FINANCIAL PERFORMANCE ANALYSIS OF

PANCHTHAR POWER COMPANY LIMITED

A Project Work Report

By

Aayusha Khatiwada

TU Reg. No. : 7-2-0003-0751-2020

Roll No. - 203

Mahendra Morang Adarsh Multiple Campus, Biratnagar

Group: Finance

Submitted to
The Faculty of Management
Tribhuvan University
Kathmandu

In Partial Fulfillment of the Requirements for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

The Research Department of

Mahendra Morang Adarsha Multiple Campus
 DECLARATION

I hereby declare that the project work entitled “FINANCIAL ANALYSIS OF

PANCHTHAR POWER COMPANY LIMITED” submitted to the Faculty of Management,
Tribhuvan University, Kathmandu is an original piece of work under the supervision of Dr.
Dharmaraj Dhakal Faculty Member, Mahendra Morang Adarsh Multiple Campus,
Biratnagar and is submitted in partial fulfillment of the requirements for the award of the
degree of Bachelor of Business Studies (BBS). This project work report has not been
submitted to any other university or institution for the award of any degree or diploma.

________________________

Aayusha Khatiwada

Date:

ii
 SUPERVISOR’S RECOMMENDATION

The project work report entitled FINANCIAL PERFORMANCE ANALYSIS OF

PANCHTHAR POWER COMPANY LIMITED submitted by Aayusha Khatiwada of
Mahendra Morang Adarsh Multiple campus, is prepared under my supervision as per the
procedure and format requirements laid by the Faculty of Management, Tribhuvan
University, as partial fulfillment of the requirements for the award of the degree of Bachelor
of Business Studies (BBS). I, therefore, recommend the project work report for evaluation.

_______________________

Dr. Dharmaraj Dhakal

Mahendra Memorial Adarsh Multiple Campus

Date:

iii
 ENDORSEMENT

We hereby endorse the project work report entitled FINANCIAL ANALYSIS OF

PANCHTHAR POWER COMPANY LIMITED submitted by Aayusha Khatiwada of
Mahendra Morang Adarsh Multiple Campus, Biratnagar, in partial fulfillment of the
requirements for award of the Bachelor of Business Studies (BBS) for external evaluation.

Signature: Signature:

Dr. Udhab Pokharel Dr. Ramavatar Sharan

Chairman Campus Chief

Management Research Committee Mahendra Morang Adarsh Multiple

Date: Date:

iv
 ACKNOWLEDGEMENT

Quality education ensures the overall development of individual. Quality education

demands quality text books that shape and develop inner potentiality of a reader. The
traditional reading materials have failed to fulfill the present requirement of the learners
who have the urgency to strengthen themselves in diverse fields and expose or apply their
competency in the global environment. Considering this reality, we have come up with the
‘Project Work’ practical studies for the student in partial fulfillment of the requirement for
the Degree of Bachelor of Business Studies. I would like to express my gratitude to Nepal
Commerce Campus for providing a great opportunity of preparing a field work report in
accordance to its syllabus.

I would like to express my hearty gratitude to my respected supervisor Dr. Dharmaraj

Dhakal of Mahendra Morang Adarsh Multiple Campus with whom the opportunity was
provided to discuss and expose some of the core ideas put forth in the project preparation. I
am also grateful to all the authors and researchers whose source have been used as reference
for preparing this report.

I express my sincere gratitude to the board of studies of TU to provide us an opportunity to

help us grow through practical studies. At last, I would like to remember and thank every
individual and my family members for their cordial cooperation in completing my project
work report successfully.

Thank you,

Aayusha Khatiwada

Date:

v
 TABLE OF CONTENTS

TITLE PAGE i
DECLARATION ..................................................................................................................ii
SUPERVISOR’S RECOMMENDATION ..........................................................................iii
ENDORSEMENT ................................................................................................................ iv
ACKNOWLEDGEMENT .................................................................................................... v
TABLE OF CONTENTS ..................................................................................................... vi
LISTS OF TABLES ...........................................................................................................viii
LISTS OF FIGURES ........................................................................................................... ix
ABBREVIATIONS .............................................................................................................. x
CHAPTER ONE Introduction .............................................................................................. 1
1. Background of the Study............................................................................................ 1
2. Profile of Panchthar Power Company Limited ......................................................... 2
3. Statement of Problem ................................................................................................. 4
4. Objective of the Study................................................................................................ 4
5. Rationale of the Study ................................................................................................ 4
6. Research Methodology............................................................................................... 5
6.1 Research Design ...................................................................................................... 5
6.2 Sources and Types of Data ...................................................................................... 6
6.3 Population and Sample ............................................................................................ 6
6.4 Data Procedure......................................................................................................... 6
6.5 Method of Data Analysis ......................................................................................... 6
7. Literature Review ..................................................................................................... 10
7.1 Conceptual Review ................................................................................................ 10
7.2 Empirical Review of Previous Works ................................................................... 11
7.3 Research Gap ......................................................................................................... 13
8. Limitation ................................................................................................................. 13
CHAPTER TWO RESULTS AND ANALYSIS ............................................................... 15
1. Liquidity Ratios ........................................................................................................ 15
1.2 Quick ratio. ....................................................................................................... 17
1.3 Cash ratio. ......................................................................................................... 19
vi
 2. Solvency Ratio ......................................................................................................... 21
2.1 Debt-to-assets ratio. ............................................................................................... 21
2.2 Equity Ratio ........................................................................................................... 22
2.3 Debt-to-Equity Ratio ............................................................................................. 23
4.5 Capitalization ratio................................................................................................. 25
3. Profitability Ratios ................................................................................................... 27
3.1 Gross operating profit margin. ............................................................................... 27
3.2 Net profit margin. .................................................................................................. 28
3.3 Return on Assets. ................................................................................................... 29
3.4 Return on Capital Employed (ROCE). .................................................................. 30
4. Findings of the Study ............................................................................................... 32
CHAPTER THREE SUMMARY AND CONCLUSION .................................................. 34
1. Summary .................................................................................................................. 34
2. Conclusion ............................................................................................................... 35
Bibliography........................................................................................................................ 36
3. Appendix 1.2: Five Year Statement of Financial Position ....................................... 37
4. Appendix 1.2: Five Year Statement of Profit and Loss ........................................... 42

vii
 LISTS OF TABLES

Table 1 Present Capital Structure of Panchthar Power Company Limited ........................... 2

