CHAPTER-I

INTRODUCTION
1.1 Background of the Study
The overall development of the nation depends upon the uplifting of the national
economy which in turn depends upon the nature of its infrastructure. One of the basic
elements in achieving self reliant growth of the economy for sustaining desired level of
economic development is an accelerated rate of infrastructure development.
Telecommunication has been identified as one of the three basic infrastructures apart
from Power and Roads, which is needed for the socio-economic development. Investment
in telecom sector has multiplier effects. Telecommunication is the pre-requisite for other
dimension of development and it plays an important role for other industries. Information
and the facilities for accessing, processing and disseminating it in electronic form have
become strategic resources as important as and, labors and capital. Thus telecom has dual
role as both a traded product and service and as a facilitator of trade in other product and
services. Moreover Telecommunication can have a dramatic impact on achieving specific
social and economic development objectives.
In fact the development of telecommunication is not only vital for IT based industry but it
has wide effect on entire economy of the country. Realizing the facts, Nepal Government
has also recognized that the provision of world class Telecommunication infrastructure is
the key to rapid economic and social development. For bringing telecommunication as
the major infrastructure of development, government has implemented national
communication policy (1992). Introduction of liberalized economic policy in Nepal has
gradually facilitated the private sector investment as a result multinational companies
also showed their presence. At this context, to speed up the process of telecommunication
development, The Telecommunication Act; 1997 was brought into action which has
created the competitive atmosphere in telecom industry which resulted the private sector
investment in the telecommunication industry. As size and sector of telecommunication
grew up to IT, Telemedicine, e-governance, e-commerce, e- education etc the
government brought the telecommunication policy; 2004 to address the entire
telecommunication sector.

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At this point of time, there are various telecom based company which are actively doing
their business. The major telecommunication service providers are Nepal Doorsanchar
Company Limited, United Telecom Limited (UTL) and Spice Nepal (P) Ltd. Other small
Players are STM Sanchar (P) Ltd and Global Plus. UTL is in the business of fixed basic
telephone and limited mobility mobile telephone of wireless technology whereas Spice
Nepal has the business of Mobile telephone. Both UTL and Spice Nepal have the focus in
urban area only. STM has got the license to perform the business of V-Sat Telephone of
534 VDCs of eastern development region where as Global plus has been establishing
Tele-centers in various part of Mustang District.
Nepal Doorsanchar Company Limited is popularly known with its name as Nepal
Telecom as a trade mark. In Telephone service, Nepal Telecom is the key market player
as it holds about 64% of total no mobile phones and 89 % of total no of Fixed
Telephones.(NTA-MIS-2066, Ashad) It offers various services like Basic telephone,
Mobile telephone, Internet, email, ISDN,ADSL, Leased line etc. The primary objective
incorporated by Nepal Telecom is to provide reliable and affordable telecommunication
services in every nook and corner of the country. It has been expanding the services in
urban as well as rural area to fulfill the socio-economic development objectives. Nepal
Telecom is the member of International Telecommunication Union (ITU). It has been
able to provide its telephone services with STD and ISD services in all the 75 districts of
the country. It has 245 Public Switch Telephone Network (PSTN) exchanges in 75
districts and has covered 3332 VDC with Telephone service and exerting its best effort to
cover remaining VDC, where its Telephone service is not accessed. Total Telephone line
distribution till Ashadh 2066 BS is 4,293,442. The installed capacity of PSTN telephone
line is 726,980 on the other hand the organization is working hard to build the one
million capacity of CDMA based Fixed as well as mobile telephone and 3.5 million of
GSM based Mobile telephone within few years. The company has the telephone density
of 15.58 per 100 people which one year ago was 10.12 there are 98,981 internet users and
4,504 e-mail users subscribed from the company. There are 4,841 International
Telephone circuits in operation and domestic microwave channels available are 4584E1.
Similarly Optical SDH-E1 link are in the figure of 1693 which are owed by the company.
East west Optical Fiber link is considered as information super high way and is expected

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to bring about IT revolution in the country. Nepal Telecom has high contribution in the
total revenue of the nation which is about 4.2 % of total national revenue. Considering
the fact The Company has got the felicitation of ‘Commercially Important Person’ (CIP)
from the government. The major portion of the total revenue of the company is from
International Subscriber dialing. These days due to fall in ISD tariff and illegal use of
Voice over Internet Protocol, there is high fluctuations in the trend of International
revenue. Other services provided by Nepal Telecom in various parts of the country are
Telegram, Telex, PCC, IVR, IN, HCD, V- SAT, ISDN,ADSL, In merest etc which too
have their own importance in revenue generation and serving the people for their
information and communication needs. The quality of service it has produced is
considered to be of international class as the company uses the latest technology of the
reputed International brands. The tariff of service it offers is considered to be of high
rational as compared to the other Telecommunication operators of the Asian region.
Though the company was registered in Magh 2060 BS in office of the company registrar
the company has got the formal inception in Baisakh 2061 BS after all the assets and
liabilities of then Nepal Telecommunications Corporation (NTC) were transferred to it by
formal notice of the government in gazette. Nepal Telecommunications Corporation was
state owned enterprise established in 2032 BS to provide telecommunication in the
nation. Before its establishment the telecommunication service were managed and
distributed by Telecommunication Development Board both as an operator and authority,
a government body under the ministry of communication. The main reason behind the
changing of status of ‘Nepal Telecommunications Corporation’, a state owned enterprise
as a public utility concern to ‘Nepal Doorsanchar Company Limited (Nepal Telecom)’ as
a limited company is to transfer the government investment in the organization to the
private sector. This was happened according to the policy of economic liberalization that
the government has adopted. Nepal Telecom is just a hypothetical company as its entire
ownership is yet held by government in the name of state owned entities. The change of
organization status gave it autonomy to some extent though there is still interference of
government in decision making process. The company is on the process of issuing share
to the public and expected to enjoy full autonomy after its share disbursement to private
sector.

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The capital structure of Nepal Telecom consists of only equity capital and at present
Nepal Telecom has the authorized capital of Rs 25 Billion allocated to 250 million shares
of each Rs100 Par. Issued and paid up capital is Rs 15 Billion. Distribute 5% to its
employee and 3.6% to the public.
The company at its top most level has a seven member Board of Director (BOD).
Chairman is secretary of Ministry of information and Communication; Members are
representatives from Ministry of information and communication, Ministry of Finance,
Ministry of Law, Justice and Parliamentary affairs and Citizen Investment Trust. Other
members are Managing Director and representative from employees (Article of
memorandum-2). Senior Management Committee is the second in hierarchy which is
headed by Managing Director and constitutes senior executives of the company.
Managing Director performs as a Chief Executive Officer (CEO). Under the Head Office
there are 20 departments 4 directorates. The regional directorates are performing as full
fledged Profit centers. Total approved Post in NT are 7,088 but the total no of working
manpower at present is 5,876 out of which 1,192 are Officers and 4,684 are of Assistant
level.( MIS-2066;Asadh).
Industrialization and Information revolution has brought the globalization which is
considered as the economic, technical and political integrations of the people in world.
This in reality made the world as a global village. At the 21’st century people in one
corner of the earth is affected by the activities in another corner. Globalization made
trade facilitation around the world. In this context Nepal could not be alone without
affiliating to the global Trade forum of World Trade Organization (WTO), hence became
the member of World Trade Organization in 2004. Now Nepal is the member of other
regional economic blocks BIMSTEC and SAARC. To become successful in present
global environment of the business, organizations should be able to face the global
competition in quality and cost of the product. In this context Nepal has adopted the
liberalized economy and hence giving up the ownership of state owned enterprises
gradually by participating private sector in the ownership. The Government is promoting
the private sector by various means which facilitated the investment of private sector, as a

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result there are various players doing their business in Telecommunication Industry as
well.
In this context Nepal Telecom is facing competition in its services and seems to face stiff
competition in future. Despite the competition rose, the demands of NT services are high
but the company is not able to meet the customers demand due to various constraints like
government intervention, slow procurement procedure, management style, work culture,
mismanagement of resources etc.
Despite the various shortcomings the company plays vital role in achievement of desired
level of national development goal by fulfilling the need of reliable dimension of
infrastructure development.
Role of Nepal Telecom
 To fulfill the need of distance communication
 To add a reliable dimension of infrastructure development
 To introduce emerging technology of communication
 To enhance economic development of nation
To minimize the digital divide by serving in rural area

1.2 Focus of the Study

Although, Nepal Telecom has better performance than other state owned enterprise of
Nepal , in the sense that it is such a state owned enterprise which is operating under the
net profit margin since the establishment of NTC, coming days are not so easy as earlier
because it has to face stiff competition in the future. Financial statement show that the
Gross Revenue as well as Net Profit has increased to a tune of higher rate before 1998 but
after that the increasing rate is lower in comparison to earlier years. Profitability alone
could not show the overall financial position of the organization and to make the
assessment of the organizational strength and weakness, ups and downs, opportunities
and challenges financial performance analysis could be very important tool. Different
financial indicator shows the capability of the organization to meet the various
expectations of stakeholders of the company. The present study primarily focuses on the
financial performance aspect of company in terms of its capacity on meeting financial

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obligation, generating rate of return, capital investment and internal revenue generation.
The study confines to the problem of financial operation in Nepal Telecom on the basis
of primary information and latest available secondary data. It will light upon the past
financial strength and weakness faced by the company and will provide the guideline to
improve the financial health.

1.3 Statement of the Problem

Nepal Telecom as a state owned enterprise has involved in providing the cost effective
and people friendly telecom services in the nation since long time. The organization has
enjoyed monopoly in the telecom market and got policy privilege during long period. The
scenario has completely changed after recent entry of telecom operators in the market. As
those companies are involved in business of various telecom services the natural
monopoly enjoyed by Nepal telecom tends to be ended. In the emerging liberalized
policy that the government should not involve in the profit motive business except the
sensitive affairs and facilitating jobs, private and multinational companies were
established in the various part of the nation. Similarly the public enterprises were made
private by making them private company or public limited company. In this scenario,
Nepal Telecom a state owned enterprise is going to issue its share to the public as a
public limited company. In this context the analysis of financial health of Nepal Telecom
as a largest business enterprise in Nepal would have great deal of importance to the
various stakeholders.
Nepal Telecom as a state owned enterprise; it is complicated to assess the efficiency with
its socio economic development goals but every organization should have sound financial
health to be efficient in the utilization and management of the resources. Proper
collection, utilization and management of the fund is financial management. To make
assurance of the strong financial operation of the company, the empirical analysis called
financial performance analysis can have the great importance.
As most of the organization depends heavily upon the external and internal information,
industrialization without proper access of telecommunication is difficult to imagine.
Nepal is on the process of industrialization and people have the demand of new and new

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technology and telecommunication is now thought to be basic requirement in urban area
and important means of development in rural sector. In this context, there is high demand
of NT services and it does have a little market competition. Despite the fact NT has not
seen efficient to fulfill the demands.
The Balance sheet shows the huge amount of cash and bank balance lying idle. Volume
of sundry debtors seems to be very large. Various studies related to the NT pointed out
the problem of its outstanding debt collection and high liquidity position. Further
suggestion is that NT management should estimate immediate required funds and either
invest all the excess fund in marketable securities, or use that fund in refunding debt as
the interest it pays for loan for capital investment is less than the rate of earning in liquid
fund. Studies have shown that the return on total assets is not so good.
Thus the problem toward which this study is directed is assessment of financial operation
of Nepal Telecom. So, the present research tries to solve the following research questions:-
 What are sources of long term financing on Nepal Telecom?
 If assets utilization in Nepal Telecom is efficient?
 What is the position of Nepal Telecom to meet the current obligations?
 Is the company providing fair rate of return?
Financial analysis may not provide exact answer to these questions but it does indicate
what can be expected in the future.

1.4 Objective of the Study

Objectives of the study are guidelines by which the study can be conducted in a
systematic manner. The main objective is to assess the strengths and weakness of Nepal
Telecom. The specific objectives are:
 To analyze the financial performance of Nepal Telecom through financial
analysis.
 To fore see the future trend of different financial ratios.
 To study the relation between sales with total cost, sales with Investment with
profit.

