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GMR ENERGY LIMITED

ANALYSIS OF FINANCIAL STATEMENT USING


RATIO ANALYSIS OF “GMR ENERGY LIMITED”

A project study submitted to Bangalore University in


partial fulfillment of the requirement for the Award of the
degree of
Bachelor of Business Management

Submitted by
Thatavarthy Swetha Sri
Reg No: 05BUC08 114

Under the Guidance of


Ms. Pavithra S.T
Faculty, RVIM

2007 - 2008

RSST
SSMRV College
R.V.INSTITUTE OF MANAGEMENT
JAYANAGAR 4th ‘T’ BLOCK

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GMR ENERGY LIMITED

CERTIFICATE

This is to certify that Ms. Thatavarthy Swetha Sri is a bonafide


Student of this Institution studying in Final Year BBM Programme
Bearing Reg.No. 05BUCO8114.

This is to certify that her project work entitled “Analysis of


Financial Statement Using Ratio Analysis”, is in partial
fulfillment of the award of Bachelor of Business Management
Degree of Bangalore University under guidance of
Ms. Pavithra S.T, faculty, R.V.I.M.

This report does not form a part of any other degree/diploma of


Bangalore University or any other university.

Ms. Pavithra S.T. Dr. T. V. Raju


Programme Co-ordinator Director

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GMR ENERGY LIMITED

GUIDE CERTIFICATE
This is to certify that Ms. Thatavarthy Swetha Sri, has
satisfactorily completed her project work on “Analysis of
Financial Statement using Ratio Analysis” under my guidance
and supervision.
This project study is being submitted in partial fulfillment of
the requirements for the award of the degree of Bachelor of
Business Management by the Bangalore University.

Date: Ms. Pavithra S.T


Place: Bangalore (Project Guide)

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GMR ENERGY LIMITED

DECLARATION

I, Thatavarthy Swetha Sri, bearing Reg. No. 05BUC08114,


hereby declare that the report titled ‘Analysis of financial statement
using Ratio Analysis’ is submitted to Bangalore University in
partial fulfillment of the requirement for the award of Bachelor of
Business Management under the guidance and supervision of
Ms.Pavithra S.T faculty, R.V.I.M, Bangalore.
This is an original study done by me and no part is taken from
any other reports or material or otherwise submitted earlier to any
college or university.

Date:
Place: Bangalore

Thatavarthy Swetha Sri

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GMR ENERGY LIMITED

ACKNOWLEDGEMENT
I consider this as my privilege to express a few words of gratitude
and respect to all those who contributed for the completion of my
project.
I acknowledge my sincere thanks to Dr. T.V. RAJU the Director of
RVIM for his kind co-operation and encouragement.
I owe much to the pioneer internal guide, Ms. Pavithra S.T, faculty,
RVIM for the valuable guidance and assistance for the successful
accomplishment of the project work.
It gives me immense pleasure to take the opportunity to thank
Ms. SHILPA SHANBAG and Mr. SHRIRAM at GMR Energy
Limited, Bangalore, for guiding me and helping me at every step of
the project.
I also extend my heart felt thanks to all those who have contributed
towards the project directly and indirectly.

PLACE : Bangalore

DATE : THATAVARHTY SWETHA SRI

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CONTENETS
CHAPTER TOPIC PAGE NO.
1 INTRODUCTION 10-36
• Financial Statements
• Ratio Analysis
• Classification Of Ratios
2 RESEARCH METHODOLOGY 37-40
• Statement Of Problem
• Need For The Study
• Objectives Of The Study
• Scope Of the Study
• Data Collection
• Limitations Of The Study
3 COMPANY PROFILE 41-49
• GMR Group
• Businesses
• GMR Energy Limited
• Organizational Structure
4 DATA ANALYSIS AND INTERPRETATION 50-78
• Liquidity Ratios
• Leverage Ratios
• Profitability Ratios
5 FINDINGS AND SUGGESTIONS 79-82
6 CONCLUSION 83-84
BIBLOGRAPHY 85-86
ANNEXURES 87-99

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CONTENT OF TABLES

SL.NO TITLE OF TABLES PAGE NO.

O1 CURRENT RATIO 51

02 WORKING CAPITAL TURN OVER RATIO 53

03 FIXED ASSETS TURNOVER RATIO 55

04 DEBT EQUITY RATIO 57

05 PROPRIETARY RATIO 59

06 GROSS PROFIT RATIO 61

07 NET PROFIT RATIO 63

08 OPERATING RATIO 65

09 RETURN ON SHAREHOLDER’S FUND 67

10 RETURN ON EQUITY 69

11 RETURN ON ASSETS 71

12 CASH PROFIT RATIO 73

13 ADMINISTRATIVE EXPENSE RATIO 75

14 TOTAL ASSET TURNOVER RATIO 77

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CONTENT OF GRAPHS

SL.NO TITLE OF GRAPHS PAGE NO.

O1 CURRENT RATIO 51

02 WORKING CAPITAL TURN OVER RATIO 53

03 FIXED ASSETS TURNOVER RATIO 55

04 DEBT EQUITY RATIO 57

05 PROPRIETARY RATIO 59

06 GROSS PROFIT RATIO 61

07 NET PROFIT RATIO 63

08 OPERATING RATIO 65

09 RETURN ON SHAREHOLDER’S FUND 67

10 RETURN ON EQUITY 69

11 RETURN ON ASSETS 71

12 CASH PROFIT RATIO 73

13 ADMINISTRATIVE EXPENSE RATIO 75

14 TOTAL ASSET TURNOVER RATIO 77

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1. INTRODUCTION

Finance is the life blood of business. It is rightly termed as the science of


money. Finance is very essential for the smooth running of the business.

According to Wheeler, “Finance is that business activity which is


concerned with the organization and conversation of capital funds in meeting
financial needs and overall objectives of a business enterprise.”

Financial management is that managerial activity which is concerned with


the planning and controlling of a firm financial reserve. Financial management as
a academic discipline, has undergone fundamental changes as regards its scope
and coverage. In the early years of its evolution it was treated synonymously with
the raising of funds. In the current literature pertaining to this growing academic
discipline, a broader scope so as to include in addition to procurement of funds,
efficient use of resources is universally recognized.

Financial analysis can be defined as a study of relationship between many


factors as disclosed by the statement and study of the trend of these factors.

The basis for financial planning, analysis and decision-making is the


financial information. Financial information is needed to predict, compare and
evaluate the firm’s earning ability. It is also required to aid in economic decision
making investment and financing decision making. The financing information of
an enterprise is contained in the financial statements or accounting reports.

The financial analysis process is identifying the financial strengths and


weakness of the firm by properly establishing relationships between the items of
the balance sheet and profit and loss account. It is the study of the performance

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of the unit and therefore is aimed at the financial performance in an individual


unit.

This is therefore aimed at analyzing the performance and trend and the
areas of strengths and weakness and the financial strength of the firm in its
environment.

The objective of financial analysis is the analyzing of strength and


weakness of a business undertaking by regrouping and analysis of figures
obtained from a financial statement and balance sheet by the tools and
techniques of management accounting. Financial analysis is regarded as the
final step of accounting that results in the presentation of final and the exact data
that helps the business managers, creditors and investors.

In the financial analysis a ratio is used as an index for evaluating the


financial position and performance of the firm. The absolute accounting figures
reported in the financial statement do not provide a meaningful understanding of
the performance and the financial position of a firm. But the accounting figures
convey the meaning when it is related to some other related information for
example Rs.5 Crores net profit may look impressive, but the firms performance
can said to be good or bad only when net profit figures is related to the firm’s
investment.

FINANCIAL STATEMENTS:

Financial statements contain summaries, information of the firm’s financial


affairs, organized systematically. They are the means to present the firm’s
financial situation to the users. Preparation of the financial statements is the
responsibility of top management. As these statements are used by investors,
and financial analysts have to examine the firm’s performance in order to make

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investment decisions, they should be well prepared and should have sufficient
information.

The basic financial statements prepared for the purpose of external


reporting to owners, investors and creditors are

1. Balance sheet or statement of financial position, and


2. Profit and loss account or income statement.

RATIO ANALYSIS:

Ratio analysis is the most used tool of analysis. A ratio is quotient of two
numbers and is expression of relationship between the figures or two amounts. It
indicates a quantitative relationship, which is used for qualified judgment and
division making. The relationship between two accounting figures is known as
ratio. These ratios may be compared with the previous year or base year ratios of
the same firm.

A comparison may also be made with the selective firms in the same
industry i.e. inter-firm comparison. Ratio analysis is useful to share holders,
creditors and executives of the company.

British institute of management has classified the ratios into two


categories- Primary Ratio and Secondary Ratios.

Relationship between profits and capital employed are primary ratios.

Secondary ratios give the information about the financial position and
capital structure of the company. Liquidity ratios and leverage ratios are the
secondary ratios.

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Ratio analysis is a powerful tool of financial analysis it is one of the


statistical yardsticks that provide relationships between two accounting figures.
Ratio analysis of financial statements refers to the process determining and
presenting the relationship of items and group of items in the statement.
Ratios may be expressed in 3 forms:

a) As a quotient 1:1 or 2:1 etc.


b) As a rate i.e. inventory turnover as number of times in a year.
c) As a percentage.

