CHAPTER 1: Introduction

1.1 Financial Performance Analysis

Financial performance refers to the overall financial health of the business. Financial Performance
shows important relationships in the financial statements & relates them to important financial
objectives; also called Financial Statement Analysis The analysis of financial performance involves
evaluating an organization's financial health, efficiency, profitability, and overall performance over a
specific period. Financial Statements used in evaluating overall financial performance including the
balance sheets, the income statement, and the statement of cash flows. This process is crucial for
stakeholders, such as investors, management, creditors, and analysts, to make informed decisions about
investments, operations, and strategic planning.

Financial performance is a complete evaluation of a company’s overall standing in categories such as

assets, liabilities, equity, expenses, revenue, and overall profitability. It is measured through various
business-related formulas that allow users to calculate exact details regarding a company’s potential
effectiveness.

For internal users, financial performance is examined to determine their respective company’s well-
being and standing, among other benchmarks. For external users, financial performance is analyzed to
dictate potential investment opportunities and to determine if a company is worth its while.

Financial Performance analysis describes the methods that those examining the affairs of a business use
to evaluate assess its financial activity. Before calculations can be made on certain financial indicators
that establish overall performance, a financial statement must occur.

Financial performance is a subjective measure of how well a firm can use assets from its primary mode
of business and generate revenues. When calculating financial performance, seven critical ratios are
extensively used in the business world to assist and evaluate a company’s overall performance.

Through a financial performance analysis, specific financial formulas and ratios are calculated, which,
when compared to historical and industry metrics, provide insight into a company’s financial condition
and performance.

1.2 Meaning of Financial Statements

Financial statements serve as the cornerstone of financial reporting, offering a transparent window into
an entity’s financial well-being. Understanding these statements empowers stakeholders to make
informed decisions. Financial analysis involves a comprehensive examination of a company’s financial
 statements, including: What the company owns and owes, How much money the company has made
and spent, The company’s profitability, and the company’s cash position. Financial statements are
typically audited for accuracy for tax, financing, or investing purposes. They can help investors, banks,
and other financial institutions understand a company’s financial health and decide whether to invest in
or loan money to the business.

1. A written record created by a company’s management that depicts financial and accounting information
relating to businesses.
2. It provides a summary of the financial balances of a business enterprise over a certain period i.e
quarterly, six-monthly, or yearly.
3. Financial Statements include a balance sheet, income statement, cash flow statement, and statement of
shareholders equity.

Following are the four primary types of financial statements, each providing a distinct lens through
which to analyze a company’s financial health.

Balance Sheet:

Often referred to as the statement of financial position, the balance sheet offers a snapshot of a
company’s financial condition at a specific date.

A financial statement that shows a company’s assets, liabilities, and capital of the organization at a
particular time.

It provides the basis for computing rates of return for investors and

It provides a snapshot of what a company owns and owes, as well as the amount invested by
shareholders.

The balance sheet assessment reveals a company’s liquidity through current and quick ratios. A strong
liquidity position, reflecting ample current assets to cover short term liabilities, may indicate a
company’s ability to meet its financial obligations. Companies with healthy liquidity positions might
be considered more favourable for investment due to their ability to navigate short-term challenges.
From the balance sheet, investors focus on liquidity, examining the adequacy of current assets to cover
short-term obligations and leveraging ratios like the current ratio to assess this. Additionally, investors
analyze asset quality, seeking insights into the composition and efficiency of assets in generating
revenue.
Balance sheets can be used with other important financial statements to conduct fundamental analysis
or calculate financial ratios. The balance sheet is based on the fundamental equation:

ASSETS = LIABILITIES + SHAREHOLDERS EQUITY

The assets and liabilities are divided into two categories:

Current assets/liabilities and non-current (long term) assets/ liabilities. More liquid accounts, such as
Inventory, Cash, and Trades Payables, are placed in the current section before illiquid accounts (or non-
current) such as Plant, Property, and Equipment (PP&E) and Long-Term Debt.

Income Statement:

The Income statement is a document that reports a company’s financial performance over a specific
period.

The income statement is the statement made by company management that shows the revenue,
expenses, and net income or loss for a period.