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  To offer the Package of suggestions to improve the financial performance of
Nepal Telecom

1.5 Significance of the study

Analysis of financial performance is a crucial part of financial decision making process

of business enterprise. Poor financial management affects adversely on liquidity, turnover
and profitability. It is required to measure the financial position of the enterprise
periodically in order to ensure smooth function of an enterprise. Financial analysis assists
in identifying the major strengths and weakness of a business enterprise. It indicates
whether a firm has enough funds to meet the obligation, a reasonable accounts receivable
collection period, an efficient inventory management policy, sufficient plant property and
equipment and adequate capital structure, all of which are necessary if a firm is to
achieve the goal of maximizing shareholder's wealth. Financial analysis can also be used
to assess a firm's viability as an ongoing enterprise and to determine whether a
satisfactory return on investment is being earned for the risks taken.
Nepal Telecom is an enterprise of great national concern. It has to face stiff competition
in near future as private players are already entered and there is open door to further
enter. The government is going to participate to the private sector in its ownership. So the
concerned parties are looking over its performance with keen interest. As a state owned
enterprise it has the obligation of socio economic development with its profitability
concern. So the insight over financial position of Nepal Telecom; leading
telecommunication service provider in the nation will be useful to provide information to
stakeholders and draw attention of concerned management regarding what can be done
for further strengthening the financial position. Further it will be important for the
following groups and individuals.
 Present and perspective customers
 Present and perspective investors
 Policy making authority
 Further researchers
 Government

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  ICT based companies

1.6 Limitation of the study

There are some limitations while undergoing this study. The main limitations of the study
are:
 This study is based on the 5 years financial reports.
 Only the financial aspect and financial structure analysis shall be made with bird
eyes view, the other area such as Marketing, Human Resource, Research and
Development aspects are also the combined input to measure the overall
efficiency.
 Secondary data are collected from annual reports of the concerned enterprises, so
the study suffers from all those limitations that are associated with these reports.
 The study makes the analysis of financial performance of Nepal Telecom; it may
not be applicable to any other enterprise.
 There is time and budget limitation.

1.7 Organization of the study

The study is divided in the following five chapters as prescribed by the university.
Chapter I : Introduction
Chapter II : Review of Literature
Chapter III : Research Methodology
Chapter IV : Presentation and Analysis of Data
Chapter V : Summary, Conclusion and recommendations
First Chapter focuses on general background of the study. It deals with major issues to be
investigated along with general background of the study, statement of problem, objective of
study with organization of the study. This chapter signifies the rational of this study.
Second chapter deals with conceptual consideration and review of related literature which
provide a framework with the help of which the study has been accomplished. In this
chapter major empirical works has been also discussed.

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Third Chapter is devoted to methodological approach employed in this study. This chapter
includes research design, nature and sources of data, population and samples, method of
analysis and definition of key terms.
The fourth chapter deals with the techniques used in analyzing the collected data and its
presentation in the descriptive and analytical manner. This chapter also deals with the
strengths, weakness, opportunities and challenges faced by Nepal Telecom.
The fifth chapter consists of summary, conclusion, and recommendation of the study.

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 CHAPTER-II
REVIEW OF LITERATURE

The review of literature basically highlights the existing literature and research work
related to the present research being conducted with the view of finding out what had
been already explained by the authors and researchers and how the current research adds
further benefits to the field of research. This review of literature had been classified into
three subgroups as follow.
 Theoretical review
 Review of related studies

2.1 Theoretical review

Finance is concerned with those activities related to money. Previously finance was
limited for procurement of long term fund. Due to industrialization, technological
innovations and intense competition, there has been a vast change in the philosophy of
management. Likewise the discipline of financial management has undergone an
unprecedented change. "Financial management is that managerial activity which is
concerned with planning and controlling of the firm's financial resources (Pandey,
2004:31).
Evaluation of financial performance is a study of overall financial position of any
organization. It is closely related to the decision making. In the modern context, it gives
vital support for the investment decisions, financing decisions and dividend decisions.
Financial performance analysis is undergone with the help of periodically made financial
statements of the firm.

2.1.1 Financial statements

The Financial Statements are the means of presentation of a firm's financial condition and
basically consist of two types of statements - The Balance Sheet & Income Statement.
These are prepared to report the overall business activities as well as financial status of

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the firm for a specified period to its stakeholders. These contain summary of information
regarding financial affairs that is organized systematically. The top management is
responsible for preparing these statements. “The basic objective of financial statements is
to assist in decision making. The analysis and interpretation of financial statements
depend on the nature and type of information available there in” (Panday, 2004: 31).
Hence financial statement refers to any formal and original statement that discloses the
financial information related to any business concern during a period. The income
statements and balance sheet usually prepared at the end of each financial year show the
firm’s position.
A) Balance Sheet
Balance sheet is one of the basic financial statements of an enterprise. It is also called the
fundamental accounting report. As the name suggests, the balance sheet provide
information about financial standing or a position of a firm at a particular point of time
usually end of the financial year. It can be visualized as a snapshot of the financial status
of a company (Khan and Jain, 1993:13).
Balance sheet summarizes the assets, liabilities and owner’s equity of a business at a
moment of time, usually at the end of the financial year. Balance sheet is a financial
statement, which contains information regarding different capital expenditures made on
purchase of assets on particular date and information regarding various sources of funds
acquired by the business concern to finance these assets and also the different sources of
capital and liabilities at that particular point of time.
B) Income Statement
Income statement is designed to portray the performance of the business firm for specific
period of time i.e. for a year or month or quarter. The business revenues and expenses
resulting from the accomplishment of the firms operation are shown in the income
statements. It is the “Scoreboard” of the firm’s performance during particular period of
time. It shows the summary of revenues, expenses and net income or loss of a firm for a
particular period of time. Income statement also serves as a true measure of the firm’s
profitability (Khan and Jain, 1993:15).

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2.1.2 Financial Analysis

Financial analysis is the process of determining financial strengths and weaknesses of a

company by establishing strategic relationship between the components of a balance
sheet and profit and loss statement and other operative data (Pandey,1999:96)
In the word of Myer, '"Financial statement analysis is largely a study of relationship
among the various financial factors in a business as disclosed by a single set of
statements and a study of the trends of these factors as shown in a series of
statement,”(Myer,1961:4).
Financial statement analysis involves the use of various financial statements. These
statements perform several things. First, the balance sheet summarizes the assets,
liabilities and owner’s equity of a business at a moment in time, usually the end of a year
or a quarter. Next, the income statement summarizes the revenues and expenses of the
firm over a particular period of time, again usually a year or quarter. While the balance
sheet represents a snapshot of the firm’s financial position at a moment in time, the
income statement depicts a summary of the firm’s profitability over time. From these two
statements certain derivate statements can be produced, such as statement of retained
earnings, a sources and uses of funds statements and a statement of cash flows etc. (Van
Horne, 1996:56).
"Financial analysis is the process of identifying the financial strengths and weaknesses of
the firm by properly establishing relationship between the items of the balance sheet and
profit and loss account. (Pandey, 2004:560). Analyzing financial statements is a process
of evaluating relationship between component parts of financial statements to obtain a
better understanding of a firm's position and performance (Metcalf, 1976:157).
In the words of Raymond P. Neveu, "Financial statement analysis allows managers,
investors and creditors as well as potential investors and creditors to teach conclusion
about the recent and current status of a corporation” The checking of financial
performance in a business deserves much attention in carrying out the financial position.
It also requires to retrospective analysis for the purpose of evaluating the wisdom and
efficiency of financial planning. Analyzing of what has happened should be of great value
in improving the standards, techniques and procedures of financial control involved in

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carrying out finance function.
The four basic statements contained in the annual report are the balance sheet, the income
statement the statement of the retained earnings and the statement of cash flows.
Investors use the information contained in these statements to form expectations about
the future levels of earnings and dividends and about the risks of these expected values.
Financial statement analysis generally begins with the calculation of a set of a financial
ratios designed to reveal the relative strength and weakness of a company as compared to
other companies in the same industry, and to show whether the firm's position has been
improving or deteriorating over time. (Weston, 1996:306). Financial analysis is that sort
of calculation which is done with the help of annual report. And the annual report would
contain the essentials for such analysis. So the data retrieved from the annual report is
indispensable for the financial analysis.
It is both an analytical and judgmental process that helps answer questions that have been
properly posed. Therefore, it is means to end. Apart from the specific analytical answer,
the solutions to financial problems and issues depend significantly on the views of the
parties involved, the related importance of the issue and on the nature and reliability of
the information available (Helfert, 1992:2).
Financial appraisal is a scientific evaluation of profitability and financial strength of any
business concern. Financial appraisal is the process of scientifically making a proper,
critical and comparative evaluation of the profitability and financial health of a given
concern through the application of the techniques of financial statement analysis. A
complete financial analysis and interpretation of financial statement involves the
assessment of past business performance, an evaluation of the present condition of the
business and the predictions about the future potential for achieving expected or desired
results(Jain,1996:36- 37).
The analysis and interpretation of financial statement depicts the actual position of a firm
regarding the objectives of that firm within a specified period of time. "Financial
appraisal is a process of synthesis and summarization of financial and operative data with
a view to get an insight into the operative activities of a business enterprise. It is a
technique of X-raying the financial position as well as progress of a concern" as observed
by Robert H. Wessel.

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According to Man Mohan "The main function of financial analysis is the pinpointing of
the strengths and weakness of a business undertaking by regrouping and analysis of
figures contained in financial statements by making comparison of various components
and by examining their contents. This can be used by financial managers as the basis to
plan future financial requirement by means of forecasting and budgeting procedures.”
"Financial statement analysis involves a comparison of firm’s performance with that of
other firms in the same line of business which often is identified by the firm's industry
classification. Generally speaking, the analysis is used to determine the firm's financial
position in order to identify its current strengths and weakness and to suggest actions that
might enable the firm to take advantage of the strengths and correct its
weaknesses."(Weston, 1996:78)
"Financial analysis is used primarily to gain insight into operating and financial problems
confronting the firms with respect to these problems. We must be careful to distinguish
between the cause of problem and symptom of it. It is thus an attempt to direct the
financial statements into their components on the basis of purpose in the one hand and
establish relationships between these components and between individual components
and totals of these items on the other. Along with this, a study of various important
factors over the past several years is also undertaken to have clear understanding of
changing profitability and financial condition of the business organization.”(Hampton,
1998:99).

Thus, Jain says "Much can be learnt about business performance and financial position
through appraisal of financial statements, the appraisal or analysis of financial statements
spotlights the significant facts and relationship concerning managerial performance,
corporate efficiency, financial strength and weakness and credit worthiness that would
have otherwise been buried in a maze of details.”(Jain, 1996:37)

2.1.3 Objectives of Financial Analysis

Financial analysis enables us to explore various facts related to the past performance of
business and predicts about the future potentials for achieving expected results. Major

15
objectives of analysis of financial statement are to assess various factors in relation to the
business firm as presented below.
 The present and future earning capacity or profitability of the concern
 The operational efficiency of the concern as a whole, and of its various parts or
departments.
 The short-term and long-term solvency of the concern.
 The comparative study regarding to one firm with another firm.
 The possibility of developments in the future making future forecasts and
preparing budgets.
 The financial stability of business concern,
 The real meaning and significance of financial data,
 The long term liquidity of its fund.

2.1.4 Need of Financial Analysis/ Financial Statement Analysis

The need for the analysis of financial statement arises in order to address the following
questions (Pradhan, 2000: 47-48).
 How was the firm doing in the past? Was there any problem? If so, in what Area?
 How it is doing at present? Is it doing better compared to the past performance,
competitors and industry average? Is there any problem at present? If so, in what
areas?
 What about the future? Is there any likely problem on the way in the future? What
will its position be in the future?
 What corrective actions can be taken now to solve the problems and improve the
performance? How will the recommendation of any course of actions or changes
in the policy or practice help solve problems and improve the company's position?
 What are the expected results of recommendations? Are there any improvements?

