CHAPTER 6 ANALYSIS AND INTERPRETATION OF DATA

Analysis and Interpretation of Data

122

CHAPTER 6

ANALYSIS AND INTERPRETATION OF DATA

Introduction

The main thrust of this chapter is to analyze the financial performance data of the Eastern

Coalfields Limited (ECL) during the period 2000-01 to 2009-10. We have already

discussed different Accounting and Statistical tools and techniques of financial

performance appraisal in Chapter 5. We have explained there, in detail, Ratio Analysis,

Trend Ratios and Cash Flow Analysis along with, the selected tools which have been

found suitable and used for measuring performance of the ECL.

In the current Chapter, we have presented the analytical part with the help of selected

tools and techniques and presented interpretation on the basis of the results obtained. In

our framework of analysis; liquidity, solvency, efficiency and profitability or profit

inability have been considered the main indicators for measuring the financial

performance of Eastern Coalfields Limited (ECL). With that, we have considered cash

flow analysis to make an in-depth study of the liquidity position of the company. In our

view, for a sick company like ECL, cash flow has got a special importance to indicate

whether the company has improved its strength to generate internal surplus to operate its

business without depending on external funds and whether it has stopped incurring cash

losses during the given the period. We have also done a comparative performance

analysis based on ratios of three companies; Eastern Coalfields Limited (ECL), Central

Coalfields Limited (CCL) and Coal India Limited (CIL) for improved investigation and

effective results.

Further, Trend Ratios for financial performance analysis with respect to long-term

solvency has been computed especially to explain a situation where we get negative

values of ratios because of negative capital employed, negative net worth etc. during our

study period. For the same reason, we have considered Return on Total Assets (ROTA)

instead of Return on Capital Employed (ROCE) for measuring overall profitability of the

company and for measuring relationship between liquidity and profitability, between

long-term solvency and profitability, between efficiency of asset management and

profitability. To make it clear, let us take one example. For ECL constantly we get figures


123

of negative capital employed during our study period whereas we get profit figures for

three years and loss figures in seven years out of ten years of our study period (i.e. from

2000-01 to 2009-10). Now if we take the following imaginary figures of Profit (PBT),

Capital Employed and Total Assets we get the reason why we have considered Return on

Total Assets (ROTA) instead of Return on Capital Employed (ROCE) in this case.

Year Return (PBT) Capital Employed Total Assets ROCE ROTA

Y1 (-) Rs.100 (-) Rs.1000 Rs.1000 (+) 10 % (-) 10 %

Y2 (+) Rs.100 (-) Rs.1000 Rs.1000 (-) 10 % (+) 10 %

Now it is clear from the above example that in our case, i.e. for ECL, ROCE gives us

misleading information. We get negative rate of return (- 10 %) in the year (Y1) of profit

and positive rate of return (+ 10 %) in the year (Y2) of loss. But ROTA gives us accurate

information. Thus, based on this logic we have considered ROTA for measuring overall

profitability instead of ROCE. Again, for the same reason and because the company is in

a state of sickness we could not compute Return on Networth (RONW) ra tio, Return on

Equity (ROE) ratio etc.

Now for the convenience of presentation and understanding the analysis of performance

of Eastern Coalfields Limited during the period 2000-01 to 2009-10 our analytical

exercise has been divided into Six Sections as under:

6.1 Section I: Ratio Analysis with Interpretation and Inference;

6.2 Section II: Analysis and Interpretation of Trends of Different Financial Ratios;

6.3 Section III: Analysis of Long Term Solvency Position on the basis of Trend

Ratios;

6.4 Section IV: Correlation Analysis and Testing of Hypothesis;

6.5: Section V: Cash Flow Analysis as an Instrument for Measuring Performance

with Regard to Liquidity Management of Eastern Coalfields

Limited;

6.6 Section VI: Financial Performances of ECL, CCL and CIL during 2000-01 to

2009-10: A Comparative Study.


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6.1. SECTION I: RATIO ANALYSIS WITH INTERPRETATION AND INFERENCE:

As stated earlier, in ratio analysis we have taken four major groups of ratios that are very

important for our study. These are (a) Liquidity Ratios to assess the short-term solvency

of the company; (b) Leverage or Capital Structure Ratios to examine the long-term

solvency of the company; (c) Turnover or Efficiency Ratios to evaluate the efficiency of

the company in asset management or in utilization of resources; and (d) Profitability

Ratios to measure the profitability position and overall performance and effectiveness of

the company.

It is important to mention here that these ratios have been calculated using standard

formula on the basis of accounting information in the Annual Reports of ECL. For better

comprehension, we have at the very outset presented all the selected ratios in Table 6.1 in

the next page before going to the Analysis part proper. The name of the individual ratio is

written in abbreviated form in Table 6.1 but full expressions of these abbreviations are

given below the Table 6.1 as well as with each group of ratios in analysis section of the

ratios. Further, we have provided with each group of ratios the relevant data related to

that particular group of ratios. However, the basic data in detail for computing these ratios

has been provided in Annexure I. We have also calculated the Mean, Standard Deviation

(S.D.), Coefficient of Variation (C.V.) and Trend of each financial ratio for analyzing and

understanding the deeper connotations and implications of these ratios. Further, for

proper analysis and interpretation of the relevant ratios we have used Microsoft Excel, the

Statistical Software Package for computing Average, Standard Deviation (S.D.),

Coefficient of Variation (C.V.) and Graphs. For computation of Trend of each financial

ratio we have used formula as suggested by H. Bhattacharya, which is explained in 6.2 of

Section II and in Chapter 5 and then all the trend values of these ratios is shown together

in one place in Table 6.12 and group wise trend values is shown with each group of

ratios. However, for coefficient of variation we have considered only its absolute value

ignoring the symbol. Moreover, in Chapter 5 we have already explained in detail all these

statistical tools used to assess the financial performance of the company.


125

Table 6.1: Selective Financial Ratios of ECL for the period 2000-01 to 2009-10

A. LIQUIDITY RATIOS C. MANAGEMENT EFFICEINCY RATIOS

YEAR CR QR SQR STR DTR CATR FATR STCR

2000-01 0.4799 0.4028 0.0418 27.80 2.44 1.65 1.37 6.48

2001-02 0.5010 0.4306 0.0646 24.66 2.21 1.52 1.60 5.62

2002-03 0.5053 0.4393 0.1283 25.46 2.32 1.44 1.68 5.60

2003-04 0.4508 0.3820 0.1661 27.46 3.12 1.51 1.78 5.31

2004-05 0.3923 0.3163 0.2095 24.56 6.06 1.85 2.17 5.32

2005-06 0.5222 0.4251 0.3158 14.10 11.45 1.81 2.66 4.61

2006-07 0.4945 0.3711 0.2446 12.23 12.91 1.81 2.79 4.59

2007-08 0.3599 0.2774 0.1653 16.86 11.83 2.02 2.55 4.26

2008-09 0.2972 0.2343 0.1339 29.42 12.62 2.58 3.10 4.00

2009-10 0.4358 0.3509 0.1774 19.08 9.64 2.71 4.31 3.99

Trend Downward Downward Upward Dn. ward Upward Upward Upward Dn. ward

MEAN 0.4439 36.30 0.1647 22.16 7.46 1.89 2.40 4.98

S.D. 0.07 0.07 0.08 6.11 4.67 0.44 0.88 0.82

|C.V.| (% ) 16.52 18.93 49.07 27.59 62.56 23.14 36.79 16.42

B. CAPITAL STRUCTURE RATIOS D. PROFITABILITY RATIOS

YEAR NWDR NWFAR LDTDR YEAR GPR NPR CPR ROTA

2000-01 -1.9221 -0.9215 0.1898 2000-01 -0.3451 -0.3617 -0.2313 -0.2534

2001-02 -2.3480 -1.1597 0.1805 2001-02 -0.0762 -0.1007 0.0234 -0.0765

2002-03 -2.9456 -1.4403 0.1681 2002-03 -0.0676 -0.1241 0.0132 -0.0948

2003-04 -3.6278 -1.7106 0.1577 2003-04 -0.1825 -0.1188 0.0105 -0.1003

2004-05 -4.9937 -2.6032 0.1433 2004-05 -0.1995 -0.2228 -0.1457 -0.2306

2005-06 -4.2862 -2.4037 0.1454 2005-06 0.0810 0.1088 0.1823 0.1070

2006-07 -4.3471 -2.3211 0.1628 2006-07 0.0134 0.0336 0.1012 0.0391

2007-08 -6.4609 -3.4170 0.1404 2007-08 -0.3335 -0.3221 -0.2400 -0.3761

2008-09 -9.2113 -5.1464 0.1181 2008-09 -0.5586 -0.5487 -0.4435 -0.7511

2009-10 -9.0338 -5.0442 0.1108 2009-10 0.0548 0.0638 0.1240 0.0930

Trend Down ward Down ward Down ward Trend Dn. ward Upward Dn. ward Dn. ward

MEAN -4.9177 -2.6160 0.1517 MEAN -0.1614 -0.1599 -0.0606 -0.1644

S.D. 2.5738 1.5010 0.0253 S.D. 0.2042 0.2077 0.1978 0.2581

|C.V.| (% ) -52.34 -57.38 16.66 |C.V.| (% ) 126.51 130.42 326.40 157.00

Source: Annexure I showing detailed data with calculations

Abbreviations: CR= Current Ratio, QR = Quick Ratio, SQR = Super Quick Ratio , NW DR = Networth to

Long-term Debt Ratio, NWFAR = Networth to Net Fixed Assets Ratio, LDTDR = Long-term Debt to Total Debt

Ratio, STR = Stock Turnover Ratio, DTR = Debtors Turnover Ratio, CATR = Current Assets Turnover Ratio,

FATR = Fixed Assets Turnover Ratio, STCR = Stores to Consumptions Ratio, GPR = Gross Profit Rat io, NPR =

Net Profit Rat io, CPR = Cash Profit Rat io, ROTA= Return on Total Assets Ratio , Dn.ward = Downward.


126

6.1.1 Liquidity Analysis to Ascertain Short-term Solvency of the Company on the

basis of Liquidity Ratios

Liquidity ratios are also termed as Working Capital or Short Term Solvency Ratios. An

enterprise must have adequate liquidity to run its day-to-day operations. In fact, liquidity

is a pre-requisite for the very survival of the company. Liquidity management is thus a

basic and broad aspect of judging the performance of the corporate entity.

For easy explanation and analysis we have presented below two Tables. Table 6.2

contains different components of Liquidity which would help computation of Liquidity

Ratios and Table 6.3 contains Liquidity Ratios which are considered for assessing

liquidity position of ECL during our study period. Under Liquidity Ratios we have

considered Current Ratio (CR), Quick Ratio (QR) and Super Quick Ratio (SQR). The

analysis and interpretation of liquidity ratios and overall inference on liquidity position

are described subsequently after presenting the basic figures underlying the liquidity

ratios along with their graphical presentations.

Table 6.2: Components of Liquidity Ratios during 2000-01 to 2009-10 (Rs. In Lakhs)

Name of the Components 2000-01 2001-02 2002-03 2003-04 2004-05

Current Assets 175165.85 187711.97 192511.36 170585.34 159693.14

Inventories 28137.49 26367.10 25114.56 26040.80 30927.84

Quick Assets 147028.36 161344.87 167396.80 144544.54 128765.30

Sundry Debtors 122566.16 127461.43 107735.50 68433.77 32111.57

Cash & bank (Super Q.A.) 15254.16 24200.39 48885.16 62870.46 85264.53

Current Liabilities 365021.75 374691.55 381016.42 378428.78 407086.99


Current Assets 217395.17 171179.54 144637.47 152959.94 232850.40

Inventories 40449.25 42727.68 33142.09 32383.41 45336.51

Quick Assets 176945.92 128451.86 111495.38 120576.53 187513.89

Sundry Debtors 27607.28 26915.51 26984.45 33810.94 74679.17

Cash & bank (Super Q.A.) 131480.19 84671.45 66435.74 68897.84 94788.14

Current Liabilities 416288.33 346132.65 401875.89 514730.10 534365.77

Source: Annexure I showing detailed Data

Table 6.3: Liquidity Ratios for Assessing Liquidity Position of ECL

Year/

Ratio

2000-

01

2001-

02

2002

-03

2003

-04

2004

-05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

Mean

S.D. |C.V.|

(%)

CR 0.4799 0.5010 0.5053 0.4508 0.3923 0.5222 0.4945 0.3599 0.2972 0.4358 0.4439 0.07 16.52

QR 0.4028 0.4306 0.4393 0.3820 0.3163 0.4251 0.3711 0.2774 0.2343 0.3509 0.3630 0.07 18.93

SQR 0.0418 0.0646 0.1283 0.1661 0.2095 0.3158 0.2446 0.1653 0.1339 0.1774 0.1647 0.08 49.07

N.B.: CR= Current Ratio, QR= Quick Ratio, SQR = Super Quick Ratio

Source: Computed from the data given in Table 6.2


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Graphical view of the Liquidity Ratios:

For greater clarity and visibility, we have shown below the graph of each ratio over ten

years.

Analysis and Interpretation of Liquidity Ratios:

i) Current Ratio (CR): Current Ratio is defined as relationship between current assets

and current liabilities. This ratio is computed based on the following formula:

Current Ratio = Current Assets/Current Liabilities.

As pointed earlier in chapter 5, current ratio is a measure of margin of safety to the

creditors. An increase in the current ratio represents improvement in the liquidity position

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

CR 0.4799 0.5010 0.5053 0.4508 0.3923 0.5222 0.4945 0.3599 0.2972 0.4358

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

Pro

po

rti

on

Figure 6.1: Graphical presentation of Current Ratio

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

QR (QA / CL) 0.4028 0.4306 0.4393 0.3820 0.3163 0.4251 0.3711 0.2774 0.2343 0.3509

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

Pro

po

rti

on

Figure 6.2: Graphical presentation of Quick Ratio

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

SQR (SQA/ CL) 0.0418 0.0646 0.1283 0.1661 0.2095 0.3158 0.2446 0.1653 0.1339 0.1774

0.0000

0.0500

0.1000

0.1500

0.2000

0.2500

0.3000

0.3500

Pro

po

rti

on

Figure 6.3: Graphical presentation of Super Quick Ratio


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of a firm while a decrease in the current ratio indicates that there has been deterioration in

the liquidity position of a firm. A conventional standard of this ratio is 2:1 though this is

not equally applicable to this industry. For PSUs, the ratio of 1:1 is considered enough.

Table 6.3 exhibits a fluctuating trend of this ratio, which varies from 0.5222 in the year

2005-06 to 0.2972 in the year 2008-09 during the period under study. On an average, the

ratio is 0.4439 during the period with S.D. 0.07 and coefficient of variation 16.52%.

Thus, we observe from the current ratio that on an average ECL has only 44 paisa of

current assets to pay off every rupee of its current liabilities. This further signifies that the

short-term solvency of ECL is under serious strain as its liquidity position is highly

vulnerable. The creditors stand at considerable risk as the company is not in a position to

meet its current obligations without infusion of working capital from the government or

some other external sources. In none of the years ECL could achieve even the minimum

standard applicable to a PSU i.e. 1:1.The analysis reveals that the mean value of current

ratio is less than half of the liberalized standard of 1:1 which is applicable to PSUs

because they enjoy the benevolence of the government of India’s support and assistance.1

The downward trend of the current ratio up to 2008-09 is a matter of concern. However,

there is some improvement after 2008-09 and it continued even after 2009-10 as per the

latest information.

For greater clarity and visibility we take the help of the Figure 6.1. In the Figure we

observe that the curve depicting the current ratio shows a downward trend. We observe

that mostly affected year is 2008-09 and this has happened due to heavy provision for pay

revision as per new enhanced pay structure. However, the current ratio has started

improving from 2008-09 and thereafter as is mentioned above.

ii) Quick Ratio (QR): The Quick Ratio may be defined as the relationship between

quick or liquid assets and current liabilities. This ratio is computed based on the following

formula: Quick Ratio = Quick Assets/ Current Liabilities.

As described before in chapter 5 that this ratio is widely accepted as the best available test

of the liquidity position of a firm. As a rule of thumb a quick ratio of 1:1 is considered

satisfactory because of its immediate ability to meet the short-term obligations. However,

many well-managed companies in this industry are operating successfully even with

quick ratio below 1:1. For PSUs, the ratio can even be less than 1:1.


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The Quick ratio of ECL is no better either. Table 6.3 shows that the quick ratio of the

ECL has a fluctuated from 0.2343 in the year 2008-09 to 0.4393 in the year 2002-03.

None of the year could achieve the standard 1:1. The mean value of Quick Ratio over a

period of ten years from 2000-01 to 2009-10 has been found to be 0.3630 which is far

below the standard norm of 1. This means the company will not be able to pay off its

current obligations, if such a need arises at once. We observe from the quick ratio that

ECL has only 36 paisa of quick assets to pay off every rupee of its current liabilities.

Obviously, there is an urgent need to augment the proportion of both current assets and

quick assets to improve the liquidity position of the company in the short-term. The

downward trend of this ratio adds to the worries of ECL.

The coefficient of variation 18.93 % indicates that it is more volatile than Current Ratio

but less than super-quick ratio. Figure 6.2 exhibits that there is also a downward trend in

this ratio and mostly affected year is 2008-09. However, 2009-10 has shown certain

improvements over the last 2 years which is a good sign for the company.

iii) Super Quick Ratio (SQR): The Super Quick Ratio is the ratio between super quick

assets and Current liabilities. This ratio is calculated based on the following formula:

Super Quick Ratio = Super Quick Assets / Current Liabilities.

As stated earlier in chapter 5, super quick assets or absolute liquid assets here include

only cash and bank balances as there is no short-term or marketable security. This ratio is

the most rigorous and conservative tests of a firm’s liquidity position. Normal standard

for this ratio is 0.5:1.

The Super Quick Ratio (SQR) turns out to be the worst of three liquidity ratios. Table 6.3

exhibits a fluctuating trend of this ratio during the period under study. This ratio varies

between 0.0418 in the year 2000-01 and 0.3158 in the year 2005-06. The average of this

ratio over ten years from 2000-01 to 2009-10 has been calculated to be 0.1647 against the

liberal standard of 0.5. As this ratio is the most rigorous and conservative test of a

company’s liquidity position, trade creditors attach great importance to this ratio for

judging the creditworthiness of the company. From this perspective, the credit score of

ECL is one of the lowest. This does not augur well for either the company or its

stakeholders.


130

Moreover, this ratio has the highest variability among all the liquidity ratios which can be

observed from the fact that this ratio has improved from merely 0.0418 to 0.1774 at the

end of 2009-10 and even reached to 0.3158 in the year 2005-06. The graphical

presentation of this ratio shown in Figure 6.3 clearly demonstrates that this ratio has an

upward trend which is quiet encouraging, which indicates that the company is

accumulating strength over the years to pay its immediate liabilities.

Overall Inference on Short-term Solvency of ECL during 2000-01 to 2009-10

It is evident from the liquidity analysis that the liquidity position of the company is not at

all satisfactory. On the whole, the liquidity analysis of ECL exposes the serious weakness

of the company in managing its working capital. The three liquidity ratios which are

considered to be the best available tests of the company’s creditworthiness are far from

satisfactory. Current ratio, Quick ratio, and Super Quick ratio are all less than the

standard norms i.e. less than 2:1, 1:1 and 0.5:1 respectively. We can call them illiquidity

ratios as they testify to illiquidity of the company. On an average ECL has only 44 paisa

of current assets to pay off every rupee of its current liabilities whereas 36 paisa of quick

assets and only16 paisa of cash balance (i.e. super quick assets) to pay off every rupee of

its current liabilities. Since ECL is a public sector company, low liquidity may not have a

significant impact on its borrowing power, but this situation may not continue forever.

With more measures of liberalization and reforms in the coming years, the govt. may ask

the company to stand on its own feet and generate internal resources to take care of its

short-term capital requirements. In our view, the lack of adequate liquidity and resultant

working capital shortage are adversely telling on the earning capacity and financial health

of ECL. The only silver lining in the otherwise gloomy scenario of liquidity is that the

SQR is showing an upward trend.

The analysis of the liquidity ratios through graph reveals an interesting picture. We

observe while both the Current Ratio and Quick Ratio have been on the decline, the SQRs

are on the rise. It may be noted in this connection that the years 2005-06, 2006-07 and

2009-10 have shown an improvement in the liquidity position of ECL. Current ratio and

Super-quick ratio were at their best in these years. This is because ECL earned profits

during those years. It was on the threshold of a turnaround twice: first in 2005-06 &

2006-07 and again in 2009-10. We have pleasure to state that ECL has been earning

profits since 2009-10. But years after 2009-10 could not be included in our study for

practical reasons.


131

6.1.2. Capital Structure Analysis to Test the Long-term Solvency of the Company on

the basis of Capital Structure Ratios

Capital Structure ratios, (also called leverage ratios), are used to analyze the long-term

solvency of a particular business unit. We have already discussed in Chapter 5 that there

are two types of leverage ratios: structural ratios indicating the firm’s ability to pay

principal amount of long term debt on maturity and coverage ratios indicating firm’s

ability to pay periodic payment of interest during the period of the loan. However, for

ECL, we have ignored the coverage ratios as the interest component is either nil or

negligible.

Further, before analyzing the long-term solvency of the company we would like to

mention here our inability to compute the Capital Structure ratios such as Debt to Equity

ratio or Debt to Net worth ratio, Debt to Capital Employed ratio, Fixed Assets to Net

worth ratio etc. in conventional ways because of negative net worth and negative capital

employed of the company which can be observed in Table 6.5 and in Annexure I in detail.

Further, our preliminary calculations show that even if we compute, those ratios in

traditional ways, the calculated values of ratios become unexplainable as denominator of

the ratio becomes negative. Thus, to cope with the situation and at the same time for

logical presentation of our analytical interpretation we have calculated these ratios in an

alternative way considering Net worth to Debt ratio, Net worth to Fixed Assets ratio etc.

as are presented in Table 6.4. To clear the idea we may take an example considering the

first year of our study period, i.e. the year 2000-01 where we have negative Networth of

Rs. 164408.63 and Long-term Debt of Rs.85537.50. Now if we compute the traditional

Debt to Networth Ratio, we get the ratio as 52: -1.00 (i.e. 85537.50/-164408.63) and

again we get the same result in other way if we follow Net worth to Debt Ratio which is

-1.00: 52 (i.e. -164408.63/85537.50). However, whenever we present the ratio in a single

compact form we get the ratio as – 0.52:1 (i.e. 52/-1.00) in the first case (i.e. Debt to

Networth Ratio) whereas in the second case (i.e. Net worth to Debt Ratio) we get the ratio

as – 1.92: 1 (i.e.-1.00 / 52). Now we will face problem of explaining or expressing the

first case (i.e. Debt to Networth Ratio) as we can’t say that for every rupee of networth,

there is negative debt of 52 paisa (– 0.52:1) but in the second case (i.e. Net worth to Debt

Ratio) we can freely say that for every rupee of debt, there is negative networth of

Rs.1.92 (– 1.92: 1). This is the reason why we have followed the second case. However,

we have also computed Trend Ratios in Section 6.3 to assess the long-term solvency of


132

the company in addition to the ratio analysis to accomplish our goal. The ideas for

selecting the most appropriate capital structure ratios for finalizing the financial

performance of a sick company like ECL are based mostly on the views of B. Banerjee

(Financial Policy and Management Accounting, PHI Learning Pvt. Ltd., 7th Edition, 2005,

p. 375) and H. Bhattacharya (Total Management by Ratios: An Integrated Approach,

Sage Publications, New Delhi, 1995, p. 22).

