Chapter: 9. Analysis o f total financial perform ance o f NTPC Ltd.
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1 Chapter: 9 Analysis o f total financial perform ance o f NTPC Ltd.
2 9.1 Evaluation o f relationship between the profitability o f NTPC Ltd. and its determ inants: The financial performance of the company depends upon so many factors. Traditionally, ultimate financial performance is indicated through profitability or earning capability of the company. In this chapter, an attempt has been made to evaluate the impact of various financial factors on the profitability of the company. Generally, profitability of an enterprise is influenced by the factors like efficiency of management of fixed assets as well as that of current assets, capital structure or leverage, liquidity etc. For this purpose, return on capital employed (ROCE) has been selected as the profitability measure of NTPC Ltd. In order to assess the impact of asset management on the profitability of the company six ratios have been selected. These are capital turnover Ratio (CTR), working capital turnover ratio (WCTR), fixed assets turnover ratio (FATR), inventory turnover ratio (ITR), debtors to sales ratio (DTSR) and market command ratio (MCR). Current ratio (CR) has also been worked out to judge the impact of liquidity on the profitability of the company under study. Two major capital structure ratios viz. debt-equity ratio (DER) and degree of financial leverage (DFL) have been chosen to find out the relationship between the capital structure and profitability of the concern. In Table 9.1 Karl Pearson s correlation coefficients have been calculated between ROCE and each of the selected nine ratios separately. In order to test whether the computed values of such coefficients are statistically significant or not, t test has been used. Table 9.1 shows that in the eighth plan period the ROCE was positively associated with the CR, CTR, WCTR, FATR, ITR and DFL. Among these correlation coefficients, the correlation between ROCE and CTR and that between ROCE and FATR were (+) and (+) respectively. They were found to 229
3 be significant at 0.05 and 0.01 levels respectively. The correlation coefficients between ROCE and CR, between ROCE and WCTR, between ROCE and ITR and between ROCE and DFL were (+) 0.748, (+) 0.335, (+) and (+) respectively. These four coefficients were not found to be significant at 0.05 level. In the same plan period the ROCE was negatively correlated with DTSR, DER and MCR. The correlation coefficients between ROCE and DTSR, between ROCE and DER and between ROCE & MCR were (-) 0,906, (-) and (-) respectively which were found to be significant at 0.05 level. So, the analysis of correlation reveals that in the eighth plan period fixed assets and capital were managed so efficiently that they had been able to make significant positive contribution towards improving the profitability of the company. But poor debtors management and low-geared capital structure impeded towards achievement of higher profitability. In the ninth plan period the correlation coefficient between ROCE and CR was (-) which was found to be significant at the 0.01 level. It is an accepted principle that the higher the liquidity, lower is the earning capability of the company. The computed value of correlation coefficient between CR and ROCE of NTPC Ltd. in the ninth plan period conform to the accepted principle. The correlation coefficients that changed their signs from positive to negative in the ninth plan period were the correlation coefficient between ROCE and ITR and that between ROCE and DFL. The values were (-) and (-) respectively. Other ratios like DTSR, DER, MCR were negatively associated with ROCE maintaining parity with the eighth plan period. The values of correlation coefficients between ROCE and DTSR, between ROCE and DER and between ROCE and MCR were (-) 0.226, (-) and (-) respectively. They were not found to be significant at 0.05 level. The ROCE was positively correlated with CTR, WCTR and FATR in the ninth plan period also. The values of correlation 230
4 coefficients between ROCE and CTR, between ROCE and WCTR and between ROCE and FATR were (+) 0.722, (+) and (+) respectively. They were found to be insignificant at 0.05 level. So, none of the ratios except CR put significant impact on the profitability of the company during the ninth plan period. For the entire study period taken as a whole, the seven ratios out of nine were significantly related with the ROCE. The positive correlation coefficients existed between the ROCE and CTR and between ROCE and FATR during the study period. The values had been (+) and (+) respectively which were found to be significant at 0.01 level. The correlation coefficient between ROCE and ITR was (+) which was found to be significant at 0.05 level. Though DTSR increased abruptly, but it could not put adverse impact on ROCE during the study period. The correlation coefficient between ROCE and DTSR was (+) Debt-Equity ratio had a negative impact on the profitability of the concern during the study period. The correlation coefficient between ROCE and DER was (-) and it was found to be significant at 0.01 level. MCR, DFL and WCTR were also negatively associated with the ROCE during the entire period under study. The values of the correlation coefficients between ROCE and MCR, between ROCE and DFL and between ROCE and WCTR were (-) 0.739, (-) and (-) respectively. A ll these three correlation coefficients were found to be significant at 0.05 level. CR also had put negative impact on the profitability of the enterprise. Though a significant negative association between liquidity and profitability of the company was noticed during the ninth plan period, the negative effect of liquidity on profitability of the company mitigated to a large extent for the entire period. The value of correlation coefficient between ROCE and CR was (-) for the study period. But it was not found to be statistically significant at 0.05 level. 231
