AN ANALYSIS ON FINANCIAL PERFORMANCE OF

NEPAL ELECTRICITY AUTHORITY

A Thesis
Bijay Lama
Patan Multiple Campus
Roll.No. 40/2063
T.U. Registration No. 7-1-25-62-96

Submitted to
Office of the Dean
Faculty of Management
Tribhuvan University

In the partial Fulfillment of the Degree of Masters of Business Studies (MBS)

Patan Dhoka, Lalitpur
July, 2010
 RECOMMENDATION

This is certify that the thesis

Submitted by
Mr. Bijay Lama

Entitled

“An Analysis of Financial Performance of Nepal Electricity Authority”

Has been prepared as approved by this department in the prescribed format of the
faculty of management. This thesis is forwarded for examination.

……………………………………. ……………………………….
Associate Prof. Rakesh Chandra Misra Lecture, Bishnu Gopal Khimbaja
(Thesis Supervisor) (Head of Research Department)

…………………………………
Mrs. Krishna Badan Nakarmi
(Campus Chief)

i
 VIVA-VOCE SHEET

We have conducted the viva-voce of the thesis presented

By:
Bijay Lama

Entitled:
“An analysis of Financial Performance of Nepal Electricity Authority”
And found the thesis to be the original work of the student and written
according to the prescribed format. We recommend the thesis to be
accepted as partial fulfillment of the requirement for
Master Degree of Business Studies (MBS)

Viva-Voce Committee

Head Research Department …………………….

Member (Thesis Supervisor) ……………………..

Member (External) ……………………..

ii
 TRIBHUVAN UNIVERSITY
Faculty of Management
Patan Multiple Campus

DECLARATION

I hereby declare that this thesis entitled “An Analysis of Financial Performance of
Nepal Electricity Authority” submitted to Patan Multiple Campus, Faculty of
Management, Tribhuvan University is my original work done for the partial
fulfillment of requirement of the degree of Masters of Business Studies (MBS),
which is prepared under the supervision of Mr. Rakesh Chandra Misra Associate
Professor of Patan Multiple Campus.

…………………………
Bijay Lama
Researcher
(T .U. Reg.NO. 7-1-25-62-96)

July, 2010

iii
 ACKNOWLEDGEMENTS

Any accomplishment requires the synergistic effort of many people and this work is
not also an exceptional. I would take pleasure to extend my sincere gratitude to
Rakesh Chandra Misra, Associate Professor of Patan Multiple Campus for him
consistent guidance to go through in-depth vision and analysis of each topic. The way,
he induced and motivated me, always keep in good compliance to my academic
discipline. His Guidelines and support has been instrumental in accomplishing this
task. This work would not have been materialized and recognized without his
intellectual direction and promptness.

It is my great pleasure to state that being student of management and attempted this
field work. I have attempted to write a thesis in “Financial Performance Analysis of
Nepal Electricity Authority” as the partial fulfillment of the degree of Master in
Business Studies.

I am indebted to Ms. Yashoda Thapa, Mr. Kabin lama, GP Mainali, Karma Wangle
Lama and my family whose untiring support and inspiration excelled my work to
achieve desirable objectives and complete the job in time. I cannot remain silent
without thanking Mr. Suman Shrestha and Mrs. Mamata Shrestha for providing
diligent effort to shape this task in the presentable form.

Many theories, statement and analysis are the result of a collection from various
sources, such as newspapers, magazines, speakers, and writers over the past time.
Regardless of the source, I wish to express my gratitude to those who may have
contributed to this work.

Bijay Lama
Kathmandu, Nepal

iv
TABLE OF CONTENE

Recommendation i
Viva-Voce sheet ii
Declaration iii
Acknowledgement iv
Table of contents v
List of Tables vi
List of Figures vii
List of Abbreviations viii

Chapter -1 Page No.

Introduction/Background:-
1.1 Introduction/General Background 1
1.2 Public Enterprises in Nepal 2
1.3 Nepal Electricity Authority 4
1.4 Development of Hydropower in Nepal 6
1.5 Statement of problem 7
1.6 Objectives of the Study 9
1.7 Important of the Study 9
1.8 Limitation of the Study 11
1.9 Organization of Chapters 11

Chapter-2

Review of Literature
2.1 Conceptual Framework 13
2.1.1 Financial statements 14
2.1.1.1 Balance Sheet 14
2.1.1.2 Income Statement 16
2.1.1.3 Assets 16

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 2.1.1.4 Liabilities 22
2.1.1.5 Statement of Assets and Liabilities 25
2.1.2 Concepts Financial Analysis 25
2.1.2.1 Types of Ratios 28
2.1.2.2 Utility of Ratio Analysis 30
2.1.3 Objective of the Financial Analysis 30
2.1.4 Need of the Financial Analysis 31
2.1.5 Significance of Financial Analysis 31
2.1.6 Process of Financial Analysis 33
2.1.7 Types of Financial Analysis 34
2.2 Review of Journals/Articles 35
2.3 Review of Previous Related Dissertation 39
2.4 Research Gap 42

Chapter-3

Research Methodology
3.1 Introduction 43
3.2 Research Design 43
3.3 Population and Sample 44
3.4 Nature and Source of Data 44
3.5 Methods of Analysis 44
3.6 Tools for Analysis 45
3.6.1 Financial Tools 45
3.6.2 Types of Ration Used 46
3.6.3 Statistical Tools 53
3.7 Method of Presentation and Analysis 56

Chapter-4

Analysis and Interpretation of Data

4.1 Introduction 57
4.2 Liquidity Positions 57

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 4.2.1 Current Ratio 58
4.2.2 Quick Ratio 60
4.3 Turn over Ratios 62
4.3.1 Fixed Assets Turnover Ratio 62
4.3.2 Total Assets turnover Ratio 65
4.3.3 Inventory Turnover Ratio 67
4.3.4 Average Collection Period and Debtor’s Turnover Ratio 68
4.4 Profitability Ratios 71
4.4.1 Net Profit to Sales 71
4.4.2 Net Operating Ratio 73
4.4.3 Return on Total Assets 75
4.5 Leverage Ratios 77
4.5.1 Debt-Equity Ratio 77
4.5.2 Total Debt Ratio 78
4.6 Trend Analysis 80
4.7 Description of Major Findings 83

Chapter-5

Summary, Conclusion and Recommendation

5.1 Summary 85
5.2 Conclusion 88
5.3 Recommendations 89

Bibliography

Annex

vii
LIST OF TABLES

Tables Page No.

1. Calculation of Current Ratio 58

2. Calculation of Quick Ratio 61
3. Calculation of Fixed Assets Turnover Ratio 63
4. Calculation of Total Assets Turnover Ratio 65
5. Calculation Inventory Turnover Ratio 67
6. Calculation of Average Collection Period 68
7. Calculation of Net Profit to Sales 72
8. Calculation of Net Operating Ratio 74
9. Calculation of Return on Total Assets 76
10. Calculation of Debt-Equity Ratio 77
11. Calculation of Total Debt Ratio 79
12. Trend Analysis of Sales Revenue 81
13. Trend Analysis of Operating Expenses 82

LIST OF FIGURES

Figures

1. Graphical Presentation of Current Assets and Current Liabilities 60

2. Graphical Presentation of Quick Assets and Current Liabilities 62
3. Graphical Presentation of Sales and Fixed Assets 64
4. Graphical Presentation of Sales and Total Assets 66
5. Graphical Presentation of Average Collection Period 70
6. Graphical Presentation of Profit and Sales 73
7. Graphical Presentation of Operating Expenses and Revenue 75
8. Graphical Presentation of Debt and Equity 78
9. Graphical Presentation of Debt and Total Assets 80

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LIST OF ABBREVIATIONS

ACP Average Collection Period

ADB Asian Development Bank
B.S. Bikash Sambat
CA Current Assets
CBS Central Bureau of Statistics
CL Current Liabilities
Co. Company
CR Current Liabilities
D/E Debt-Equity
D/TA Debt to Total Assets
e.g. Examples
EBT Earning Before Tax
etc. Etcetera
Fy Fiscal Year
GoN Government of Nepal
GWh Giga Watt
ITR Inventory Turnover Ratio
ITR Inventory Turnover Ratio
JCF Janakpur Cigarette Factory
KUKL Kathmandu Upatyaka Khanepani Ltd.
KV Kilovolt
KW Kilowatt
Ltd limited
MW Megawatt
NEA Nepal Electricity Authority
NPAT Net Profit After Tax
NRs. Nepal Rupees
NTC Nepal Telecom
PE Public Enterprise
PR Profitability Ratio
QR Quick Raito
ROA Return on Assets
ROD Return on Total Deposit
TATR Total Assets Turnover Ratio
US united States

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x
 CHAPTER-1
GENERAL BACKGROUND

1.1 Introduction/General Background

The overall development of the nation depends upon the uplifting of the national
economy, which in turn depends upon the nature of its infrastructure. On of the
basic elements in achieving self-reliant growth of the economy for sustaining
desired level of economic development is an accelerated rate of infrastructure
development. Nepal is one of the least developed country, considered to be
economically less privileged among the countries in the world with around 320
US dollar per capital income, 3.5% economic growth and 30% people are under
the line of poverty. More than 76% or the total population are actively engaged on
agriculture the contribution of agriculture sector to the gross domestic product is
only 36% the sustainable development of the country industrial sector should be
contribute more in GDP with involvement of more people. Now Nepal has
adopted the path of economic development through liberalization for the
economic growth of the nation. However, it is a known fact that any strategy for
economic development requires a steady supply of funds for productive
investment, productive investment, in other words refer to the investment venture
in productive enterprises. Thus for the development of the country, many of the
business firms have been established as public enterprises as well as private under
company act 1964. The development of the nation largely depends on its
economic development. Thus the primary goal of any nation, including Nepal, is
rapid economic development to promote welfare of the people and nation as well.
This requires productive activities enterprises, which in term in the result of the
investment venture in the productive enterprises. The establishment of these
enterprises needs a huge amount of funds. Existing enterprises and companies,

1
with in the economy can be viewed as productive enterprises to operate with
equity and debt funds. The decision making process of choosing funds with the
best financial mix among various alternatives, plays a crucial role in the capital
investment decision of the form. The capital structure concept has an important
place in the theory of financial management. The term capital structure is also
known as financial structure of financial plan of leverage. The financial decision
of a firm relates to choice of proportion of debt and equity to finance the
investment requirements. A proper balance between debt and equity is necessary
to ensure a tradeoff between risk and return to the shareholders mix. A capital
structure with reasonable proportion of debt and equity is called optimal capital
structure. However, the capital structure and its implication are more noticeable.
Nepalese companies have not adopted proper combination of capital structure
policy. Thus firms objective to maximize the wealth of shareholders or return on
equity is not meet by Nepalese companies because in most of companies, there is
no existence of debts in their capital structure and equity capital is only source of
financing where as in some cases the promotion of debt is very high which creates
the financial burden of firm. On the other hand, if is very low in some cases for
instance.
From the above presentation, we can say Nepalese companies do not take capital
structure concept seriously, therefore some the companies went in to bankruptcy
and some of the companies have been suffering losses due to huge amount of
interest payment. Thus appropriate capital structure should be managed for the
sound health of the company with proper combination of capital structure
components. In the context of Nepal, Public utility services organization like
Nepal Electricity Authority is playing a major role in the development of country.

1.2 Public Enterprises in Nepal:

Public Enterprises are the statutory companies which produce goods and services
to satisfy the basic needs of the people. The government is the owner of such

2
enterprises. The practicality of public Enterprises emerged with the concept of
welfare state that state should be responsible to satisfy the basic needs of its
people. Usually the public Enterprises are established for production and
marketing of fundamental goods and services in a suitable rate. The provision of
services by public enterprises is a common practice in Europe and elsewhere.
Usually the practice is highly significant in communist countries.
Public enterprises play a vital role in most developing countries. The role of
public enterprises different from country basically due to political philosophy of
existing governments, public enterprises play a major role in achieving the twin
objectives of social and economic developing envied in the national policy, the
role of public enterprises in simulating and augmenting the place of economic
growth in developing countries can hardly be under estimated. Different agencies
and government to suit their own respective situation have defined PE as “Those
organization namely owned and or controlled by the public authorities consisting
of establishment which by virtue of their kind of activities, technology and mode
of operation are classified as industries”(Shrestha, Bhumeshor:1990;-Public
enterprises management in Nepal).
In Nepal in the mid 1950s, it was observed that the public enterprises were
essential. Though Nepal is a country with mixed economy, in that time it was hard
for any individual or private group to start the business providing basic goods and
services to the people. Accumulation of capital from private sector was difficult.
The state took the initiatives; result of which is the establishment of public
Enterprises. Public enterprises in Nepal in the past had contributed a lot to the
people and the national economy. The government had established enterprises to
provide and supply food products, petroleum products, basic medicines,
convenience trading of imported goods, and means of air and land transportation,
means of communication, electricity etc. But in present scenario in almost all
sectors there exist private national and international companies in the market.
Because of the tough competition, many public enterprises are in loss. The

3
performance of public enterprises weakened over the 2007/08 fiscal year, as 15
companies suffered losses leading to a decline in the volume of combined profits.
Only a very few corporations are in a position to pay revenue to the government.
Majority of them are hard pressed to sustain even everyday administrative costs.
Most public enterprises have very weak financial position and lack professional
competence. Because of the complicated bureaucratic structure and political
appointment of the head of the corporation, most of the corporation lacks
professionalism, experts and competence.

PEs in Nepal contributes a vital instrument for the social economic development
of the country. It enjoys a strategic crucial position in our mixed economy. They
have been established in many sectors for the overall development of the country
with different goals and objectives. Nepal Bank Ltd, a commercial Bank
established in 1994 BS was a first PE to have separate legal status in Nepal.
During Second World War some other PEs were established, however, they could
not make substantial progress. Nepal started its planned economic development in
2013 BS with the lunching of first five year plan since then the number of PEs has
increased substantially in the various fields of national economy, most of the PEs
were established in the “Panchat Era”. Nepal Electricity Authority is a largest
public utility PE, there were 6 PEs before the privation program but now there are
only 36 PEs, among them now 17 are in profit others have been suffering from
losses. Harisiddhi Break Factory is the first privation PE in 1992 AD.

1.3 Nepal Electricity Authority:

Nepal Electricity Authority (NEA) was established on August 16, 1985 under the
Nepal Electricity Authority Act, 1984 through the merger of the Department of
Electricity Development, Ministry of Water Resources, related Development
Boards and Nepal Electricity Corporation. Prime purpose of creation of NEA was
to remedy the inherent weakness associated with incumbent fragmented electricity

4
organizations with overlapping responsibilities and duplication of works. Merger
of these individual organizations became necessary to achieve efficiency and
reliable service. NEA has been always languishing with the issues of high tariff,
high system losses, high generation costs, high overheads, over staffing and lower
domestic demand. Its endeavors to maximize the utilization of available resources
including import through trading of power from Indian short term market has not
able to offset the unbalance, resulting in long hours of distasteful load shedding.
Water resources are important natural resources for the economic development of
Nepal. Availability of abundant water resources and geo-physical features provide
ample opportunity for hydropower production in Nepal. Out of total hydropower
generation capacity of about 83000 MW in the country about 43000 MW of
power generation appears feasible to date from financial-technical perspective.
Nepal’s hydropower history begin in 1911 AD with the construction of first power
house “The Pharping Hydropower station” harping along generated enough
electricity to feed the people of Kathmandu for more than two decades,
Sundarijal(640KW), Sikaros(600KW), were also developed in the Rana regime.
NEA is one of the largest government organizations in Nepal with the country’s
highest capital investment, assets and human resources. Since, it has been
established in 1st Bhadra 2042 BS under NEA Act 2041 to provide electricity
services all over the country, but it has no radically developed and serves
electricity only urban area. NEA’s responsibilities are planning, construction,
operation and militants of the power system through the country including power
trading with India. The primary objectives of NEA is to generate, transmit and
distribute adequate reliable and affordable power by planning, construction
operating and maintaining all generations, transmission, distribution facilities in
Nepal’s power system both interconnected and isolated. A major developments
activity of NEA has been through credit from international leaders such as ADV,
World Bank, OPEC, and Fund for international development and Norwegian

5
government. Now there are total 10,314 staff in approved position and 9,280 in
existing situation.