For easy explanation and analysis we have presented below three Tables. Table 6.4 shows

the list of Original Capital Structure Ratios which can be replaced by the new ratios that

are suitable for our analysis because of negative values of different variables as are

mentioned above, Table 6.5 contains different components of Capital Structure which

would help in computing Capital Structure Ratios and Table 6.6 contains Capital

Structure Ratios which are considered for analyzing the long-term solvency position of

ECL during our study period. The analysis and interpretation of capital structure ratios

and overall inference on long-term solvency position of ECL is presented subsequently.

Table 6.4: List of Original Capital Structure Ratios and New Ratios

Original Capital Structure Ratios Replaced by Reasons

1. Debt to Net worth Ratio Net worth to Debt

Ratio (NWDR)

Negative Net worth

in the denominator

2. Fixed Assets to Net worth Ratio Net worth to Net Fixed

Assets Ratio (NWFAR)

Negative Net worth

in the denominator

3. Long-term Debt to Total Debt Ratio (LDTDR) Not Replaced Suitability of the ratio


133

Table 6.5: Components of Capital Structure Ratios during 2000-01 to 2009-10

(Rs. in Lakhs)


Net block of Fixed Assets 178406.36 167073.31 157455.86 150291.95 130603.10

Equity Capital 221845.00 221845.00 221845.00 221845.00 221845.00

Net worth -164408.63 -193754.75 -226782.42 -257084.62 -339988.83

Long Term Debt 85537.50 82520.62 76990.99 70864.45 68084.06

Total Debt 450559.25 457212.17 458007.41 449293.23 475171.05

Capital Employed -11449.54 -19906.27 -31049.20 -57551.49 -116790.75


Net block of Fixed Assets 126307.38 126037.75 124081.11 123366.63 119257.23

Equity Capital 221845.00 221845.00 221845.00 221845.00 221845.00

Net worth -303602.65 -292542.52 -423985.76 -634894.64 -601554.74

Long Term Debt 70833.07 67296.38 65623.35 68925.49 66552.44

Total Debt 487121.40 413429.03 467499.24 583655.59 600918.21



Table 6.6: Capital Structure Ratios for Analyzing Long-Term Solvency of ECL

YEAR NWDR

(Net worth to

Debt Ratio)

NWFAR

(Net worth to Net

Fixed Assets Ratio)

LDTDR

(Long-term Debt to

Total Debt Ratio)

2000-01 -1.9221 -0.9215 0.1898

2001-02 -2.3480 -1.1597 0.1805

2002-03 -2.9456 -1.4403 0.1681

2003-04 -3.6278 -1.7106 0.1577

2004-05 -4.9937 -2.6032 0.1433

2005-06 -4.2862 -2.4037 0.1454

2006-07 -4.3471 -2.3211 0.1628

2007-08 -6.4609 -3.4170 0.1404

2008-09 -9.2113 -5.1464 0.1181

2009-10 -9.0338 -5.0442 0.1108

Trend Downward Downward Downward

MEAN -4.9177 - 2.6160 0.1517

S.D 2.57 1.50 0.03

|C.V.|

(%)

52.34 57.38 16.66



134

Graphical Presentation of the Liquidity Ratios

For greater clarity and visibility, we have shown below the graph of each ratio over ten

years.

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

NWDR -1.9221 -2.3480 -2.9456 -3.6278 -4.9937 -4.2862 -4.3471 -6.4609 -9.2113 -9.0338

-10.0000

-9.0000

-8.0000

-7.0000

-6.0000

-5.0000

-4.0000

-3.0000

-2.0000

-1.0000

0.0000

Pro

port

ion

Figure 6.4: Graphical presentation of Networth to Debt Ratio

2000-

01

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0

NWFAR -0.9215 -1.1597 -1.4403 -1.7106 -2.6032 -2.4037 -2.3211 -3.417 -5.1464 -5.0442

-6

-5

-4

-3

-2

-1

0

Pro

port

ion

Figure 6.5: Graphical presentation of Networth to Fixed Assets Ratio

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

LDTDR 0.1898 0.1805 0.1681 0.1577 0.1433 0.1454 0.1628 0.1404 0.1181 0.1108

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

0.1400

0.1600

0.1800

0.2000

Pro

port

ion

Figure 6.6: Graphical presentation of Long- term Debt to Total Debt Ratio


135

Analysis and Interpretation of Capital Structure Ratios

i) Net Worth to Debt Ratio (NWDR): As stated earlier in chapter 5, this ratio is used

here as an alternative of ‘Debt to Net worth Ratio’ because of negative net worth of the

company as is discussed earlier. This ratio shows negative values because of negative net

worth in the numerator. If we consider the traditional ratio, it would give an

unexplainable value of this ratio. Hence, the ratio is computed based on the following

formula:

Net worth to Debt Ratio = Net worth / Long-term Debt.

The standard norm of this ratio is 1:2 (i.e. 2:1 for Debt to Net worth ratio) for private

sector enterprises whereas for public sector it is 1:1.

Table 6.6 exhibits that the ratio ranged between -1.92, being the lowest negative value in

the year 2000-01 to - 9.21, being the highest negative value in the year 2008-09. This

indicates that for every rupee of long term debt, there is negative net worth of Rs. 9.21 at

the end of 2008-09. This is because of the highest loss figure in 2008-09. The average

value of this ratio is -4.92 with a standard deviation of 2.57 and absolute value of C.V.

52.34 %. The higher value of C.V. indicates that there is a substantial change and

inconsistency in this ratio. The ratio indicates deteriorating networth over the years due to

continuing loss of the company except in the years 2005-06, 2006-07 and 2009-10 where

the company has a breakthrough making profits and as a result there have been some

improvements in these years. Here we find that Long-term debt has been decreasing very

slowly during the period under study whereas net worth has deteriorated further and as a

result the proportion of negative net worth to debt has increased. Thus, the basic purpose

of this ratio which is to give protection to the lenders of debt capital is completely

defeated. Again, Figure 6.4 depicts the decreasing trend of this ratio indicating declining

net worth of the company. If this trend continues unabated in future there would be a

problem for long-term existence of the company. Thus, in this respect we can say that

long-term solvency of the company is disastrous which needs to be improved with

immediate effect. To beat this situation, infusion of new equity funds and structural

changes are immediately required.

However, it is known that the company has improved the situation by making

profits in three consecutive financial years continuously after 2008-09. This is a good sign

for the company indicating its current financial health.


136

ii) Net worth to Fixed Assets Ratio (NWFAR): Networth to Fixed Assets Ratio which

is used as an alternative to ‘Fixed Assets to Net worth Ratio’ is computed based on the

following formula:

Net worth to Fixed Assets Ratio = Net worth / Net Fixed Assets.

As stated before in chapter 5, usually a part of net worth (around 60 % to 75 %) is

supposed to be used for investment in fixed assets and the balance part should be used for

investment in working capital. Thus, the very objective of this ratio is completely failed.

Instead, the company has negative net worth around Rs. 5.04 for every rupee of fixed

assets at the end of the year 2009-10. This implies that assets are fully exposed to the

lenders and the company is in the state of liquidation. Thus, this fact needs immediate

attention from the management

Table 6.6 shows that the ratio has fluctuated from - 0.92 being the lowest negative value

in the year 2000-01 to -5.15 being the highest negative value in the year 2008-09. On an

average, this ratio is -2.62 with a standard deviation 1.50 and an absolute value of

coefficient of variation 57.38 %. The highest value of Coefficient of variation indicates

that the values of this ratio are very scattered and deviated from mean value and further it

has the highest inconsistency. Figure 6.5 confirms the decreasing trend of this ratio,

which is a matter of concern. However, there is improvement in the net worth in the

recent years and particularly from the year 2009-10 onwards as is discussed earlier which

is a good signal for the company.

iii) Long Term Debt to Total Debt Ratio (LDTDR): As stated earlier in chapter 5, this

ratio is an expression of the relationship between Long Term Debt and Total Debt and is

calculated based on the following formula:

Long Term Debt to Total Debt Ratio = Long Term Debt/Total Debt Ratio.

This ratio has fluctuated from 0.1898, being the highest in the year 2000-01to 0.1108,

being the lowest in the year 2009-10. The ratio has an average 0.1517 with standard

deviation 0.03 and coefficient of variation 16.66 %. The value of the Coefficient of

variation of this ratio indicates that it has the lowest variability as compared to other

capital structure ratios.

Table 6.6 exhibits that proportion of long term debt to total debt is decreasing over the

study period. We observe from the study that the main cause behind this matter is that

there has been remarkable increase in the short term debt over the study period though


137

long term debt has slowly decreased over the study period. As a result, proportion of

long-term debt has decreased during the period under study with increase in total debt. It

may give the impression that the company has a preference for short term debt over long

term debt but it is due to inability of the company to pay off its short-term obligations for

its inadequate liquidity. The clear indication is that the company is depending mostly on

short term debt which is a cause of grave concern for the long term survival and solvency

of the company. This would affect the moral of the employee. This trend needs to be

checked and improved by controlling over the short term debt.

Figure 6.6 confirms the decreasing trend of this ratio. We observe that at the end of 2009-

10, the long-term debt represents only 0.1108, i.e. 11.08 % of the total debt. On the other

hand, short term debt represents 88.92 % of the total debt indicating a serious threat to the

day to day running of the organization and long-term existence of the company. Heavy

amount of short term debt may prove to be unmanageable and counter productive for the

company. Thus, there must have been certain balance between the short-term and long-

term debts and control over short-term debts. Thus, again we can say that long-term

solvency of the company is disastrous which needs to be improved with immediate effect.

Overall Inference on Long-term Solvency of ECL during 2000-01 to 2009-10

It is evident from our analysis that, long-term solvency of the company is very

unsatisfactory and not at all encouraging. The company has negative net worth and

negative capital employed which mean it has nothing of its own and is completely

running with the outsider’s funds. Thus, capital structure analysis of ECL exposes the

serious weakness of the company in managing its long-term solvency. The three capital

structure ratios which are considered to be the best available test of the company’s long-

term creditworthiness are far from satisfactory. In our view, the lack of equity and long-

term fund are adversely telling on the earning capacity and financial health of the Eastern

Coalfields Limited.

The analysis of the capital structure ratios through graph reveals that all the ratios are

having declining trends indicating deteriorating capital structure position and long-term

solvency of the company. For focused attention we present a summary of long-term

solvency analysis as under:


138

i) We find from Net Worth to Debt ratio that ECL has completely failed to give any

protection to the lenders of the long-term debt from the proprietor’s equity because of

negative and declining net worth during our study period. Thus, main objective of this

ratio, which is to give full coverage of the long-term debt by the owner’s fund, is entirely

unsecured. Accordingly, declining net worth is a great setback for long-term solvency of

the company. The company may face a staunch crisis to pay off its long term liabilities

and will face a problem of existence and its control in future if this trend continues.

ii) We find that the very objective of Net worth to Fixed Assets Ratio which is to give

full coverage for fixed assets and a part for working capital is completely failed. A

customary that is around 60 percent to 75 percent of net worth should be used to finance

fixed assets and the balance part to finance working capital, is failed completely in this

case. Instead, the company has negative net worth around Rs. 5.04 for every rupee of

fixed assets at the end of the year 2009-10.

iii) From Long Term Debt to Total Debt Ratio we find that proportion of long-term debt

to total debt is decreasing over the years. The clear indication is that the company has

been depending mostly on short-term debt that is a cause of concern for the long-term

survival of the company. However, this practice may help as a short-term measure but is

not good for the company as far as its reputation and future prospects are concerned.


139

6.1.3 Efficiency Analysis to Evaluate the Assets Utilization Efficiency of the

Company on the basis of Efficiency Ratios:

Activity ratios are basically concerned with measuring the efficiency of a firm in asset

management or in utilization of resources and, hence, these ratios are also called

efficiency ratios or asset utilization ratios. The efficiency with which the assets are used

would be reflected in the speed and rapidity with which assets are converted into sales.

Generally, the greater is the rate of turnover or conversion, the more efficient is the

utilization of assets, other things remaining the same. For this reason, such ratios are also

designated as turnover ratios. Further, these ratios indicate whether the firm’s investment

in current assets and long term assets are too large or to small. If investment in an asset is

too large, it means the fund is tied up unproductively in that particular asset. This needs

immediate release of that fund to be used for purposes that are more productive.

Alternatively, if investment is too small, it may indicate that the firm is providing poor

services to the customers or inefficiently producing its products. Thus, a balance must be

maintained to reach an optimal level of profit.

For easy explanation and analysis we have given below two Tables. Table 6.7 contains

different components of efficiency ratios, which would help in computing Efficiency

Ratios and Table 6.8 contains Efficiency Ratios which are considered for assessing

efficiency of asset management of ECL during our study period. Under Efficiency Ratios

we have considered Stock Turnover Ratio (STR), Debtors Turnover Ratio (DTR), Current

Assets Turnover Ratio (CATR), Fixed Assets Turnover Ratio (FATR), and Stores to

Consumption Ratio (STCR). The analysis and interpretation of Efficiency Ratios and

overall inference on assets management efficiency of ECL is presented subsequently after

giving the Tables in the next page.


140

Table 6.7: Components of Efficiency Ratios during 2000-01 to 2009-10 (Rs. In Lakhs)


Net sales 253566.33 275740.79 272906.41 274624.15 304819.22

Cost of Goods Sold 340432.22 298936.71 302457.45 306847.82 372658.36

Average Current Assets 153580.68 181438.91 190111.67 181548.35 165139.24 Average Stock of Coal 12270.47 12032.47 11445.32 11827.47 14889.08

Average Debtors 103723.51 125013.80 117598.47 88084.64 50272.67 Average Net Fixed Assets 184556.29 172739.84 162264.59 153873.91 140447.53

Stock of Stores in Months Consumption

6.48 5.62 5.60 5.31 5.32


Net sales 341768.20 351820.90 318761.31 383740.26 522777.76

Cost of Goods Sold 303567.20 339967.94 421398.15 594303.41 489436.80

Average Current Assets 188544.16 194287.36 157908.51 148798.71 192905.17 Average Stock of Coal 22269.11 28383.69 25208.58 20327.24 25900.02

Average Debtors 29859.43 27261.40 26949.98 30397.70 54245.06

Average Net Fixed Assets 128455.24 126172.57 125059.43 123723.87 121311.93 Stock of Stores in Months Consumption

4.61 4.59 4.26 4.00 3.99


Table 6.8: Efficiency Ratios for Assessing Efficiency of Asset Management of ECL

YEAR STR

(Stock

Turnover

Ratio)

DTR

(Debtors

Turnover

Ratio)

CATR

(Current Assets

Turnover

Ratio)

FATR (Fixed Assets

Turnover

Ratio)

STCR (Months)

(Stores to

Consumption

Ratio)

2000-01 27.80 2.44 1.65 1.37 6.48

2001-02 24.66 2.21 1.52 1.60 5.62

2002-03 25.46 2.32 1.44 1.68 5.60

2003-04 27.46 3.12 1.51 1.78 5.31

2004-05 24.56 6.06 1.85 2.17 5.32

2005-06 14.10 11.45 1.81 2.66 4.61

2006-07 12.23 12.91 1.81 2.79 4.59

2007-08 16.86 11.83 2.02 2.55 4.26

2008-09 29.42 12.62 2.58 3.10 4.00

2009-10 19.08 9.64 2.71 4.31 3.99

Trend Downward Upward Upward Upward Downward

MEAN 22.16 7.46 1.89 2.40 4.98

S.D. 6.11 4.67 0.44 0.88 0.82

C. V. (%) 27.59 62.56 23.14 36.79 16.42

Source: Computed from the data given in Table 6.7 and Stores to Consumption Ratio

(STCR) is taken from the Annual Reports & Accounts of ECL


141

Graphical View of the Efficiency Ratios

For greater clarity and visibility, we have shown below the graph of each of the

efficiency ratios over ten years of our study period.

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

STR 27.80 24.66 25.46 27.46 24.56 14.10 12.23 16.86 29.42 19.08

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

No

. o

f T

imes

Figure 6.7: Graphical presentation of Stock Turnover Ratio

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

DTR 2.44 2.21 2.32 3.12 6.06 11.45 12.91 11.83 12.62 9.64

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

No

. o

f T

imes

Figure 6.8: Graphical presentation of Debtors Turnover Ratio

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

CATR 1.65 1.52 1.44 1.51 1.85 1.81 1.81 2.02 2.58 2.71

0.00

0.50

1.00

1.50

2.00

2.50

3.00

No

. o

f T

imes

Figure 6.9: Graphical presentation of Current Assets Turnover Ratio


142

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

FATR 1.37 1.60 1.68 1.78 2.17 2.66 2.79 2.55 3.10 4.31

0.00

1.00

2.00

3.00

4.00

5.00

No

. o

f T

imes

Figure 6.10: Graphical presentation of Fixed Assets Turnover Ratio

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

STCR 6.48 5.62 5.60 5.31 5.32 4.61 4.59 4.26 4.00 3.99

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Mo

nth

s

Figure 6.11: Graphical presentation of Stores to Consumption Ratio

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

SHP 13.13 14.80 14.34 13.29 14.86 25.88 29.85 21.65 12.41 19.13

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Days

Figure 6.12: Graphical presentation of Stock Holding Period

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

ACP 149.31 165.48 157.28 117.07 60.20 31.89 28.28 30.86 28.91 37.87

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

Days

Figure 6.13: Graphical presentation of Average Collection Period


143

Analysis of Efficiency of Assets Management on the basis of Efficiency Ratios:

i) Stock Turnover Ratio (STR): This ratio is computed here by dividing Cost of Goods

Sold by the Average Stock of coal and coke. Thus, this ratio is calculated based on the

following formula:

Stock Turnover Ratio = Cost of Goods Sold / Average Stock of coal and coke.

As stated earlier in chapter 5 that this ratio indicates how fast stock is sold. A high ratio is

good from the viewpoint of liquidity, which usually indicates the efficiency of the

management. Alternatively, a low ratio indicates inefficiency of the management.

However, too high ratio indicates low investment in stock resulting frequent stockouts

and loss of sales and customer goodwill. In standard practice, stock turnover ratio of 5 to

6 times of the average stock is considered good.

Table 6.8 shows that this ratio has a fluctuating trend during the period under study. It has

fluctuated between 12.23 times in the year 2006-07 and 29.42 times in the year 2008-09.

On an average this ratio is 22.16 times with standard deviation 6.11 and coefficient of

variation as a percentage of mean is 27.59 %. The latter indicates that the data are

relatively less scattered as compared to DTR and FATR. The table shows that the ratio

has declined up to 2006-07 (12.23 times being the lowest) and again started increasing

after that. However, in the year 2008-09 it was the highest i.e. 29.42 times. Ratio of the

year 2000-01 to 2004-05 & 2008-09 are above the average and ratio of all other years are

below the average.

However, we find roughly a negative relation between this ratio and profitability. The

year 2005-06 with the second lowest turnover ratio 14.10 times and the year 2009-10 with

the fourth lowest ratio 15.26 times have yielded the highest profit figures of Rs.363.86

crores and second highest profit figure of Rs. 333.40 crores respectively and again the

year 2006-07 with the lowest turnover ratio 12.23 times a year has given a profit figure of

Rs.110.60 crores whereas the year 2008-09 with the highest turnover ratio 29.42 times

has resulted in the highest ever loss of Rs. 2109.09 crores and further better turnover

ratios of the other years except 2007-08 have failed to produce positive results. Table 6.8,

in conjunction with the Table 6.9, in page no. 150 showing the performance of the

company, confirms the above fact. Thus, the company management needs to formulate

and follow up an appropriate policy striking a balance between the volume of stock held

and carrying cost of inventory for improving profitability.


144

Figure 6.7 exhibits that this ratio has a downward trend up to 2006-07 that indicates

decrease in stock turnover. Though the ratio increased in 2007-08, it has again decreased

in 2009-10 and hence followed a downward trend as compared to earlier years. Perhaps it

is required up to a certain level to avoid stock out situation at the present level. Thus, the

management needs to give a re- look at this ratio to maintain a balance between

profitability and liquidity.

Further, Figure 6.12 viewing the graphical representation of the Stock Holding Period

(Stock Holding Period (in days) = 365 days in a year / Stock Turnover Rate) of the

company shows an upward trend during the period under study which reciprocates the

Stock Turnover Ratio as is observed in Figure 6.7. Again we observe here that the lowest

stock holding period (12.41 days) in the year 2008-09 is followed by the highest loss of

Rs. 2109.09 crores whereas the highest stock holding period (29.85 days) in the year

2006-07 has yielded the third highest profit figure of Rs. 110.60 crores. Thus roughly we

find a positive relation between stock holding period and profitability which reciprocates

Stock Turnover Ratio.

ii) Debtors Turnover Ratio (DTR): For ECL this ratio is computed based on the

following formula:

Debtor’s Turnover Ratio = Net Sales / Average Debtors.

Here Net Sales has been considered for Net Credit Sales. As stated earlier in chapter 5,

this ratio is an important tool to analyze the liquidity position as well as asset utilization

of the company. The ratio focuses on the credit and collection policy followed by a

company. A high debtor’s turnover ratio indicates prompt payments made by the deb tors

and vice-versa. However, excessive conservatism in credit granting may cause in the loss

of some desirable sales.

Table 6.8 shows that Debtors Turnover Ratio has a fluctuating trend during the period

under study. The ratio ranged between the lowest 2.21 times in the year 2001-02 and the

highest 12.91 times in the year 2006-07. The ratio has an average 7.46 times with

standard deviation 4.67 times and coefficient of variation 62.56 %. The latter indicates

that this ratio has the highest variability in the data as compared to other efficiency ratios.

This ratio indicates a big surge in the collection policy of the company implying that a

well- formulated and well-managed collection policy is being pursued. The performance

of the collection policy of 2000-01 to 2004-05 is below the average whereas performance


145

of the rest of the years is above average. Though, we get roughly a positive relation

between Debtors Turnover Ratio and Profitability in the year 2006-07 where we find the

highest turnover ratio is followed by the third highest profit figure of Rs. 110.60 crores

and the fourth highest turnover ratio of the year 2005-06 has yielded the highest profit

figures of Rs.363.86 crores, the second highest turnover ratio of the year 2008-09 has

resulted in the highest figure of loss of Rs.2109.09 crores. Again we can not find any

good relation in the year 2009-10 where a lower debtors’ turnover ratio (fifth highest

turnover ratio) has recorded second highest profit figure of Rs. 333.40 crores. Thus we

can not find any good relation between Debtors Turnover Ratio and Profitability.

The graphical presentation of this ratio, which is shown in Figure 6.8, exhibits a sharp

upward trend of this ratio during the period under study. However, the performance of the

ratio was unsatisfactory during the last year of our study period which deserves proper

attention from the management.

Further, Figure 6.13 viewing the graphical representation of the Average Collection

Period (Average Collection Period (in days) = 365 days in a year / Debtors Turnover

Rate) of the company shows a sharp downward trend during the period under study which

reciprocates the Debtors Turnover Ratio as is observed in Figure 6.8. Figure 6.13 shows

that the collection period has tremendously reduced from 165.48 days in the year 2001-02

to even 28.28 days in the year 2006-07. A huge improvement may be noticed especially

from the year 2004-05 onwards. This implies the existence of quality debtors as well as

right collection policy of the company, which is also very important for improving

liquidity status. However, we confirm the fact that there is no good relation between

collection period and Profitability. When the year 2005-06 with fourth lowest collection

period (31.89 days) has yielded the highest profit of Rs. 363.86 crores, the year 2008-09

with second lowest collection period (28.91 days) has resulted in the highest ever loss of

Rs. 2109.09 and again higher collection period in 2009-10 has yielded the second highest

profit of Rs. 333.40 crores during our study period. This fact can be understood from the

Table 6.8 in conjunction with the Table 6.9 in page no. 150 showing the performance of

the company.


