a study on profitability of heg ltd., · pdf filewhen profit earning is the aim of business...

ISSN: 2320-8236 VOLUME: 2, ISSUE:3 JULY- SEPTEMBER 2014 www.ircjournals.org www.ircjournals.org

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A Study on Profitability of HEG Ltd., Bhopal PRAVIN CHAUDHARY

Assistant Professor,

VNS Business School,

Bhopal (M.P..), India,

APOORVA BHATNAGAR

Assistant Professor,

VNS Business School, ,

Bhopal (M.P.), India

ABSTRACT The objective of this research paper is to through light on the profitability position of HEG Ltd. from 2005-06 – 2012-13. To find the

profitability position of the organization, relevant ratios were analyzed and research tools like Mean, Standard deviation and also to

test the significant relationship between the independent and dependent variables of the topics. The variables were tested with the help

of correlation and regression analysis. The tested which supports the hypothesis is ―t‖ test and analysis is being judged on the basis of

―t‖ test. The research shows that HEG Ltd. is in sound position by analysis, the data and various profitability ratios from the given

period 2005-06—2012-13.

Keywords: - Profitability, ROI, ROE, Gross Profit, Net Profit.

INTRODUCTION Profit earning is the main aim of every economic activity. A business being an economic institution must earn profit to cover its costs

and provide funds for growth. No business can survive without earning profit. Profit is a measure of efficiency of a business

enterprise. Profits also serve as a protection against risked which can not be ensured. The accumulated profits enable a business to face

risks like fall in prices, competition from other units, adverse government policies etc. The following arguments are advanced in favor

of profitability.

1. When profit earning is the aim of business then profit maximization should be the obvious objective.

2. Profitability is the barometer for measuring efficiency and economic prosperity of a business enterprise, thus profit maximization is

justified on the grounds of rationality.

3. Economic and business conditions do not remain same at all the times. There may be adverse business conditions like recession,

depression, severe competition etc. A business will be able to survive under unfavorable situation, only if it has some past earnings to

rely upon. Therefore, a business should try to earn more and more when situation is favorable. \

4. Profits are the main sources of finance for the growth of a business. So, a business should aim at maximization of profits for enabling

its growth and development.

5. Profitability is essential for fulfilling social goals also. A firm by pursuing the objective of profit maximization also maximizes socio-

economic welfare.

Objective of the Study: 1) To evaluate the gross profit and net profit with respect to sales.

2) To evaluate the performance with respect to Total Asset.

3) To evaluate the Return with respect to Equity.

Scope of the Study: For our study, I selected one of the leading industries HEG Ltd is a leading graphite electrode manufacturer in India. The company

engaged in manufacturing graphite electrodes and a captive power generation. This study covers 8 years published data from 2005-

2006--2012-13. This unit is situated in Madhya Pradesh at Mandideep district of Raisen.

Literature Review In this section I will provide a critical analysis of the most relevant theories, from the classical to the modern approaches, also

presenting the theoretical concepts of the studied field, the definition of the main variables, as the main theories and researches

relating the relationship between liquidity and profitability.

Profitability can be defined as the main form of measuring the economic success of a firm in terms of the capital invested in it. This

economic success is determined by the extent of the net accounting profit.

Shim and Siegel (2000, pp.46-47): Accounting liquidity is the company’s capacity to liquidate maturing short-term debt (within one

year). Maintaining adequate liquidity is much more than a corporate goal is a condition without which it could not be reached the

continuity of a business. Solvency and liquidity are two concepts that are closely related and reflect upon the actions of company’s

working capital policy. A low liquidity level may lead to increasing financial costs and result in the incapacity to pay its obligations.

The research conducted by Chandra in 2001, normally a high liquidity is seen as a sign of financial strength. However, some authors

like Assaf Neto believe that a high liquidity can be as undesirable as a low one. This would be a consequence of the fact that current

assets are usually less profitable than fixed ones. Money invested in assets generates less revenue than fixed assets, thus representing

an opportunity cost.

