 531.09 4803.67 0.11
2004 540.02 5295.94 0.10
2005 536.98 6026.89 0.09
2006 558.24 7301.37 0.08
2007 89.33 8788.26 0.01
2008 95.18 10774.21 0.01
2009 149.37 12938.81 0.01
2010 127.75 15917.36 0.01
2011 163.35 20153.84 0.01
2012 12679.88 25373.21 0.50
Source - Annual report of BHEL Company From 2003-2012.
Interpretation – Table no.1 shows the relationship between debt and equity capital. This
table indicates that the debt equity ratio for the year 2003 is 0.11:1 but in 2004 the ratio
decreased by 0.10:1.In the year 2005 the ratio again seems decreased by 0.09:1. The debt-
equity ratio was 0.08:1 in the year 2006 but the ratio from 2007-2011 remain same as 0.01:1,
it means in these years no change were seen in the relation of debt and equity and the
financial position is not highly solvent in these years. In the year 2012 the debt equity ratio
increased to 0.50:1.
Funded Debt to Total capitalization-
This ratio is used to indicate the long term fund raised from outsiders and long term fund
available in the business. This ratio is generally helpful to know the capital structure of the
company.

Funded Debt to Total capitalization=Funded Debt

Total Capitalization
Table no.2 (Rs. In Crores)

Year Funded Debt Total Capitalization Funded debt to Total capitalization

2003 531.09 5334.76 0.10
2004 540.02 5835.96 0.09
2005 536.98 6563.87 0.08
2006 558.24 7859.61 0.07
2007 89.33 8877.59 0.01
2008 95.18 10869.39 0.01
2009 149.37 13088.18 0.01
2010 127.75 16045.11 0.01
2011 163.35 20317.19 0.01
2012 12679.88 38053.09 0.33
Source - Annual reports of BHEL Company From 2003-2012.
Interpretation – Table no. 2 throws light on the funded debt to total capitalization. In the
year 2003 the ratio was 0.10:1 and declined to 0.09:1 in the year 2004. In the year 2005 the
funded debt to total capitalization ratio declined to 0.08:1and further reduced to 0.07:1 in the
year 2006, but from 2007-11 the ratio was 0.01:1 which is very low. In 2012 the ratio again
increased to 0.33:1, which means company has not relied on outsider sources for raising long
term funds.
Proprietary Ratio-
Proprietary Ratio is also known as equity ratio to net worth to total assets ratio. Proprietary
ratio is one of the ratios which show the relationship of owner’s funds to total assets. It is used
to evaluate and measure the soundness of the capital structure of the company. Therefore a
higher ratio indicates a strong financial position of the company and greater security for
creditors.
Equity Ratio =Shareholders fund
Total Assets
Table no: 3 (Rs. In Crores)
Year Shareholders Fund Total Assets Proprietary Ratio
2003 4803.67 9587.9 0.50
2004 5295.94 11656.36 0.45
2005 6026.89 14491.47 0.42
2006 7301.37 17505.92 0.42
2007 8788.26 22362.54 0.39
2008 10774.21 29352.3 0.37
2009 12938.81 39580.78 0.33
2010 15917.36 46959.6 0.34
2011 20153.84 57096.74 0.35
2012 25373.21 65229.78 0.39
Source - Annual report of BHEL Company From 2003-2012.

Interpretation:
Table no.3 indicates the relationship between shareholders fund to total assets. In the year
2003 the proprietary ratio was 0.50:1 and declined to 0.45:1 in the year 2004. The
proprietary ratio in the year 2005 was 0.42:1 which remain same for the next year also. In the
year 2007 the ratio decreased by 0.39:1 again in the year 2008 the ratio was 0.37:1. In the
year 2009 the ratio declined to 0.33:1 but the ratio increased by 0.34:1in the year 2010. The
ratio in the year 2011 was 0.35:1 which increased to 0.39:1in the year 2012. Which means
that financial strength of the Company, is decreasing.