146

iii)Current Assets Turnover Ratio (CATR): For ECL this ratio is calculated based on

the following formula:

Current Assets Turnover Ratio = Net Sales / Average Current Assets.

As stated earlier in chapter 5, this ratio reflects the extent to which a company is

operating on a small or large amount of current assets in relation to sales. This ratio also

shows whether a company is over-trading or under trading. A very high ratio may be the

result of over-trading indicating inadequate investment in the current assets of the

company. On the other hand, a very low ratio may be the result of under trading, which

indicates more investments in current assets, which is more than what required.

Table 6.8 shows that this ratio has fluctuated between 1.44 times being the lowest in the

year 2002-03 to 2.71 times in the year 2009-10. The Table gives a clear indication that the

company has been constantly improving its performance with regard to the utilization of

current assets. The ratio has an average 1.89 times with standard deviation 0.44 times and

coefficient of variation 23.14 %. The co-efficient of variation of this ratio confirms a

moderate volatility in this ratio. The ratios for the years 2000-01 to 2006-07 are below the

average. Where as, ratios for the rest of the years are above the average. Reading Table

6.8 in conjunction with the Table 6.9, which is given under profitability analysis in page

no. 150, we find that this ratio does not show any direct relationship with profit. For

example the year 2005-06 with below the average ratio (1.57 times) has yielded a highest

profit figure of Rs. 363.83 crores whereas the year 2008-09 with the second highest ratio

(2.58 times) has suffered highest ever loss of Rs. 2109.09 crores and the year 2009-10

with the highest ratio (2.71 times) has yielded second highest profit figure of Rs. 333.40

crores during our study period.

The graphical presentation of this ratio, which is shown in Figure 6.9, exhibits an upward

trend of this ratio during the period under study. This indicates an improvement in the

efficiency of the management of current assets to improve sales which deserves proper

attention from the management.


147

iv) Fixed Assets Turnover Ratio (FATR): This ratio is computed by dividing net sales

by average value of net fixed assets. The ratio is calculated based on the following

formula:

Fixed Assets Turnover Ratio = Net Sales / Average Net Fixed Assets.

As stated earlier in chapter 5, this ratio is an important tool to measure the efficiency of

the company pertaining to utilization of fixed assets. A high ratio is good which usually

indicates the efficiency of the management. Alternatively, a low ratio indicates

inefficiency of the management. This ratio also reflects whether a company is over-

trading or under trading. A very high ratio may be the result of over-trading indicating

inadequate investment in fixed assets of the company.

Table 6.8 shows a continuous improvement in this ratio, which gives a clear indication of

efficient management of fixed assets. It may be noted here that some assets (Continuous

Miner for mass production at Jhanjra UG Mines, Dragline in Sonepurbazari etc.) are

being used by the company on risk / gain sharing basis which are not included in the fixed

assets’ balance even if they are giving extra production and revenue. This fact is known

from the Annual Report & Accounts of the company as well as from company officials.

However, the fact cannot be ignored that the management has efficiently used fixed assets

under its control. On an average, this ratio is 2.40 times with standard deviation 0.88 and

coefficient of variation as a percentage of mean is 36.79 %. The latter indicates that this

ratio, in relation to other efficiency ratios, has the second highest variability after Debtors

Turnover Ratio. The values of this ratio from the year 2000-01 to 2004-05 are below the

average whereas values for the rest of the years are above average.

Reading Table 6.8 in conjunction with Table 6.9, we find that fixed assets turnover ratio

also does not have any direct relation with profit like current assets turnover ratio. For

instance, when the highest ratio of the year 2009-10 (4.31 times) has produced second

highest profit figure of Rs.333.40 crores, the second highest ratio (3.10 times) has

produced highest ever loss of Rs. 2109.09 crores in the year 2008-09.

Figure 6.10 shows the graphical representation of that ratio which confirms an upward

trend of this ratio and hence the efficiency of fixed assets utilization during our study

period. This is very much required to improve sales and for the turnaround of the

company.


148

v) Stores to Consumption Ratio (STCR): This ratio is computed based on the

processed data given in the Annual Reports and Accounts of the ECL. Thus, we have not

calculated the values of this ratio unlike other ratios as are selected for analysis. As stated

before in chapter 5, this ratio here indicates stock of stores as a number of months’

consumption, i.e. holding of stores in advance for certain months’ consumption. The

holding period has sharply reduced from 6.48 months in 2000-01 to 3.99 months in the

year 2009-10. It is clear from Table 6.8 that the company has been trying to keep only

reasonable amount of stores which is actually required for smooth running of the

production function to avoid unnecessary blocking of working capital in the stores. It

implies improvement in the efficiency of the management in utilization of stores and

spare parts and in reducing slow moving items in the stores and disposing off non-moving

items if any. The mean of this ratio is 4.98 months with coefficient of variation 16.42 %.

The coefficient of variation indicates that data are moderately variable.

Figure 6.11 representing the graphical presentation of the ratio shows that there is a sharp

declining trend in this ratio which is a good signal for the company to improve

profitability by controlling over stores and spares.

Overall Inference on Efficiency of Assets Management of ECL during 2000-01 to

2009-10:

It is observed from the analysis that all the activity ratios of ECL except stock turnover

ratio in the recent years particularly after 2005-06 are comparatively better than the

earlier years i.e. as compared to 2000-01 to 2004-05 of our study period indicating its

efficiency in assets management. Thus, it is evident from our study that the performance

with regard to assets management of the company is encouraging and satisfactory.

However, there is an extreme pressure on assets utilization because inadequate liquidity.

The findings in detail are described below:

i) Stock turnover ratio has declined as compared to earlier years of our study period.

However, the year 2008-09 is an exception. The ratio has a downward trend during the

period under study, which usually does not give a good signal to a company but for the

ECL, the case is different. Here we have seen when lower turnover ratio has given profits;

the highest turnover ratio of the year 2009-10 has resulted in the highest loss.


149

ii) Debtor’s turnover ratio has improved substantially over the study period with little

exception in the year 2009-10. This has resulted reduction in collection period

tremendously during our study period. This is an achievement for the company and

indicates some efficiency in maintaining the credit policy of the management. This is

encouraging and positive from the efficiency point of view.

iii) Utilization of current assets has improved during the period under study, which is

confirmed from the upward trend of the current assets turnover ratio.

iv) In case of fixed assets turnover ratio we observe that there has been continuous

improvement in the utilization of fixed assets during our study period. The upward trend

of this ratio indicates that the management has efficiently used fixed assets under its

control. However, the company recently is using some machines like Continuous Miners

etc on risk or gain sharing basis to improve production and profitability.

v) The consumption of stores and spares has reduced in the recent years as compared to

the earlier years during the period of our study which is confirmed from stores and spares

to consumption ratio. This implies improvement in the efficiency of the management in

utilization of stores and spare parts and in avoiding excess holding of these items.


150

6.1.4. Profitability Analysis to Examine the Profitability Strength of the Company on

the basis of Profitability Ratios.

A company should earn reasonable profits to survive and grow over a long period of time.

When owners invest their funds in the expectation of reasonable return, the management of

the firm is eager to measure its operating efficiency through profit. Thus, the operating

efficiency of a firm and its ability to ensure adequate returns to its shareholders /owners

depends finally on the profits earned by it.

For easy explanation and analysis we have presented below two Tables. Table 6.9 contains

different components of Profitability Ratios and Table 6.10 contains relevant Profitability

Ratios which are considered here for measuring Profitability strength of ECL during our

study period. Under Profitability Ratios we have considered Gross Profit Ratio (GPR), Net

Profit Ratio (NPR), Cash Profit Ratio (CPR) and Return on Total Assets Ratio (ROTA)

which we consider more relevant to our study. The analysis of these ratios is done after

presentation of the Profitability Ratios.

Table 6.9: Components of Profitability Ratios (Rs. In Lakhs)


Net Sales 253566.33 275740.79 272906.41 274624.15 304819.22

Gross Profit -86865.89 -23195.92 -29551.04 -32223.67 -67839.14

Profit before Tax (PBT) -91719.19 -27764.27 -33877.70 -32637.57 -67920.10

Profit after Tax (PAT) -91719.19 -27764.27 -33877.70 -32637.57 -67920.10

Cash Profit -58661.49 6442.14 3612.24 2894.35 -44409.81

Annual Operating Expenses 364499.58 326184.70 324026.61 354051.85 401037.74

Salary & Wages 236312.08 192925.32 191193.33 222735.82 262570.49

Total Assets 361918.29 362754.68 357369.94 325308.78 294590.03



Net Sales 341768.20 351820.90 318761.31 383740.26 522777.76

Gross Profit 38201.00 11852.96 -102636.84 -210563.15 33340.96

Profit before Tax (PBT) 37196.44 11812.09 -102665.96 -210570.45 33339.90

Profit after Tax (PAT) 36386.18 11060.13 -102993.49 -210908.88 33339.90

Cash Profit 62318.91 35605.28 -76494.59 -170183.31 64836.62

Annual Operating Expenses 352679.07 372820.36 442085.54 623096.05 550569.64

Salary & Wages 198169.11 216086.96 275071.11 430864.13 342315.52

Total Assets 347806.62 302175.24 272886.96 280342.52 358615.53




151

Table 6.10: Profitability Ratios for Examining Profitability Strength of ECL


Graphical Presentation of the Profitability Ratios

For greater clarity and visibility, we have shown below the graph of each of the

profitability ratios over ten years of our study period.

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

G.P.R. -0.3451 -0.0762 -0.0676 -0.1825 -0.1995 0.0810 0.0134 -0.3335 -0.5586 0.0548

-0.6000

-0.5000

-0.4000

-0.3000

-0.2000

-0.1000

0.0000

0.1000

0.2000

Pro

port

ion

Figure 6.14: Graphical presentation of Gross Profit Ratio

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

NPR -0.3617 -0.1007 -0.1241 -0.1188 -0.2228 0.1088 0.0336 -0.3221 -0.5487 0.0638

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

Pro

port

ion

Figure 6.15: Graphical presentation of Net Profit Ratio

YEAR GPR NPR CPR ROTA

2000-01 -0.3451 -0.3617 -0.2313 -0.2534

2001-02 -0.0762 -0.1007 0.0234 -0.0765

2002-03 -0.0676 -0.1241 0.0132 -0.0948

2003-04 -0.1825 -0.1188 0.0105 -0.1003

2004-05 -0.1995 -0.2228 -0.1457 -0.2306

2005-06 0.0810 0.1088 0.1823 0.1070

2006-07 0.0134 0.0336 0.1012 0.0391

2007-08 -0.3335 -0.3221 -0.2400 -0.3761

2008-09 -0.5586 -0.5487 -0.4435 -0.7511

2009-10 0.0548 0.0638 0.1240 0.0930

Trend Upward Upward Downward Downward

MEAN -0.1614 -0.1593 -0.0606 -0.1644

SD 0.20 0.21 0.20 0.26

|C. V.| (%) 126.51 130.42 326.40 157.00


152

Analysis of the Profitability Strength of ECL on the basis of Profitability Ratios:

i) Gross Profit Ratio (GPR): This ratio is calculated based on the following formula:

Gross Profit Ratio = (Gross Profit / Net Sales).

As stated earlier in chapter 5, Gross Profit is the result of the relationship between sales

price, sales volume, and costs. A high gross profit margin is a sign of good management

as it implies that cost of production of the firm is relatively low. Alternatively, a low

margin is definitely a danger signal.

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

CPR -0.2313 0.0234 0.0132 0.0105 -0.1457 0.1823 0.1012 -0.2400 -0.4435 0.1240

-0.5000

-0.4000

-0.3000

-0.2000

-0.1000

0.0000

0.1000

0.2000

0.3000 P

rop

ort

ion

Figure 6.16: Graphical presentation of Cash Profit Ratio

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

ROTA -0.2534 -0.0765 -0.0948 -0.1003 -0.2306 0.107 0.0391 -0.3761 -0.7511 0.093

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

Pro

port

ion

Figure 6.17: Graphical presentation of Return on Total Assets Ratio

2000-

01

2001-0

2

2002-

03

2003-0

4

2004-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0

SWOER 0.6483 0.5915 0.5901 0.6291 0.6547 0.5619 0.5796 0.6222 0.6915 0.6217

0

0.2

0.4

0.6

0.8

Pro

po

rti

on

Fig 6.18: Graphical presentation of Salary & Wages to Operating Expenses Ratio


153

Table 6.10 shows that the gross profit ratio has fluctuated from -0.5586 being the lowest

ratio in the year 2008-09 to 0.0810, the highest ratio in the year 2005-06. This ratio

indicates the proportion of cost of production to sales. In the year 2008-09 the cost of

production was the highest during the period under study and this was 154.96 % (i.e.

Total cost = Sales price + Loss = 1.00 + 0.5496 = 1.5496 x 100) of the sale price of the

coal per tonne whereas, cost of production was the lowest in the year 2005-06 which was

nearly 91.90 % (i.e. Sales price - Profit =1.00 – 0.0810 = 0.9190 x 100) of the sales price

of coal per tonne. It may be noted here that the highest cost of production of the year

2008-09 was due to heavy expenditure on remuneration of the employees on account of

pay revision as per National Coal Wage Agreement (NCWA) - VIII and provision for

actuarial gratuity and leave encashment. It is observed around 56 to 69 % of the operating

expenditure is usually incurred for the salary & wages of the employees which can be

observed in Table 6.11 in page no. 157. However, in totality the company has to reduce

its cost of production to make a turnaround in reality. The mean of this ratio is -0.1614

with standard deviation 0.20 and coefficient of variation 126.51%. The high degree of

C.V. indicates that there is much volatility in this ratio. This is a fact and can be observed

from the Figure 6.14 showing the graphical representation of this ratio.

Figure 6.14 viewing the graphical representation of the gross profit ratio which shows that

there is too much fluctuation in this ratio and the curve roughly appears to have

downward trend up to 2008-09 though it improved to some extent in 2005-06 and 2006-

07. However, it has improved after 2008-09 onward.

ii) Net Profit Ratio (NPR): This ratio is calculated based on the following formula:

Net Profit Ratio = (Profit before Tax / Net Sales).

As stated earlier in chapter 5, the net profit margin is an indicator of management’s ability

to operate the business with sufficient surplus. By net profit we have considered here

Profit before Tax (PBT). The reason for choosing PBT in place of Profit after Tax (PAT)

has already been explained in Chapter 5.

Table 6.10 exhibits that this ratio has fluctuated from -0.5487 being the highest loss figure

in the year 2008-09 to 0.1088 being the highest profit figure in the year 2005-06. The year

2005-06 has given us the highest performance followed by 2009-10, the second highest


154

and the year 2006-07 being the third highest performing year during the period under

study.

However, from the Annual Reports of the company and from consultation with company

officials, we have found that a part of loss for the year 2000-01 and 2001-02 was for pay

revision as per NCWA-VI negotiation and a part of loss for the year 2003-04 and 2004-05

was again for pay revision as per NCWA-VII negotiation and a part of loss for the year

2007-08 was further due to pay revision as per NCWA-VIII negotiation. A huge loss for

the year 2008-09 was mainly due to enormous provision for pay revision as well as for

actuarial gratuity and leave encashment. But, the loss for the year 2002-03 was mainly

due to decrease in production followed by decrease in sales revenue. However, we

understand that profit for the year 2009-10 would have been increased had there been no

provision for pay revision as per NCWA-VIII negotiation. The mean value of this ratio is

-0.1593 with standard deviation 0.21 and coefficient of variation 130.42 %. The mean

value implies that the company has incurred loss of around 16 paisa for every rupee of

sale during our study period. The high degree of C.V. indicates that there is much

volatility in this ratio. We observe from the Table 6.10 that the ratios of the years 2000-

01, 2004-05, 2007-08 and 2008-09 are poorer than average figure. Thus, it is a matter of

concern for the company. The situation needs immediate control over operating cost.

Moreover, one interesting thing may be observed from the Table 6.10 that net profit ratio

of the years 2003-04 and from 2005-06 to 2009-10 has been better than gross profit ratio

which is very unusual. Our enquiry reveals that this happened due to waiver of interest in

2003-04, waiver of electricity charges as well as interest received from Term Deposit

with bank in 2005-06 and 2006-07 whereas it is due to interest received in the years 2007-

08 to 2009-10.

Figure 6.15 showing the graphical presentation of the net profit ratio exhibits that there is

too much instability in the ratio and the curve. Though it improved to some extent in

2005-06 and 2006-07, it deteriorated in 2007-08 and 2008-09. However, it has improved

after 2008-09 onward and further we observe that the curve representing the net profit

ratio seemed to have slightly upward trend over the study period.


155

iii) Cash Profit Ratio (CPR): This ratio is calculated based on the following formula:

Cash Profit Ratio = (Cash Profit / Net Sales).

As stated before in chapter 5, this ratio is more reliable indicator of performance and

efficiency of operation in terms of cash generation as it is not affected by the method of

depreciation. It is very essential for a company to earn cash profit from operations for

smooth running of its day to day operating activities and for its survival. Table 6.10

clearly shows that the ratio has fluctuated from -0.4435 being the lowest ratio in the year

2008-09 to 0.1823 being the highest ratio in the year 2005-06 during our study period.

The year 2009-10 has given the second highest ratio 0.1240 and 2006-07 has given the

third highest ratio 0.1012 during the period under study. The reasons for negative ratios

are mainly due to increase in remuneration and retirement benefits of the employees

which are already discussed. However, the lowest ratio of the year 2008-09 which is very

uncommon and is due to huge provision for pay revision as well as for actuarial gratuity

and leave encashment. The mean value of this ratio is -0.0606 with standard deviation

0.20 and the highest value of coefficient of variation 326.40 %. The mean value implies

that the company has incurred cash loss of around 6 paisa for every rupee of sale value

during our study period. The highest degree of C.V. indicates that the ratio has the highest

volatility and inconsistency as compared to other profitability ratios. Table 6.10 shows

that in six years out of the ten years of our study period the ratio is above the average, and

thus the ratio in the years 2000-01, 2004-05, 2007-08 and 2008-09 are below the average.

Figure 6.16 showing the graphical representation of the cash profit ratio exhibits too

much volatility in the ratio and the curve. The curve representing the ratio appears to have

a downward trend indicating the deterioration in this ratio and hence not at all

satisfactory. However, if we ignore the very uncommon figure of 2008-09 that is mainly

due to huge provision for pay revision as well as for actuaria l gratuity and leave

encashment, we find some improvements over the study period. However, the company

has improved the situation after 2008-09 onward. Further, it is also known that the

company has made profit in the year 2010-11 and in 2011-12.


156

iv) Return on Total Assets (ROTA): This ratio is calculated based on the following

formula:

Return on Total Assets = (Profit before Tax / Total Assets).

As stated earlier in chapter 5, the return on assets is a central measure of the overall

profitability and operational efficiency of a firm. It shows the interaction of profitability

and activity ratios. Table 6.10 shows that this ratio for ECL has fluctuated between -

0.7511 being the highest negative return in the year 2008-09 and +0.1070 being the

highest positive return in the year 2005-06. A mammoth negative return of the year 2008-

09 is mainly due to the huge provisions for pay revision as per NCWA-VIII negotiation,

otherwise the ratio would have been -0.10 to -0.20 instead of –0.7511 as observed from

the Annual Report of the company. This fact implies that though there has been proper

utilization of assets there is loss because of heavy provisions charged against profit.

Further, it is also seen that there is inadequate investment in working capital which also

affects the profitability as is discussed under efficiency ratios. Thus, if this trend is

checked it would give impressive results in the years to come. The highest positive return

of the year 2005-06 is because of overall improvement in the performance of the

company. The year 2006-07 and 2009-10 also imply that the assets have been properly

utilized to generate income. The mean of this ratio is -0.1644 with S.D. 0.26 and C.V. 157

%. The high degree of C.V. ratio indicates that there is high volatility in this ratio as

compared to other profitability ratios except cash profit ratio. We also observe that the

ratio for the year 2000-01, 2004-05, 2007-08 and 2008-09 are poorer than the average

whereas rest of the years are having ratios better than the average.

Figure 6.17 viewing the graphical representation of the ‘return on total assets’ ratio shows

that the curve representing the ratio appears to have downward trend upto 2008-09 though

it improved to some extent in 2005-06 and 2006-07 and hence it is not satisfactory.

However, the curve has turned upward after 2008-09. Further we came to know from the

Annual Report & Accounts as well as company officials that there is improvement in this

ratio and in the performance of the company from 2009-10 onward.


157

6.1.5 Additional Analytical Work to find out the impact of Salary & Wages on

Operating Expenses and on Profitability of the Company during 2000-01 to 2009-10:

After going through the Annual Reports & Accounts of the company we have understood

that a lion’s share of operating expenses is incurred for the remuneration of the employees

of the company. We have observed even though number of employees has decreased

during the period under study, there is no substantial decrease in the proportion of

remuneration to total operating expenses which has been more or less stable. Thus, this

has consistently affected the profitability of the company over the years. This

phenomenon attracted our attention to such an extent that we thought it wiser to make a

supplementary analysis to find out the impact of salary and wages on operating expenses

and on profit of the company. Therefore, we have computed the particular expense ratio

(i.e., Salary & Wages to Operating Expenses Ratio) for the ten years. Table 6.11 shows

the nearly unchanging trend of the ratio with proper explanation after the Table.

Table 6.11: Salary & Wages to Operating Expenses Ratio during 2000-01 to 2009-10

Year 2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008-

09

2009-

10

Mean

S.D. |C.V.|

(%)

SWOER 0.65 0.59 0.59 0.63 0.65 0.56 0.58 0.62 0.69 0.62 0.62 0.04 6.35


Salary and Wages to Operating Expenses Ratio (SWOER): This ratio indicates what

portion of operating expenses is represented by salary and wages. A high ratio which is

above the standard or industry average is a cause of concern for a firm. This ratio is


Salary and Wages to Operating Expenses Ratio =

(Total Salary and Wages for the period / Total Operating Expenses).

Table 6.11 exhibits that the ratio has ranged between 0.56 in the year 2005-06 to 0.69 in

the year 2008-09. On an average the company pays around 62 % of operating expenses

for remuneration of the employees. Thus, we understand from the analysis of data that a

lion’s share of operating expenses is spent on account of remuneration. The highest ratio

of the year 2008-09 is mainly due to provision for pay revision as per NCWA-VIII

negotiation and actuarial gratuity, the fact what we have already discussed. In case

number of employees decrease and certain payments related to overtime wages etc. are

controlled then this expenses can be brought down to an optimum level. The lowest value


158

of coefficients of variation (6.35 %) confirms the least variability in this ratio, which

confirms that the proportion of salary and wage expenses to operating expenses is nearly

stable. Therefore, this ratio at present is very unsatisfactory.

Figure 6.18 showing the graphical presentation of the Salary and Wages to Operating

Expenses Ratio exhibits that the ratio seems to have just downward trend. Interestingly,

though number of employees has reduced over the study period, proportion of salary to

operating expenses has not reduced to that extent because of enhancement and revision in

pay structure as per different wage negotiations (i.e. National Coal Wage Agreements).