With the help of ratio analysis, conclusions can be drawn regarding the
liquidity position of a firm. The liquidity position of a firm will be satisfactory if it is
able to meet its current obligations when they become due. A firm can be said to
have the ability to meet the short term liabilities if it has sufficient liquid funds to
pay the interest on its short term liabilities if it has sufficient liquid funds to pay
the interest on its short-making debt usually with in a year as well the principal.
The ability is reflected in the liquid ratios of a firm. The liquid ratios are
particularly useful in credit analysis by banks and other suppliers of short term
loans.

Ratio analysis not only throws light on the financial position of a firm but
also serves as a stepping-stone to remedial measures. This is made possible
from inter-firm comparison with industry averages. An inter-firm comparison
would demonstrate the relative position vis-à-vis its competitors. If the results are
at variance either with the industry overage or with those of the competitors, the
firm can seek to identify the probable reasons and, in that light, take remedial
measures.

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OBJECTIVES OF RATIO ANALYSIS:

The main objective of ratio analysis is to show the firms relative strengths
and weakness. The objectives of ratio analysis are as follows:
• It determines the financial condition and financial performance of the firm.
• It involves comparison for a useful interpretation of the financial statements.
• It helps in finding solutions to unfavorable financial statements.
• It helps to take suitable corrective measures when the financial conditions
and performance are unfavorable to the firm, in comparison to other firms in
the same industry.
• With the help of this analysis, an analyst can determine the
! The ability of the firm to meet its obligations.
! The efficiency with which the firm is utilizing its various assets in
generating sales.
! The overall operating efficiency and performance of the firm.

NATURE OF RATIO ANALYSIS:

Ratio analysis is a technique of analysis and interpreting of financial


statements. It is the process of establishing and interpreting various ratios for
helping in making certain decisions. However, ratio analysis is not an end in
itself. It is only a means of better understanding of financial strengths and
weakness of any institution. The following are the steps involved in ratio analysis:
1. Selection of relevant data from the statements depending upon the
objective of the analysis.
2. Calculation of appropriate ratios from the above data.
3. Comparison of the calculated ratios with the past ratios of the same
institute, or with the ratios developed from projected financial statements, or the
ratios of some other institution.
4. Interpretation of ratios.

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ADVANTAGES OF RATIO ANALYSIS:


There are several advantages of ratio analysis. Some of them are:

1) Helps in financial performance analysis: Ratio analysis is very powerful


tool for financial performance analysis. Ratio analysis answers various questions
relating to companies profitability, assets utilization, liquidity, financing strategies,
capabilities etc.

2) Helps in credit analysis: Ratio analysis reveals the credit worthiness of a


firm. Creditors are always interested to know whether the liquidity position of the
firm is sound or not. Only those companies, whose liquidity position is sound, will
be able to repay the loans and survive in the long run.

3) Helps in security analysis: Ratio analysis also helps in security analysis.


The major focus in security analysis is on the long-term profitability, which
depends on a number of factors. In this the efficiency with which the firm utilizes
its assets and the financial risk to which the firm is exposed are also studied.

4) Helps in planning: Ratio Analysis helps in planning and forecasting over a


period of time. A firm or industry has certain norms that may indicate future
success or failure.

5) Simplifies Financial Statement: Ratios analysis simplifies the


comprehension of financial statements. Ratio tells the whole story of changes in
the financial condition of the business.

6) Facilities Inter Firm Comparison and Trend Analysis: It provides data for
inter firm comparison and trend analysis ratio and highlights the factors
associated with successful and unsuccessful firms. They also reveal strong firms
over value and under value firm.

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LIMITATION OF RATIO ANALYSIS:

The ratio analysis is a widely used technique to evaluate the financial


position of business. But there are some certain problems in using ratios. The
analyst must be aware of these problems. The following are some of the
limitations of ratio analysis.

1) Difficulty in comparison: - One serious limitation of ratio analysis arises


out of the difficulty associated with their comparison to draw inferences.

This may be due to the following:

• Differences in the basics of inventory valuation.

• Different depreciation methods.

• Estimated working life of assets particularly of plant and equipment.

• Amortization of intangible of assets like good will patents and so on.

• Amortization of deferred revenue expenditure such as preliminary


expenditure and discount on issue of shares.

• Treatment of extraordinary items of income and expenditure and so


on.

2) Impact of Inflation: - The second major limitation of ratio analysis is


associated with price level changes. This impact is a weakness of traditional
statements that are based on historical costs.

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3) Conceptual Diversity: - Another factor that affects the usefulness of


ratios is that there is difference of opinion regarding the various concepts used to
compute the ratios.

4) The ratios are generally calculated from past financial statement and thus
are no indicators of future.

1.3 CLASSIFICATION OF RATIOS:

There are three main types of ratios, namely liquidity ratio, leverage ratios
or capital structure, profitability ratio. The ratios in each of these types are as
shown below:

LIQUIDITY RATIOS:
! Current ratios
! Liquid ratio or quick ratio
! Working capital ratio
! Inventory turnover ratio
! Debtors turnover ratio
! Creditors turnover ratio
! Fixed assets turnover ratio

LEVERAGR RATIOS:
! Debt equity ratio
! Proprietary ratio
! Capital gearing ratio
! Interest coverage ratio
! Total or overall coverage ratio

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PROFITABILITY RATIO:
! Gross profit Ratio
! Net profit Ratio
! Operating Ratio
! Return on Investment
! Return on share holders Equity
! Return on Equity capital

LIQUIDITY RATIOS:

The term liquidity refers to the firm's ability to meet its current liabilities. A
firm should ensure that it does not suffer from lack of liquidity and that it is not too
highly liquid. The failure of a firm to meet its obligations due to lack of sufficient
liquidity will result in closure of the firm. A very high degree of liquidity is also bad
as idle assets earn nothing. The firm's funds will necessarily get locked up in the
current assets. Therefore it is necessary to strike a proper balance between
liquidity and non-liquidity. The ratios which reflect the short term solvency of a
business unit are current ratio, quick ratio, working capital, turn over ratio, stuck
turn over ratio, debtors turn over ratio, creditors turn over ratio, fixed assets turn
over ratio etc.

Current Ratio:

Current ratio is defined as the ratio of current assets to current liabilities. It


shows the relationship between total current assets and total current liabilities. It
is a measure of the firm's short-term solvency. Current ratio is also called working
capital ratio. It is calculated as follows:
Current assets
Current ratio = -------------------------

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Current liabilities

Significance of Current ratio:

Current ratio is an index of the firm's short-term solvency. In other words, it


is the index of the strength of working capital. The higher the current ratio, the
greater is the firm's ability to meet its short-term debts. Usually a high current
ratio indicates that funds are not being economically used in the firm. There may
be exclusive inventories or account receivable or large idle cash balance. Usually
a low current ratio indicates that the firm may have some difficulty in paying off its
debts. It is essential that a firm should have a reasonable current ratio.

Interpretation:

Conventionally a current ratio of 2:1 is considered satisfactory. The higher


the current ratio the greater is the margin of safety. The larger the amount of
current assets in relation to current liabilities the more is the firms ability to meet
its current obligations.

Liquid ratio or quick ratio:

Liquid ratio is the ratio of liquids (quick assets) to current liabilities. It


establishes the relationship between quick assets and current liabilities. It is also
called acid test ratio.
Liquid assets
Liquid ratio = ------------------------
Current liabilities
Where liquid assets = current assets – stock

Significance of liquid ratio:

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Quick ratio is considered to be superior to current ratio in testing the


liquidity position of a firm. An asset is liquid if it can be converted into cash
immediately or within a reasonable time without loss of value. Cash is the most
liquid asset. The other assets that are considered to be relatively liquid and are
included in the quick assets are book debts and marketable securities. Stock or
inventory and prepaid expenses are considered to be less liquid.

When used in conjunction with current ratio, the liquid ratio gives a better
picture of the firm's liquidity.
Interpretation:

A quick ratio of 1: 1 is considered ideal. It is considered that if quick assets


are equal to current liabilities then the firm can meet its current obligation.

Working capital turnover ratio:

Working Capital is the excess of current assets over current liabilities. This
ratio is computed to test the efficiency with which the net working capital is
utilized. In other words, this ratio indicates whether working capital is effectively
used in making sales. It is calculated as follows:
Sales
Working capital turnover ratio = ----------------------------
Net working capital

A low working capital turnover ratio may reflect an inadequacy of working


capital and lower turnover of inventories or receivables. A high ratio may be the
result of high turnover of inventories or receivables.

Current assets mean cash or those assets, which can. be converted into
cash within a year, current assets normally include cash in hand and at bank,
marketable securities, stock, sundry debtors, bills receivable and prepaid

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expenses. Current liabilities are those, which are to be repaid within a year.
Current liabilities include sundry creditors, bill payable, bank overdraft, and
provision for taxation.

