Financial Analysis is the process of identifying the financial strengths

and weakness of the firm by properly establishing relationships between

the items of the balance sheet and the profit and loss account. Ratio
Analysis is a powerful tool of financial analysis. The relationship
between two accounting figures, expressed mathematically, is known as
a financial ratio. Ratios help to summarize the large quantities of
financial data and to make qualitative judgment about the firms
financial performance.

Standards of comparison: A single ratio in itself does not indicate

favourable or unfavorable conditions. It should be compared with some
standard. Standards of comparison may consist of:
1. Ratios calculated from the past financial statements of the same firm;
2. Ratios developed using the projected, or pro forma, financial
statements of
the same firm;
3. Ratios of some selected firms, especially the most progressive and
successful, at the same point of time, and
4. Ratios of the industry to which the firm belongs.

DEFINING THE PROBLEM

Title of the project: Ratio Analysis of Orissa Power Transmission Corporation
Limited (OPTCL).
Statement about the project: This particular topic is chosen because in most of
the large organization encompassing the following-power transmission, generation,
operation etc has an investment of huge amount of funds which is needed to be
controlled and managed efficiently and effectively.

Objective and scope of the study:

To study the present financial system at OPTCL.
To determine profitability and liquidity ratio.
To analyze the capital structure of the OPTCL with the help of
leverage ratio.
To offer appropriate suggestions for the better performance of the
organization.

Significance of the Problem:

2

1. It helps in evaluating the firms performance:

With the help of ratio analysis conclusion can be drawn regarding several aspects
such as financial health, profitability and operational efficiency of the undertaking.
Ratio points out the operating efficiency of the firm i.e. whether the management
has utilized the firms assets correctly, to increase the investors wealth. It ensures
a fair return to its owners and secures optimum utilization of firms assets.
2. It helps in inter-firm comparison:
Ratio analysis helps in inter-firm comparison by providing necessary data. An inter
firm comparison indicates relative position. It provides the relevant data for the
comparison of the performance of different departments. If comparison shows a
variance, the possible reasons of variations may be identified and if results are
negative, the action may be initiated immediately to bring them in line.
3. It simplifies financial statement:
The information given in the basic financial statements serves no useful Purpose
unless it s interrupted and analyzed in some comparable terms. The ratio analysis is
one of the tools in the hands of those who want to know something more from the
financial statements in the simplified manner.
4. It helps in determining the financial position of the concern:
Ratio analysis facilitates the management to know whether the firms financial
position is improving or deteriorating or is constant over the years by setting a
trend with the help of ratios The analysis with the help of ratio analysis can know
the direction of the trend of strategic ratio may help the management in the task
of planning, forecasting and controlling.
5. It is helpful in budgeting and forecasting:
Accounting ratios provide a reliable data, which can be compared, studied and
analyzed. These ratios provide sound footing for future prospectus.
6. Liquidity position:
With help of ratio analysis conclusions can be drawn regarding the Liquidity
position of a firm. The liquidity position of a firm would be satisfactory if it is able
to meet its current obligation when they become due. The ability to met short term
liabilities is reflected in the liquidity ratio of a firm.

Need of the study:

3

 The study has great significance and provides be

n e f i t s t o various parties whom directly or indirectly interact with the company.
It is beneficial to management of the company by
p r o v i d i n g crystal clear picture regarding important aspects like
liquidity, leverage, activity and profitability.
The study is also beneficial to employees and offers
m o t i v a t i o n by showing how actively they are contributing for companys
growth.
The investors who are interested in investing in the
c o m p a n y s shares will also get benefited by going through the
study
and
can
easily take a decision whether to invest or not to invest
i n t h e companys shares.
Objective and Scope of the Study:
1.
2.
3.
4.
5.

Commitment for people development.

Focus on team work and business excellence.
Trust on customer focus.
Strive for a standard of performance driven by quality and innovation.
Demonstrate a responsible, sincere and fair, and trust worthy corporate
culture.
6. Care for environment and society.

REVIEW OF LITERATURE
Ratio is the arithmetical expression of relationship between two related items. Ratio when
calculated is the basis of accounting information called as accounting ratios. Ratio is the
4

process of determining and interpreting numerical relationship between two variables which
are interrelated.

Kennedy and Mc Mullan:

The relationship of one term to another, expressed in simple mathematical form is known as
ratio.

R.N Anthony:
A ratio is simply one number expressed in terms of another. It is found by dividing one
number by another.
The term "accounting ratios" is used to describe significant relationship between figures
shown on a balance sheet, in a profit and loss account, in a budgetary control system or in
any other part of accounting organization. Accounting ratios thus shows the relationship
between accounting data. An accounting ratio compares two aspects of a financial statement,
such as the relationship or ratio of current assets to current liabilities. The ratios can be used
to evaluate the financial condition of a company, including the company's strengths and
weaknesses. An example of an accounting ratio is the price-to-earnings (P/E) ratio of a stock.
These measures the price paid per share in relation to the profit earned by the company per
share in a given year. Accounting ratios assist in measuring the efficiency and profitability of
a company based on its financial reports. Accounting ratios form the basis of fundamental
analysis.

J.Batty:
The term accounting ratio is used to describe significant relationship which exist between
figures shown in profit and loss account and balance sheet in a budgetary control system or in
any part of the accounting organization.

A financial ratio is a relative magnitude of two selected numerical values taken from an
enterprise's financial statements. In standard ratios it is used to try to evaluate the overall
financial condition of a corporation or other organization. Financial ratios may be used by
managers within a firm, by current and potential shareholders (owners) of a firm and by a
company are traded in a financial market, the market price of a firm's creditors. Financial
analysts use financial ratios to compare the strengths and weaknesses in various companies.
If shares in the shares is used in certain financial ratios.
The study of relationships between financial variables is ratio analysis. Ratios of one firm
are often compared with the same ratios of similar firms or of all firms in a single industry.
This comparison indicates if a particular firm's financial statistics are suspect. Similarly, a
particular ratio for a firm may be evaluated over a period of time to determine if any special
trend exists. Ratio analysis is defined as the systematic use of ratio to interpret the financial
statements so that the strength and weaknesses of a firm as well as its historical performance
and current financial condition can be determined. Ratio Analysis is a tool used by
individuals to conduct a quantitative analysis of information of company's financial
5

statements. Ratios are calculated from current year numbers and are then compared to
previous years. The companies, industries or the economy use ratio analysis to judge the
performance. Ratio analysis is a fundamental means of examining the health of a company
by studying the relationships of key financial variables. Many analysts believe ratio analysis
is the most important aspect of the analysis process. A firm's ratios are normally compared to
the ratios of other companies in that firm's industry or tracked over time internally in order to
see trends. Ratio analysis is basically a technique of establishing meaningful relationship
between significant variables of financial statements and interpreting the relationship to form
judgement regarding the financial affairs of the unit.
According to Myers Ratio analysis is a study of relationship among various financial
factors in a business The usefulness of ratio analysis depends upon identifying:
(a) Objective of analysis
(b) Selection of relevant data
(c) Deciding, appropriate ratios to be calculated
(d) Comparing the calculated ratio with standard norms
(e) Interpretation of the ratios.
Ratio can be used in the form of (1) percentage (20%) (2) Quotient (say 10) and (3) Rates. In
other words, it can be expressed as a to b; a: b (a is to b) or as a simple fraction, integer and
decimal. A ratio is calculated by dividing one item or figure by another item or figure.
Analysis or Interpretations of Ratios
The analysis or interpretations in question may be of various types. The following approaches are
usually found to exist:
(a) Interpretation or Analysis of an Individual (or) Single ratio.
(b) Interpretation or Analysis by referring to a group of ratios.
(c) Interpretation or Analysis of ratios by trend.
(d) Interpretations or Analysis by inter-firm comparison.
Principles of Ratio Selection
The following principles should be considered before selecting the ratio:
(1) Ratio should be logically inter-related.
(2) Pseudo ratios should be avoided.
(3) Ratio must measure a material factor of business.
(4) Cost of obtaining information should be borne in mind.
(5) Ratio should be in minimum numbers.
(6) Ratio should be facilities comparable.