Table 2 Details of Board of Directors in PPCL .................................................................... 2

Table 3 Management Team ................................................................................................... 3

Table 4 Current Ratio .......................................................................................................... 15

Table 5 Quick Ratio ............................................................................................................ 17

Table 6 Cash Ratio .............................................................................................................. 19

Table 7 Debt-to-asset ratio .................................................................................................. 21

Table 8 Equity Ratio ........................................................................................................... 22

Table 9 Debt-to-Equity ratio ............................................................................................... 23

Table 10 Capitalization ratio ............................................................................................... 25

Table 11 Gross Operating Profit Margin ............................................................................ 27

Table 12 Net Profit Margin ................................................................................................. 28

Table 13 Return on Assets .................................................................................................. 29

Table 14 Return on Capital Employed ................................................................................ 31

viii
 LISTS OF FIGURES

Figure 1 Organizational Structure ......................................................................................... 3

Figure 2 Current ratio ......................................................................................................... 16

Figure 3 Quick Ratio ........................................................................................................... 18

Figure 4 Cash Ratio ............................................................................................................. 20

Figure 5 Liquidity Ratio ...................................................................................................... 20

Figure 6 Debt-To-Asset Ratio ............................................................................................. 22

Figure 7 Equity Ratio .......................................................................................................... 23

Figure 8 Debt-Equity Ratio ................................................................................................. 24

Figure 9 Capitalization Ratios ............................................................................................. 26

Figure 10 Solvency Ratios .................................................................................................. 26

Figure 11 Gross Operating Profit Margin ........................................................................... 28

Figure 12 Net Profit Margin ................................................................................................ 29

Figure 13 Return on Assets ................................................................................................. 30

Figure 14 Return on Capital Employed .............................................................................. 31

Figure 15 Profitability Ratio ............................................................................................... 32

ix
 ABBREVIATIONS

BBS : Bachelor of Business Studies

CA : Current Assets

CL : Current Liabilities

CR : Current Ratio

D/A : Debt to Assets ratio

D/E : Debt to Equity

F/Y : Fiscal Year

GOP : Gross Operating Profit

GP : Gross Profit

KW : Kilo Watt

MW : Mega Watt

NP : Net Profit

Prof. : Professor

QR : Quick Ratio

ROA : Return on Assets

ROCE : Return on Capital Employed

x
 1

CHAPTER ONE
INTRODUCTION

1. Background of the Study

The Financial analysis is the most powerful tool of the financial analysis. It is used in
analyzing the financial information to indicate the operating &financial efficiency and
growth of the company. An arithmetical relationship between two figures is known as Ratio.
It is computed by dividing one item of relationship with the other. Ratio simply means one
number expressed in terms of another. Ratio analysis is a technique of analysis and
interpretation of financial statement through mathematical expression. It may be defined as
the mathematical expression of the relationship between two accounting figures. To evaluate
the different performance of an organization by creating the ratios from the figures of
different accounts is termed as Ratio Analysis. In short, ratio analysis can be defined as an
analysis of financial statements with the help of ratios. (ICAN, 2011)

Ratios are critical quantitative analysis tools. One of their most important functions lies in
their capacity to act as lagging indicators in identifying positive and negative financial
trends.

Flowing water creates energy that can be captured and turned into electricity called
hydropower. Hydro comes from the Greek word 'hydra', meaning water. It is the electricity
produced by the movement of fresh water from rivers and lakes. Also called hydropower, it
is a renewable energy source dependent upon the hydrologic cycle of water, which involves
evaporation, precipitation and the flow of water due to gravity. Gravity causes water to flow
downwards and this downward motion of water contains kinetic energy that can be
converted into mechanical energy, and then from mechanical energy into electrical energy.
At a good site, hydropower can generate very cost-effective electricity.

Nepal is rich in hydro-resources, with one of the highest per capita hydropower potentials
in the world. The estimated theoretical power potential is approximately 83,000 MW.
However, the economically feasible potential has been evaluated at approximately 43,000
MW. After establishment of first hydropower plant (0.5 MW) in 1911.
 2

2. Profile of Panchthar Power Company Limited

Panchthar Power Company Limited is a limited company incorporated in Nepal under the
company Act, 2063. The registered office of the company, and the principal place of
business, is located at Hattiban, Lalitpur, Nepal and production unit is located in Phalelung
Rural Municipality of Panchthar, Nepal. The company is converted into the Public Limited
on 22-10-2074.
The company produces electricity as per the terms of the license issued by Ministry of
Electricity. The company has Hewa Khola ‘A’ Hydroelectric Project (14.9 MW) under its
fold.

Table 1 Present Capital Structure of Panchthar Power Company Limited

As at 31st Ashadh 2080

Share Capital Structure
No of Shares Amount (NRs)

Authorized Capital 9,625,000 962,500,000

Issued Equity Capital 9,625,000 962,500,000

Paid-up capital 7,700,000 770,000,000

Table 2 Details of Board of Directors in PPCL

Name Designation
Rajesh Kumar Shrestha Chairperson
Raghu Nath Puri Director
Hima Timalsina Director
Rajan Kafle Director
Yagya Prasad Chapagain Director
Prakriti Raj Timalsina Director
 3

Table 3 Management Team

Name Designation
Pushpa Jyoti Dhungana Chief Executive Officer
Sundar Mani Subedi Finance Manager
Sundar Mani Subedi Company Secretary

Ssouce

Soucrce; Panchthar Power Company Limited Official Site

Figure 1. Organizational Structure

 4

3. Statement of Problem

The mushrooming of hydropower companies and about a dozen of micro hydropower in

short span of time has brewed new comparative scenario, and has posed a challenge to the
hydropower like PPCL which are making attractive profits. In the changed scenario this
hydropower needs to explore their strength and weakness to improve their performance
because their successes depend upon their ability to boost their productivity and financial
performance.