5 9.2 M easurem ent of Effect o f Fixed Assets M anagement and W orking Capital M anagem ent of NTPC Ltd. on its Overall Financial Perform ance The measures for assessing corporate performance are several. The most common ones are net profit ratio, return on investment, return on owners equity, etc. When the performance o f a business firm is measured using any one of these conventional yardsticks, the implied premise is that the firm exists, operates and grows only for its owners. But this concept does not match with the philosophy of the public enterprises. In fact, it has now become an obsolete one for enterprises belonging to the private sector. The modem corporate philosophy is that the beneficiaries of the company earnings are not only the shareholders or the suppliers of finance and labour, and the government. Each and every company generates its earnings through collective efforts of owners (shareholders), human resources (employees), providers of debt capital (lenders) and suppliers of infrastructural facilities (government). The contribution made by a business firm to the society and community cannot be assessed through the accounting profit-based measures of financial performance. Thus, the net earning-based ratios, conventionally applied in performance evaluation, caimot be considered as the only dependable measure o f performance. As a result, a considerable number of companies in developed countries and also a few in India, have adopted the Value- Added (VA) concept of income over the last 20 years or so, in addition to the traditional net profit-based measures forjudging their performance. In order to overcome the limitations of accounting profit-based measures of performance, the Accounting Standards Steering Committee (ASSC) of the UK published a discussion document entitled The Corporate Report in 1975, wherein the VA concept of income was first recognized as a theoretical alternative in the 232
6 context of measurement of the corporate performance. VA is the increase in market value resulting from an alteration in the form, location or availability of a product or service, excluding the cost of bought-in-materials and services. In other words, it is the excess of turnover over the cost of bought>in-materials and services. It also represents the wealth that the company has been able to generate on its own and by the efforts of its employees during the period. There are two alternative approaches to the measurement of the VA income of an enterprise: (1) Subtractive approach and (2) Additive approach. Under the first approach, the VA income of an enterprise is obtained by subtracting the cost of bought-in-materials and services from the value o f output produced by the enterprise during the period under consideration. In the second approach, the VA income is ascertained by adding the amounts payable to those who have taken part in the process of value creation. Thus, VA is computed by applying any one of the following two formulae: 1. Subtractive Approach VA = VOO- COT Where, VOO = Value of Output; and COT = Cost of Throughputs (Throughputs include all materials and services purchased from other firms) 2. Additive Approach: VA =RPE + RPC + GTS + ARB Where RPE = Remuneration Paid on Employees, RPC = Remuneration Paid to Capital Providers, GTS = Government Taxes, and ARB = Amounts Retained by the Business Enterprise for its Maintenance and Growth Computation of VA under the subtractive approach, involves the following steps: 233
7 Computation of Value of Output (VOO): Value of Output includes sales as well as income from services. Sales are the net of return, rebates, discounts, brokerage, etc., but the gross of excise duty and sales tax. Income from services represents revenue generated from the services rendered by the company. Ascertainment of Cost of Throughputs (COT): Cost o f throughputs refers to the acquisition cost of inputs in the form o f goods and services by the company from other firms. It is only the cost of those bought-in goods and services that have been used in producing sales for the period. Computation of Value Added (VA): If the value of output exceeds the cost of throughputs the value during the period of operation w ill be created and vice-versa. Computation of VA under the additive approach involves the following steps: Computation o f Remuneration Paid to Employees (RPE): It refers to the aggregation o f wages, salaries, bonus, gratuity, pensions and all other payments made to the employees. Determination of Remuneration Paid to Capital Providers (RPC): Interest on long-term debt capital, preference dividend and equity dividend paid are added up to arrive at RPC. Ascertainment o f Government Taxes (GTS): It represents the taxes of various kinds to be paid to the government. Computation o f Amounts Retained by the Business (ARB): Amounts retained by the business includes depreciation, retained earnings and deferred taxation. Determination of Value-Added (VA): Value-added generated by a firm is obtained by summing up the four kinds of payments made by it. 234