2.1.5 Significance of Financial Analysis

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Significance of analysis lies on the objectives of financial analysis of any firm. The facts
discovered by the analysis are perceived differently by different groups associated with
the concern. The facts and the relationships concerning managerial performance,
corporate efficiency, financial strengths and weaknesses and credit worthiness are
interpreted on the basis of objectives in the hand.
Such analysis leads management of an enterprise to take crucial decisions regarding
operative policies, investment value of the firm, internal financial control system and
bargaining strategy for funds from external sources (Agrawal, 1993:582).
The parties that are benefited by the results or conclusion drawn from the analysis of
financial performance can be numerated as (Srivastava, 1993:58-59)
 Top Management
 Creditors
 Shareholders
 Economists
 Labor Unions
A) Top Management
The responsibility of the top management is to evaluate:
 Are the resources of the firm has been used effectively and efficiently?
 Is the financial condition of the firm sound enough?
On the basis of past facts, firms can anticipate their future. Hence, top
management can measure the success or failure of a company’s operations,
determine the relative efficiency of various departments, process and products
appraise the individual’s performance and evaluate the system of internal audit.
B) Creditors
The creditors can find out the financial strength and capacity of the borrower to
meet their claims. Trade creditors are interested in the firm’s ability to meet their
claims over a short span of time. The suppliers of long term debt focus upon the
firm’s long term solvency and survival. A lending bank through and analysis of
these statements can decide whether the borrower retains the capacity of
refunding the principal and paying interest in time or not.
C) Shareholders

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 The shareholders, who have invested their money in the firm's shares, are most
concerned about the firm's earning. They evaluate the efficiency of the
management and determine about the necessity for the change. In large company
the shareholder's interest is to decide whether to buy, sell or hold the shares. They
wish to buy the shares in case of sound performance of the firm where as they
simply intend to hold the shares in the condition of satisfactory performance. But
they are hurried to sell the shares in case of poor performance.
D. Economists
To diagnose the prevailing status of business and economy, economists analyze
the financial statements (of any firm). The government agencies analyze them for
the purpose of price regulation; rate setting and similar other purposes.
E. Labor Unions
Productivity is the synonym of well-motivated labors. Labor unions are interested
in rights and benefits of labor to enhance the moral of labors. For further
motivation they expect increase in wages, fringe benefits and so on. These
benefits are affected by the company's profitability condition. Therefore the union
assesses the financial condition of the firm to determine whether the firm is in the
situation or not to make such facilities available.

2.1.6 Process of Financial Analysis

Financial analysis basically financial statement analysis, is a technique of answering

various questions regarding the performance of a firm in the past, present and the future
on the basis of past performance. The analysis recommends the steps to be taken by
financial managers while undergoing the assessment of financial position.

The questions, that as elucidated above create the need to follow certain steps such as
first identification and analysis of problem in order to come up with appropriate
recommendations, and then to project the expected results and examine them if there are
improvements before implementing such recommendations.

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2.1.7 Types of Financial Analysis

In the words of Man Mohan “The nature of financial analysis differs according to the
purpose of the analyst. A distinction may be drawn between various types of financial
analysis either on the basis of material used for the same or according to the modus
operandi of the analysis”
A.)According to material used
1. External Analysis
It is made by those who do not have access to the detailed records of the company. This
group, which has to depend almost entirely on published financial statements, includes
investors, credit agencies and governmental agencies regulating a business in a nominal
way.
2. Internal Analysis
The internal analysis is accomplished by those who have access to the books of accounts
and all other information related to the business. While conducting this analysis, the
analyst is a part of the enterprise he is analyzing. Analysis for managerial purpose is the
internal type of analysis and is conducted by executives and employee of the enterprise as
well as governmental and court agencies which may have major regulatory and other
jurisdiction over the business.
B. According to Modus Operandi Analysis
1. Horizontal Analysis
When financial statements for a number of years are reviewed and analyzed, the analysis
is called horizontal analysis. As it is based on data from year to year, rather than on one
date or period of times as a whole, this is also known as dynamic analysis.
2. Vertical Analysis
It is frequently used for referring to ratios developed for one date or for one accounting
period. It is also called static analysis.
Besides, the types of financial analysis on the basis of material used and modus operandi,
S.P Jain and K.L. Narang have categorized on the basis of objective of the study.
C.)According to Objective

19
1. Long Term Analysis
This is made in order to study the long term financial stability, solvency and liquidity as
well as profitability and earning capacity of a business concern. For the long run success
of a business concern, this analysis helps in the long term financial planning.
2. Short Term-Analysis
This is made to determine the short-term solvency, stability and liquidity as well as
earning capacity of the business. This analysis is helpful for short term financial
planning.

2.1. 8 Techniques of Financial (Statement) Analysis

The fundamental of the analytical technique is to simplify or reduce the data under
review to the understandable terms. There are various tools and techniques of financial
statement analysis, each of which is used according to the purpose for which the analysis
is carried out. The widely used techniques are as follows:
a. Ratio Analysis
b. Du Pont System of Financial Statement Analysis
c. Common Size Analysis
d. Funds Flow Analysis
e. Cash Flow Analysis
a. Ratio Analysis:
Ratio analysis has been used as a major tool in the interpretation and evaluation of
financial analysis. The term ratio refers to the numerical quantitative relationship between
the two items/variables. A ratio is calculated by dividing one item of the relationship with
the other base. In financial analysis, a ratio is used as a yardstick for the evaluation of
financial performance of the firm. "The analysis of financial ratio involves two types of
comparison. First, the present ratio may be compared with the past and expected future
ratios for the same company and second, the method of comparison involves comparing
the ratios of one firm with those of similar firm or with industry averages at the same
point, in time. Such comparison gives insight into the financial performance of the firm."
Ratio analysis is widely in use. It may not give the entire picture of an enterprise. Ratios

20
themselves are not conclusion. They are only the means. The Ratios are calculated from
data available in the financial statement of an enterprise. The Ratio completed from the
available data are numerical, there should not be the tendency to regard them as a precise
portrayals of a firm true financial status. For some firms, accounting data may closely
approximate economic reality, for others, it is necessary to go beyond the figures in order
to obtain their financial condition of performance.
Types of Ratios
Different Ratios can be calculated from the available data in the financial statement.
Broadly Ratios are classified in four groups. They are:
a) Liquidity ratios
b) Capital structure/leverage ratios
c) Activity ratios
d) Profitability ratios
a) Liquidity ratio
Liquidity refers to the ability of enterprises to pay its current liabilities. Liquidity implies
the utilization of such funds of the firm which are idle or in very little amount. A proper
balance between the two contradictory requirements i.e. liquidity and profitability are
required for the efficient financial management. The more current assets associated with
high liquidity and low profitability and vice versa. The less current Ratio and quick Ratio
are the most widely used ratios for the general purpose to measure the liquidity position
of an enterprise.
b) Capital structure/leverage ratios
The Capital Structure/Leverage Ratio is associated with the long -term solvency of an
enterprise. The long -term creditors would judge the soundness of a firm on the basis of
long term financial strength measured in terms its ability to pay the interest regularly as
well as repay the installment of principal due to dates or in one lump sum at the time of
maturity. Leverage Ratios show how much of an enterprise's fund are financed by debt &
equity. These Ratios also show the prospects for future financing.
The Capital Structure Ratio indicates the soundness of capital structure of an enterprise. It
can be calculated on two ways. The first approach is to examine what proportion of
borrowed capital occupies the capital structure i.e. calculated the Debt to Total Capital

21
Ratio. The second approach is to examine the number of times the interest earned
covered by earnings and to calculate the fixed charges covered by earnings.
c) Activity ratio
An Activity Ratio may be defined as the test of relationship between sales and various
types of Activity Ratios. Activity Ratios are employed to evaluate the efficiencies with
which the firm manages and utilizes its assets. These Ratios are also called Turnover
Ratios because they indicate the speed with which the assets are being covered or turned
over into sales. So Activity Ratios presume that there exists an appropriate relationship
between sales and various assets. The more important Activity Ratios for general
-purpose analysis are Inventory Turnover Ratio, Total Assets Turnover Ratio, Fixed
Assets Turnover Ratio, Capital Employed Turnover Ratio etc.
d) Profitability ratio
Profitability is very important aspect of management of any enterprise. It shows the
overall performance of an enterprise. The Profitability Ratios are calculated to measure
the operative effectiveness of an enterprise. Besides management of the company,
creditors and owners are interested in the Profitability Ratios of the firm. Profitability
Ratios can be calculated on the basis of either sales or investment. The important
Profitability Ratios, calculated in relation to sales are Net Profit Margin, Gross Profit
Margin, and Operating Expenses Ratio etc. Similarly, the important Profitability Ratios,
calculated in relation to investment are Return on Shareholders' Equity, Return on Capital
Employed, and Return on Fixed Assets etc. Together these Ratios indicate the firm's
efficiency of operation (Panday, 1998:133).

b. Du Pont System of Financial Statement Analysis:

"The Du Pont system is designed to show how the profit margin on sales , the assets
turnover ratio and the use of debt interact to determine the rate of return on
equity.”(Weston, 1996-307)
The Du Pont system of financial statement analysis is developed by the financial experts
of the Du Pont Company by putting together the effects of profitability, investment and
the equity ratios. The approach is based on the relationship among the three basic areas of
the firm such as (i) cost controlling area (ii) Assets management area and (iii) Financial

22
leverage area. The directed to address the concern of the shareholders; hence its main
focus is on the return on equity (ROE). The ROE is analyzed in terms of the factors that
directly affect the ROE. The factors such as costs, assets utilization and leverage ratio are
the grounds on which several test are made to see how the ROE is affected by such
factors. The following modified Du Pont Chart presents the relationship among these
factors and ROE.
Figure
Chart of Du Pont System of Financial Analysis

Sales

Net Operating cost

–
profit
+
Total
Profit Non operating cost
÷ cost
margin +

Taxes
Sales

Land &
× Building
ROA
Sales +
Net fixed
assets Machine,
÷ equipment
Total assets +
turnover Cash & marketable
Total
securities
assets +
Current
ROE × Inventories
assets
+
Account receivable
Total
assets
Debt
–
Total
assets
Equity + Equity
multiplier

÷ Common stock
Equity
+
Premium
+
Equity
Retained earnings

Source: Weston and Brigham, 1996:99.

For a business firm, the return on assets (ROA) is the rate of return on the total
investment that includes both equity and debt capital. The ROA does not reflect the

23
actual rate of return to equity holders. What reflects the return for stock holders is the
return on their money (i.e. ROE), which is generally higher than the ROA. Thus ROA is
an overall measure and reflects the overall performance of the company. The Du Pont
system addresses the concerns of stockholder and focuses on ROE.
Du Pont equation defines ROE as a product of ROA and equity multiplier and ROA as a
product of profit margin and total assets turnover.
The Du Pont equation is as follows:
ROE = ROA x equity multiplier
= profit margin x total assets turnover x equity multiplier
= (Net profit/sales) x (sales/total assets) x (total assets/ equity)
C. Common Size Analysis
The common size analysis is another technique of analyzing the items of financial
statement on relative terms. Under this method, the percentage of every item in the
income statements and balance sheets is carried out for past several years to determine
the performance trend of each item during the period under analysis. After analyzing the
rising, falling or constant trend of efficiency in the business operation one can make
comparison with the industry average or competitors.
The common size analysis is carried out for a period of one or more. The income
statement items are divided by sales and expressed as a percentage of sales. The balance
sheets items are divided by total assets and expressed as percentage of total assets. These
percentages for a company are compared with the standard measures such as percentages
calculated in the same manner industry and the competitors.
Thus, the comparison shows the company's performance relative to competitors as well
as compared to its own past r
d. Funds Flow Analysis
Funds flow analysis is the statement of changes in financial position of any organization
that determines only the sources and used of fund between two dates of balance sheet. It
is prepared to uncover the information that financial statements fail to describe clearly. It
describes the sources from which funds were derived and used to which these funds were
put.
The statement is prepared to summarize the changes in assets and liabilities resulting

24
from financial and investment transactions during the period as well as those changes
occurred due to the changes in owner’s equity. It also uncovers the way of using financial
resources during the period by the firm.
Method of preparing funds flow statement depends essentially upon the sense in which
the term 'fund" is used. There are three concept of fund: cash concept, total resources
concept and working capital concept. According to cash concept, the word fund is
synonymous with cash. Total resources concept refers total assets and resources as fund.
The term' fund" represents only to working capital on the stated last concept However,
working capital concept of fund has gained wide acceptance as compared to the other
concepts. Therefore any transaction that increases the amount of working capital is taken
as source of fund while conducting funds flow analysis. Any transaction that decreases
working capital is treated as application. But, any transaction that affects current
liabilities or current assets without resulting any changes in working capital is not taken
as sources or use.
e. Cash Flow Analysis
This statement is carried out to know clearly the various items of inflow outflow of cash.
It is different from funds flow analysis in the sense, the analysis relates to the movement
of cash rather than the inflow and outflow of working capital.
It deals the causes of changes in cash position for the period of two balance sheets date in
brief. At the time of preparing cash flow statement, only cash receipt from debtors against
credit deals are considered as the source of cash. Similarly, cash purchases and cash
payments to suppliers for credit purpose are regarded as the uses of cash. The same holds
true for expenses and incomes outstanding and prepaid expenses are not to be considered
under this analysis.