Thus, the present study seeks to explore the efficiency and weakness of PPCL. Attempts are
also being made to explore the following questions.

 What is the financial position of Panchthar Power Company Limited?

 What is the relationship of ROA, ROE and profitability position of Panchthar Power
Company Limited?

4. Objective of the Study

Each and every activity should be motivated to achieve specific goals. It is desired
outcomes. It defines path and courses of action to the human being. So, the primary objective
of study is to indicate the financial position of Panchthar Power Company Limited. And the
secondary objective is to analyze & judge the financial stability of Panchthar Power
Company Limited, and make suggestion to improve its financial efficiency. The specific
objectives of the study are;

 To analyze the impact on profitability by financial performance.

 To assess the major ratios in order to evaluate profitability.

5. Rationale of the Study

Hydropower in countries like Nepal has the greatest responsibility towards the economic
development of the country. The main objective of the hydropower company as a
commercial organization is to maximize the surplus by the efficient use of its fund and
resources. Being company, it also has a responsibility towards the socio economic up-
 5

liftmen of the country by providing specially considered facilities towards less privileged
sectors.

The study has various significant.

 The study enlightens the shareholders about the financial performance of their
company. This allows them to have a comparative retrospect whether their fund was
better utilized or not.
 The study also compels the management of company for self-assessment of what
they have done in the past and guides them in their future plans and programs.

6. Research Methodology

Research methodology is the technique to achieve the stated objectives of the study. This
chapter studies how research should be conducted, how the research is made effective and
what are the steps of research so that the study and goal of the related study can be easily
achieved. Especially research refer sequential steps to be followed by researcher at the time
of solving problem or studying the concerned subject matter in detail that include following
steps.

 Research design
 Sources and types of data
 Population and sample
 Data procedure
 Method of data analysis

6.1 Research Design

A research design is the framework or plan that guides the computation and analysis of the
data gathered for the study purpose. Basically, this study deals with the financial
performance analysis of Panchthar Power Company Limited. Hence, analytical as well as
descriptive approach have been used to evaluate the financial performance of the company
and obtained stated objectives.
 6

6.2 Sources and Types of Data

To conduct this study, Primary data are taken from questionnaire. Secondary data are taken
from annual reports of related office and their websites. So the major sources and types of
data include these published sources,

 Financial statement of Panchthar Power Company Limited

 Annual report of the Company
 Different previous studies
 Related bulletins, reports, periodically published by various government bodies.

6.3 Population and Sample

At present, there are 91 listed hydropower companies are operating in Nepal. They
constitute the population sample. Among of them Panchthar Power Company Limited is
selected for the study of Financial Analysis. Three years data are taken to conduct the study
from 2078/79 to 2080/81.

6.4 Data Procedure

Various data obtained through different sources can't be used directly for the analysis in
their original form. So, they have been rechecked, re-evaluated, edited and tabulated
to bring them into appropriate form for the analysis purpose. The researcher made the
collected data trust worthier getting them from authorized sources.

Moreover, different graph charts are presented according to necessity to interpret

visually. The data are tabulated according to subject matter and they are shown in
table in sequential way. Similarly, the financial ratios are also used for the analysis
and interpretation of the financial performance of selected sample.

6.5 Method of Data Analysis

In order to ascertain actual financial position of any firm, various analytical tools can be
used. It is true that suitable or appropriate tools, according to the nature of statement
and data make the analysis more effective and significant for achieving these objectives
 7

basically two sorts of tools can be used, financial and statistical the researcher has therefore,
applied these tools extensively.

As this study is related to financial performance analysis financial tools are more
useful, they help to identify the financial strength and weakness of the firm in spite of
various financial tools available the research has primarily stressed on ratio analysis
assuming it the most suitable tools. The various formulas that are beneficial for the study
are as follows:

 Current Ratio:

The current ratio measures a company's ability to pay off its current liabilities (payable
within one year) with its current assets such as cash, accounts receivable and inventories.
The higher the ratio, the better the company's liquidity position:

Current Ratio= Current Assets/ Current Liabilities

 Quick Ratio:

The quick ratio is the ratio of total quick assets to total current liabilities and measures
the short-term solvency of a firm. It is calculated by dividing quick assets by current
liabilities. Inventories are excluded from current assets. It is also called “Acid Test”. The
higher the ratio, the better the company's liquidity position.

Quick Ratio= (Current Assets- Inventories-Prepaid expenses)/ Current Liabilities

 Cash Ratio

The cash ratio is the ratio of a company's total cash and cash equivalents to its current
liabilities. The ratio calculates a company's ability to repay its short-term debt; this
information is useful to creditors when deciding how much debt they would be willing
to extend to the company. The cash ratio is more conservative look at a company's ability
to cover its liabilities than many other liquidity ratios because other assets, including
accounts receivable, are left out of the equation.

Cash Ratio= (Cash and Cash Equivalent)/ Current Liabilities

 8

 Debt-to-Assets Ratio

The debt-to-assets ratio is the most basic solvency ratio, measuring the percentage of a
company’s total assets that is financed by debt. The ratio is calculated by dividing total
liabilities (debt) by total assets.

Debt-to-Asset Ratio= Total debt/ Total Assets

The debt to asset ratio is commonly used by analysts, investors, and creditors to
determine the overall risk of a company. Companies with a higher ratio are more
leveraged and, hence, riskier to invest in and provide loans to. If the ratio steadily
increases, it could indicate a default at some point in the future.

 A ratio equal to one (=1) means that the company owns the same amount of liabilities
as its assets. It indicates that the company is highly leveraged.

 A ratio greater than one (>1) means the company owns more liabilities than it does
assets. It indicates that the company is extremely leveraged and highly risky to invest
in or lend to.

 A ratio of less than one (<1) means the company owns more assets than liabilities
and can meet its obligations by selling its assets if needed. The lower the debt to
asset ratio, the less risky the company.

 Equity Ratio

The equity ratio is calculated as follows:

Equity Ratio = Shareholder Equity / Total assets

The equity ratio shows how much of a company is funded by equity as opposed to debt.
The higher the number, the healthier a company is. The lower the number would indicate
that a company has more debt on its books.