1.4 Development of Hydropower in Nepal:

The history of hydropower in Nepal begins with the Pharping hydro plant 500KW
build way back in 1964 BS. The second hydropower project of 900 KW capacities
was installed at Sundarijal in 1991 BS. The third power generation is Morang
hydro electricity Power Company of 977 KW. During the period of 2013 to 2027
BS Trisuli-1(9000KW), Phewa(1080KW) hydropower project were started.
During the fourth five year plan i.e. from 2028 BS to 2032 BS total 29090 KW
capacity of hydropower plant was completed by Trisuli-2(1200KW), Koshi(6800
KW), Sunkoshi(10050 KW), Dhankuta(2040 KW) hydropower plant. At the end
of fourth five-year plan, total hydropower production capacity reached to 42978
KW.
Similarly in the sixth five-year plan, total 19,864 KW of additional hydropower
project were complicated with the starting of Gandak(15000 KW), Kulekhani-
1(6000 KW), Derghat(14100 KW), Seti-Pokhara(1500 KW), Doti(200 KW),
Phidim(240 KW), Balgung(200 KW), Dhaging(32 KW), Gorkha(64 KW),
Jomsom(240 KW), Jumla(200 KW), and Shyangji(80 KW), Hydro project.
During the seventh and eighth year plan, Kulekhani-2(32000 KW),
Marshyandi(6900 KW), selleri(400 KW), Darchula(50 kW), Chame(45 KW),
Terhathum(100 KW), Helambu(50 KW), Manang(80 KW), Sharpudaha
Rukum(200 KW), Chaughaeri Rukum(150 KW), Bajhang(200 KW),
Taplegung(125 KW), Khandbari(250 KW), Bhojpur(250 KW), Okhaldunga(125
KW), Tatopani-1(100 KW), Namche(600 KW), Suranaiya Gaun(200 KW),
Rupalgadi(100 KW), Andhikhola(5100 KW), Duhabi multifiber power
project(2600 KW), Jhimruk(12500 KW), Tatopani-2(100 KW), Achham(400
KW), and Chatra(3500 KW) were completed.

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During the ninth and tenth five-year plan up to 2066 BS till now, Kaligandaki
‘A’(144000 KW), Modikhola(14800 KW), Devighat(14100 KW), Pukhola(6200
KW), Middle Marsyandi(70000 KW), Chatra(3200 KW), Panauti(2400 KW),
Phidim(240 kW), Sumalyagad(200 KW), Khandbari(250 KW), Dhanging(32
KW), Heldung Humla(500 KW), Duhabi Multifiber Diesel Plan(39000 KW),
Simikot Solar Power Station(50 KW), Gamgadhi Solar Power Station(50 KW)
have been completed.
Future plan of NEA is to implement a short term, meddle term and long term
strategic plans to expand generation, transmission and distribution capacity. Curb
the system losses and improve financial health. Rehabilitating existing hydro and
thermal plants for 100% availability shall be lunch as short term masers
Khlakhani-3 Hydroelectric Projects, Chameliya hydroelectric projects and
multfiber- Dhalkeber 400 KV cross and medium term measures, upper Tamakoshi
(456 000 KW), Upper Trishuli- 3 A (60000 KW), Upper Trishuli -3 B (37000
KW), Hydroelectric profects will go in implementation as long term measures,
similarly from private sector Kebeli-A (300000 KW), Upper Marshyangdi (50000
KW), Upper Modhi-A (40000 KW), and few more projects are expected to be
completed within five year from now. With the completion of high capacity cross
broader interconnection, seasonal trading shall be possible and problem of base
load supply during dry season shall be resolved. NEA plans to take strong projects
like Nasyagudag and Budigandaki as longer option. With plans in hands for
expansion, we shall have a vast fabric of transmission network to meet our
domestic and export capacity requirement. Modes operand of distribution and
supply services shall be changed to make it customer friendly by use of
information technology and latest state of art use elsewhere.

1.5 Statement of Problem

Electricity is one of the basic infrastructures of nation. Industrialization and
development without electricity cannot be imagined. NEA has almost full

7
monopoly of the generation and distribution of electricity, as Nepal is a second
richest country over the water resources, NEA has a very doom scope for its
future growth and expansion. NEA has been established to improve the national
economy and to make self sufficient in the electricity that is why it is beneficial to
evaluate the financial performance of NEA. In order to evaluate the financial
performance of NEA this study seeks to find out the answer of the question
through various methods of analysis.
Financial analysis is one of the most important functions of an enterprise. It is
concerned with generation, transmission, distribution and other function any PEs,
Including NEA.
NEA must be able to generate fair rate of return and surplus on its own. For this
purpose it becomes imperative to be financially sound and independent at least in
terms of paying interest on debts, operation and maintenance expenditure,
administrative expenditure and generating desirable rate of return on capital
employed without it no industrialization of the economy can be imagined. In this
context, NEA has great role to play than any other PEs s most of the industries
depend on power supply. In this sense NEA has no difficult in selling its product
and services as the demand of power supply is always growing. NEA gets the
highest potential to further growth and expansion, as it does have no market
competition, despites these facts the performance of NEA is not satisfactory. In
the context, the study of NEA primary focuses on the financial obligation,
generating rate of return on capital investment and internal revenue generation.
This study confines to the problems of financial operation, financial position,
capital structure and financial management of NEA. The present study will make
a mildest attempt to have incited over the problems of financial management of
NEA as well as to recommend some concrete suggestions for the improvement in
overall financial performance through financial analysis. The study tries to seek
answer to the following question.

8
 • Is the NEA in a position to meet its current obligation?
• How efficiency has NEA been to use its assets?
• How the NEA can get red of current great losses?
• What sources of long-term finance do NEA and what is the relationship
between them employ?
• Is the company providing fair rate of return?

Analysis of financial position and statement is a crucial part of business

enterprise, poor financial management affects adversely on liquidity, turnover and
on profit it is required to measure the financial position of the enterprises
periodically in order to ensure its smooth function. Financial analysis may not be
expected in the future (Pandy I: 1988: edition publishing house).

1.6 Objective of the study

The study basically aims to evaluate the financial position if NEA and to suggest
recommendation based on it. The specific objectives of this study will be:

¾ To assess the performance of NEA through financial analysis.

¾ To identify financial drawbacks and strengths of NEA.
¾ To recommend the best possible sector for the NEA to invest.
¾ To find out measures to reduce financial wastages of the NEA.
¾ To find out the present financial condition of the NEA.
¾ To fore see the future trend of different financial ratios.
¾ To study the relation between sales with total cost, sales with investment with
profit.

1.7 Significance of the study

Among the different natural resources available in Nepal, water resources are the
most important, by posing nearly 2.27 percent of the world’s water resources

9
(NG/NDC: 1993: Sectarian central of statistics). The theoretical hydropower
potential of Nepal is 83000 MW of which an estimated 650 MW is exploited
which is only 0.78% of the total capacity. One of the major resources for the
rampant poverty and backwardness of the Nepalese economy is the power deficit
shortage power creates multifarious problem in the development of agriculture
industry, trade and other sector of the economy. The three-year interim plan of
government of Nepal provided high priority to the energy sector. A part from the
medium/mega hydropower projects, emphasis has been laid for the development
of small hydropower is essential not only for reducing regions imbalance on
development but also for assisting the mug ration of population from the hills to
the Terai.
Analysis of financial position and statement is crucial part of financial decision
making process of business enterprises. Poor financial management affects
adversely on liquidity turnover and profitability, if is required to measure the
financial position of the enterprises periodically in order to ensure smooth
functioning of an enterprises. NEA is an enterprise of great national concern.
Thus, this study is made to evaluate the financial position of NEA.
The changing socio-economic scenario and current policies of Nepal government
in the power sector have encouraged private enterprises to grow and to participate
in this sector as well. In other words, NEA will have to face competition on few
years back as private sector would emerge and if would not be able to enjoy the
monopoly like now. According to energy policy of the government, there is a
provision for external, internal and joint collaboration with private sector in
development and facing of small scale hydropower projects, in addition there is
also a provision for legal and institutional arrangement for pricing the power.
This study will be useful to provide information and to draw the attention of NEA
management regarding what can be done for further strengthening the financial
position of NEA. This study is expected to be helpful to the private and non-
government agencies, which are willing to invest in hydropower projects in

10
Nepal. This study is beveled to be an important effort to provide some appropriate
measures to solve financial problems of NEA. Further it will be important for the
following groups and individuals.
• Present and perspective customers
• Policy making authority
• Further researcher
• Government

1.8 Limitation of the study

The study may have some constrains, financial position, lack of sufficient data
and lack of research experience. The study will be limited by following factors;
As the title specified the study covers only the financial position of NEA.
• The study will be based on secondary data: therefore the accuracy of result
and conclusion highly depends upon the reliability of these data.
• The evaluation is made with analysis of financial statement published and
presented by NEA.
• The study excludes profitability and cost of joint and by products of NEA.
• Because of resource constraint, this study is not comprehensive neither
extensive.
• The study will be cover a period of 9 year from FY2000/01 to 2008/09.

1.9 Organization of Chapter:

The study is divided in the following five chapters as prescribed by the university.

Chapter I : Introduction
Chapter II : Review of Literature
Chapter III : Research Methodology
Chapter IV : Presentation and Analysis of Data
Chapter V : Summary, Conclusion and Recommendation

11
Chapter one; concentrates on introductory part of the study. It includes
introduction of NEA, historical background of NEA, and development of
hydropower in Nepal as well as the statement of the problem, significance of the
study, limitations of the study and chapter plan.

Chapter two; is review of literature under conceptual framework and review of

previous studies have been covered.

Chapter three; is concentrated in research methodology, which deals research

design, period covered types and sources of data, data collection procedure,
method of analysis and analytical tools used.

Chapter four; is the major part of the thesis, which is related to presentation,
analysis, and interpretation of data related to the financial performance of the
NEA.

Chapter five; is the concluding chapter, discusses the summary, conclusion and
recommendations.
Besides these, bibliography and annexes are included at the end of the thesis.

12
 CHAPTER -2
REVIEW OF LITERATURE

The review of literature basically highlights the existing literature and research
related to the present study with a view to finding out what had already been
explained and how the present research adds to the dimension. A literature review
is an essential part of all studies. It is a way to discover what other research have
concerned and left in the area. The purpose of literature review is to find out what
research duties have been conducted in ones chosen field of study and what
remains to do.
Review of literature is supposed to revise the eminent literature relating to the
study, various books, journals, statements, reports and thesis etc, are the basis for
preparing it. Some in writer or researcher have also give contribution on it.
Financial performances in the context of Nepalese enterprises in concerned, the
management exports and students describing the financial performance of public
enterprises have undertaken some studies. Nepal being one of the rich countries in
hydropower sector, many important literatures are available in this field.

The review of relevant literature has been categorized into following headings:
1. Conceptual Framework
2. Review of articles/journals/thesis
3. Review of related unpublished thesis

2.1 Conceptual Framework

Since this study is related with the structure of assets and liabilities management
of Nepal Electricity Authority, we must have some knowledge about assets
liabilities and their structure. Assets and liabilities are shown in balance sheet so

13
the concept of balance sheet must be known and what types of tools are used to
manage the assets and liabilities also be considered.

2.1.1 Financial Statements

The financial statements are the means of presentation of a firm’s financial
condition and basically consist of two types of statements- the balance sheet &
income statement. These are prepared to report the overall business activities as
well as financial status of the firm for a specified period to its stakeholders. These
contain summary of information regarding financial affairs that is organized
systematically. The top management is responsible for prepar4ing these
statements. “The basic objective of financial statements is to assist in decision
making. The analysis and interpretation of financial statements depends on the
nature and type of information available there in” (Panday, 2004:31).

Hence financial statement refers to any formal and original statement that
discloses the financial information related to any business concern during a
period. The income statements and balance sheet usually prepared at the end of
each financial year show the firm’s position.

2.1.1.1 Balance Sheet

Balance sheet is a financial statement that summarizes a company’s assets,
liabilities and scholar’s equity at a specific point of time. This balance sheet
segment gives investors and idea as to what the company owes, as well as the
amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders’ Equity
It’s called a balance sheet because the two sides balance out. This makes sense: a
company has to pay for all the things it has (assets) by either borrowing money
(liabilities) or getting it from shareholders ( shareholders’ equity).

14
The liabilities side of the balance sheet is comparatively simple. It consists in the
first place, of the banks liability to their shareholders- the capital originally paid in
and any accumulation of undistributed profits. The assets side of balance sheet is
both more complicated and more interesting. In distributing its resources among
the different types of assets open to it.

Importance and Objectives of Balance Sheet

Balance sheet being the position statement prepared at certain date, it reveals
state of affairs. Balance sheet contains accounts mentioned in the trail balance,
which don't have place in Trading and profit, & loss account being capital items.
Importance and objectives of balance sheet can be presented in the following
points.
1. It reveals the financial position of the firm.
2. It ascertains composition of assets and liabilities.
3. It depicts the solvency i.e. debt paying capacity of the firm.
4. It shows the position of proprietor’s capital as calculated assets- borrowed
money= proprietor’s capital.

Advantage of Balance Sheet

1. A balance sheet serves the purpose of communication to the user groups
the quantitative information generated by the financial accounting process.
The income statement and the balance are the most useful end product of
the final accounting.
2. Wherever a business entity wants to raise capital balances sheet is the basic
document that has to be provided to the investors of lenders for
determining the financial status and taking an investment or lending
decision on the basis of it.
3. A balance sheet prepared in an efficient manner containing the necessary
information, well assist the outside investors and user to take a decision

15
 and it will encourage them to invest to invest their money in that business
concern.
4. A balance sheet, properly prepared, will help the financial analyst to
interpret the same with the help of ratio analysis.

2.1.1.2 Income statement

Income statement is designed to portray the performance of the business firm for
specific period of time i.e. for a year or month or quarter. The business revenues
and expenses resulting from the accomplishment of the firms operation are shown
in the income statements. It is the “Scoreboard” of the firm’s performance during
particular period of time. It shows the summary of revenues, expenses and net
income or loss of a firm for a particular period of time. Income statement also
serves as a true measure of the firm’s profitability (Khan and Jain, 1993:15).