An income statement is also called a Profit and Loss Account.

This statement sheds light on a company’s profitability and efficiency in generating revenue.

The focus of the income statement is to provide all the financial information about the profitability
status in a period to the readers, creditors, and investors.

This is one of the crucial documents among all financial documents since it shows the entity’s
profitability and its business status.

It is prepared by several entities annually, quarterly and monthly.

Investors and management can make swift and better decisions and form strategies for a specific
product, department, or business as a whole.

The performance of the organization over some time and comparison of the performance of the previous
year and a quarter can be done with the thorough study of the income statement and other financial
documents.

Based on them investors can perform various analyses, such as if the organization has reduced overhead
expenses and operating expenses without compromising the quantity and quality of the production.
 Ratios derived from the income statement offer crucial insights into a company’s financial health and
guide investment decisions. Metrics like profit margin unveil a company’s efficiency in generating
profits from sales, influencing investor confidence.

The format that almost all organizations include the following line items:

1) Revenue
2) Expenses
3) Profit

Types of Income Statement

i. Single-step income statement:

It is a simple report of a business’s profit, using a single equation to calculate net income.

It uses a single subtotal for all revenue line items and a single subtotal for all expense line items, with
a net profit or loss appearing at the bottom of the report.

ii. Multi-step Income statement:

The multi-step format is the format of choice for larger and multi-department organizations.

It categorizes income and expenses into operating and non-operating heads.

Operating heads include selling and administration expenses from operating expenses. The total
operating expenses are obtained by adding both selling expenses and administrative expenses. The
operating income is then calculated as follows:

OPERATING INCOME = GROSS PROFIT – OPERATING

EXPENSES

The non-operating head lists all business incomes and expenses that are not related to the principal
activities of the business. Once the items in the non-operating head are summed up, the net income for
the particular period is computed as follows:

NET INCOME = OPERATING INCOME + NON-OPERATING

ITEMS
 Cash Flow Statement:

Unlike the balance sheet and income statement, a cash flow statement focuses on the movement of cash
within a company.

Cash flow analysis is crucial in fundamental analysis as it reflects a company’s ability to generate cash
from its operating activities, manage debts, invest in growth, and provide returns to shareholders.

The cash flow statement provides information about how much the cash is entering and leaving the
business during a specified period.

It acts as a bridge between the income statement and the balance sheet by showing how money is in and
out of the business.

It offers insights into the company’s cash position, which is vital for its sustainability.

There are three sections of the statement of the cash inflows:

• Operating activities

The principal revenue-generating activities that are not investing or financing; any cash flows from
current liabilities.

• Investing activities

Any cash flows the acquisition and disposal of long-term assets and other investments not included in
cash equivalents

• Financing activities

Any cash flows that result in changes in the size and composition of the contributed equity capital or
borrowings of the entity (i.e., bonds, stock, dividend)

Statement of shareholder’s equity: It is a report that shows all of the major equity accounts during a
period. It is required to prepare along with other important financial documents at the end of the
reporting period.
These statements are used by various stakeholders, including investors, creditors, management, and
regulators, to evaluate financial health, performance, and future prospects.

1.3 Definition of Financial Performance Analysis

Financial performance analysis is the process of identifying the financial strengths and weaknesses
of the firm by properly establishing the relationship between the items of the balance sheet and the
profit and loss account. It also helps in short-term forecasting and growth can be identified with the
help of financial performance analysis.

1.4 Advantages and Disadvantages of Financial Statement Analysis

Financial statements are made by the finance or accounting area. Knowing then its definition and seeing
who the business structure helps, we can enter into the advantages and disadvantages of an analysis of
financial statements.

Advantages of Financial Statement Analysis:

Financial statements are important to investors because they can provide information about a company’s
revenue, expenses, profitability, debt load and, ability to meet its short-term and long-term financial
obligations. Companies choose different processes to be profitable, safely increasing their productivity.
One of these safe ways is the analysis of financial statements, its use makes it easier to respond to
possible problems. Using financial analysis in a company brings advantages that help the fulfillment of
our business plan, such as better communication in the company and increased productivity. Next, we
will mention and explain the advantages it has.