 Debt-to-Equity Ratio:
 9

The debt-to-equity ratio is calculated as follows:

Debt-to-Equity ratio = Total Liabilities / Total Shareholder Equity

The debt-to-equity ratio is similar to the debt-to-assets ratio, in that it indicates how a
company is funded, in this case, by debt. The higher the ratio, the more debt a company
has on its books, meaning the likelihood of default is higher. The ratio looks at how
much of the debt can be covered by equity if the company needed to liquidate.

 Capitalization Rate:

The capitalization ratio measures the debt component of a company's capital structure,
or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to
support a company's operations and growth. Long-term debt is divided by the sum of
long-term debt and shareholders' equity. Ratios are critical quantitative analysis tools.
One of their most important functions lies in their capacity to act as lagging indicators
in identifying positive and negative financial trends.

Capitalization Ratio=Long Term Debt/(Long-Term Debt+ Shareholders Equity)

 Gross Operating Profit Margin:

Gross operating profit margin is derived by dividing operating profit by sales revenue.
Operating profit margin shows the efficiency of company in generating profit from
operating activities.

Operating Profit Margin= Operating Profit /Sales

 Net Profit Margin:

Net profit margin is the ratio of net profits to revenues for a company or business
segment. Typically expressed as a percentage, net profit margins show how much of
each rupee collected by a company as revenue translates into profit. The equation to
calculate net profit margin is:
 10

Net Profit
Net margin =
Revenue or sales

 Return on Assets (ROA):

Return on assets (ROA) is an indicator of how profitable a company is relative to its

total assets. ROA gives an idea as to how efficient management is at using its assets to
generate earnings. Calculated by dividing a company's annual earnings by its total
assets, ROA is displayed as a percentage:

Net Profit
ROA=
Total Assest

 Return on Capital Employed (ROCE):

Return on capital employed (ROCE) is a financial ratio that measures a company's

profitability and the efficiency with which its capital is employed. ROCE is calculated
as:

Earning before Interest and Tax(EBIT)

ROCE=
average Capital Employed

7. Literature Review

7.1 Conceptual Review

A ratio analysis is a quantitative analysis of information contained in a company’s financial

statements. Ratio analysis is based on line items in financial statements like the balance
sheet, income statement and cash flow statement; the ratios of one item – or a combination
of items - to another item or combination are then calculated. Ratio analysis is used to
evaluate various aspects of a company’s operating and financial performance such as its
efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied
to check whether they are improving or deteriorating. Ratios are also compared across
different companies in the same sector to see how they stack up, and to get an idea of
comparative valuations. Ratio analysis is a basis of fundamental analysis. (Tulsian 2014)
 11

Ratios are critical quantitative analysis tools. One of their most important functions lies in
their capacity to act as lagging indicators in identifying positive and negative financial
trends. The information a trend analysis provides allows to you to make and implement
ongoing financial plans and, when necessary, make course corrections to short-term
financial plans. Ratio analysis also provides ways for you to compare the financial state of
one business against other businesses within industry or between one business and
businesses in other industries. (Tulsian, 2014)

Ratio analysis is the base for Fundamental Analysis. Financial ratios are tools used to assess
the relative strength of companies by performing simple calculations on items on income
statements, balance sheets and cash flow statements. Ratios measure company’s operational
efficiency, liquidity, stability and profitability, giving investors more relevant information
than raw financial data. Investors and analysts can gain profitable advantages in the stock
market by using the widely popular, and arguably indispensable, technique of ratio analysis.
(Bhattacharya, 2016)

 Ratio Analysis is used for following:

 Comparison
 Industry Analysis
 Stock Valuation
 Planning and Performance

7.2 Empirical Review of Previous Works

Gopinathan Thachappilly (2009), in this article he discuss about the Financial Ratio
Analysis for Performance evaluation. Its analysis is typically done to make sense of the
massive number of numbers presented in company financial statements. It helps evaluate
the performance of a company, so that investors can decide whether to invest in that
company. Here we are looking at the different ratio categories in separate articles on
different aspects of performance such as profitability ratios, liquidity ratios, debt ratios,
performance ratios, investment evaluation ratios.
 12

James Clausen (2009), in this article he barely express about the liquidity ratio. He
Pronounce that it is analysis of the financial statements is used to measure company
performance. It also analyze the income statement and balance sheet. Investors and lending
institutions will often use ratio analyses of the financial statements to determine a
company’s profitability and liquidity. If the ratios indicate poor performance, investors may
be reluctant to invest. Therefore, the current ratio or working capital ratio, measures current
assets against current liabilities. The current ratio measures the company’s ability to pay
back its short-term debt obligations with its current assets. He thinks a higher ratio indicates
the company is better equipped to pay off short-term debt with current assets. Wherefore,
the acid test ratio or quick ratio, measures quick assets against current liabilities. Quick
assets are considered assets that can be quickly converted into cash. Generally, they are
current assets less inventory.

Prasanta Paul (2011) stated on the Financial Performance Evaluation – Some of the selected
NBFCs are taken for the comparative study. In the study, five of the listed NBFCs are
considered for the analyzation of comparative financial performance. Different type of
statistical tools like standard deviation, arithmetic mean, correlation etc. are used
extensively.

Sheela Christina (2011) reported on Financial Performance of Wheels India Ltd. Secondary
data collection method is used for the analytical type of research design. Before conducting
the study, validity and reliability is checked for the past three years where the researcher
used this for the purpose of study.

Gaur Jighyasu (2010) focuses on the measurement of financial performance of business

group companies of nonmetallic mineral products industries of India. This study uses the 57
business group companies’ financial data of nonmetallic mineral products industries of India
such as glass, cement, jewellery and gems, ceramic tiles, refractories etc.

Amalendu Bhunia (2010) took the analysis of pharmaceutical company’s financial

performance to understand how the management of finance playing a crucial role in the
growth. For a period of twelve years the study has undertaken from 1997-98 to 2008-09.
 13

Query-Jen Yeh (1996) The application of Data Envelopment analysis in conjunction with
financial ratios for bank performance evaluation. This paper demonstrated the application
of DEA in respect to the conjunction with financial ratios to help the bank regulators in
Taiwan to gain the insight of various financial dimensions which is link to the financial
operational decisions of banks.