2.1.1.3 Assets
Assets are the resources owned by the business or non-business firms to generate
economic benefits. Assets can be tangible or intangible which solely or combine
contribute in earning capacity of the firm. Simply assets can be defined as any
property that has monetary value. Assets can be defined as “Physical things of
right owned that has a monetary value is assets. In other words assets are that
expenditure which results in acquiring of some property of benefit of a lasting
nature” (Jain & Narang, 1991:8).
Assets represent economic resources is the valuable possessions owned by the
firm. These possessions should be capable of being measured in monetary terms.
Assets are the future benefits (Panday, 2002:31)
The right hand column in the balance sheet shows assets of the bank assets are
thing of the value owned by a business and acquired at a cost, which is
measurable. Assets are the future benefit that represents:
Store purchasing power (e.g. cash)

16
 ¾ Money claims(e.g. Receivable stock)
¾ Tangible and intangible items that can be sold of used in business to
generate earnings.
¾ A tangible item includes land, building, plant, equipment etc.
¾ Intangible items include copyright, trade name or goodwill.

I. Classification of assets
The assets are classified into current and fixed assets. Fixed assets are further
classified as tangible and intangible assets. Assets may also be classified as
money resources, physical resources and intangible resources.
Bills receivable and marketable investment are examples of money resources.
Plant and machinery, buildings and inventory are examples of physical resources
while goodwill and copyrights comprise intangibles.

a) Fixed Assets
As the name suggests, such assets are fixed in the sense that they are acquire to be
retained in the business on a long-term basis to produce goods and services, and
are not, for resale. They are, in a sense, long-term resources in that they are held
for longer than one accounting period. Such assets are obviously of crucial
significances as they basically determine the future earnings/revenue/profits of
firms.
Fixed assets fall into two categories: tangible and intangible. Tangible fixes assets
are those, which have a physical existence and generate goods and services.
Included in this category of fixed assets are land, building, plants, machinery,
furniture, and so on. They are shown in the balance sheet, in accordance with the
cost concept, at their cost to the firm at the time they were purchased.
The other types of fixed assets, intangible assets; do not generate goods and
services of assets directly. In as way, they reflect the right of the firm. This
category of assets comprises patents, copyrights, trademarks and goodwill. These

17
assets confer certain exclusive rights on their owners. Patents confer exclusive
rights to use an invention: trademarks represents exclusive rights to use certain
names, symbols, labels, designs, etc. intangible fixed assets are also written –off
over a period of time.

Valuation of Fixed Assets in the Balance Sheet

i. Land:
Land is shown at cost price in the balance sheet. However, land in the form of
wasting assets such as oil, well, mineral deposits etc includes depletion year after
year due to the extraction of such land. Such kinds of assets at cost less depletion
in the balance sheet.

ii. Buildings:
In the Balance sheet the building is shown at cost on the date of acquisition and
cost less depreciation date in the subsequent years. The building may be
purchased r constructed by the business concern. If the building may be purchased
then its cost include all costs incurred up to the point of registration and if it is
constructed, its cost include the cost of (material and overhead) architect’s fees
and imputed value of its own resources.

iii. Plant and Machinery:

The term plant and machinery includes such assets as machinery, equipment,
computers, vehicles, and material handling equipment of all types they are used in
the business for productive purpose. Plant and machinery are shown in the
balance sheet at cost on the date of acquisition and cost less accumulated
depreciation to date in the subsequent years.

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iv. Intangible Assets:
These assets includes patents, trademarks, goodwill etc. the intangible assets
which have limited existence or economic life shall be shown in the balances
sheet and be amortized over a number of years until they outline their utility. The
assets, which have indefinite existence, must be shown in the balance sheet at cost
and should be amortized till they start losing their value.

v. Contingent Assets:
A contingent asset is the right to property, which may come into existence or the
happening of some future event. Example are uncalled share capital of the
company, copyright etc. usually these assets are not shown in the balance sheet
because of the principle of conservation.

vi. Goodwill:
It is a thing easy to describe but difficult to define. It is an intangible asset.
According to Kohler “Goodwill is the current value of expected future income of
normal return on the investment in net tangible assets”. Goodwill is not recorded
unless it is paid. Therefore it should not be considered that is no goodwill for the
business if it does not figure in the balance sheet.

vii. Other Assets:

These includes deferred charges such as formation expanses, discount on issue of
shares and debentures etc, any amount not written off no the date.

b) Current Assets;
The second category of assets included in the balance sheet is current assets. In
contrast to fixed assets, current assets are short-term in nature. As short-term
assets, they refer to assets resources which are either held in the form of cash or
are expected to be realized in cash within the accounting period or the normal

19
operating cycle of the business. The term “operating cycle: means the time span
during which cash is converted into inventory, inventory into receivables/cash
sales and receivable into cash. Conventionally, current assets designate assets
which are held for a short period of time, usually not more than a year from the
balance sheet. These are also known as liquid assets. Current assets include cash,
marketable securities, accounts receivable (debtors), notes/bills receivables and
inventory.
Normally the current assets are arranged in the balance sheet in the liquidity order
which may be shown as follows:
™ Cash
™ Bank balance
™ Temporary investment
™ Bills receivable
™ Debtors
™ Stock in trade(inventories)
™ Payment in advance

i. Valuation of Current Assets in the Balance Sheet Cash in hand and at

Bank:
It is the most liquid assets and includes cash in hand and cash at bank. It provides
instant liquidity and cash be used to meet obligations/ acquire assets without any
delay. So cash is shown in the balance sheet and in current fair value. In the case
of embezzlement or to be recoverable, it can be shown in the balance sheet below
the cost or the market price.

ii. Marketable Securities:

These are short-term investments which are both readily marketable and which
are expected to be converted into cash within a year. According to the outlet to
invest temporarily surplus/idle funds/cash. According to the generally accepted

20
accounting principles, marketable securities are shown in the balance sheet below
the cost or the market price.

iii. Account Receivable:

They represent the amount the customer owe to the firm, arising from the sale of
goods on credit is formal document of promise made by a debtor 1.0 payable
amount due either on demand or at a specific date. Bills receivable are shown in
the balance sheet at its normal amount and present value.

iv. Note/Bills Payable;

These refer to amounts owned to outsiders which written acknowledgements to
the obligation are available.

v. Inventories;
It means the aggregate of those items which are held for sale in the ordinary
course of business (finished goods), or are in the process of production for such
sales(work in progress), or are to be currently consumed in the production of
goods and services(raw materials) to be available for sale. It is the least liquid
current assets. Included in inventory are raw materials, work in progress (semi-
finished) and finished goods. Each of these serves a useful purpose in the process
of production and sale. Inventory is reported in the balance at the cost or market
value whichever is lower.

c) Investment;
The third category of assets is investments. They represent investment of funds in
the securities of another company. They are long-term assets outside the business
of the firm.

21
The purpose of such investments is either to earn a return or /and to control
another company. It is customarily shown in the balance sheet with the market
value shown in parenthesis.

d) Other Non-Current Assets;

Included in this category of assets is what is called deferred charges, i.e.
advertisement expenditure, preliminary expenses, and so on. They are pre
payments for services/benefits for periods exceeding the accounting period. All
other assets which cannot be included in any of the above categories are grouped
as other assets usually they represent deferred charged. Prepayments for services
of benefits for period longer than the accounting period are referred to as deferred
charges and include advertising, preliminary expenses etc. (Pandy: 1995:306).

2.1.1.4 Liabilities
The second major content of balance sheet is liabilities of the firm. Liabilities may
be defined as the claims of outsiders against the firm. Alternatively, they represent
the amount that the firm owes to outsiders i.e. other owners. The assets have to be
financed by different sources. One sources of funds is borrowing long-term as
well as short-term. The firm can borrow on a long-term basis from financial
institution, banks or through bonds, mortgages, debentures, etc. the short-term
borrowing may be in the form of purchase of goods and services on credit. These
outside sources from which a firm can borrow are termed as liabilities.
Depending upon the periodicity of the funds, liabilities can be classified into:
i. Long-term liabilities
ii. Current liabilities
iii. Owners equity

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i. Long-term Liabilities:
They are so called because the sources of funds included in them are available for
periods exceeding one year. In other words, such liabilities represent obligations
of a firm payable after the accounting period. The sources of long-term
borrowings are (i) debentures, (ii) bonds, (iii) mortgages. (iv) Secured loans from
“financial institutions and commercial banks. They have to be repaid/redeemed
either in lump sum at the maturity of the loan/debenture or in installments over the
life of the loan. Long-term liabilities are shown in the balance sheet net of
redemption-repayment.

ii. Current Liabilities:

The second type of liability is current liabilities. In contrast, to the long-term
liabilities, such liabilities obligations to outsiders repayable in a short period.
Usually within the accounting period or the operating cycle of the firm. It can be
said to the counterpart of the current assets. Conventionally, they are paid out of
the current assets; in some cases, however, existing current liabilities can be
liquidated through the creation of additional current liabilities. Included in this
category are:
i. Account payable
ii. Bill/Note payable
iii. Tax payable
iv. Accrued expenses
v. Deferred income and
vi. Short-term bank credit.
The first two categories may also be called trade credit. Trade credit represents the
claims of such outsiders as have sold goods to the firm on credit for a short period
depending upon trade practices. Usually, such credit is unsecured. One form of
this type of short-term credit(current liabilities) is that the buyer-firm will pay the

23
amount after a lap of time but there is no formal written loan agreement. This type
is known as account payable.
When the claim of the supplier of the good and services is evidenced by a not/bill-
written acknowledgement of debt, it is called bill/note payable. A bill/note is a
promise in writing to pay a certain sum of money at some specific date.
Another source of current liabilities is short-term bank taxes. Accrued expenses
represent certain obligations, which are claims against assets, but there is no
documentary evidence. Examples of this type of current liability are outstanding
wages, salaries, rent and commission, etc.
Deferred income represents the liability that arises out of receipt of income in
advance, e.g. rent received in advance.
Current liabilities are debts payable within an accounting period. Current assets
are converted into cash to pay current liabilities. The typical examples of current
liabilities are creditors, bills payable, borrowing, deposits, expenses payable and
incomes received in advance.

iii. Owners’ Equity

The third major content of a balance sheet is the owner’s equity. Conceptually, it
refers to the claims of the owners of the business against the assets of the firm.
Alternatively, owners’ equity may be viewed as that part of the resources of a firm
which are supplied by its owners. The owners of a business are known as
shareholders. There are two types of shareholders- ordinary and preference. The
preference shareholders are entitled to a stared amount of dividend and return of
principal at ma maturity. The ordinary shareholders as well as the creditors. They
are entitled to the income /assets of the firm remaining after the claims of the
creditors/preference shareholders are met in full. Their claim against the assets of
the firm is, thus, residual. This is also known as the equity of the owners.
The owners’ equity may be said to consist of two elements: (i) paid –up capital,
i.e. the initial amount of funds contributed by the shareholders; (ii) retained

24
earnings/reserves and surplus, i.e. that part of the profits belonging to the
shareholders which is not paid out to them as dividends but instead is
retained/ploughed back in the business.

2.1.1.5 Statement of Assets and Liabilities:

If a balance sheet shows the financial-position of a concern the question arises
how the financial position of concern ascertained? The financial position or
financial worth of a concern is indicated by its assets on a given date and its
liabilities (excluding capital) on that date. Excess of assets over liabilities (other
than capital) represents capital and is indicative of the financial soundness of
concern.

2.1.2 Concepts Financial Analysis:

Financial analysis is the process of identifying the financial strength and weakness
of the firm by properly establishing relationships between the items of balance
sheet and profit and loss account. Financial analysis can be undertaken by
management of the firm or by parties outside the firm viz. owners, creditors,
investors and others.
Ratio analysis is a powerful tool of financial analysis. A ratio analysis defined as
“the indicated quotient of two mathematical expressions” and “as the relationship
between two things”. In financial analysis, a ratio is used as a benchmark for
evaluating the financial position and performance of the firm.
Manohar K. Shrestha in his book “Financial Management deals that the essence of
financial analysis is to covert data into useful information in a way relevant to
measure significant relationship for undertaking the decisions. This needs the
fulfillment of the essence that constitutes a good financial analysis. As much
especially in a developing country like Nepal, we have to see firstly how far the
financial statement prepared by public corporation and industrial enterprises bear

25
the essence of good financial analysis and whether these are handled by
competent analysts.
Weston and Bringham, in the book “Essentials of Managerial finance” financial
statements reports states that firm’s position at the point in time and on its
operation over some past periods. However, the real value of financial statement
lies in the fact they can be used to help the firm’s future earnings and dividends.
From an investor’s stand point, predicting the future is what financial statement
analysis is all about, while from managements standpoint, Financial statement
analysis is useful both as a way to anticipate future conditions and more
important, as a standing point for planning actions that will influence the future
course f actions.
Dr. Radhey Mohan Srivastava, the book “Financial Management” argues that
Financial strengths and weaknesses of the company by establishing strategic
relationship between components of balance sheet and profit and loss statement
and other comparative data. Financial analysis is this attempt to dissect the
financial statements into their components on the basis of the purpose in hand and
establish relationship as between these components on the other hand and as a
between individual components on the other. Along this a study of trends of
various important factors over the past several years is also undertaken to have
clear understanding profitability and financial conditions of the business
organization.

According to Mr. Khan and Jain, “The balance sheet provides information about
the financial position of a firm at a particular point of time, say, as on Dec 31st. It
can be visualized as a snapshot of the financial status of company. (Khan and Jain,
1993)
Ratio analysis is a widely-used tool of financial analysis. It is defined as the
systematic use of ratio to interpret the financial statements so that the strength and

26
weakness of a firm as well as its historical performance and current financial
condition can be determined.
The main objective of a financial ratio analysis is to prepare a basis to evaluate
financial performance of the firm by computing all the possible ratios. The ratios
thus taken are nothing but the translated forms of the accounting numbers
extracted from the financial statements into relative values that allow us to
compare the financial position of one firm to another. In another word, it can be
stated that the ratios computed in the course of financial ratios analysis are
designed to show the relationship between financial statement within firms and
between firms.

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the

indicated quotient of two mathematical expressions” and “ as the relationship
between two things”. In financial analysis a ratio is used as a benchmark for
evaluating the financial position and performance of a firm.

Standard of Comparison:
The ratio analysis involves comparison for a useful interpretation of financial
statements. A single ratio in itself doesn’t indicate favorable or unfavorable
condition. It should be compared with some standard. Standard of comparison
may consist of:

1) Past ratio:- i.e. ratio calculated from the past financial statement of the
same firm.
2) Projected ratios: - i.e. ratio developed using the projected of Performa
financial statement of the same firm.
3) Competitor’s ratio: - ratio of some selected firms, especially the most
progressive and successful competitor, at the same point in time.
4) Industry ratio: - i.e. ratios of the industry to which the firm belongs.

27
2.1.2.1 Types of Ratios:
Several ratios calculated from the accounting data can be grouped into various
classes according to financial activity of function to be evaluated. The parties
interested in financial analysis are short and long term creditors, owners and
management. Short-term creditor’ main interest is in the liquidity position or the
short solvency and profitability of the firm. Similarly owners concentrate on the
firm’s profitability and financial condition. Management is interested in
evaluating every aspect of firm’s performance.
In view of the requirement of several of ratios we may classify them into
following four groups.
1) Liquidity ratios
2) Capital adequacy ratios
3) Activities ratios
4) Profitability ratios
1) Liquidity ratios:
Liquidity ratios measure the firm’s ability to meet current obligations. It reflects
the short-term financial strength of the business activities, two ratios under
liquidity ratios, which are as follows:
a) Current ratio
b) Cash and Bank Balance to total Deposit Ratio

2) Capital Adequacy Ratio:

This ratio shows the proportion of debt and equity in financing the firm’s assets.
Long-term creditors, like debenture holders, financial institutions etc. are more
concerned with the firm’s long-term financial strength. The following ratios are
included in capital adequacy ratio.
a) Shareholder’s funds to total deposit ratio.
b) Shareholder’s funds to total assets ratio.

