India is one of the largest energy consumer in the world. India s consumption of coal, crude oil, natural gas and other renewable comprises nearly 4.7% of the global energy consumption. Having said so, the Indian energy sector consuming all these sources is a highly government regulated sector which covering almost all the aspects of the functioning of its various segments. With passage of time and liberalization, the government has allowed non-government entities (private players) to operate in this sector. The energy sector is a capital intensive sector with long gestation periods. With the Indian energy sector being open for investment by private and foreign entities, it becomes imperative to examine the financial performance of the entities involved in this sector. The objective of the paper is: (i) to analyse the financial performance of these companies over a period of ten years from 2003–04 to 2013–13 and; (ii) find whether there exists a correlation between average capital employed, earnings before interest & tax (EBIT) and returns. The paper considers 11 energy companies for the analysis of their financial performance. The data for these companies has been taken from the annual reports of the respective companies. To analyse financial performance Return On Average Capital Employed (ROACE). ROACE is a fair measure to understand the financial performance, since it takes into account an average of total assets for two years, while measuring the return against EBIT. To analyse correlation, Pearson's coefficient of correlation is employed. It is found that in oil & natural gas sector overall, the ROACE is on a downward side despite of an increase in the total asset value and EBIT. For the downstream companies engaged in the refining and retailing of crude oil products even with the increase in the total assets and EBIT, this has not translated to an increasing ROACE for these companies. For the oil exploration & production companies (upstream), ROACE is on also on a reducing trend. However, the returns do not show an increasing trend from the beginning of the study period to its end despite of an increase in EBIT and capital employed in absolute value. In the electricity sector, it is seen that for one of the private player operating, ROACE has steadily but marginally increased during the ten-year period of time alongwith the government owned transmission company. There is an overall downward trend when ROACE is concerned in the energy sector as a whole. For both the oil & natural gas and electricity segment, there has been an increase in the total assets of the companies engaged alongwith their earnings. However, this increase is not reflected while the returns are taken into account.
Correlation, Return on Average Capital Employed