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A Study on Profitability of HEG LTD, Bhopal PRAVIN CHAUDHARY, APOORVA BHATNAGAR

© INTERNATIONAL RESEARCH COMMUNION


139

Assaf Neto (2003, p.22) : the greater the amount of funds invested in current assets, the lower the profitability, and by the same

time the less risky is the working capital strategy. In this situation, the returns are lower in the case of a greater financial slack,

in comparison to a less liquid working capital structure. Conversely, a smaller amount of net working capital, while sacrificing

the safety margin of the company, by raising its insolvency’s risk, positively contributes to the achievement of larger return

rates, since it restricts the volume of funds tied up in assets of lower profitability. This risk-return ratio behaves in a way that no

change in liquidity occurs without the consequence of an opposite move in profitability. However, Hirigoyen (1985) argues

that mid-term and long-term relationship between liquidity and profitability could be positive, meaning that low liquidity would

lead to lower profitability due to a greater need for loans and low profitability would not generate sufficient cash flow, thus

forming a vicious circle. A company with low liquidity and high profitability will have to increase its lending, resulting to

increased financial costs. This would certainly lead to increasing Interest rates, given that resource cheap are depleting rapidly.

In addition, enlarging the level of the debt, company’s credit risk increases, causing increasing interest rates charged by their

financiers. Under these conditions, the company must plan to obtain from suppliers more time, resulting in the acquisition of

more expensive materials. Also, the enterprise will not be able to enjoy discounts offered by anticipating financial payments

instead bear interest and late payment penalties for various bills, taxes and others. After all this process liquidity problems

might get bigger. Moreover, a firm that has low profitability and high liquidity does not generate sufficient resources to finance

expansion of its working capital needs, acquiring new assets, overdue loans, etc. And finally the liquidity turns out to become

lower. Thus Hirigoyen, profitability and solvency are a necessary condition for the existence of a healthy company and both of

them are the subject to the strategy adopted in the medium and long term.

Empirical Review

In 1997 Smith and Begemann studied if the maximization of the firm's returns could threaten its liquidity, and the pursuit of

liquidity had a tendency to dilute returns. They analyzed the relation between working capital measures and return on

investment (ROI) for a sample of industrial firms listed on the Johannesburg Stock Exchange (JSE).

The statistical test results showed that a traditional working capital leverage ratio, current liabilities divided by funds flow,

displayed the greatest associations with return on investment. Traditional liquidity ratios as current and quick ratios registered

insignificant associations.

In 2005 Pimentel analyzed a sample of retailing companies in the Brazilian market for the period of 2000 to 2003. The results

obtained where that the larger the current ratios, the smaller the ROE, therefore it was demonstrated a negative correlation

among liquidity and profitability on the short run. His study supports the main literature on the relationship between liquidity

and profitability. For the medium run they analyzed Hirigoyen Hypothesis that the companies with high liquidity but low

profitability would have its current ratio reduced, and that companies with low liquidity and high profitability would have the

returns reduced. They rejected this hypothesis based on two-dimensional analyses, which showed that 72% of their sample

moved in disagreement with this theoretical prediction.

Raheman and Nasr (2007) studied the relationship between capital and earnings management for 94 companies listed on the

Stock Exchange in Karachi, Pakistan. One of their findings was to obtain a significantly negative relationship between liquidity

and profitability of analyzed companies.

In 2007 García-Teruel and Solano have studied the effects of working capital management on the profits made from use of

assets (ROA) for companies. They analyzed 8872 companies and found out that shortening the cash conversion cycle had no

significant effect on the profitability of companies.

Research Methodology

1) Method of Data Collection: The research is fully based upon secondary data and the data was collected from the published

annual report by internet.

2) Time period of the study: to cover only 8 years from 2005-06—2012-13.

3) Selection of the sample: Sample was selected from the many companies which are engaged in the manufacturing of the graphite

e.i. HEG Ltd. Mandideep.

4) Limitations of the study:

a) The data was only analyzed was of HEG Ltd. Mandideep.

b) Other Graphite factories are not taken into account.

c) Time and cost of the study are also limited.

Hypotheses: The following hypotheses were framed to conduct the analysis and evaluate the profitability results of HEG Ltd.:

a) H01: There is no significance relationship between gross profit margin and Net sales.

b) H02: There is no significance relationship between net profit margin and net sales.

c) H03: There is no significance relationship between net profit margin and total assets.

d) H04: There is no significance relationship between net profit margin and Owner’s equity.