28
3) Activities Ratio:
Activity ratios are employed to evaluate the efficiency with which the firm
manage and utilizes its assets. These ratios are also called turnover ratio because
they indicate the spiced with which the assets are being converted turn over into
sales. Activity ratios, thus, involve a relationship between sales and assets.
a) Loan and advances (total credit) to total deposit ratio.
b) Investment to total deposit ratio.
c) Performing assets to total assets.

4) Profitability ratio:
The profitability ratios are calculated to measure the operating efficiency of a
company. Beside management of the company, creditors and owners are also
interested in the profitability of the firm. Creditors want to get interest and
repayment of principal regularly. Owners want to get a reasonable return on their
investment. This is possible only when the company earns enough profits.
The profitability position can be evaluated through following ratios.
1. Return on total assets (ROA)
2. Return on total deposit (ROD)
3. Return on risky assets i.e. loan and advances
4. Interest earned to total assets.
Ratio analysis is the process of determining and interpreting numerical
relationships based on financial statements. A ratio is a statistical yardstick that
provides a measure of the relationship between two variables or figures. As ratio
are simple to calculate and easy to understand, there is a tendency to employ them
profusely. While such statistical calculations stimulate thinking and develop
understanding, there is a danger of the accumulation of a mass of data that
obscures rather than clarifies relationship. The financial analyst has to steer a
careful course. His experience and objectives of analysis help him in determining
which of the ratios are more meaningful in a given situation.

29
2.1.2.2 Utility of Ratio Analysis:
The ratio analysis is the most powerful tool of the financial analysis. Many
diverse groups of peoples are interested in analyzing the financial information to
indicate the operating and financial efficiency and growth of the firm. These
people use ratio to determine those financial characteristics of the firm in which
they are interested. With the help of ratios one can determine.
1) The ability of the firm to meet its current obligations.
2) The extent to which the firm has used its long-term solvency by borrowing
funds.
3) The efficiency with which the firm is utilizing its assets in generation sales
revenue.
4) The overall operating efficiency and performance of the firm.

2.1.3 Objective of Financial Analysis

Financial analysis enables us to explore various facts related to the past
performance of business and predicts about the future potentials for achieving
expected results. Major objectives of analysis of financial statement are to asses
various factors in relation to the business firm as presented below;
• The present and future earning capacity or profitability of the concern.

• The operational efficiency of the concern as a whole, and of its various

parts or departments.

• The short-term and long-term solvency of the concern.

• The comparative study regarding to one firm with another firm.

• The possibility of developments in the future making future forecasts and

preparing budget.

• The real meaning and significance of financial data.

30
 • The long-term liquidity of its fund.

2.1.4 Need of Financial Analysis

The need for the analysis of financial statement arises in order to address the
following questions (Pradhan, 2000:47-48).
• How was the firm doing in the past? Was there any problem? If so, in what
area?

• How it is doing at present? Is it doing better compared to the past

performance, competitors and industry average? Is there any problem at
present? If so, in what areas?

• What about the future? Is there any likely problem on the way in the
future? What will its position be in the future?

• What corrective actions can be taken now to solve the problems and
improve the performance? How will the recommendation of any course of
actions or changes in the policy or practice help solve problems and
improve the firm’s position?

• What are the expected results of recommendations? Are there any

improvements?

2.1.5 Significance of Financial Analysis

Significance of analysis lies on the objectives of financial analysis of any firm.
The facts discovered by the analysis are perceived differently by different groups
associated with the concern. The facts and the relationships concerning
managerial performance, corporate efficiency, financial strengths and weakness
and credit worthiness are interpreted on the basis such analysis leads management
of an enterprise to take crucial decision regarding operative policies, investment

31
value of the firm, internal financial control system and bargaining strategy for
funds from external sources (Agrawal, 1993:582)

The parties that are benefited by the results or conclusion drawn from the analysis
of financial performance can be numerated as ( Srivastava, 1993:58-59)
• Top Management

• Creditors

• Shareholders

• Economists

• Labor Unions

A) Top Management

The responsibility of the top management is to evaluate:

• Are the resources of the firm has been used effectively and efficiently?

• Is the financial condition of the firm sound enough?

On the basis of past facts, firms can anticipate their future. Hence, top
management can measure the success of failure of a company’s operation,
determine the relative efficiency of various departments, process and
produces appraise the individual’s performance and evaluate the system of
internal audit.

B) Creditors
The creditors can find out the financial strength and capacity of the borrower to
meet their claims. Trade creditors are interested in the firm’s ability to meet their
claims over a short span of time. The suppliers of long-term debt focus upon the

32
firm’s long-term solvency and survival. A lending bank through and analysis of
these statements can decide whether the borrower retains the capacity of
refunding the principal and paying interest in time or not.

C) Shareholders
The share holders, who have invested their money in the firm’s shares, are most
concerned about the firm’s earning. They evaluate the efficiency of the
management and determine about the necessity for the change. In large company
the shareholder’s interest is to decide whether to buy, sell or hold the shares. They
wish to buy the shares in case of sound performance of the firm where as they
simply intend to hold the shares in the condition of satisfactory performance. But
they are hurried to sell the shares in case of poor performance.

D) Economists
To diagnose the prevailing status of business and economy, economists analyze
the financial statements (of any firm). The government agencies analyze them for
the purpose of price regulation; rate setting and similar other purposes.

E) Labor Unions
Productivity is the synonym of well-motivated labors. Labor unions are interested
to rights and benefits of labor to enhance the moral of labors. For further
motivation they expect increase in wages, fringe benefits and so on. These benfits
are affected by the company’s profitability condition. Therefore the union
assesses the financial condition of the firm to determine whether the firm is in the
situation or not to make such facilities available.

2.1.6 Process of Financial Analysis

Financial analysis basically financial statement analysis, is a technique of
answering various questions regarding the performance of a firm in the past,

33
present and the future on the basis of past performance. The analysis recommends
the steps to be taken by financial managers while undergoing the assessment of
financial position.
The questions, that as elucidated above create the need to follow certain steps
such as first identification and analysis of problem in order to come up with
appropriate recommendations, and then to project the expected results and
examine them if there are improvements before implementing such
recommendations.

2.1.7 Types of Financial Analysis

In the words of Man Mohan “The nature of financial analysis differs according to
the purpose of the analyst. A distinction may be drawn between various types of
financial analysis either on the basis of material used for the same or according to
the modus operandi of the analysis.”

A) According to material used

I. External analysis
It is made by those who do not have access to the detailed records of the
company. This group which has to depend almost entirely on published financial
statements includes investors, credit agencies and governmental agencies
regulating a business in a nominal way.

II. Internal Analysis

The internal analysis is accomplished by those who have access to the books of
accounts and all other information related to the business. While conducting this
analysis, the analyst is a part of the enterprise he is analyzing. Analysis for
managerial purpose is the internal type of analysis and is conducted by executives
and employee of the enterprise as well as governmental and court agencies which
may have major regulatory and other jurisdiction over the business.

34
B) According to Modus Operandi Analysis
I. Horizontal Analysis
When financial statements for a number of years are reviewed and analyzed, the
analysis is called horizontal analysis. As it is based on data from year to year,
rather than in one date or period of times as a whole, this is also known as
dynamic analysis.

II. Vertical Analysis

It is frequently used for referring to ratios developed for one date or for one
accounting period. It is also called static analysis. Besides, the types of financial
analysis on the basis of material used and modus operandi, SP Jain and K. L.
Narang have categorized on the basis of objective of the study.

C) According to Objective

I. Long Term Analysis

This is made in order to study the long term financial stability. Solvency and
liquidity as well as profitability and earning capacity of a business concern. For
the long-run success of a business concern, this analysis helps in the long term
financial planning.
II. Short Term Analysis
This is made to determine the short-term solvency, stability and liquidity as well
as earning capacity of the business. This analysis is helpful for short term
financial planning.

2.2 Review of Journals/Articles:

Analytical studies of an enterprise pertaining to the financial position are essential
to know their profit potentiality, operative efficiency and decision-making

35
technique. In our country as well, the financial experts and other analysts have
made some research towards financial position of different corporations by using
various analytical tools. Some of the available research studies relating to the
financial aspects of PEs in Nepal have been reviewed.
Mr. Prachar Pradhan (2064) on his article entitled “Challenges and issues on the
domestic hydropower projects and perspective on export oriented hydropower
project” has the written about hydropower potential, hydropower generation,
existing status, power demand forecast by 2020 for domestic scenario and power
generation expansion (NEA and IPP).
He said about hydropower potential of Nepal that, the Karnali and Mahakali river
systems represents approximately 43 percent of Nepal theroretical hydropower
potential and 55 percent of the technical/economical potential.
Mr. Pradhan has added that, now the total installed capacity in NEA owned by the
private sector and NEA’s thermal power (Diesel) of 55 MW. Although total
hydropower capacity in the system is 556 MW, only about 452 MW can be
generated from hydropower stations during the winter season when the power
demand will be at its peak. During the time of power deflect; about 50 MW is
imported from India as per the Indo-Nepal power exchange agreement. Nepal and
India have agreed in principle to increase this level of exchange form 50 MW to
150 MW. Nepal is also entitled to 70 million units of energy annually from
Tanakpur in the far west under the Mahakali Treaty. NEA continues to be sole
purchase of independent power producer (IPP) power. To date, twenty two power
purchase agreements totaling 228.840 MW have been concluded of which
152.613 MW have already been commissioned (as of July, 2007).
In “Energy Sector Perspectives”, Dr. Bhekh B. Thapa and Bharat B. Pradhan says
that hydropower is Nepal’s major resource endowment-numerous attractive run-
off river and multipurpose hydro schemes have been identified but remain
undeveloped, small and micro-hydro potential remains virtually unused in the hill
and mountain areas and despite Nepal’s small sized, only about 10.5% of the

36
population have access to electricity supply, whereas about 40% of domestic
connections are concentrated in the Kathmandu valley(Thapa, Bhekh B.et al,
1995).
In the journal “Hydro Nepal” Mr. Anil Kumar Shah (January, 2008) has viewed
on his article entitled “Banker’s perspectives on hydropower sector and traced out
on the possibilities and problems associated with it. In his words, “the financial
sector has identified hydropower development as a lucrative financial opportunity.
The success stories of few hydropower projects developed by independent power
producers in the recent past have also helped to create positive market interest and
response. On the other hand, the risks are relatively high in this sector due to its
technical nature, the necessity of huge finds and longer gestation as well as
repayment periods. The financial sector is entering the energy sector gradually by
taking some exposure, preferring to share the risk amongst various banks and
developing consortium financing.
The funds available in the local market are able to support projects with a capacity
of 20-50 MW only for mega projects we will have to seek help from foreign
institutional investors. As such, a new market for debentures, bonds or even
mutual funds will open up. This will spread to mass. In the event of an open
market, by the year 2010 international banks will also enter Nepal. This, in turn,
will increase the capacity of financial sector. Therefore, now is the right time to
start lending in the sector to gain required experience and hold in the market.
In the magazine Hamro sampada, Mr. Baburam Bharadwaj (2064 Falgun) has
written an article entitled some thought on hydropower development in Nepal. “In
this article he has focused on the opportunities, challenges and issues.
He has added about opportunity on hydropower in Nepal that “From the study of
229 potential projects of different size in Nepal a technically feasible capacity of
42,133 MW has been derived. Among these 229 identified potential sites there are
157 projects between 10-100 MW, 47 between 100-300 MW; and 5 above 1000
MW. Total they make 176,764 GWh/year generations potential. Till now only 585

37
MW (less than 2% of the economically feasible capacity) has been harnessed.
Availability of various sizes(pico, Micro, Mini, Small, Medium to large) ranging
from few kilowatts to as big capacity as of 10,800 megawatts sites adds further
attraction to different domestic as well as international investors. The Karnali and
Mahakali River Basin that lies in the western part of Nepal has the largest
potential (36,180 MW technically feasible and 25,125 MW economically feasible
and the largest single scheme identified so far in Nepal the Karnali Chisapani
storage scheme (10,800 MW) lies in this basin. The basin not only has highest
potential but also has the highest percentage of economically feasible potential
(59.63). the basin with second largest potential is Saptakoshi River basin with
20,650 MW technically 10,860 MW economically feasible potential.
Nepal not only has potential for hydropower development but also has secured
market place to sell the electricity. The electricity hungry Indian market also
secures power export possibilities.
He has also focused about the challenges of hydropower development of Nepal,
he said that hydropower development in Nepal not only opportunities but also
packed with numerous challenges. The youngest geological formations where the
construction of large structures like dams, tunnels and powerhouses are always of
a hydropower scheme is always packed with large number of geological problems
that demands a great degree of care and expertise. The capital-intensive nature
and long gestation period of the development stage of the hydro projects further
add uncertainties of return of investment. The political instabilities and frequent
changing government policies regarding the tax structure further repels the
investment in hydro power development. The complex environmental sensitive
and further difficulties in getting government approvals, at the same time the
requirements of the environmental mitigation works are becoming extra financial
and managerial burden for the project. Though there are ample opportunities in
domestic as well as Indian market to sell the generated electrical energy but it is
not that simple and easy. Securing a long-term power purchase agreement with

38
NEA and with Indian power trading corporation is another hurdle. As the
hydropower project requires large initial investment the availability of fund in
local financial institution is also not developed to the required extent. Though the
list of difficulties is very long and frightening but they are still manageable and
are within the reach of the developers.

2.3 Review of Previous Related Thesis:

Prior to this study, several theses works have been conducted by many other
students regarding the financial performance such as resource mobilization,
lending policy, interest rate structure, investment policy, working capital
management, capital structure etc. the gifts concluded by them is relevant and
supposed to be worthwhile to this study.
Shrestha (1996), had done a research entitled “financial Power Development of
Nepal: A case study of NEA”, points out that the power is a capital intensive
sector for country likes Nepal but there was no clear-cut policy for its
development and its financing prior to the era of planned development. The trend
of financial in power development shows that the Nepalese government only
covers about 15 to 25 percent of investment is covered by foreign aid. The share
of international loan is greater than the grant. The study also ways that the main
issues of financial in power development is Nepal are the shortage of capital,
dependency on foreign aid, constraints in exporting power, risk of investment etc.
Frequent changes in the government policies and adequate legal provision,
geographical complexity, lack of trained manpower and modern technology are
other constraints. According to the study, observing the power deficiency
problem, it can be said that there is market within the county. But while analyzing
the country’s market with respect to the economically feasible power potential
and with the large scale projects, the scarcity of the sizable market is in front.
Basyal(2001), had done research entitled “Financial Analysis of National Trading
Limited” points out that the total management performance of the company had

39
reflected unsatisfactory financial state of affairs and most of the fund were applied
for meeting operating loss alone.
Chaudhary (2001), had done research entitled “A study of financial statement of
Janakpur Cigarette factory limited” concluded that the main defect of this
company should try to maximize its financial activities (financing and investment)
in near future. The company should invest their sources where the return is
optimum. It should generate maximum possible sources i.e. successful operation
of the companies’ activities. Regarding financing and investment strategy J.C.F
should have a proper long term planning investment on capital budgeting
technique to evaluate every investment alternative on the basis of its incremental
benefit.
Koirala (2005), had done research entitled “A Study of Financial Performance of
Nepal Telecom” concluded that financial performance of NTC has satisfactory
results. This shows that NTC is maintaining the good liquidity position and the
financial capacity of the firm to repay current liabilities. All other ratios are seen
in satisfactory position besides average collection period, so NTC should make
effective strategy to collect the receivables. It also lacks proper utilization of fixed
assets in generating sales. Khanal (1999), “A study on Capital Structure of
Industrial Public Enterprises” have selected samples from industrial public
enterprises of Nepal and used financial ratio and correlation analysis as the tool of
analysis. He concluded that the capital investment and earnings were not
correlated. Most of the public enterprises were in loss position. He suggested that
the management should improve their performance efficiency.
Poudel(2002), had done a research entitled “Financial Performance of Nepal
Electricity Authority,” says that there is no effective utilization of assets in NEA.
It has been seriously facing the problem of outstanding debt collection. From the
overall analysis, NEA has generated very low returns. Increasing cost in each
fiscal year is an important issue of NEA. It has adopted the cost control tools and
techniques.