Multiply the competitiveness of the company.

They help assess the profitability, efficiency, and overall financial performance of a business over a
specific period

Assist management in making informed decisions regarding investments, cost control, expansion, or
diversification.

One of the characteristics that every company should have is the ability to solve the needs of its
consumer, which can be achieved by analyzing financial status analyzes, which helps make decisions
based on these reports that you provide us.

Increase productivity in the company.

Currently, in such a competitive market, companies have production prioritized in their business
strategy, and using financial status analysis helps in detecting problems on time. This to generate new
paths with which to meet the company’s objectives, Improve communication in the company.

Not having good communication slows down the achievement of objectives in companies. To which a
solution is to have a system that shows the information of each specific area, so that its workers can
analyze those reports, which are given by the analysis of financial statements.

Gives a better view of the finance department.

If we have an analysis of financial statements and manage them correctly, we can reduce the margin of
error in the financial department, which facilitates the detection of any abnormality in time, preventing
the company.

By offering a clear and standardized view of financial performance and position, financial statements
support sound decision-making and strengthen stakeholder trust.

Disadvantages of Financial Statement Analysis:

One disadvantage of using financial statements for decision making is that the data and figures are based
on the market at that given time. Financial statements have considerable advantages, such as helping to
give an easy response in case of a problem, but it also has some negative effects, another disadvantage
is generating patterns in the market, affecting decision-making, to only shows how the company did it
once, without giving the chance to compare the information with past years and generate market patterns
with the possibility of changing suddenly. We will explain these disadvantages in more detail below.

Generate patterns in the market

A disadvantage of the use of financial statement analysis when making decisions is that the data they
provide is based on the current market, which can change suddenly, so the directors of the company
cannot fully trust, since it is not a daily check.

They do not capture qualitative aspects like customer satisfaction, employee morale, market conditions,
or brand reputation, which are essential for decision-making.

Certain items, such as depreciation, bad debts, or asset valuations, involve subjective estimates, which
can affect accuracy.
 This disadvantage is related to the previous one since a problem with the analysis of financial statements
is that they precisely show what the company does on one occasion, this without showing if the
company is doing better than in previous years, taking away the possibility to analyze. This makes it a
continuous scan that should be used only once.

Despite these limitations, financial statements remain vital tools for analyzing and understanding a
business’s financial situation when used alongside other assessments.

1.5 Importance of Financial Performance Analysis

Financial analysis allows to identify potential risks and vulnerabilities in a business’s financial
performance. It is a critical process for understanding the financial health and efficiency of an
organization. By addressing these risks protectively, one can mitigate their impact and protect the
business from financial setbacks. It’s importance can be highlighted through the following points.

1. It makes you financially literate about the complexities of operation and minute things of business. A
good analysis provides you with the information in the simplest form of, strategies wisely, and invests
in long-term business plans.
2. It contains different types of analysis of every characteristic of the business. It forms the relationships
between the figures and the financial statement of the company. It is vital to calculate past business
outcomes, policies, and goals.
3. It tells the nature of your company and all the strong and weak points of the firm. It suggests rectifying
the errors in business policies and making necessary changes, resulting in growing profits year after
year.
4. It helps make investments in the right time frame for smooth financial activities and generate more
revenue as companies require all sorts of short-term and long-term investments for growth.
5. It reports all the receivables accounts that are liable to pay by the time.
6. It facilitates efficient inventory management to keep track of fluency in cash flow for day-to-day
business operations. It indicates the sufficiency of stock level as inadequate or excess.

In summary, financial performance analysis is crucial for ensuring an organization’s financial well-
being, guiding decision-making, and maintaining competitiveness in a dynamic business environment.
 1.6 Purpose

The main purpose of financial analysis is to track the progress and performance of the business and
evaluate it’s financial health. It provides insights into how well a business is utilizing its resources,
managing its finances, and achieving its strategic goals. Key objectives include:

• Track financial trends over time to understand growth patterns and predict future performance.
• Compare actual results against budgets, forecasts, and industry benchmarks to evaluate performance.