140

Data Analysis and Interpretation Table-1 GROSS PROFIT RATIO

Year Net sales Gross profit Ratio (%)

2012-13 1622.6147 306.7195 18.90

2011-12 1423.99 258.60 18.16

2010-11 1113.65 262.35 23.56

2009-10 1131.40 354.00 31.29

2008-09 1029.00 274.73 26.70

2007-08 945.98 303.90 32.13

2006-07 817.8693 194.8166 23.82

2005-06 525.2710 121.5198 23.13

Sources: Published annual report from 2005-06—2012-13

Statistical Analysis:

GRAPHICAL REPRESENTATION--1:

Gross Profit ratio indicates the ratio of firm’s gross profit to its total Net sales. In the year 2006 the Net sales of the firm was

525.2710 whereas in the year 2007 it became Rs.817.8693 crores. The Gross profit for that period was Rs.121.5198 crores and

Rs.194.8166 crores respectively. Net Sales for the years 2008, 2009, 2010, 2011, 2012, 2013 were Rs945.98, Rs.1029.00,

Rs.1131.40, Rs.1113.65, Rs.1423.99, Rs.1622.6147 crores respectively. Also the Gross profit for the same period was Rs.

303.9, Rs.274.73, Rs.354.00, Rs.262.35, Rs.258.60, Rs.306.7195crores respectively. Table 1 depicts the average Gross profit

ratio as 24.71%. The growth rate of Net sales for these years was 208.91% and that of Gross Profit was 152.40%. the Net sales

has been showing a constant increase every year but Gross Profit ratio decreased gradually year during these period except

2008 and 2010. it shows the poor progress of the Company.

Testing of the Hypotheses

Hypotheses 1:

H0: There is no significance relationship between gross profit and net sales.

Ha: There is a significance relationship between gross profit and net sales

Table 2: Correlation Results Correlation Results

Karl Pearson coefficient of correlation 0.753

Spearman’s Rank Correlation 0.62

Table 2 Relate to Correlation results of net sales and gross profit. Karl Pearson coefficient of correlation and Spearman Rank

Correlation were used to test the Hypotheses-1 at 0.05 significant level between the net sales and gross profit with r = 0.753 and

0

200

400

600

800

1000

1200

1400

1600

1800

Net sales

Gross profit

Arithmetic Average

1076.22 259.58 24.71 %

Growth Rate

208.91% 152.40%






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0.62 respectively , which shows high degree of correlation. So, there is a significance relationship between gross profit and net

sales.

D.O.f--- (n-2) =8-2=6

N=8

Table value of “t” test = 2.447

Calculated Value of “t” test = 2.8030

The calculated value of t-test is 2.8030 is more than table value. So null hypotheses are rejected and there is a significance

relationship between gross profit and net sales.

Table -3 NET PROFIT RATIO

Year Net sales Net profit Ratio(%)

2012-13 1622.6147 105.7940 6.52

2011-12 1423.99 62.32 4.38

2010-11 1113.65 128.86 11.57

2009-10 1131.40 171.06 15.12

2008-09 1029 106.99 10.40

2007-08 945.98 146.35 15.47

2006-07 817.8693 73.8356 9.03

2005-06 525.2710 38.9337 7.41

Sources : Published annual report HEG Ltd. from 2005-06—2012-13

Statistical Analysis

GRAPHICAL REPRESENTATION--2:

Net Profit ratio indicates the ratio of firm's Net profit to its total Net sales . In the year 2006 the Net sales of the firm was

525.2710 whereas in the year 2007 it became Rs.817.8693 corers. The Net profit for that period was Rs.38.9337 crores and

Rs.73.8356 crores respectively. Net Sales for the years 2008, 2009, 2010, 2011, 2012, 2013 were

Rs945.98,Rs.1029.00,Rs.1131.40,Rs.1113.65,Rs.1423.99, Rs.1622.6147 crores respectively. Also the Net profit for the same

period was Rs. 146.35, Rs.106.99, Rs.171.06, Rs.128.86, Rs.62.32, Rs.105.7940 crores respectively. Table 3 depicts the

average Net profit ratio as 9.9875%. The growth rate of Net sales for these years was 208.91% and that of Net Profit was

171.73%. the Net sales has been showing a constant increase every year but Net Profit ratio is also increased gradually year by

year during these period except 2009,2011and 2012. it shows the positive sign of the Company. In the three years cost of sales

has increased drastically resulting in lowering the profits. Rs. 92.84 crore Loss on account of Foreign Exchange arising out of

exceptional volatility in Foreign currency rates if this exchange deficit have not occurred there may be a direct relationship

between profit and sales.