Interpretation:

There is no standard or ideal set for working capital turnover ratio. But one
can say that a higher working capital turn over ratio indicates the efficiency of the
management in the utilization of the working capital.

Inventory turnover ratio:

Inventory turnover ratio is also known as stock turnover ratio. This ratio
indicates the number of times the inventory is replaced during the year. It shows
the rate at which inventories are converted in to sales and then into cash. It
establishes the relationship between cost of goods sold and average inventory.
Besides, it helps determine the liquidity of a business concern. It is computed as
follows:

Cost of goods sold


Inventory Turnover Ratio = --------------------------------
Average inventory

365
Inventory holding period (days) = -------------------------------------
Inventory turnover ratio

Significance of Inventory Turn over Ratio:

It measures the velocity of the conversion of stock into sales. A high


inventory turnover indicates

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Interpretation:

It measures the velocity of the conversion of stock into sales. A high


inventory turnover indicates efficient management of inventory and low inventory
turnover indicates inefficient management of inventory. No standards for
inventories are laid down.

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Debtors turnover ratio:

Debtor's turnover ratio is also called as receivable turnover ratio. It relates


net credit sales to sundry debtors. The ratio indicates the relationship between
the sales and debtors of a firm. It is a test of the liquidity of the debtors of firm.
It is calculated as follows:

Net credit sales


Debtors turn over ratio = -----------------------------------------------
Debtors including bills receivables

Where net credit sales = credit sales – returns

The second ratio is the average collection period ratio. It brings out the
nature of firm’s credit policy and the quality of the debtors more clearly.
This ratio is calculated as:

Debtors x Number of days in a year


Average collection period = ------------------------------------------------------
Credit sales per day

The term debtor for this ratio is the debtors plus bills receivables at the
end of the accounting period. Sometimes the ratio is computed by taking the
overage of opening and closing debtors. It should be remembered that provision
for bad and doubtful debts should not be deducted from debtors. When the credit
sales are not given the total sales may be used.

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Significance of debtors turnover ratio:

The debtor turnover ratio indicates the quality of debtors by measuring the
rapidity or slowness in the collection process. A shorter collection period (on
higher turn over ratio) indicates prompt payment of debtors while a longer period
(lower turnover ratio) indicates the inefficiency of the credit collection.

Interpretation:

There are no fixed norms for this ratio. As a rule higher ratio indicates
better efficiency.

Creditors turnover ratio:

Creditor’s turnover ratio is the ratio between net credit purchase and the
amount of sundry creditors. It implies the credit period enjoyed by the firm in
paying its creditors.
It is computed by use the following formula:

Net credit purchases


Creditors turnover ratio = ----------------------------------------------------
Sundry creditor’s bills payable

Where Net credit purchases = credit purchase – purchase return.

The terms creditors for this ratio is the amount plus bills payable at the
end of the accounting period. Some times the ratio is computed by taking the
average of opening and closing creditors. The creditors turnover ratio may also
be expressed in days. Then it is known as creditors payment period or creditors
velocity.

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No. of days in a year


Creditors velocity = -------------------------------------- x 365 days
Net credit purchase

Significance of creditors turnover ratio : -

This ratio reflects whether terms of credit allowed by suppliers are liberal
or stringent. A high creditors Turnover ratio (shorter period) shows that creditors
are being paid promptly; while a low turn ratio (longer period) reflects liberal
credit terms granted by suppliers.

Fixed Assets Turnover Ratio:

Fixed assets turn over ratio shows the relationship between sales and
fixed assets. It shows whether fixed assets are fully utilized, to be clearer,
This ratio measures the efficiency with which a firm is utilizing its fixed assets in
generating its sales.

It is computed as follows:

Sales
Fixed Assets Turn over Ratio = -----------------------
Fixed Assets

The term fixed assets for this ratio is the depreciated value i.e. the amount
of depreciation is deducted from the value of fixed assets.

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Significance of fixed Assets Turnover Ratio:

This ratio measures the efficiency in the utilization of fixed assets. A high
ratio reflects over trading. On the other hand, a lower ratio indicates idle capacity
and excessive investment in fixed assets.

Net sales
Fixed assets turnover ratio = -----------------------------
Fixed assets

Interpretation:

There cannot be any norms for these ratios. But as rule, a higher turnover
indicates better utilization.

LEVERAGE RATIOS:

As already observed, the short-term creditors like banks and suppliers of


raw materials are interested in the short-term solvency of a firm. For the analysis
of short-term solvency or the current financial position, liquidity ratios are used.
The shareholders, debenture holders and other long-term creditors like financial
institutions are more interested in the long- term financial position or long term
solvency of a firm. Leverage or solvency ratios are used for such an analysis.
These ratios are also used to analyze the capital structure of a company. That is
only these are also called capital structure ratios. The term solvency generally
refers to the firm ability to pay the interest regularly and repay the principal
amount of debt on due date.

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There are two aspects of long-term solvency of a firm:


1. Ability to repay the principal amount of loan on the due date and
2. Regular payment of interest.

Accordingly, there are two types of leverage ratios. The first type of leverage
ratios is based on the relationship between owned capital and borrowed capital.
These ratios are calculated from the balance sheet items. The second type of
leverage ratios is coverage ratios. These are computed from the profit and loss
account.

Debt-Equity Ratio:

Debt-equity ratio shows the relationship between total debts and owned
capital. It is the ratio of the amount invested by outsides to the amount invested
by the shareholders. It is known as ‘External-internal Equity ratio’. This ratio
reflects claims of shareholders and creditors against the assets of a company
alternatively; this ratio indicates the relative proportion of debt and equity in
financing the assets of a company.

It may be expressed as follows:

External Equity Outsides fund


Debt-equity ratio = ------------------------ or ---------------------------
Internal Equity Shareholders funds

The term external equity refers to total outside liabilities or borrowed funds.
Outside liabilities include all debt whether long term or short term. Internal equity
or shareholders funds include equity share capital, preference share capital and
reserves and surpluses. Internal equity is equal to net worth.

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Significance of debt- Equity Ratio:-

This ratio is one of the most important measures of long-term solvency. It


reflects the relative contributions of creditors and owners of business in its
financing. It is an index of the degree of protection the creditors have a high ratio
shows that the creditors have invested more in the business than the
shareholders. Liquidity or quick assets include cash, bank balance debtors, and
bills receivable and short-term marketable securities. In order words they are
current assets minus stocks and prepaid expenses stock cannot be include in
quick assets because it is not easily and readily convertible into cash. Prepaid
expenses by their very nature cannot be used for payment of quick liabilities.
Current liabilities taken after deducting that it tends to become a permanent
mode of financing.

Interpretation:

A ratio of 1:1 is considered to be a satisfactory ratio, although there cannot


be a standard norm for all types of businesses.

Proprietary Ratio:

This ratio establishes the relationship between shareholders funds and


total assets financed by shareholders. This is variant of the debt-equity ratio. This
ratio establishes the relationship between shareholders funds and total assets. It
indicates the proportion of total assets financed by shareholders. It is usually
computed as a percentage. It is computed as follows:

Share Holders funds


Proprietary Ratio = -------------------------------------------X100
Total assets or Total resources

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Shareholder’s funds include equity share capital, preference share capital


and all reserves and surpluses. Total assets include all assets including goodwill.

Significance of proprietary Ratio:

Like debt-equity ratio, proprietary ratio gives results relating to capital


structure of a company. It reflects the general financial strength of the company.
It enables the creditors to find out the proportion of shareholders funds in the
total assets. A high proprietary ratio indicates a relatively favorable position to the
creditors at the time of liquidation. On the order hand, a low ratio indicates risk to
creditors.

Interpretation:

As proprietary ratio presents a relationship of owner’s funds to the total


assets, the higher the ratio or the share of the shareholders in the total capital of
the firm better is the long-term solvency position of the firm.

Capital Gearing Ratio:

This is one of the important ratios used to analyze the capital structure of
a company. The term capital gearing refers to the proportion b/w fixed income
bearing funds and equity shareholders funds. Fixed income bearing funds
include. Debentures other long term loans and preference share capital. Equity
shareholders funds include equity capital and all reserves and surplus that
belong to equity shareholders. Preference share carry a fixed rate of dividend on
equity shares and are notified.

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Fixed income bearing funds


Capital gearing ratio = ---------------------------------------------------------
Equity shareholders funds

Where Fixed income bearing funds = preference share capital + debentures


+Long terms

Significance of Capital gearing ratio:

Capital gearing ratio reveals the company capital structure. This ratio is
important not only to the company but also to investors. The capital gearing ratio
may affect the company dividend policy building up of reserves etc. this ratio
shows the effects of use of fixed interest dividend funds on the profits available to
equity shareholders.

Interpretation:

If the preference share capital and other fixed interest bearing loans
exceed the equity share capital and reserve then, the firm is highly geared and
vice versa. Usually both are not preferred. A firm must be evenly geared.

Profitability Ratio:

The ultimate aim of any business enterprise is to earn maximum profit.