SIGNIFICANCE OR OBJECTIVE OF RATIO ANALYSIS:

1. It helps in evaluating the firms performance:
6

With the help of ratio analysis conclusion can be drawn regarding several aspects such as
financial health, profitability and operational efficiency of the undertaking. Ratio points out the
operating efficiency of the firm i.e. whether the management has utilized the firms assets
correctly, to increase the investors wealth. It ensures a fair return to its owners and secures
optimum utilization of firms assets.
2. It helps in inter-firm comparison:
Ratio analysis helps in inter-firm comparison by providing necessary data. An inter firm
comparison indicates relative position. It provides the relevant data for the comparison of the
performance of different departments. If comparison shows a variance, the possible reasons of
variations may be identified and if results are negative, the action may be initiated immediately
to bring them in line.
3.It simplifies financial statement:
The information given in the basic financial statements serves no useful Purpose unless it s
interrupted and analyzed in some comparable terms. The ratio analysis is one of the tools in the
hands of those who want to know something more from the financial statements in the simplified
manner.
4. It helps in determining the financial position of the concern:
Ratio analysis facilitates the management to know whether the firms financial position is
improving or deteriorating or is constant over the years by setting a trend with the help of ratios
The analysis with the help of ratio analysis can know the direction of the trend of strategic ratio
may help the management in the task of planning, forecasting and controlling.
5. It is helpful in budgeting and forecasting:
Accounting ratios provide a reliable data, which can be compared, studied and analyzed. These
ratios provide sound footing for future prospectus. The ratios can also serve as a basis for
preparing budgeting future line of action.
6. Liquidity position:
With help of ratio analysis conclusions can be drawn regarding the Liquidity position of a firm.
The liquidity position of a firm would be satisfactory if it is able to meet its current obligation
when they become due. The ability to met short term liabilities is reflected in the liquidity ratio
of a firm.
7. Long term solvency:
Ratio analysis is equally for assessing the long term financial ability of the Firm. The long term
solvency s measured by the leverage or capital structure and profitability ratio which shows the
earning power and operating efficiency, Solvency ratio shows relationship between total liability
and total assets.
8. Operating efficiency:

Yet another dimension of usefulness or ratio analysis, relevant from the View point of
management is that it throws light on the degree efficiency in the various activity ratios measures
this kind of operational efficiency.
Advantages of Ratio Analysis
Ratio analysis is necessary to establish the relationship between two accounting figures to
highlight the significant information to the management or users who can analyze the business
situation and to monitor their performance in a meaningful way. The following are the
advantages of ratio analysis:
(1) It facilitates the accounting information to be summarized and simplified in a required form.
(2) It highlights the inter-relationship between the facts and figures of various segments of
business.
(3) Ratio analysis helps to remove all type of wastages and inefficiencies.
(4) It provides necessary information to the management to take prompt decision relating to
business.
(5) It helps to the management for effectively discharge its functions such as planning,
organizing, controlling, directing and forecasting.
(6) Ratio analysis reveals profitable and unprofitable activities. Thus, the management is able to
concentrate on unprofitable activities and consider to improve the efficiency.
(7) Ratio analysis is used as a measuring rod for effective control of performance of business
activities.
Limitations of Ratio Analysis
Ratio analysis is one of the important techniques of determining the performance of financial
strength and weakness of a firm. Though ratio analysis is relevant and useful technique for the
business concern, the analysis is based on the information available in the financial statements.
There are some situations, where ratios are misused; it may lead the management to wrong
direction. The ratio analysis suffers from the following limitations:
1. Ratio analysis is used on the basis of financial statements. Number of limitations of
financial statements may affect the accuracy or quality of ratio analysis.
2. Ratio analysis heavily depends on quantitative facts and figures and it ignores qualitative
data.
3. Therefore this may limit accuracy.
4. Ratio analysis is a poor measure of a firm's performance due to lack of adequate
standards laid for ideal ratios.
5. It is not a substitute for analysis of financial statements. It is merely used as a tool for
measuring the performance of business activities.
6. Ratio analysis clearly has some latitude for window dressing.

CLASSIFICATION OF RATIOS
8

Accounting Ratios are classified on the basis of the different parties interested in making use of
the ratios. A very large number of accounting ratios are used for the purpose of determining the
financial position of a concern for different purposes. Ratios may be broadly classified in to:
(1) Classification of Ratios on the basis of Balance Sheet.
(2) Classification of Ratios on the basis of Profit and Loss Account.
(3) Classification of Ratios on the basis of Mixed Statement (or) Balance Sheet and Profit
and Loss Account.
These classifications are discussed here under:
1. Classification of Ratios on the basis of Balance Sheet: Balance sheet ratios which establish
the relationship between two balance sheet items. For example, Current Ratio, Fixed Asset Ratio,
Capital Gearing Ratio and Liquidity Ratio etc.
2. Classification on the basis of Income Statements: These ratios deal with the relationship
between two items or two group of items of the income statement or profit and loss account. For
example, Gross Profit Ratio, Operating Ratio, Operating Profit Ratio, and Net Profit Ratio etc.
3. Classification on the basis of Mixed Statements: These ratios also known as Composite or
Mixed Ratios or Inter Statement Ratios. The inter statement ratios which deal with relationship
between the item of profit and loss account and item of balance sheet. For example, return on
Investment Ratio, Net Profit to Total Asset Ratio, Creditor's Turnover Ratio, Earning per Share
Ratio and Price Earnings Ratio etc.
This classification further grouped in to:
I. Liquidity Ratios
II. Profitability Ratios
III. Turnover Ratios
IV. Solvency Ratios
V. Overall Profitability Ratios

1. LIQUIDITY RATIOS
Liquidity Ratios are also termed as Short-Term Solvency Ratios. The term liquidity means the
extent of quick convertibility of assets in to money for paying obligation of short-term nature.
Accordingly, liquidity ratios are useful in obtaining an indication of a firm's ability to meet its
current liabilities, but it does not reveal h0w effectively the cash resources can be managed. To
measure the liquidity of a firm, the following ratios are commonly used:
a. Current Ratio.
b. Quick Ratio (or) Acid Test or Liquid Ratio.
c. Absolute Liquid Ratio (or) Cash Position Ratio.

a) Current Ratio:
Current Ratio establishes the relationship between current Assets and current Liabilities. It
attempts to measure the ability of a firm to meet its current obligations. In order to compute this
ratio, the following formula is used:
Current Assets
9

Current Ratio =
Current Liabilities
The two basic components of this ratio are current assets and current liabilities. Current asset
normally means assets which can be easily converted in to cash within a year's time. On the other
hand, current liabilities represent those liabilities which are payable within a year.