Solvency Ratio:
Solvency Ratio is used to measure a company’s ability to meet long term obligations. This
ratio indicate how likely a company will be able to meet its debt obligations. Solvency ratio is
a small variant of equity ratio and can be simply calculated as 100 equity ratio.
Solvency Ratio: Total liabilities to outsiders
Total Assets
Table no.4 (Rs. In Crores)
Year External Liabilities Total Assets Solvency Ratio
2003 5287.14 9587.9 0.55
2004 6876.87 11656.36 0.59
2005 8982.87 14491.47 0.62
2006 10878.26 17505.92 0.62
2007 14509.44 22362.54 0.65
2008 19916.02 29352.3 0.68
2009 28482.27 39580.78 0.72
2010 32569.47 46959.6 0.69
2011 39106.45 57096.74 0.68
2012 41402.81 65229.78 0.63
Source - Annual report of BHEL Company From 2003-2012.
Interpretation: Table no 4 shows the relationship between external liabilities to total assets.
In the year 2003 the ratio was 0.55:1 but the ratio in the year 2004 increased to 0.59:1.in the
year 2005 the ratio was 0.62:1 and same for the year 2006. In the year 2007 the solvency
ratio was 0.65:1 and again in the year 2008 the ratio increased to 0.68:1. The solvency ratio in
the year 2009 was 0.72:1; it indicates that total liabilities had fewer fractions than total assets.
In the year 2010 the ratio was 0.69:1 but declined to 0.68:1 in the year 2011.The ratio in the
year 2012 again decreased to 0.63:1 which indicates that long term solvency position of the
company is stable.

Fixed Assets Ratio to Net Worth Ratio-

This ratio establishes the relationship between fixed assets and shareholders fund. If the ratio is
less than 100, it indicates that the owners’ funds are more than total fixed assets and a part of a
working capital is provided by the shareholders.
Fixed Assets Ratio to Net Worth=Net fixed Assets
Net Worth
Table no.5 (Rs. In Crores)
Year Net fixed assets Net worth Fixed Assets ratio to net worth ratio
2003 1229.19 4803.67 0.26
2004 1202.69 5295.94 0.23
2005 1139.55 6026.89 0.19
2006 1166.84 7301.37 0.16
 2007 1291.28 8788.26 0.15
2008 1639.29 10774.21 0.15
2009 2627.37 12938.81 0.20
2010 3944.95 15917.36 0.25

2011 5134.68 20153.84 0.25

2012 5644.42 25373.21 0.22
Source - Annual report of BHEL Company From 2003-2012.
Interpretation- Table no 5 indicates the ratio of fixed assets to net worth, the extent to which
shareholders fund are sunk into the fixed assets. In the year 2003 the ratio was 0.26:1and again
in the year 2004 decreased by 0.23:1.The fixed assets ratio to net worth ratio in the year 2005
was 0.19:1 again in the year 2006 the ratio declined to 0.16:1.from the year 2007-2008 the
ratio was 0.15:1 but in the year 2009 the ratio increased to 0.20:1.The ratio from 2010-2011
remain 0.25:1 but in the year 2012 the ratio again declined to 0.22:1.The satisfactory level of
this ratio is 0.60:1,the table values indicate that it is very less than satisfactory level.
Interest Coverage Ratio-
Interest coverage ratio is used to determine how easily a company can pay interest on due
debt. This ratio is also known as Debt service Ratio.

Interest Coverage Ratio= operating profit

Fixed Interest charges
Table no.6 (Rs. In Crores)

Year EBIT Fixed Interest charges Interest Coverage Ratio

2003 1020.8 54.78 18.63
2004 1317.39 60.08 21.93
2005 1683.05 81.4 20.68
2006 2619.57 58.74 44.60
2007 3778.89 43.33 87.21
2008 4466.73 35.42 126.11
2009 4867.67 30.71 158.50
2010 6616.88 33.5 197.52
2011 9062.19 54.73 165.58
2012 1020.8 51.28 19.91
Source - Annual report of BHEL Company From 2003-2012.
Interpretation - Table no. 6 depicts the relationship between operating profit to fixed interest
charges. In the year 2003, the ratio was 18.63:1 and increased to 21.93:1 in the year 2004. In
the year 2005, the interest coverage ratio was 20.68:1 but the ratio increased to 44.60:1 in the
year 2006. The ratio was 87.21 in the year 2007 which increased to 126.11:1 in the year
2008, which is very high and not good for a company. In the year 2009 the ratio was again
high on 158.50:1 and the ratio further increased to 197.52:1 in the year 2010. The interest
coverage ratio in the year 2011 was 165.58:1 but in the year 2012 the ratio declined to
19.91:1.
Capital gearing Ratio-
Capital gearing ratio helps to show the relationship between various long term forms of
financing such as debentures, preference share capital and equity share, capital including
reserves and surplus. A company is said to be low geared if the larger portion of the capital is
composed of common stockholder’s equity.
Capital gearing Ratio=Equity share capital +Reserves &surplus
Preference capital +long-term debt bearing fixed interest
Table no.7 (Rs. In Crores)
Year Equity Preference share &long term debt Capital gearing Ratio
2003 4803.67 531.09 9.04
2004 5295.94 540.02 9.81
2005 6026.89 536.98 11.22
2006 7301.37 558.24 13.08
2007 8788.26 89.33 98.38
2008 10774.21 95.18 113.20
2009 12938.81 149.37 86.62
2010 15917.36 127.75 124.60
2011 20153.84 163.35 123.38
2012 25373.21 12679.88 2.00
Source - Annual report of BHEL Company From 2003-2012.