Lord keens remarked “profit is the engine that drives the business enterprise” a
firm should earn profits to survive and grow over a long period of time. To the
management profit is the measure of efficiency and control. To the owners it is to
measure of worth of their investment. To the creditors, it is the margin of safety.
The management of the company should know how efficiently they carry on
business operations. In order words, the management of the company is very

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GMR ENERGY LIMITED

much interested in the profitability of the company. Besides management,


creditors and owners also are interested in the profitability of the co-creditors
want to get interest and repayment of principal regularly. Owners want to get a
reasonable return on their investment. The profitability ratios measure the ability
of the firm to earn an adequate return on sales total assets and invested capital.
Profitability ratios are generally calculated either on relation to sales or in a
relation to investment. The profitability ratios in relation to sales are gross profit
ratio. Net profit ratio, operating ratio, expenses ratio etc. the profitability ratios in
relation to investment are return on assets on investments, Return on Equity
capital etc.

Gross profit Ratio:

Gross profit ratio is also known as gross margin. This is the ratio of gross
profit to net sales. That is usually expressed as percentage.
It is computed as follows:

Gross profit
Gross profit ratio=-------------------------x100
Sales

Where, Gross profit= sales – cost of goods sold.

In the case of trading concern, cost of goods sold could be equal to


opening stock plus purchase plus all direct expenses charged to trading account
minus closing stock. In case of manufacturing concerns, it could be equal to the
sum of cost of materials consumed, usage, direct expenses and all factory or
manufacturing expenses.

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GMR ENERGY LIMITED

Significance of Gross Profit Ratio:-

Gross profit Ratio indicates the margin of profit on sales. It is useful to


ascertain whether the average percentage of mark-up on the goods sold is
maintained. Gross Profit is the result of the relationship between price, sales
volume and the cost. A change in the gross margin can be brought about by
changes in any of these factors. A high Gross Profit Ratio is a sign of good
management.

An increase in Gross Profit ratio may be due to any of the following factors:

• Increase in the selling price without any corresponding increase in the cost
of goods sold.
• Decrease in the cost of goods sold without any corresponding decrease in
the selling price and
• Under valuation of opening stock or overvaluation of closing stock
• A relatively low Gross Profit ratio is a danger signal.

The decrease in the Gross Profit Ratio may be due to following factors.

• Decrease in the selling price without corresponding decrease in the coast


of goods sold.
• Increase in the cost of goods sold with out any corresponding increase in
the selling price.
• Overvaluation of opening stock or under valuation of closing stock and
• Inability of the management to improve the volume of sales.

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GMR ENERGY LIMITED

Interpretation:

As the gross profit is found by deducting cost of goods sold from the net
sales, higher the gross profit ratio the better are the results. A low Gross Profit
ratio indicates high cost of goods sold due to unfavorable purchases, polices,
excessive competition etc.

Net profit ratio:

Net profit ratio is the ratio of net profit to sales. It is know as profit margin.
It is usually expressed as percentage.
It is calculated as follows:

Net profit
Net profit ratio = ------------------------------------x 100
Sales

Here, net profit is the balance of profit and loss account after adjusting
interests and taxes and all non-operating expenses like less on sale of fixed
assets, provision or containment liability etc.

Significance of Net Profit Ratio:

Net profit ratio indicates management’s efficiency is manufacturing,


administrating and selling the products. This is a measure of over all profitability.
It includes what portion of sales is left to the owners after all expenses have been
meet. This ratio also indicates the firms capacity to withstand adverse economic
conditions.

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GMR ENERGY LIMITED

A high Net Profit ratio could indicate higher over all efficiency of the
business, better utilization of limited resources and reasonable return to owners.
A low Net profit ratio could mean low efficiency and inadequate return to owners.

Interpretation:

A high Net Profit ratio indicates that the profitability of the firm is good. If
the Net Profit ratio is not sufficient, the firm may not be able to achieve a
satisfactory return on its investment.

Operating ratio:

The Operating Ratio is an important ratio that explains the changes in the
Net Profit Margin Ratio. This is calculated by dividing all the operating expenses
minus cost of goods sold, selling expenses and general administrative expenses
by net sales.

Cost of goods sold + Operating profit


Operating ratio = --------------------------------------------------------x100
Sales

Interpretation:

Operating ratio indicates the percentage of net sales that is consumed by


operating costs. Higher the operating ratio, the less favorable it is to the firm. This
is because it would have a small margin to lower interest, income tax, dividend
and reserves.

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GMR ENERGY LIMITED

Return on Investment (ROI):

The over all objective of a business is to earn a satisfactory return on


capital invested. The management and owners are very much interested in the
rate of earning on the capital employed. The rate of earning on capital employed
(expressed as a percentage) is referred to as ROI. This is the over all profitability
as follows:

Profit before interest and tax


ROI = -----------------------------------------------
Capital employed

Where capital employed is computed from the assets side. It will include:

Fixed assets:

• Land and building


• Plant and machinery
• Furniture and fittings
• Motor vehicle
• Investment made in business

Current assets:

• Cash
• Bank balance
• Book debts
• Inventories
• Bills receivable

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GMR ENERGY LIMITED

Current liabilities:
• Sundry creditors
• Bills payable
• Bank over draft

Interpretation:

There cannot be any norms for this ratio. It depends on the industry.

Return on Share Holder’s Fund:

This is the ratio of net profit shareholder’s fund or net worth. It measures
the profitability from the shareholder’s point of view. It is calculated as follows:

Profit after interest and tax


Return on Shareholder’s Fund = ------------------------------------------x100
Shareholder’s fund

Here the profit is the profit after tax and preference dividend out of the
profit left after tax. The preference dividend is paid first. The remaining profit is
said to be available to equity shareholders. Equity shareholder’s fund includes
equity capital and reserves and surplus.

Cash Profit Ratio:

The net profits of a firm are affected by the amount/method of depreciation


charged. Further, depreciation being non-cash expense, it is better to calculate
cash profit ratio. This ratio measures the relationship between cash generated
from operations and the net sales.

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GMR ENERGY LIMITED

Cash profit
Cash Profit Ratio = ------------------------------------------x100
Net sales

Where, cash profit = Net Profit +Depreciation

Administrative Expense Ratio:

The ratio which establishes the relationship between administrative


expense and net sales is called administrative expense ratio.

Administrative expense
Administrative Expense Ratio = -------------------------------------------x100
Net sales

Total Asset Turnover Ratio:

It is relation between sales and total assets. This ratio is calculated to


measure the efficiency with which a firm utilizes its assets.

Sales
Total Assets Turnover Ratio = ------------------------------------------
Total Assets

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GMR ENERGY LIMITED

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GMR ENERGY LIMITED

2. RESEARCH DESIGN

STATEMENT OF PROBLEM:

The analysis of the financial statements i.e. income statement and the
balance sheet it is very difficult to analyze the complete picture of financial
performance. Therefore there is a need of applying the modern tools of
management accounting to access the exact financial performance and position
of the business enterprise.

Accounting ratios are relationships expressed in mathematical terms


between the figures that are connected with each other in some manner. All
companies whether big or small will prefer to be in good financial position. The
balance sheet of the company that has been undertaken for the study, furnishes
that the company is in good financial position. But the exact worth of the financial
position of the company would be better understandable only if it is subjected to
analysis such as “Ratio Analysis in GMR Energy Limited, Bangalore.”

Hence the topic for the study is chosen as “Analysis of Financial


Statement using Ratio Analysis.”

OBJECTIVES OF THE STUDY:

• To ascertain the financial ratios which are likely to reflect the liquidity,
profitability, solvency as well as the profit of “GMR Energy Limited”.
• To know the profit of “GMR Energy Limited” and understand the
movement of profits over the years.
• To assess the operating efficiency of “GMR Energy Limited.”
• To know the Equity position of “GMR Energy Limited.”
• To know the working capital position of “GMR Energy Limited.”

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GMR ENERGY LIMITED

NEED FOR THE STUDY:

The financial parameters are the ultimate performance indicator of any


company. This is because invariability all costs and efficiency activities and
solvency position of the company will reflect the financial status of the company.

The following are stated to be in the need for the study:


• To know the financial performance of GMR ENERGY LIMIMTED.
• To know the operating efficiency of the company.
• To know liquidity position of the company.
• To understand the movements of profits over a period of time.
• To know the reasons for the variation of profits.

In short, this study is conducted so that the financial performance


evaluation will serve as an eye opener to the company.

SCOPE OF THE STUDY:

This study is about the ratio analysis of “GMR ENERGY LIMITED”, which
is a part of financial analysis.

Ratio analysis is perhaps the first financial tool developed to analyze and
interpret the financial statement and is still used widely for this purpose. Financial
performance analysis is a well researched area and innumerable studies have
proved the utility and usefulness of this analytical technique. This research seeks
to investigate and constructively contribute to help:
• The company in finding out the gray areas for improvement in
performance.
• The company to understand its own position over time.

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GMR ENERGY LIMITED

• The managers to understand their contribution to the performance of the


company.
• The present and potential investors, outside parties such as the creditors,
debtors, government and many more to get an idea of the overall
performance of the firm.