40
Shrestha (2004) had done research entitled “study on Profit Planning and Control
of Public Utility Sector, A comparative Study of Nepal Electricity Authority and
Nepal Telecommunication Corporation,” has tried to find out some major
problems of NEA and NTC.
Mr. Shrestha has conducted the study covering the time period of five years.
Some major findings pointed by Mr. Shrestha are as follows:
• NEA and NTC both have no in depth analysis of the company’s strength
and weakness. Electricity leakage, theft and wastage is major problem of
NEA wereas high demand and low supply is problem of NTC.
• Huge amount of cash and bank balance of NTC indicates some deficiency
of organization to utilize its liquid assets. Expenses are not identified as
fixed and variable in NEA and NTC. Leverage ratio indicates NEA is
taking high risk while NTC is not. NTC is efficient in utilization of
working capital, fixed assets and capital employed in generation of sales
in comparison of NEA. NTC has higher profitability ratio than NEA.]
Eliza Amatya (2005) had done a research entitled “An Evaluation of Financial
Performance of Nepal Electricity Authority”, says that there is no effective
utilization of assets in NEA. NEA has been facing the problem of outstanding
debt collection. Though is in control over some years, it has been highly
receivable of NEA is recorded high. The capacity of assets in the generation is not
satisfactory and the revenue earned is very low in comparison to the investments
made in assets.
Poudel (2006), has done a research entitled on “A Comparative Ratio Analysis of
Nepal Electricity Authority (NEA), Nepal Water Supply Corporation (NWSC)
and Nepal Telecommunication (NTC)”, Some major findings concluded by Mr.
Poudel are as follows:
1. NEA is using large amount of external source in its capital structure due to
which interest expenses is high. Capital structure of seems somehow better
than the capital structure of NEA but it does not have ideal debt equity

41
 relation. The capital structure of NTC seems satisfactory and it is seen that
NTC emphasized internal funding.
2. NEA and KUKL are not able to meet their internal expenses through
operating profit. Due to high interest expenses net profit of this
organization also affected adversely.
3. NEA and NTC have satisfactory inventory turnover but KUKL has poor
proper stock management is lacking in KUKL.
Those about researches have pointed out the two common problems in another
lack of efficiency in utilization of fixed assets.
The researcher recommended that both bank need to be improved their capital
structure like as shareholders equity long-term debt and short-term debt. Bank
should try to provide the better service their customers for earning to reasonable
profit.

2.4 Research Gap

Although various studies have been conducted and many articles are published in
the trend of financing in power development, shortage of capital, dependency on
foreign aid, financial performance of NEA, some of above stated are focused on
debt collection, low returns and income and expenses trends. NEA have no in
depth analysis of the company’s strength and weakness. Some study has done
only in the power generation. However, this study has been carried out to cover all
aspects. In the context of this study, mainly focused financial position like capital
structure of NEA, profitability trends, turnover trends and liquidity position of
NEA.

42
 CHAPTER-3
RESEARCH-METHODOLOGY

3.1 Introduction
A simple words, research means to search or study about a phenomenon. The
research in composed by ‘re’ and ‘search’ where‘re’ means repeatedly or again
and again, and ‘search’ means to investigate or find. Thus, search again and again
and again is research. Research methodology is the way to solve systematically
about the research problem. It is the application of scientific methods to the study
of the universe.

In this chapter focuses have been made on research design, sample and
population, nature and sources of data collection and tools used for analysis. In
this research, one of the strong measures likes arithmetic mean, trend analysis,
correlation and regression and probable error.

3.2 Research Design

Research design is the plan structure and strategy of investigation conceived so as
to obtain answer to research questions. In order to make any type of research, a
well set research design is necessary, which fulfills the objective of the study.
This research work is analytical and descriptive as per the need of classification
and arrangement of research work.

Analysis is made on the basis of post, so the research is also historical in nature.
The accumulated data is presented, tabulated and described systematically under
specific heading so as to meet the objective of the study. Thus, research design is
a plan to obtain the answer of research question through analysis of data.

43
3.3 Population and Sample:
Among the all service providing organization, Nepal Electricity Authority is
selected for the study which is the most crucial infrastructure developing
organization. The objective is mainly focused with the financial performance
analysis of NEA. The study comprises financial statement i.e. only balance sheet
and profit and loss account of NEA.

3.4 Nature and Sources of Data

The main source of data for the purpose of this study is the published financial
statements the NEA. The study is thus mainly based on the secondary data. It
constitutes mostly the annual reports, which comprises balance sheet and profit
and loss account statement. Information has also been supplemented from various
publications of NEA. Through the study basically covers the secondary data. All
other available published and unpublished materials concerning the study as well
as some journal abstracts will also be used in the study/ the data has been
processed through editing, coding and classification of the collected data.
Presented data have been analyzed using various analytical as well as descriptive
financial and statistical tools. The reliability of the study and its findings depends
upon the available secondary data.

3.5 Method of Analysis:

In order to make an analysis of available data, following methods have been
employed.
a. Various books, journals, publications and other related literatures were as
the first step to begin the study.
b. In order to process the data, first of all financial statement and other
economic data were reviewed. They were grouped into various tables and
charts, according to their nature. After that condensed balance sheet and
income statement are prepared.

44
 c. On the basis of obtained financial statement, balance sheet and profit and
loss accounts, different tables are prepared and presented as required.
d. From the collected data, ratios are analyzed.
e. With the help of analysis, conclusions were drawn and recommendations
were suggested.

3.6 Tools for Analysis:

For the sake of analysis, various financial and statistical tools are used. The major
tool employed for the analysis of this study is the ratio analysis that establishes the
quantitative or numerical relationship of two variables of the financial statements.
Ratio analysis is the basic tool used for the study and is considered to be the
powerful tool of financial analysis. Beside ratio analysis, various other financial
tools and statistical tools have been used for the study. The financial as well as
statistical tools have been studied in brief in the following stages:

3.6.1 Financial tools

Financial statements are prepared not as end in themselves, but to assist users to
make decisions. The financial statements, therefore, need to be interpreted the
commonly and widely used means of conducting financial analysis is ratio
analysis. Ratio simply expresses a quantitative relationship between tow figures.
It, in general is a statistical yardstick through which the relationship between two
figures can be compared and measured. Ratio analysis is the process of
determining, interpreting and presenting the relationship of items and groups of
items from the financial statements. Financial ratios help describe the financial
conditions of a business firm, efficiency of its comparable profitability, and the
perception of investors as expressed by their behavior in financial market. They
often permit analysts and decision makers in partying post reveal strengths and
weaknesses of the firm. The ratios are expressed as percentages, fractions, or
proportions. The way a particular ratio is used depends on the need of a particular

45
user. Through there are many categories of financial ratios, each serving the
particular purpose is commonly categorized in four classes, liquidity, activity,
leverage and profitability.
Ratio analysis may be done for a variety of purposes, which ranges from a simple
analysis of the short-term liquidity position of the firm to a comprehensive
assessment of the strengths and weakness of the firm in various areas. In other
words, ratio analysis helps the analyzer to make quantitative judgment on the
firms’ financial position as well as performance.
It presents the actual situation of the organization and provides guidelines
especially in spotting trend towards better or poor performance.
Ratio analysis has many managerial uses also. Ratio analysis helps in assessing
the operating efficiency of the business and measuring the financial solvency. Not
only these it helps in making quantitative judgment while decision making, taking
connective action and forecasting future.

3.6.2 Types of Ratio Used;

a) Liquidity Ratio
b) Turnover Ratio
c) Profitability Ratio
d) Leverage Ratio

A) Liquidity Ratios: -
Liquidity ratios are used to analyze a firm’s efficiency to met short-term
obligations. Short-term liquidity includes the relationship between current assets
and current liabilities. Two ratios are mainly used to measure the liquidity
position.
i. Current Ratio
ii. Quick/Acid –test Ratio

46
1. Current Ratio:
Current ratio is the proportion of current assets to the current liabilities. Current
ratio is also known as working capital ratio.

Current Assets
Current Ratio=
Current liabilities

Current asset includes cash and those assets that can be converted into cash within
a year such as account receivables, marketable securities, inventories and prepaid
expenses. Creditor’s bills for payment, accrued expenses, bank overdraft, income
tax, liability, interest and long term debt within a year are included in the current
liability.
Higher the current ratio, greater is the probability of timely and full payment for
current liability, low ratio value indicates the firm will not be able to pay its future
bills. For an instance, 2:1 ratio is considered acceptable for many firms.

2. Quick/Acid Test Ratio;

Quick ratio is the proportion of quick assets to current liabilities which is more
accurate measure of liquidity rather than the current ratio. The quick ratio is
calculated by dividing the total quick assets by current liabilities.
Quick Assets
Quick Ratio=
Current Liabilities

Quick Assets= Current- Inventories

Inventories and prepaid expenses are considered to be less liquid as the emphasis
is on ready availability of cash. Quick ratio is considered to be better than current
ratio for the test of financial soundness of a firm. As a guideline 1:1 quick ratio is
believed optimum for many firms. Higher ratio indicates that the firm has

47
excessive quick assets and indicates inefficient management. A ratio with a low
value indicates that payments of bills on time would be difficult in future.

B) Turnover Ratio:
Turnover ratios involve comparison between the level of sales and investment of
various assets. Funds of creditors and owners are invested in various assets to
generate sales and profit. The better management of assets, the large amount of
sales. The activity ratios are employed to evaluate the efficiency with which firm
manages and utilizes its assets. A proper balance between sales and assets
generally reflects that assets are managed well several activity ratios can be
calculated to judge the effectiveness of asset utilization. Following four turnover
ratios are generally used in practice.
1. Fixed Assets Turnover Ratio
2. Total Assets Turnover Ratio
3. Inventory Turnover Ratio
4. Average collection period

1. Fixed Assets Turnover Ratio;

Fixed assets turnover ratio measures the efficiency with which the firm utilizes its
investment in its various net fixed assets. It is calculated as:

Total Sales in a Year

Fixed Assets Turnover Ratio=
Net Fixed Assets in a Year

Net fixed asset is defined by difference between gross fixed assets and cost of
depreciation. Generally high fixed asset turnover ratio indicates efficient
utilization of fixed asset while inefficiency in utilization is shown by low fixed
asset turnover ratio.

48
2. Total Assets Turnover Ratio:
Total assets turnover ratio indicates the sales generated per rupee of investment in
the total assets.

Total Sales in a Year

Total Assets Turnover Ratio=
Total Asset in a Year

Total assets constitute the fixed assets as well as current assets and investment of
the firm. Generally higher turnover ratio shows efficiency in utilization of firm’s
scarce resources and vice-versa.

3. Inventory Turnover Ratio:

Inventory turnover ratio is defined as a ratio between sales and inventory.
Total sales in a Year
Inventory Turnover Ratio=
Inventory in a Year

Inventory turnover ratio shows how rapidly the inventory is turning into
receivable through sales. Generally, high inventory turnover is the indication of
good inventory management and lower inventory. Turnover suggests an
inefficient inventory management. A relatively higher inventory turnover ratio
will overall a lower one that results frequent stock out and raises the cost of the
firm.

4. Average Collection Period:

The average collection period provides the average turnover days of receivable
and outstanding, the average times it takes to convert them into cash. The average
collection period is computed in two steps.

49
 a. Annual sales divided by number of days in a year (360 days) to get the
average daily sales.
b. Account receivable is divided by daily sales to find out the number of days
tied up in receivable.

Total Sales in a Year

Sales per Day=
No. of Days in a Year

Receivable
Average Collection Period=
Net Sales/365

Short average collection period shows the timely payment of debt but it may
suggest an excessive and restrictive credit policy of firm. Too long average
collection period indicates inefficiency of the firm in collection of receivables.

C) Profitability Ratio
Profitability ratio measures success of a firm to achieve return of the total sales or
of the investment. It gives information regarding how effectively the firm is being
managed. Profitability ratio can be classified in to following major groups.
1. Net Profit Margin
2. Operating Expenses Ratio
3. Return on Total Asset.

1. Net Profit Margin:

The net profit margin establishes the relationship between net profits as sales.

Net Profit in a Year

Net Profit Margin=
Total sales in a Year

50
Net profit, here is defined as firm’s profit after taxes excluding other charges such
as dividend and other provisions. The ratio measures the firm’s ability to change
each rupee sales into net profit. In other words, if the net profit margin is
inadequate the firm will fail to satisfactory returns on owner’s equity.

2. Operating Expense Ratio:

Operating expense ratio is the yardstick of operating efficiency, which computed
by dividing operating expenses by sales.

Operating Expenses in a Year

Operating Expenses Ratio=
Sales in a Year

Operating expenses constitute administrative and selling expenses excluding

interest. In general higher operating ratio indicates the inefficiency due to higher
operating cost in terms of sales; lower operating ratio is favorable since it will
generate higher operating income, which will be sufficient to meet interest,
dividend and other expenses of the firm.

3. Return on Total Asset:

Return on total assets ratio is the proportion of net income after taxes plus interest
expenses to total assets.
Net Income after Tax+ Interest
Return on Total Assets=
Total Assets

It is the rate of return earned by the firm for all its investments including the
lenders. Higher return on total assets ratio shows higher earning of the firm in
terms of its total assets. Lower ratio indicates unsound financial position due to
level of return.

51
D) Leverage Ratio:
Financial leverage ratios are calculated to judge the long-term financial position
of the firm. This ratio indicates the mix of fund provided by owners and lenders.
The short-term creditors like bankers and suppliers of new material are more
concerned with the firms’ current debt paying ability on the other hand, long-term
creditors like debenture holders; bondholders etc. are concerned with the firm’s
long-term financial strength. In fact, a firm should have a strong short as well as
long-term financial position. As a general rule, there should be an appropriate mix
of debt and owner’s equity in financial mix of the firm’s assets.
The manner in which assets are financed has a number of implications. Debt is
considered to be more risky in compare to equity. The firm has a legal obligation
to pay interest to debt holders, irrespective of the profits made of losses incurred
by the firm. If the firm fails to pay the debt holders in time, they can take legal
action against to get payments and in extreme cases can force the firm into
liquidation. On the other hand employment of debts is advantages for shareholders
in two ways, they can retain control of the firm with a limited stake, and secondly
their earning will be magnified when the firm earns a rate of return on the total
capital employed. The process of magnifying the shareholders return through the
employment of debt is called financial leverage:
The leverage ratio consists of:
1. Total Debt to Total Assets Ratio
2. Debt-Equity Ratio

1. Total Debt to Total Assets Ratio:

The ratio between total debt and net assets is called, total debt ratio. Total debt
will include short and long term borrowings from financial institutions,
debentures, bonus, deferred payment arrangements for buying capital equipments
and bank borrowings, public deposits and any others interest bearing loan.