2.1.9 Limitations of Financial Analysis

Financial performance analysis is of great significance for investor, creditor,

management, economist, and other parties having interest in business. It helps
management to evaluate its efficiency in past performance and takes decision relating to
the future (Jain, 1989-33). However, it is not free from drawbacks. Its limitations are

25
listed below.
(a) Historical nature of financial statements:
The basic nature of statements is historical. Past can never be a precise and can never be
perfectly helpful for the future forecast and planning.
(b) No subject for judgment:
Financial analysis is a tool to be used by experts, analysts etc. to evaluate the financial
performance of firm. That's why it may lead to faulty conclusion if used by unskilled
analyst.
(c) Reliability of figures:
Reliability of analysis depends on reliability of the figures of the financial statements
under scrutiny. The entire working of analysis will be vitiated by manipulation in the
income statement, window dressing in the balance sheet, questionable procedures
adopted by the accountant for the valuation of fixed assets and such other facts.
(d) Single year analysis is not much valuable:
The analysis of these statements relating to single year only will have limited use and
value. From this, one cannot draw meaningful conclusion.
(e) Result may have different interpretation: Different users may differently interpret the
result derived from the analysis. For example, a high current ratio may suit the banker but
it may be the cause of inefficiency of the management due to under-utilization of fund.
(t) Change in accounting methods:
Analysis will be effective if the figures derived from the financial statements are
comparable. Due to change in accounting methods the figures of current period may have
no comparable base, and then the whole exercise of analysis will become futile.
(g) Pitfall in inter-firm comparison:
When different firms are adopting different procedures, records, objectives, policies and
different items under similar heading, comparison will be more difficult. If done, it will
not provide reliable basis to assess the performance, efficiency, profitability and financial
condition of the firm as compared to the whole industry.
(h) Price level change reduces the validity of analysis:
The continuous and rapid changes in the value of money, in the present day,
economically also reduces the validity. Acquisition of assets at different level of prices

26
make comparison useless as no meaningful conclusion can be drawn from a comparative
analysis of such items relating to several accounting periods.
(i) Selection of appropriate tool
There are different tools of analysis available to the analyst. The tools to be used in a
particular situation depend on skill, training, intelligence and expertise of the analyst. If
wrong tool is used, it may lead to wrong conclusion. This may be harmful to the interest
of business.

2.2 Reviews from Articles \ Journal

Acharya (1999), in his article ‘Present status of NTC and privatization’, suggested to
utilize its fund rather than accept high interest bearing loans for capital investment, since
the rate of earning in liquid fund is less than the rate of interest it pays for the loan.. In
another article, again has suggested utilizing its internal resources. He concluded, “It has
become possible to maximize profit utilizing internal resources with minimum cost. On
the other hand, liquidity position of the corporation is quite high as it keeps capacity to
pay off whole debt at once if the circumstances so required.”
Neupane (2006), ‘Increasing bad debt: matter of thinking’ in his articles, pointed out
some facts about the bad debt and doubtful debt of Nepal Telecom during 2055/56 BS to
2059/60 B S.
He found the amount of doubtful debt is in increasing trend and Bad debt is in fluctuation
trend. He concluded the following reasons;
 There is no clear cut strategies and vision to recover bad debt in time.
 There is lack of inter office coordination to collect receivables.
 It has seen that there delay payment by government offices which has
enhanced others to make delay payment or remain unpaid.
 There is lack of motivation to employees as they feel recovery of bad debt
is a risky job.
 In some cases, there is unauthorized use of telephone service and
organization has no effective control mechanism.

27
A study on the performance of PEs of Nepal was conducted by the Management
Consultant Company. In the study it was concluded that the assets management, in
general Current Assets Management in particular were weakest point in Nepalese PEs.
It was pointed out that financial performance of the PEs was poor and indicated
management of the resources. The report also pointed out that because of the lack of
operational objectives, application of the long run planning, use of modern management
tools. Capital budgeting and efforts towards cost control had not seen made so far. The
study thus pointed that there was poor current assets management and management of
resources in PEs of Nepal thereby causing poor financial performance.
Shrestha (2001), “Analysis of capital structure of selected enterprises” pointed out that
majority of corporations in our country had large amount of government investment and
they possess huge amount of assets. He also pointed out that the existing assets were not
fully utilized in many corporations. As for example, according to him, it was found that
there had been large amount of construction materials remaining without use in NTC,
underutilized assets and holding of useless assets by NTC and so on. It’s the fund concept
as effective system of conversion was what our corporate managers must think to change
their traditional view of funds as “cash to cash” transaction

Upadhaya (2007), in his article “Five years financial projection of Nepal Telecom”
published in 3 rd Anniversary Souvenir 2007. He highlights Nepal Telecom have to
invest on modern technology in time and optimum utilization of the technology so as to
guide for the high return on investment. Only investing on modern technology may not
be sufficient to get the required return on investment its optimum utilization is must
otherwise the investment in new technology cannot give the return. Investment in modern
new technology may turn riskier for the company. He had analyze past five year
financial data of NTC and tried to project the financial future of the company. He found
that the operating profit of NTC is slightly increasing this is due to decreasing of
operating expenses. Study shows that NTC is successful to manage cost efficient. Return
on assets is about 26% this means Company is able earn 26% profit in terms of total
assets. He projects the future five years financial performance of NTC by using

28
regression analysis, judgmental approach. According to his projection growth rate on
return will remain around 4.69%.
Strategic plan of 7th phase of NTC-2002 based on the analysis of the period 1996-2000,
has drawn attention upon the investment environment of NTC as follow.
 Total income is increasing
 Liquidity is also increasing
 NTC has got sufficiently good fund for investment.
 There is high possibility of external funding to NTC as it has strong base to pay
the loans back on due time.

2.3 Review of Related Dissertations

There are few researches that have been made in the areas of financial performance of
NTC. Most of the researches have not been fully able to explain the financial condition of
this organization. Thus an attempt has been made to review the available thesis, which is
relevant to this study. Most research works have been done in the areas of manufacturing.
But there are few in the areas of public utilities.
Adhikari (1995), on his unpublished thesis "An Evaluation of financial Position of Nepal
Telecommunications Corporation" the main objectives of the study are: -
 To highlight the different aspects of NTC.
 To analyze, examine and interpret the financial position of NTC by using various
techniques.
 To give workable recommendation, if there are weaknesses inherent in the
corporation.

The Main Findings were

♦ Liquidity position
There is no serious liquidity problem in NTC. The current Ratio of NTC is 1.15 times.
The current assets of NTC are greater than current liabilities in each fiscal year. It shows
the better liquidity position of NTC. But it does not mean that there is not any liquidity
problem in NTC. The current Ratio is affected by the huge amount of sundry debtors.

29
The coefficient of correlation between current assets and current liabilities is 0.9904 and
the probable error of the correlation is .0089. This means that both the variables are
positively correlated and the corporation has been following a uniform policy to finance
current assets and current liabilities.
♦ Utilization of Fixed Assets
NTC has invested the huge amount in purchasing the fixed assets but the revenue
generating ability is very low in comparison to investment, which is only 0.04 times. This
shows that there is no effective utilization of fixed assets in generating revenue.
♦ Utilization of Total Assets
There is increasing trend in the size of total assets but it is not significant. The total assets
turnover ratio is very low. On an average, the total assets turnover ratio is only 0.22
times. Therefore, it can be said that the management of NTC is not able to utilize the
assets properly.
♦ Receivables Management
From the analysis of financial statement, we know that sundry debtors are the most
sensitive sector for the management of NTC. In an average, the collection period is 132
days. Only in two fiscal years, the collection period is below the average debt collection
period and in other three years the collection period is highly greater than the standard
debt collection period. Because the receivables are taking long period to be collected,
there is very low debtor's turnover ratio. Therefore, it can be inferred that the firm is not
adopting proper receivables management policy. When referred to NTC management, it
has set 90 days as standard collection period.
♦ Return on Total Assets
It is already mentioned that NTC has been operating under the profit position over the
five years study period. But return on total assets percentage shows poor performance.
On an average, NTC is able to earn only 3.88% rate of return on total assets. This shows
the very low profitability position. In the first four fiscal years, it has not even been able
to cover the average rate of return on total assets. But it has shown some improvements in
the last fiscal year of the study period. In most of the fiscal years, the return is very low in
relation to total assets. It means return has not increased as increment in the investment of
assets.

30
Adhikari shows major issues and gaps as follows:
 There is no effective utilization of assets in NTC.
 NTC has been seriously facing the problem of outstanding debt collection. In each
fiscal year, the collection period is too long in comparison to the allowed
collection period.
 Profit earned by NTC is not sufficient to make it self-reliance in its activities.
 Increment of cost in each fiscal year is another important issue of NTC. It is not
adopting the cost control tools and techniques.
 NTC is not able to fulfill the requirement of funds from the successful operation
of the corporation's activities. It has been taking considerable amount of loan to
fulfill the requirement of funds.
 Another hottest issue is that NTC is not conducted under the business principle.
The idea of privatization is coming into the telecommunication sectors boost. But
NTC is not in a position to meet the competition with the private sectors.
Aryal (1999), has submitted the Thesis entitled “Working Capital Management in
Nepal Telecommunication Corporation”
Objectives of the study were;
 To appraise working capital of NTC with respect to cash, receivable and
inventory management.
 To know how far NTC is being able to utilize its current assets properly.
 To evaluate the credit policy of NTC and its effectiveness.
 To study the relationship between sales and different variables of working capital
 To shed light on creation and mobilization of fund in NTC.
The Major findings were.
 NTC kept its large portion of profit as retained earnings. There are no systematic
techniques used for managing the cash in NTC.
 The fund collected from different sources is used mainly to purchase of fixed
assets. Large portion for purchase or current assets and in repayment of current
liabilities some amount is used in purchasing marketable securities.

31
  The sizes of current assets were increasing rapidly than the fixed assets. Which
indicates the conservative policy in current assets. Size of working capital in NTC
is far greater than the industry average.
 Cash and bank balance constitute the most important and largest element of
working capital in NTC. About 36%of current assets is held as cash during the
study period.
 The growth trend of current assets is highly increasing than the total assets and net
sales. The increasing trend of receivable seems to be consistent with the increase
in net sales. But the size of cash has been increased in an inconsistent manner,
which is the main cause of rapid increase in current assets.
 NTC kept excess amount of working capital. The volume of sales seems to be
increasing every year. But rate of growth in working capital is higher than that of
sales. Therefore, the turnover ratios are continuously decreasing every year
 There has been excess liquidity position in NTC. The relationship between
liquidity and profitability ratio does not follow any regular trend during that
period. There is no correlation between liquidity and profitability. This condition
does not meet the proposition that ‘Higher the liquidity lower the profitability’.
Calculation of t-statistic shows that there is no significance difference between
liquidity and profitability in NTC.
 There is no comprehensive long\midterm planning or control system of account
receivable in the corporation. Larger amount is still due from many a last years
and the amount of doubtful debt covers a significant portion of the account
receivable.
The Recommendations were as follows.
 Optimize liquidity position
 Concentrate on collection of outstanding bills. As credit terms and standard are to
much liberal in NTC. NTC should make appropriate decision regarding credit
terms, credit standard and policy.
 Apply cash management techniques so as to invest excess fund in marketable
securities.

32
  It would be better to pay off long term loan by using internal fund as NTC has
large amount of internal fund lying idle on one hand and a significant portion of
total fund is provided by high interest bearing loan on other.
 The financial position should be timely assessed through financial experts in order
to know the financial strengths and weakness.
 Long term and midterm planning and control system of account receivable and
cash budget should be prepared.
Neupane D. K (2001), had make study on the topic "A Study on Profit Planning in Nepal
Telecommunications Corporation". The general objective of the study was:
 To examine the present comprehensive profit planning system applied by NTC.
The other specific objectives of the study were to highlight NTC to analyze functional
budgets adopted in the Corporation, to analyze Ratio Analysis and variances of NTC, etc.

The Main findings were as follows:

 Budgets are prepared for the formalities.
 The corporation has no skilled planners
 NTC has not adequately considered controllable and non - controllable variables
affecting the organization.
 Actual sales line trends are always below the budgeted sales lines.
 Net Profit of NTC is in increasing trend.
 Huge amount of cash is remaining idle.
 There is no clear-cut criterion to separate cost into fixed and variable.
 Turnover Ratio is not so good even it enjoys monopoly market.
The Recommendations were as follows:
 NTC must restructure its capital structure.
 Long term objectives should be reformulated.
 Estimation of fund is needed.
 CVP relationship should be considered while formulating profit plan.
 There should be timely address of the weakness shown by the evaluation.
 A separate Profit Planning department must be established.