The researcher can further analyze the cash flow statement, funds flow
statement, working capital analysis, balance sheet analysis, marketing trends to
know the financial and liquidity position of the “GMR Energy Limited.”

DATA COLLECTION:

Since the study is restricted only to financial statements of “GMR Energy


Limited”, there is no scope for the primary collection of data.

The data collection is done through Secondary data which is collected by


referring annual reports i.e. balance sheets, profit and loss account etc, of “GMR
Energy Limited”.

LIMITATIONS OF THE STUDY:

• This study is limited to “GMR Energy Limited”, Bangalore.


• Since, the company is one among the corporate sector so it was a bit
tough for me to approach the company at regular intervals.
• Since the study is an academic effort, availability time was the constraint.

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GMR ENERGY LIMITED

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GMR ENERGY LIMITED

3. COMPANY PROFILE

GMR GROUP:

The GMR Group is one of the leading and fastest growing private sector
organizations of India. The GMR group, established in 1978 and it is a listed
company on Bombay Stock Exchange (BSE) and National Stock Exchange
(NSE). Mr. Grandhi Mallikarjun Rao is the chairman of “GMR GROUP.”

GMR Group is a Bangalore headquartered global infrastructure major with


interests in the Airports, Energy, Highways and Urban infrastructure. In addition
to the manufacturing sector, spanning the Agri-business includes Sugar and
Ferro alloys. The Group is also actively engaged in the areas of Education,
Health, Hygiene and Sanitation, Empowerment & Livelihoods and Community-
Based Programs under its Foundation wing, reaffirming its grass root presence
as change agents of society in the field of Corporate Social Responsibility. A
dedicated division, the GMR Varalakshmi Foundation, manned by committed
professionals, oversees and manages these projects across India.

VISION:

To build entrepreneurial organizations that makes a difference to society


through creation of value.

BUSINESSES:
Energy:

GMR Group operates three power plants: GMR Energy Ltd. in Mangalore,
GMR Power Corporation Pvt. Ltd. in Chennai and Vemagiri Power Generation
Ltd. in Andhra Pradesh. GMR's Mangalore Power plant uses environment

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GMR ENERGY LIMITED

friendly fuel and combined cycle gas turbine technology to achieve maximum
thermal efficiency. The plant received the ISO 14001 and OHSAS 18001
certifications from Det Norske Veritas for its compliance with internationally-
benchmarked environmental standards. GMR Power Corporation Pvt. Ltd
operates a 200 MW power plant in Chennai and supplies the entire power to the
Tamil Nadu State Electricity Board. Chennai plant too has received ISO 14001
and OHSAS 18001 certifications. Vemagiri Power Generation is a natural gas
based thermal power plant with an installed capacity of 388.5 MW. Besides these
power plants the GMR Group is developing three more power projects: GMR
Badrinath Hydro Power Generation Pvt. Ltd. in Alaknanda, Uttarakhand,
Kamalanga Power Project in Orissa and the Talong Power Project in Arunachal
Pradesh.

Airport:

GMR Group is developing a world-class Greenfield international airport in


Shamshabad, Hyderabad and modernizing and expanding the Indira Gandhi
International Airport in New Delhi. A consortium of GMR Infrastructure Malaysia
Airports Holdings and Turkey's Limak recently bagged the contract to build
Istanbul's second airport.

Roads:

GMR Group has completed a 4 lane Highway between Tuni - Anakapalli


on NH - 5 in Andhra Pradesh for a distance of 60 km and the other between
Tambaram - Tindivanam on NH - 45 in Tamil Nadu for a distance of 93 km. The
company has bagged four more projects. These include: 35 km Ambala -
Chandigarh road project, 107 km Adloor – Yellareddy - Gundla Pochanpalli
stretch, 58 km Thondapalli - Jadcherla project on NH - 7 in Andhra Pradesh and
the 71 km Tindivanam - Ulunderpet stretch on NH - 45 in Tamil Nadu.

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GMR ENERGY LIMITED

GMR Institute of Technology:

GMR Institute of Technology, situated in Rajam, Srikakulam District of


Andhra Pradesh is an ISO certified engineering college affiliated to the
Jawaharlal Nehru Technological University. GMRIT has emerged as a premier
institute offering Bachelors Degree in Engineering in seven engineering streams
to over 1800 students. Its Chemical, Mechanical, Electronic and Electrical
Engineering, Electronic and Chemical Engineering & Information Technology
courses are accredited by NBA (National Accreditation Board).

Agri-Business:

GMR Group has a sugar plant located at Sankili in Srikakulam district of


Andhra Pradesh and is setting up two more sugar plants in Karnataka.

Ferro Alloys:

GMR Ferro Alloys and Industries Ltd have an ISO 9001 certified plant
located in the Tekkali district of Andhra Pradesh. It manufactures internationally
accepted high carbon Ferro-chrome for the stainless steel industry.

GMR Varalakshmi Foundation:

GMR Varalakshmi Foundation (GMRVF) is the Corporate Social


Responsibility arm of the GMR Group. It works to improve lives and livelihoods of
communities where the Group has a presence.

GMRVF is a Section 25 company, and gets its funding from the various
Group companies.

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GMR ENERGY LIMITED

The Foundation has its own professional team, drawn from the top
academic and social work institutions in the country. GMRVF is governed by a
Board headed by the Chairman of the GMR Group.

The thrust areas of the Foundation’s activities are Education; Health,


Hygiene & Sanitation; Empowerment and Livelihoods and Community - based
programs.

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GMR ENERGY LIMITED

GMR Energy Limited

GMR's Mangalore Power plant uses environment friendly fuel and


combined cycle gas turbine technology to achieve maximum thermal efficiency.
GMR Energy was commissioned in November 2001 and supplies power to the
Karnataka Power Transmission Corporation Limited. On June 4, 2003, GMR
Energy was certified for ISO 14001:1996 for operation and maintenance of the
Mangalore plant.

The Barge mounted combined cycle power plant at Mangalore has a net
power export capability of 220MW. The plant comprises of 4 X 46.48MW LM6000
PC GE make gas turbines using naphtha as fuel and 1 X 53.58MW ABB make
steam turbine.

It is the world largest power plant on barge and first of its kind in India. The
major milestones achieved are:

• Barge Reached at Mooring Basin 12/02/01


• First Gas turbine synchronized 03/05/01
• Simple cycle commercial operations 08/06/01
• Steam turbine synchronized 17/11/01
• Combined cycle commercial operation 21/11/01

ENVIRONMENT:

Disposal of marine debris:

They are using about 18000 M3 per hour of seawater for cooling the
Steam Turbine and Chiller condensers. The water carries lot of organic debris
which is trapped in the Traveling water screens before the pump suction. The

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GMR ENERGY LIMITED

debris, when disposed as a land fill, created bad smell and attracted lot of flies
causing nuisance to the work force. A compost pit has been made to convert the
marine debris to organic manure which is used in the development of green belt.

Waste paper recycling:

The waste paper generated in the plant was disposed by incineration.


With the aim to minimize pollution and conserve natural resource, the
incineration was stopped. An environment management program was developed
for recycling of the waste paper. The waste paper is shredded and the shredded
waste is disposed to paper vendors for recycling.

Development of renewable energy source (jetropa):

A management program is made to study the possibilities of cultivation


and yield of Jetropa in GMR plants. Around 2000 square feet of land from the
green belt is taken up for Jetropa plantation with out disturbing the existing plant
species. This pilot project will give valuable information about the nurturing of
Jetropa plant and the ways in which the yield of seeds can be maximized. Once
the outcome is positive it can be extended to other GMR Plants in Chennai and
Vemagiri in Andhra Pradesh. The second phase of the Jetropa plantation will be
based on the outputs from the pilot project and will be developed in a
commercially viable manner.

Safety & Health:

They achieved Zero accident record for the last three years and they plan
to maintain the zero accident record for the entire PPA period of Seven years.
They are certified for OSHAS 18001.

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GMR ENERGY LIMITED

ENERGY POLICY:

GMR Energy Limited, a 220MW Barge Mounted Power Plant, is


committed to optimally utilize energy, so as to make it environmentally
sustainable for further generations.
They plan to achieve this by:

! Managing efficiently the utilization of energy resources (like Naphtha,


HSD) and the operational practices.
! Adopting energy efficient technologies/equipment for all future
acquisitions.
! Making energy conservation a mass movement with the involvement of all
employees.
! Going beyond standards, wherever economically viable.
! Enrich our experience in energy conservation through exchange of ideas
with other organizations.
! Closely monitoring and controlling the energy consumption utilizing
effective energy management systems.

