INDUSTRY SCENARIO
As of 2009, India is the fourth largest producer of electricity and oil products and the fourth largest importer of coal and crude-oil in the world. Coal and oil together account for 66 % of the energy consumption of India.
India's oil reserves meet 25% of the country's domestic oil demand. As of 2009, India's total proven oil reserves stood at 775 million metric tonnes while gas reserves stood at 1074 billion cubic meters. Oil and natural gas fields are located offshore at Mumbai High, Krishna Godavari Basin and the Cauvery Delta, and onshore mainly in the states of Assam, Gujarat and Rajasthan. India is the fourth largest consumer of oil in the world and imported $82.1 billion worth of oil in the first three quarters of 2010, which had an adverse effect on its current account deficit. The petroleum industry in India mostly consists of public sector companies such as Oil and Natural Gas Corporation (ONGC), Hindustan Petroleum Corporation Limited (HPCL) and Indian Oil Corporation Limited (IOCL). There are some major private Indian companies in the oil sector such as Reliance Industries Limited (RIL) which operates the world's largest oil refining complex.
As of December 2011, India had an installed power generation capacity of 185.5 Giga Watts(GW), of which thermal power contributed 65.87%, hydroelectricity 20.75%, other sources of renewable energy 10.80%, and nuclear power 2.56%. India meets most of its domestic energy demand through its 106 billion tones of coal reserves. India is also rich in certain renewable sources of energy with significant future potential such as solar, wind and bio-fuels. India's huge thorium reserves – about 25% of world's reserves – are expected to fuel the country's ambitious nuclear energy program in the long-run. India's dwindling uranium reserves stagnated the growth of nuclear energy in the country for many years.[However, the Indo-US nuclear deal has paved the way for India to import uranium from other countries.
The Indian Power Industry is one of the largest and most important industries in India as it fulfills the energy requirements of various other industries. It is one of the most critical components of infrastructure that affects economic growth and the well-being of our nation.
India has the world’s 5th largest electricity generation capacity and it is the 6th largest energy consumer accounting for 3.4% of global energy consumption.
In India, power is generated by State utilities, Central utilities and Private players. The share of installed capacity of power available with each of the three sectors can be seen in the pie-chart below:
As per the latest Report of CEA (Central Electricity Authority) i.e. as on 31-03-2011, the Total Installed Capacity of Power in India is 173626.40 MW. Of this, more than 75% of the installed capacity is with the public sector (state and central), the state sector having the largest share of 48%.
Thermal Power: – In India, major proportion of power is generated from thermal sources where the main raw material used is coal. Around 83% of thermal power is generated using coal as a raw material whereas 16% of thermal power is generated with the help of Gas and 1% of thermal power is generated with the help of Oil.
Hydro Power: – Hydroelectric power or hydroelectricity is electrical power which is generated through the energy of falling water. India has hydro power generation potential worth 1, 50,000 MW, of which only 25 % has been harnessed till date.
Nuclear Power: – A Nuclear Power Plant is a thermal power station in which the heat source is one or more nuclear reactors. A nuclear reactor is a device to initiate and control a sustained nuclear chain reaction. In the process, heat is generated which is then used to generate electricity.
Renewable Energy Sources: – The energy obtained from renewable sources like sun, wind, biomass can be converted into power. Renewable energy sources have great potential to contribute to improving energy security of India and reducing green-house gas emissions. India is among the five largest wind power generators in the world.
BACKGROUND AND INCEPTION
Karnataka is the eighth largest states in India, rich in natural resources. It is bestowed with high potential of Renewable Energy Resources especially Wind, Small Hydro, Biomass, Cogeneration and Solar which offer great possibilities of exploiting energy without polluting the environment and is effectively implemented in all parts of the State, thereby improving economic condition of the farmers and creating employment opportunities too.
Electricity is one of the most vital energy sources for economic development activities. The economic development of a country by and large depends on its efficient supply of power which can help in transforming the many people and work.
