Financial performance analysis of Bhel: Evidence from accounting performance metrics & DU-PONT model

In the 21^st century business firms operate in a dynamic and volatile environment. High-growth markets, policy changes, financial crisis, advancement in technology, cut throat competition, etc. are the key features of business environment. In order to sustain, survive and succeed, corporates need to keep a close watch on their financial performance and hence there is a need to analyse it from time to time. This paper is an endeavour to appraise the financial performance of Bharat Heavy Electricals Limited (BHEL) through the technique of ratio analysis. BHEL, a Maharatna category Public Sector Undertaking, is a giant power plant equipment manufacturer. In India, BHEL is among the largest engineering and manufacturing companies of its kind along-with the competence to manufacture wide range of power plant equipment. It has proven turnkey proficiencies for performing power projects from concept-to-commissioning (“BHEL”, n.d.). This study aims to find the influence of liquidity, solvency and management efficiency on financial performance of BHEL. To achieve this, the researcher has employed Ordinary Least Square method. To measure the financial performance, return on capital employed (ROCE) is the explained dependent variable (Pal, 2013). Current ratio (Afeef, 2011), debt equity ratio (Arab, Masoumi, & Barati, 2015) and inventory turnover (Arab, Masoumi, & Barati, 2015) are the independent variables. Data Analysis has been done with the help of E-views 9. Further, DuPont Analysis is also used to evaluate the financial performance. It is evident from OLS regression results that financial performance of BHEL was reasonable in early years but thereafter it declined. Liquidity and solvency were found to be significant variables affecting the financial performance of BHEL. In line with previous literature (Saluja & Kumar, 2012) negative relation between liquidity and profitability confirms that as the company tries to decrease its liquidity, profitability will increase. A positive relation among solvency and profitability confirms with our previous accord, as the more solvent a firm is high will be the profitability for the reason that the suppliers will be ready to give credit and investors will be attracted. However, it is found that management efficiency has insignificant impact. Finally, it is concluded that persistent efforts towards the betterment of financial performance are necessary for the company to survive and flourish. BHEL should pay special attention on its liquidity management and solvency status as these are found to be important factors determining the financial performance of BHEL. The findings from DuPont analysis reveal that the Return on Equity (ROE) of BHEL is dependent on equity multiplier. Therefore, BHEL should work to improve its Net Profit Margin and Asset Turnover Ratio so as to improve its ROE. Lastly, it is recommended that BHEL should avoid inclusion of additional debt in its capital mix.