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GMR ENERGY LIMITED

Organizational structure of GMR Energy Limited:

Vinu Saini, Sector


EA to Sector Head Head
B.V.N.Rao
N K Kumar
Secretary
CEO
Raaj
Kumar
Jaya Lakshmi
Secretary

MVS Rao
S.N. Barde S. Nagarajan VP Commercial
VP (O&M) Advisor & CR IVS Rao
Shared Services Company
Departments Secretary

Kamala N.Nema Plant Head Support


Kannan GEL/ GPCL/ Team (4)
GM CFO BHR Commercial
VPGL Manjunath
AM Anantha contracts
Murthy
O & M Team Raman
(Organ gram Leni Shaji
Attached)

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GMR ENERGY LIMITED

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GMR ENERGY LIMITED

4. DATA ANALYSIS AND INTERPRETATION

LIQUIAITY RATIOS:

CURRENT RATIO

Table 1 – Current Ratio


Particulars 2004-2005 2005-2006 2006-2007
Current assets 32223.46 29700.92 34692.58
Current 21233.06 12474.09 21637.00
liabilities
Current Ratio 1.52 2.38 1.60
(Rupees in lakhs)

Graph 1 – Current Ratio:

2.5

1.5
RATIO

2.38
1 1.52 1.6
Current
Ratio
0.5

0
2004-2005 2005-2006 2006-2007
YEARS

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GMR ENERGY LIMITED

Analysis and Interpretation:

The table 1 reveals that the current ratio is 1.52 in the year 2004-2005, it
has increased to 2.38 in the year 2005-06. It is again decreased to 1.60 in the
year 2006-07.

The current ratio is increased in the year 2005-06 due to increase in


current assets i.e. Inventories, Cash and Bank balances and other Current
Assets. Hence, company has to maintain constant position of current Assets in
order to meet its short obligation.

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GMR ENERGY LIMITED

TABLE 2 – WORKING CAPITAL TURNOVER RATIO

Particulars 2004-2005 2005-2006 2006-2007


Sales 52726.18 52356.82 43868.02
Net working 11090.40 17226.83 13055.58
capital
W.C Turnover 4.75 3.03 3.36
Ratio

(Rupees in lakhs)
Graph 2 – Working Capital Turnover Ratio:

4.5

3.5

3 4.75
RATIO

2.5

2 3.03 3.36
W.C
1.5 Turnover
Ratio
1

0.5

0
2004-2005 2005-2006 2006-2007
YEARS

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GMR ENERGY LIMITED

Analysis and Interpretation:

The table 2 reveals that the working capital turnover ratio is 4.75 in the
year 2004-05; it is decreased to 3.03 in the year 2005-06 and it is increased to
3.36 in the year 2006-07.

The working capital turnover ratio is decreased in the year 2006-07 when
compared to base year i.e. 2004-05 because of increase in net working capital.

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GMR ENERGY LIMITED

TABLE 3 – FIXED ASSETS TURNOVER RATIO

Particulars 2004-2005 2005-2006 2006-2007


Sales 52726.18 52356.82 43868.02
Fixed assets 83513.65 75190.45 77014.02
Fixed Assets 0.63 0.69 0.56
Turnover Ratio

(Rupees in lakhs)

Graph 3 – Fixed Assets Turnover Ratio:

0.7

0.6

0.5
0.69
0.4 0.63
0.56
RATIO

0.3
Fixed
0.2 Assets
Turnover
Ratio
0.1

0
2004-2005 2005-2006 2006-2007
YEARS

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GMR ENERGY LIMITED

Analysis and Interpretation:

From the above table we observe that Fixed Asset Turnover Ratio is 0.63
in the year 2004-05, it is increased to 0.69 in 2005-06, and it has decreased to
0.56 in the year 2006-07.

The fixed assets turnover ratio is increased in the year 2005-06 because
of decrease in sales which indicates assets are not utilized efficiently.

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GMR ENERGY LIMITED

LEVERAGE RATIOS:

TABLE 4 – DEBT EQUITY RATIO

Particulars 2004-2005 2005-2006 2006-2007


Outsiders Fund 49941.97 45639.00 40392.25
Shareholder’s 44662.08 46778.28 49677.35
Fund
Debt Equity 1.11 0.97 0.81
Ratio
(Rupees in lakhs)
Graph 4 – Debt Equity Ratio:

1.2

0.8
1.11
0.97
RATIO

0.6
0.81
Debt
0.4 Equity
Ratio

0.2

0
2004-2005 2005-2006 2006-2007
YEARS

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GMR ENERGY LIMITED

Analysis and Interpretation:

The table 4 reveals that the debt equity ratio is 1.11 in the year 2004-05, it
is decreased to 0.97 in the year 2005-06, and again it is decreased to 0.81 in
2006-07.

Therefore, there is a gradual decrease in the debt equity ratio during the 3
years due to repayment of borrowings.

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GMR ENERGY LIMITED

TABLE 5 – PROPRIETARY RATIO

Particulars 2004-2005 2005-2006 2006-2006


Shareholder’s 44662.08 46778.28 49677.35
Fund
Total Assets 94604.05 92417.28 90069.60
Proprietary 0.47 0.50 0.55
Ratio

(Rupees in lakhs)
Graph 5 – Proprietary Ratio:

0.6

0.5

0.4
RATIO

0.55
0.3 0.47 0.5

0.2 Proprietary
Ratio

0.1

0
2004-2005 2005-2006 2006-2007
YEARS

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GMR ENERGY LIMITED

Analysis and Interpretation:

It is clear from table 5 that proprietary ratio is 0.47 in 2004-05; it is


increased to 0.50 in the year 2005-06, and it is further increased to 0.55 in the
year 2006-07.

As there is a gradual increase in the proprietary ratio over the 3 years, the
long-term solvency is satisfactory.

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GMR ENERGY LIMITED

PROFITABILITY RATIOS:

TABLE 6 – GROSS PROFIT RATIO:

Particulars 2004-2005 2005-2006 2006-2007


Gross profit 26049.83 27031.84 28492.9
Sales 52726.18 52356.82 43868.08
Gross Profit 49.40 51.63 64.95
Ratio
(Rupees in lakhs)
Graph 6 – Gross Profit Ratio:

70

60

50

40
64.95
RATIO

51.63
30 49.4
Gross
Profit
20 Ratio

10

0
2004-2005 2005-2006 2006-2007
YEARS

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GMR ENERGY LIMITED

Analysis and Interpretation:

The table 6 reveals that the Gross Profit Ratio is 49.40 in the year 2004-
05, it is increased to 51.63 in 2005-06, and again it is increased to 64.95 in the
year 2006-07.
The gross profit ratio is gradually increasing every year. It shows that,
higher the gross profit ratio the better is the results i.e. the company’s profitability
has been increased in the past 3 years. Hence it is satisfactory.

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GMR ENERGY LIMITED

TABLE 7 – NET PROFIT RATIO

Particulars 2004-2005 2005-2006 2006-2007


Net Profit 7606.02 8015.21 8821.26
Sales 52726.18 52356.82 43868.08
Net Profit Ratio 14.42 15.30 20.10

(Rupees in lakhs)

Graph 7 – Net Profit Ratio:

25

20

15
RATIO

20.1
10
15.3
14.42 Net Profit
Ratio

0
2004-2005 2005-2006 2006-2007
YEARS

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GMR ENERGY LIMITED

Analysis and Interpretation:

In above table the net profit is gradually increasing every year i.e. 14.42 in
the year 2004-05, 15.30 in 2005-06 and 20.10 in 2006-07.

A high Net Profit ratio indicates that the profitability of the firm is good.
Since the Net Profit Ratio is satisfactory, the company can see gradual growth in
coming days.

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GMR ENERGY LIMITED

TABLE 8 – OPERATING RATIO

Particulars 2004-2005 2005-2006 2006-2007


Cost of goods 26676.35 25324.98 15375.18
sold
Operating profit 33141.21 30689.03 32409.38
Sales 52726.18 52356.82 43868.02
Operating Ratio 113.44 106.98 108.92

(Rupees in lakhs)
Graph 8 – Operating Ratio:

120

100

80

113.44 108.92
RATIO

106.98
60

Operating
40 Ratio

20

0
2004-2005 2005-2006 2006-2007
YEARS

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GMR ENERGY LIMITED

Analysis and Interpretation:

The above table 8 reveals that the operating ratio is 113.44 in 2004-05, it
has decreased to 106.98 in the 2005-06 and it is increased to 108.92in the year
2006-07.
Even though there is a decrease operating ratio in the year 2005-06 which
is an unfavourable situation as it can be 70% to 85%, but it has crossed 100%.
So operating ratio is considered to be satisfactory.

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GMR ENERGY LIMITED

TABLE 9 – RETURN ON SHAREHOLDERS FUND

Particulars 2004-2005 2005-2006 2006-2007


Profit after 7606.02 8015.21 8821.26
interest and tax
Shareholder’s 44662.08 46778.28 49677.35
Fund
Return on 17.03 17.13 17.75
Shareholder’s
Fund

(Rupees in lakhs)
Graph 9 – Return on Shareholder’s Fund:

20

16

12
RATIO

17.03 17.13 17.75

8 Return on
Shareholder’s
Fund
4

0
2004-2005 2005-2006 2006-2007
YEARS

R.V.INSTITUTE OF MANAGEMENT - 68 -
GMR ENERGY LIMITED

Analysis and Interpretation:

In the year 2004-05 the return on shareholder’s fund was 17.03, in 2005-
06 it has increased to 17.13 and in the year 2006-07 again it is increased to
17.75.
There is a gradual increase in the share holder’s fund. Thus, the overall
efficiency of a firm has been increased gradually. Hence the company measures
its profitability from the share holder’s point of view which is good sign for the
company.