Interpretation: The ideal current ratio is 2: 1. It indicates that current assets

double the current liabilities are considered to be satisfactory. Higher value of current ratio
indicates more liquid of the firm's ability to pay its current obligation in time. On the other hand,
a low value of current ratio means that the firm may find it difficult to pay its current ratio as one
which is generally recognized as the patriarch among ratios.
b) Acid test ratio or quick ratio:
It is the ratio of quick assets to current liability. It is an indicator of a company's shortterm liquidity. The quick assets are defined as those assets which are quickly
convertible into cash. While calculating quick assets closing stock and prepaid
expenses are excluded from current assets. The quick ratio measures a
company's ability to meet its short-term obligations with its most liquid assets. Higher
the quick ratio, better the position of the company. Quick ratio is viewed as a sign of
company's financial strength
or
weakness
(higher number means
stronger, lower number means weaker). It is also known as acid test ratio. It is
expressed as:
QUICK RATIO= QUICK ASSETS/CURRENT LIABILITIES
Interpretation:

If quick ratio is higher, company may keep too much cash on hand or have a problem
collecting its accounts receivable. Higher quick ratio is needed when the company has
difficulty borrowing on short-term notes. A quick ratio higher than 1:1 indicates that
the business can meet its current financial obligations with the available quick funds
on hand.
If a quick ratio is lower than 1:1 it indicates that the company relies too much on
inventory or other assets to pay its short-term liabilities.
Many lenders are interested in this ratio because it does not include inventory, which
may or may not be easily converted into cash.
c) Absolute liquid ratio or cash position ratio:
Absolute liquid ratio extends the logic further and eliminates accounts receivable
(sundry debtors and bills receivables) also. Though receivables are more liquid as
comparable to inventory but still there may be doubts considering their time and
10

amount of realization. Therefore, absolute liquidity ratio relates cash, bank and
marketable securities to the current liabilities. Since absolute liquidity ratio lays down
very strict and exacting standard of liquidity, therefore, acceptable norm of this ratio
is 50 percent. It means absolute liquid assets worth one half of the value of current
liabilities are sufficient for satisfactory liquid position of a business. It can be
expressed as:
ABSOLUTE LIQUID RATIO= ABSOLUTE LIQUID ASSETS/CURRENT
LIABILITY
WHERE ABSOLUTE CURRENT ASSETS= CASH+BANK+MARKETABLE
SECURITIES
2. SOLVENCY RATIO:
Solvency ratio is calculated to determine the ability of the business to service its debt in
the long run. The following ratios are normally computed for evaluating solvency of the
business:
(a)
Debt equity ratio:
Debt equity ratio measures the relationship between long term debt and equity. If debt
component of the total long term funds employed is small. Outsiders feel more secure.
From security point of view, capital structure with less debt and more equity is
considered favourable as it reduces the chances of bankruptcy. Normally 2:1 debt
equity ratio is considered safe. It is computed as follows:
DEBT EQUITY RATIO = LONG TERM DEBT/SHAREHOLDERS FUND
Interpretation:
The ratio measures the degree of indebtedness of an enterprise and gives an idea to
the long term lender regarding extent of security of the debt. A low debt ratio reflects
more security and high ratio is considered risky as it may put firm into difficulty in
meeting its obligations to outsiders. The prescribed ratio is limited to 2:1. This ratio is
also termed as leverage ratio.
(b)

Debt ratio:
Debt equity ratio refers to proportion of long term debt a company has relative
to its assets or the capital employed. The measure gives an idea to the leverage
of the company along with the potential risks the company faces in terms of
its debt-load. Capital employed is equal to long term debt + shareholders fund.
It is computed as follows:
DEBT EQUITY RATIO= TOTAL DEBT/TOTAL ASSETS

11

Interpretation:
The higher the ratio, the greater risk will be associated with the firm's operation. In
addition, high debt to assets ratio may indicate low borrowing capacity of a firm,
which in turn will lower the firm's financial flexibility. Like all financial ratios, a
company's debt ratio should be compared with their industry average or other
competing firms.
Total liabilities divided by total assets. The debt/asset ratio shows the proportion of a
company's assets which are financed through debt. If the ratio is less than 0.5, most of
the company's assets are financed through equity. If the ratio is greater than 0.5, most
of the company's assets are financed through debt. Companies with high debt/asset
ratios are said to be "highly leveraged," not highly liquid as stated above. A company
with a high debt ratio (highly leveraged) could be in danger if creditors start to
demand repayment of debt.
Low ratio provides security to creditors and high ratio helps management in trading
on
equity.
(c)

Proprietary ratio:
Proprietary ratio expresses relationship of proprietors (shareholders fund) to
net assets. It is calculated as follows:
PROPRIETARY
EMPLOYED

RATIO=

SHAREHOLDERS

FUND/CAPITAL

Interpretation:
Higher proportion of shareholders fund in financing the assets is positive feature as it
provides security to creditors. This ratio can also be computed in relation to total
assets in lead of net assets (capital employed). It may be noted that the total debt ratio
and proprietary ratio will be equal to 1.
Cautions: The proprietary ratio is not a clear indicator of whether or not a business is
properly capitalized. For example, an excessively high ratio can mean that
management has not taken advantage of any debt financing, so the company is using
nothing but expensive equity to fund its operations. Instead, there is a balance
between too high and too low a ratio, which is not easy to discern.
Also, the ratio is not necessarily a good indicator of long-term solvency, since it does
not make use of any information on the income statement, which would indicate
profitability or cash flows.

12

(d)

Total assets to debt ratio:

This ratio measures the extent of the coverage of long term debt by assets. It is
calculated as:
TOTAL ASSETS TO DEBT RATIO=TOTAL ASSETS/LONG TERM
DEBT

Interpretation:
The higher ratio indicates that assets have been mainly financed by owners fund and
the long term debt is adequately covered by assets. It is better to take net assets
instead of total assets for computing this ratio. It is observed that the ratio will be
reciprocal to the debt ratio.
(e)

Interest coverage ratio:

A ratio used to determine how easily a company can pay interest on outstanding debt.
The interest coverage ratio is calculated by dividing a company's earnings before
interest and taxes (EBIT) for one period by the company's interest expenses for the
same period. It is calculated as follows:
INTEREST COVERAGE RATIO=NET PROFIT BEFORE INTEREST AND
TAX/INTEREST ON LONG TERM DEBT
Interpretation:
The lower the ratio is, the more a company is burdened by its debt expense. When a
company's interest coverage ratio is 1.5 or less, its ability to meet its interest expenses
may be questionable. An interest coverage ratio below 1 indicates that a company is
not generating sufficient revenues to satisfy interest expenses and should raise a red
flag for investors.
3. ACTIVITY RATIO:
The activity ratio expresses the number of times assets employed or any constitution of
assets is turned into sale during an accounting period. Higher turnover ratio means better
utilization of assets and signifies improved efficiency and profitability, it is also known as
efficiency ratio. The important activity ratio is:
(a)

Stock turnover ratio:

Stock turnover ratio is a relationship between the cost of goods sold during a
particular period of time and the cost of average inventory during a particular
period. It is expressed in number of times. Stock turnover ratio/Inventory
turnover ratio indicates the number of time the stock has been turned over
during the period and evaluates the efficiency with which a firm is able to

13

manage its inventory. This ratio indicates whether investment in stock is

within proper limit or not. It is calculated as follows:
STOCK TURNOVER RATIO=COST OF GOODS SOLD/AVERAGE
STOCK
Interpretation:
Inventory turnover ratio measures the velocity of conversion of stock into sales.
Usually a high inventory turnover/stock velocity indicates efficient management of
inventory because more frequently the stocks are sold; the lesser amount of money is
required to finance the inventory. A low inventory turnover ratio indicates an
inefficient management of inventory. A low inventory turnover implies overinvestment in inventories, dull business, poor quality of goods, stock accumulation,
accumulation of obsolete and slow moving goods and low profits as compared to total
investment. The inventory turnover ratio is also an index of profitability, where a high
ratio signifies more profit; a low ratio signifies low profit. Sometimes, a high
inventory turnover ratio may not be accompanied by relatively high profits. Similarly
a high turnover ratio may be due to under-investment in inventories.
(b)