What happens is that saving in the remuneration due to retirement or other reaso n is

usually nullified by the enhanced remuneration as per the new pay structure. Thus, if this

area improves in the coming years overall profitability of the company would also

improve.

Overall Inference on Profitability Analysis of ECL during 2000-01 to 2009-10

In general, we have observed that all the profitability ratios except cash profit ratio have

shown negative results in all most all the years except 2005-06, 2006-07 and 2009-10

wherein the company has earned profits. Thus, overall performance of the company is not

at all satisfactory during the period under study. However, from the year 2005-06 the

company has started improving its profitability strength. Unfortunately, during the most

of the financial years except 2002-03, 2005-06, and 2006-07, ECL incurred losses due to

either increase in provision for pay revision and actuarial gratuity or decrease in

production and sales revenue. In the year 2002-03, the company suffered loss due to

decrease in production as well as sales but not for pay revision. The losses in the years

2001-02, 2003-04, 2004-05, 2007-08 and 2008-09, were mainly due to increase in salary

& wages on account of extra provision for pay revision. However, in the years 2005-06

and 2006-07, the company made profits without any provision for pay revision. In 2009-

10, it made profit with some amount of provision for pay revision as per NCWA-VIII

negotiation, actuarial gratuity and leave encashment. The year 2009-10, though, saw

profit of Rs. 333.40 crores, which would have been far better had there been no extra

provision for pay revision and for actuarial gratuity and leave encashment. The year

2005-06 crossed all the earlier barriers with the highest ever profit of Rs. 363.86 crores,

whereas 2008-09 has shown highest ever loss of Rs. 2109.09 crores due to heavy

provision for enhanced salary and other payments to employees as stated earlier.


159

It has also been revealed that a substantial part of operating expenses is represented by

salary and wages, which is around 56 % to 69 % of the total operating expenses. Thus,

any cost reduction in the area of remuneration would improve profitability. Further, if the

reduction in cost is supported by increased sales because of increased production from

more mechanized process and improved sales price from proper marketing strategies as

have been started in the recent years, profits would further accelerate in near future. We

have observed that sales have gone up significantly in 2009-10, the last year of our study

period and again in the year 2010-11 and in 2011-12. However, the years 2010-11 and

2011-12 are beyond our study period. Once more, stores expenses are slowly coming

under the grip of management indicating a step ahead for improving profitability. Thus,

we expect an improved picture of profitability of the company in the coming years.

However, our detailed findings based on the above analysis are presented below:

i) Gross Profit Ratio is unstable and not satisfactory though there have been some

improvements over the study period. We know a high ratio of gross profit to sales is a

sign of good management as it implies that cost of production of a firm is relatively low.

In the year 2008-09 the cost of production was as high as 155.86 % of the sale price of the

coal per tonne whereas, cost of production was the lowest in the year 2005-06 which was

nearly 91.90 % of the sales price of coal per tonne. The most important factor dominating

the cost of production is the remuneration of the employees, which is around 56 % to 69

% of total operating cost.

ii) Net Profit Ratio is neither consistent nor satisfactory. However, the upward

movement of net profit ratio indicates some improvements in this ratio over the study

period. This improvement gives a good signal for the survival of the company and this is

because of proper utilization of assets. Our enquiry through direct interview with the

finance officials of the ECL reveals that, a part of this improvement is due to waiver of

interest, waiver of electricity charges and interest received from Term Deposit. This

means that the first two are non-operating extraordinary income whereas last one is non-

operating but regular income. The year 2005-06 has given the company the highest

performance followed by 2009-10, the second highest and the year 2006-07 being the

third highest performing year during the period under study. However, huge loss for the

year 2008-09 is due to heavy provision for pay revision as per NCWA-VIII negotiation as

well as for actuarial gratuity and leave encashment. We understand that profit for the year


160

2009-10 would have been higher had there been no provision for additional expenses due

to pay revision.

iii) The downward movement of Cash Profit Ratio indicates that the ratio is deteriorating

and hence not satisfactory as per data. Earning cash profit from operations is very

essential for a company for smooth running of its day to day operating activities and its

survival. However, the company has made cash profits in 6 years out of 10. Further, it is

known that the company has also earned profits in the year 2010-11 and 2011-12. This is

a good sign for the company. However, it is beyond our study period.

iv) The downward Return on Total Assets ratio represents deterioration in this ratio. Thus

at the present situation the ratio is unsatisfactory. We understand from our analysis that,

though, there has been proper utilization of assets there is loss because of heavy

provisions mainly for enhanced remuneration. Thus, any control over remuneration would

improve overall profitability of the company.

v) We understand from Salary and Wages to Operating Expenses Ratio that a lion’s

share of operating expenses is spent for remuneration of the employee. Thus, if number of

employees decrease and certain payments like overtime wages etc. are controlled then

this expenses can be brought down to an optimum level to improve profitability. The just

downward trend of this ratio implies that though total manpower cost has been increasing,

the increase is getting nullified because of the savings in the manpower cost due to

retirement and other reasons.


161

6.2 SECTION II: ANALYSIS AND INTERPRETATION OF TRENDS OF

DIFFERENT FINANCIAL RATIOS:

Earlier we have attempted to find out and interpret the Trends of various ratios

graphically in Figure 6.1 to 6.18, at the time of analysis of each and every individual

ratio. However, in the absence of best fit line because of negative character of some

ratios, we could not get a clear idea in some cases. Thus, to fine-tune our Trend Analysis

of the various ratios of ECL for the period 2000-01 to 2009-10 we have used in his book

the formula suggested by H. Bhattacharya (“Total Management by Ratios: An Integrated

Approach”, Sage Publications, New Delhi, 1995). We have already explained in Chapter

5 the formula recommended by H. Bhattacharya for determining Trend of different

financial ratios for the measurement of financial performance of a company. We have

also stated there that the formula is very useful and easy for computing quick estimate of

the trend of financial ratios and to interpret without going through any statistical

measures. The formula is again produced below:

LHS (Calculated value) RHS (Standard value)

Where are the values of the ratio for the years 1, 2, 3, 4 …. n and

N is the no of years for which the ratio is calculated. In our analysis, the RHS will always

be

for N = 10 i.e. the duration of our study period from 2000-01 to 2009-

10. The trend of a particular ratio may be regarded as rising or flat or declining if the left

hand side (LHS) of the equation, i.e. the calculated value of Trend is greater than or equal

to or less than the right hand side (RHS) of the equation (i.e. 5.5).

We would like to note down here that very frequently certain ratios of ECL during

the period of our study (i.e. from 2000-01 to 2009-10) have been found to be negative and

thus their apparent Trends what come from the comparison between calculated values

(LHS) and standard values (RHS) as per formula do not give true results at the first hand.

The result is to be interpreted taking into consideration the negative nature of the ratio.

Thus, the Ultimate Trend would be just opposite of the Apparent Trend because of the

negative nature of the particular ratio. Actually, upward toward negative means toward

more negative which indicates downward performance of the particular ratio. For

instance, we may take the result of ‘Networth to Long-tern Debt Ratio’ from our study.

This ratio has negative nature and its Apparent Trend according to comparison as per the


162

formula is ‘upward’, but its Ultimate Trend would be ‘downward” because of the negative

nature of the original ratio. Following this rule we have interpreted the result of the other

ratios. However, for positive nature of the original ratios, the result would be same for both

the cases.

Here we have calculated, analyzed and then interpreted the Trend values of all those

financial ratios which are considered suitable for financial performance appraisal of ECL for

the period 2000-01 to 2009-10 and are listed under four major groups i.e. Liquidity,

Leverage, Efficiency, and Profitability in Table 6.1, at the very outset of our analysis. Now

Trend values of different financial ratios are presented below in Table 6.12 and analysis,

interpretation of the Trends and an overall comment are followed subsequently.

Table 6.12: Trend Values of Selected Financial Ratios of ECL during 2000-01 to 2009-10

Ratios Nature

of the

Ratios

Calculated

Values of

the Trend

(LHS )

Standard

Values of

the Trend

(RHS)

Comparison

of LHS with

RHS of the

Equation

Apparent

Trend

Ultimate

Trend

A. Liquidity Ratios

Current Ratio Positive 5.24 5.5 LHS < RHS Downward Downward

Quick Ratio Positive 5.15 5.5 LHS < RHS Downward Downward

Super Quick Rat io Positive 6.18 5.5 LHS > RHS Upward Upward

B. Capital Structure Ratios

Networth to Long-tern Debt Rat io Negative 6.83 5.5 LHS > RHS Upward Downward

Networth to Net Fixed Assets Ratio Negative 6.96 5.5 LHS > RHS Upward Downward

Long-term Debt to Total Debt Ratio Positive 5.08 5.5 LHS < RHS Downward Downward

C. Efficiency Ratios

Stock Turnover Ratio Positive 5.17 5.5 LHS < RHS Downward Downward

Debtors Turnover Ratio Positive 6.97 5.5 LHS > RHS Upward Upward

Current Assets Turnover Ratio Positive 6.05 5.5 LHS > RHS Upward Upward

Fixed Assets Turnover Ratio Positive 6.43 5.5 LHS > RHS Upward Upward

Stores to Consumptions Ratio Positive 5.06 5.5 LHS < RHS Downward Downward

D. Profitability Ratios

Gross Profit Ratio Negative 5.57 5.5 LHS > RHS Just

Upward

Just

Downward

Net Profit Ratio Negative 5.35 5.5 LHS < RHS Downward Upward

Cash Profit Ratio Negative 6.11 5.5 LHS > RHS Upward Downward

Return on Total Assets Ratio Negative 6.19 5.5 LHS > RHS Upward Downward

E. Expenses Ratio

Salary & Wages to Operating Expenses Ratio

Positive 5.53 5.5 LHS < RHS Just

Down ward

Just

Downward

Source: List of Ratios given in Table 6.1


163

Analysis and Interpretation of the Trend of Financial Ratios

A. Analysis and Interpretation of the Trend of Liquidity Ratios :

Liquidity ratios help in evaluating the short-term solvency of a company at a particular

time. Under liquidity ratios we have included here current ratio, quick ratio and super

quick ratio. We find from analysis that both current ratio and quick ratio have downward

trend during our study period. This indicates that proportion of current assets and quick

assets to current liabilities have been decreasing over the years. Thus short-term liquidity

position of the company is not at all satisfactory which is further deteriorating. However,

if collection policy and stock turnover ratio improve, it would help in paying short-term

obligations of the company. On the other hand, super quick ratio has a high upward trend

during our study period. It is good in the sense that the super quick assets in the form of

cash and bank balance has been increasing over the years which indicate improvement in

immediate liquidity position of the company. However, even if the trend of super quick

ratio is exhibiting a high upward trend, it is not at all satisfactory in individual term at the

present level. On an average the company has around 16 paisa for every rupee of current

liabilities over the study period which is very embarrassing for a concern like ECL. A

huge amount of current liabilities can not be paid by this small amount of cash and bank

balance. To improve the trend of current and quick ratio adequate investment in current

assets especially in the form of stock has to be made to meet the increasing demand for

coal in the economy. At the same time efforts should be made to reduce the magnitude of

current liabilities.

The graphical representations (Figure 6.1 to 6.3) of these ratios in our ratio analysis part

show the same trend as we observe here in Table 6.12. Thus, overall liquidity position of

the company at the present level is not at all encouraging and satisfactory which actually

demands more investment in working capital.

B. Analysis and Interpretation of the Trend of Capital structure ratios:

Leverage or capital structure ratios assess the long-term solvency of a company. Here all

the capital structure ratios are showing downward trends. Thus, as far as the long-term

solvency of the company is concerned, it gives a very depressing picture. Networth to

Long-tern Debt Ratio and Networth to Net Fixed Assets Ratio indicate a declining

networth of the concern due to losses incurred in seven years out of the ten years of our


164

study period, whereas Long-term Debt to Total Debt Ratio indicates that lender’s

contribution in the form of long-term fund in the capital structure of the company is

significantly decreasing. The company is loosing an opportunity of using long-term

external fund in the capital structure to make gain from ‘Trading on Equity’.

However, both graphical presentations (Figure 6.4 to 6.6) as well as trend analysis done

here (Table 6.12) show the same trends of our selected capital structure ratios. Overall,

we observe that three capital structure ratios which are considered here to be the best

available test of the company’s long-term creditworthiness are far from satisfactory.

Thus, we get a gloomy picture of the long-term solvency of ECL that demands immediate

measures to rectify and rationalize capital structure.

C. Analysis and Interpretation of the Trend of Efficiency Ratios:

Efficiency ratios measure the efficiency at which a firm is managing or utilizing resources

that are available to it. Stock Turnover Ratio shows here a downward trend which

indicates that the performance of this ratio are declining indicating either accumulation of

stock or less sales due to inadequate stock of coal which means inadequate investment in

stock. For ECL the second one is correct. Both too high and too low stock turnover is bad

which indicate inadequate investment and excessive investment in stock respectively.

However, in case of Stores to Consumptions Ratio, downward trend indicates

improvement and reduction in consumption of spare parts and stores in the production.

This would improve profitability of the concern. Further, Debtors Turnover Ratio exhibits

a very high upward trend and Current Assets Turnover Ratio and Fixed Assets Turnover

Ratio show high upward trends. Very high upward trend of Debtors Turnover Ratio

indicates much improvement in collection policy of the company and high upward trends

of Current Assets Turnover Ratio and Fixed Assets Turnover Ratio indicate improving

efficiency of the company with regard to the utilization of current assets and fixed assets.

The graphical representation (Figure 6.7 to 6.11) of these selected efficiency ratios in our

earlier ratio analysis part exhibits the same trends as we observe here in Table 6.11. Thus,

it is evident from our study that the performance with regard to assets management of the

company except stock turnover ratio is highly encouraging and satisfactory. However, a

very high upward turnover ratio is not good for a firm, which implies an inadequate

investment in these assets that would affect profitability of the company as it would face


165

problem in meeting customers’ demand because of low level of assets or inadequate

investment in these assets. This situation is an indication of ‘overtrading’ where company

faces a severe crisis of liquidity with poor proprietary fund and profitability but will have

high efficiency of assets management to tackle the situation. That situation will find an

extreme pressure on assets utilization which would adversely affect profitability. This

matter needs more attention from the management.

D. Analysis and Interpretation of the Trend of Profitability ratios:

Profitability is the ability of a firm to earn income to survive and grow over a long period

of time. In our case profitability ratios of ECL are mostly negative in nature which

indicates a dismal picture of profitability of the concern. Both in graphical presentations

(Figure 6.14 to 6.17) of the selected profitability ratios and as per the formula (Table

6.12) we get the same trends. However, graphical presentations could not give clear idea.

The Gross Profit Ratio of the company shows just downward trend which indicates that

indicates that though the company is incurring losses, gross profit ratio can be rectified

with little care. For net profit ratio we get an upward trend which indicates that the Net

Profit Ratio has been improving over the study period. Interestingly, we observe mainly

interest from bank deposit and to some extent waiver of electricity charges by the state

government have contributed to this improvement in net profit ratio which we have

already discussed in ratio analysis part. On the other hand, high downward trend of Cash

Profit Ratio indicates a dismal position of cash profit and high downward trend of Return

on Total Assets Ratio presents a very gloomy picture of overall profitability. However,

huge loss in the year 2008-09 because of heavy provision for pay revision as per NCWA

VIII negotiation as well as for actuarial gratuity and leave encashment has greatly

affected the profitability trend of the company.

On the whole, we can say that profitability trend of the company during the

period under study is not at all satisfactory except net profit ratio which is the only silver

lining in the otherwise dark picture. This situation must be improved.

E. Analysis and Interpretation of the Trend of Salary & Wages to Operating

Expenses Ratio: The Salary & Wages to Operating Expenses Ratio shows just

downward trend in both graphical presentation (Figure 6.18) of this ratio and as per

formula (Table 6.11), which indicates that the ratio is relatively stable. Interestingly,

though number of employees has gone down over the study period, proportion of salary


166

to operating expenses has not decreased to that extent because of enhancement and

revision in pay structure as per different wage negotiations under various National Coal

Wage Agreements. If corrective measures are taken in this particular area we believe that

the overall profitability of the company would improve and this point we have already

mentioned in ratio analysis part earlier in this chapter.

6.3 SECTION III: ANALYSIS OF LONG TERM SOLVENCY POSITION ON

THE BASIS OF TREND RATIOS:

As stated earlier in chapter 5, Trend Ratios are the index numbers of the movements of

financial figures reported in the financial statements for more than one accounting period.

It is a statistical technique which is adopted here to reveal the trend of those financial

items, which are selected to analyze the capital structure and long-term solvency of ECL

for the period of ten years from 2000-01 to 2009-10. The objective of doing this analysis

is to gain a clear picture of long-term solvency of ECL and to verify the results we have

found in capital structure analysis using Financial Ratios with negative values.

We have shown Trend Ratios of different components of capital structure in Table 6.13

and explanation of the Trend Ratios is given subsequently after presentation of the Table.

Table 6.13: Trend Ratios of Different Components of Capital structure of ECL during

the period 2000-01 to 2009-10 (Rs. in crores)

YEAR Equity

Capital

Trend

(% )

Net

Worth

Trend

(% )

L.T.

Debt

Trend

(% )

S.T.

Debt

Trend

(% )

Total

Debt

Trend

(% )

Fixed

Assets

Trend

(% )

1 2 3 4 5 6 7 8 9 10 11 12 13

2000-01 2218.45 100.00 -1644.09 100.00 855.38 100.00 3650.22 100.00 4505.59 100.00 1784.06 100.00

2001-02 2218.45 100.00 -1937.55 117.85 825.21 96.47 3746.92 102.65 4572.12 101.48 1670.73 93.65

2002-03 2218.45 100.00 -2267.82 137.94 769.91 90.01 3810.16 104.38 4580.07 101.65 1574.56 88.26

2003-04 2218.45 100.00 -2570.85 156.37 708.64 82.85 3784.29 103.67 4492.93 99.72 1502.92 84.24

2004-05 2218.45 100.00 -3399.89 206.80 680.84 79.60 4070.87 111.52 4751.71 105.46 1306.03 73.21

2005-06 2218.45 100.00 -3036.03 184.66 708.33 82.81 4162.88 114.04 4871.21 108.11 1263.07 70.80

2006-07 2218.45 100.00 -2925.43 177.94 672.96 78.67 3461.33 94.83 4134.29 91.76 1260.38 70.65

2007-08 2218.45 100.00 -4239.86 257.89 656.23 76.72 4018.76 110.10 4674.99 103.76 1240.81 69.55

2008-09 2218.45 100.00 -6348.95 386.17 689.25 80.58 5147.30 141.01 5836.56 129.54 1233.67 69.15

2009-10 2218.45 100.00 -6015.55 365.89 665.52 77.80 5343.66 146.39 6009.18 133.37 1192.57 66.85

Mean 2218.45 -3438.60 723.23 4119.64 4842.87 1402.88

L.T. Debt = Long Term Debt, S.T. Debt = Short Term Debt

Source: Annexure I showing detailed data


167

Graphical view of the Trend Ratios of different components of Capital Structure:

For greater clarity and visibility, we have shown below the graph of each of the Trend

Ratios of different components of capital structure over ten years of our study period.

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Eq Cap 2218.45 2218.45 2218.45 2218.45 2218.45 2218.45 2218.45 2218.45 2218.45 2218.45

L.T. Debt 855.38 825.21 769.91 708.64 680.84 708.33 672.96 656.23 689.25 665.52

Total Debt 4505.59 4572.12 4580.07 4492.93 4751.71 4871.21 4134.29 4674.99 5836.56 6009.18

0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

7000.00

Rs.

in

Cro

res

Fig 6.19: Graphical presentation of Equity Capital and Total Debt

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net Worth -1644.09 -1937.55 -2267.82 -2570.85 -3399.89 -3036.03 -2925.43 -4239.86 -6348.95 -6015.55

L.T. Debt 855.38 825.21 769.91 708.64 680.84 708.33 672.96 656.23 689.25 665.52

-7000.00

-6000.00

-5000.00

-4000.00

-3000.00

-2000.00

-1000.00

0.00

1000.00

2000.00

Rs.

in

cro

res

Fig 6.20: Graphical presentation of Net Worth and Long-term Debt

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

L.T. Debt 855.38 825.21 769.91 708.64 680.84 708.33 672.96 656.23 689.25 665.52

Total Debt 4505.59 4572.12 4580.07 4492.93 4751.71 4871.21 4134.29 4674.99 5836.56 6009.18

0.00 1000.00 2000.00 3000.00 4000.00 5000.00 6000.00 7000.00

Rs

in C

ro

res

Fig 6.21: Graphical presentation of Long term Debt and Total Debt

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Total Debt 4505.59 4572.12 4580.07 4492.93 4751.71 4871.21 4134.29 4674.99 5836.56 6009.18

Total Assets 3619.18 3627.55 3573.70 3253.09 2945.90 3478.07 3021.65 2728.87 2803.43 3586.16

0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

7000.00

Rs

in C

ro

res

Fig 6.22: Graphical presentation of Total Debt and Total Assets


168

Explanation of the Trend Ratios of different components of capital structure

i) Relation between Equity Capital and Total Debt: Table 6.13 in page no. 166 exhibits

that total debt reveals an increasing trend. The increasing trend of total debt is the result

of increase in short term debt at a higher rate over the years in comparison with decrease

in long term debt. We see when short term debt has increased to 146.39 % of the base

year; long term debt has declined to 77.80 % at the end of our study period 2009-10. As

equity capital remains constant over the study period there has been completely a

mismatch between total debt and equity capital relation. Further, though there has been

increase in total debt, there is no improvement in capital structure due to increase in short

term debt. However, in the year 2006-07 there is decrease in total debt which is again due

to decrease in short-term debt. Thus, we find that short-term debt plays a dominating role

in the quantum of total debt. So, there is a problem of existence of the company and its

control. If this trend continues the company will face a severe crisis to pay off its long

term liabilities.

Figure 6.19 in the previous page shows this relation where we find that the equity capital

has remained constant though there has been growth in total debt during our study period.

ii) Relation between Net Worth and Long-term Debt: Table 6.13 shows that the

negative net worth has increased to 365.89 % of the base year at the end of the year 2009-

10. It touched even 386.17 % in the year 2008-09 because of heavy loss during that

particular year which was due to heavy amount of provision for pay revision, actuarial

gratuity, pension and leave encashment. There are certain resp ites in the year 2005-06,

2006-07 and 2009-10, otherwise this trend ratio would have crossed 400 % as is

understood from the table. This implies uncontrollability of the negative net worth at the

present situation. Long term debt, in contrast, even reduced to 77.80 % of the base year at

the end of 2009-10.

Main objective of this relation is to check the coverage of long term debt by the owner’s

fund. Accordingly, this ratio has failed to give any protection to the lenders of the long

term debt and hence it is very unsatisfactory because of declining net worth over the

study period. The need of the hour is to inject fresh equity fund to improve capital

structure. However, a lion’s share of this fund should be used for mechanization of mines

to increase production and productivity to make profit. Otherwise, the company will lose


169

an opportunity of meeting huge demand of coal even at better sales price in the present

situation. Figure 6.20 exhibits a mismatch between these two components where we

observe net worth has turned towards negative over the study period whereas long term

debt has decreased during that period.

iii) Relation between Net Fixed Assets and Net Worth: The objective of this ratio is to

identify the portion of net worth utilized for the purchase of fixed assets. Usually a part of

net worth should be used for investment in fixed assets and another part should be used

for investment in working capital. The management of ECL has completely failed to give

any coverage for fixed assets because of its increasing negative net worth during our

study period.