R.V.INSTITUTE OF MANAGEMENT - 69 -
GMR ENERGY LIMITED

TABLE 10 – RETURN ON EQUITY

Particulars 2004-2005 2005-2006 2006-2007


Profit after tax 7606.02 8015.21 8821.26
Net worth 44662.08 46778.28 49650.64
Return on 17.03 17.13 17.76
Equity

(Rupees in lakhs)
Graph 10 – Return on Equity:

20

16

12 17.76
17.13
RATIO

17.03

Return
8 on
Equity

0
2004-2005 2005-2006 2006-2007
YEARS

R.V.INSTITUTE OF MANAGEMENT - 70 -
GMR ENERGY LIMITED

Analysis and Interpretation:

In the year 2004-05, the Return on Equity is 17.03, it has increased to


17.13 in the year 2005-06 and again it has increased to 17.76 in the year 2006-
07.
As there is gradual increase in the past 3 yrs i.e. 2004 – 2006 which
shows that the company is performing well where equity shareholders can get
back 17% to 18% return if they invest in the company.

R.V.INSTITUTE OF MANAGEMENT - 71 -
GMR ENERGY LIMITED

TABLE 4 – RETURN ON ASSETS

Particulars 2004-2005 2005-2006 2006-2007


Net profit 7606.02 8015.21 8821.26
Total assets 94604.05 92417.28 90069.60
Return on 8.03 8.67 9.79
assets

(Rupees in lakhs)
Graph 11 – Return on Assets:

10
9
8
7
6 9.79
RATIO

8.67
5 8.03
Return
4 on
assets
3
2
1
0
2004-2005 2005-2006 2006-2007
YEARS

R.V.INSTITUTE OF MANAGEMENT - 72 -
GMR ENERGY LIMITED

Analysis and Interpretation:

The above table reveals that the Return on Assets is 8.03 in the year
2004-05, it has increased to 8.67 in 2005-06 and again it is increased to 9.79 in
the year 2006-07.
There is gradual increase in the return on assets from past 3 years which
indicates the assets are not fully utilized and maintained well.

R.V.INSTITUTE OF MANAGEMENT - 73 -
GMR ENERGY LIMITED

TABLE 12 – CASH PROFIT RATIO

Particulars 2004-2005 2005-2006 2006-2007


Cash profit 18842.8 18303.3 19257.52
Net sales 52726.18 52356.82 43868.02
Cash Profit 35.73 34.95 43.89
Ratio

(Rupees in lakhs)
Graph 12 – Cash Profit Ratio:

45

40 43.89

35

30
35.73
25
RATIO

34.95

20
Cash
15 Profit
Ratio
10

0
2004-2005 2005-2006 2006-2007
YEARS

R.V.INSTITUTE OF MANAGEMENT - 74 -
GMR ENERGY LIMITED

Analysis and Interpretation:

The table 12 shows that the Cash Profit Ratio is 35.73 in the year 2004-
05, it has decreased to 34.95 in 2005-06 and it has increased to 43.89 in the year
2006-07.

This shows a high increase in 2006-07 and a fall in 2005-06, this is


because of some depreciation methods that have been changed. So, when it is
added to net profit, this type of increase and decrease can takes place. Hence
this ratio measures the relationship between cash generated and net sales.

R.V.INSTITUTE OF MANAGEMENT - 75 -
GMR ENERGY LIMITED

TABLE 13 – ADMINISTRATIVE EXPENSE RATIO

Particulars 2004-2005 2005-2006 2006-2007


Administrative 4145.40 6630.90 6519.78
expenses
Net sales 52726.18 52356.82 43868.02
Administrative 7.86 12.66 14.96
Expense Ratio

(Rupees in lakhs)
Graph 13 – Administrative Expense Ratio:

16

14

12

10 14.96
RATIO

8 12.66
Administrative
Expense
6
7.86
4

0
2004-2005 2005-2006 2006-2007
YEARS

R.V.INSTITUTE OF MANAGEMENT - 76 -
GMR ENERGY LIMITED

Analysis and Interpretation:

The above table 13 reveals that the administration expense ratio is 7.86 in
the year 2004-05, it has increased to 12.66 in 2005-06 and it is again increased
to 14.96 in the year 2006-07.

The administrative expense ratio is having a high increase because the


administration cost is more. This ratio has a negative effect on net profit of a
company. Hence the company must control the administrative expense.

R.V.INSTITUTE OF MANAGEMENT - 77 -
GMR ENERGY LIMITED

TABLE 14 – TOTAL ASSET TURNOVER RATIO

Particulars 2004-2005 2005-2006 2006-2007


Sales 52726.18 52356.82 43868.02
Total assets 94604.05 92417.28 90069.60
Total asset 0.55 0.56 0.48
turnover ratio

(Rupees in lakhs)

Graph 14 – Total Asset Turnover Ratio

0.6

0.5

0.4
0.56
RATIO

0.55
0.3 0.48
Total
0.2 Asset
Ratio

0.1

0
2004-2005 2005-2006 2006-2007
YEARS

R.V.INSTITUTE OF MANAGEMENT - 78 -
GMR ENERGY LIMITED

Analysis and Interpretation:

The table 14 shows that the Total Turnover Ratio is 0.55 in the year 2004-
05, it has increased to 0.56 in 2005-06 and it has decreased to 0.48 in 2006-07.

It has decreased in 2006 due to decrease in the total assets and sales.
This shows that the total assets are not utilized effectively to generate sales.

R.V.INSTITUTE OF MANAGEMENT - 79 -
GMR ENERGY LIMITED

R.V.INSTITUTE OF MANAGEMENT - 80 -
GMR ENERGY LIMITED

4. FINDINGS AND SUGGESTIONS

FINDINGS:

• In the year 2005-06 the ratio has been increased to 2.38 but it has come
down to 1.60 in the year 2006-07. Hence the company must take
necessary measures to meet standard ratio.
• The working capital turnover ratio has decreased to 3.36 in the year 2006-
07 when compared to the base year 2004-05 which indicates that the ratio
is not satisfactory.
• The fixed asset turnover ratio has been increased in the year 2005-06
when compared to base year i.e. 2004-05 but it has got down in the year
2006-07. Hence the company must utilize the assets efficiently.
• The debt equity ratio has decreased gradually during the 3 years. So the
company must repay the borrowings within given time.
• The proprietary ratio has increased in 3 years. Hence, the long term
solvency is satisfactory.
• Gross profit ratio is increased to 64.95 in the year 2006-07 when
compared to the year 2004-05. Hence, the gross profit ratio is highly
satisfactory.
• The net profit ratio is also highly satisfactory. By this the company can
enjoy huge profits and it also indicates growth trend of the company.
• The operating ratio is favorable because it has crossed 100%.
• The return share holder’s fund has increased gradually which measure its
profitability from the shareholder’s point of view.
• The increase in return on equity indicates that the company is performing
well and the equity share holder’s can get back high returns. This helps
the company to gain popularity.

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GMR ENERGY LIMITED

• The return on assets has increased gradually which shows the


unfavorable situation for the company. Hence the total assets must be
utilized effectively.
• The company’s cash profit ratio was gone down to 34.95 in the year 2005-
06 when compared to base year. But the company has taken measures to
change the depreciation method which has led the company to increase
its cash profit ratio in the year 2006-07.
• The administration expense ratio is gradually increased in 3 years which is
an unfavorable situation for the company because it indicates the negative
effect on net profit. Hence, the administration expense must be controlled
efficiently
• The decrease of total asset turnover ratio in the year 2006-07 when
compared to other 2 years i.e. 2004-05 and 2005-06. This indicates that
there is decrease in sales. Hence, the company should utilize total assets
effectively to generate sales.

R.V.INSTITUTE OF MANAGEMENT - 82 -
GMR ENERGY LIMITED

SUGGESTIONS

• The company has to take measures to increase sales and utilize the
assets effectively.
• There is an increase in return on assets. Hence, the company should
take measures to maintain with the return on assets.
• The company must control the administrative expenses so that it does
not indicate negative effect on net profit.
• Optimum utilization of resources will help the company to get more
profits.
• Maintenance of liquid assets will definitely help the company in facing
the unexpected situation.
• In conducting of successful business, shareholder’s wealth plays a vital
role.

R.V.INSTITUTE OF MANAGEMENT - 83 -
GMR ENERGY LIMITED

R.V.INSTITUTE OF MANAGEMENT - 84 -
GMR ENERGY LIMITED

6. CONCLUSIONS

Every organization needs the financial manager to manage the financial


activities of a company by using different analytical tools, which helps the
company in taking managerial and tactical decision. So every manager should
make proper analysis of operational performance of the company.

The analysis and interpretation of various ratios will help in giving better
understanding of the financial conditions and the performance of the
organization.

It is a perfectly organized company having all the departments well


organized to perform the activities that lead to the customer’s satisfaction.
Company is performing satisfactorily as the increasing trend and is
expected to grow in the coming years also.