• Analysis of financial performance aims to create a strategic relationship between all financial statements
and make suggestions accordingly to compare its business environment.
• It determines the worth of the company’s investment and the revenues it gathers from that. It helps to
figure out the expenditures and cash flows.
• Its primary purpose is to improve future performance and move to a stable financial position. It helps
in making long-term plans for constant growth for many years.
• It is helpful for the investors to gain correct information about the company’s market position. The
investor can make a reasonable perception of the ongoing business speed.
• It has a purpose to study the suitability of stocks, and debtors should vary by the company.
• Highlight areas of strong performance and pinpoint inefficiencies or potential risks.

Overall, financial performance analysis is essential for ensuring an organization’s long-term success
and sustainability.

1.7 About PTC India

PTC India Financial Services Limited is a NBFC registered with RBI which holds the status of
Infrastructure Finance Company. PTC India Limited was born in April 1999 out of the need for an
institution that would provide credit risk mitigation to private power project developers. It provides
equity/debt financing solutions to the energy value chain. At a point in time when no private player was
willing to venture into this arena, the Government initiated the inception of the Company. PTC is a
pioneer in starting a power market in India and undertakes trading activities which include long-term
trading of power generated from large power projects as well as short-term trading arising.

Pre-Establishment Context:

• Power Sector Challenges: Before the late 1990s, India’s power sector faced significant issue such as
demand-supply gaps, uneven regional power distribution, and a lack of organized power trading.
• Policy Shift: The Indian government recognized the need for market reforms to optimize electricity
usage across regions and facililtate private investment.

1.8 History of PTC India Limited

PTC India Limited (PTC) is the leading provider of power trading solutions in India. Its primary focus
is to develop a commercially vibrant power market in the country. PTC India's subsidiary PTC India
Financial Services Limited (PFS) provides total financing solutions to the energy value chain. PTC
India holds a 65% stake in PFS.

PTC India's wholly-owned subsidiary PTC Energy Limited has a renewable energy portfolio of 288.8
MW consisting of 50 MW wind power projects in Madhya Pradesh 50 MW wind power project in
Karnataka and 188.8 MW wind power projects in Andhra Pradesh. PTC was born on 16th April 1999
out of the need for an institution that would provide credit risk mitigation to private power project
developers. At a point in time when no private player was willing to venture into this arena, the
Government initiated the inception of the company.

The trading activities undertaken by PTC include long-term trading of power generated from large
power projects as well as short-term trading arising as a result of supply and demand mismatches that
inevitably arise in various regions of the country. Today the company is not just the leading power trader
in the country but has also diversified into the unique role of being a Complete Energy Solutions
Provider.

The Company commenced its business on 15th July of the year 1999 with an initial contribution from
POWERGRID NTPC Power Finance Corporation and Individuals. The development agreement for the
project Hirma Mega Power Project (6x660 MW) Orissa on the lines of Memorandum of Understanding
(MoU) was signed during September of the year 2000 in Washington DC. At the first, time that the
company had entered into Power Purchase Agreement (PPA) in the year 2000-01 with a generating
company in a state and a private sector company for inter-regional / interstate trading of power and also
during the same period PTC was notified as to the Nodal Agency for exchange of power between India
and Nepal.

An agreement was signed in February 2001 between the company and the West Bengal Power
Development Corporation Ltd. (WBPDCL) in the Eastern Region for the purchase of power up to 200
MW for supply to the neighboring regions. Since July 2001 PTC had started trading of power on a
sustainable basis; it provided the best value to both the buyers and sellers while ensuring optimum
utilization of resources.

During the year 2002, the company had purchased office accommodation in the NBCC Tower at Bhikaji
Cama Place to shift its registered office. PTC had shifted its focus from very large power projects to
small and medium-sized projects in the year 2002-03 that are promoted by IPPs. And also in the same
year of 2002-03 MoUs had been signed with developers of projects like Lower & Middle Kolab
hydropower projects in Orissa Samal hydropower project in Orissa Vemagiri Gas based Project in
Andhra Pradesh besides those of large projects like Maithon Thermal Project in Jharkhand and West
Seti Hydroelectric Project in Nepal.