Table 6.13 shows that when negative net worth has increased to 365.89 % of the base

year, net fixed assets has reduced to 66.85 % of the base year at the end of the year 2009-

10. Both the components have deteriorated over the study period. Thus, this relation is

highly unsatisfactory and needs immediate attention from the management.

iv) Relation between Long Term Debt and Total Debt: In Table 6.13 we observe that

portion of the long term debt to total debt has reduced over the study period. The reason is

that long term debt during the study period has slowly reduced to 77.80 % of the base

year at the end of the year 2009-10 whereas total debt has increased to 133.37 % of the

base year. This is because of the increase in the short term debt which has even increased

to 146.39 % at the end of 2009-10. In fact long-term debt component in the capital

structure is very less indicating that the company is deprived of the benefit from ‘trading

on equity’ for improving the return on share holders’ fund. Thus, this situation is not

conducive at all for the long term solvency of the company as it is in stake.

The Figure 6.21 showing a graphical presentation of Long term Debt and Total Debt

exhibits a relation between them, where we see total debt is moving upward whereas long

term debt is having downward trend i.e. just opposite of total debt. This implies that there

has been increase in the short-term debt which helps total debt to increase.

v) Relation between Total Debt and Total Assets: Table 6.13 shows when total debt

has increased to 133.37 % of the base year, total asset has reduced to 99.09 % of the base

year at the end of the year 2009-10. Thus, total debt shows an increasing trend whereas


170

total asset shows somewhat a decreasing trend. The mean value of total debt is Rs.

4842.87 crores whereas total asset is Rs. 3586.86 crores. Thus, total debt is not covered

by total assets and hence control of the company is technically out of the bound of the

management. Further, it is the current assets which have helped total assets to increase as

fixed assets have even reduced to 66.85 % of the base year at the end of the year 2009-10.

Thus, more funds in the form of investment in the fixed assets is immediately required for

the survival and growth of the company. For that, there is enough scope for increasing the

revenue of the company.

Figure 6.22 showing a graphical presentation of total debt and total assets, which

confirms that in the recent years especially after 2006-07 the gap between total debt and

total assets has increased that is mainly due to increasing trend of total debt corresponding

with nearly no change in total assets which is a matter of concern.

Overall Inference on long-term solvency on the basis of Trend Ratios

We observe from the analysis of Trend Ratios of selective capital structure components

that long-term solvency of ECL does not look good. When equity capital has remained

constant total debt has increased at a faster rate due to huge increase in short-term debt

and further networth of the company has turned into negative and deducted further due to

losses incurred in earlier years and even in seven years out of the ten years of our study

period. Thus, there is no improvement in capital structure and even it has become worse

over the years. As a result, neither lenders are protected by assets nor fixed assets are

supported by the owner’s fund. The company mainly depends on the outsiders’ funds and

it is specially Coal India Limited. The company may go out of control any time if it is not

supported and taken under consideration by its parent company i.e. Coal India Limited as

well by the Government of India. Thus long-term solvency of the company is in danger

and not at all satisfactory. However, the company has started making profits in a row

from 2009-10 onwards, which gives a good signal to refurbish networth and to bounce

back for its turnaround.


171

6.4 SECTION IV: CORRELATION ANALYSIS AND TESTING OF

HYPOTHESES

In this phase our objective is to find out whether there is any relation or association

between the overall profitability (Return on Total Assets) and other group of financial

ratios, viz. Liquidity Ratios, Capital Structure Ratios and Efficiency Ratios. For this and

further to test the null hypothesis developed earlier we have calculated the correlation

statistics between groups of ratios using Pearson’s Correlation Coefficient (r) formula as

described in Chapter 5. Further, to find out the significance or in-significance of

correlation statistic (r) we have used ‘t’ test. This phase of analysis and interpretation we

have divided in three parts as shown in Table 6.14 and in our interpretation in the next

page. Under each part we have presented our hypothesis as well the result of correlation

analysis and ‘t’ test for the financial performance appraisal of ECL. It may be noted here

that we have used Microsoft Excel Package for calculation of correlation analysis

whereas value of ‘t’ statistic for ‘t’ test has been computed manually.

We have presented the values of Correlation coefficient (r) and test of ‘r’ among various

Financial Ratios of ECL, for the period 2000-01 to 2009-10, in Table 6.14 given in the

next page. The Table shows the group wise correlation analysis, hypothesis, the

calculated values and observed values of test statistic ‘t’ at 5 % level of significance with

8 degree of freedom and the decisions for each of the test. After that we have interpreted

the result and gave overall view on the group ratios.

It is also important to note that though we have carried out correlation analysis and

hypothesis testing employing the usual statistical procedures, the presence of negative

values of a variable corresponding with positive values of another variable has made the

analysis and interpretation of the results very difficult. Quite often the application of

negative statistical values for analyzing and explaining the financial performance leads to

erratic conclusion. For this, we have sparingly used the correlation analysis and have

exercised maximum caution and prudence to avoid the pitfalls of wrong conclusions. For

this, Debtors Turnover Ratio, which in this case does not fit into the scheme of logical

analysis and interpretation, has been dropped out for rational consideration.


172

Presentation of the values of Correlation coefficient (r) and test of ‘r’ among various

Financial Ratios of ECL for the period 2000-01 to 2009-10:

Null Hypothesis: H0: r = o, against Alternative Hypothesis: H1 : r≠0.

Test Statistic ‘t’ = (r √n-2)/√ (1-r2);

Level of significance = 0.05;

Table value of ‘t’ at half the significance level (i.e. 0.025) with 8 degree of freedom =

2.306.

Decision rule: Reject H0 if observed t ≥ t n-2, Accept H0 Otherwise,

or

Decision rule: Reject H0 if observed t < -t n-2, Accept H0 Otherwise.

Table 6.14: Result of Correlation Coefficient (r) and Test of ‘r’ among various

Financial Ratios of ECL for the period 2000-01 to 2009-10

Sl

No.

Correlation between ROTA

and

‘r’

value Hypothesis

‘t’ value

(observed)

t0.05; 8

(table value)

Decisions

A. Liquidity Ratios

1. Current Ratio (CR) 0.841 H0 : r=0 against

H1:r≠0 4.397 2.306

t observed >

t 2.306

Reject H0

2. Quick Ratio (QR) 0.759 H0 : r=0 against

H1:r≠0 3.297 2.306

t observed >

t 2.306

Reject H0

3. Super Quick Rat io (SQR) 0.401 H0 : r=0 against

H1:r≠0 1.238 2.306

t observed <

t 2.306

Accept H0


4. Networth to Long-term Debt

Ratio (NW DR) 0.378

H0 : r=0 against

H1:r≠0 1.155 2.306

t observed <

t 2.306

Accept H0

5. Networth to Net Fixed Assets

Ratio (NWFAR) 0.362

H0 : r=0 against

H1:r≠0 1.098 2.306 t observed <

t 2.306

Accept H0

6. L.T. Debt to Total Debt Ratio

(LDTDR) 0.227

H0 : r=0 against

H1:r≠0 0.659 2.306

t observed <

t 2.306

Accept H0


7. Stock Turnover Ratio (STR) - 0.564 H0 : r=0 against

H1:r≠0 -1.932 2.306

t observed <

- t 2.306

Accept H0

8. Current Assets Turnover

Ratio (CATR) - 0.318

H0 : r=0 against

H1:r≠0 -0.949 2.306

t observed <

- t 2.306

Accept H0

9. Fixed Assets Turn Over

Ratio (FATR) 0.071

H0 : r=0 against

H1:r≠0 0.201 2.306

t observed <

t 2.306

Accept H0

10. Stock of Stores to

Consumption Ratio (STCR) 0.136

H0 : r=0 against

H1:r≠0 0.388 2.306

t observed <

t 2.306

Accept H0

Source: Data generated by our study


173

A. Correlation between Liquidity and Profitability and testing the significance of

the relationship.

Hypothesis:

In each case, we have tested the significance of Correlation coefficient with the help of

the following two assumptions:

Null Hypothesis (H0): There is no significant correlation between Liquidity and

Profitability.

Alternative Hypothesis (H1): There is significant correlation between Liquidity and

Profitability.

Level of significance = 0.05 and table value of ‘t’ at half the significance level (i.e. 0.025)

with 8 degree of freedom = 2.306.

Interpretation of the hypothesis testing based on correlation statistics and relevant

inference at 0.05 level of significance

1) Relation between Current Ratio (CR) and Return on Total Assets (ROTA): Since

calculated value of ‘t’ (4.397) > table value of ‘t’ (2.306) in respect of the correlation

between the Current Ratio and Return on Total Assets, the null hypothesis (H0) is

rejected and alternative hypothesis is accepted. Thus, we conclude that there is a

significant positive correlation between Current Ratio and Return on Total Assets at

0.05 level of significance with 8 degree of freedom.

2) Relation between Quick Ratio (QR) and Return on Total Assets (ROTA): Since

calculated value of ‘t’ (3.297) > table value of ‘t’ (2.306) in respect of the correlation

between the Quick Ratio and Return on Total Assets, the null hypothesis (H0) is

rejected and alternative hypothesis is accepted. Thus, we can conclude that there is a

significant positive correlation between QR and ROTA at 0.05 level of significance

with 8 degree of freedom.

3) Relation between Super Quick Ratio (SQR) and Return on Total Assets (ROTA):

Since calculated value of ‘t’ (1.238) < table value of ‘t’ (2.306) in respect of the

correlation between the Super Quick Ratio and Return on Total Assets, the null

hypothesis (H0) is accepted. Therefore, we can conclude that although the coefficient

of correlation is estimated to be positive (0.401), the relation did not turn out to be

statistically significant at 0.05 level of significance with 8 degree of freedom.


174

B. Correlation between Capital Structure and Profitability and testing the

significance of the relationship

Hypothesis:

In each case, we have tested the significance of Correlation coefficient with the help of


Null Hypothesis (H0): There is no significant correlation between Capital Structure and

Profitability.

Alternative Hypothesis (H1): There is significant correlation between Capital Structure

and Profitability.





4) Relation between Networth to Long-term Debt Ratio (NWDR) and Return on Total

Assets (ROTA): Since calculated value of ‘t’ (1.155) < table value of ‘t’ (2.306) in

respect of the correlation between the Networth to Long-term Debt Ratio and Return

on Total Assets, the null hypothesis (H0) is accepted. Therefore, we can conclude that

although the coefficient of correlation is estimated to be positive (0.378), the relation

did not turn out to be statistically significant at 0.05 level of significance with 8

degree of freedom.

5) Relation between Networth to Net Fixed Assets Ratio (NWFAR) and Return on Total


respect of the correlation between the Networth to Net Fixed Assets Ratio and Return


although the coefficient of correlation between Networth to Net Fixed Assets Ratio

and Return on Total Assets is estimated to be positive (0.362), the relation did not

turn out to be statistically significant at 0.05 level of significance with 8 degree of

freedom.


175

6) Relation between Networth to Long-term Debt Ratio (NWDR) and Return on Total


respect of the correlation between the Networth to Long-term Debt Ratio and Return


although the coefficient of correlation between NWDR and ROTA is estimated to be

positive (0.227), the relation did not turn out to be statistically significant at 0.05 level

of significance with 8 degree of freedom.

C. Correlation between Efficiency and Profitability and testing the significance of

the relationship

Hypothesis:

In each case, we have tested the significance of Correlation Coefficient with the help of


Null Hypothesis (H0): There is no significant correlation between Efficiency and

Profitability.

Alternative Hypothesis (H1): There is significant correlation between Efficiency and

Profitability.





7) Relation between Stock Turnover Ratio (STR) and Return on Total Assets (ROTA):

Since calculated value of ‘t’ (-1.932) > table value of ‘t’ (- 2.306) in respect of the

correlation between the Stock Turnover Ratio and Return on Total Assets, the null

hypothesis (H0) is accepted and alternative hypothesis is rejected. Hence, we can

conclude that although the coefficient of correlation between STR and ROTA is

estimated to be negative (-0.564), the relation did not turn out to be statistically

significant at 0.05 level of significance with 8 degree of freedom.

8) Relation between Current Assets Turnover Ratio (STR) and Return on Total Assets

(ROTA): Since calculated value of ‘t’ (-0.949) > table value of ‘t’ (- 2.306) in respect

of the correlation between the Current Assets Turnover Ratio and Return on Total


176

Assets, the null hypothesis (H0) is accepted. Hence, we can conclude that although the

coefficient of correlation between CATR and ROTA is estimated to be negative

(-0.318), the relation did not turn out to be statistically significant at 0.05 level of

significance with 8 degree of freedom.

9) Relation between Fixed Assets Turnover Ratio (FATR) and Return on Total Assets

(ROTA): Since calculated value of ‘t’ (0.201) < table value of ‘t’ (2.306) in respect of

the correlation between the Fixed Assets Turnover Ratio and Return on Total Assets,

the null hypothesis (H0) is accepted. Therefore, we can conclude that although the

coefficient of correlation between FATR and ROTA is estimated to be positive

(0.071), the relation did not turn out to be statistically significant at 0.05 level of


10) Relation between Stores to consumption Ratio (STCR) and Return on Total Assets

(ROTA): Since calculated value of ‘t’ (0.388) < table value of ‘t’ (2.306) in respect of

the correlation between the Stores to consumption Ratio and Return on Total Assets,

the null hypothesis (H0) is accepted. Therefore, we can conclude that although the

coefficient of correlation between STCR and ROTA is estimated to be positive

(0.136), the relation did not turn out to be statistically significant at 0.05 level of


Overall Comments on Correlation Analysis and Testing of Hypothesis

As regards the correlation between the Liquidity and Profitability (ROTA), we find that

there are significant positive relations between current ratio and return on total assets and

between quick ratio and return on total assets at 5% level of significance with 8 degree of

freedom. This implies that improvement in current ratio and quick ratio at the present

level will significantly improve return on total assets i.e. profitability. However, super

quick ratio (i.e. cash and bank balance here) does not have any such impact on

profitability.

As regards the correlation between the Capital Structure and Profitability (ROTA), we

find that though there is a positive relation, no such relation is significant at 5% level of

significance with 8 degree of freedom. We observe that though all the capital structure

ratios, i.e. Net Worth to Debt ratio, Net worth to Fixed Assets Ratio and Long Term Debt

to Total Debt Ratio, are slightly positively correlated to the profitability (ROTA), not a


177

single relation turned out to be statistically significant. Hence, we can conclude that there

is no relation between capital structure and profitability at 5% level of significance with 8

degree of freedom.

As regards the correlation between the Efficiency of Assets Management and Profitability

(ROTA), we find that there is no significant relation at 5% level of significance with 8

degree of freedom. This also implies that the efficiency of assets management has no

direct bearing on the return on total assets (ROTA). Thus, we can conclude that though

apparently efficiency ratios show much improvement in assets utilization or turnover of

the assets of the ECL, it is, in the present situation, not helping to improve profitability.

However, moderate degree of negative correlation between stock turnover ratio and return

on total assets indicates that if stock turnover ratio increases profitability would suffer

though not significantly.

Taking into consideration both significant positive correlation between current ratio and

profitability and moderate degree of negative correlation between stock turnover ratio and

profitability and between current assets turnover ratio and profitability, we can say that

there is inadequate investment in current assets and specially it is in stock which is

affecting profitability badly. Thus, the result supports our earlier findings in our ratio

analysis Part where we have found high ratio of current assets turnover and stock turnover

as compared to industry has been adversely affecting profitability.


178

6.5: SECTION V: CASH FLOW ANALYSIS AS AN INSTRUMENT FOR MEASURING

PERFORMANCE WITH REGARD TO LIQUIDITY MANAGEMENT OF THE COMPANY

In Ratio Analysis Section of this chapter, we have assessed liquidity position of our sample

company with the help of three Liquidity Ratios, i.e. Current Ratio, Quick Ratio and Super

Quick Ratio. We know that liquidity is a complex issue and the analysis of liquidity involves

much more than computing the relationship between current assets and current liabilities. It

should also consider the overall framework of the ability of management to monitor and

control the firm’s ability to generate operating cash flow. Thus, we believe that the standard

approaches used in the past need to be reviewed in this changing era to get more information

for better cash management. Cash flow analysis provides such information that supplements

Profit &Loss account and the Balance Sheet.

The analysis of cash flow statement of our sample company is done here for eight years, i.e.

from 2002-03 to 2009-10, instead of the study period of ten years from 2000-01 to 2009-10

for two reasons. Firstly, cash flow statement has become mandatory only from April 1, 2001

and secondly, all the relevant data are not available before 2002-03. However, we have taken

utmost care in preparing and analyzing the cash flow statement for the period 2002-03 to

2009-10 in discovering some vital information that would certainly help management to

improve further for the turnaround of the company. It is important to state in this connection

that for the purpose of cash flow analysis, we have collected a lot of information through

direct interviews and discussions from the officials of ECL to supplement the data in the

Annual Reports.

Here, our main objective of Cash Flow Analysis is to ascertain the ability of the company to

generate cash from operating activities. Further, we have done it for fine-tuning of our

liquidity analysis to pinpoint the reasons for the worsening liquidity position of ECL even

though there has seen sufficient earnings from operating activities in most of the years.

Actually, the amount of cash inflow from operating activities is a key indicator to examine

whether the operations of the company have generated sufficient cash to maintain operating

capability of the company without any help from external sources of financing. We have also

tried to find out main factors dominating cash flow from operating activities in particular,

which is very important for the survival of the company. Accordingly, we have done Cash

Flow Analysis in three parts as under :

A. Analysis of Cash Flow Statement based on absolute figures of financial data,

B. Analysis of the main factors dominating Cash Flow pattern of the company, and

C. Analysis of Cash Flow Statement based on certain important ratios on Cash Flow.


179

Now, first, we have presented Cash Flow Statement of ECL in two pages and then the data

from above-mentioned analysis have been interpreted to derive a clearer view of liquidity

position of the company.

Table 6.15: Cash Flow Statement of ECL for the period 2002-03 to 2009-10 (Rs. in lakhs)

Particulars/ Years 2002-03 2003-04 2004-05 2005-06

A. Cash Flow from Operating Activi ties

Net Profit before Tax & Extraordinary Items -29166.90 -57147.51 -64930.62 34053.32

Adjustments For:

Depreciat ion 22047.40 17474.75 15543.18 14956.38

Impairment 0.00 0.00 1148.57 1472.50

Lease Rent Received -350.00 -350.00 -350.00 -350.00

Interest Income -756.67 -2783.01 -3490.53 -6731.20

OBR Adjustment 12947.39 9180.80 6924.90 9979.74

Provision for Loss of Assets 1103.39 313.86 -417.10 399.75

Interest Expenses 4226.66 413.90 80.96 1004.56

Operating Profit before Working Capital Changes 10051.27 -32897.21 -45490.64 54785.05

Decrease (+)/Increase (-) in Sundry Debtors 19725.93 39301.73 36321.60 4504.29

Decrease (+)/Increase (-) in Loans & Adv. -911.06 -2901.18 1904.06 -4749.39

Decrease (+)/Increase (-) in Other Current Assets -182.03 437.01 -52.35 -1719.86

Decrease (+)/Increase (-) in Inventories 1252.54 -926.24 -4887.04 -9521.41

Decrease (-)/Increase (+) in Unsecured Loans 0.00 0.00 0.00 2848.21

Decrease in Misc. Expenses not written off 850.03 2335.37 0.00 0.00

Decrease (-)/Increase (+) in Current Liab. (-OBR) 16950.97 12137.86 48070.84 4101.66

Cash Generated from Operation 47737.65 17487.34 35866.47 50248.55

Fringe Benefit Tax 0.00 0.00 0.00 -810.26

Prior Period Adjustments -4710.80 -602.77 -2989.48 -288.74

Extraordinary Item:

Waiver of Electricity Duty 0.00 0.00 3431.86

Waiver of Interest 0.00 16865.38 0.00 0.00

Waiver of Apex Office Charges 0.00 8247.33 0.00 0.00

Net Cash Flow from Operating Activities 43026.85 41997.28 32876.99 52581.41

B. Cash Flow From Investing Activities

Purchase of Fixed Assets (+ Capital WIP) -13923.73 -9900.46 -11691.02 -12231.75

Adjustment in Value of Fixed Assets 177.70 628.55 148.65 202.92

Redemption of 8.5 % RBI Power Bond 0.00 0.00 0.00 0.00

Acquisition of UPSEB 8.5 % Tax Free Bond 0.00 -33.00 0.00 0.00

Lease Rent Received 350.00 350.00 350.00 350.00

Interest Income 756.67 2783.01 3490.53 6731.20

Net Cash Flow from Investing Activities -12639.36 -6171.90 -7701.84 -4947.63

C. Cash Flow from Financing Activi ties

Repayment of Long Term Borrowings -4750.26 -4497.12 -2670.23 -413.56

Interest Paid -952.46 -477.58 -110.85 -1004.56

Waiver on Account of Apex Interest 0.00 -16865.38 0.00 0.00

Net Cash Flow from Financing Activities -5702.72 -21840.08 -2781.08 -1418.12

Net Cash Flow from All Activities (A+B+C) 24684.77 13985.30 22394.07 46215.66

Opening Cash & Bank Balance 24200.39 48885.16 62870.46 85264.53

Closing Cash and Bank Balance 48885.16 62870.46 85264.53 131480.19


180

Table 6.15: Cash Flow Statement of ECL (Rs. in lakhs) – Contd. from Previous Page

Particulars / Years 2006-07 2007-08 2008-09 2009-10

A. Cash Flow from Operating Activi ties

Net Profit before Tax & Extraordinary Items 9899.81 -101374.02 -210292.13 33502.28

Adjustments For:

Depreciat ion 14235.22 15343.94 21669.28 15305.26

Impairment 528.22 2182.63 2095.59 951.06

Lease Rent Received -350.00 -350.00 -350.00 -350.00

Interest Income -6601.54 -6204.45 -6074.73 -3696.96

OBR Adjustment 8272.95 8041.81 15586.26 17035.15

Provision for Loss of Assets -102.05 30.05 -16.36 -83.51

Interest Expenses 40.87 29.12 7.30 1.06

Operating Profit before Working Capital Changes 25923.48 -82300.92 -177374.79 62664.34

Decrease (+)/Increase (-) in Sundry Debtors 907.86 -68.94 -6826.49 -40868.23

Decrease (+)/Increase (-) in Loans & Adv. 1050.31 -533.65 766.58 -1648.56

Decrease (+)/Increase (-) in Other Current Assets -270.14 -676.64 -559.14 1469.73

Decrease (+)/Increase (-) in Inventories -2278.43 9585.59 758.68 -12953.10

Decrease (-)/Increase (+) in Unsecured Loans -2848.21 0.00 0.00 0.00

Decrease in Misc. Expenses not written off 0.00 0.00 0.00 0.00

Decrease (-)/ Increase (+) in Current Liab.(-OBR) -61429.94 67336.43 199476.04 30271.01

Cash Generated from Operation -38945.07 -6658.13 16240.88 38935.19

Fringe Benefit Tax -751.96 -327.53 -338.43 0.00

Prior Period Adjustments 290.20 -1291.94 -278.32 -162.38

Extraordinary Item:

Waiver of Electricity Duty 1622.08 0.00 0.00 0.00

Waiver of Interest 0.00 0.00 0.00 0.00

Waiver of Apex Office Charges 0.00 0.00 0.00 0.00

Net Cash Flow from Operating Activities -37784.75 -8277.60 15624.13 38772.81

B. Cash Flow From Investing Activities

Purchase of Fixed Assets (+ Capital WIP) -15691.79 -16178.72 -19187.72 -16501.53

Adjustment in Value of Fixed Assets 182.58 68.76 36.76 16.81

Redemption of 8.5 % RBI Power Bond 3.30 3.30 3.30 3.30

Acquisition of UPSEB 8.5 % Tax Free Bond 0.00 0.00 0.00 0.00

Lease Rent Received 350.00 350.00 350.00 350.00

Interest Income 6601.54 6204.45 6074.73 3696.96

Net Cash Flow from Investing Activities -8554.37 -9552.21 -12722.93 -12434.46

C. Cash Flow from Financing Activi ties

Repayment of Long Term Borrowings -428.75 -376.78 -431.80 -446.99

Interest Paid -40.87 -29.12 -7.30 -1.06

Waiver on Account of Apex Interest 0.00 0.00 0.00 0.00

Net Cash Flow from Financing Activities -469.62 -405.90 -439.10 -448.05

Net Cash Flow from All Activities (A+B+C) -46808.74 -18235.71 2462.10 25890.30

Opening Cash & Bank Balance 131480.19 84671.45 66435.74 68897.84

Closing Cash and Bank Balance 84671.45 66435.74 68897.84 94788.14

Source: Annual Reports & Accounts of ECL


181

A. Analysis of Cash Flow Statement based on absolute figures of financial data :

i) We observe from the analysis of Cash Flow Statement in Table 6.15 that the company

has been able to generate cash from operating activities in all most all the years except in

2006-07 and 2007-08, which gives a clue for the survival of the company. In 2006-07, a

heavy amount of payment for current liabilities took place because of arrear remuneration

whereas in 2007-08, it happened mainly for increase in remuneration as per new wage

agreement. These are discussed below year wise. We further observe that in most of the

years except in 2006-07 there has been increase in current liabilities, which implies that

expenses for the year is not paid. This is either due to non-availability of cash or to

maintain certain balance in cash to preserve liquidity so that operating activities of the

company do not hamper. From the analysis of the current liabilities and provisions, it

reveals that an important part of unpaid current liabilities and provisions is because of

actuarial liabilities for gratuity, pension etc. that have been increasing over the years.