Debtors turnover:
Ratio of net credit sales to average trade debtors is called debtors turnover
ratio. It is also known as receivables turnover ratio. This ratio is expressed in
times. Accounts receivables are the term which includes trade debtors and
bills receivables. It is a component of current assets and as such has direct
influence on working capital position (liquidity) of the business. In simple
words it indicates the number of times average debtors (receivable) are turned
over during a year. It is computed as follows:
DEBTORS TURNOVER RATIO= NET CREDIT SALES/ AVERAGE
ACCOUNTS RECEIVABLE

Interpretation:
Accounts receivable turnover ratio or debtors turnover ratio indicates the
number of times the debtors are turned over a year. The higher the value of
debtors turnover the more efficient is the management of debtors or more
liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient
management of debtors or less liquid debtors. It is the reliable measure of the
time of cash flow from credit sales. There is no rule of thumb which may be
used as a norm to interpret the ratio as it may be different from firm to firm.
(c)
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Creditors turnover:

Creditors Turnover Ratio also known as Accounts Payable Turnover Ratio is

calculated by taking the total purchases made and dividing it by the average
accounts payable during the period. It is used to measure the rate at which a
firm pays off its suppliers. It indicates the speed with which the payments are
made to the trade creditors. It establishes relationship between net credit
annual purchases and average accounts payables. Accounts payables include
trade creditors and bills payables. Average means opening plus closing
balance divided by two. In this case also accounts payables' figure should be
considered at gross value i.e. before deducting provision for discount on
creditors. It is computed as follows:
CREDITORS TURNOVER RATIO=NET CREDIT
PURCHASE/AVERAGE ACCOUNTS PAYABLE
Interpretation:
Shorter average payment period or higher payable turnover ratio may indicate
less period of credit enjoyed by the business it may be due to the fact that
either business has better liquidity position; believe in availing cash discount
and consequently enjoys better credit standing in the market or business credit
rating among suppliers is not good and therefore they do not allow reasonable
period of credit.
(d)

Investment turnover:
The Inventory Turnover Ratio measures how many times in a year a company
sells its inventory. The investment turnover ratio is a measure of how
efficiently a company's assets generate revenue. It measures the number of
dollars of revenue generated by one dollar of the company's assets.
INVESTMENT TURNOVER RATIO=NET SALES/CAPITAL
EMPLOYED
Interpretation:

A low asset turnover ratio suggests problems with excess production capacity,
poor inventory management, or lax collection methods. Increases in the asset
turnover ratio over time may indicate a company is "growing into" its capacity
(while a decreasing ratio may indicate the opposite), but remember
that asset purchases made in anticipation of coming growth (or the sale of
unnecessary assets in anticipation of declining growth) can suddenly and
somewhat artificially change a company's asset turnover ratio.

15

Low-margin industries tend to have higher asset turnover ratios than high-margin
industries because low-margin industries must offset lower per-unit profits with
higher unit-sales volume. Additionally, capital-intensive companies will typically
have lower asset turnover ratios than companies using fewer assets. This is why
comparison of asset turnover ratios is generally most meaningful among
companies
(e)

Fixed assets turnover:

The fixed asset turnover ratio is the ratio of net sales to net fixed assets (also
known as property, plant, and equipment). A high ratio indicates that a
company is doing an effective job of generating sales with a relatively small
amount of fixed assets. Conversely, if the ratio is declining over time, the
company has either overinvested in fixed assets or it needs to issue new
products to revive its sales. Another possible effect is for a company to make
a large investment in fixed assets, with a time delay of several months to a
year before the new assets start generating revenues. The concept of the fixed
asset ratio is most useful to an outside observer, who wants to know how well
a business is employing its assets to generate sales. It is computed as follows:
FIXED ASSETS TURNOVER RATIO=NET SALES/NET FIXED
ASSETS

Interpretation:
If the fixed asset turnover ratio is low as compared to the industry or past years of
data for the firm, it means that sales are low or the investment in plant and equipment
is too high. This may not be a serious problem if the company has just made an
investment in fixed asset to modernize. If the fixed asset turnover ratio is too high,
then the business firm is likely operating over capacity and needs to either increase its
asset base (plant, property, equipment) to reduce its sale.
4. PROFITABILITY RATIO:
The profitability or financial performance is summarized in income statement.
Profitability ratio is calculated to analyse the earning capacity of the business which is
outcome of utilisation of resources employed in the business. The various ratios which are
commonly used are:
(a)

Gross profit ratio:

Gross profit ratio is the ratio of gross profit to net sales i.e. sales less
sales returns. The ratio thus reflects the margin of profit that a concern

16

is able to earn on its trading and manufacturing activity. It is the most

commonly calculated ratio. It is employed for inter-firm and inter-firm
comparison of trading results. It is computed as follows:
GROSS PROFIT RATIO=GROSS PROFIT/NET SALES*100

Interpretation:
The selling price of the goods has gone up without corresponding increase in
the cost of goods sold. The cost of goods sold has gone down without
corresponding decrease in the selling price of the goods. Purchases might
have been omitted or sales figures might have been inflated. The valuation of
the opening stock is lower than what it should be or the valuation of the
closing stock is higher than what it should be. In case, there a decrease in the
rate of gross profit, it may be due to one or more of the following reasons.
There may be decrease in the selling rate of the goods sold without
corresponding decrease in the cost of goods sold. There may be increase in
the cost of goods sold without corresponding increase in the selling price of
the goods sold. There may be omission of sales. Stock at the end may have
been under-valued or opening stock may have been over-valued.
(b)

Operating ratio:
The operating ratio is determined by comparing the cost of the goods
sold and other operating expenses with net sales. It is computed as
follows:
OPERATING RATIO= (COST OF SALES+OPERATING
EXPENSE)/NET SALES*100

Interpretation:
This ratio is a test of the efficiency of the management in their business
operation. It is a means of operating efficiency. In normal conditions, the
operating ratio should be low enough so as to leave portion of the sales
sufficient to give a fair return to the investors. Operating ratio plus operating
profit ratio is 100. The two ratios are obviously interrelated. For example, if
the operating profit ratio is 20%, it means that the operating ratio is 80%. A
rise in the operating ratio indicates a decline in the efficiency. Lower the
operating ratio, the better is the position because greater is the profitability
and management efficiency of the concern. The higher the ratio, the less
17

favourable is the situation, because there will be smaller margin of profit

available for the purpose of payment of dividend and creation of reserves.

(c)

Operating profit ratio:

It is calculated to reveal operating margin. It may be computed as
follows:
OPERATING PROFIT RATIO=100-OPERATING PROFIT
OR
OPERATING PROFIT/SALES*100
Where operating profit= sales-cost of operation.

Interpretation:

Operating margin is used to measure company's pricing strategy and

operating efficiency. It gives an idea of how much a company makes (before
interest and taxes) on each dollar of sales. Operating margin ratio shows
whether the fixed costs are too high for the production or sales volume.
A high or increasing operating margin is preferred because if the operating
margin is increasing, the company is earning more per dollar of sales.
Operating margin can be used to compare a company with its competitors and
with its past performance. It is best to analyze the changes of operating margin
over time and to compare company's figure to those of its competitors.
Operating margin shows the profitability of sales resulting from regular
business. Operating income results from ordinary business operations and
excludes other revenue or losses, extraordinary items, interest on long term
liabilities and income taxes.