8 The computation methodology of VA mentioned here is not unique. A great deal of controversy always persists as to the treatment of depreciation and taxation. There are generally two alternative ways of treating depreciation in VA computation: Gross Value-Added (GVA) approach and Net Value-Added (NVA) approach. Under the GVA approach, as recommended by the Corporate Report (ASSC 1975), the excess obtained by deducting the COT from the VOO is not further reduced by the amount of depreciation. The rationale of this approach is that, like other items included in retained earnings, depreciation should be treated as an application for the maintenance and expansion o f business. In the NVA approach, depreciation charge is treated as an item o f cost and is included in the COT. Similarly, whether taxes are to be shown as the government s share or not, is a subject of controversy among accountants and academics. A large section of them opine that only the corporation tax less subsidies, if any, is to be treated as the government s share, while the amount of sales and excise duties paid on the value of inputs purchased from external agencies is a part of these throughputs. On the other hand, the sales and excise duties collected on the value of output sold are not treated as part of VA. The rationale of this treatment is that the government has no direct contribution towards the creation of wealth by the companies belonging to the private sector. However, the treatment should be just the opposite in case of public enterprises. In Table 9.2, an attempt has been made to analyze the joint effect of the turnover of the two most vital parts of the capital fund investment, viz working capital investment and fixed asset investment upon the financial performance of the company during the eighth and ninth plan periods separately and also for the entire study period. Multiple regression technique has been used for this purpose. While making the analysis of multiple regression value added to capital employed (VACE) ratio has been taken as the financial performance measure of NTPC Ltd. 235
9 The regression model that has been fitted in this study is: VACE =a +Pi WCTR + 32 FA IR where a is the value of intercept term and and p2 are the partial regression coefficients. The partial regression coefficients have been tested by t test. Table 9.2 shows that for one unit increase in WCTR, the VACE of NTPC Ltd. increased by units in the eighth plan period which was not found to be significant at.05 level. When FATR increased by one unit, the VACE of the company improved by units in the same plan period which was found to be significant at 0.05 level. Thus, the net outcome of the multiple regression analysis in the eighth plan period reflects that only fixed assets management o f NTPC Ltd. contributed significantly towards improving its overall financial performance. In the ninth plan period the partial regression coefficient of VACE on WCTR and that of VACE on FATR were and respectively. Both the coefficients were found to be significant at 0.05 level. Thus, it implies that the management of both working capital and fixed assets of the company made positive as well as notable contribution towards enhancing its overall financial performance. For the entire study period, the value of regression coefficients Pi and P2 were and respectively which were found to be significant at,05 level and.01 level respectively. This result indicates that the influences of working capital management and fixed assets management of the company on its overall financial performance were noticeable during the period under study. 236
10 References Gour, A S and Gour S S (2006), S tatistical methods fo r practice and research: a guide to data analysis using SPSS, New Delhi, Response Books, ppl Levin, I R and Rubin D S (1997), Statistics fo r management. New Delhi, Prentice-Hall o f India Pvt. Ltd., pp
11 TABLE 9.] ANALYSIS OF PEARSON S SIMPLE CORRELATION BETWEEN THE SELECTED PROFITABILITY MEASURE AND RATIOS INDICATING LIQUIDITY, LEVERAGE AND EFFICIENCY IN ASSETS MANAGEMENT OF NTPC LTD. Eighth plan period CR CTR WCTR FATR ITR DTSR DER DFL MCR * ** * * * Ninth Plan period ** Entire study Period ** * 0.820** 0.689* ** * * * Significant at the 0.05 level; ** Significant at the 0.01 level Source: Compiled and computed from Published Annual Reports of NTPC Ltd. for the period to
12 Variable WATR Variable FATR TABLE 9.2 NTPC LTD. MULTIPLE REGRESSION ANALYSIS REGRESSION EQUATION OF VACE ON WATR AND FATR: Partial VACE =a +pi WCTR + p2 FATR Eighth Plan period Ninth Plan period Study Period Regression Co-efficient t value Partial Regression Co-efficient t value Partial Regression Co-efficient t value * * * * ** Constant (-) (-) (-) (-) (-) (-) * Significant at the 0.05 level; ** Significant at the 0.01 level Source: Compiled from the Annual Reports of NTPC Ltd. for the period
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