Karnataka Renewable Energy Development Limited (KREDL) was formed on 8th March1996 as a nodal agency of the government of Karnataka to facilitate the development of non conventional energy sources. It is registered under the companies’ act 1956.
Prior to the creation of KREDL, the Karnataka State Council for Science and Technology (KSCST) the erstwhile Karnataka Electricity Board(KEB) and Karnataka Power Corporation Limited (KPCL) were looking after this sector as a subsidiary function to their main activity.
But each of the above agencies had their own priorities and limitations. While KSCST had research oriented, the KEB’s priority was management of power transmission and distribution. KPCL was involved in construction of large power projects and could not focus adequately on small power projects in the non conventional energy sector.
Therefore promotion of renewable energy projects as a supplement to conventional power generation to energy where in Karnataka. This persuaded the Government of Karnataka to set up a separate agency rendering hand holding project of support to renewable energy project development.
Thus, was born the Karnataka Renewable Energy Development Limited for Promotion of Renewable Energy and Renewable Energy projects development in Karnataka.
NATURE OF BUSINESS CARRIED
KREDL takes great opportunity to generate Renewable Energy power in Karnataka (As more power to remote areas).
Today Karnataka has huge potential of renewable energy sources of more than 13000 megawatt primarily in the sectors of wind, small hydro, co-generation and biomass. During 10th five year plan (2002-2007) about 1450 megawatt of renewable energy power has been added to the state grid.
KREDL is planned about 1500 megawatt (MW) of renewable energy power during the 11th five year plan (2012).
To develop energy MINISTRY OF NEW AND RENEWABLE ENERGY (MNRE) projects to meet the challenges of the raising energy supply and demand in Karnataka.
Apart from KSCST, KEB, KPCL AND MNRE other agencies joining hands to give more power to Karnataka includes IREDA, KERC and KPTCL, along with departments of Government of Karnataka such as Irrigation, Finance, Revenue, Forest and Environment. PSU’s like BESCOM, MESCOM, HESCOM, GESCOM.
Others in this line are Karnataka Solar Manufactures and consultants, wind Biomass and co-generation developers and consultants etc.
A dedicated of above professionals shares the vision of KREDL with technocrats, administrators and supporting staff joining hands to give more power to Karnataka.
Renewable Energies:-
The wind, sun, and biomass are three Renewable Energy Sources.
Renewable energy is generally defined as energy that comes from resources which are naturally replenished on a human timescale such as sunlight, wind, rain ,tides, waves and geothermal heat.
Renewable energy resources exist over wide geographical areas, in contrast to other energy sources, which are concentrated in a limited number of countries. Rapid deployment of renewable energy and energy efficiency is resulting in significant energy security, climate change mitigation, and economic benefits. In international public opinion surveys there is strong support for promoting renewable sources such as solar power and wind power. While many renewable energy projects are large-scale, renewable technologies are also suited to rural and remote areas and developing countries, where Energy is often crucial in human development. United Nations' Secretary-General Ban Ki-moon has said that renewable energy has the ability to lift the poorest nations to new levels of prosperity.
Renewable energy is derived from natural processes that are replenished constantly. In its various forms, it derives directly from the sun, or from heat generated deep within the earth. Included in the definition is electricity and heat generated from solar, wind, ocean, hydropower, biomass, geothermal resources, and bio fuels and hydrogen derived from renewable resources.
Renewable Energy Sources: –
The energy obtained from renewable sources like sun, wind, biomass can be converted into power. Renewable energy sources have great potential to contribute to improving energy security of India and reducing green-house gas emissions. India is among the five largest wind power generators in the world.
1.2 THEORITICAL BACKGROUND
MEANING OF PROFITABILITY
According to AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, Profitability statement reflect “A combination of recorded facts, accounting conventions and personal judgments and the judgments and conventions apply affect them materially.”
Profitability statement refers to “the process of determining financial strengths and weaknesses of the firm by establishing strategic relationship between the items of the balance sheet, profit and loss account and other operative data.”