(d)

Net profit ratio:

Net profit ratio expresses the relationship between net profit after taxes
and sales. This ratio is a measure of the overall profitability net profit
is arrived at after taking into accounts both the operating and nonoperating items of incomes and expenses. The ratio indicates what
portion of the net sales is left for the owners after all expenses have
been met.

18

NET PROFIT RATIO= NET PROFIT/SALES*100

Interpretation:
Net profit ratio is used to measure the overall profitability and hence it is
very useful to proprietors. The ratio is very useful as if the net profit is not
sufficient, the firm shall not be able to achieve a satisfactory return on its
investment. This ratio also indicates the firm's capacity to face adverse
economic conditions such as price competition, low demand, etc. Obviously,
higher the ratio the better is the profitability. But while interpreting the ratio
it should be kept in minds that the performance of profits also be seen in
relation to investments or capital of the firm and not only in relation to sales.

(e)

Earnings per share:

The portion of a company's profit allocated to each outstanding share
of common stock. Earnings per share serve as an indicator of a
company's profitability.
EARNINGS PER SHARE=PROFIT AVAILABLE FOR EQUITY
SHAREHOLDER/NO OF EQUITY SHARES

(f)

Dividend Yield Ratio:

Dividend Yield Ratio indicates the relationship is established between dividend per share and
market value per share. This ratio is a major factor that determines the dividend income from the
inventors' point of view. It can be calculated by the following formula:
Dividend Per Share
Dividend Yield Ratio =
x 100
Market Value Per Share

19

ABOUT OPTCL:
Orissa power transmission corporation limited (OPTCL), one of the Largest Transformer Utility
in the country was incorporated in march 2004 under The Companies act 1956.As a company
wholly owned by Government of Odisha to undertake the business of transmission and wheeling
of Electricity in the state .The registered office of the company is situated at Bhubaneswar, which
is the capital of Odisha. Its project and field units are spread all over the state. OPTCL became
fully operational with affect from 9th June 2005 consequent upon issue of Odisha Electricity
Reform (transfer of transmission and related activities). Scheme, 2005 under the provision of
electricity ct 2003 and the Odisha reform act, 1995 by the state government for transfer vesting
of transmission related activities of GRIDCO with OPTCL the Company has been designated as
the state transmission utility in terms of section 39 of the electricity act 2003.
20

Presently the company is carrying on intra state transmission and wheeling of electricity under a
license issued by Odisha electricity regulatory commission. .The company owns Extra High
Voltage Transmission system and operates about 9550.93ckt kms of transmission line at 400
kb,220kb,132kb levels and 81 nos. of substations with transformation of capacity of MVA.
The day to day affairs of the company are managed by the Managing Director assisted by wholetime Functional Director as per the advice for the board of directors constituted. They are in turn
assisted by a team of dedicated and experienced professionals in the various fields.
Orissa pioneered Power Sector Reform with an objective to unbundle generation, transmission
and distribution and to establish an independent and transparent Regulatory Commission in order
to promote efficiency and accountability in the Power Sector.
The State Government enacted the Orissa Electricity Reform Act, 1995 which came into force
with effect from 01.04.1996. In exercise of power under Section 23 and 24 of the Orissa
Electricity Reform Act, 1995, the State Govt. notified the Orissa Electricity Reform (Transfer of
Undertakings, Assets, Liabilities, Proceedings and Personnel) Scheme Rules 1996. As per the
Scheme, the transmission, distribution activities of the erstwhile OSEB along with the related
assets, liabilities, personnel and proceedings were vested on GRIDCO. Simultaneously the hydro
generation activities of OSEB along with related assets, liabilities, personnel and proceedings
were vested on OHPC.
COREVALUES:

Commitment for people development.

Focus on team work and business excellence.
Thrust on customer focus.
Strive for a standard of performance driven by quality and innovation.
Demonstrate a responsible, sincere and fair, and trust worthy corporate culture.
Care for environment and society.

PROFILE:
SHARE CAPITAL:
The authorized capital of the company is Rs 300.00 crore & paid up share capital is Rs
203.07 crore as on 1.4.2012. The entire share capital is held by Honble Governor of Orissa
and his nominees.
MISSION:
Plan and operate the transmission system so as to ensure that transmission system built,
operated and maintained to provide efficient, economical and coordinated system of
transmission and meet the overall performance standard.
21

 To upgrade the transmission system network so as to handle power to the tune of three
thousand MW by the year 2009 per 100% availability of power to each family.
To maintain the system losses at par with that of national level.
To impart advance techno managerial training to the participating engineers and work
force so as to professionalism them with progressive technology and capable commercial
organization of the country.
VISION:
To build up OPTCL at of the best transmission utility in the country in terms of
uninterrupted power supply, minimizing the loss, contributing to state industrial growth.
Development of well coordinated transmission system in the backdrop of formation of
strong national pore grid as flagship, endeavour to steer the development of power system
on planned path leading to cost affective fulfilment of the objectives of electricity to all at
affordable price
OBJECTIVE:
To affectively operate transmission line and sub-station in the set for evacuation of power from
the State generating station grid power to state distribution companies, wheeling of power to
other State, maintenance of existing lines, up gradation and modernization of the transmission
network. OPTCL being a state transmission utility public authority has set the following
objective:
Discharge all functions of planning and coordination relating to intra state, inter- state
transmission system with central transmission utility, State Govt. generating companies,
regional power board, authorities, Licensees or other person notified by State Govt in this
behalf.
Ensure development of an efficient and economical system of intra state and inter- state
transmission lines for smooth flow of electricity from generating station to the load
centres.
Provide non- discriminatory open access to its transmission system for use by any licensee
or generating companies.
Restore power at the earliest possible time through deployment of emergency restoration
system in the event of any Natural Disaster like super cyclone, flood etc.

SCOPE OF THE STUDY:

The scope of the study provides recommendations on the design, preparation, interpretation,
and use of ratio studies for assessing OPTCL performance and status. It is basically designed
22

to meet informal needs of investors, creditors, management. OPTCL does ratio analysis for
the comparative measurement of financial data to facilitate wise investment, credit and
managerial decisions. It may have the opportunity to utilize ratio study information at a
greater depth than oversight agencies. These internal studies can help improve appraisal
methods or identify areas within the jurisdiction that need attention. The ratio studies
conducted focuses more upon testing the companys past performance in a few broad
property categories.
OBJECTIVE OF THE STUDY:
The major objectives of the resent study are to know about financial strengths and weakness
of OPTCL through financial ratio analysis.
The main objectives of resent study aimed as:

To evaluate the performance of the company by using ratios as a yardstick to measure

the efficiency of the company.
To understand the liquidity, profitability and efficiency positions of the company during
the study period.
To evaluate and analyze various facts of the financial performance of the company. To
make comparison between the ratios during different periods.

Philosophy:
Assemble best people, delegate authority and dont interfere people make the
difference.
Business heads are entrepreneurs.
Mistakes are facts of life. It is response to the error that counts.

Success:
1. Create your luck by hard work.
2. Trust + delegation = growth.
Work Culture :
1. Commitment, creativity, efficiency, team spirit.

