The Power Sector

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3. Higher quick ratios are more favourable for companies because it shows there are more quick assets than current liabilities. A company with a quick ratio of 1 indicates that quick assets equal current assets. This also shows that the company could pay off its current liabilities without selling any long-term assets. In this case the quick ratio for the company keeps fluctuating.

Therefore comparing with last few years of performances, the company is not at all liquid in short term. Thus the business is not liquid at the cost of profitability.

c. Is the business financially stable in the long term? Substantiate.

The company is financially stable or not can be known from the following parameters.

· Bottom Line: These figures are very unstable from past few years. It varies from huge losses to profit of not very considerable amount.

· Return of Capital Employed: Comparing all the figures from last few years we can see that the output or the returns are fluctuating. When compared to last year, the company has got fewer returns on its capital employed.

d. Is profitability high enough to justify owners’ continued investment in the company?

A company’s profitability can be known from margin analysis that is gross profit and net profit margin. From last few years’ of data we can see that the company has not been doing very well in these two margins. Current year the net profit margin went in negative.

e. How well has the company managed its overall business as compared to its competitor?

ADANI POWER

NTPC

Operating Profit Margin

23.17

30.74

21.5

24.68

Gross Profit Margin

14.87

19.65

14.79

18.93

Net Profit Margin

-0.64

5.55

14.04

15.23

Return On Capital Employed

6.95

8.95

8.08

11.01

Return on Assets

26.87

27.11

99.03

104.08

f. Comment on the operating performance of the company. (Reformulate the financial statements if required.)

Cash flow from operating activities is Rs. 2615.11 Crores. Whereas cash flow from investing activities and financing activities are negative thus we can say that the company is performing well in operating performance.

g. What are the key sources of competitive advantage for the company as compared to its competitor/s? What are the key drivers of profitability and growth?

· The company is new in compare to its competitors it has high price-earnings ratio in compare to its competitors.

· Company’s Operating Profit Margin is the most competitive advantage in compare to of other peer’s in the market.

h. How is the market viewing the performance of the company as compared to its competitor? Is it in line with your analysis of performance?

Company is one of the top 4 players in the market segment. Return on Assets of the company is 27.11, which is average to its peers. And yes it is in line with our analysis of the performance of the company and its competitors.

i. What inferences can you draw from the company’s cash flow statement about its ability to generate future cash flows, repay its borrowings and pay dividends?

The company's operating cash flow was +2611 cr for the year 2015 and +3385 cr for the year 2014. Thus the company is producing enough cash from its operating activities, but the interest payment is 2497cr and 3338 cr respectively which is causing the company to make net losses. In other words, the interest coverage ratio is less than 1.5. Thus the financial standing of the company is weak and it has to pick up its operations and start producing more cash flow than interests to cover its borrowings.

The company has invested more money in 2015(-2,575.38 cr from investing activities) and borrowed more in 2014(-3,352.75 cr from financing activities).

Since the net income of the company is negative, the company is unable to pay dividends to its shareholders.

Company's ability to generate future cash flow depends on the performance of the industry in coming years and also on how well the money spent on investing activities in the curent year will generate yield in future years.

j. Comment on earnings quality.

The company has good operating profits but its interest expense and depreciation is too high which is bringing the net income to negative levels.

The long term liabilities have reduced but there is increase in unsecured loans and short term payables. This is a cause of concern because current ratio (0.75) is less than 1 and in case of sudden disruptions in operations, the company might not be able to repay its short term liabilities.

The debt equity ratio has gone down from 5.31 in 2013 to 2.71 in 2015 which indicates that, the negative profits can be attributed to the company paying off some of its liabilities from its operations.

Although the company is in losses, the liquidity and solvency ratios are improving which shows that there is no need to worry for creditors and investors about company's position in the future.

The management ratios (debtors and inventory turnover) has increased considerably over past two years which is a positive sign that the