Though the company assets are not fully utilized and maintained well, the
firm is in a liquidity position as it is earning profit from last 3 years. The company
should take some necessary precautions regarding utilizing the assets.

Finally I can conclude that the “GMR Energy Limited” is performing


efficiently at the outset satisfactorily.

R.V.INSTITUTE OF MANAGEMENT - 85 -
GMR ENERGY LIMITED

R.V.INSTITUTE OF MANAGEMENT - 86 -
GMR ENERGY LIMITED

BIBLOGRAPHY

Text books:

1. Financial Management
- Reddy, Appaniah
- B.S.Raman

2. Management Accounting
- R.K.Sharma and S.K.Gupta

Web sites:

• www.gmrgroup.co.in
• www.studyfinance.com

R.V.INSTITUTE OF MANAGEMENT - 87 -
GMR ENERGY LIMITED

R.V.INSTITUTE OF MANAGEMENT - 88 -
GMR ENERGY LIMITED

ANNEXURES

BALANCESHEET AS AT 31st MARCH 2005

2005 2004

I. Sources of Funds
1. Shareholders’ Funds

a) Capital 32,607.41 32,607.41

b) Reserves & Surplus 14,170.87 12,054.67

2. Loan Funds

a) Secured Loans 4,303 43,520.00 47,822.97

b) Unsecured Loans 2,119.00 2,119.00

Total 92,417.28 94,604.05

II. Application of Funds

1. Fixed Assets

a) Gross Block 80,093.88 79,959.70

b) Less : Depreciation 41,533.74 31,245.65

c) Net Block 38,560.14 48,714.05

2. Investments 36,630.31 34,799.60

3. Current Assets,
Loans and Advances

a) Inventories 2,364.55 2,125.56

b) Sundry Debtors 6,735.37 10,939.90


c) Cash and Bank
Balances 16,173.75 15,421.37

R.V.INSTITUTE OF MANAGEMENT - 89 -
GMR ENERGY LIMITED

d) Other Current
Assets 257.00 235.05

d) Loans and Advances 4,170.25 3,501.58

29,700.92 32,223.46
Less : Current
Liabilities and
Provisions

a) Liabilities 7,746.10 15,800.93

b) Provisions 4,727.99 5,332.13

12,474.09 21,133.06

Net Current Assets 17,226.83 11,090.40

Statement on Significant
Accounting Policies
and Notes to the Accounts

Total 92,417.28 94,604.05

R.V.INSTITUTE OF MANAGEMENT - 90 -
GMR ENERGY LIMITED

PROFIT AND LOSS ACOOUNT FOR THE YEAR ENDED MARCH 31st 2005

2005 2004

I.
Income

Sales 52,356.82 52,726.18


[net of prior period items Rs. Nil
(2004 - Rs. 294.47 Lacs)]

Other Income 1,960.10 2,513.65

54,316.92 55,239.83
II. Expenditure
Generation
Expenses 25,324.98 26,676.35

Administration and Other Expenses 6,630.90 4,145.40


Finance
Charges 3,239.61 4,520.21

Depreciation 10,288.09 11,236.78


Amortisation of Miscellaneous
Expenditure (net) - 421.66

45,483.58 47,000.40

III. Profit Before Taxation 8,833.34 8,239.43


Provision for Taxation -
Current 818.13 633.41

IV. Profit After Taxation 8,015.21 7,606.02


Surplus brought forward from
Previous Year 5,678.35 3,063.75

V. Available for
Appropriation 13,693.56 10,669.77

Interim Dividend @ Rs.1.60 (2004 -

R.V.INSTITUTE OF MANAGEMENT - 91 -
GMR ENERGY LIMITED

Rs. 0.80) per Equity Share 5,217.19 2,214.70


Proposed Final Dividend @ Rs.
(2004 - Rs. 0.60 per Equity Share -
Prorata) 1,677.97
Tax on
Dividend 681.82 498.75
Transfer to General
Reserve 700.00 600.00

VI. Available surplus carried to


Balance Sheet 7,094.54 5,678.35

Earnings Per Share (Rs.) - Basic &


Diluted 2.46 2.72

Statement on Significant Accounting


Policies and Notes to the Accounts

R.V.INSTITUTE OF MANAGEMENT - 92 -
GMR ENERGY LIMITED

BALANCESHEET AS AT 31st MARCH 2006

2006 2005

I. Sources of Funds
1. Shareholders’ Funds

a) Capital 32,607.41 32,607.41

b) Reserves and Surplus 17,043.23 14,170.87

49,650.64 46,778.28
2.Share Application Money
Pending Allotment 26.71 -

3. Loan Funds

a) Secured Loans 36,162.19 43,520.00

b) Unsecured Loans 4,230.06 2,119.00

40,392.25 45,639.00

Total 90,069.60 92,417.28

II. Application of Funds


1. Fixed Assets

a) Gross Block 81,802.38 80,093.88

b) Less : Depreciation 51,950.51 41,533.74

c) Net Block 29,851.87 38,560.14


d) Capital Work in
Progress (including

capital advances) 153.11 -

30,004.98 38,560.14

2. Investments 47,009.04 36,630.31

R.V.INSTITUTE OF MANAGEMENT - 93 -
GMR ENERGY LIMITED

3. Current Assets, Loans


and Advances

a) Inventories 2,279.46 2,364.55

b) Sundry Debtors 11,132.28 6,735.37


c) Cash and Bank
Balances 10,186.29 16,173.75

d) Other Current Assets 1,139.29 257.00

e) Loans and Advances 9,955.26 4,170.25

34,692.58 29,700.92
Less : Current Liabilities
and Provisions

a) Liabilities 10,271.17 7,746.10

b) Provisions 11,365.83 4,727.99

21,637.00 12,474.09

Net Current Assets 13,055.58 17,226.83

Statement on Significant
Accounting Policies
and Notes to the Accounts

Total 90,069.60 92,417.28

R.V.INSTITUTE OF MANAGEMENT - 94 -
GMR ENERGY LIMITED

PROFIT AND LOSS ACOOUNT FOR THE YEAR ENDED MARCH 31st 2006

2006 2005

I.
Income

Sales 43,868.02 52,356.82

Other Income 1,646.49 1,914.26

45,514.51 54,271.08
II. Expenditure
Generation
Expenses 15,375.18 25,324.98

Administration and Other Expenses 6,519.78 6,585.06


Finance
Charges 3,440.38 3,239.61

Depreciation 10,436.26 10,288.09

35,771.60 45,437.74

III. Profit Before Taxation 9,742.91 8,833.34


Provision for Taxation -
Current 812.63 818.13
Provision for Fringe
Benefit Tax 109.02 -

IV. Profit After Taxation 8,821.26 8,015.21

Surplus brought forward from Previous Year 7,094.55 5,678.35

V. Available for
Appropriation 15,915.81 13,693.56
Interim Dividend @ Rs.Nil (2005 - Rs. 1.60) per
Equity Share - 5,217.19
Proposed Final Dividend @ Rs. 1.60 (2005- Rs. Nil)
per equity Share 5,217.19 -

R.V.INSTITUTE OF MANAGEMENT - 95 -
GMR ENERGY LIMITED

Tax on
Dividend 731.71 681.82
Transfer to General
Reserve 800.00 700.00

VI. Available surplus carried to Balance Sheet 9,166.91 7,094.55

Earnings Per Share (Rs.) - Basic & Diluted 2.71 2.46

Statement on Significant Accounting Policies and Notes


to the Accounts

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GMR ENERGY LIMITED

BALANCESHEET AS AT 31st MARCH 2007

R.V.INSTITUTE OF MANAGEMENT - 97 -
March 31, 2007 March 31, 2006
I. Sources of Funds
1. Shareholders’ Funds GMR ENERGY LIMITED
a) Capital 39,952.35 32,607.41
b) Reserves and
Surplus 26,817.69 17,043.23

66,770.04 49,650.64

2. Share Application Money


Pending Allotment - 26.71

3. Loan Funds

a) Secured Loans 37,672.64 36,162.19

b) Unsecured Loans 12,229.00 4,230.06

49,901.64 40,392.25

Total 116,671.68 90,069.60

II. Application of Funds


1. Fixed Assets

a) Gross Block 81,385.94 81,802.38

b) Less : Depreciation 62,725.90 51,950.51

c) Net Block 18,660.04 29,851.87


d) Capital Work in
Progress (including

capital advances) 977.90 153.11

19,637.94 30,004.98

2. Investments 54,754.78 47,009.04

3. Current Assets, Loans


and Advances

a) Inventories 2,215.44 2,279.46

b) Sundry Debtors 15,938.84 11,132.28


c) Cash and Bank
Balances 20,785.06 10,186.29
d) Other Current
Assets 721.47 1,139.29
e) Loans and
Advances
R.V.INSTITUTE 12,031.56
OF MANAGEMENT 9,955.26 - 98 -
51,692.37 34,692.58
Less : Current Liabilities
GMR ENERGY LIMITED

R.V.INSTITUTE OF MANAGEMENT - 99 -