POWER REFORM
A: AIMS AND OBJECTIVES OF POWER SECTOR REFORM

23

The power sector reform programme of government of Odisha is closely linked to the New
Economic Policy (NEP) of the Government of India initiated in 1991.
To reduce reliance on Government support for expansion of the power system by
attracting private investment.
To foster a climate of fair play and transparency in all matter related to the sector so
as to reassure private investors of a fair return.
To improve efficiency of the system through increased competition and to improve
the quality of the services to the consumer.
B: REFORM ACHIEVEMENT
Milestones of Odisha Power Sector Reform:

First transfer between OHPC and GRIDCO affected on 1st April, 1996.
OER Act, 1995 created Odisha Electricity Regulatory Commission, a regulatory body
which became functional on 1.8.1996
Unbundling of Transmission and Distribution via Second transfer Scheme. Effective from
November 26, 1998.
9 Tariff Orders after public hearing has been passed by OERC (FY98, FY00.FY99,
FY01,FY02, FY03,FY04,FY05,FY06)
BSES took over management and operational control of 3 distribution Companies
(WESCO, SOUTHCO and NESCO)from April 1,1999
Privatization and Distribution completed with AES taking over the fourth distribution
company, CESCO from September 1, 1999
CESCO remained under the management of an Administrator (CEO) appointed by OERC
with effect from 27.8.2001
A new public limited company under the name of Odisha Power Transmission
Corporation limited was incorporated on 29.3.2004 to carry on the business of
transmission, STU and SLDC function of GRIDCO.

C: THE ODISHA ELECTRICITY REFORM ACT, 1995

THE ODISHA ELECTRICITY REFORM ACT, enacted on 10th January, 1996 by the state after
obtaining prior presidential assent. The Act came into effect on 1st April 1996, with an objective
to provide for the restructuring of the electricity industry for the rationalization of the generation,
transmission, distribution and supply of electricity for avenues of participation of private sector
entrepreneurs in electricity industry and generally taking measures conductive to the
development and management of the electricity industry in the state in an efficient, economic
competitive manner including the constitution of an electricity regulatory commission for the
state and for matters connected there with of incidental thereto.
24

D: THE ELECTRICITY ACT, 2003

The Govt. of India enacted the Electricity Act, 2003, which came into force with effect from 10th
June 2003. The act has repealed the earlier Central Act namely the Indian Electricity Act, 1910,
Electricity (Supply) Act, 1948 and the Electricity Regulatory Commission Act, 1998. The main
objective of the Act as envisaged in the preamble are an Act to consolidate the laws relating to
generation, transmission, distribution, trading and the use of electricity and generally for taking
measures conductive to electricity industry, rationalization of electricity tariff, ensuring
transparent policies regarding subsidies, promotion of efficient and environmentally begin
policies, Constitution of Central Electricity Authority, Regulatory Commissions and
establishments of Appellate Tribunal and for matters connected therewith or incidental thereto.
The Electricity Act, 2003 is a comprehensive law intended for growth and electricity sector as a
whole. This Act gives clarity to the investors, regulators, the consumers and other stakeholders at
large and connected to electricity sector in particular. It also brings modern concept like power
trading, open access and parallel networks. The main features of the Act are as follows:

De licensing Generation except in case hydro.

Captive generation free from control.
Open access to multiple choices for selection of supplier/consumers.
Transmission utilities not to engage in the business of trading of power.
Power trading recognized as a distinct legal and licensed activity.
Appellate Tribunal to replace High Court to expedite court cases.
Government to distant itself from regulatory function and to formulate policies which
will be guiding principle for the regulators.
SEBs will be restricted into separate companies and transmission will be separated from
other business.
Stringent provisions for penalizing theft.
Regulatory Commissions to issue license.
Regulatory Commissions to determine tariff for sale of power to distribution licensee.
Set up of State Regulatory Commissions is mandatory.
Rationalization of traffic to reflect cost and cross subsidies to be eliminated progressively.

CHALLENGES FOR OPTCL:

To have adequate network to cater to sudden load growth in the state.
Facing the future competition from Private sectors.
25

 Time and cost efficient Project completion.

Having a skilled work force.

Research Methodology
Research Methodology is a purely and simply the framework or a plans for the
study that guides the collection and analysis of data. Research is the scientific
way to solve the problems and its increasingly used to improve market
potential. This involves exploring the possible methods, one by one and
arranging at the best solution, considering the resources at the disposal research.
This study has been done in Orissa Power Transmission Corporation
Limited(OPTCL),Saheed Nagar, Bhubaneswar.
Research Steps
Some of the important research steps are as follows:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.

Study about organization

Setting of objectives
Instrument-design (Ratio analysis)
Main study
Tabulation and cross tabulation
Analysis and interpretation
Findings
Conclusion
Suggestions and recommendation
Research Design

A research design is a specification of methods and procedure for acquiring the

information needed. It is the over-all operations pattern or framework of the project
that stipulates what information is to be collected from which source by what
procedure, it also refers to the blue print of the research process.

26

Research Design consists of:

A clear statement of the research problem.

Procedure and technique to be used for gathering information.
The population is to be studied.
Methods to be used in processing for analyzing the data.

There are four types of Research Design:

i.
ii.
iii.
iv.

Exploratory of formative study

Diagnostic study
Experimental study
Descriptive study

Data Collection
The required data for all projects has collection from Secondary data.
27

Secondary Data:
The secondary data are collected from the companys annual report, balance sheet, books,
internal magazines, websites, newspapers etc .The basic understanding of the subject is
referred from various professional institutes and the valuable guidance of the guide.
Interpretation of various statistics is done through analysis whichever is necessary. The
ratio analysis is done by taking data from balance sheet and conducting survey of the
company by taking ratio of three consecutive years i.e. 2008-2009, 2009-10 and 2010-11.
The balance sheet, together with the income statement and cash flow statement, make up
the cornerstone of any company's financial statements.
Sources of Secondary Data:

Most of the calculations are made on the financial

s t a t e m e n t s o f the company provided statements.
Referring standard texts and referred books
c o l l e c t e d s o m e o f the information regarding theoretical aspects.
Method- to assess the performance of the company
m e t h o d o f observation of the work in finance department in followed.
Ratio Analysis:
The analysis of the financial statements and interpretations of financial results of a
particular
period of operations with the help of 'ratio' is termed as "ratio analysis." Ratio analysis used to
determine the financial soundness of a business concern. Alexander Wall designed a system of
ratio analysis and presented it in useful form in the year 1909.
Meaning and Definition:
The term 'ratio' refers to the mathematical relationship between any two inter-related variables.
In other words, it establishes relationship between two items expressed in quantitative form.
According J. Batty, Ratio can be defined as "the term accounting ratio is used to describe
significant relationships which exist between figures shown in a balance sheet and profit and loss
account in a budgetary control system or any other part of the accounting management."
Ratio can be used in the form of (1) percentage (20%) (2) Quotient (say 10) and (3) Rates. In
other words, it can be expressed as a to b; a: b (a is to b) or as a simple fraction, integer and
decimal. A ratio is calculated by dividing one item or figure by another item or figure.
Analysis or Interpretations of Ratios:
The analysis or interpretations in question may be of various types. The following approaches are
usually found to exist:
(a) Interpretation or Analysis of an Individual (or) Single ratio.
(b) Interpretation or Analysis by referring to a group of ratios.
(c) Interpretation or Analysis of ratios by trend.
(d) Interpretations or Analysis by inter-firm comparison.
28

Principles of Ratio Selection:

The following principles should be considered before selecting the ratio:

Ratio should be logically inter-related.

Pseudo ratios should be avoided.
Ratio must measure a material factor of business.
Cost of obtaining information should be borne in mind.
Ratio should be in minimum numbers.
Ratio should be facilities comparable.