James [Link] et al (1980) Cash flows, Ratio analysis and the W.T. grant company
bankruptcy. The W.T Grant company problems such as bankruptcy, liquidation was not
raised at overnight. The traditional analysis which is the ratio analysis only cannot reveal
the company problems whereas cash flow analysis reveal most of the problems of the
company.

Frederick D.S. Choi et al (1983) Analyzing foreign financial statements: The use and misuse
of International ratio analysis. The foreign companies are often misused the measurement
of financial risk and return. This paper used to explain the differences in the international
accounting principles.

7.3 Research Gap

As we know that environment is not static i.e. constantly changing in nature, due to which
the data included in the analysis and hence the results of the study may differ. Hence,
summarizing the overall information, various ratios are systematically analyzed and
evaluated in this study.

This study covers the more recent financial data than those of the study which were
previously conducted. Some researchers have concentrated on one institution and some have
selected different institution. But this study selects PPCL’s ratio analysis to cover and fulfill
its objective. This research covered 2078/2079 to 2080/2081.

8. Limitation

From Starting of this study some force has restricted the area of study, which may interrupt
the accuracy, fluency knowledge limitation of this whole work.

 This study limits to only one Hydropower Company.

 14

 The study is confined to five years. Detailed analysis covering a lengthy period,
which may give slightly different results, has not been made.
 15

CHAPTER TWO

RESULTS AND ANALYSIS

In this chapter, the data have been analyzed and interpreted using financial and statistical
tools following the research methodology. In the part of analysis, various tables have been
used to present the data collected from various sources have been inserted in the required
tables according to their homogenous nature. The outcomes of the analysis have been
compared with conventional standard with respect to ratio analysis and other factors.
Furthermore, many suitable graphs, and diagrams have also been used to clarify the actual
position and performance of the company.

Ratio analysis involves the methods of calculating and interpreting financial ratios in
order to assess the firm's performance and status. The basic input to ratio analysis is the
firm's income and expenditure statement and balance sheet for the periods to be examined.
The study consists of the following ratios to analyze the financial performance of the
Pancthar Power Company Limited.

1. Liquidity Ratios

Liquidity Ratio measures the firm's ability to fulfill its short-term commitments or debt
obligations. These ratios focus on current assets and current liabilities and are used to
ascertain the short-term solvency. The following ratio has been applied to find out liquidity
position of the company

1.1 Current ratio

The current ratio is a liquidity ratio that measures whether a firm has enough resources to
meet its short term obligations. It compares firm’s current assets with current liabilities.

Current Ratio= Current Assets/ Current Liabilities

 16

Table 4 Current Ratio

Particulars 2078-79 2079-80 2080-81

Current Assets 120,601,410 119,379,869 455,460,304

Current 287,895,100 404,153,095 1,136,155,984

Liabilities

Current Ratio 0.41 0.29 0.40

Note: Annual Report (From 2078/79 to 2080/81)

The analysis of Table 4 shows From Fiscal Year 2078/79 to 2080/81, Panchthar Power
Company Limited's current ratio remained low, indicating weak liquidity. The ratio dropped
from 0.41 in 2078/79 to a low of 0.29 in 2079/80, slightly improving to 0.40 in 2080/81.
This shows the company may struggle to meet short-term obligations, especially with a large
term loan maturing soon. The above can be shown as:

current ratio
0.45
0.41 0.4
0.4
0.35
0.29
0.3
0.25
0.2
0.15
0.1
0.05
0
2078/79 2079/80 2080/81

Figure 2. Current ratio from FY 2078/79 to FY 2080/81

 17

1.2 Quick ratio.

The quick ratio is the ratio of total quick assets to total current liabilities and measures the
short-term solvency of a firm. It is calculated by dividing quick assets by current liabilities.
Inventories are excluded from current assets. It is also called “Acid Test”. The higher the
ratio, the better the company's liquidity position.

Quick Ratio= (Current Assets- Inventories-Prepaid expenses)/ Current Liabilities

Table 5 Quick Ratio

Particulars 2078-79 2079-80 2080-81

Quick Assets 77,242,883 119,379,869 455,460,304

Current Liabilities 287,895,100 404,153,095 1,136,155,984

Quick Ratio 0.27 0.96 0.64

Note: Annual Report (From 2078/79 to 2080/81)

Analysis of Table 5 shows that the quick assets of Panchthar Power Company Limited have
significantly decreased in 2078/79 but increased again in the following years. The company
has the lowest quick ratio of 0.27 in 2078/79 and a relatively higher ratio of 0.96 in 2079/80
during the study period. However, in 2080/81, although the quick assets increased
sharply,the quick ratio declined to 0.64 due to a substantial rise in current liabilities. The
quick ratio fluctuated during the study period, indicating changes in the company's short-
term liquidity position.

The above can be shown as:

 18

Quick Ratio
1.2

1 0.96

0.8
0.64
0.6

0.4
0.27

0.2

0
2078-79 2079-80 2080-81

From FY 2078/79 to 2080/81, Panchthar Power Company Limited's current ratio remained
low, indicating weak liquidity. The ratio dropped from 0.41 in 2078/79 to a low of 0.29 in
2079/80, slightly improving to 0.40 in 2080/81. This shows the company may struggle to
meet short-term obligations, especially with a large term loan maturing soon.

Figure 3. Quick Ratio for FY 2078-79 to FY 2080-81

 19

1.3 Cash ratio.

The cash ratio is the ratio of a company’s total cash and cash equivalents to its current
liabilities. The ratio calculates a company’s ability to repay its short-term debt; this
information is useful to creditors when deciding how much debt they would be willing to
extend to the company. The cash ratio is more conservative look at a company’s ability to
cover its liabilities than many other liquidity ratios because other assets, including accounts
receivable, are left out of the equation.