33
2.4 Research gap

The former research in telecommunication sector, there are only one stake holder telecom
company NTC. Nowadays there are many telecom service providers. In the past research
period the total no. of shares of NTC owned by Government. Now government
distributes the some portion of the shares to the public and its employee. Here is very
tough competition between the telecom service providers. The organization has enjoyed
monopoly in the telecom market and got policy privilege during long period. The
scenario has completely changed after recent entry of telecom operators in the market. As
those companies are involved in business of various telecom services the natural
monopoly enjoyed by Nepal telecom tends to be ended.

34
 CHAPTER - III
RESEARCH METHODOLOGY
Introduction
The basic objective of the study is to appraise the true picture of the financial
performance of Nepal Telecom and to recommend necessary suggestions for the
improvements. Financial analysis is the process of identifying the financial strengths and
weakness of the firm by properly establishing the relationships between capital and assets
of the organization. Financial analysis plays an important role in finding the real picture
of financial performance of any organization. It provides an idea to the management
while adopting the financial policies.
The study requires an appropriate research methodology so as to achieve its objectives.
The purposeful methodology has been followed for the fulfillment of the stated
objectives. The methodology consists of research design, nature and sources of data, data
collection procedure, data processing, sample and population and tabulation and
analytical tools used.
A human nature is so curious and always wants to do something new and different. For
this, several questions raises in his mind and to get the answers, he should gather
information from different sources and analyze them to get the result. The researcher for
gaining the knowledge about method of goal achievement, when we desire, is known as
research methodology (Joshi; 2001:12-13). Research methodology is the way to solve
systematically about the research problem. (Kothati; 1990:39)

3.1 Research Design

Research Design is the plan structure and strategy of investigation conceived so as to

obtain answer to research questions. The research is based on recent historical data as
well as primary source of information. The study will explore the financial position of
Nepal Telecom. The financial position refers to the amount of resources i.e. assets and
liabilities of the company on the specific period and the results of their utilization. To
conduct the study both descriptive and analytical research approaches has been adopted.
Descriptive approach is utilized for conceptualization, problem identification, conclusion

35
and suggestion of the study whereas analytical approach will be followed for the
presentation and analysis of data. Thus the study is analytical as well as exploratory in
nature. The data have been analyzed on the basis of standard financial formulas used in
the book of financial management.

3.2 Population and sample

As the study concerns to the financial position of Nepal Telecom, the study tries to draw
conclusion by analyzing yearly financial statement of the organization. Thus the entire
fiscal years are considers as the population and the five years from 2013/ 2014 to
2017/2018 are taken as sample.

3.3 Types and sources of data

The main source of data for the purpose of this study is the published financial statements
of Nepal Telecom. The study is thus mainly based on the secondary data. However a
good effort has been made to draw the vital information by gathering and analyzing
primary source of information. It constitutes mostly the annual reports, which comprises
balance sheet and profit and loss account statement. Information has also been
supplemented from various publication of Nepal Telecom. All other available published
and unpublished material concerning the study as well as some journal abstracts will also
be used in the study. The data has been processed through editing, coding and
classification of the collected data. Present data have been analyzed using various
analytical as well as descriptive financial and statistical tools. The reliability of the study
and its findings depends upon the mainly on secondary data
The major sources of data and information are as follows:
 Website of Nepal Telecom: http://www.ntc.net.np
 Annual Reports and other published documents of Nepal Telecom.
 Economic Survey F/Y 2008/09, Ministry of Finance, Government of Nepal
 Various Planning Documents, National Planning Commission Government of
Nepal

36
  Telephone inquiries
 Materials published in paper and magazines.
 Various Research Studies, Dissertations and articles related to the subject.
Other related books and booklets.

3.4 Data Collection Procedure

The main sources of data are secondary and they are collected directly from official
records and published statements. The researcher has consulted concerned officials for
data and information. Verification and clarification of data has been done through
discussion with the concerned authority.

3.5 Data processing

The balance sheet, income statements and the profit and loss accounts of the company for
5 years create from 2013/14 are collected for the convenience of the study. Then all the
raw data are processed and presented in tabular form with the help of simple arithmetic
rules. Entire raw data are converted into approximate and condensed in the form of
consolidated balance sheet and income statement. Most of the data have been compiled in
one form and processed and interpreted as per the need of the study. The secondary type
of data is presented for the analytical purpose after the tabulation of data. This type of
data processing will help to present the clear situation of financial position of Nepal
Telecom.

3.6 Analytical Tools Used in the Study

Since the study is concentrated on Financial Performance of Nepal Telecom some

important financial as well as statistical tools and techniques are used for the analysis.
The major tool employed for the analysis of this study is the ratio analysis that establishes
the quantitative relationship of two variables of the financial statements. Ratio Analysis is
the basic tool used for the study and is considered to be the powerful tool of financial

37
analysis. Beside ratio analysis, various other financial tools and statistical tools have been
studied.

3.6.1 Ratio Analysis

Ratio Analysis Ratio analysis is a widely used tool of financial analysis. Ratio analysis is
a powerful and important tool of financial analysis, which helps in identifying the health
of the organization. In other words, Ratio analysis helps the analyst make qualitative
judgment on the firm's financial position as well as performance.
It presents the actual situation of the organization. It provides guideline especially in
spotting trend towards better or poor performance. Since financial efficiency is vital
element to achieve the goal, the management should be aware of the current financial
position. If present condition can be assessed correctly, then the management can predict
the future position, and take corrective actions to improve the financial position. So it is
very important for any organization to analyze its financial position with the help of ratio
analysis.
Ratio analysis helps in identifying the strengths & weaknesses of the organization.
Through Ratio analysis, one can meaningfully summarize the large quantities of financial
data to make qualitative judgment about the firm's financial performance as well as
financial position. The financial Ratio is simply the relationship between two figures
taken mainly from the financial statements of a business firm. Mathematically, Ratio
refers to the numerical or quantitative quotient between two variables. A Ratio is
calculated by dividing one item of the financial statement with other. The primary
purpose of Ratio is to point out areas of further investigation. Ratio analysis is used as a
major tool in interpreting and evaluating financial statements.
Ratio analysis stands for the process of determining and presenting the relationship of
items and groups of items in the financial statement. According to Van Horne, "to
evaluate the financial condition and performance of a firm, the financial analysis needs
certain yardsticks. The yardstick frequency used is a Ratio or index relating to pieces of
financial data to each other."(Van Horne, 1998:759)

38
3.6.1.2 Types of Ratio Used

Ratio may be classified in number of ways keeping in view of the particular purpose.
There are different views about classification of ratio analysis. According to James C Van
Horne,” Different types of ratios namely liquidity ratio, leverage ratio , turnover ratio and
profitability ratios are used in analysis of the financial position of a company.” The study
considers only those ratios, which are essential for decision making of capital structure.
Following ratios are used to know the financial performance of Nepal Telecom.
A) Liquidity Ratio
B) Turnover Ratio/Assets Management Ratio / Activity Ratio
C) Profitability Ratio
D) Leverage/ Solvency Ratio/ Debt Management Ratio
A. Liquidity Ratio
Generally, the first concern of the financial analysis is liquidity. It tests whether the firm
will be able to meet its maturing short-term obligations or not. The preparation of cash
budgets & funds flow statements is required for detailed liquidity analysis of a company,
but Liquidity Ratios provide a quick and easy measure of liquidity as it shows the
relationship between cash & other current assets to current liabilities. Two commonly
used liquidity Ratios are presented here. This Ratio helps to analyze the financial capacity
of NTC to repay current liabilities and short - term loan.
II. Current Ratio
Commonly used to measure the short term solvency of a firm. It is a measure of short -
term financial liquidity that indicates the availability of the rupees of current assets for
each rupee of current liabilities. "The higher the Current Ratio, the larger is the amount of
rupees available per rupee of current liability, the more is the firm's ability to meet
current obligations and the greater is the safety of funds of short - term creditors."(Khan,
3Ed: 4) The current assets normally include those assets that can be converted into cash
within a year; such assets are marketable securities, accounts receivable and inventories.
Current liabilities generally include those obligations maturing within a year; such
liabilities are accounts payable, short term notes payable, current maturities of long term

39
debt, accrued income taxes and other accrued expenses etc. The Current Ratio is
calculated by using this formula.
Current Ratio = Currents/ Current Liabilities
II. Quick Ratio
The Quick Ratio is calculated by deducting inventories from current assets and dividing
the remainder by current liabilities. Generally, quick assets mean those types of assets
that can be converted into cash quickly without any loss in value. So cash is considered
the most liquid or quick asset and other quick assets include sundry debtors, bills
receivables, marketable securities etc. Inventories are typically the least liquid of the
firm's current assets and the assets on which losses are most likely to occur in the event of
liquidation. Therefore, the measure of the firm's ability to pay off short term obligation
without relying on the sale of inventories is important.

Quick Ratio = (Current Assets - Inventory) / (Current Liabilities)

OR
Quick Ratio = Quick Assets / Current Liabilities

B. Activity Ratios
"Activity Ratios are used to measure the speed with which various accounts are converted
into sales or cash."(Lawrence, 5th Ed; 1997). Funds have been invested in various assets -
fixed as well as current to generate sales and profits in the firm. And these Ratios, also
called Turnover Ratios, are employed to evaluate the efficiency with which the firm
manages and utilizes its assets. So it involves a relationship between sales and various
types of assets. A number of Ratios are available for measuring the activity of the firm.
I. Inventory Turnover Ratio
Inventory Turnover Ratio indicates the efficiency of the firm in producing and selling its
product. It is the measurement of how quickly inventory turns into sales. Generally, the
higher the Inventory Turnover Ratio, the better is the inventory management. Low Ratio
is either the sign of slow moving / obsolete inventory or the sign of excess inventory level
than warranted by the production & sales activities. A very high Ratio should also be
carefully analyzed as it may be the result of carrying too low level of inventory. Due to

40
this situation, the firm might suffer from the problem of frequent stock outs and frequent
replenishment in small volume which adversely affect the total cost of maintaining the
inventory (ordering and carrying costs). Thus neither too high nor too low Ratio should
be better for the company. It is calculated by dividing, the cost of goods sold by average
inventory.
Inventory Turnover = Cost of Goods Sold / Average Inventory
In the absence of information on cost of goods sold, one can use the following formula to
find Inventory Turnover Ratio.
Inventory Turn Over Ratio = Sales / Inventor
Where, Average inventory is the closing balance of inventory.
We can also calculate the Average Age of Inventory dividing the number of days in a
year i.e. 360 by inventory turnover ratio. It shows the average length of time, inventory is
held by the firm.
Average Age of Inventory = 360 / Inventory Turnover Ratio
II. Debtors (Account Receivable) Turn Over Ratio
Many firms sell their goods both for cash and credit. And when goods are sold for credit
to the customers, debtors are created. Debtors Turnover Ratio indicates how many times
debtors are turned into cash each year. Generally higher value of this Ratio indicates the
management of credit is more efficient. Debtors Turnover Ratio is calculated dividing
credit sales by average debtors. But in the absence of information about a firm's credit
sales and opening & closing balances of debtors one can calculate this Ratio dividing
sales by closing balance of debtors.
Debtors Turnover Ratio = Credit Sales / Average Debtors
OR
Debtors Turnover Ratio = Sales / Debtors
III. Average Collection Period (ACP)
The average number of days in which debtors remain outstanding is called Average
Collection Period. It can be computed as follows.
ACP = Debtors / Average Credit Sales per Day
OR
ACP = Debtors*360 / Credit Sales

41
But in the absence of information about a firm's credit sales, the Ratio will be calculated
as follows:
ACP = Debtors/ Average Sales per Day
Or
ACP = Debtors*360 / Sales
IV. Assets Turnover Ratios
Assets Turnover Ratio is simply the relationship between sales and assets. Several Assets
Turnover Ratios can be calculated. But only four types of Assets Turnover Ratios are
calculated in this research.
a). Total Assets Turnover Ratio
This Ratio shows the relative efficiency in utilizing its resources in order to make output
by the firm. It is calculated by dividing sales by total assets.
Total Assets Turnover Ratio = Sales / Total Assets
b). Fixed Assets Turnover Ratio
Fixed Assets Turnover measures the relative efficiency of utilizing fixed or earning assets
to generate sales by the firm. And it is calculated simply dividing sales by net fixed assets
of the firm.
Fixed Assets Turnover Ratio = Sales / Net Fixed Assets
V. Working Capital Turnover Ratio
A firm may like to relate net working capital to sales to judge the efficiency of net current
assets employed by the firm. It may computer net Working Capital Turnover Ratio by
dividing sales by net working capital. Mathematically,
Working Capital Turnover = Sales / Net Working Capital
This Ratio indicates the amount of sales generated by each rupee of current assets that is
financed by permanent fund.
VI. Capital Employed Turnover Ratio
Capital Employed Turnover indicates the amount of sales generated by each unit of
permanent capital employed in the business. It can be taken as refined estimated for Total
Assets Turnover. It is also called Net Assets Turnover. It excludes the amount of current
liabilities from total assets to arrive at the amount of capital employed. Fund financed by

42
current liabilities is not considered as a part of true capital because it is argued that
current liability financing frequently changes its size.
Mathematically,
Capital Employed Turnover Ratio = Sales / Total Capital Employed
Where;
Total Capital Employed = Total Assets - Total Current Liabilities
C. Profitability Ratios
Profitability Ratio is the main concern of the owners and the management of the firm.
The management of the firm always wants to know how efficient the operation of the
firm is. Likewise the owners of the company always expect a reasonable return for their
investment in the firm. For this reason, profitability Ratio can be a good measurement of
the operating efficiency and profitability of the firm. By the help of the Profitability
Ratios, one can make a quick and clear view towards the firm's Profitability, Return on
Assets, and Return on Equity and Earnings per Share etc. In general, Profitability Ratios
can be determined by two different factors of the financial statements. One is related to
the income statement i.e. sales, expenses etc. and the other one is related to the balance
sheet i.e. the investments, capital etc.