Interpretation- Table no.7 reveals that the capital gearing ratio in the year 2004 was
9.04:1.In the year 2005 the ratio was little bit increased by 9.81:1 and again increased by
11.22:1.In the year 2006 the capital gearing ratio was 13.08:1 but in the year the ratio was
increased by 98.38:1.In the year 2008 the ratio remains 113.20:1 but in the year 2009 the
ratio decline by 86.62:1.In the year 2010 the ratio was increased by 124.60:1 and decreased
by 1.42:1,but in the year 2012 the ratio was 2.00:1 and little bit increased by 2056:1 in year
2013 which indicates that company is in low gear.
Fixed Assets Ratio to Long term funds-
This Ratio shows the relationship between fixed assets to long term funds. This ratio also
indicates that the total assets are financed by the long term funds. Under this ratio the total of
fixed assets and the total of long term funds remains equal i.e. the ratio should be 100%. But
sometimes the fixes assets exceeds the total of long term funds it means that the firm financed
a part of the fixed assets out of the working capital which is not right financial policy for a
firm.
Fixed Assets Ratio = Fixed Assets
Total Long term funds
Table no.8 (Rs. In Crores)

Year Fixed assets Long term Funds Fixed Assets ratio to Long term funds
2003 1229.19 5334.76 0.23
2004 1202.69 5835.96 0.21
2005 1139.55 6563.87 0.17
2006 1166.84 7859.61 0.15
2007 1291.28 8877.59 0.15
2008 1639.29 10869.39 0.15
2009 2627.37 13088.18 0.20
2010 3944.95 16045.11 0.25
2011 5134.68 20317.19 0.25
2012 5644.42 38053.09 0.15
Source - Annual report of BHEL Company From 2003-2012

Interpretation :- From the above table it was ascertained that in the year 2003 the ratio was
by 0.21:1 but in the year 2004 the ratio decreased to 0.21:1. In the year 2005 the ratio was
0.17:1 but in 2005 the ratios decreased to 0.15 and remain same for the next two years i.e.
from 2007-2008.The ratio in the year 2009 was 0.20:1 but from 2010-2011 the ratio was
0.25:1 and in the year 2012 the fixed assets to long term funds ratio was declined to 0.15:1.

Financial leverage- The term financial leverage refers to the use of debt and preference share
capital along with equity capital. This ratio is used to measure the firm’s ability to meet
financial obligations.
Financial leverage =Earnings before Interest and Tax
Earnings before Tax
Table no.9 (Rs. In Crores)
Year EBIT EBT Financial Leverage Ratio
2003 1020.8 966.02 1.06
2004 1317.39 1257.31 1.05
2005 1683.05 1601.65 1.05
2006 2619.57 2560.83 1.02
2007 3778.89 3735.56 1.01
2008 4466.73 4431.31 1.01
2009 4867.67 4836.96 1.01
2010 6616.88 6583.38 1.01
2011 9062.19 9007.23 1.01
2012 10372.79 10321.51 1.00
Source - Annual report of BHEL Company From 2003-2012.
Interpretation - Table no.9 depicts that the financial leverage ratio in the year was 1.06:1 but
from the year 2004-2005 the ratio was 1.05:1. In the year 2006 the ratio was 1.02:1 but in the
year 2007 the ratio was 1.01:1 and remain same from the year 2008-2011 but in the year 2012
the financial leverage ratio was decreased to 1.00:1.