The purpose of measuring trading performance, operational efficiency, profitability and financial position of a concern revealed by Trading, Profit and Loss Account and Balance Sheet. These financial statements are prepared to find out the Gross Profit or Gross Loss, Net Profit or Net Loss and financial soundness of a firm ~ a whole for a particular period of time. From the management point of view, the usefulness of information provided by these income statement functions effectively and efficiently. In the true sense they do not disclose the nature of all transactions. Management, Creditors and Investors etc. want to determine or evaluate the sources and application of funds employed by the firm for the future course of action. Based on these backgrounds, it is essential to analyze the movement of assets, liabilities, funds from operations and capital between the components of financial statements. The analysis of financial Statements help to the management by providing additional information in a meaningful manner.
OBJECTIVES OF PROFITABILITY:
1. Helpful in analysis of Financial Statements.
2. Helpful in comparative Study.
3. Helpful in locating the weak spots of the business.
4. Helpful in Forecasting.
5. Estimate about the trend of the business.
6. Fixation of ideal Standards.
7. Effective Control.
8. Study of Financial Soundness.
FINANCIAL STATEMENT ANALYSIS:
We know business is mainly concerned with the financial activities. In order to ascertain the financial status of the business every enterprise prepares certain statements, known as financial statements. Financial statements are mainly prepared for decision making purposes. But the information as is provided in the financial statements is not adequately helpful in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial statements is required.
Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves the following purposes:
Measuring the profitability
Indicating the trend of Achievements
Assessing the growth potential of the business
Comparative position in relation to other firms
Assess overall financial strength
Assess solvency of the firm
TOOLS OF FINANCIAL STATEMENTS
Comparative financial statements
Common size statements
Trend analysis
Ratio analysis
Funds flow and cash flow analysis
MEANING OF SOLVENCY
Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth
The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a company also needs liquidity to thrive. Liquidity is a company's ability to meet its short-term obligations. A company that is insolvent must enter bankruptcy; a company that lacks liquidity can also be forced to enter bankruptcy even if it is solvent.
INVESTOPEDIA EXPLAINS 'SOLVENCY'
Investors can use ratios to analyze a company's solvency. The interest coverage ratio divides operating income by interest expense to show a company's ability to pay the interest on its debt, with a higher result indicating a greater solvency. The debt-to-equity ratio divides a company's debt by its equity to show whether a company has taken on too much debt, with a lower result indicating a greater solvency. Solvency ratios vary by industry, so it's important to understand what constitutes a good ratio for the company in question before drawing conclusions from the ratio calculations.
COMPARATIVE FINANCIAL STATEMENT
In brief, comparative study of financial statements is the comparison of the financial statements of the business with the previous year’s financial statements. It enables identification of weak points and applying corrective measures. Practically, two financial statements (balance sheet and income statement) are prepared in comparative form for analysis purposes.
COMMON SIZE STATEMENT
The common size statements (Balance Sheet and Income Statement) are shown in analytical percentages. The figures of these statements are shown as percentages of total assets, total liabilities and total sales respectively. Take the example of Balance Sheet. The total assets are taken as 100 and different assets are expressed as a percentage of the total. Similarly, various liabilities are taken as a part of total liabilities.
TREND PERCENTAGE ANALYSIS (TPA)
The trend analysis is a technique of studying several financial statements over a series of years. In this analysis the trend percentages are calculated for each item by taking the figure of that item for the base year taken as 100. Generally the First year is taken as a base year. The analyst is able to see the trend of figures, whether moving upward or downward.
RATIO ANALYSIS
Meaning of Ratio:
A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions.
According to Accountant’s Handbook by Wixon, Kell and Bedford, “a ratio is an expression of the quantitative relationship between two numbers”.
Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements.
According to Batty J. Management Accounting “Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication”.
It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgment, otherwise complex situations.
Ratio may be expressed in the following three ways:
• Pure Ratio or Simple Ratio: – It is expressed by the simple division of one number by another. For example, if the current assets of a business are Rs. 200000 and its current liabilities are Rs. 100000, the ratio of ‘Current assets to current liabilities’ will be 2:1.