52
 Total Debt
Debt Ratio=
Total Assets

2. Debt-Equity Ratio:
The ratio between total debt and net worth is called debt-equity ratio.

Total Debt
Debt-Equity Ratio=
Net Worth

3.6.3 Statistical Tools:

Statistical methods are the mathematical techniques used to facilitate the analysis
and interpretation of numerical data scared from groups of individuals of groups
of observations from a single individual. The statistical analysis is one particular
language, which describes the data and figures and complicated problems can be
studied in very simple way. It becomes possible to convert abstract problems into
figures and complex data in the form of tables. There are various methods of
statistical analysis of them, we use only trend analysis.
a. Average:
An average is the figure representing even distribution among the included
elements or terms. It is calculated by dividing the sum of the elements
with number of elements.

∑X
Average Value=
N

Where X is total summation of given sales, costs etc.

N is total number of years.

53
 b. Trend Analysis:
Trend analysis is basically the analysis of time series in which the statistical data
are arranged in accordance with their time of occurrence. It shows the relation
between two variables and one of them is time. It mainly helps in understanding
the past behavior of the variables in the data which helps in identification of the
causes and circumstances which lead to a particular behavior of the data. It also
helps in future forecasting and planning with the help of the past and present data
and the factors affecting them. There are various methods of trend analysis among
which the method of least square is widely used one. So, we have also chosen the
same method in our analysis.
Methods of Least Square
This method is most widely used in practice for the purpose of finding the general
movement of a variable or variables. It is the mathematical methods using for
various purpose. With the help of this period, a trend line can be fitted to the data
in a manner that the following two conditions are satisfied.
∑(Y-Yn) = 0……………………..(i)
Where, Y= the actual value of dependent variable.
Yn= the computed value for different (n) periods.
N=1,2,3……………….n
∑(Y-Yn)2 is least i.e. the sum of the squares of the deviations of the actual and
computed value is least from this line and hence, the method named least square.
The line obtained by this method is the “the line of best fit”. The method of least
square may be used either to fit straight trend line or parabolic trend line. The
straight trend line is represented by the equation.
Y= a+bx
Where, Y is used to designate the trend values to distinguish them form the actual
‘a’ is the intercept ‘b’ is slope of the trend line, and ‘x’ is independent variable. In
order to determine the values of constants ‘a’ and ‘b’ the following two normal
equations are to be solved.

54
∑Y=Na + b ∑x……………………(i)
∑xy= a∑x + b∑x2............................(ii)
Where, N= Total numbers of years.
It can be measured. The variable ‘x’ from any point of time in the origin such as
the year, but the computation is very simple when using least square method.
Under this method, the midpoint (in terms of time) is taken as the origin because
the preceding and following values are negatives and positives accordingly, so
that the summation of independent variable (∑x) is equal to zero. In other words,
the time variables as an independent variable is measured as a deviations from its
mean which ultimately result to zero as a sum of deviations of ‘x’ from ‘x’ since
∑(X-X)=0, the above two normal equations would take the form as follows,
∑Y= Na………………(iii)
∑XY =b∑X2…………….(iv)
The value of ‘a’ and ‘b’ can now be determine easily like this, since,
∑Y = Na
A= ∑Y/N…………….(v)
Since,
∑XY = b∑X2
b =∑Y/∑2

The constant ‘a’ simply equal to the mean of y vales and the constant ‘b’ is rate of
change i

Graph: graph helps to show the general trend of the ratios in respect to the time
period. A very common and simple way of presenting data for two variables.
Which have a relationship, is in a figure or char or a graph? Graph works best
when the data is continuous.

55
3.7 Method of Presentation and Analysis:
Simple methods of analysis have been used. Data presentation and analysis are
divided into small sub-topics. Every result has been tabulated and clear
interpretations have been given simultaneously. Details of calculation are
presented at the end of the report. Tables, diagrams and graphs have been used to
make report clear and easily understandable. Summary, conclusion and
recommendations have been presented at the last chapter of the report.

56
 CHAPTER-4
ANALYSIS AND INTERPRETATION OF DATA

4.1 Introduction
This chapter highlights the financial position of NEA the tools used of the purpose
of the analysis have been discussed in detail in the research methodology. Some
financial and statistical tools have been use to evaluate the financial position of
NEA. The financial tools include ratio analysis between various variables where
as the statistical tools include graphical presentation as well as regression analysis
between some to the variables. The major variables like assets, liabilities, sales,
debt, and equity are taken for the analysis. Moreover, the variables affecting to the
financial performance are also considered in the study.
The analysis is made through the data presentations and various financial ratios
reflecting the relationship among variables affecting financial performance with
the help of ratio analysis, the financial performance of NEA has been analyzed
and interpreted so that the strengths and weakness of the NEA as well as its
historical performance and current financial condition can be determined.
The operational target for the current fiscal year and the impact it will leave in the
financial position in coming future can be ascertained. The single ratio cannot
indicate the favorable or unfavorable condition of NEA. It should be compared
with some standard for evaluation. Therefore the average ratio from the actual
ratios of 9 years period have been calculated and used as a standard the ratios used
have been described as below.

4.2 Liquidity position

Liquidity ratios are used to judge an organizations ability to meet its short-term
obligations. These ratios are comparison of short-term obligation with the

57
resources available and are measured by current ratio and quick ratio. The
liquidity ratio reflects the short-term financial strength of a firm.

4.2.1 Current Ratio (CR):

Current ratio measures the liquidity position of the organization. The standard
current ratio should be 2:1 and it is also defined by the nature of the organization.
As already discussed in chapter three, the current ratio is a measure of liquidity
calculated by dividing the firm’s current assets by current liabilities. The position
of current ratio and the values of current assets and current liabilities according to
NEA balance sheet are tabulates as below.

Table No.1

Calculation of Current Ratio (Rs. In Millions)

Year Current Assets Current Liabilities Current Ratio
2001 6313.60 6113.70 1.03:1
2002 7322.00 10096.99 0.73:1
2003 7690.48 12347.00 0.63:1
2004 7883.41 14538.09 0.54:1
2005 8491.60 17466.39 0.49:1
2006 8995.30 19854.19 0.45:1
2007 10322.91 22812.13 0.45;1
2008 11178.08 26213.39 0.43:1
2009 9736.55 28480.84 0.34:1
Average 8659.33 17546.96 0.56:1
Sources: NEA Balance sheet 2008/2009

Analyzing over the trend of current ratio of NEA over 9 years, it can be observed
that NEA’s current ratio is always less than the standard norm of 2:1. Current

58
ratio is decreasing phase. According to above table the current asset of NEA has
increased from Rs. 6313.60 million to 11178.08 million in year 2001 to 2008 but
has decreased in year 2009. Whereas current liabilities varied from Rs. 613.70 to
Rs. 28480.84 increasing highly.

According to table no. 1 the average current ratio is 0.56 times. The current ratio
in the year 2001 was recorded 1.03 times. Similarly the current ratios were
recorded as 0.73, 0.63, 0.54, 0.49, 0.45, 0.5, 0.43 and 0.34 in the year 2002, 2003,
2004, 2005, 2006, 2007, 2008 and 2009 respectively. All over 9 years shows that
the current ratio is below the average standard of 2:1 this shows that the liquidity
position of NEA is very poor. It means that NEA was not in the position to meet
its current obligations in the appropriate time that the current liabilities could not
be covered by current assets, from the year 2001 to the year 2009 the current ratio
has been in gradually declining position. It does not show the satisfactory
position.
From the above table it can be seen that the volume of current assets from the year
2001 has been increasing gradually to the year 2008. Similarly the amount of
current liabilities is increasing gradually form the year2001 to the year 2009.
Increasing rate of current liabilities is higher than the current assets. The analysis
showed that NEA has tried to follow a consistent trend in its working capital
management policy. There has been change in the current assets depending upon
the changes in its production and sales.

59
Fig. 1 Graphical presentation of Current Assets and current Liabilities:

The graphical line of current assets and current liablities above shows that the
current asset is increasing slightly from the starting year but decreasing after
2008. The current liabilities increasing very highly up ward slopping with regards
to its overall liquidity position it can be considered that there is no satisfactory
tradeoff between current assets and current liabilities i.e. current assets were not
enough to pay off if current liabilities.

4.2.2 Quick Ratio:

The quick ratio is more accurate guide to measure the liquidity position of the
firm. The ratio establishes the relationship between quick or liquid assets and
current liabilities. Liquidity of an asset can be measured by it’s virtue of
immediate conversion into cash without the loss of value. Cash is the most liquid
asset. Book debt and marketable securities are relatively, liquid whereas prepaid
expenses are considered relatively less liquid. So, the calculation of quick ratio
include only three types of assets those are relatively more liquid. It can be found
out by dividing the total of quick assets by the total of current liabilities the quick
ratio of NEA is presented in the table.

60
Table No. 2
Calculation of Quick Ratio(Rs. In Millions)
Year Current Prepaid Inventory Quick Current Quick
Assets Exp. Assets Liabilities Ratio
2001 6313.60 2634.90 960.90 2717.80 6113.70 0.44:1
2002 7322.00 3314.40 1058.10 2949.50 10096.99 0.29:1
2003 7690.48 2216.91 1017.22 4456.35 12347.0 0.36:1
2004 7883.41 2063.27 1048.01 4772.13 14538.09 0.33:1
2005 8491.60 2098.60 1372.70 5020.30 17466.39 0.29:1
2006 8995.30 2293.90 1354.80 5346.60 19854.19 0.27:1
2007 10322.97 2225.53 1498.45 6598.99 22812.13 0.29:1
2008 11178.08 2319.72 1800.13 7058.22 26213.39 0.27:1
2009 9736.55 2417.15 1856.41 5462.99 28480.84 0.19:1
Average 8659.33 2398.36 1329.63 4931.43 17546.96 0.30:1
Source NEA Balance Sheet of FY 2008/09
Quick ratio measures the liquidity position of the organization and the standard
quick ratio should be 1:1, which is also defined by the nature of organization. The
quick ratio shows the ability for payment of immediate current debt from current
assets. Table-2 shows the quick ratio is very poor and unsatisfactory. Quick ratio
is fluctuating from 2001 to 2009. The quick ratio less the 1:1 every year and also
declining position. The average quick ratio is only 0.30 it is not satisfactory. Thus,
NEA is in poor condition in meeting its current obligations.
Quick assets increased from Rs 2717.80 million to Rs 7058.22 million from the
year 2001 to 2008 but in 2008 decreased to 5462.99 the increasing tendency in
current liabilities is more than increasing tendency in quick assets. Throughout all
these year NEA is considered unable to meet its short-term obligations and cannot
pay immediate current debt, which may lead to unfavorable circumstances to the
business.

61
It can be observed from the table that the quick assets have not grown at par with
current assets primarily because; NEA has accrued a lot of less liquid assets like
inventory and prepaid expenses.
There was not much difference between the trend of quick and current ratios. If
inventories were unnecessarily tied up in the working capital of NEA, the case
would be different. The analysis showed the comparison of these two current and
quick ratios. The position of quick ratio was better than current ratios.

Fig,2-Graphical Presentation of Quick Assets and Current Liabilities.

The above graph shows that the quick assets is in fluctuating position as it is
slowly increasing in year 2008 and then declines in 2009 similarly, the current
liability is increasing highly every year.

4.3 Turn-over Ratios

How effectively the assets are utilized can be judged by using different types of
turnover ratio. In the case of NEA, evaluation of fixed assets turnover ratio, Total
assets turnover, debtor’s turnover
And average collection period was made to judge the utilization assets.

4.3.1 Fixed Assets Turnover Ratio (FATOR):

Fixed assets turnover ratio measures the efficiency with which the firm is
utiliz0ing its investment in its various ne fixed asset the ratio expresses that a

62
rupee of investment in a net fixed asset generates the resulted sale. Generally,
high fixed assets turnover ratio indicates efficient utilization of fixed asset while
inefficiency in utilization is shown by low fixed turnover ratio. The FATOR of
NEA has been calculated by taking revenue from sales and total fixed assets as in
the following table to know how effectively the fixed assets are being utilized in
NEA.
Table No.3
Calculation of Fixed Assets Turnover Ratio (Rs. In millions)
Year Sales Fixed Assets FATOR
2001 8160.80 28238.26 0.29
2002 9476.20 51080.91 0.18
2003 11012.60 50094.75 0.22
2004 11874.70 51415.14 0.23
2005 12605.20 52166.56 0.24
2006 13331.90 51743.38 0.26
2007 14449.73 51781.76 0.28
2008 5041.49 52030.28 0.29
2009 15220.87 78678.89 0.19
Average 12352.61 51914.44 0.24
Sources: NEA Balance Sheet 2008/09
The fixed assets turnover ratio is calculated by dividing sales by total fixed assets.
Above table no. 3 along with increase in the net sale of electricity, the fixed assets
of NEA have also increase every year except year 2003. It has varied from Rs.
28238.26to Rs. 78678.89 million from the year 2001 to the year 2009. NEA has
been expanding its services throughout the country for which it requires additional
fixed assets like land and building, plant and machinery, solar power plant
transmission line, substations etc. thus the fixed assets of NEA have been
increased every year with addition plant and power generation capacity.

63
The fixed assets turnover ratio shows the poor utilization of fixed assets within the
organization. The average FATOR is 0.24 that mean that a rupee investment in
the fixed assets of NEA is generating sales worth of Rs. 0.24 only. This indicates
the poor utilization of fixed assets may be the asset remaining idle without any
use. Sales didn’t seem to have expanded along with investments in fixed assets
has increased by 2078 times in the year 2009, compared to 2001 and the increase
sales was only 1086 times by 2009. One of the main causes for the low volume of
electricity sales was also due to the leakage and theft for which NEA must make a
god control system.

Fig.3 Graphical Presentation of Sales and Fixed Assets.

The fig. no. 3 the bar chart of sales and fixed assets above shows that the scale of
NEA is increasing gradually in compare to fixed assets. The fixed asset of NEA
declines in year 2003 and 2006 after which it inclines gradually till year 2009.
In conclusion, through the sale gradually increasing in respect of fixed asset, fixed
assets turnover ratio of 0.24 is not a satisfactory turnover. The fixed asset
comprises almost 90 percent of total assets of NEA and these assets are supposed
to provide revenue to the firm. The poor assets turnover was the cause of
inefficient utilization of these assets and there has been high investment in the
unproductive fixed assets like land and building the low sale of electricity is the
result of electricity leakage, low sales to the industrial sector etc. through the

64
study shows the gradual improvement in the FATOR to meet its objective and
goals, NEA should look for the effective utilization of available resources.