The Company made its Initial Public Offering (IPO) in the year of 2004 and also in the identical year
PTC had structured innovative products to address the opportunities across all time-epochs. PTC had
conceptualized various product modules for the sale of surplus power namely Round the clock Evening
peak Night Off-Peak Afternoon OffPeak 18 hours a day Off-Peak etc. with price variation to meet the
requirements of customers.

The Company took its first decision on acquisition of an equity stake in generation in the 330 MW
LANCO Amarkantak Power Project during the year 2004-05. PTC had agreed with SWECO Groner
AS Norway in September of the year 2005 for cooperation in the field of 'Nordic Power Market
Experiences and their Relevance for the Evolving Power Market in India'.

In 2006 the company had entered into long-term Power Purchase / Sale agreements for five projects
totaling a capacity of 4000 MW and also the Lanco Amarkantak project in Chhattisgarh where PTC had
previously picked up an 11% stake achieved financial closure and entered the construction phase.

India Infrastructure Finance Company Ltd and PTC had signed an MOU in May of the year 2007 to
facilitate encourage and promote the development and construction of power projects including thermal
hydro and other sources. The Company Indian Renewable Energy Development Agency Limited
(IREDA) and PTC India Financial Services Ltd.

(PFS) had entered into MoU to provide a range of services for both fee and fund-based activities and
off-take & marketing of power focused upon renewable energy projects it was signed in April 2008.
Meenakshi Energy Pvt. Ltd's project of 2x150 MW capacity in Andhra Pradesh has been commissioned
on 30th April 2013. The aforementioned Power Tolling Agreement was converted into a Power Trading
Agreement between Meenakshi Energy Pvt. Ltd and PTC India during FY 2013-14.
GMR Kamalanga Energy Ltd's project in Orissa has been commissioned on 30th April 2013. PTC has
tied up 323 MW from this project under the Case-1 bidding route to Haryana Discoms. Power flow
under the PSA to Haryana Discoms commenced w.e.f. 7th February 2014. During the year 2014 PTC
entered into Power Purchase Agreements with M/s. Ideal Energy Private Limited for 240 MW power.

PTC has signed long-term Power Purchase Agreements (PPAs) with the generators for a cumulative
capacity of about 11560 MW for further sale of power to Discoms which includes Cross-Border power
trade. The projects are based on domestic coal imported coal gas and hydro resources. In addition to the
above projects, PTC has also signed MoUs/MoAs with several Project developers during the FY 2013-
14 for purchase of power aggregating to approximately 1332 MW.

Cumulative MoUs/MoAs at the end of the year by PTC is around 11329 MW based on domestic coal
imported coal to wind and hydro resources. During FY2014 PTC has tied up for the purchase of 100
MW from M/s. Bharat Aluminium Company Ltd's thermal power plant in Chhattisgarh sold the power
to Kerala State Electricity Board through Medium Term Case-1 tender for 3 years

1.9 PTC India Financial Servicess Ltd:

PTC India Financial Services Limited (“PFS”) has been promoted by PTC India Ltd (PTC) as a
company incorporated under the Companies Act 1956 and registered with RBI as an NBFC. It is a
systemically important non-deposit-taking NBFC classified as “Infrastructure Finance Company (IFC)”
by RBI and is listed on the Bombay Stock Exchange Limited and the National Stock Exchange of India
Ltd.

PTC India Financial Services Ltd is an Indian non-banking financial institution. The company makes
principal investments in and provides financing solutions for, companies with projects across the energy
value chain. The product and services offered by the company include Equity Investments - The focus
of equity investment is for projects in brownfields well as greenfields, backed by promoters with a
proven track record, good growth prospects, and clearly defined exit routes. Their investment horizon
tends to focus on the short to medium term. They also provide the last mile equity to power projects as
and when required depending upon the project viability, its progress, and their investment guidelines.
Lending - PFS offers debt assistance to projects subject to exposure limits stated earlier. PFS provides
debt assistance to projects in the entire energy value chain i.e. power projects, fuel sources, related
infrastructure like gas pipelines, LNG terminals, ports, equipment manufacturers like transformers,
conductors, insulators, cables, etc; which are technically and economically viable.