Current Assets to proprietors’ funds ratio:

This ratio establishes the relationship between current assets and shareholders’ funds. The
ratio indicates the percentage of shareholders funds invested in current assets .There is no
rule of thumb for this ratio and depending upon the nature of the business there may be
different interpretation.
Current Assets to proprietors’ funds ratio = Current Assets
Shareholders’ funds
Table no.10 (Rs.In Crores)

Current Assets to Shareholders’ funds

Year Current Assets Shareholders' Funds ratio
2003 8348.39 4803.67 1.74
2004 10424.69 5295.94 1.97
 2005 13342.97 6026.89 2.21
2006 16330.78 7301.37 2.24
2007 21062.97 8788.26 2.40
2008 27704.72 10774.21 2.57
2009 36901.07 12938.81 2.85
2010 42934.81 15917.36 2.70

2011 51494.74 20153.84 2.56

2012 48174.94 25373.21 1.90
Source - Annual report of BHEL Company From 2003-2012.
Interpretation: Table no 10 throws light on the ratio of currents assets to shareholders funds
.In the year 2003 the ratio was 1.74:1 but in the year 2004 the ratio increased to 1.97:1.The
ratio in the year 2005 was 2021:1 and increased to 2.24:1 in the year 2006.In the year 2007
again ratio was 2.40:1 and increased to 2.57:1.In the year 2009 again the ratio increased to
2.85:1 but in the year 2010 the declined to 2.70:1.The ratio in the year 2011 decreased to
2.56:1 and it seems declined to 1.90:1.

Fixed assets turnover ratio:

This ratio explains the relationship between net sales to fixed assets. This ratio shows that
every one rupee of fixed assets employed in the business generates net sales also. Fixed assets
turnover ratio helps to measures the firm’s ability to generate net sales from the investment of
fixed assets. Fixed assets turnover ratio can be calculated by the following formula:
Fixed Assets turnover Ratio = Net sales
Fixed Assets

Table no.11 (Rs. In Crores)

Year NET sales Fixed assets Fixed Assets Turnover Ratio
2003 6930.03 1229.19 5.64
2004 8019.03 1202.69 6.67
2005 9527.13 1139.55 8.36
2006 13374.03 1166.84 11.46
2007 17237.53 1291.28 13.35
2008 19304.64 1639.29 11.78
2009 26212.33 2627.37 9.98
2010 32861.44 3944.95 8.33
 2011 41566.13 5134.68 8.10
2012 47227.86 5644.42 8.37
Source - Annual report of BHEL Company From 2003-2012.
Interpretation - This ratio indicates that in the year 2003 the ratio was 5.64:1 and increased
to 6.67:1.In the year 2005 the ratio was 8.36:1 which means that every one rupee of fixed
assets employed in the business and generates net sales of Rs.8.36.The ratio in the year
2006 was 11.46:1 and increased to 13.35:1 in the year 2007.In the year 2008 the ratio was
1.78:1 but in the year 2009 the ratio was decreased to 9.98:1. In the year 2010 the ratio again
decreased to 8.33:1and in the year 2011 the ratio was 8.10:1.Fixed assets turnover ratio in the
year 2012 was 8.37:1.