Cash Ratio= (Cash and Cash Equivalent)/ Current Liabilities

Table 6 Cash Ratio

Particulars 2078-79 2079-80 2080-81

Cash 4,683,758 5,581443 36,211,425

Current Liabilities 287,895,100 404,153,095 1,136,155,984

Quick Ratio 0.0021 0.016 0.032

Note: Annual Report (From 2078/79 to 2080/81)

The table shows the company's cash balance, current liabilities, and quick ratio over three
fiscal years (2078-79 to 2080-81). While cash initially declined, it saw a significant boost
in 2080-81, reaching 36,211,425. However, current liabilities also grew sharply, rising from
287,895,100 in 2078-79 to 1,136,155,984 in 2080-81. The quick ratio, though improving
from 0.0021 to 0.032, remains very low, indicating that the company’s ability to cover short-
term obligations with cash is weak despite the recent increase. The analysis suggests a slight
improvement in liquidity, but the company still faces challenges in meeting its short-term
liabilities.

This can be shown as:

 20

Cash Ratio
0.035
0.032

0.03

0.025

0.02
0.0156
0.015

0.01

0.005
0.0021

0
2078-79 2079-80 2080-81

Figure 4. Cash Ratio from FY2078-79 to FY2080-81

Liquidity Ratio
1.2

1
0.96

0.8

0.64
0.6

0.4 0.41 0.4

0.27 0.29
0.2

0 0.0021 0.0156 0.032

2078-79 2079-80 2080-81

Current Ratio Quick Ratio Cash Ratio

Figure 5. Liquidity Ratio of FY 2078/79 to FY 2080/2081

 21

2. Solvency Ratio

Solvency ratios measure a company’s ability to meet its longer-term obligations. Analysis
of solvency ratios provides insight on a company’s capital structure as well as the level of
financial leverage a firm is using. A solvency ratio indicates whether a company’s cash
flow is sufficient to meet its long-term liabilities and thus is a measure of its financial health.
It can indicate the likelihood that a company will default on its debt obligations

2.1 Debt-to-assets ratio.

Debt to asset ratio indicates how much of the total assets is being funded by the debt. It
shows leverage used by the entity. Higher debt to asset ratio indicates higher risk and vice-
versa.

Debt-to-asset Ratio= Total debt/ Total Assets

Table 7 Debt-to-Assets Ratio

Particulars 2078-79 2079-80 2080-81

Total Debt 1,245,273,934 1,148,231,459 1,619,919,093

Total Asset 2,324,712,689 2,213,360,247 2,545,988,794
Debt to Asset
0.54 0.52 0.64
Ratio

Note: Annual Report (From 2078/79 to 2080/81)

The table presents the Debt-to-Assets Ratio over three fiscal years (2078-79 to 2080-81),
revealing that the company's reliance on debt for asset financing has increased, with ratios
rising from 0.54 to 0.64, indicating higher financial risk. While the ratio was lowest in 2079-
80 (0.52) and peaked at 0.66 in 2076-77 (not shown), the upward trend suggests growing
debt dependency, which reduces solvency and signals increased riskiness. This trend implies
that the company is progressively using more debt to finance its assets, potentially
weakening its financial stability. Data is sourced from Annual Reports (2078/79 to
2080/81)..
 22

Debt-to-Assets Ratio
0.7
0.64

0.6
0.54
0.52
0.5

0.4

0.3

0.2

0.1

0
2078-79 2079-80 2080-81

Figure 6. Debt-To-Asset Ratio for the FY 2078/79 to FY2080/81

2.2 Equity Ratio

Equity ratio indicates the portion of total assets funded by shareholders of the company. It
indicates how much portion of investment is being made by own money rather than
borrowed funds.

Equity ratio = Shareholder equity / Total assets

Table 8 Equity Ratio

Particulars 2078-79 2079-80 2080-81

Shareholders’
1,079,438,755 1,065,128,787 926,069,701
Equity
Total Assets 2,324,712,689 2,213,360,247 2,545,988,794
Equity Ratio 0.464 0.481 0.364
Note: Annual Report (From 2078/79 to 2080/81)

The table shows the company's Equity Ratio over three years (2078-79 to 2080-81),
calculated as Shareholder Equity divided by Total Assets. In 2078-79, the ratio was 0.464
 23

(46.4%), rising slightly to 0.481 (48.1%) in 2079-80, then dropping to 0.364 (36.4%) in
2080-81. Shareholder Equity decreased over the period (from 1,079,438,755 to
926,069,701), while Total Assets peaked in 2080-81 (2,545,988,794). The trend suggests
declining reliance on equity financing in the final year.

Equity Ratio
0.6

0.5 0.481
0.464

0.4 0.364

0.3

0.2

0.1

0
2078-79 2079-80 2080-81

Figure 7. Equity Ratio for the FY 2078/79 to FY2080/81

2.3 Debt-to-Equity Ratio

Debt-Equity ratio indicates how the company is being financed. It indicates what the sources
of funds of the company are. It shows what portion of assets are being financed by debt and
what are being financed by equity. High Debt Equity ratio indicates high degree of leverage
which is deemed to be risky.

Debt-to-equity ratio = Total liabilities / Total shareholder equity

 24

Table 9 Debt-to-Equity ratio

Particulars 2078-79 2079-80 2080-81

Total Liabilities 1,245,273,934 1,148,231,459 1,619,919,093

Shareholders’
1,079,438,755 1,065,128,787 926,069,701
Equity
D/E Ratio 1.15 1.08 1.75
Note: Annual Report (From 2078/79 to 2080/81)
The table shows the company's **Debt-to-Equity (D/E) Ratio** over three years (2078-79
to 2080-81), calculated as **Total Liabilities** divided by **Shareholders' Equity**. The
ratio decreased from **1.15 (2078-79)** to **1.08 (2079-80)**, indicating lower debt
reliance, but surged to **1.75 (2080-81)** due to higher liabilities (1,619,919,093) and
declining equity (926,069,701). Though the ratio remained below the standard 2:1 threshold,
the sharp rise in 2080-81 suggests increased leverage or weakened equity, contradicting the
initial claim of a "reducing trend."