It is further observed that in the year 2002-03, cash was generated through charging

depreciation, OBR adjustments, and collection from debtors and non-payment of current

liabilities including actuarial liabilities. Combined effect of these all has converted the

result from negative PBT (Profit before Tax) into positive operating cash flow. Same

thing has been observed in the year 2003-04. But further improvement in debt collection

has improved the liquidity position of the company. As usual, there have been increases

in current liabilities and provisions, however, with these items, waiver of interest and

apex office charges have further helped to generate positive cash flow from operating

activities. In 2004-05, the most important factor contributing to positive operating cash

flow is the increase in current liabilities and provisions, especially provision for actuarial

liabilities along with improvement in debt collection. In the year 2005-06, we know that

there has been improvement in the performance of the company in almost all the areas.

With positive PBT (Profit before tax and extra-ordinary items) there has been further

improvement in debt collection, funds from depreciation and OBR adjustment and

increase in current liabilities in such a way that even if there have been increase in

inventories, loans and advances and other current assets, still there has been positive cash

flow from operating activities. In the year 2006-07, though, the company has generated

funds from depreciation and OBR adjustment, heavy amount of payment for current


182

liabilities, especially payment because of arrear remuneration has resulted negative cash

flow from operating activities.

In the year 2007-08, there is second highest negative figure of PBT (Profit before Tax)

which has happened mainly for increase in remuneration of the employees. However,

funds from the increased Current Liabilities and Provisions, the second highest increase

during the period under study after 2008-09, added with funds from depreciation and

OBR adjustment has reduced heavy amount of negative PBT into a meager amount of

negative cash flow i.e. from Rs. -1013.74 crores to Rs. -82.78 crores only. The year 2008-

09, has incurred highest ever loss of Rs. 2102.92 crores (Net Profit before Tax &

Extraordinary Items) during our study period, which is again due to increased salary as

per revised pay. It was nearly 112 percent of Net Sales value. However, increase in

current liabilities, which is due to arrear remuneration, and increase in provision for

actuarial liability again resulted into positive cash flow from operating activity. We

observe that there has been tremendous increase in current liabilities and provisions in

this year, which is the highest figure of increase during the period under study. In the year

2009-10, again we observe that increase in current liabilities and provisions along with

funds generated from depreciation charges and OBR adjustment has contributed towards

positive operating cash flow. However, we observe that there is substantial increase in

sundry debtors in the year that is due to either delay in collection as compared to earlier

years or a poor selection of customers. With that, stock of inventory has started increasing

indicating the inefficiency of the management in handling stock and further there is

increase in loans and advances.

ii) The main contributors to the cash flow from operations are the provision for

depreciation, OBR adjustment, increase in current liabilities, and decrease in sundry

debtors and decrease in inventories.

iii) It is observed that the company is running its activities mainly from cash generated

through operating activities. Moreover, it has been meeting its investment needs from its

own generated funds. However, this implies that the company is using short-term fund

that is released from operating activities for the long-term investment purpose, which is

not usual practice. It is expected that not only the long-term investment should be

financed from long-term funds but also a part of working capital has to be funded from

long-term source, which is completely absent here in case of ECL.


183

iv) We observe that the company has been repaying long-term borrowing same way as

the company meets long-term investment from the cash generated from operating

activities. As a result, current liabilities of the company are increasing over the years.

v) We also observe that OBR adjustment has again started increasing in the recent years

though it was lesser in the years 2004-05, 2006-07 and 2007-08. Debtors balance has

started increasing from the year 2007-08 though it was amazingly controlled up to 2006-

07. The mostly affected year is 2009-10 where we notice a sudden and unexpected

increase in the debtors around Rs. 408.68 crores. Further, there has been a substantial

increase in inventory, around Rs. 129.53 crores. We observe that there has been a

tendency of accumulating stock during the period under study except 2007-08 and 2008-

09. However, there is very substantial increase in the year 2009-10. All these factors

jointly affect operating cash flow and liquidity position of the company very badly. These

factors need to be managed very carefully for the survival and growth of the company.

vi) We also observe that there has been increase in current liabilities (excluding OBR) in

almost all the years during our study period except in the year 2006-07.Though

technically it generates positive operating cash flow and maintains a cash balance to meet

operating expenses, it is a matter of concern that current liabilities and provisions are not

paid regularly and has accumulated year after year. As a short-term measure though it can

be followed, it does not give a good signal for the company in the long run. This trend

needs to be controlled for the betterment of the company.

B. Analysis of the main factors dominating Cash Flow pattern of the company:

First we have shown below main factors dominating Cash Flow in Table 6.16 and then

we have analyzed and explained those factors with the help of the graphs after the Table.

Table 6.16: Main Factors dominating Cash Flow during 2002-03 to 2009-10 (Rs.in crores)

Variables / Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Depreciation 220.47 174.75 155.43 149.56 142.35 153.44 216.69 153.05

Operating Cash Flow 430.27 419.97 328.77 525.81 -377.85 -82.78 156.24 387.73

Financing Cash Flow -57.03 -218.40 -27.81 -14.18 -4.70 -4.06 -4.39 -4.48

Investing Cash Flow -126.39 -61.72 -77.02 -49.48 -85.54 -95.52 -127.23 -124.34

OBR Adjustment 129.47 91.81 69.25 99.80 82.73 80.42 155.86 170.35

Decr(+)/Incr (-) in Debtors 197.26 393.02 363.22 45.04 9.08 -0.69 -68.26 -408.68

Decr(+)/Incr (-) in Inventories

12.53 -9.26 -48.87 -95.21 -22.78 95.86 7.59 -129.53

Decr(-)/Incr (+) in CL 169.51 121.38 480.71 41.02 -614.30 673.36 1994.76 302.71

Source: Cash Flow Statement given in Table 6.15


184

The Analysis of the main factors dominating Cash Flow is presented subsequently after

the graphical view of the dominating factors to have a clear picture:

Graphical impression of the dominating factors

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Depreciation 220.47 174.75 155.43 149.56 142.35 153.44 216.69 153.05

Operating C/F 430.27 419.97 328.77 525.81 -377.85 -82.78 156.24 387.73

OBR Adjustment 129.47 91.81 69.25 99.80 82.73 80.42 155.86 170.35

-500.00

-400.00

-300.00

-200.00

-100.00

0.00

100.00

200.00

300.00

400.00

500.00

600.00

Rs.

in

Cro

res

Figure 6.23: Deprciation & OBR Adjustment Vs Operating Cash Flow

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Decr(+)/Incr(-) in Debtors 197.26 393.02 363.22 45.04 9.08 -0.69 -68.26 -408.68

Decr(-)/Incr(+) in CL 169.51 121.38 480.71 41.02 -614.30 673.36 1994.76 302.71

Decr(+)/Incr(-) in Inventories 12.53 -9.26 -48.87 -95.21 -22.78 95.86 7.59 -129.53

Operating C/F 430.27 419.97 328.77 525.81 -377.85 -82.78 156.24 387.73

-1000.00

-500.00

0.00

500.00

1000.00

1500.00

2000.00

2500.00

Rs.

in

Cro

res

Figure 6.24: Change in Debtors, Creditors, Inventories Vs. Operating Cash Flow

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Operating C/F 430.27 419.97 328.77 525.81 -377.85 -82.78 156.24 387.73

Financing C/F -57.03 -218.40 -27.81 -14.18 -4.70 -4.06 -4.39 -4.48

Investing C/F -126.39 -61.72 -77.02 -49.48 -85.54 -95.52 -127.23 -124.34

-500.00

-400.00

-300.00

-200.00

-100.00

0.00

100.00

200.00

300.00

400.00

500.00

600.00

Rs.

in

Cro

res

Figure 6.25: Operating Cash Flow Vs Financing Cash Flow Vs Investing Cash Flow


185

Analysis of the main factors dominating Cash Flow

i) Figure 6.23 given in the previous page shows that operating cash flow curve though

declined in 2006-07, it started improving from the year 2007-08 onwards after a great fall

in the year 2006-07 to the negative. OBR adjustment started increasing again after 2007-

08 whereas depreciation had a fall in 2009-10. Depreciation and OBR adjustment have

contributed towards operating cash inflow as usual. However, heavy outflow for payment

of current liabilities has reduced operating cash flow to such negative in 2006-07.

ii) Figure 6.24 given in the previous page shows how payment (decrease) and

nonpayment of current liabilities has affected operating cash flow of the company. We

can understand how payment of current liabilities in 2006-07 has adversely affected

operating cash flow to such negative level and nonpayment of current liabilities (increase)

has helped operating cash flow to be positive in the year 2008-09, and helped the

company to manage liquidity in the year 2004-05 and saved it from a disastrous state in

the year 2007-08.

It is also observed that how better collection policy and appropriate choice of debtors

have helped operating cash flow to become positive mainly in the year 2003-04 and 2004-

05 and delay in collection from debtors has affected operating cash flow in the year 2008-

09 and especially in the year 2009-10. In 2009-10 operating cash flow would have been

far better had the debtors (Rs. 408.63 crores) been collected regularly.

Further we notice how increase (-) and decrease (+) in inventories have affected the cash

flow position. Increase in inventories in five years out of eight years of the study period

has adversely affected the operating cash flow. Particularly the operating cash flow of the

year 2009-10 is severely affected to the tune of Rs. 129.53 crores. Both increase in

debtors (Rs. 408.68 crores) and increase in inventories (Rs. 129.53 crores) have affected

operating cash flow of the year 2009-10 in such a way that the company had to restrain

from paying full amount of current liabilities of that year. However, in the year 2007-08

decrease in inventories has helped operating cash flow favourably.

From Figure 6.24 we observe that the most influential factor of these three factors is

change in creditors and then the second factor is change in debtors’ followed by the third

influential factor that is the change in inventories. Thus, we observe all these factors have


186

great influences on operating cash flow for Eastern Coalfield Limited. It is suggested that

the management should be more careful in dealing these items.

iii) Figure 6.25 shown in page no. 184 depicts that cash flow from financing activities and

investing activities are always negative whereas cash flow from operating activities in

almost all the years except 2006-07 and 2007-08 is always positive. It implies that

outflow for investing activities and financing activities is managed from operating cash

flow. It gives a good signal conveying a message that the company is slowly becoming

internally strong to pay financing as well as investing needs by its own but it is risky and

would give burden on operating cash flow. Further, in the present era of change and

competition where the company is required to invest a heavy amount in new technology

and machine for the revolution in production, the internal source of funds created from

operating activities may not be sufficient enough to cater these needs. Thus, heavy

investing needs of the company should be financed from outside source at least in the

present condition. However, one good indication is that the outflow for financing

activities (i.e. payment of loan and interest) is slowly decreasing over the years that would

help the company to invest more funds for much needed investing activities in near

future. Figure 6.25 exhibits that there is substantial improvement in operating cash flow

from the year 2007-08 onwards, a good mark for the company.

C. Analysis of Cash Flow Statement based on certain important ratios on Cash Flow

Data:

To have a better idea and form a correct view it is better to have a comparative analysis of

the liquidity management of the company. Accordingly, we have analyzed cash flow

statement with the help of some important ratios based on cash flow data, which are very

significant and help us to understand the true cash position. We have presented two

Tables in the next page. Table 6.17 contains the Cash Flow Data for the computation of

Ratios and Table 6.18 contains important Ratios based on Cash Flow data. Subsequently,

we have explained the results.


187

Table 6.17: Cash Flow Data for computing Ratios for the Period 2002-03 to 2009-10

(Rs. in Crores)

Variables / Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Depreciat ion 220.47 174.75 155.43 149.56 142.35 153.44 216.69 153.05

Operating Cash Flow 430.27 419.97 328.77 525.81 -377.85 -82.78 156.24 387.73

Operating Cash Flow

after Interest

420.74 415.20 327.66 515.77 -378.26 -83.07 156.17 387.72

Financing Cash Flow -57.03 -218.40 -27.81 -14.18 -4.70 -4.06 -4.39 -4.48

Investing Cash Flow 126.39 61.72 77.02 49.48 85.54 95.52 127.23 124.34

Total Assets 3573.70 3253.09 2945.90 3478.07 3021.65 2728.87 2803.43 3586.16

Long-Term Debts 769.91 708.64 680.84 708.33 672.96 656.23 689.25 665.52

Operating Profit -231.72 -507.10 -707.77 274.10 49.97 -1075.95 -2146.18 284.85

No. of Shares ('000) 22184.5 22184.5 22184.5 22184.5 22184.5 22184.5 22184.5 22184.5

Source: Cash Flow Statement given in Table 6.15

The important ratios that we have considered for cash flow analysis are Depreciation to

Operating Cash Flow Ratio (DOCFR), Debt Coverage Ratio (DCR), Return of Cash to

Total Assets Ratio (RCTAR), Operating Cash Flow to Investing Cash Flow Ratio

(OCFICFR), Earning Cash Flow Ratio (ECFR) and Cash Flow per Share (CFPS).

Table 6.18: Important Ratios based on Cash Flow Data

Year / Ratios DOCFR DCR RCTAR OCFICFR ECFR CFPS

2002-03 51.24 54.65 12.04 340.43 -185.69 189.66

2003-04 41.61 58.59 12.91 680.44 -82.82 187.16

2004-05 47.28 48.13 11.16 426.86 -46.45 147.70

2005-06 28.44 72.81 15.12 1062.67 191.83 232.49

2006-07 -37.67 -56.21 -12.50 -441.72 -756.15 -170.50

2007-08 -185.36 -12.66 -3.03 -86.66 7.69 -37.44

2008-09 138.68 22.66 5.57 122.80 -7.28 70.40

2009-10 39.47 58.26 10.81 311.83 136.12 174.77

Mean 15.46 30.78 6.51 302.08 -92.84 99.28

S.D. 94.15 44.22 9.55 459.08 292.49 138.35

C.V. (%) 608.97 143.66 146.77 151.97 308.64 139.35

Source: Table 6.17 showing Cash Flow data for Computing Ratios

The Analysis of the Cash Flow Ratios is presented subsequently after the graphical

impression of these Ratios to have a clear picture:


188

Graphical view of Cash Flow Ratios

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

DOCFR 51.24 41.61 47.28 28.44 -37.67 -185.36 138.68 39.47

-250.00

-200.00

-150.00

-100.00

-50.00

0.00

50.00

100.00

150.00

200.00

Figure 6.26: Graphical presentation of Depreciation to Operating C/Flow Ratio P

erce

nta

ge

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

DCR 54.65 58.59 48.13 72.81 -56.21 -12.66 22.66 58.26

-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

Figure 6.27: Graphical presentation of Debt Coverage Ratio

Perc

en

tage

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

RCTAR 12.04 12.91 11.16 15.12 -12.50 -3.03 5.57 10.81

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00 Figure 6.28: Graphical presentation of Return of Cash to Total Assets Ratio

Percen

tag

e

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

OCFICFR 340.43 680.44 426.86 1062.67 -441.72 -86.66 122.80 311.83

-1000.00

-500.00

0.00

500.00

1000.00

1500.00 Figure 6.29: Graphical presentation of Operating C/ F to Investing C/ F Ratio

Percen

tag

e


189

The Analysis of the Cash Flow Ratios is presented below:

i) Depreciation to Operating Cash Flow Ratio (DOCFR): The ratio is calculated

based on the following formula:

DOCFR = (Depreciation / Operating Cash Flow) X 100.

The ratio reveals how much of Operating Cash Flow is generated through Depreciation. A

higher ratio indicates that a higher amount of fund for replacement of fixed assets is

generated through internal sources, which helps the management in buying new assets.

Table 6.18 depicts that the value of this ratio has varied from 138.68 percent in the year

2008-09 to (-) 185.36 percent in the year 2007-08 during the period under study. On an

average, this ratio is 15.46 % with coefficient of variation (C.V.) 608.97 %. The highest

value of C.V. indicates that the ratio has the highest volatility as compared to other ratios.

However, if we ignore the negative value of the year 2006-07 and 2007-08 because of

negative operating cash flow and abnormal positive value of the year 2008-09, we can say

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

ECFR -185.69 -82.82 -46.45 191.83 -756.15 7.69 -7.28 136.12

-1000.00

-800.00

-600.00

-400.00

-200.00

0.00

200.00

400.00

Per

cen

tage

Figure 6.30: Graphical presentation of Earning Cash Flow Ratio

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

CFPS 189.66 187.16 147.70 232.49 -170.50 -37.44 70.40 174.77

-200.00

-150.00

-100.00

-50.00

0.00

50.00

100.00

150.00

200.00

250.00

300.00 Figure 6.31: Graphical presentation of Cash Flow Per Share (Rs)


190

that the depreciation on an average generates 41.61 percent (i.e. average value of the left

five years ratios, 51.24 percent, 41.61 percent, 47.28 percent, 28.44 percent and 39.47

percent) of operating cash flow of the company. Thus, depreciation is a dominating factor

for operating cash flow of the company and it can be observed that the company is ably

managing the investment need for purchasing of new assets from this source. However,

the use of this fund for other purpose may create problem for the company, as it needs

very badly installation of some new and advanced technology oriented machine for

enhancing production for its turnaround. A graphical presentation of this ratio is given in

Figure 6.26.

Figure 6.26 exhibits that the curve representing the ratio had a downward trend up to

2007-08 but started improving after 2007-08 as is indicated by the upward portion of the

curve. However, though the fund created from depreciation may help to meet immediate

liquidity requirement, it does not indicate a good financial health of the company in the

long-run.

ii) Debt Coverage Ratio (DCR): This ratio is calculated based on the following formula:

Debt Coverage Ratio = (Operating Cash Flow after Interest / Long-term Debt) X 100.

This ratio is an indicator of the ability of the company to redeem the existing long-term

debts from the cash generated from operating activities. A high ratio indicates a sound

liquidity position and vice versa.

Table 6.18 shows that this ratio has varied from (-) 56.21 percent, being the lowest ratio

in the year 2006-07 to 72.81 percent being the highest positive ratio in the year 2005-06.

On an average, this ratio is 30.78 % that indicates only 30.78 % of debt is covered

through cash flow from operating activities. The high value of coefficient of variation

(143.66 %) indicates that the operating cash flow after interest is highly variable. Thus,

long-term solvency of the company has been very bad during our study period. A

graphical presentation of this ratio is shown in Figure 6.27.

Figure 6.27 indicates that though the curve representing the ratio improved in the year

2005-06 with 72.81 percent coverage of debt through operating cash flow, it deteriorated

drastically in 2006-07. However, it has started improving after 2006-07 as is indicated by


191

the upward portion of the curve, a good signal for the debt coverage ability of the

company.

iii) Return of Cash to Total Assets Ratio (RCTAR): This ratio is calculated based on

the following formula:

RCTAR = (Operating Cash Flow / Total Assets) X 100.

This ratio explains how far the company is able to utilize its total assets for generating

cash flow from operating activities. A high ratio indicates the proper utilization of total

assets to generate cash and vice-versa.

Table 6.18 shows that this ratio has fluctuated from 15.12 percent, the highest rate of

return in the year 2005-06 to the lowest rate of return (-) 12.50 percent in the year 2006-

07. On an average, the return of cash to total assets ratio is 6.51 % with C.V. 146.77 %.

The high value of C.V. indicates that this ratio is highly inconsistent. The highest rate of

return in the year 2005-06 indicates efficient utilization of assets in the year. We have

already observed that the year 2005-06 has recorded tremendous performance in every

respect. However, lowest ratio of the year 2006-07 does not mean that the assets have

been utilized inefficiently but it is because of negative operating cash flow mainly due to

heavy payment of current liabilities during that period (Rs. 614.30 crores).

A graphical presentation of this ratio is given in Figure 6.28. We observe that the ratio has

a downfall in 2006-07 but the rate of return has started improving very sharply after

2006-07 onward as is indicted by the upward rising portion of the curve in the recent

years, a good mark signifying proper utilization of to tal assets of the company.

iv) Operating Cash Flow to Investing Cash Flow Ratio (OCFICR): This ratio is


OCFICR = (Operating Cash Flow / Investing Cash Flow) X 100.

This ratio indicates the ability of the company to generate cash for investing activities.

Higher the ratio better is the ability of the company to generate funds and vice-versa.

Table 6.18 shows that this ratio has fluctuated from 1062.67 %, being the highest ratio in

the year 2005-06 to (-) 441.72 percent being the lowest ratio in the year 2006-07. On an

average, the ratio is 302.08 %, which indicates that the operating cash flow is sufficient to

provide 302.08 % of the funds required for investing needs. However, high degree of

coefficient of variation (151.97 %) indicates a high volatility in the data. We have already


192

observed that the year 2005-06 has been the highest performing year in every respect

since inception of the company and so it is natural that the company has been able to

generate more internal funds through operating cash flow for investing activities. We

have also discussed that the lowest performance of the company in 2006-07 was mainly

due to heavy cash outflow for the payment of current liabilities during that year.

Figure 6.29 graphically exhibits that though the ratio has a great fall in the year 2006-07 it

has got an upward movement from the year 2007-08 and onwards as is indicated by the

rising turn of the curve after 2006-07. This gives a positive signal to the company.

v) Earning Cash Flow Ratio (ECFR): This ratio is calculated based on the following

formula: ECFR = (Operating Cash Flow / Operating Profit) X 100.