Findings:
On the basis of analysis and observation of the study we have to reach to some findings
which are given as below:
 The debt equity position of the BHEL ltd was not risky because the company has used
few amount of debt capital during the study period. Although it has been seen that debt
capital increases during the year 2011-2012 near about 50% of total capital, the average
rate of debt capital was near about 10% which was not a good sign as per the financial
aspects.
 The capital mix ratio of any company may be 2:1 which was not according to his ratio
BHEL Ltd. Company should take advantages of leverage. In the present scenario
company having a sound financial position but do not want to take financial risk.
 Funded Debt to total capitalization position of the company was not satisfactory because
the long term borrowings were very less as compare to total capitalization, which is not
beneficial for the organization.
 The position of proprietary fund to total assets ratio was quite satisfactory because the
proprietary investment in total assets was 40% and rest of the total assets have been
managed by outsider’s funds.
 Solvency ratio of the company was satisfactory because company can easily make the
payment of external liabilities.
 Fixed assets to net worth ratio were also satisfactory because fixed assets are less than net
worth hence company have required the less amount of fixed assets in their business.
 Interest coverage ratio of the BHEL Company was in a sound position and the company
can easily meet out their obligations without any hurdles. This ratio on average was more
than 100 times. There is no any financial risk and it is a conservative approach.
 BHEL Company has low geared position because variable cost bearing securities are
more than their fixed cost bearing securities. In the present situation on average variable
cost securities was more than 555% of fixed cost bearing securities which is not good for
the company as per the financial aspects but as per the creditors point of view it is good
because they are fully secured.
 Fixed assets to long term funds ratio is being quite satisfactory during the study period
because company have only few amount of fixed assets as compare to long term funds.
 Only 20% of long term funds to fixed assets. A long term funds are not to be fully
secured because company have less amount of fixed assets in their business.
 The financial Leverage position of the BHEL Company is quite satisfactory from the
point of creditors or outsiders but from the point of company is not good because
company is not getting the advantages of debt capital due to less employment of debt
capital due to less employment of debt capital. Due to less employment of debt Capital
Company have less amount of interest and it is near to EBIT. Hence EBIT and EBT were
much closed due to interest factor or less employment of long term capital.
 In current assets to proprietary ratio we examine that current assets were more than
shareholders funds during the study period. The basic thumb rule of current assets should
be managed by current liabilities and the few portions should be managed by shareholders
funds. In this study it is found that current assets not only managed by current liabilities
apart from current liabilities they also managed by shareholders funds. This ratio is being
satisfactory during the study period.
 The position of fixed assets turnover ratio was quite satisfactory during the study period
because the fixed assets have been properly utilized by the company. This thinks leads to
increase the performance of the company.
Testing of Hypothesis:
H01 -There is no significant difference between debt and equity ratios of the BHEL Ltd.
Company.
H02 –There is no significant difference e between EBIT and EBT ratios of the BHEL Ltd.
Company
 r1 =+0.66
r2 = +0.51
t= r ×√ n-2
√1- r2
t.05 =Degree of freedom (n-2)
t.05 = d.f. (10-2)
t.05 =1.86

Table
Debt-Equity Ratio EBIT-EBT
r =+0.66 r = +0.51
t =2.53 t =1.69
t.05 =1.86 t.05 =1.86

ANALYSIS:

Ho1: There is no significant difference in the debt and equity capital of BHEL Ltd. Company.
The coefficient of correlation between debt and equity was +0.66, its indicating that debt and
equity gas been moving in same direction which means debt capital has been increasing and
equity capital will also been increasing in the same direction and has a moderate positive
degree of correlation between debt and equity while we have analyze through the testing of
hypothesis between debt and equity than results come as follows.
t.05 =1.86
On the basis of above observation it is found that the calculated value is more than the critical
value. Thus the hypothesis which was taken is fully rejected and it’s clear that there is a
significant difference between debt and equity capital.
H02: There is no significant relationship between EBIT and EBT.
The coefficient of correlation between EBIT and EBT is +0.51 which indicates that there is
moderate degree of correlation among EBIT and EBT and they are moving in the same
direction and they have positive relationship.
The null hypothesis which was taken that there is no significant difference among the EBIT
and EBT which was analyze through student t- test and results come t=1.69 and t.05=1.86
hence critical value is more than the calculated value thus it is clear that null hypothesis is
accepted and there is no significant difference between EBIT and EBT because there values
are very closed to each other.
Suggestions:
 Company should increase the debt capital to get the advantages of more EPS.
 BHEL Company should slightly increase their shareholders funds and also at least
maintain existing position of this ratio.
 BHEL Ltd Company should increase their external liabilities for betterment of the
company.
 Company having a huge amount of net worth this must be properly utilized. It can be
invested in better revenue generating opportunities.
 Company should take financial risk in the present condition and adopt a modern
approach for capital mix if the company excess amount their amount in their business
.In this case company can diversified their business for betterment of the company.
 As per the financial concepts BHEL Company should increase their financial cost
bearing securities to get the advantages of fixed interest and company can utilize such
a capital for the expansion or company should diversified the business.
 BHEL Company should increase their fixed assets and also properly utilize the long
term funds.
 BHEL Company should invest owners’ funds in expansion activities of the business.
 Company should also try to do effective utilization of fixed assets. Although the
present position is also good so that company should at least takes precautions to
maintain its present position.

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