4.3.2 Total Assets Turnover Ratio (TATOR):

Total assets are the sums of fixed assets and current assets of the firm. Fixed
assets have direct effect on the generation of the sales revenue. Total assets
turnover ratio indicates the sales generated per rupee of investment in the total
assets. Total assets constitute the fixed assets as well as current assets and
investment of the firm. Generally, higher turnover ratio shows efficiency in
utilization of firm’s scare resources and vice-versa. The total assets turnover ratio
of NEA has been computed by talking the data of net sales from the sale of
electricity services.
Table No-4
Calculation of Total Assets Turnover Ratio (Rs. In Millions)
Year Sales Total Assets TATOR
2001 8160.80 58708.96 0.14
2002 9476.20 63793.71 0.15
2003 11012.60 67053.72 .016
2004 11874.70 70631.10 0.17
2005 12605.20 77495.56 0.16
2006 13331.90 83550.08 0.16
2007 14449.73 92131.97 0.16
2008 15041.49 100528.26 0.15
2009 15220.87 108790.01 0.14
Average 12352.61 80298.15 0.15
Sources: NEA Balance Sheet 2008/09
The investment on assets has increased in each year as compared to the revenue
generating ability. According to the table no. 4 the gross operating revenue of

65
NEA has increased each year. Investment on assets has varied from Rs. 58708.96
to Rs. 108790.01 million from the year 2001 to the year 2009.
The total assets turnover ratio showed the ability of generating revenue from all
the financial resources committed to the NEA. The total assets turnover ratio
indicates the sales generated per rupee of investment in total assets. In 2001, NEA
has earned Rs. 0.14 per rupee of its investment in total assets. The TATOR is
fluctuating position. Looking some in same years, the result reflects, the very poor
status of the ratio. The average fixed assets turnover ratio during these periods is
calculated to be 0.15 as compare to rupee 1 investment in the total assets. The
position of TATOR indicates that some major portion on NEA’s assets is
remaining idle or they were not properly utilized.

Fig.4 Graphical Presentation of Sales and Total Assets:

Total assets of the NEA are increasing gradually in every year and the sales of
NEA are increasing slightly per year. The average return on total assets of NEA
indicates that there has been up planned investment in the assets of NEA without
making proper analysis of cost and benefits attention did not seem to be paid in
the revenue generation aspects of assets and their effective utilization as well as
the costs of investments. The main cause of decrease in total assets turnover ratio
was in the low volume of sales in comparison to the investments made. NEA has

66
remaining idle assets or they were not properly utilized. The result of total assets
turnover ratio does not see to be satisfactory.

4.3.3 Inventory Turnover Ratio (ITR):

The inventory or stock turnover indicates the efficiency of the firms’ inventory
management. Inventory turnover ratio of NEA for the study period is presented in
the table below:
Table NO.5
Calculation of Inventory Turnover Ratio (Rs. In millions)
Year Sales Inventory ITR( in times)
2001 8160.80 960.90 8.49
2002 9476.20 1058.10 8.95
2003 11012.60 1017.22 10.83
2004 11874.70 1048.01 11.33
2005 12605.20 1372.70 9.18
2006 13331.90 1354.70 9.84
2007 14449.73 1498.45 9.64
2008 15041.49 1800.13 8.35
2009 15220.87 1856.41 8.19
Average 12352.61 1329.63 9.42
Sources: NEA Balance Sheet 2008/09
The study shows that the inventory ratio of the Nepal Electricity Authority is 9.42
times on average. It varied from 8.49 times in 2001 and 11.33 times in 2004 then
decreased to 8.19 times in 2009. It followed fluctuating trend for the study period
during 2001 to 2009. It showed that NEA’s inventory management might be
efficient. However, it needs to be recorded that NEA is not an organization that
needs large amount of inventory. The only inventory required is parts and
components.

67
4.3.4 Average Collection Period and Debtor’s Turnover Ratio:
One of the major challenges with NEA at present in the problem of receivable
management. It was due to mismatch of collection and its turnover. Observing the
nine years data the important variables like receivable, net revenue from sales
have been considered to show their relationship with each other on a period wise
analysis.
The relationship between receivable and net revenue from sales. The receivable
turnover ratio and average collection period were computes. The average
collection period tally the average turnover of the days receivable and
outstanding, the average times it takes to convert them into cash. Short average
collection period shows the timely payment of debt and long average collection
period indicates inefficiency of the firm in collection of receivables.
Table No.6
Calculation of Average Collection Period and Debtor’s Turnover Ratio (Rs.
In millions)
Year Sundry Debtors Sales Collection period Debtor’s
and Receives in days Turnover Ratio
(Times)
2001 1678.05 8160.80 75.07 4.86
2002 2284.90 9476.20 88.00 4.14
2003 3350.20 11012.6 112.03 3.25
2004 3735.71 11874.7 114.83 3.18
2005 3697.10 12605.2 107.07 3.41
2006 4088.00 13331.9 111.92 3.26
2007 5154.41 1449.73 130.12 2.80
2008 5721.08 15041.49 138.83 2.63
2009 4765.88 15220.87 114.28 3.19
Average 3883.71 1235.61 110.24 3.41
Sources: NEA Balance sheet 2008/2009

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 Receivable
Average collection Period=
Net Sales/365
Sales
Debtor’s turnover Ratio=
Receivable

Average collection period provides the information about the liquidity of the
shorter the collection period, better is the debtor’s turnover ratio. Higher duration
of collection period means tying the wealth of the business in the form of debtors.

We can see from the table No. 6 that the receivable is in increasing trend. The
revenue from the sale of electricity is also in increasing trend. The average
collection period for the period 2001 was 75 days and reached to 88 days in 2002.
The average collection fluctuating, trend, looking poor collection condition. The
collection period reached extremely higher in the year 2008 and reached to 138
days.
Collection period is almost consistent. However, the average collection period is
110.24 days in 9 years. There is no nay standard average collection interim
government and ineffectiveness in revenue collection. NEA has realized the
important of the expediting the collection period and has made same significant
steps to improve the condition. It has used the discounting system for the timely
submission of the bills. For those who pay bills in time, it offers 4% discount.
Apart from that, it has also been using the technique of mobile team for the
collection efforts.
There is adversely relationship between average collection period and debtors
ratio. The table and graphs also shows same condition which is mentioned above.
On the basis of this it may be concluded that lower the collection period means
the NEA gets recovered its cost quickly and so the turnover will be high. It shows

69
that such low turnover of receivable or longer receivable collection period has
greatly blocked the amount required for the working capital. The amount of
revenue from sales has increased higher than the increase in amount of receivable.

Fig.5 Graphical Presentation of Average Collection Period

The above graph shows average collection period of NEA. According to the trend
line, the average collection period of NEA is fluctuating. It shows that the
collection of bill is not satisfactory as it is increasing except in some of the years
that show the satisfactory collection period. NEA being a government corporation
although with an autonomous status did not seem to be serious in collecting the
outstanding receivable looking at the various reports.
NEA should take it seriously in the matter of collection of revenue. The NEA
should improve the behavior and culture of the staff and it should be client
oriented on the other hand initiatives and corrective actions should be taken in
revenue collection from different sectors especially dues with government
agencies and institutions, which seemed to be the greatest defaulter. Finally it can

70
be said that there is no any clear policy for debt management in Nepal Electricity
Authority.

4.4 Profitability Ratios (PR):

A company must earn sufficient amount to survive and sustain in the future
without profit n firm can exist and the future of the company will be dark.
Therefore are the measures of a firms earning capacity and operation efficiency.
Profitability ratios of the firm can be calculated in relation to sales and in relation
to investment. Higher the profitability, better the financial position of the
company and vice-versa.

4.4.1 Net Profit to Sales:

From this ratio the relation between sales and net profit becomes clear. The
amount after subtracting the whole operating expenses, income tax, interest etc.
from the gross profit is knows as net profit. The ratio measures the firm’s ability
to change each rupee sales in to net-profit.

71
Table No-7
Status of Net Profit on Sales Position (Rs. In Millions)

Year Sales Net Profit Net Profit to

Sales (%)
2001 8160.80 -51 -0.62
2002 9476.20 -860.70 -9.08
2003 11012.60 -1953.70 -17.74
2004 11874.70 -1760.30 -14.82
2005 12605.20 -1312.81 -10.41
2006 13331.90 -1267.80 -9.51
2007 14449.73 240.78 1.67
2008 15041.49 -961.47 -6.39
2009 15220.87 -4681.24 -30.75
Average 1235.61 -1400.91 -10.85
Source: NEA Balance Sheet 2008/09
The ratio of net profit to sales shows the profitability of corporations indicating
that the only increase in sales doesn’t mean anything unless it commands. Profit
from this ratio it can also be acquired the information of the total expenses
incurred auditors certain period of times.
According to the table-7 NEA has been suffering from heavy losses particularly in
the year 2009 amounting nearly to 4700 million it is shows very critical condition.
How the NEA operating its activities. Similarly the NEA was losses by 51 million
in year 2001. The loss of NEA has been increasing every year but in year 2007 the
NEA has been success to earn 240.78 million after that the losses has been
increasing trend. The reason behind those after that the losses were heavy
operating expenses, increasing burden of interest on long term loan and prior
years expenses adjustment. Depreciation, doubtful debts and deferred expenditure
have also become instruments to cut of profit margin.

72
It’s really a matter to question that in this condition how can continue operate
NEA. NEA has incurred heavy losses in the recent post in spite of sharp rise in its
revenue. So, enhancement of revenue is not enough to earn the profit. The cost is
going high especially because of the delayed projects which are really an area of
paramount concern for NEA. If it can work in this area, the operating expenses,
debt serving costs both would come down to declare a healthy financial statement
by NEA.

Fig.6 Graphical Presentation of Profit and Sales

The above bar chart of profit and sales of NEA shows that the losses of NEA are
increasing. NEA has been facing losses from 2001 but in 2007 seems to be
satisfactory. The expenses in NEA still does not seems to be in due control
therefore the management of NEA should take initiative actions to reduce
unnecessary and wasteful expenses.

4.4.2 Net Operating Ratio (NOR)

This ratio shows the relation between operating expenses and sales value. The
information about the cost structure can be obtained from this ratio. This ratio
computed by dividing operating expenses by sales. The operating ratio is the
yardstick of the operating efficiency of any firm. In general higher operating ratio
is inefficient due to higher operation cost in terms of sales. Lower operation ratio

73
is favorable, as it will generate higher operating income, which will be sufficient
to meet interest divided and other expenses of the firm.

Table No.8
Calculation of Net Operating Ratio (Rs. In millions)

Year Operational Sales NOR(%)

Expenses
2001 1832.30 8160.80 22.45
2002 1621.80 9476.20 17.10
2003 1844.70 11012.60 16.75
2004 1865.20 11874.70 15.70
2005 2106.60 12605.20 16.71
2006 2123.20 13331.90 15.92
2007 2312.98 14449.73 16.01
2008 2793.99 15041.49 18.57
2009 3167.34 15220.87 20.81
Average 2185.46 12352.61 17.78
Source: NEA Balance Sheet 2008/09
The average operating ratio of NEA has remained 17.78% this means that 17.78%
of revenue was consumed by operating expenses and allowed 82.22% of revenue
to cover interest and other charges. The ingredients of operating expenses which
have been instrumental in the rise of the operating expenses are the depreciation
which rose the mendously because of the heavy purchase of assets without
commensurate intensification in revenue. In all these study period good margin of
revenue has been left. In conclusion, operating expenses of Nepal Electricity
Authority (NEA) during the study period could be termed satisfactory as it
showed sufficient operating income to meet interest dividend and other expenses
of the organization.

74
Fig.7 Graphical Presentation of Operating Expenses and sales:

The above graph shows that the sales of electricity is increasing rapidly btu the
operational expenses rise slightly in compare to its revenue.

4.4.3 Return on Total Assets (ROTA)

Return on total assets sets the relationship between total assets and net profit. It is
calculated to measure the profit after tax against the amount invested in total
assets to ascertain whether the assets are being utilized properly or not. The return
on total assets ratio measures the profitability of all financial resources employed
in the firm’s assets. The return on the total assets is the rate of return earned by the
firm and whole for its investments including the lenders. Higher return on total
assets shows higher earning of the firm in terms of its total assets. Lower ratio
indicates unsound financial position due to low level of return. The following
table shows the return on total assets of NEA over the study period of 9 years.

75
Table No. 9
Calculation of Return on Total Assets. (Rs. In Millions)
Year Net Profit Before Tax Total Assets ROTA(%)
2001 -1.9 58708.96 0.00
2002 -717.40 63793.71 -1.12
2003 -455.90 67053.72 -0.68
2004 -1486.10 70631.11 -2.10
2005 -1312.381 77495.56 -1.69
2006 -1267.80 83550.08 -1.52
2007 314.20 92131.97 0.34
2008 -1018.86 100528.26 -1.01
2009 -4681.24 108790.01 -4.30
Average -1180.87 80298.15 -1.34
Source: NEA Balance sheet 2008/2009

The above table shows that the return on total assets of NEA for the year 2001 is -
1.12% it shows the very weak condition of NEA. In every year it seems to be
negative but in 2007 the ratio is positive. The trend is fluctuating in the year 2009
it seems very unsatisfactory. The ratio is -4.30% it shows for such a big
enterprises though, it showed poor condition. These following ratios were the
result of heavy and uncontrollable general and operating expenses. The average
return on total assets on NEA is also negative by 1.34%, which is not good. The
reason behind the low return on total assets of NEA was mainly the excess
investment made on assets than actually required and the ineffective utilization of
the assets.
The overall ratio analysis indicates relatively poor performance of NEA.
Hydraulic plants and machines are purchased in heavy amounts but they have not
been made the most of capital “work in process” is blocking a huge amount of
profit. Due attention should be paid to effectively use these assets.

76
4.4 Leverage Ratios:

4.5.1 Debt-Equity Ratio

The ratio between total debt and net assets is called total debt ratio. The debt
equity ratio of NEA is table below:

Table No. 10
Calculation of Debt- Equity Ratio (Rs. In Millions)
Year Total Debt Total Equity D/E Ratio
2001 36707.50 15360.30 2.39
2002 37325.61 16601.30 2.25
2003 39637.11 16976.87 2.33
3004 41103.14 18215.85 2.25
2005 44537.51 20161.80 2.21
2006 46487.91 23113.10 2.01
2007 47616.15 26382.18 1.80
2008 51368.84 28609.97 1.79
2009 58217.77 32273.67 1.80
Average 44777.95 21965.00 2.09
Sources: NEA Balance sheet 2008/2009

Form the above table debt increased form Rs. 36707.50 million to Rs. 58217.77
million form year 2001 to 2009. Similarly the total equity increased from Rs.
15360.30 million to Rs. 32273.67 million from the year 2001 to 2009. The result
shows that the increasing tendency of debt is very high than equity. This indicates
that the financial position of NEA is not in good position. NEA should pay huge
amount of revenue for hiring long-term loan.

77
Fig No. 8 Graphical presentation Debt and Equity

The above graph shows that the realation between total debt and total equity of
NEA. From above it can be seem that the increasing tendency of total debt is very
high than total equity. This shows the poor condition unsatisfactory performance
to cover its long term debts as its equity is decreasing in proportion to the debt.

4.5.2 Total Debt Ratio:

It is also called the debt-total assets ratio the ratio between total debt and net
worth.

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Table No. 11
Calculation of Total Debt Ratio (Rs. In millions)
Year Total Debt Total Assets D/TA Ratio
2001 36707.50 58708.96 0.63
2002 37325.61 63793.71 0.59
2003 39637.11 67053.72 0.59
2004 41103.14 70631.11 0.58
2005 44537.51 77495.56 0.57
2006 46487.91 83550.08 0.56
2007 47616.15 92131.97 0.52
2008 51368.84 100528.26 0.51
2009 58217.77 108790.01 0.53
Average 44777.95 80298.15 0.56

From the above table it can be seem that the total debt ratio remained constant at
0.59 in the year 2002 and the year 2003. The total debt ratio is 0.63 in the year
2003. The total debt ratio is 0.63 in the year 2001. The above table shows that the
decreasing tendency to the year 2008. The amount of total debt increased from Rs.
36707.30 million to Rs. 58217.77 million from the year 2001 to the year 2009,
which is 1.58 times more than the starting year. Similarly, the total assets
increased from Rs. 58708.96 million to the year Rs. 108790.01 million from the
year 2001 to the year 2009, which is 1.85 times more than the starting year. The
above table shows that the both total debt and total assets is in increasing trend,
but the increasing trend of debt is higher than increasing trend of total assets.