Profitability Ratios related to sales:

These Ratios explain how much profit earned or how much expenses occurred by the
company on each rupee of its sales. The following Profitability Ratios related to income
statement are presented here.
I. Net Profit Margin
Net profit is the residue of revenue over total costs. The costs include operating & selling
expenses, interests, and taxes. The Net Profit Margin Ratio measures the relationship
between Net Profit and sales of the firm. It indicates the ability of the management in
running the business efficiently in terms of revenue generation, costs of producing goods
& services, operating & selling expenses, costs of borrowed capital and making a
reasonable return for its owners. It is computed by dividing net profit after tax by sales.
Net Profit Margin = Net Profit after Tax (NPAT) / Sales

43
Some Scholars does not consider interest charges as the expenses of the firm in
computing Net Profit Margin. To exclude the effect of financing charges on profitability,
they used the following alternative formula for computing Net Profit Margin Ratio:
Net Profit Margin = (NPAT + Interest after Taxes) / Sales
II. Operating Expenses Ratio
The Operating Expenses Ratio explains the changes in Operating Profit Margin. This
Ratio is computed by dividing operating expenses by sales. Operating expenses consists
of cost of goods sold, selling expenses and general and administrative expenses excluding
interests.
Operating Expenses Ratio = Operating Expenses / Sales
Profitability Ratios Related To Investments:
Another computation of Profitability Ratios is related to investments. It is called Return
on Investment (ROI). But there are different concepts of investments in financial
literature: assets, capital employed and shareholders' equity. Based on these, the ROI also
categorized in different categories:
 Return on Assets
 Return on Capital Employed
 Return on Shareholders' Equity.

III. Return on Assets (ROA)

Here, the Profitability Ratio is measured in terms of the relationship between net profits
and the assets of the firm. Different approaches are applied to define Net profit and assets
for calculating ROA. But we will apply net profit after tax (NPAT) plus interest and total
closing assets for this study. It is computed as:
Return on Assets = (NPAT + Interest after Taxes)/Total Assets

IV. Return on Capital Employed (ROCE)

This is another type of ROI and a little different from ROA. Here, profit is related to the
capital employed which is equal to net fixed assets plus net working capital or
shareholders' equity plus long term debt. It is calculated as:
ROCE = (NPAT + Interest after Taxes) / Capital Employed

44
 Where,
Capital Employed = Owner's Equity + Total Long Term Debt
V. Return on Equity (ROE)
Common or ordinary shareholders are entitled to the residual profits. "While the ROCE
expresses the profitability of a firm in relation to the funds supplied by the creditors and
owners taken together, the Return on Shareholders' Equity measures exclusively the
return on the owners’ fund."(Khan, 3Ed: 4). A Return on Shareholders’ Equity is
calculated to see the profitability of owners' investment. The shareholders’ equity or net
worth will include paid - up share capital, share premium and reserves and surplus less
accumulated losses. Net worth can also be found by subtracting total liabilities from total
assets. It is computed as net profit after taxes divided by shareholders’ equity.
Return on Equity = Net Profit after Taxes (NPAT) / Net Worth (NW)
D. Leverage Ratios
Leverage Ratios measure the firm's ability to meet its long - term obligations. These also
indicate how much levered the firm is. In other words, from Leverage Ratios, one can
easily know, how much long - term debt is being used in the company and whether the
company will be able to pay the debt or not when due. The Leverage Ratios are the main
concern of long - term outside creditors such as debenture holders, banks, and financial
institutions etc. "The short term creditors like bankers and suppliers of raw materials are
more concerned with the firm's current debt paying ability. On the other hand, long term
creditors, like debenture holders, financial institutions, etc. are more concerned with the
firm's long term financial strength."(Pandey, 7Ed: 211) So Leverage Ratios are calculated
to judge the long-term financial position of the firm. Some basic types of Leverage Ratios
are:
I. Debt Ratio
The Ratio of total debt to total assets, generally called the Debt Ratio, measures the
percentage of funds provided by creditors. In other words, this Ratio shows the
proportion of interest bearing debt in the capital structure. Debt Ratio is calculated by
dividing the total debt by total assets (net). Total debts include both current and long -
term debts and total assets (net) include net fixed assets plus current assets. In the outside
creditors' view, low Debt Ratios are preferred because the lower the Ratio, the greater the

45
probability against their losses in the event of liquidation while in the stockholders' view,
the reverse is preferred because the high leverage will increase the probability of
expected earnings. But there should be an appropriate mix of debt & equity financing for
better health of the company.
Debt Ratio = Total Debt/ Total Assets
II. Debt Equity Ratio
Debt Equity Ratio reflects the relative portion of creditors' and shareholders' claims upon
the total assets of the company. It can be computed by dividing total debt by net worth.
Debt Equity Ratio = Total Debt / Net Worth
III. Long -Term Debt Ratio
Long - Term Debt Ratio explains the leverage in terms of long - term capitalization and it
is calculated dividing long - term debt by capital employed. Capital employed consists of
long - term debt plus net worth.
Long -Term Debt Ratio = Long -Term Debt/ Capital Employed
Where;
Capital Employed = Long -Term Debt + Net Worth
IV. Interest Coverage Ratio:
It is also known as 'Time-Interest-Earned Ratio'. This Ratio measures the debt servicing
capacity of a firm insofar as fixed interest on long term debt is concerned. Higher Ratio is
preferable both from the view point of lenders as well as from the view point of the
owners. This Ratio, as the name suggests, shows how many times the interest charges are
covered by the EBIT out of which they will be paid. In other words, it indicates the extent
to which a fall in EBIT is tolerable in the sense that the ability of the firm to service its
interest payments would not be affected. It is determined by dividing by dividing the
operating profits or earnings before interest and taxes (EBIT) by fixed interest charges on
debts.
Interest Coverage Ratio = EBIT / Interest

3.6.1.3 Comparison of Standards

"The Ratio analysis involves comparison for a useful interpretation of the financial
statements."(Pandey, 2005: 104) A Ratio itself could not help much to the analyzer unless

46
he/she makes comparison of it with some standards. There are many types of standards
available for comparisons. The important ones are:
a. Past Ratios
b. Projected Ratios
c. Competitors' Ratios
d. Industry Ratios
Comparison with past Ratios of the same company may be suitable to evaluate
performance over a period of time of a company. It is known as time series analysis or
trend analysis. Projected Ratios are future Ratios that are developed from projected
financial statements of the company. Comparison with future Ratios helps to find
whether the company's performance is accordance with the long term planning or not.
Comparison with competitors' Ratio is also called cross-sectional analysis. The analyzer
compares the company's performance with its competitors' and finds the company's
relative financial position / performance. Industry Ratios are always useful to compare
the company's performance with whole the industry's as it is from the same industry.
"This sort of analysis, known as the industry analysis, helps to ascertain the financial
standing and capability of the firm vis-à-vis other firms in the industry."(Pandey, 2006:
105)
Among various types of comparisons, this research mainly uses the past Ratios for
meaningful analysis of NT's financial performance.

3.6.2 Statistical Analysis

Facts and figures about any phenomenon whether it relates to population, production,
sales, profit or any other matters are called 'statistics'. In this sense, the term statistics is
considered synonymous with figure. To the layman, the term statistics usually carries
only the nebulous and too often distasteful connections of figures. "The word statistics
refer either to quantitative information or to a method of dealing with quantitative
information." (Gupta, 1983:1). This Research applies the following statistical tools for
the required financial analysis.
 Arithmetic Mean

47
  Correlation Analysis
 Regression Analysis
3.6.2.1 Arithmetic Mean

The Arithmetic Mean is the most popular and commonly used measures of central
tendency, which represents the entire data by a single value. The Arithmetic Mean of
values of variable in a given set of observation is the summation of all the values of the
variables divided by the number of observations. In general, X1, X2, X3............, Xⁿ are
given observations up to Nth term, then their Arithmetic Mean (X bar) is given by:
X bar = (X1 + X2 + X3 + ................. Xⁿ) / N
Where, X bar = Mean, X1, X2, X3... Xⁿ are the given set of observations and N =
numbers of item observed.

3.6.2.2 Correlation Analysis

Correlation Analysis is the statistical tool generally used to describe the degree to which
one variable is related with another. The relationship is generally assumed to be a linear
one. This analysis is also used in conjunction with Regression Analysis to measure how
well the regression line explains the variations of the independent variable. It enables one
to determine to the degree and direction of association between two variables.
For measuring Correlation, it is essential that the two phenomena should have cause and
effect relationship. In absence of such relationship, one should not talk of Correlation
between them. But the Correlation in itself does not tell about the nature of the cause and
effect of relationship between the variables. It is explained by Regression analysis.
There are several mathematical methods of measuring Correlation. The method
developed by Carl Pearson, popularly known as Pearson's co-efficient of Correlation, is
most widely used in practice. Carl Pearson's co-efficient of correlation measures the
degree of association between two variables, say variable X and variable Y, and is
denoted by the symbol 'r'. The formula for computing Pearson an correlation 'r' is:

48
 COV (XY)
r = ---------------- or,
√ VAR (X) VAR (Y)

N∑XY - ∑X∑Y
r = ---------------------------
√ [N∑X2 - (∑X) 2] [N∑Y2 - (∑Y) 2]
Where, X = Value of variable X
Y = Value of variable Y
The value of the co-efficient of Correlation obtained by the above formula shall always
lie between +1 to -1. The following general rules are taken to interpret the value of 'r'.
A. If 'r' = +1, it means that there is perfect positive relationship between the two
variables.
B. If 'r' = -1, it means that there is perfect negative relationship between the two
variables.
C. If 'r' = 0, it means that there is no relationship between the two variables i.e. the
variables in question are independent.
D. The closer the value of 'r' to =+1 or -1, the closer the relationship between the two
variables; and the closer the value of 'r' to 0, the less close is the relationship.
The correct interpretation of 'r' depends on the size of the sample, among the other things.
Smaller the size of sample, less reliable is the result. So we need to test the statistical
significance of 'r' before confidently inferring from it.
Probable Error: The Probable Error of the co-efficient of Correlation helps in
interpreting its value. With the help of Probable Error, it is possible to determine the
reliability of the value of coefficient in so far as it depends on the conditions of random
sampling. The Probable Error of the coefficient of Correlation is obtained as follows:
P. E. r = 0.6745*(1-r2)/ √n
Where r is coefficient of Correlation and n is the number of pairs of items.
Interpretation:
1. If the value of r is less than the Probable Error, there is no evidence of
Correlation, i.e. the value of r is not at all significant.

49
2. If the value of r is more than six times the Probable Error, the existence of
Correlation is practically certain, i.e., the value of r is significant

3.6.2.3 Regression Analysis

Regression analysis is used to estimate the likely value of one variable from the known
value of the other variable i. e. in regression analysis we establish a kind of average
irreversible functional relationship between the two variables. The cause and effect
relationship is clearly indicated through regression analysis than by correlation. In other
words, regression analysis is a mathematical measure of the average relationship between
two or more variables in terms of original units of data. There are two types of variables
in regression analysis viz. dependent variable and independent variable, the variable
whose-value is influenced or is predicted is called dependent variable whereas the
variable which influences the value or is used for prediction is called independent
variable. The dependent variable is also known as regressed or explained variable while
the independent variable is called as regress or predictor or explanatory variable.