PFS is engaged in the business of making investments in and providing financing solutions to
companies with projects in the power sector and related areas across the entire energy value chain. It
 majorly provides fund-based / non-fund-based financial assistance in the form of term debt or corporate
debt instruments, taking into account the need of the promoter/borrowing company, condition of the
financial markets, risks and rewards from the project, and regulatory requirements.

PFS provides debt financing on a Non-Recourse or a Limited Recourse basis for the following:-

• Expenditure on a Greenfield project.

• Expenditure on capacity expansion of an existing asset.
• Acquisition of an operating asset.
• A takeover of an existing debt facility.
• Securitization of future cash-flows of an operating asset.
• Investment as structured debt in a subsidiary company for Capex addition.
• Pooling of assets.

PTC India Ltd. (PTC), the leading provider of power trading solutions in India, was established in the
year 1999 as a Government of India initiated Public-Private Partnership, whose primary focus is to
develop a commercially vibrant power market in the country.

PTC is the pioneer in implementing the power trading concept in India and has successfully
demonstrated its efficacy in optimally utilizing the existing infrastructure within the country to the
benefit of all.

PTC has maintained the No. 1 position in electricity trading since sustained trading began in 2000-01.
It seeks to provide holistic services in the power trading market, including intermediation for long-term
supply of power from identified domestic IPPs and cross-border power projects, financial services like
providing equity and debt support to projects in the energy value chain through its subsidiary PTC India
Financial Services (www.ptcfinancial.com), fuel intermediation/ aggregation for cross-border power
plants through PTC Energy Ltd. and advisory services among others.

PTC today is not just the leading power trader in the country, but also the co-promoter of the 1st National
Power Exchange in the country besides diversifying into the unique role of a Complete Energy Solutions
Provider.

1.10 Objectives of Financial Performance:

Financial Statements are prepared to measure how well a firm is financially performing which means
how a firm can use assets from its primary mode of business and generate revenues.

The primary objectives of financial statements are to present the true and fair value of the state of
affairs of the firm with the help of its various statements, for example, Income Statement, Balance
Sheet, Cash Flow Statement. In short, to provide information about the financial position,
performance, and change in the financial position of an organization that is useful to a wide range of
users in making economic decisions.

The significant objectives are:

1. Provides necessary information about the financial activities to the interested parties.
2. Provides necessary information about the efficiency or otherwise of the management,
regarding the proper utilization of the scarce resources.
3. Provide necessary information for predictions (financial forecasting).
4. They help to evaluate the earning capacity of the firm by supplying a statement of financial
position, a statement of periodical earnings together with a statement of financial activities
to the various interested persons.
5. Decisions regarding the changes in the manner of acquisition, utilization, preservation, and
distribution of scarce resources.
6. It will facilitate decisions regarding the replacement of fixed assets and the expansion of the
firm.
7. Provide necessary data to the government for taking proper decisions relating to duties, taxes,
price control, etc., and for some legal and control purposes.
8. They devise remedial measures for the deviations between the actual and budgeted
performances.
9. Provide necessary data and information to the managers for internal reporting and
formulation of overall policies.
10. Also help to safeguard the interest of shareholders who are not allowed to go through the
day-to-day affairs of the firm.
11. Help to settle disputes arising from High Court, Supreme Court, Arbitrators, etc.
12. To guide and determine the dividend action
13. While making policies relating to licensing, taxation, price fixation, etc., government officials
study the financial analysis of various companies to conclude.
14. Presenting the basis of future activities.
15. Analysing a company’s current balance sheet and income statement is the most effective way
to estimate the condition of a company here and now.
16. To reveal the right and proper position of a business.
17. To provide necessary information for the full use of the available and potential resources of
the organization.
18. List the creation of the work done by the institution to upgrade the social environment.
19. To conduct inter-firm and intra-firm comparisons for self-evaluation and for operating
efficiency to take corrective actions.
20. To know the solvency.
21. To know the financial strengths.
22. Reviewing companies’ records.
23. Taking loan decisions by the bank.
24. To see the effect of various non-economic and economic factors of the firm.