Hypotheses 2:

0

200

400

600

800

1000

1200

1400

1600

1800

Net sales

Net profit

Arithmetic Average

1076.22 104.2679 9.9875

Growth Rate

208.91% 171.73%






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H0: There is no significance relationship between net profit and net sales.

Ha: There is a significance relationship between net profit and net sales.

Table 4: Correlation Results

Correlation Results



Table 4 Relate to Correlation results of net sales and net profit. Karl Pearson coefficient of correlation and Spearman Rank

Correlation were used to test the Hypotheses-1 at 0.05 significant level between the net sales and net profit with r = 0.274and

0.24 respectively , which shows low degree of positive correlation. So, There is a significance relationship between net profit

and net sales.

D.O.f--- (n-2)=8-2=6

N=8



The calculated value of t-test is 0.7877 is less than table value. So null hypotheses is accepted. So, there is no significance

relationship between net profit and net sales . Due to deficit of 92.84 crore shown in the balance sheet due to foreign

exchange fluctuations.The relationship can’t be seen in the said year i.e.2011-12

Table -5 NET PROFIT ON TOTAL ASSETS RATIO

Year Net profit Total Assets Ratio

2012-13 105.7940 2617.9550 4.04

2011-12 62.32 2358.4489 2.64

2010-11 128.86 1800.2409 7.16

2009-10 171.06 1536.5834 11.13

2008-09 106.99 1550.5595 6.90

2007-08 146.35 1330.5888 10.99

2006-07 73.8356 1329.5005 5.55

2005-06 38.9337 1195.0245 3.26

Sources : Published annual report from 2005-06—2012-13


Arithmetic Average

104.2679 1714.8627 6.45875 %

Growth Rate

171.73% 119.07%

GRAPHICAL REPRESENTATION—3:

Net Profit on total assets ratio indicates the ratio of firm's Net profit to total assets . In the year 2006 the Total assets of the firm

was Rs.1195.0245 whereas in the year 2007 it became Rs. 1329.5005 crores. The Net profit for that period were Rs.38.9337

crores and Rs.73.8356 crores respectively. Total Assets for the years 2008, 2009, , 2010, 2011, 2012,2013 were

0

500

1000

1500

2000

2500

3000

Net profit

Total Assets






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Rs1330.5888,Rs.1550.5595,Rs.1536.5834 , Rs. 1800.2409,Rs.2358.4489, Rs.2617.9550 crores respectively. Also the Net

profit for the same period was Rs. 146.35,Rs.106.99,Rs.171.06,Rs.128.86,Rs.62.32,Rs.105.7940crores respectively. Table 5

depicts the average Net profit on total assets ratio as 6.45875%. The growth rate of Total Assets for these years was

119.07% and that of Net Profit was 171.73%. the Total Assets has been showing a constant increase every year but Net Profit

on total assets ratio is also increased gradually year by year during these period except 2009,2011and 2012. it shows the

positive sign of the Company. In the three years cost of sales has increased drastically resulting in lowering the profits.

Hypotheses 3: H0: There is no significance relationship between net profit and Total Assets.

Ha: There is a significance relationship between net profit and Total Assets.


Table 6 Relate to Correlation results of net profit and Total Assets. Karl Pearson coefficient of correlation and Spearman Rank

Correlation were used to test the Hypotheses-1 at 0.05 significant level between the net profit and Total Assets with r = -0.042

and 0.12 respectively , which shows negative low degree of correlation. So, there is no significance relationship between net

profit and total assets.

D.O.f--- (n-2)=8-2=6

N=8



The calculated value of t-test is 0.10305 is less than table value. So null hypotheses is accepted. There is no significance

relationship between net profit and total assets. Due to deficit of 92.84 crore shown in the balance sheet due to foreign

exchange fluctuations. The relationship can’t be seen in the said year i.e.2011-12.