3.6.2.4 Lines of Regression

If there exists a relationship between two variables, the points in the scatter diagram wi1l
more or less concentrate around a cure, called the curve of regression. If the curve is a
straight line, it is called the line of regression and relationship between the variables is
said to be linear regression.
A line of regression is the line, which gives the best estimate to the value of one variable
for any specified value of the other variable. Thus the line of regression is the line of best
fit.
The term best fit is interpreted in accordance with the principle of Least Squares which
consists in minimizing the sum of squares of the residuals or the errors of estimates, i.e.
deviation between the given observed values of the variables and their corresponding
estimated values as given by the line of best fit. If we have two variables X and Y, we

50
shall have two regression lines, Minimizing squares of error parallel to y-axis gives the
equation of the line of regression equation of Y on X and minimizing the sum of squares
of the errors parallel to X- axis, gives the equation of the line of regression of X on Y.
Regression Equation of Y on X.
It is the line, which gives the best estimates for the values of Y for any specified values of
X.
Regression equation of Y on X is given by
Y= a + b X.......................(I)
Where,
Y= Dependent variable
X= Independent variable
a = Intercept of the line
b = Slope of the Line (It measures the average change in the value of Y as a result of one
unit change in value of X). It is also called regression coefficient of Y on X. In other
words, it measures the rate of relationship.
The value of the constants a and b can be determined by solving following equation.
Y = n a + b ΣX...............................(ii)
ΣXY = a ΣX + b ΣX.......................(iii)
By calculating the equation no (ii) and (iii), we get the value of 'a' and 'b' and substituting
these value in equation (i), we get required estimated regression equation of Y on X.

3.7 Methods of Presentation and Analysis

Simple methods of analysis have been used, data presentation and analysis has been
divided into small sub - topics. Every result has been tabulated and clear interpretation of
it has been given simultaneously. Detail of calculations has been presented in appendices
at the end of the report. Tables, and have been used to make report clear and easily
understandable. Summary, conclusion and recommendation have been presented at the
last chapter of the report.

51
 CHAPTER – IV
PRESENTATION AND ANALYSIS OF DATA
4.1 Introduction

This chapter highlights the financial position of Nepal Telecom. The tools used for the
purpose of analysis have been discussed in detail in research methodology. Some
financial and statistical tools have been used to evaluate the financial position of NT. The
financial tool includes ratio analysis between various variables whereas the statistical
tools include Correlation and regression analysis between the variables. The measure
variables like assets, liabilities, sales, debt, and equity are taken for the analysis.
Moreover the variables affecting to the financial performance are also considered in the
study. The analysis is made through the data presentation and various financial ratios
reflecting the relationship among variables affecting financial performance.

4.2. Financial Analysis

The main objective of this study is to examine the financial position/performance of

NTC. To meet this objective, it is essential to present, analyze and interpret data
contained in annual reports of NTC. The annual reports include balance sheet and
Income statement along with their supporting schedules. Analysis and interpretation of
data is an attempt to find - out the implications and the significance of past
activities/decisions in the light of present position and future prospect and to make
suggestion for future action. In this study, the data are presented, analyzed and interpreted
on the basis of research questions. The analysis part begins with a brief overview of
financial position/performance indicators of the firm.

The different types of tools and techniques that have been used to analyze the data are as
follows:
 Ratio Analysis
 Trend Analysis

52
 Correlation/Regression Analysis

RATIO ANALYSIS
Ratio Analysis will help us to analyses the financial position and financial performance
of Nepal Telecom. The rationale of Ratio Analysis lies in the fact that it makes related
information comparable. A single figure by itself has no meaning but when expressed in
terms of a related figure, it yields significant inferences. Following are some of the ratios
that will help us to analysis the financial position of Nepal Telecom.

4.2.1 Liquidity Ratio:

Liquidity ratios are used to judge an organizations ability to meet its short-term
obligation. These ratios are comparison of short-term obligation with the resources
available and are measured by current ratio and quick ratio. The liquidity ratio reflects the
short-term financial strength of a firm.

4.2.1.1 Current Ratio (CR)

The relationship between current assets and current liabilities is expressed by Current
Ratio. Current Ratio is supposed to be around 2:1 but this standard should not be used
rigidly. A higher Ratio here would imply that the company maintains a sound liquidity
position from the short-term lenders' viewpoint and from the Corporation's own
viewpoint. But a very high Ratio would indicate that a high amount of idle fund being
invested in current assets or higher proportion of financing the current assets by dearer
permanent sources.
Current Ratio (CR) = Current Assets / Current Liabilities

53
 Table 1
Calculation of current ratio and its straight line trend equation
Year
orde Current Current Current Straight
r Year Assets Liabilities Ratio line trend
1 2014/15 20598352122 14722678059 1.3991 1.248
2 2015/16 22526522206 15665379821 1.4380 1.5
3 2016/17 23519753772 15675153717 1.5004 1.752
4 2017/18 24180638361 11518713104 2.0992 2.004
5 2018/19 28837295203 12406063044 2.3245 2.256
2937211302 1136362852
2.50584 2.508
6 2019/20 8 5
Average current Ratio 1.87784
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.999+ 0.0.251(x)
Straight line trend value
When X=6, Ŷ =2.506, i.e. Expected Current Ratio for next year (year=6)
Where, Y= estimate of the Current Ratio
X= measure of time when base year 2014/15 = 1
The above table shows that the average Current Ratio is 1.765 times during the study
period. The Ratio 1.874 on an average indicates that the Organization has current assets
of Rs 1.765 for each rupee of current liabilities. As current liabilities are paid from the
current assets, it seems that NTC will be able to pay its current liabilities at the time of
requirement. It ranges between a highest of 2.50 times in F/Y 2019/20 AD and a lowest
of 1.3991 times in F/Y 2014/15. The overall Ratio trend does not show any clear
direction but in most recent years it seems increasing slowly. While comparing with the
average, one finds that in F/Ys 2017/18 to 2019/20 AD the Ratio is higher than the
average and for F/Ys 2014/15 to 2016/17AD the Ratio is lower than the average. If we
see the actual trend, we can find its Current Ratio is not so volatile over time.
The fitted Trend Line shows that the liquidity position of the Organization would remain
sound in future.

54
4.2.1.2 Quick Ratio/ Acid Test Ratio
One defect of Current Ratio is that it fails to convey any information on the composition
of the current assets of a firm. Quick Ratio is a measure of liquidity designed to
overcome the defect of Current Ratio. The term quick refers to current assets which can
be converted into cash immediately or at a short notice without diminution of value. The
current assets excluded from this category are inventory and prepaid expenses. So, while
calculating Quick Ratio for NTC, inventory is deducted from total current assets and
divided by total current liabilities. Quick Ratio is supposed to be around 1:1 but this
standard also should be defined by the nature of the organization.

Current Straight line

Year Quick Assets Liabilities Quick Ratio trend
2014/15 20288495358 14722678059 1.378043809 1.228
2015/16 22197206771 15665379821 1.416959373 1.479
2016/17 23192069630 15675153717 1.479543362 1.730
2017/18 23764214211 11518713104 2.063096285 1.981
2018/19 28657163600 12406063044 2.309932127 2.231
1.592
29111133091 11363628525 2.482489056
2019/20
Average current Ratio 1.855
Quick ratio = Quick assets/Current liabilities
(Qr) Quick Assets = Current Assets-Inventory
Table 2
Calculation of quick ratio and its straight line trend equation
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.9765+0.251(X)
When X=6, Ŷ = 2.482 {i.e. Expected Quick Ratio for next year (year=6)}
Where, Y= estimate of the Quick Ratio
X= measure of time when base year 2014/15 = 1
The above table shows that the average Quick Ratio is 1.7295 times during the study
period. The Ratio of 1.7295, on an average, indicates that the Organization has quick
assets of Rs 1.7295 for each rupee of current liabilities. As average Current Ratio is 1.855

55
throughout the study period, we can see little difference between these two ratios. It
means that the least liquid item among the current assets, the inventory, has occupied a
very nominal place as part of the total current assets of NTC. In this respect, NTC can be
said to have a good liquidity position to fulfill its current obligations when they become
due.
The table shows that the Ratio ranges between a highest of 2.3099 times in F/Y2018/19
AD and a lowest of 1.378 times in F/Y 2014/15AD. The overall Ratio Trend shows the
positive direction. While comparing with the average, one finds that in F/Ys 2014/15 to
2016/17AD the Ratio is lower than the average and in F/Ys 2017/18, 2018/19, and
2019/20 AD the Ratio is higher than the average. The Straight Line Trend fitted on the
basis of least square method shows a positive growth rate of 0.251times per year for this
Ratio. Based on the fitted Trend Line, it can be expected that the liquidity position of the
Organization could remain sound in future.

4.2.2 Turnover Ratio / Activity Ratio

Funds of creditors and owners are invested in various assets to generate sales and profits.
The better the management of assets, the larger will be the amount of sale. Activity
Ratios are employed to evaluate the efficiency with which the firm manages and utilizes
its assets. These Ratios are also called Turnover Ratios because they indicate the speed
with which assets are being converted or turned over into sales. So, it involves a
relationship between sales and assets reflecting whether assets are managed well. Several
Activity Ratios can be calculated to judge the effectiveness of assets utilization.

4.2.2.1 Inventory Turnover Ratio (ITR)

The Inventory Turnover Ratio (ITR) is the relation between the sales and the inventory of
a firm. It indicates the efficiency with which the firm is able to use its inventory to
generate sales revenues. Generally, the higher a firm's Inventory Turnover, the more
efficient its inventory management is supposed to be. The Inventory Turnover is

56
calculated by dividing sales by closing inventory. This Ratio of NTC for the period of
five years along with its Straight Line Trend is calculated.
Inventory Turnover Ratio = Sales/Inventory
Table 3
Calculation of inventory turnover ratio and its straight line trend equation
Year
orde Operating Inventory Straight
r Fiscal Year Sales Inventory Turnover line trend
1 2014/15 9194297192 309856764 29.6727 41.7
2 2015/16 11058914824 329315435 33.5815 51.52
3 2016/17 14751623805 327684142 45.0178 61.34
4 2017/18 17889310266 416424150 42.9593 71.16
5 2018/19 22147582000 180131603 122.9522 80.98
260979936.
24829435135 95.13924882
6 2019/20 7 41.7
61.5537914
7
Average Inventory Turnover Ratio
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ =-3.944+19.594 (X)
When X=6, Ŷ = 114{i.e. Expected ITR for next year (year=6)}
Where, Y= estimate of the Inventory Turnover Ratio
X= measure of time when base year 20014/15 = 1
Above table shows that the average Inventory Turnover Ratio of NTC is 54.84 times for
the past five years. The average Ratio 54.84 indicates that each rupee of inventory is
generating sales of Rs. 54.84. It ranges between a highest of 122.9522times in F/Y
2018/19AD and a lowest of 26.67 times in F/Y2014/15 A.D. The overall Ratio Trend
shows an upward direction particularly in the most recent years. If we see the actual
trend, we can find that the Inventory Turnover Ratio is mildly volatile over time. But for
the last years, the Ratio is increasing continuously. And since a high Ratio is good from
the view point of inventory utilization, the increasing Ratio seems favorable for NTC.
The Straight Line Trend fitted on the basis of least square method shows a long run
positive growth rate of 9.82 times per year for this Ratio. Based on the fitted Trend Line,

57
it can be expected that the inventory utilization level of NTC should improve in coming
years.