Debt-to-Equity Ratio
2
1.75
1.8

1.6

1.4
1.15
1.2 1.08
1

0.8

0.6

0.4

0.2

0
2078-79 2079-80 2080-81

Figure 8. Debt-Equity Ratio for the FY 2078/79 to FY2080/81

 25

4.5 Capitalization Ratio.

Capitalization ratio is a financial ratio that measures the proportion of debt in a company’s
capital structure. It indicates how much a company relies on debt to finance its operations
and goals. It also reflects company’s solvency and financial leverage.
Capitalization Ratio=Long Term Debt/ (Long-Term Debt+ Shareholders Equity)

Table 10 Capitalization Ratio

Particulars 2078-79 2079-80 2080-81

Long Term Debt 1,175,186,834 744,078,364 483,763,108

Long Term Debt +

2,254,625,589 1,809,207,151 1,409,832,809
Equity

Capitalization Ratio 0.52 0.41 0.34

Note: Annual Report (From 2078/79 to 2080/81)

The table presents the Capitalization Ratio over three fiscal years (2078-79 to 2080-81),
showing the proportion of long-term debt in the company's capital structure. In 2078-79, the
long-term debt was 1,175,186,834, accounting for 52% of the total capital (long-term debt
+ equity). By 2079-80, the debt decreased to 744,078,364, reducing the ratio to 41%, and
further declined to 483,763,108 (34%) in 2080-81. This indicates a consistent reduction in
the company's reliance on debt financing over the three-year period.
 26

Capitalization Ratio
0.6
0.52
0.5

0.41
0.4
0.34

0.3

0.2

0.1

0
2078-79 2079-80 2080-81

Figure 9. Capitalization Ratios for the FY 2078/79 to FY2079/80

Solvency Ratio
2
1.8
1.75
1.6
1.4
1.2
1.15
1.08
1
0.8
0.6 0.64
0.54
0.52 0.52
0.464 0.481
0.4 0.41 0.364
0.34
0.2
0
2078-79 2079-80 2080-81

Debt-to-Equity Ratio Equity Ratio Debt-to-Equity Ratio2 Capitalization Ratio

Figure 10. Solvency Ratios for the FY 2078/79 to FY2079/80

 27

3. Profitability Ratios

Profitability ratios are arguably the most widely used ratios in investment analysis. These
ratios include the ubiquitous “margin” ratios, such as gross, operating and net profit margins.
These ratios measure the firm’s ability to earn an adequate return.

3.1 Gross Operating Profit Margin.

Gross Operating Profit Margin is a measure of proportion of revenue left after accounting
for production costs. It is calculated as under:
Gross Operating Profit Margin= Operating Profit /Sales

Table 11 Gross Operating Profit Margin

Particulars 2078-79 2079-80 2080-81

Operating Profit 278,244,988 175,684,525 320,855,625

Sales 403,069,309 326,179,339 398,691,264

Gross Profit
69.03% 53.86% 80.48%
Margin
Note: Annual Report (From 2078/79 to 2080/81)

The table presents the Gross Operating Profit Margin for three fiscal years (2078-79 to 2080-
81), showing Operating Profit, Sales, and the calculated margin. In 2078-79, the margin was
69.03% (Operating Profit: 278,244,988; Sales: 403,069,309), which dropped to 53.86% in
2079-80 (Operating Profit: 175,684,525; Sales: 326,179,339), before rising significantly to
80.48% in 2080-81 (Operating Profit: 320,855,625; Sales: 398,691,264). The data indicates
fluctuating profitability, with the highest margin achieved in 2080-81.
 28

Gross Operating Profit Margin

90.00%
80.48%
80.00%
69.03%
70.00%

60.00% 53.86%
50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
2078-79 2079-80 2080-81

Figure 11 Gross Operating Profit Margin for FY2078/79 to FY2080/81

3.2 Net Profit Margin.

Net Profit Margin is a ratio of profit to revenue that shows how much of each Rupees in
revenue collected by a company translates into profit.
Net margin = Net profit / revenue or sales

Table 12 Net Profit Margin

Particulars 2078-79 2079-80 2080-81

Net Profit 116,938,755 53,065,032 (193,059,086)

Sales 403,069,309 326,179,339 398,691,264

Net Profit Margin 29.01% 16.27% -48.42%

Note: Annual Report (From 2078/79 to 2080/81)

The table shows the company's net profit margin over three years. In 2078-79, it was
29.01%, dropping to 16.27% in 2079-80, and plunging to -48.42% in 2080-81 due to a net
 29

loss. This indicates a sharp decline in profitability, with the company facing significant
financial challenges in the final year.

Net Profit Margin

40.00%
29.01%
30.00%

20.00% 16.27%

10.00%

0.00%
2078-79 2079-80 2080-81
-10.00%

-20.00%

-30.00%

-40.00%

-50.00%
-48.42%
-60.00%

Figure 12 Net Profit Margin for FY 2078/79 to FY 2080/81

3.3 Return on Assets.

Return on assets is the profitability ratios that measure how much net income a company
generates from its total assets. It shows the efficiency of usage of assets by entity to earn
income. It is calculated as under:
ROA= Net Profit /Total Assets

Table 13 Return on Assets

 30

Particulars 2078-79 2079-80 2080-81

Net Profit 116,938,755 53,065,032 (193,059,086)

Total Assets 2,324,712,689 2,213,360,247 2,545,988,794

ROA 5.03% 2.40% -7.58%

Note: Annual Report (From 2078/79 to 2080/81)

The table shows Return on Assets (ROA) over three years: 5.03% (2078-79), 2.40% (2079-
80), and -7.58% (2080-81). ROA was positive in the first two years but turned negative in
the third due to a net loss. Earlier years (2076-77, 2077-78) also had negative ROA,
indicating fluctuating profitability.

Return on Assets
6.00% 5.03%

4.00%
2.40%
2.00%

0.00%
2078-79 2079-80 2080-81
-2.00%

-4.00%

-6.00%

-8.00%
-7.58%

-10.00%
s
Figure 13. Return on Assets for FY 2078/79 to FY 2080/81

3.4 Return on Capital Employed (ROCE).

Return on Capital Employed is a financial ratio that can be used in assessing a company’s
profitability and capital efficiency. It is calculated as under:
 31

ROCE = Earnings before Interest and Tax (EBIT) / Average Capital Employed.