• ‘Rate’ or ‘so Many Times: – In this type, it is calculated how many times a figure is, in comparison to another figure. For example , if a firm’s credit sales during the year are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison to debtors.
• Percentage: – In this type, the relation between two figures is expressed in hundredth. For example, if a firm’s capital is Rs.1000000 and its profit is Rs.200000 the ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%
CLASSIFICATION OF RATIO :
Ratio may be classified into the three categories as follows:
A. Liquidity Ratio
• Current Ratio
• Quick Ratio or Acid Test Ratio
B. Leverage or Capital Structure Ratio
• Debt Equity Ratio
• Debt to Total Fund Ratio
• Proprietary Ratio
• Fixed Assets to Proprietor’s Fund Ratio
• Capital Gearing Ratio
• Interest Coverage Ratio
C. Profitability Ratio or Income Ratio
1. Return on Capital Employed
2. Return on Shareholder’s Funds:
a. Return on Total Shareholder’s Funds
b. Return on Equity Shareholder’s Funds
c. Earnings Per Share
d. Dividend Per Share
e. Dividend Payout Ratio
f. Earnings and Dividend Yield
g. Price Earnings Ratio
LIQUIDITY RATIO
(A) Liquidity Ratio:- It refers to the ability of the firm to meet its current liabilities. The liquidity ratio, therefore, are also called ‘Short-term Solvency Ratio’. These ratios are used to assess the short-term financial position of the concern. They indicate the firm’s ability to meet its current obligation out of current resources.
In the words of Saloman J. Flink, “Liquidity is the ability of the firms to meet its current obligations as they fall due”.
Liquidity ratio includes two ratios:-
a. Current Ratio
b. Quick Ratio or Acid Test Ratio
a. Current Ratio: – This ratio explains the relationship between current assets and current liabilities of a business.
Formula:
Current Ratio = Current Asset/ Current Liabilities
Current Assets:-‘Current assets’ includes those assets which can be converted into cash with in a year’s time.
Current Assets = Cash in Hand + Cash at Bank + B/R + Short Term Investment + Debtors (Debtors – Provision) + Stock(Stock of Finished Goods + Stock of Raw Material + Work in Progress) + Prepaid Expenses.
Current Liabilities: – ‘Current liabilities’ include those liabilities which are repayable in a year’s time.
Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation + Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans Payable within a Year.
Significance: –
According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio.
It means that current assets of a business should, at least , be twice of its current liabilities. The higher ratio indicates the better liquidity position, the firm will be able to pay its current liabilities more easily. If the ratio is less than 2:1, it indicates lack of liquidity and shortage of working capital.
The biggest drawback of the current ratio is that it is susceptible to “window dressing”. This ratio can be improved by an equal decrease in both current assets and current liabilities.
b. Quick Ratio:- Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately.
Formula:
Quick Ratio = Liquid Assets/ Current Liabilities
‘Liquid Assets’ means those assets, which will yield cash very shortly.
Liquid Assets = Current Assets – Stock – Prepaid Expenses.
Significance: – An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better. This ratio is a better test of short-term financial position of the company.
LEVERAGE OR CAPITAL STRUCTURE RATIO
(B) Leverage or Capital Structure Ratio: – This ratio discloses the firm’s ability to meet the interest costs regularly and Long term indebtedness at maturity.
These ratios include the following ratios
a. Debt Equity Ratio: – This ratio can be expressed in two ways:
First Approach: According to this approach, this ratio expresses the relationship between long term debts and shareholder’s fund.
Formula:
Debt Equity Ratio=Long term Loans/Shareholder’s Funds or Net Worth
Long Term Loans: – These refer to long term liabilities which mature after one year. These include Debentures, Mortgage Loan, Bank Loan, Loan from Financial institutions and Public Deposits etc.
Shareholder’s Funds: – These include Equity Share Capital, Preference Share Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and Credit Balance of Profit & Loss Account.