EXPRESSING A RATIO:
1. In simple(pure) number:
Ratio is quoted as quotient e.g. acid test ratio which expresses the relationship between
quick assets and current assets.
2. In percentage:
In this form, a quotient obtained by dividing one item by another is multiplied by 100 and
it becomes a percentage form of expression. For e.g. the relationship between gross profit
and sales may be 40%.
3. In rate or times of coefficient:
In this method ratio is expressed in number of times a particular figure is compared to
another figure. For e.g. cost of goods sold is 50,000 and average stock is 10,000, the ratio
of cost of goods sold to average stock will be 5 times.
4. In fraction:
It is expressed in fraction e.g. the ratio of fixed assets to current assets say 4/5 (0.80).

ADVANTAGES OF RATIO ANALYSIS:

The advantages derived by the use of accounting ratios are:
29

1) Useful in analysis of financial statements:

Bankers, investors, creditors, etc analysis balance sheets and profit and loss accounts by
means of ratios.

2) Useful in simplifying accounting figures:

Accounting ratio simplifies summarizes and systematizes a long array of accounting
figures to make them understandable. In the words of Biramn and Dribin, Financial
ratios are useful because they summarize briefly the results of detailed and complicated
computation

3) Useful in judging the operating efficiency of business:

Accounting Ratio is also useful for diagnosis of the financial health of the enterprise. This
is done by evaluating liquidity, solvency, profitability etc. Such an evaluation enables
management to access financial requirements and the capabilities of various business
units.

4) Useful for forecasting:

Ratio analysis is helpful in business planning, forecasting. What should be the course of
action in the immediate future is decided on the basis of trend ratios, i.e., ratio calculated
for number of years.

Limitations of Ratio Analysis:

Ratio analysis is one of the important techniques of determining the performance of financial
strength and weakness of a firm. Though ratio analysis is relevant and useful technique for the
business concern, the analysis is based on the information available in the financial statements.
There are some situations, where ratios are misused; it may lead the management to wrong
direction. The ratio analysis suffers from the following limitations:
Ratio analysis is used on the basis of financial statements. Number of limitations
of financial statements may affect the accuracy or quality of ratio analysis.
Ratio analysis heavily depends on quantitative facts and figures and it ignores
qualitative data.
Therefore this may limit accuracy.
Ratio analysis is a poor measure of a firm's performance due to lack of adequate
standards laid for ideal ratios.
30

 It is not a substitute for analysis of financial statements. It is merely used as a tool

for measuring the performance of business activities.
Ratio analysis clearly has some latitude for window dressing.
It makes comparison of ratios between companies which is questionable due to
differences in methods of accounting operation and financing.
Ratio analysis does not consider the change in price level, as such; these ratios
will not help in drawing meaningful inferences.

ANALYSIS
31

1. CURRENT RATIO:
Current Ratio = Current Assets/ Current Liabilities
YEAR
CURRENT
ASSETS
CURRENT
LIABILITY
CURRENT
RATIO

2008-09

2009-10

2010-11

6306313319

5079375378

4438538139

7304056872

8213664274

8423481867

0.86

0.61

0.52

CURRENT RATIO
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

CURRENT RATIO

INFERENCES:
From the above bar graph it is evident that the current ratio indicates the liquidity of current
assets or ability of business to meet its maturing current liabilities. In the year 2008-09,200910,2010-11 the current ratio is 0.86,0.61,0.52 respectively. This shows the unhealthy position of
organization. As a concern 2:1 is regarded as satisfactory level for an organization.

2. QUICK RATIO:
Quick assets=quick assets/current liability
YEAR
QUICK ASSETS*
CURRENT
LIABILITY
QUICK RATIO
32

2008-09
252232668
20
730405687
2
3.45

2009-10
343758813
0
821366427
4
0.41

2010-11
4033771839
8423481867
0.47

*Quick Assets = Cash& bank balance+ other current assets+ loans and advances-{stores& spares+ sundry debtors}

33

QUICK RATIO
4
3.5
3
QUICK RATIO

2.5
2
1.5
1
0.5
0
1

INFERENCES:
From the above bar graph it is evident that the quick ratio in the year 2008-09,2009-10,2010-11is
3.45,0.41,0.47respectively which indicates it is drastically falling in this significant years. Which
is lower than the ideal ratio 1:1 it indicates that the company relies too much on inventory or
other assets to pay its short-term liabilities.

3. DEBT EQUITY RATIO:

Debt equity ratio = long term debt/shareholder fund
YEAR
TOTAL DEBT
SHARE CAPITAL
DEBT-EQUITY
RATIO

34

2008-09
1311659720
7

2009-10
1030905809
0

2010-11
9188577750

6362931826

7705921950

8675204648

2.06

1.33

1.05

DEBT-EQUITY RATIO
2.5
2
DEBT-EQUITY RATIO

1.5
1
0.5
0
1

INFERENCES:
From the above bar graph it is evident that in the year 2008-09,2009-10,2010-11the
organizations debt-equity ratio is declining from 2.06,1.33,1.05 respectively.The low debt ratio
indicates that the organization should maintain a proper debt-equity. The prescribed ratio is
limited to 2:1.

4. PROPRIETARY RATIO:
Proprietary ratio = shareholder fund/total assets
YEAR
SHARE CAPITAL
TOTAL ASSETS
PROPRIETARY
RATIO

35

2008-09
6362931826

2010-11
8675204648

13116597207

2009-10
7705921950
1030905809
0

0.48

0.74

0.94

9188577750

PROPRIETARY RATIO
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

PROPRIETARY RATIO

INFERENCES:
From the above bar graph it is evident that the higher proportion of shareholders fund in
financing the assets is positive feature as it provides security to creditors. This ratio can also be
computed in relation to total assets in lead of net assets (capital employed).In the year 200809,2009-10,2010-11 the proprietary ratio is 0.48,0.74,0.94 respectively. It may be noted that the
total debt ratio and proprietary ratio will be equal to 1.

5. RATIO OF CURRENT LIABILITY TO PROPRIETARY FUND:

Ratio of Current Liability to Proprietary fund = current liability/shareholder
fund
Year
CURRENT LIABILITY
SHARE HOLDER FUND
RATIO OF PROPRIETARY
FUND

36

2008-09

2009-10

2010-11

7304056872
6362931826

8213664274
7705921950

8423481867
8675204648

1.14

1.06

0.97

RATIO OF PROPRIETARY FUND

1.2
1.15
1.1

RATIO OF PROPRIETARY
FUND

1.05
1
0.95
0.9
0.85
1

INFERENCES:
From the above bar graph it is evident that the higher the ratio, the greater risk will be associated
with the firm's operation. In addition, high debt to assets ratio may indicate low borrowing
capacity of a firm, which in turn will lower the firm's financial flexibility.In the year 200809,2009-10,2010-11 the ratio of proprietary fund of the organization is 1.14,1.06,0.97
respectively.The above ratios are decreasing gradually. If the ratio is less than 0.5, most of the
company's assets are financed through equity. If the ratio is greater than 0.5, most of the
company's assets are financed through debt. Low ratio provides security to creditors and high
ratio helps management in trading on equity.

6. CASH RATIO:
Cash ratio = absolute liquid assets/current liability
YEAR
ABSOLUTE LIQUID
ASSETS
CURRENT LIABILITY
CASH RATIO

37

2008-09
907019750
7304056872
0.12

2009-10
727106129
8213664274
0.08

2010-11
579433119
8423481867
0.06

CASH RATIO
0.14
0.12
0.1

CASH RATIO

0.08
0.06
0.04
0.02
0
1

INFERENCES:
From the above bar graph it is evident that the optimum value for this ratio should be one, i.e.,
1: 2. In the year 2008-09,2009-10,2010-11 the cash ratio is 0.12,0.08,0.06 respectively.If the ratio
is relatively lower than one, it represents that the company's day-to-day cash management is
poor.