Table 14 Return on Capital Employed

Particulars 2078-79 2079-80 2080-81

Operating
278,244988 175,684,525 320,855,625
Profit

Average
Capital 2,254,625,589 1,809,207,151 1,409,832,809
Employed

ROCE 12.34% 9.71% 22.75%

Note: Annual Report (rom 2078/79 to 2079/80)

Analysis of table 14 shows that the ROCE is 2078-79, 2079-80 and 2080-81 is 12.34%,
9.71% ,and 22.75% respectively.

Return on Capital Employed

25.00%
22.75%

20.00%

15.00%
12.34%

9.71%
10.00%

5.00%

0.00%
2078-79 2079-80 2080-81

Figure 14. Return on Capital Employed for FY 2078/79 to FY 2080/81

 32

Profitability Ratio
100.00%

80.00% 80.48%
69.03%
60.00%
53.86%
40.00%
29.01%
20.00% 22.75%
12.34% 16.27%
9.71%
5.03% 2.40%
0.00%
2078-79 2079-80 -7.58%
2080-81
-20.00%

-40.00%
-48.42%
-60.00%

Gross Operating Profit Margin Net Profit Margin

Return on Assets Return on Capital Employed

Figure 15. Profitability Ratio for FY 2078/79 to FY 2080/81

4. Findings of the Study

The following findings have been derived from the analysis and interpretation of the
Primary and Secondary data, during the study period.

The liquidity ratios of Panchthar Power Company Limited Ltd. have been calculated over
the period of 2078/79 to 2080/81 B.S. The following findings were noted:

 Company’s current ratio is always lower than the standard level of 2:1. The maximum
current ratio is 1.59 in 2078-79. Hence company is facing liquidity issues in paying short
obligations.
 Company is facing decreasing trend of Liquidity Ratios. Hence company might be
facing liquidity crisis if the issues are not identified and resolved.
 The company is moving further towards equity financing as a source of financing. It has
been observed that the debt-to-asset ratio has been gradually decreasing whereas equity
ratio has been increasing gradually. This might impact on the solvency of the equity
shareholders in case of Liquidation.
 33

 Company’s Debt to Equity ratio is always better than standard level of 2:1. The
maximum debt to equity ratio is 1.96:1 during the study period. It shows that company
can easily settle the debt obligation in the future as debt level is within the recommended
level
 Gross operating profit margin of the company is in decreasing trend on recent years.
Decrease on profit margin in recent years indicates deficiencies inefficient management
of resources by the company as well as low tariff rate fixed by NEA
 Return on Assets is below 8% in recent years this shows that company is moderate in
managing its assets for the optimum return
 Return on Capital Employed (ROCE) is below 23% in recent years and is in decreasing
trend which shows that company has not been able to manage the fund collected from
its shareholders and creditors efficiently for better return.
.
 34

CHAPTER THREE

SUMMARY AND CONCLUSION

In this chapter, the summary has been presented along with conclusions and actionable
recommendations. This is brief introduction to all the chapters of the study as well as the
overall summary from the analysis of the relevant data. Since a study would not be complete
without any suggestive findings, the study has also tried to point out errors in the financial
activities of Panchthar Power Company Limited Ltd as well as the corrective suggestions
for the elimination of the same, with the hope of giving directions for further growth and
improvement in the company's operation.

1. Summary

The present study is a conclusion-oriented study of ratio analysis of Panchthar Power

Company Limited Ltd. The study had been undertaken to examine and evaluate the
performance of company. The researcher had used the financial tools to make this study
more effective and informative. This study has covered five years data from 2076/77 to
2080/81 of Panchthar Power Company Limited Ltd. In this section, the researcher has tried
to summarize the ratio analysis of Panchthar Power Company Limited.

The company has been able to maintain its position in the country as one of the leading
hydropower companies in the country. Moreover, competition in the hydropower sector is
getting tougher day by day. Our own domestic unrest and threats have also suffered a set a
setback due to these and many other reasons. However, in line with the current market trend,
the company is making all possible efforts to consolidate its business portfolio and cut down
the cost in all operating areas to the extent possible, to maintain the profitability.

The principal activities of the company in the past three years continued to be rural
electrification and serving national grid. The company continues to strive in order to
maintain its position in the country as the market leader in the hydropower arena. There are
ongoing efforts and commitments in enhancing its projects and corporate social
responsibility both, establishing sister companies.
 35

A very low debt to equity ratio, capitalization ratio and debt to asset ratio is favorable
because debts are considered to be riskier than equity funds in the sense that the company
has a compulsory legal obligation to pay interest to the debt holders irrespective of the profit
made or losses incurred. Therefore, appropriate mix of debt and owners' fund is desired by
the company.

2. Conclusion

From the analysis of various available secondary data using many financial and statistical
tools, the study has come up with the following conclusions:

From the analysis of various available secondary data using many financial and statistical
tools, the study has come up with the following conclusions:

 While comparing current assets with current liabilities, it reveals those current assets
are less in comparison to cover the current liabilities. The practice of holding small
size of current assets is problematic as it leads to inability to meet short term
commitments. On the other hand, too little liquidity may lead to serve cash problems,
which can result in inability to pay short term obligations in time.
 Similarly, cash ratio has also decreasing trend. Cash and bank balance has not been
maintained according to total current liability.
 Decreasing Trend of Debt-to-Equity ratio and capitalization ratio indicated less use
of debt hence decrease credit default risk of the company.

In conclusion, financial condition of Panchthar Power Company Limited is deteriorating

as all vital ratios shows degradation in comparison to previous years which means
management has not performed well in the market. Overall, the financial position of
Panchthar Power Company Limited is not able to provide any significant return to its
investors.
 36

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3. Appendix 1.2: Three Year Statement of Financial Position

38
39
40
41
 42

4. Appendix 1.2: Three Year Statement of Profit and Loss

43
44
45
46