Table -7 RETURN ON EQUITY (ROE) RATIO

Year Net profit Equity Ratio

2012-13 105.7940 863.2911 12.25

2011-12 62.32 762.2265 8.18

2010-11 128.86 816.3133 15.79

2009-10 171.06 730.8926 23.40

2008-09 106.99 593.5369 18.03

2007-08 146.35 545.1968 26.84

2006-07 73.8356 358.1822 20.61

2005-06 38.9337 320.5273 12.15

Sources: Published annual report from 2005-06—2012-13


Arithmetic Average

104.2679 623.770 17.15625

Growth Rate

171.73% 169.33%

GRAPHICAL REPRESENTATION—4:

Correlation Results

Karl Pearson coefficient of correlation -0.042







144

Return on equity ratio indicates the ratio of firm's Net profit to owner’s Equity . In the year 2006 the equity of the firm was

Rs. 320.5273 whereas in the year 2007 it became Rs. 358.1822 crores. The Net profit for that period was Rs.38.9337 crores and

Rs.73.8356 crores respectively. Owner’s Equity for the years 2008, 2009, , 2010, 2011, 2012,2013 were Rs545.1968

,Rs.593.5369,Rs.730.8926, Rs. 816.3133,Rs.762.2265, Rs.863.2911 crores respectively. Also the Net profit for the same

period was Rs. 146.35, Rs.106.99, Rs.171.06, Rs.128.86, Rs.62.32, Rs.105.7940crores respectively. Table 4 depicts the

average Net profit on Equity ratio as 17.15625%. The growth rate of Equity for these years was 169.33% and that of Net

Profit was 171.73%. The Equity has been showing a constant increase every year but Return on Equity ratio is also increased

gradually year by year during these period except 2009,2011and 2012. it shows the positive sign of the Company. In the three

years buy back of the shares resulting in lowering the profits due to exhausting the shares. Due to deficit of 92.84 crore shown

in the balance sheet due to foreign exchange fluctuations .The relationship can’t be seen in the said year i.e.2011-12.

Hypotheses 4: H0: There is no significance relationship between net profit and Owner’s Equity.

Ha: There is a significance relationship between net profit and Owner’s Equity.


Table 8 Relate to Correlation results of net profit and owner’s equity. Karl Pearson coefficient of correlation and Spearman

Rank Correlation were used to test the Hypotheses-1 at 0.05 significant level between the net profit and owner’s equity with r

= 0.49 and 0.29 respectively , which shows positive low degree of correlation. So, There is no significance relationship

between net profit and owner’s equity.

D.O.f--- (n-2)=8-2=6

N=8



The calculated value of t-test is 1.3768 is less than table value. So null hypotheses is accepted. There is no significance

relationship between net profit and owner’s equity. Due to deficit of 92.84 crore shown in the balance sheet due to foreign

exchange fluctuations .The relationship can’t be seen in the said year i.e.2011-12.

Observations & Findings :

Hypotheses01--There is a significance relationship between gross profit and net sales.

Hypotheses02 --There is no significance relationship between net profit and net sales.

Hypotheses03-- There is no significance relationship between net profit and total assets.

Hypotheses04--There is no significance relationship between net profit and owner’s equity.

SUGGESTIONS:

0

100

200

300

400

500

600

700

800

900

1000

Net profit

Equity

Correlation Results








145

The company’s sales was increasing order over the year under study period but Net profit of the company was also increasing

order except these three years 2009,2011,2012 due to loss on fluctuation of the foreign exchange rates. So, the company use

the Hedging concepts for fluctuating the rates of foreign exchange.

Conclusion: The overall performance of HEG Ltd. regarding was good but it was observed that the gross profit, net profit are increasing

order but not as compared to sales, total assets and equity. So, the company uses the Hedging concepts for fluctuating the rates

of foreign exchange which will be appropriate in near future.

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3. Agrawal N.K. management Accounting of working Capital : Sterting Publishers (P) Ltd. New Delhi 1983

4. Donald Cooper : business research Methods NewDelhi TataMcGraw Hill Edition 1998 5. I.M. PAndy Financial Management New Delhi Vikas Publishing house (P)Ltd: 1983

6. James C. Van Home Financial management policy singapur pearson Education Pvt. Ltd. Twelfth Edition 1998

7. K.V. Smith: Management of Working capital : New York: West Publishing Company : 1994 8. Kothari C.R : Research Methodology: Methods and Techniques: New Delhi: Wishwa Prakashan : 1999

9. Kulshreshtha N.K. : Theory and Practices of Management Accounting : Aligarh: Naveen Prakashan :1985

10. M.A. Sahaf; Management Accounting : Principles and Practices : New Delhi: Vikas Publishing (p) Ltd: 1999



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