79
Fig. No. 9 Graphical Presentation of Debt and Total Assets:

The above graph shows the both debt and total assets increasing trend. The
increasing trend of total assets is higher than the total debt. The result shows that
the condition of NEA is not good to meet its long-term debt.

4.6 Trend Analysis:

Here, we are using the technique to forecast the future trend of sales revenue and
operational expenses of NEA the trend forecast will be based on the past data of
study period.
To forecast the trend of sales revenue of NEA we have chosen two variables. One
of them is time and other is the sales revenue. So, we have taken the data of sales
revenue over our study period (201 to2009).

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Table No-12
Trend Analysis for Sales Revenue (Rs. In millions):
Year (X) Sales Revenue (Y) X=X-2005 X2 XY
2001 8160.80 -4 16 -32643.20
2002 9476.20 -3 9 -28428.60
2003 11012.60 -2 4 -22025.20
2004 11874.70 -1 1 -11874.70
2005 12605.20 0 0 0
2006 13331.90 1 1 13331.90
2007 14449.73 2 4 28899.46
2008 15041.49 3 9 45124.47
2009 15220.87 4 16 60883.48
N=9 ∑y=111173.49 ∑x=0 ∑x2=60 ∑xy=53267.61
Sources: NEA Balance Sheet 2008/09
Let the straight line trend y= a+bx…………………(i)
Since,
∑x=0, so, a=∑y/n=111173.49/9=12352.61
b= ∑xy/∑x2=53267.61/60=887.79
Substituting the value of a, b in (i), the equation of the trend line is
Y= a+ bx
Y=12352.61+ 887.78.x

Trend Values
For the year 2010x=5,Hence,Y=12352.61+887.79*5=Rs. 16791.56
For the year 2012x=7,Hence,Y+12352.61+887.79*7=Rs. 18567.14

From the above analysis the sales trend is increasing the sales will be Rs.
16791.56 million in 2010 and the sales will be Rs. 18567.14 million in 2012.

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Table No. -13
Trend Analysis for Operating Expenses (Rs. In millions)
Year(X) Operational X=X -2005 X2 XY
Expenses(Y)
2001 1832.30 -4 16 -7329.20
2002 1621.80 -3 9 -4865.40
2003 1844.70 -2 4 -3689.40
2004 1865.20 -1 1 -1865.20
2005 2106.60 0 0 0
2006 2123.20 1 1 2123.20
2007 2313.98 2 4 4627.96
2008 2793.99 3 9 8381.97
2009 3167.34 4 16 12669.36
N=9 ∑Y=19669.11 ∑X=0 ∑X2=60 ∑XY=10053.29
Sources: NEA Balance Sheet 2008/09
Let the straight line trend be, y= a+bx…………..(i)
Since,
∑X=0
So, a = ∑Y/n= 19669.11/9 =2185.46
b =∑XY/∑X2 = 10053.29/60 = 167.55
substituting the values of a and b in (i), the equation of the trend line is y =a + bx
Y= 2185.46 +167.55X

Trend value:
For the year 2010X =5 Hence Y=2185.46 + 167.55*5=Rs. 3023.21
For the year 2012 X=7 Hence Y=2185.46+ 167.55*7=Rs.3358.31

From the above analysis it can be seen that the operating expenses is increasing
tendency.

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For 2010 the operating expenses will be Rs. 3023.21 million and
For 2012 the operating expenses will be Rs. 3358.31 million.

4.7 Description of Major Findings:

• The average current ratio being 0.56, and the average quick ratio though
the trend suggests the their needs some more attention in this direction.
• Throughout the study period, the current assets have remained more or at
least equal to the current liability that further evidences that NEA and any
point of time has been good enough to oblige its current liabilities.
• However, there have been few years like 2001 in the study period where in
the liquidity position is considerable and NEA could have rather used its
funds elsewhere.
• The quick ratio, which is even more stringent measurement of the liquidity,
also suggests that NEA is by and large able to live its liquidity obligations.
• The average total assets turnover ratio is 0.15, which means that own rupee
of assets is contributing only 0.15 of sales revenue. As such, it implies that
there is huge amount of excess revenue and ideally, NEA can run
additional projects even without much addition of the capital. So, there is
under utilization of the existing assets.
• With respect to the base year 2001, the inventory turnover ratio of NEA
showed a fluctuating trend. It started form 8.49 in the base year 2001
attained the maximum of 11.33 in the year 2004 and lowered to the level of
8.19 in the year 2009. The average inventory turnover ratio of NEA in the
study period is 9.42 days, which is a good ratio. However, the trend has not
been consistent.
• The average collection period of NEA is 110.24 days, which confirms
average receivable management is the problematic area of NEA. The
average collection period has been in and around 74 to 139 days, however
in the year 2008 the ratio has all of sudden for organization like NEA. Due

83
 to relatively longer collection period, the debtor’s turnover ratio is low
which averages 3.41 for the study period.
• From the above analysis of net profit to sales position, it can be known that
NEA has achieved poor results and in most of the years losses were
recorded from operation. It has not been able to pay interest charges on
long-term debts form its operation and EBIT was also unsatisfactory
because the inefficient utilization of fixed assets resulted in low
profitability position threatening the existence of NEA in long-run.
• Net operating ratio in case of NEA is found to follow a fixed trend of the
operating expenses be in generally 90% of the operating revenue.
• Return on total assets records relationship between total assets of NEA for
the study period is -0.0134. The ratio has shown a fluctuating trend. It has
started form -0.00003 the beginning of the study period, attained the
maximum of -0.043 in the year 2009 except year 2007, it is seemed
negative all the year (2001 to 2009).

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 CHAPTER-5
SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary
The perception of the government and its role in public welfare has helped to
establish public enterprises engaged in public utilities. Role of the government
owned enterprises is supposed to be undermined in the present context of
worldwide privatization, liberation and globalization. But in developing country
like Nepal where private sector is not strong and in sound position to provide
public utilities to the people, public utility concern’s role cannot be undermined.
Though Nepal is rich in water resources, we Nepalese people are in the condition
of “shadow under light”. There is consensus that development of its abundant
water resources could largely benefit the nation. Though hydro-electric
potentiality of Nepal is 83000 MW, but so far only about 650 MW was generated
including from diesel and multi fuel plant. Many changes are talking place in the
power sector in the concept of competition, choice in the process of
commercialization and management are being changed. In such situation, the
proper utilization and management of our available water resources is essential for
the all round development of the nation. In this regard, Nepal electricity authority
is only an institution engaged for the development of essential for the better
utilization of available water resources of the country. NEA has a challenge to
operate in a manner that improves the key business processes, maximizes the
revenue generation and profitability of the organization.

The commercial goals of NEA should also be financially viable, fully

autonomous, and accountable and majority owned government business entity. In
this sense, the research is made whether NEA is in the way to achieve those goals
or not. If NEA is seen to be financially sick for 10 years financial supports. So this

85
study is made to sketch a clear financial picture of NEA, which definitely supports
the stakeholders and other researchers for their analytical purpose.
Overall picture and trend of the financial condition by the end of FY 2008/09 is
crippling and asks for urgent and effective financial restricting for the
sustainability of the organization. Gradual recovery of accumulated financial
losses and generation of investment funds for expansion may be possible only by
reviewing tariff, reducing interest rate on government loans, capitalization of
grant project at average coast estimate of the region, reduction of system losses
and management of seasonal surplus energy.

The liquidity position of NEA is not likely position. The average current ratio
which is below 0.56 shows that is suffering from liquidity problem from a long-
term, it has been failure to meet its short-term obligations which has severely
damaged its reputation in the eye of its creditors. Analyzing the turnover ratio of
NEA sales of electricity and other equipments is increasing day by day. NEA is
failed to meet the demand of electricity, because there limited hydropower
stations generating electricity. In average NEA is earning Rs. 0.154 for its one
rupee investment in total assets. It shows that NEA has failed to complete its
major hydro-projects in time. The installed plants are not been appropriately
utilized. Similar results have obtained in case of fixed assets turnover ratio. NEA
by its nature certainly has to install plants, which to utilize for above 50 years.
The installed one of the transmission of line can work for several hydro-projects.
Under the completion of those hydro-projects many vehicles, equipments
furniture etc. can go under “bidding process”. So, manor hydro-projects are
completed it time it helps to its turnover. Besides this the inventory ratio is quite
satisfactory, but it does not have any financial meaning. Because the major selling
product is electricity which are be put as an inventory goods only meter boxes,
cables etc. are inventory of NEA.

86
Analyzing the average collection period, the average collection period is 110.24
days, although there is no any standard collection period, but NEA reads the
customer meters in 2 month, and with adding one month of delaying in payment,
it should be around 60 days, but it is nearly double. NEA can’t imply obligations
in collecting its receivables which harms itself it meet its current obligations.
Higher AVP results to lower debtors’ turnover ratio.

Analyzing NEA’s profitability position, only in year 2007 NEA has earned a
profit near 1.67 million. Besides this all NEA base huge losses. The reason behind
heavy losses are heavy operating expenses, increasing burden of interest on debt,
deferred expenditure, underutilization of plants, leakage theft of electricity, high
collection periods, extended time in completion of mega-projects etc, which cause
more than double cost. An example of Middle-Marsyangdi hydro-project is
sufficient to prove it. The total debt of NEA is increasing day to day which insert
a huge burden of interest. But the debt is not properly used to generate high sales.
The ratio of debt’s increment is higher than rate of assets increment and only a
short vacancy is seen between total assets and total debt, which itself is not bad
condition but a harmful condition too.

The trend analysis on forecasting sales cost shows a satisfactory future, but it is
followed by similarly increasing operational cost. NEA is a organization which
can sell its product by the raw material as water only. So, there will not be scarcity
of raw material for years and years. Only the utilization of raw material (water) is
major thing. It can sell its electricity in neighbor countries too. So, there is no
tension on future demands, only the tension is how to establish major projects and
generate hydropower likewise decreasing the operational cost may be a issue to
generate a huge profit in near future.

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5.2 Conclusion
Based on the major findings, it is found that there are various problems in NEA.
Problems that are affecting to greater extent to the financial position of NEA are
listed below as major issues and gaps. Major issues can be concludes the
following:
1. The NEA has high amount of fixed costs and the interest payable on long
term loans every show the considerable portion of fixed costs.
2. According to the fixed assets turnover ratio it seems that the assets are not
used effectively.
3. NEA has been facing the problem of outstanding debt collection, it has
been highly increasing tendency. The account receivable of NEA is
recorded high.
4. Leakage, outage and theft are one of the major consideration in NEA. Due
to this leakage there is a vast gap between sales production and this leakage
is reducing the NEA’s profit annually.
5. All the expenses, such as; manufacturing administrative and selling and
distribution are not separated systematically. Authority has combined all
these expenses together and named it, operation and maintenance
expenditure budget.
6. Operation and maintenance expenditure is very high due to the higher
amount of fixed cost and interest on long-term loan.
7. NEA hasn’t adequately considered the strength and weakness, which affect
the enterprises.
8. Higher amount of account receivable in balance sheet indicates the
inefficiency of authority to collect the debt.
9. Long term liability is very high but current liability is lower than current
assets.
10. There are no clear-cut boundaries to separate cost in to fixed and variable.
The cost classification is not scientific and systematic.

88
 11. The authority is not able to maintain a proper co-ordination between
various directorates in regard of the goals, objectives and strategies of the
organization.
12. From the overall analysis, NEA has generated very low returns with the
negative profitability. Increasing cost in each fiscal year is important issue
of NEA. They have not adopted the cost control program.

5.3 Recommendation: -
Based on the above study, the following suggestions are recommended to improve
the financial position of Nepal Electricity Authority.

1. The corporation, liquidity position is not sufficient though the current ratio
shows the problem in the liquidity position. This indicates that the NEA
must show some seriousness to improve its liquidity position by adopting
effective mechanism. The company should adopt efficient working capital
policy to make the stability in liquidity position.

2. NEA should try to increase the sales volume and should reduce the power
purchases. It can be done by either reducing leakage, establishing new
plants or by increasing the capacity utilization.

3. NEA is paying a huge amount as interest on long term loan, which is not
good for authority. So it should emphasized internal financing to minimize
such burden. Therefore NEA must restructure its capital structure and for
this it can issue the shares and can refund the debt.

4. NEA should improve in human resources:- human resources is the key to

success of any organization. The organization staffs are the main brain to
utilize the organizational assets more effectively and efficiently through

89
 which NEA can increase its profit earning capacity. A spirited, motivated,
skillful honest and delight staff is bound to perform well which can achieve
organizational goals and objectives effectively. Thus NEA should always
try to maintain high spirit in its staff by providing right appointments
motivation, training and promotional opportunities.

5. Leakage of the electricity should be controlled. For this meter reading and
meter joining system should be improved. The most important aspect is to
motive its employees engaged in transmission and distribution line to
control the leakage. Staffs who are they engaged in encouraging power
leakage should be strictly demoralized.

6. NEA should try to maximize its operating profit. For this cost control
program can be launched in one respect and the alternative should be
established. It should maintain the discipline of budget.

7. In NEA planning should be communicated to lower level management and

coordinating among them should be established.

8. Load shedding is a big issue in Nepal. The authority should try to avoid
load shedding.

9. It should bring the effective program. The receivable from government

sector is very high. So government should help to NEA for collection.

10. NEA should be careful in selecting investment projects. Higher IRR and
other criteria are definitely complimentary in high efficiency in
mobilization of resources. Because of some contract of projects, NEA

90
 should bare maximum level of losses so, should be contract those projects
who give certain level of Profits.

11. NEA as public utility concern, it should serve public however it should run
in commercial principle and has to be self sustainable by its own income, it
must carry out the objective of surplus generation with full commitment
and responsibility.

12. NEA has invested big amount in fixed assets but the fixed assets turnover
ratio shows the poor utilization of fixed assets. Therefore, NEA should put
stress on effective utilization of fixed assets. Thus, NEA should adopt the
discounting modern technique of capital budgeting.

13. NEA must show efficiency in reducing the loss which can increase its
profit definitely. But over the period, NEA has not been able to achieve
progress in loss reduction activities despite clear instruction from
electricity tariff commission to maintain its loss rate at less than 15%
percent.

14. The development of organization and management system on the part of

NEA should be efficient. It should develop on the basis of its post
experience effective target- oriented project planning incorporation proper
cost benefit and financial plan so that target are achievable and profitability
is ensured at least to minimum extent.

15. NEA should develop efficient system of revenue collection. It should make
well-defined rules and regulation in regard of revenue collection and if the
customer of any category delays or denies, it should charge a penalty. In

91
 revenue collection any kind of pressure, hypnotism and biases should
strictly be undermined.
16. In the recent 10 years, there is not practice about increased and decreased
based price system in the NEA’s history, so NEA have faced huge losses.
That’ why NEA should be apply increased and decreased based price
system.

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http://www.nepalhydro.org.np/