Second Approach: According to this approach the ratio is calculated as follows:-
Formula: Debt Equity Ratio=External Equities/internal Equities
Debt equity ratio is calculated for using second approach.
Significance: – This Ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally, debt equity ratio of is considered safe.
If the debt equity ratio is more than that, it shows a rather risky financial position from the long-term point of view, as it indicates that more and more funds invested in the business are provided by long-term lenders.
The lower this ratio, the better it is for long-term lenders because they are more secure in that case. Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders.
b. Debt to Total Funds Ratio: This Ratio is a variation of the debt equity ratio and gives the same indication as the debt equity ratio. In the ratio, debt is expressed in relation to total funds, i.e., both equity and debt.
Formula:
Debt to Total Funds Ratio = Long-term Loans/Shareholder’s funds + Long-term Loans
Significance: – Generally, debt to total funds ratio of 0.67:1 (or
67%) is considered satisfactory. In other words, the proportion of long term loans should not be more than 67% of total funds.
A higher ratio indicates a burden of payment of large amount of interest charges periodically and the repayment of large amount of loans at maturity. Payment of interest may become difficult if profit is reduced. Hence, good concerns keep the debt to total funds ratio below 67%. The lower ratio is better from the long-term solvency point of view.
c. Proprietary Ratio: – This ratio indicates the proportion of total funds provide by owners or shareholders.
Formula:
Proprietary Ratio = Shareholder’s Funds/Shareholder’s Funds + Long term loans
Significance: – This ratio should be 33% or more than that. In other words, the proportion of shareholders funds to total funds should be 33% or more.
A higher proprietary ratio is generally treated an indicator of sound financial position from long-term point of view, because it means that the firm is less dependent on external sources of finance.
If the ratio is low it indicates that long-term loans are less secured and they face the risk of losing their money.
d. Fixed Assets to Proprietor’s Fund Ratio: – This ratio is also known as fixed assets to net worth ratio.
Formula:
Fixed Asset to Proprietor’s Fund Ratio = Fixed Assets/Proprietor’s Funds (i.e., Net Worth)
Significance:- The ratio indicates the extent to which proprietor’s (Shareholder’s) funds are sunk into fixed assets. Normally, the purchase of fixed assets should be financed by proprietor’s funds. If this ratio is less than 100%, it would mean that proprietor’s fund are more than fixed assets and a part of working capital is provided by the proprietors. This will indicate the long-term financial soundness of business.
e. Capital Gearing Ratio: – This ratio establishes a relationship between equity capital (including all reserves and undistributed profits) and fixed cost bearing capital.
Formula:
Capital Gearing Ratio = Equity Share Capital+ Reserves + P&L Balance/ Fixed cost Bearing Capital
Whereas, Fixed Cost Bearing Capital = Preference Share Capital + Debentures + Long Term Loan
Significance: – If the amount of fixed cost bearing capital is more than the equity share capital including reserves an undistributed profits), it will be called high capital gearing and if it is less, it will be called low capital gearing.
The high gearing will be beneficial to equity shareholders when the rate of interest/dividend payable on fixed cost bearing capital is lower than the rate of return on investment in business.
Thus, the main objective of using fixed cost bearing capital is to maximize the profits available to equity shareholders.
f. Interest Coverage Ratio:- This ratio is also termed as ‘Debt Service Ratio’. This ratio is calculated as follows:
Formula:
Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest Charges
Significance: – This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges.
This ratio measures the margin of safety for long-term lenders.
This higher the ratio, more secure the lenders is in respect of payment of interest regularly. If profit just equals interest, it is an unsafe position for the lender as well as for the company also, as nothing will be left for shareholders.
An interest coverage ratio of 6 or 7 times is considered appropriate.
Profitability Ratios or Income Ratios
(D) Profitability Ratios or Income Ratios: – The main object of every business concern is to earn profits. A business must be able to earn adequate profits in relation to the risk and capital invested in it. The efficiency and the success of a business can be measured with the help of profitability ratio.