This ratio reveals how far the operating profit of the company is realized in cash. Higher

the ratio better is the efficiency of the management in realizing operating profit and hence

better is the liquidity position of the company.

Table 6.18 shows that this ratio for the ECL has fluctuated from (-) 756.15 percent being

the lowest ratio in the year 2006-07 to 191.83 percent being the highest ratio in the year

2005-06 during the period under study. Again, we have already discussed the reasons for

the highest performance of the year 2005-06 and the lowest performance of the year

2006-07. On an average this ratio is (-) 94.77 % indicating that the company has failed to

realize its operating profit in cash, a warning signal for the company. However, a higher

value of the coefficient of variation (308.64%) indicates that the ratio is highly volatile.

A graphical presentation of this ratio is given in Figure 6.30 in page no. 189. We observe

that after a great fall in 2006-07, the ratio has started improving from 2007-08 onward.

The upward movement of the curve representing the ratio indicates that there is

improvement in the efficiency of the company in realizing the operating pro fit in the

recent years.

vi) Cash Flow per Share (CFPS): This ratio is calculated based on the following

formula: CFPS = (Operating Cash Flow after Interest / No. of Shares).

This ratio indicates the ability of the company to generate cash flow per share through

operating activities. Higher the ratio better is the ability of the company and vice-versa.


193

Table 6.18 shows that the ratio has varied from Rs. (-) 170.50 per share being the highest

negative cash flow per share in the year 2006-07 to Rs 232.49 per share, being the highest

positive cash flow per share in the year 2005-06 during the period under study. It has an

average cash flow of Rs. 99.28 per share. This ratio also indicates a high degree of

variability in data with coefficient of variation 139.35 %. We have observed that the year

2005-06 has performed very efficiently whereas inefficiency of the year 2006-07 is

followed by obvious reasons that are discussed earlier.

A graphical representation of this ratio is given in Figure 6.31 in page no.189. Again we

observe that there is a downfall in the ratio in the year 2006-07 but it has started

improving continuously after that which is evident from the upward movement of the

curve from 2007-08 and onwards.

Findings from Cash Flow Analysis

We realize from the cash flow analysis that the company is able to generate Cash Flow to

maintain its operating activities without any support from external sources during our

study period. The major findings from Cash Flow Analysis are briefly stated below:

1) We find that the company has been capable enough to generate sufficient cash from

operating activities in all most all the years except in 2006-07 and 2007-08, which gives a

clue for the survival of the company, as it is very important for a sick company like ECL.

However, the year 2005-06 has been the highest performing year from cash flow

perspective as the company was able to generate more internal funds through operating

cash flow in that year whereas lowest performance in the year 2006-07 was mainly due to

heavy cash outflow for the payment of current liabilities on account of arrear

remuneration arising out of the revised pay structure etc.

2) The study reveals that the main contributors to the cash flow from operations are the

provision for depreciation, OBR adjustment, increase in current liabilities, decrease in

sundry debtors and inventories. Depreciation as an internal source of fund has contributed

nearly sufficient (91.79 percent in 2006-07) to more than sufficient funds (188.47 percent

in 2003-04) for the purchase or replacement of the fixed assets.

3) It is also found from the analysis that for ECL the most influential factor of operating

cash flow is change in creditors and then the second influential factor is the change in


194

debtors followed by the third influential factor that is change in inventories. It is observed

that there has been increase in current liabilities in almost all the years during our study

period except in the year 2006-07. Though, technically it generates positive operating

cash flow to meet operating expenses as a short-term measure; it does not give a good

signal for the company in the long-run. Further, there has been a tendency to accumulate

sock during the period under study except 2007-08 and 2008-09. Debtors balance has

started increasing from the year 2007-08 though it was amazingly controlled up to 2006-

07. All these factors jointly affect operating cash flow very badly and restrict its inflow,

which need to be managed very carefully for the surviva l and further growth of the

company keeping in mind the emerging demand of coal prevailing in the energy based

economy. Inefficient handling of these issues will further affect liquidity position of the

company.

4) We also observe that the company has generated sufficient cash from operating

activities except 2006-07 and 2007-08 to meet investing needs and even financing needs

without any support from external sources instead of using it for payment of current

liabilities, which is not usual. As a result, liquidity position has not improved as expected.

5) We find from debt coverage ratio that the operating cash flow after interest is not

sufficient to meet long-term debt of the company. Thus, it supports our earlier findings

that the long-term solvency of the company is not satisfactory. This has been discussed in

detail in capital structure analysis in Section 6.1.2 under ratio analysis.

6) It is also found that the company has started improving return of cash flow to total

assets and cash flow per share very sharply after 2007-08. These factors jointly indicate

some improvements in liquidity position of the company in the recent years that would

help in the revival of the company.


195

6.6 SECTION VI: FINANCIAL PERFORMANCES OF ECL, CCL AND CIL

DURING 2000-01 TO 2009-10: A COMPARATIVE STUDY

In this Part of our analytical work, we have tried to make a comparative study of financial

performances of Eastern Coalfields Limited (ECL), the company under study, Central

Coalfields Limited (CCL), a rival company of like nature and the Coal India Limited

(CIL) representing the industry for better understanding of the financial performances of

ECL. It is a fact that Ratio Analysis not only throws light on the financial position of a

firm but also serves as a controlling instrument to take remedial measures. However, a

single ratio is meaningless unless we compare with some standard or benchmarks. These

benchmarks may be, i) the past ratios, i.e. the historical ratios of the company itself called

time series analysis, or ii) the competitors’ ratios, i.e. the ratios of some successful

competitors called cross-section analysis, or iii) industry ratios, i.e. average ratios of the

industry to which the company belongs, which is also called industry analysis to get a

better idea of the financial health of the selected company. Time series analysis gives an

indication of the direction of change in financial performance of the firm over time, cross-

sectional analysis indicates the relative financial position and performance of the firm

whereas industry analysis helps to ascertain the financial standing and capability of the

firm vis-à-vis other firms. 2 If the result varies either with the industry average or with

those of competitors, the firm needs to identify the probable reasons and accordingly to

take remedial measures for the improvement.

However, we have already done time series analysis and identified the direction of change

in financial performance of our study company over time based on its past ratios in 6.2 &

6.3. Thus, here we mainly concentrate on comparative study of financial performances of

ECL, the company under study, the CCL, an important rival subsidiary of like nature, and

CIL representing the industry, based on cross-sectional analysis and industry analysis to

understand clearly the strengths and weaknesses of the ECL. However, we know that

standard is always changing and further standard varies from industry to industry, even

from firm to firm under the same industry within the same span of time.

Now, to have an overall idea of the comparative financial ratios at a glance we have

presented in the next page all the relevant ratios of the three companies together in Table

6.19. Subsequently, we have presented our analysis and interpretation of each


196

comparative ratio and then at last we have given an overall view of the comparative

analysis.

Further, we would like to mention here that calculations are done in MS Excell Package

and rounded up to two decimal points. For that reason C.V. values may slightly vary in

few cases with manual calculations. However, we have considered the machine-

calculated values for our analysis.

Table 6.19: Comparative Financial Ratios of ECL, CCL & CIL during 2000-01 to 2009-10

Source: Annexure I, II and III showing detailed Data

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S.D. |C.V.|

%

A. Liquidity Ratios

1. Current Ratio (CR) = Current Assets / Current Liabilities

ECL 0.48 0.50 0.51 0.45 0.39 0.52 0.49 0.36 0.30 0.44 0.44 0.07 16.35

CCL 0.79 0.82 1.12 1.02 0.98 1.11 1.08 1.04 1.01 1.07 1.00 0.11 11.34

CIL 0.76 0.93 0.94 0.83 0.96 1.12 1.26 1.22 1.15 1.27 1.04 0.18 17.58

2. Quick Ratio (QR) = Quick Assets (i.e. Current Assets – Inventories) / Current Liabilities ECL 0.40 0.43 0.44 0.38 0.32 0.43 0.37 0.28 0.23 0.35 0.36 0.07 19.09

CCL 0.57 0.58 0.81 0.69 0.71 0.88 0.85 0.83 0.85 0.84 0.76 0.12 15.19

CIL 0.59 0.75 0.76 0.68 0.82 0.99 1.13 1.11 1.06 1.16 0.91 0.21 23.03

3. Super Quick Ratio (SQR) = Super Quick Assets i.e. Cash & Bank Balance / Current Liabilities

ECL 0.04 0.06 0.13 0.17 0.21 0.32 0.24 0.17 0.13 0.18 0.17 0.08 49.92

CCL 0.04 0.06 0.12 0.08 0.08 0.08 0.10 0.24 0.29 0.49 0.16 0.14 89.75

CIL 0.06 0.09 0.13 0.20 0.44 0.62 0.70 0.71 0.73 0.91 0.46 0.32 68.70


4. Net Worth to Long Term Debt Ratio (NWDR) = Net Worth / Long Term Debt

ECL -1.92 -2.35 -2.95 -3.63 -4.99 -4.29 -4.35 -6.46 -9.21 -9.04 -4.92 2.57 52.33

CCL -0.03 -0.10 0.13 0.43 0.85 1.48 2.89 4.46 7.30 23.75 4.12 7.30 177.30 CIL 0.64 1.51 2.46 3.21 4.16 6.71 9.74 11.54 9.68 15.89 6.55 5.01 76.47

5. Net Worth to Fixed Assets Ratio (NWFAR) = Net Worth / Net Fixed Assets

ECL -0.92 -1.16 -1.44 -1.71 -2.60 -2.40 -2.32 -3.42 -5.15 -5.04 -2.62 1.50 57.38

CCL -0.03 -0.10 0.15 0.40 0.67 0.99 1.19 1.35 1.48 1.75 0.79 0.66 84.41 CIL 0.32 0.51 0.64 0.77 1.00 1.39 1.75 1.84 1.74 2.14 1.21 0.64 53.07

6. Long Term Debt to Total Debt Ratio (LDTDR) = LT Debt / Total Debt

ECL 0.19 0.18 0.17 0.16 0.14 0.15 0.16 0.14 0.12 0.11 0.15 0.03 16.64

CCL 0.23 0.21 0.26 0.28 0.25 0.28 0.28 0.24 0.14 0.06 0.22 0.07 31.99

CIL 0.31 0.25 0.19 0.16 0.12 0.09 0.07 0.05 0.05 0.04 0.13 0.09 69.73


197

Table 6.19: Comparative Financial Ratios of ECL, CCL & CIL – Contd. (Page 2)

ii) Average Collection Period (ACP) = 365 days / Debtors Turnover Ratio

ECL 149.31 165.48 157.28 117.07 60.20 31.89 28.28 30.86 28.91 37.87 80.72 59.29 73.45

CCL 125.62 97.23 82.90 81.37 68.41 59.32 50.68 42.39 45.06 41.82 69.48 27.48 39.55

CIL 92.14 86.21 76.79 54.51 30.56 23.18 19.42 16.31 15.10 15.92 43.01 31.42 73.04

9. Current Assets Turnover Ratio (DTR) = Net Sales / Average Current Assets

ECL 1.65 1.52 1.44 1.51 1.85 1.81 1.81 2.02 2.58 2.71 1.89 0.44 23.14

CCL 1.34 1.56 1.88 1.95 1.86 1.37 1.09 1.02 0.93 0.92 1.39 0.40 28.99

CIL 1.72 1.73 1.75 1.85 1.75 1.37 1.11 1.00 0.95 0.89 1.41 0.39 27.58

10. Fixed Assets Turnover Ratio (FATR) = Net Sales / Average Net Fixed Assets

ECL 1.37 1.60 1.68 1.78 2.17 2.66 2.79 2.55 3.10 4.31 2.40 0.88 36.83

CCL 1.19 1.42 1.84 2.04 2.54 2.91 2.83 3.10 3.67 3.70 2.52 0.88 34.87

CIL 1.36 1.56 1.73 1.94 2.43 2.83 2.91 3.15 3.64 3.87 2.54 0.88 34.58

11. Stock of Stores to Consumption Ratio in Months (STCR)= Stock of Stores/Avg.Consumption p.m.

ECL 6.48 5.62 5.60 5.31 5.32 4.61 4.59 4.26 4.00 3.99 4.98 0.82 16.42

CCL 6.76 5.44 4.96 4.46 4.11 3.68 3.62 3.19 3.51 3.66 4.34 1.10 25.42

CIL 4.75 4.08 3.67 3.44 3.26 2.81 2.58 2.46 2.58 2.62 3.23 0.76 23.70

D. Profitability Ratios

12. Gross Profit Ratio (GPR) = (Gross Profit / Net Sales) *100

ECL -34.51 -7.62 -6.76 -18.25 -19.95 8.10 1.34 -33.35 -55.86 5.48 -16.14 20.42 126.51

CCL -30.14 2.18 18.12 16.59 15.68 32.30 28.44 25.20 15.49 28.25 15.21 18.18 119.51

CIL -4.19 12.89 16.85 22.04 19.66 30.94 29.35 27.24 15.08 31.61 20.15 10.89 54.08

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S.D. |C.V.|

%


7. i) Stock Turnover Ratio (STR) = Cost of Goods Sold / Average Stock of Coal ECL 27.80 24.66 25.46 27.46 24.56 14.10 12.23 16.86 29.42 19.08 22.16 6.12 27.60 CCL 11.55 9.26 8.80 8.29 7.57 5.18 4.43 4.24 5.29 4.34 6.90 2.55 36.96

CIL 15.26 15.27 15.45 14.76 16.10 12.03 10.39 10.51 13.57 10.70 13.40 2.28 17.03

ii) Stock Holding Period (SHP) = 365 days / Stock Turnover Ratio

ECL 13.13 14.80 14.34 13.29 14.86 25.88 29.85 21.65 12.41 19.13 17.93 6.03 33.65

CCL 31.60 39.40 41.48 44.04 48.20 70.43 82.48 86.16 68.97 84.01 59.68 20.88 34.98 CIL 23.91 23.90 23.63 24.73 22.67 30.34 35.14 34.73 26.90 34.10 28.01 5.08 18.13

8. i) Debtors Turnover Ratio (DTR) = Net Sales / Average Debtors

ECL 2.44 2.21 2.32 3.12 6.06 11.45 12.91 11.83 12.62 9.64 7.46 4.67 62.57

CCL 2.91 3.75 4.40 4.49 5.34 6.15 7.20 8.61 8.10 8.73 5.97 2.11 35.33

CIL 3.96 4.23 4.75 6.70 11.95 15.75 18.79 22.38 24.17 22.93 13.56 8.28 61.05


198

Table 6.19: Comparative Financial Ratios of ECL, CCL & CIL –Contd. (Page 3)

Profitability Ratios (Contd.)

13. Net Profit Ratio (NPR) = (Net Profit / Net Sales) *100

ECL -36.17 -10.07 -12.41 -11.88 -22.28 10.88 03.36 -32.21 -54.87 06.38 -15.93 20.77 130.42

CCL -37.41 -4.59 13.47 12.53 12.54 29.79 26.16 23.73 14.66 27.93 11.88 20.10 169.14

CIL -8.09 10.57 15.36 21.37 18.92 30.62 29.06 26.78 14.68 31.30 19.06 11.97 62.83

14. Cash Profit Ratio (CPR) = (Cash Profit / Net Sales) * 100

ECL -23.13 02.34 01.32 01.05 -14.57 18.23 10.12 -24.00 -44.35 12.40 -6.06 19.78 326.40

CCL -21.32 10.25 26.19 24.16 22.46 41.18 39.25 33.68 23.29 37.51 23.67 18.42 77.83

CIL 3.47 22.06 25.92 30.10 28.24 39.68 39.74 37.06 25.02 41.59 29.29 11.45 39.08

15. Return on Total Assets (ROTA) = (PBT / Total Assets) *100

ECL -25.34 -07.65 -09.48 -10.03 -23.06 10.69 03.91 -37.62 -75.11 09.30 -16.44 25.81 156.98

CCL -23.19 -3.23 11.85 11.11 10.30 21.91 17.97 14.74 8.82 18.95 8.92 13.25 148.45

CIL -5.73 8.15 12.72 17.55 15.35 22.74 19.96 17.09 9.29 19.86 13.70 8.28 60.43

E. Expenses Ratio

16. Salary & Wages to Operating Exp Ratio (SWOER) = (Salary & Wages / OP. Exp.) *100

ECL 64.83 59.15 59.01 62.91 65.47 56.19 57.96 62.22 69.15 62.17 61.91 3.93 6.35

CCL 38.37 34.11 32.52 35.57 38.60 31.44 32.75 36.67 44.58 41.28 36.59 4.19 11.45

CIL 52.65 43.93 43.56 47.19 49.09 44.02 42.74 46.78 52.99 47.90 47.09 3.67 7.80

Source: Annexure I, II and III showing detailed Data

Analysis and Interpretation of Comparative Financial Performances of ECL, CCL

and CIL for the period 2000-10 to 2009-10:

A. Comparative Liquidity Position

1) Current Ratio (CR)

Current Ratio = Current Assets / Current Liabilities

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 0.48 0.50 0.51 0.45 0.39 0.52 0.49 0.36 0.30 0.44 0.44 0.07 16.35

CCL 0.79 0.82 1.12 1.02 0.98 1.11 1.08 1.04 1.01 1.07 1.00 0.11 11.34

CIL 0.76 0.93 0.94 0.83 0.96 1.12 1.26 1.22 1.15 1.27 1.04 0.18 17.58

It is a measure of the firm’s ability to meet current obligations of the company. Here we

observe that the average liquidity position of all the subsidiaries represented by CIL is

better than that of ECL. The mean value of current ratio of CIL is 1.04, which is far better

than that of ECL. It is only 0.44 for ECL. Even CCL has a better liquidity position

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S.D. |C.V.|

%


199

(average is 1.00) which is nearly at par with CIL. Both the companies, CCL being a

valued competitor of ECL and CIL representing the industry, are keeping current assets,

which are equal to or greater than current liabilities whereas ECL is yet to achieve this.

Thus, short-term solvency position of ECL as compared to CIL is not at all satisfactory to

meet the current liabilities of the company as and when required. We also observe that

from the beginning of the study period the current ratio of CCL and CIL are better than

ECL and further they have improved steadily during the study period whereas ECL has

deteriorated. However, analysis of coefficient of variation (C.V.) indicates that the data of

ECL are less volatile than CIL but more volatile than CCL over the study period.

2) Quick Ratio (QR) / Liquid Ratio:

Quick Ratio = Quick Assets (i.e. Current Assets – Inventories) / Current Liabilities Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 0.40 0.43 0.44 0.38 0.32 0.43 0.37 0.28 0.23 0.35 0.36 0.07 19.09

CCL 0.57 0.58 0.81 0.69 0.71 0.88 0.85 0.83 0.85 0.84 0.76 0.12 15.19

CIL 0.59 0.75 0.76 0.68 0.82 0.99 1.13 1.11 1.06 1.16 0.91 0.21 23.03

Usually a high liquid ratio is an indication of better liquidity and ability of the firm to

meet short-term liabilities in time. Here we find that the quick ratio of ECL is poorer than

that of both CCL and CIL. We also find that proportion of quick assets to current

liabilities for ECL, though has been 0.40 at the beginning of our study period, it has

deteriorated to 0.35 at the end of our study period whereas, CCL has improved from 0.57

to 0.84 and CIL has improved from 0.59 to 1.16 at the end of our study period. Again,

when CCL has increased this ratio nearly 1.5 times of the starting ratio and CIL has

increased even at higher speed, which is nearly two times of the starting ratio; ECL has

failed to do so. Further, if we compare between current ratios and quick ratios of all the

companies we find industry is keeping more inventories as compared to ECL but still

maintain a better quick ratio than ECL. Coefficient of variation (C.V.) analysis indicates

that the data of ECL are less variable than CIL but more variable than CCL during the

period under study. Thus, we conclude that the very short-term liquidity position of ECL

is again not satisfactory as compared to industry average.


200

3) Super Quick Ratio (SQR)

Super Quick Ratio = Super Quick Assets(i.e. Cash & Bank Balance ) / Current Liabilities

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 0.04 0.06 0.13 0.17 0.21 0.32 0.24 0.17 0.13 0.18 0.17 0.08 49.92

CCL 0.04 0.06 0.12 0.08 0.08 0.08 0.10 0.24 0.29 0.49 0.16 0.14 89.75

CIL 0.06 0.09 0.13 0.20 0.44 0.62 0.70 0.71 0.73 0.91 0.46 0.32 68.70

This ratio is the most rigorous and conservative test of a firm’s liquidity position. In

calculating Super Quick Ratio, we have only included Cash and Bank Balance under

super quick assets. We find from analysis that cash position of all the companies

including CIL, representing the industry, at the beginning of our study was not good. The

ratio was only 0.04 for both CCL and ECL but it was 0.06 for CIL. Though industry

average has increased from just 0.06 to 0.91, a big surge in the ratio during our study

period and even CCL has increased from 0.04 to 0.49 at the end of 2009-10; ECL has

increased from 0.04 to 0.18 only. This indicates when CCL and CIL have been able to

maintain more balance in cash and bank account from profits, ECL has failed to do so

because of its losses in most of the years. Coefficient of variation (C.V.) analysis

indicates that the data of ECL are relatively consistent than CIL as well CCL during the

period under study. However, high variability in the data of CCL and CIL indicates here

improvement in this ratio which is clearly visible in the Table where we observe CCL and

CIL have improved this ratio from 0.04 and 0.06 to 0.49 and 0.91 respectably at the end

of 2009-10 whereas ECL has failed to do so.

B. Comparative Long-term Solvency Position

4) Net Worth to Long-Term Debt Ratio (NWDR):

Net Worth to Long-Term Debt Ratio = Net Worth / Long-Term Debt

Year/

COs

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

Mean S .D. |C.V.| %

ECL -1.92 -2.35 -2.95 -3.63 -4.99 -4.29 -4.35 -6.46 -9.21 -9.04 -4.92 2.57 52.33

CCL -0.03 -0.10 0.13 0.43 0.85 1.48 2.89 4.46 7.30 23.75 4.12 7.30 177.30

CIL 0.64 1.51 2.46 3.21 4.16 6.71 9.74 11.54 9.68 15.89 6.55 5.01 76.47

Here we observe that the position of ECL is not at all satisfactory as compared to its rival

company (CCL) and the industry (CIL). At the end of the year 2009-10, it has negative

net worth of Rs. 9.04 for every rupee of long-term debt when CCL and CIL are having

positive net worth of Rs. 23.75 and Rs.15.89 respectively for every rupee of long-term


201

debt. Coefficient of variation analysis shows that ECL has the lowest volatility (52.33 %)

in this ratio which implies that negative networth of ECL is more or less stable in nature,

which is a cause of concern. Thus, ECL has failed to give any coverage to the lender of

the long-term debt and as a result, we can say that the company is at the mercy of the

lender at the present situation. Thus, ECL is in great danger and has to put herculean

efforts to make this ratio positive for its turnaround and even for its survival.

5) Net Worth to Fixed Assets Ratio (NWFAR):

Net Worth to Fixed Assets Ratio (NWFAR) = Net Worth / Net Fixed Assets

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL -0.92 -1.16 -1.44 -1.71 -2.60 -2.40 -2.32 -3.42 -5.15 -5.04 -2.62 1.50 57.38

CCL -0.03 -0.10 0.15 0.40 0.67 0.99 1.19 1.35 1.48 1.75 0.79 0.66 84.41

CIL 0.32 0.51 0.64 0.77 1.00 1.39 1.75 1.84 1.74 2.14 1.21 0.64 53.07

The objective of this ratio is to test and find the portion of net worth utilized for

purchasing of fixed assets. Usually a part of net worth is used for investment in fixed

assets and another part for investment in working capital. The case is just oppos ite for

ECL. It has completely failed to give any coverage for fixed assets. When CCL has

maintained net worth of Rs. 1.75 for every rupee of fixed assets and industry has

maintained net worth of Rs. 2.14 for every rupee of fixed assets, ECL in opposition has

kept negative net worth of Rs. 5.04 for every rupee of fixed assets at the end of 2009-10.