38

FINDINGS OF DATA

Ratio analysis is used to evaluate relationships among financial statement items. The ratios are
used to identify trends over time for one company or to compare two or more companies at one
point in time. Financial statement ratio analysis focuses on three key aspects of a business:
liquidity, profitability, and solvency.
After analyzing from the data collected from the company and a conclusive test is done.
Liquidity ratio is calculated to know about the short term solvency of business. From liquidity
ratio, current ratio of the company is calculated. The current ratio should be always 2:1 but in
the year 2008-09 , 2009-10 & 2010-11 the current ratio is very low i.e. 0.86:0.61and 0.52
respectively. The position of the organization from the above data shows it is unhealthy.The
excess of current assets over current liabilities provides a measure of safety margin available
against uncertainty in realization of current assets and flow of funds. The company should try to
recover amount from sundry debtors.
As the quick ratio measures the ability to quickly liquidate assets or use cash on hand to
pay business obligations like suppliers, landlords, and taxes due. To improve this ratio and
ultimately the business are similar to the current ratio above. The goal is to generate cash through
your business without having to finance the growth (debt or payables). The quick ratio should
be in 1:1 ratio but it is lower 2009-10,2010-11is 0.41:1,0.47:1 respectively i.e. which implies; the
company relies too much on prepaid expenses and other assets to pay its short term liabilities.
But in the year 2008-09 it was 3.45:1.
Solvency ratio helps in interpreting capacity of business to make periodic payments of
interest, repay long term debt as per installments stipulated in contract. Debt equity ratio
measures the degree of indebtedness of an enterprise and gives an idea to the long term lender
regarding extent of security of the debt. The ratio is 2.06:1 in 2008-09 which is greater than the
standard debt equity ratio which is risky for the company as it may put the company in meeting
the obligations to outsiders. From owners perspective there is greater use of debt trading equity
which may help ensuring higher returns from them if rate of earnings on capital employed is
higher than the rate of interest payable. In the year the ratio is 2009-10 1.33:1 & in the year
2010-11 the ratio is 1.93:1 which indicates there should be more security of the debt.
There is higher proportion of shareholders fund that is Rs 6362931826, Rs7705921950 and
Rs 8675204648 in respective years in financing the assets is positive feature as it provides
security to the creditors. In the year 2008-09, 2009-10, 2010-11 the proprietary ratio is 0.48,
0.74, 0.94 respectively. It may be noted that the total debt ratio and proprietary ratio will be equal
to 1.

The ratio of current liability to proprietary fund during the year 2008-09, 2009-10, 2010-11
are 0.38,0.32,0.32, there is decrease in the ratio. If the ratio is greater than 0.5, most of the
company's assets are financed through debt.
39

The cash ratio of this company should be one, i.e.,1: 2. In the year 2008-09,2009-10,2010-11
the cash ratio is 0.12,0.08,0.06 respectively. If the ratio is relatively lower than one, it represents
that the company's day-to-day cash management is poor.
.

SUGGESTIONS
CURRENT RATIOThe current ratio should be always 2:1 but in the year 2008-09 , 2009-10 & 2010-11 the current
ratio is very low i.e. 0.86:0.61and 0.52 respectively. The position of the organization from the
above data shows it is unhealthy.
SUGGESTION:
The company should try to recover amount from sundry debtors.
The company should further reduce its current liability by paying off the
liabilities through long term funds.

QUICK RATIOThe quick ratio should be in 1:1 ratio but it is lower 2009-10,2010-11is 0.41:1,0.47:1
respectively i.e. which implies; the company relies too much on prepaid expenses and other
assets to pay its short term liabilities. But in the year 2008-09 it was 3.45:1.
SUGGESTION:

As the quick ratio measures the ability to quickly liquidate assets or use
cash on hand to pay business obligations like suppliers, landlords, and
taxes due. The company should try to improve this ratio.

DEBT EQUITY RATIODebt equity ratio measures the degree of indebtedness of an enterprise and gives an idea to the
long term lender regarding extent of security of the debt.
SUGGESTION:
The ratio is 2.06:1 in 2008-09 which is greater than the standard debt
equity ratio which is risky for the company as it may put the company in
meeting the obligations to outsiders. From owners perspective there is
greater use of debt trading equity which may help ensuring higher returns
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from them if rate of earnings on capital employed is higher than the rate of
interest payable. In the year the ratio is 2009-10 1.33:1 & in the year 201011 the ratio is 1.93:1 which indicates there should be more security of the
debt.

PROPRIETARY RATIOIn the year 2008-09, 2009-10, 2010-11 the proprietary ratio is 0.48, 0.74, 0.94 respectively.The
proprietary ratio is gradually increasing in the current years.
SUGGESTION:
o The organization proprietary ratio is significantly increasing in the above
mentioned years and it should put its maximum effort to bring it at par
with the ideal ratio.

RATIO OF PROPRIETARY RATIOThe ratio of current liability to proprietary fund during the year 2008-09, 2009-10, 2010-11
are 0.38,0.32,0.32, there is decrease in the ratio which is a positive sign for the organization.
SUGGESTION:

The organization should keep this ratio as minimum as possible.

CASH RATIOThe cash ratio of this company should be one, i.e.,1: 2. In the year 2008-09,2009-10,2010-11
the cash ratio is 0.12,0.08,0.06 respectively.
SUGGESTION:
To improve the cash ratio the company can resort to reduce its stores &
spares component and at the same time efficiently collect short term debt.

LIMITATIONS OF THE STUDY

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There may be limitations in the study because the study duration (summer placement) is very
short it is not possible to observe every aspects of ratio analysis.

CONCLUSION
42

OPTCL ranks one among the leading Transmission utilities in India.

Transmitting quality, reliable and secured power with minimum transmission
loss at a competitive price. Orissa pioneered Power Sector Reform with an
objective to unbundle generation, transmission and distribution and to
establish an independent and transparent Regulatory Commission in order to
promote efficiency and accountability in the Power Sector. Transmission
network need based is to be increased to meet the demand of the state in
2025. OPTCL should set planning standards for stock days, debtors and
creditor days.
An understanding among the staff should be instilled that proper ratio
analysis produces profit. The company should try to invest surplus cash in
some other profitable manner without keeping it idle.

BIBLIOGRAPHY
BOOKS:

1. C R Kothari, Research Methodology, 2nd Revised Edition, New

Age International Publishers, New Delhi.

43

2. R.K. Sharma & Gupta, A Textbook of Cost & Management

accounting, 4th Revised Edition, Roopak Printers, New Delhi.
3. V.K. Saxena & C.D. Vashist, 6th Revised Edition,Kalyani
Publishers, New Delhi.
4. S.N. Maheswari & S.N. Mittal, 3rd Revised Edition, Mahavir
Publications, New Delhi.
Website:
1. www.google.com retrieved on May/June, 2013
2. www.yahoo.com retrieved on May/June, 2013 and February,
2014
3. www.optcl.co.in/
4. http://www.readyratios.com/reference/liquidity/cash_ratio.html
5. http://my.safaribooksonline.com/book/accounting/9788131775097
/objective-5-liquidity-ratios/ch16_sub5_3_xhtml
6. http://en.wikipedia.org/wiki/Financial_ratio
7. http://www.prenhall.com/divisions/bp/app/cfl/RA/RatioAnalysis.h
tml
8. http://www.cliffsnotes.com/more-subjects/accounting/accountingprinciples-ii/financial-statement-analysis/ratio-analysis
Annual Report:
Annual Report and Accounts of OPTCL, Bhubaneswar for year 2008-09, 2009-10,
2010-11.

ANNEXTURE

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