Profitability ratios are calculated to provide answers to the following questions:
Is the firm earning adequate profits?
What is the rate of gross profit and net profit on sales?
What is the rate of return on capital employed in the firm?
What is the rate of return on proprietor’s (shareholder’s) funds?
What is the earning per share?
Profitability ratio can be determined on the basis of either sales or investment into business.
I. Return on Capital Employed
II. Return on Shareholder’s funds
I. Return on Capital Employed: – This ratio reflects the overall profitability of the business. It is calculated by comparing the profit earned and the capital employed to earn it. This ratio is usually in percentage and is also known as ‘Rate of Return’ or ‘Yield on Capital’.
Formula:
Return on Capital Employed = Profit before interest, tax and dividends/
Capital Employed *100
Where, Capital Employed = Equity Share Capital + Preference Share Capital + All Reserves + P&L Balance +Long-Term Loans- Fictitious Assets (Such as Preliminary Expenses OR etc.) – Non-Operating Assets like Investment made outside the business.
Capital Employed = Fixed Assets + Working Capital
Advantages of ‘Return on Capital Employed:-
Ø Since profit is the overall objective of a business enterprise, this ratio is a barometer of the overall performance of the enterprise. It measures how efficiently the capital employed in the business is being used.
Ø Even the performance of two dissimilar firms may be compared with the help of this ratio.
Ø The ratio can be used to judge the borrowing policy of the enterprise.
Ø This ratio helps in taking decisions regarding capital investment in new projects. The new projects will be commenced only if the rate of return on capital employed in such projects is expected to be more than the rate of borrowing.
This ratio helps in affecting the necessary changes in the financial policies of the firm.
Ø Lenders like bankers and financial institution will be determine whether the enterprise is viable for giving credit or extending loans or not.
Ø With the help of this ratio, shareholders can also find out whether they will receive regular and higher dividend or not.
II. Return on Shareholder’s Funds:-
Return on Capital Employed Shows the overall profitability of the funds supplied by long term lenders and shareholders taken together. Whereas, Return on shareholders’ funds measures only the profitability of the funds invested by shareholders.
These are several measures to calculate the return on shareholder’s funds:
(a) Return on total Shareholder’s Funds:-
For calculating this ratio ‘Net Profit after Interest and Tax’ is divided by total shareholder’s funds.
Formula:
Return on Total Shareholder’s Funds = Net Profit after Interest and Tax / Total Shareholder’s Funds
Where, Total Shareholder’s Funds = Equity Share Capital + Preference Share Capital + All Reserves + P&L A/c Balance –Fictitious Assets
Significance:- This ratio reveals how profitably the proprietor’s funds have been utilized by the firm. A comparison of this ratio with that of similar firms will throw light on the relative profitability and strength of the firm.
(b) Return on Equity Shareholder’s Funds:-
Equity Shareholders of a company are more interested in knowing the earning capacity of their funds in the business. As such, this ratio measures the profitability of the funds belonging to the equity shareholder’s.
Formula:
Return on Equity Shareholder’s Funds = Net Profit (after int., tax & preference dividend) / Equity Shareholder’s Funds *100RATIO ANALYSIS
Where, Equity Shareholder’s Funds = Equity Share Capital + All Reserves + P&L A/c
Balance – Fictitious Assets
Significance: – This ratio measures how efficiently the equity shareholder’s funds are being used in the business. It is a true measure of the efficiency of the management since it shows what the earning capacity of the equity shareholders funds. If the ratio is high, it is better, because in such a case equity shareholders may be given a higher dividend.
(c) Earnings Per Share (E.P.S.):- This ratio measure the profit available to the equity shareholders on a per share basis. All profit left after payment of tax and preference dividends are available to equity shareholders.
Formula:
Earnings Per Share = Net Profit – Dividend on Preference Shares / No. of Equity Shares
Significance:- This ratio helpful in the determining of the market price of the equity share of the company. The ratio is also helpful in estimating the capacity of the company to declare dividends on equity shares.