On an average, when CCL has maintained net worth of Re. 0.79 for every rupee of fixed

assets and industry has maintained net worth of Rs. 1.21 for every rupee of fixed assets,

ECL has kept a negative net worth of Rs. 2.62 for every rupee of fixed assets during our

study period. Further, when CCL and CIL are providing a part of net worth for working

capital of the concern, ECL is running with negative working capital. Thus, this ratio of

ECL is very unsatisfactory and needs urgent notice from the management. Analysis of

Coefficient of variation shows that CCL has more volatility in this ratio; however, this is

towards improvement of this ratio. It is evident from the trend analysis of this ratio that

CCL has improved the ratio from just – 0.03 to 1.75 at the end of our study period.


202

6) Long Term Debt to Total Debt Ratio (LDTDR):

Long Term Debt to Total Debt Ratio = Long Term Debt / Total Debt

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 0.19 0.18 0.17 0.16 0.14 0.15 0.16 0.14 0.12 0.11 0.15 0.03 16.64

CCL 0.23 0.21 0.26 0.28 0.25 0.28 0.28 0.24 0.14 0.06 0.22 0.07 31.99

CIL 0.31 0.25 0.19 0.16 0.12 0.09 0.07 0.05 0.05 0.04 0.13 0.09 69.73

We observe from the table that when CCL is maintaining a ratio 0.06 and CIL is just

maintaining a ratio 0.04, ECL is still using more long-term debt to its capital structure

that is 0.11 at the end of the year 2009-10. ECL has kept long-term debt of 11 paisa for

every rupee of total debt whereas CCL and CIL have kept only 6 paisa and 4 paisa

respectively for every rupee of total debt. The fact is that when CCL as well as the whole

industry are becoming richer and accordingly they prefer to run the concern with their

own funds, ECL is still in the debt trap and a potential user of debt because of its poor

performance and incurring losses. However, use of more term loan may give benefit to

ECL once it improves its earning capacity. Thus, the company has no option but to

improve its performance by the way of making profits for the revival.

Coefficient of variation (C.V.) analysis of this ratio indicates that this ratio of ECL is

relatively stable than CIL and CCL during the period under study. This further proves its

dependence on loan fund that is already discussed in the above paragraph.

C. Comparative Efficiency of Assets Management

7) i) Stock Turnover Ratio (STR)

Stock Turnover Ratio = Cost of Goods Sold / Average Stock of Coal

Year/

COs

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

Mean S .D. |C.V.| %

ECL 27.80 24.66 25.46 27.46 24.56 14.10 12.23 16.86 29.42 19.08 22.16 6.11 27.60

CCL 11.55 9.26 8.80 8.29 7.57 5.18 4.43 4.24 5.29 4.34 6.90 2.55 36.96

CIL 15.26 15.27 15.45 14.76 16.10 12.03 10.39 10.51 13.57 10.70 13.40 2.28 17.03

ii) Stock Holding Period (SHP)

Stock Holding Period = 365 days / Stock Turnover Ratio

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 13.13 14.80 14.34 13.29 14.86 25.88 29.85 21.65 12.41 19.13 17.93 6.03 33.65

CCL 31.60 39.40 41.48 44.04 48.20 70.43 82.48 86.16 68.97 84.01 59.68 20.88 34.98

CIL 23.91 23.90 23.63 24.73 22.67 30.34 35.14 34.73 26.90 34.10 28.01 5.08 18.13


203

We observe from Stock Turnover Ratio that ECL has improved this ratio far better than

the industry. When ECL, on an average, is converting its stock of coal into sales, around

22 times a year, the industry is doing it around 13 times a year and CCL is doing only

around 7 times a year. Thus, both CCL and CIL have poorer ratio than ECL. Thus, the

company has tremendously performed in this area during our study period. In the last

year, the company has converted its stock into sales nearly 19 times a year whereas

industry has done around 11 times a year and CCL has converted its stock into sales only

around 4 times a year.

Again we can confirm from the analysis of stock holding period which is a key indicator

for measuring short-term solvency to know how quickly stock is converted into cash that

ECL is in a better position in this respect. In the year 2009-10, ECL has taken only 19

days to convert stock of coal into sales whereas CIL has taken 34 days and CCL has taken

maximum around 84 days for the conversion. On an average, when ECL takes only

around 18 days to covert stock of coal into sales, industry takes 28 days and CCL takes

around 60 days for the conversion. Thus, we observe that the management of ECL has

efficiently dealt with inventory of coal, which is better than the industry and even far

better than that of CCL.

However, what we understand from the study and from the company officials that too less

holding period of ECL as compared to industry is due to inadequate investment in stock.

This is due to less productivity of underground mines, comparatively less number of

opencast mines and further less use of modern technology that is affecting its

profitability. We have discussed this matter in detail in Efficiency Analysis of ECL. We

realize that most of the coal companies, now days, are holding much amount of stock of

coal to meet heavy demand of coal in the emerging energy based economy where ECL

still fails to capitalize the opportunity due to shortage of capital. Thus, though reduced

stock holding period is an indication of efficiency of the company and is very satisfactory

from the liquidity point of view of ECL, it indicates over efficiency that affects

profitability of the company at the present situation due to stock out situation. Coefficient

of variation (C.V.) analysis indicates that this ratio of ECL is more variable than CIL but

it is stable as compared to CCL during the period under study.


204

8) i) Debtors Turnover Ratio (DTR)

Debtors Turnover Ratio = Net Sales / Closing balance of Debtors

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 2.44 2.21 2.32 3.12 6.06 11.45 12.91 11.83 12.62 9.64 7.46 4.67 62.57

CCL 2.91 3.75 4.40 4.49 5.34 6.15 7.20 8.61 8.10 8.73 5.97 2.11 35.33

CIL 3.96 4.23 4.75 6.70 11.95 15.75 18.79 22.38 24.17 22.93 13.56 8.28 61.05

ii) Average Collection Period (ACP)

Average Collection Period = 365 days / Debtors Turnover Ratio

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |CV|

%

ECL 149.31 165.48 157.28 117.07 60.20 31.89 28.28 30.86 28.91 37.87 80.72 59.29 73.45

CCL 125.62 97.23 82.90 81.37 68.41 59.32 50.68 42.39 45.06 41.82 69.48 27.48 39.55

CIL 92.14 86.21 76.79 54.51 30.56 23.18 19.42 16.31 15.10 15.92 43.01 31.42 73.04

We observe from Debtors Turnover Ratio that the performance of ECL though has

improved within which is even better than CCL, it is still poorer than the industry

average. On an average, when CCL is converting debtors into cash around 6 times a year,

the industry is converting debtors into cash around 13.5 times a year; ECL is converting

its debtors into cash realization around 7.5 times a year. Thus, though it is better than

CCL, it is poorer than the industry. However, in the year 2009-10, ECL has performed

very poorly as compared to the industry average.

It is also evident from the analysis of collection period that the average collection period

of the industry represented by CIL has been continuously decreasing which indicates a

big improvement in the collection policy of the industry. Thus, even if ECL has improved

its collection policy tremendously during our study period, it has miles to go to match

with the industry. When collection period has been just 15 to 19 days during last 4 years

for the industry, ECL has maintained around 28 to 31 days during 2006-07 to 2008-09.

However, in the year 2009-10 the collection period has increased to around 38 days

which is though better than CCL (around 42 days), it is poorer than CIL. We understand

from this fact that ECL is still following a credit policy that is more liberal and as a result,

more funds are blocked in debtors. Thus, ECL needs to review and improve its credit

policy to match with the industry and for this; it has to select customers on merit basis for

its turnaround and further growth. The analysis of coefficient of variation (C.V.)

indicates that this ratio of ECL has the highest variability as compared to CIL and CCL


205

during the period under study. However, for ECL, the variability in this ratio is towards

growth of the ratio that is already discussed.

9) Current Assets Turnover Ratio (CATR)

Current Assets Turnover Ratio = Net Sales / Closing balance of Current Assets

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 1.65 1.52 1.44 1.51 1.85 1.81 1.81 2.02 2.58 2.71 1.89 0.44 23.14

CCL 1.34 1.56 1.88 1.95 1.86 1.37 1.09 1.02 0.93 0.92 1.39 0.40 28.90

CIL 1.72 1.73 1.75 1.85 1.75 1.37 1.11 1.00 0.95 0.89 1.41 0.39 27.66

We observe from the above that ECL has very efficiently utilized its current assets to

convert into sales. When both CCL and the industry have a sluggish performance, the

ECL has performed far better than the industry and produced better result with the lesser

amount of current assets. On an average, when CCL and the industry have been able to

turn its current assets into sales 1.39 times and 1.41 times a year respectively, ECL has

done it 1.89 times a year. However, in the recent years ECL has been performing

tremendously. In the year 2009-10, it has even speeded up to 2.71 times a year as against

0.92 times of CCL and only 0.89 times of CIL. Thus, this ratio for ECL is highly

satisfactory and far better than that of competitors and the industry. However, though, it

is a good from the liquidity point of view, this high ratio or over efficiency has been

affecting profitability of the company adversely. It is revealed from the analysis that this

has happened due to inadequate investment in working capital of the company. Thus, the

company needs to invest some more funds in current assets and especially it is in stock

that is found in the analysis of Stock Turnover Ratio. Coefficient of variation (C.V.)

analysis indicates that this ratio of ECL has led variability as compared to CCL as well as

CIL during the period under study.

10) Fixed Assets Turnover Ratio (FATR)

Fixed Assets Turnover Ratio = Net Sales / Closing balance of Net Fixed Assets

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 1.37 1.60 1.68 1.78 2.17 2.66 2.79 2.55 3.10 4.31 2.40 0.88 36.83

CCL 1.19 1.42 1.84 2.04 2.54 2.91 2.83 3.10 3.67 3.70 2.52 0.88 34.87

CIL 1.36 1.56 1.73 1.94 2.43 2.83 2.91 3.15 3.64 3.87 2.54 0.88 34.58


206

Here we observe that ECL has improved its performance a lot during our study period.

On an average, it has utilized its fixed assets little less efficiently as compared to the

industry and even CCL. The company has converted amount of fixed assets into sales

2.40 times as compared to 2.52 times of CCL and 2.54 times of CIL. However, in the year

2009-10 the ECL has utilized its fixed assets more efficiently as compared to others. It

has maintained 4.31 times a year as against 3.70 times of CCL and 3.87 times of CIL.

Thus, the position of ECL in this respect is almost satisfactory as compared to industry

but it has to maintain this tempo for its turnaround. Coefficient of variation (C.V.) of this

ratio for ECL indicates the same fact as it is slightly more variable than the CIL and CCL

during the period under study.

11) Stock of Stores To Consumption Ratio (STCR)

Stores to Consumption Ratio in Months = Stock of Stores / Average Consumption p.m.

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 6.48 5.62 5.60 5.31 5.32 4.61 4.59 4.26 4.00 3.99 4.98 0.82 16.42

CCL 6.76 5.44 4.96 4.46 4.11 3.68 3.62 3.19 3.51 3.66 4.34 1.10 25.42

CIL 4.75 4.08 3.67 3.44 3.26 2.81 2.58 2.46 2.58 2.62 3.23 0.76 23.70

We observe from the above Table that Stores to Consumption Ratio of ECL, on an

average, is poorer than that of the industry average but slightly poorer than the CCL.

When industry keeps only 2.62 months stores for consumption and CCL keeps 3.66

months stores for consumption, ECL retains nearly 4 months stores in advance for

consumption. Table shows that CCL has improved in this area far better than even CIL as

it has reduced from 6.76 months to 3.66 months during the period of our study. Though

ECL has reduced the inventory of stores from 6.48 months to nearly 4 months during our

study period, which is a great achievement for such a huge company, it has to improve

further as compared to the industry. Analysis of coefficient of variation (C.V.) indicates

that for ECL, C.V. value of this ratio indicates less variability in this ratio confirming

slow improvement comparing with CIL as well as CCL during our study period. Thus,

comparative performance of ECL in this respect is less satisfactory.


207

D. Comparative Profitability Strength

12) Gross Profit Ratio (GPR)

Gross Profit Ratio = (Gross Profit / Net Sales) x100

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL -34.51 -7.62 -6.76 -18.25 -19.95 8.10 1.34 -33.35 -55.86 5.48 -16.14 20.4

2

126.5

1

CCL -30.14 2.18 18.12 16.59 15.68 32.30 28.44 25.20 15.49 28.25 15.21 18.18 119.51

CIL -4.19 12.89 16.85 22.04 19.66 30.94 29.35 27.24 15.08 31.61 20.15 10.89 54.08

We know a high ratio of gross profit to sales is a sign of good management as it implies

that cost of production of a firm is relatively low. In this respect, we can say that the

Gross Profit ratio of the ECL is not at all satisfactory as compared to industry average as

well as CCL. When, on an average, industry maintains 20.15 percent of sales as gross

profit and CCL maintains 15.21 percent, ECL faces a negative gross profit ratio 16.14

percent of sales. It implies that cost of production of ECL is too high as compared to the

industry and even CCL. Further, when CCL has improved from -30.14 percent of gross

profit at the beginning of the study period to 28.25 percent and industry from -4.19

percent to 31.61 percent at the end of 2009-10, ECL has failed to do so and managed only

5.48 percent. However, one of the reasons behind this result is its excessive work force

and hence extra remuneration. Further, the highest degree of C.V. of gross profit ratio

(126.51%) of ECL indicates that gross profit ratio of ECL has the highest degree of

variability comparing with the CIL and CCL.

Thus, GP ratio for the company is not at all satisfactory and the company at any cost has

to improve its cost of production to improve this gross profit ratio. For that, even cost

transparency and proper classification of cost is very much essential for cost red uction.

13) Net Profit Ratio (NPR)

Net Profit Ratio = (Net Profit / Net Sales) x100

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL -36.17 -10.07 -12.41 -11.88 -22.28 10.88 03.36 -32.21 -54.87 06.38 -15.93 20.77 130.42

CCL -37.41 -4.59 13.47 12.53 12.54 29.79 26.16 23.73 14.66 27.93 11.88 20.10 169.14

CIL -8.09 10.57 15.36 21.37 18.92 30.62 29.06 26.78 14.68 31.30 19.06 11.97 62.83

We observe the same thing as we have already observed in case of gross profit ratio. On

an average, when industry maintains 19.06 percent of net profit ratio and CCL maintains


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11.88 percent of net profit ratio, ECL has incurred net loss of 15.93 percent of sales.

Again, we observe that when CCL has improved from -37.41 percent at the beginning of

our study period to 27.93 percent and industry has improved net profit ratio from -8.09

percent of net profit to 31.30 percent at the end of the year 2009-10, ECL has failed to do

so. Further, we find from our study and from the comparison between Gross Profit Ratio

and Net Profit Ratio of all the companies that maximum part of the cost of production of

the coal industry in general and for ECL in particular are direct in nature.

Further, higher degree of C.V. of net profit ratio (130.42 %) indicates net profit ratio of

ECL is more volatile than the industry. Other way, net profit ratio of the industry is less

volatile and stable in nature. However, the highest value of C.V. for CCL signifies its

variability towards growth i.e. improvement from the highest negative net profit ratio to

comparatively better positive net profit ratio. From the above fact, we can conclude that

Net Profit ratio of the company is not at all satisfactory.

14) Cash Profit Ratio (CPR)

Cash Profit Ratio = (Cash Profit / Net Sales) * 100

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL -23.13 02.34 01.32 01.05 -14.57 18.23 10.12 -24.00 -44.35 12.40 -6.06 19.78 326.40

CCL -21.32 10.25 26.19 24.16 22.46 41.18 39.25 33.68 23.29 37.51 23.67 18.42 77.83

CIL 3.47 22.06 25.92 30.10 28.24 39.68 39.74 37.06 25.02 41.59 29.29 11.45 39.08

We observe from the above that Cash Profit ratio of ECL also is not satisfactory as

compared to the industry and even CCL. ECL is lagging behind the industry and CCL.

When industry maintains an average of 29.29 percent of sales as cash profit and CCL

maintains 23.67 percent of sales as cash profit, ECL has failed to do so and has attained

an average (–) 6.06 percent of sales as cash profit during our study period. Again, in the

year 2009-10, when CCL has improved cash profit ratio from just -21.32 % to 37.51 %

and industry has improved from just 3.47 % to 41.59 %, ECL has managed only 12.40 %.

Further, the highest degree of C.V. of cash profit ratio (326.40%) of ECL indicates that

gross profit ratio of ECL has the highest degree of variability as compared to the industry

and CCL. We observe that cash profit ratio of the industry is more uniform and stable in

nature. However, it is an important fact that a sick company like ECL has been able to

earn cash profit in six financial years out of the ten financial years undertaken for our

study and further, it has improved this ratio in the year 2010-11 and 2011-12 as is known.


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This is good for the company as it is very necessary for ECL being a sick company for its

turnaround.

15) Return on total assets (ROTA):

Return on Total Assets = (PBT / Total Assets) *100

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL -25.34 -07.65 -09.48 -10.03 -23.06 10.69 03.91 -37.62 -75.11 09.30 -16.44 25.81 156.98

CCL -23.19 -3.23 11.85 11.11 10.30 21.91 17.97 14.74 8.82 18.95 8.92 13.25 148.45

CIL -5.73 8.15 12.72 17.55 15.35 22.74 19.96 17.09 9.29 19.86 13.70 8.28 60.43

This ratio is used here as a measure of the overall profitability and operational efficiency

of a concern and shows the interaction between profitability and utilization of assets. We

observe from the table that when CCL has improved ROTA from - 23.19 % at the

beginning of our study period to 18.95 % and industry has improved this rate of return

from -5.73 % to 19.86 %, ECL has attained only 9.30% at the end of the year 2009-10.

On an average, when CCL has attained a ROTA 8.92 % and industry earned 13.70 % on

total assets, ECL has earned a negative return of 16.44 % on total assets. One of the

causes is the heavy loss of the year 2008-09 because of huge provision for pay revision as

per NCWA-VIII, actuarial gratuity and leave encashment in 2008-09.

Thus, rate of return on assets for ECL is well behind the industry and at the present

situation is not satisfactory at all. The company has to improve further its utilization of

assets. For that, the company first has to investigate whether there is any unused asset or

the asset that does not earn and then to reduce that asset if necessary for proper growth of

the ratio and the company. The management must verify that each rupee of investment

earn profit.

E. Comparative Salary & wages expenses

16) Salary and Wages to Operating Expenses Ratio (SWOER)

Salary & Wages to Operating Exp Ratio = (Salary & Wages / OP Exp.) *100

Year/

COs

2000-

2001

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

Mean S .D. |C.V.|

%

ECL 64.83 59.15 59.01 62.91 65.47 56.19 57.96 62.22 69.15 62.17 61.91 3.93 6.35

CCL 38.37 34.11 32.52 35.57 38.60 31.44 32.75 36.67 44.58 41.28 36.59 4.19 11.45

CIL 52.65 43.93 43.56 47.19 49.09 44.02 42.74 46.78 52.99 47.90 47.09 3.67 7.80


210

We observe from the table that salary and wages to total operating expenses ratio of ECL

is much higher than the industry average as well as CCL. It was even from the beginning

of the company as it was formed with huge manpower irrespective of their quality which

we have discussed in detail in Chapter 4. The position of CCL is much better than ECL

and even the industry. On an average, ECL is spending around 62 % of total operating

expenses for salary and wages. That is nearly 25 % more than the CCL and around 15 %

more than the industry average. We also observe when salary and wages to operating

expenses ratio is around 53 % of the total operating expenses in the year 2008-09 for the

industry and only 44.58 % for CCL, ECL has incurred 69.15 % of operating expenses for

salary and wages. That is nearly 24.57 % more than CCL and 16.16 % more than the

industry, which is mainly for heavy work force in ECL as compared to the industry.

However, in the year 2009-10 this ratio is 61.11 % for ECL whereas it is only 41.28 % for

CCL and 47.90 % for CIL.

The lowest degree of coefficient of variation of this ratio (6.37%) for ECL indicates that

the ratio at the present situation has the highest degree of consistency as compared to the

CIL and CCL. It further specifies that the proportion of wages & salaries to operating

expenses for ECL is roughly constant. This is a cause of concern. Thus, Salary and Wages

to Operating Expenses Ratio for ECL is not at all satisfactory during the period under

study.

Overall Comment on the Financial Performance Analysis of ECL, CCL and CIL

during 2000-01 to 2009-10

1. On Liquidity position: It is evident from the comparative analysis that all most all

the liquidity ratios of the ECL are poorer than those of the industry and even that of CCL

and hence are not satisfactory at all. We observe that there is a significant growth in

liquidity position of the industry reflected by CIL during the study period. It shows that

current assets exceed current liabilities whereas ECL has failed in this respect. However,

the company has tremendously reduced its stock holding period as compared to CCL and

CIL and further it has been able to reduce its average collection period from around 149

days at the beginning of our study period to 28 to 32 days in the recent years except in the

year 2009-10 which gives a boost to improve liquidity position of the company.


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2. On Capital Structure: The analysis here also discloses the fact that capital structure

ratios of ECL are either poorer than those of the industry (CIL) and CCL or not according

to the industry trend. The most danger is that ECL is running with negative net worth, the

positive value of which usually gives strength to the company to fight in the long run.

Thus, ECL has failed to give any coverage to the lenders of the long-term funds. We also

know that the company has been declared sick and still under BIFR (Board for Industrial

and Financial Reconstruction). Therefore, the long-term solvency of the company is in

danger and is not at all satisfactory.

3. On Asset Management Efficiency: It is also found that most of the efficiency ratios

of ECL that are considered for measuring efficiency of assets management of the

company have shown improvement over the period of our study and are more or less

satisfactory. However, stock turnover ratio and current assets turnover ratio of ECL are

far better than the industry (CIL) as well as CCL and even fixed assets turnover ratio has

been better in the last year of our study period though on an average it is slightly below

the industry (CIL) and CCL. However, an extreme stock turnover ratio is followed by loss

for ECL, which we have already observed in Efficiency Analysis under Section 6.1.3,

page 143, Part of Ratio Nevertheless, debtors’ turnover ratio and spares to consumption

ratio though have improved satisfactorily, are yet lagging behind the industry and thus

need further improvement in future.

4. On Profitability strength: From comparative study on profitability analysis we

observe that though ECL, after 2005-06, has shown some improvements in its

profitability pattern, it is very unsatisfactory and far behind the industry average (CIL)

and that of the CCL. The main reason is the higher percentage of its operating cost as

compared to industry and again it is due to higher salary and wages expenses for its larger

size of work force. Moreover, when profitability position of the industry is improving

over the study period, the same is not happening consistently for ECL. This, we believe,

is mainly due to huge work force and inappropriate mechanization in production process

for inadequate funds. However, in all the cases we observe that profit of all the companies

for the year 2008-09 has been lower and it is because of the heavy provision for pay

revision as per NCWA-VIII, actuarial gratuity and leave encashment etc.

Documents

CHAPTER 6 ANALYSIS AND INTERPRETATION OF DATA