4.2.2.2 Average Age of Inventory

Average Age of Inventory is just an alternate method of expressing the efficiency of the
inventory management. Lesser the time the inventory remains in the go down, better
would be the inventory management. The Average Age of Inventory is calculated by
dividing 360 by Inventory Turnover Ratio.
Average age of inventory = 360 / inventory turnover ratio
Table 4
Calculation of Average Age of Inventory (days)

Fiscal Year Inventory Turnover Average Age of Inventory

2014/15 29.67273353 12.1324
2015/16 33.58152594 10.7202
2016/17 45.01781415 7.9968
2017/18 42.9593487 8.3800
2018/19 122.9522284 2.9280
2019/20 95.13924882 3.8325
Average 7.664983
Source: Annual Reports of NTC
Above tables show that the Average Age of Inventory of NTC for the study period is 8.4
days. The average value of 8.4 indicates that an item of inventory purchased by the firm
remains in the gowdon for 8.4 days before being released for sale or service to its
customers (i.e. a typical item of inventory in the store is replaced every 8.4th day. The
Average Age ranges between a highest of 12 days in F/Y 2014/15 AD and a lowest of
3days in F/Y 2018/2019AD. The overall value trend shows a downward direction
particularly in the most recent years.. If we see the actual trend, we can find that the
Average Age of Inventory is showing decreasing tendency over time, particularly for the

58
last four years. And since a lower value is good from the view point of inventory
utilization

4.2.2.3 Debtors Turnover Ratio (DTR)

The Debtors Turnover Ratio (DTR) is the relation between the sales and the receivables
of a firm. The analysis of Debtors Turnover Ratio supplements the information regarding
the liquidity of one item of current assets of the firm. It indicates the efficiency with
which the firm is able to turn its credit sales into cash. Generally, the higher a firm's
Debtors Turnover, the more efficient its credit management is supposed to be and vice
versa. The Debtors Turnover is calculated by dividing sales by closing sundry debtors.
This Ratio of NTC for the period of five years along with its Straight Line Trend is
calculated.
Debtors Turnover Ratio= Sales / Debtors
Table 5
Calculation of Debtors Turnover Ratio and its straight line trend equation

Year Debtors Straight line

order Year Sales Debtors Turnover Ratio trend
1 2014/15 9194297192 2825943646 3.2535 3.00036238
2 2015/16 11058914824 3099495949 3.5680 3.73928212
3 2016/17 14751623805 3455511680 4.2690 4.47820186
4 2017/18 17889310266 3482610812 5.1368 5.2171216
5 2018/19 22147582000 3593205053 6.1637 5.95604134
386664473
24829435135 6.69496 6.69496108
6 2019/20 1
4.84766
Average Debtors Turnover Ratio
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ =2.261+0.739 (X)
When X=6, Ŷ = 6.69 {i.e. Expected DTR for next year (year=6)}
Where, Y= estimate of the Debtors Turnover Ratio
X= measure of time when base year 2014/15 = 1

59
Above table shows that the average DTR of NTC for the past five years is 4.847 times.
The average Ratio of 4.847 indicates that each rupee of investment in receivables is
generating sales of Rs. 4.478. It ranges between a highest of 6.69 times in F/Y
20119/20AD and a lowest of 3.2535 times in F/Y 2014/2015AD. The overall trend of the
Ratio does not show any specific direction. The Ratio seems to be mildly volatile over
time but it has shown marked improvements over the most recent years of the study
period which, if maintained, can be a very good sign for the credit collection of the NTC.
While comparing with the average, one finds that from F/Y 2017/18 and 2019/20 the
Ratio is higher than the average and for F/Ys 2014/15 to 2016/17 AD the Ratio is lower
than the average.
The Straight Line Trend fitted on the basis of least square method shows a long run
positive growth rate of 0.739 times per year for this Ratio. Based on the fitted Trend
Line, it can be expected that the receivable management of NTC should improve in
coming years.

4.2.2.4 Average Collection Period (ACP)

The average number of days through which debtors remains outstanding is called
Average Collection Period. Average Collection Period is just an alternate method of
expressing the turnover efficiency of the receivables. Lesser the time the receivables
remains due, better it is supposed to be. The Average Collection Period is calculated by
dividing 360 by Debtors Turnover Ratio.
Average Collection Period (ACP) = Debtors*360 /Sales
Table 6
Calculation of Average Collection Period
Year Order Fiscal Year Debtors Operating Sales ACP (Days)
1 2014/15 2825943646 9194297192 110.6490
2 2015/16 3099495949 11058914824 100.8977
3 2016/17 3455511680 14751623805 84.3286
4 2017/18 3482610812 17889310266 70.0832
5 2018/19 3593205053 22147582000 58.4061
6 2019/20 3866644731 24829435135 44.28283
78.107905
5-Yearly Average

60
 Source: Annual Reports of NTC
Above table shows that the Average Collection Period of NTC over the five years of
study period is 78 days. The average value of 78 indicates that an invoice of credit
receivable remains outstanding for 78 days before being collected from the customers
(i.e. a typical debtor of NTC pays his/her dues 78 days after the purchase of
goods/consumption of service). The ACP ranges between a highest of 110 days in F/Y
2014/2015 and a lowest of 58 days in F/Y 2018/2019 A D. While comparing with the
average, one finds that from F/Y 2014/15 to 2016/17 the values are higher than the
average and for F/Ys 2017/18 and 2019/20; the values are lower than the average.. If we
take a close look at the actual trend, we can find that the Average Collection Period is
showing decreasing tendency over the periods of the study periods. And since a lower
value is good from the view point of collection efficiency, the decreasing value may be a
good indication for NTC in coming years.

4.2.2.5 Total Assets Turnover Ratio

The Total Assets Turnover (TATR) is the relation between the sales and the total assets
of a firm. It indicates the efficiency with which the firm is able to use all its assets to
generate sales revenues. Generally, the higher a firm's Total Assets Turnover, the more
efficiently its assets said to be. The Total Assets Turnover is calculated by dividing sales
by total assets. This Ratio of NTC for the period of five years along with its graphic trend
is shown in the following table.
Total Assets Turnover Ratio (TATA) = Sales / Total assets

Table 7
Calculation of Total Assets Turnover Ratio and its straight line trend equation

61
 Year Fiscal TA Straight
Order Year Total Sales Total Assets Turnover Line Trend
1 2014/15 9194297192 20850093671 0.4410 0.46105301
2 2015/16 11058914824 23686026881 0.4669 0.47249404
3 2016/17 14751623805 27985960845 0.5271 0.48393507
4 2017/18 17889310266 35343894199 0.5061 0.4953761
5 2018/19 22147582000 46280626076 0.4785 0.50681713
0.51826
24829435135 49584999973 0.51818
6 2019/20
0.48963
Average of Total Assets Turnover   
Source: Annual Reports of NTC
Where, Total Assets = Current Assets + Total fixed Assets
Total fixed Assets =Net fixed assets + capital work in progress+ Investments)
Straight Line Trend of the Ratio is: Ŷ = .4496+0.1144 (X)
When X=6, Ŷ = 0.52{i.e. Expected TAT Ratio for next year (year=6)}
Where, = estimate of the Total Assets Turnover Ratio
= measure of time when base year 2014/15 = 1
Above table shows that the average of the TATR Ratio of NTC for past five years is
0.4839
Times which is lower than the general standard average of at least 1.00 times for this line
of business. The Ratio seems to be a little volatile as it ranges from 0.4410 in F/Y
2014/15 to 0.5271 in F/Y 2016/17 AD. The average Ratio of 0.489 indicates that each
rupee of investment in assets is generating sales of Rs. 0.489. The overall Ratio Trend
shows a random movement of the Ratio over the eight year period. Though the Inventory
Turnover Ratio is mildly volatile over time, but for the last 3-4 years, the Ratio is
increasing continuously which shows the good trends for the NTC. Unless the firm
generates sufficient volume the further investment in assets will not be justified.
The Straight Line Trend fitted on the basis of least square method shows a long run
negligible positive growth rate of 0.1144 times per year for this Ratio. If this Ratio is to
move as per the fitted Trend Line in future, it can be expected that the total assets
utilization level of NTC should remain at least constant in coming years. Continuous
expansion of its assets over the recent years followed by marginal increase in sales has
primarily caused TATR to remain stable. If the firm cannot utilize this expanded capacity

62
in the near future, the firm may have to retrench its assets investment or else it would face
stagnant TATR Ratio.

4.2.2.6 Fixed Assets Turnover Ratio (FATR)

The Fixed Asset Turnover measures the efficiency with which the firm has been using its
fixed (earning) assets to generate sales. This Ratio shows the relationship between sales
and net fixed assets of a firm. Generally, higher turnover is preferred because it reflects
greater efficiency in the utilization of fixed assets.
The Fixed Asset Turnover is calculated by dividing the firm's sales by its net fixed assets.
This Ratio of NTC along with its graphical trend for the period of five year is shown as
follows:

Fixed assets turnover ratio (FATR) = Sales / net fixed assets

Table 8
Calculation of fixed assets turnover ratio and its straight line trend equation
Year Fiscal Operating Net Fixed FA Straight
Order Year Sales Assets Turnover Line Trend
1 2014/15 9194297192 19168413096 0.4797 0.4750
2 2015/16 11058914824 21412058749 0.5165 0.5342
3 2016/17 14751623805 24234180530 0.6087 0.5934
4 2017/18 17889310266 27241988330 0.6567 0.6526
5 2018/19 22147582000 31389578442 0.7056 0.7118
6 2018/19 24829435135 33770921911 0.77104 0.771
0.62304
Average of Fixed Assets Turnover
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.4158+0.05920 (X)
When X=6, Ŷ = 0.77{i.e. Expected FAT for next year (year=6)}
Where, Y= estimate of the Fixed Assets Turnover Ratio
X= measure of time when base year 2014/15 = 1
From the above table, it is clear that the Fixed Assets Turnover of NTC is in increasing
trend. It ranges from a minimum of 0.4797 times in F/Y 2014/15 AD to a maximum of .
771 times in F/Y 2019/20. While comparing with the average, one finds that in initial two

63
years, the Ratios are below the average and for later three years, the Ratios are above the
average. The average Ratio is 0.62 times which indicates that each rupee of investment in
fixed assets is generating sales of 0.62 paisa. Although average of this Ratio is below
1.00 marks, the good aspect is that it is showing a clear upward trend in later half of the
study period. It can be safely termed that the company’s efficiency in using its fixed
assets is poor but it is going toward the right direction in the most recent years.
The Straight Line Trend fitted on the basis of least square method shows a sizeable long
run positive growth rate of 0.0592 times per year for this Ratio. If this Ratio is to move as
per the fitted Trend Line in future, it can be expected that the fixed assets utilization level
of NTC should improve, at least in coming years. NTC should try to increase its current
level of fixed assets utilization in the near future.

4.2.2.7 Working Capital Turnover Ratio (WCT)

The Working Capital Turnover (WCT) Ratio measures the efficiency with which the firm
has been using its net current assets (revolving assets) to generate sales. This Ratio shows
the relation between sales and net current assets of a firm. Generally, higher turnover is
preferred because it reflects greater efficiency in the utilization of net current assets.
Working capital here means only that part of current assets which is financed by the long
term sources. The Working Capital Turnover is calculated by dividing the firm's sales by
its net working capital. This Ratio of NTC along with its graphical trend for the period of
five year is shown as follows:
Working Capital Turnover Ratio (WCT) = Sales / Net working capital
Table 9
Calculation of Working Capital Turnover ratio and its straight line trend equation

Year Fiscal Operating WC Straight

Order Year Sales Net WC Turnover Line Trend
1 2014/15 9194297192 5875674063 1.5648 1.690
2 2015/16 11058914824 6861142385 1.6118 1.681
3 2016/17 14751623805 7844600055 1.8805 1.671
4 2017/18 17889310266 9166198936 1.9517 1.662
5 2018/19 22147582000 16431232159 1.3479 1.653

64
 6 2018/19 24829435135 16260621343 1.64317 1.6435
1.666645
Average of Working Capital (WC) Turnover
Source: Annual Reports of NTC
Where,
Total Current liabilities= Current liabilities + provision
Straight Line Trend of the Ratio is: Ŷ = 1.6995-0.0094 (X)
When X=6, Ŷ =1.6431{i.e. Expected WCT for next year (year=6)}
Where, Y= estimate of the Working Capital Turnover Ratio
X= measure of time when base year 2014/15 = 1
Above table and figure show that the average of the WCT Ratio of NTC for past five
years is 1.6713 times and this is lower than the general standard average of at least 2.00
times for this line of business. The ratio seems to be increasing as it ranges from 1.3479
in 2018/19 AD to 1.9517 in 2017/18 AD. The average Ratio of 1.6713 indicates that each
rupee of investment in working capital is generating sales of Rs. 1.66 The overall Ratio
Trend shows a upward movement of the Ratio over the five year period.. It means that
for the 6 years, the Ratio is increasing continuously which should be the real cause of
concern for the NTC. Unless the firm generates sufficient volume the further investment
in current assets will not be justified.
The Straight Line Trend fitted on the basis of least square method shows a long run
sizeable growth rate of 0.009 times per year for this ratio. If this ratio is to move as per
the fitted trend Line in future, it can be expected that the total assets utilization level of
the company would be to the level of satisfactory in the near future. Continuous addition
in working capital over the recent years followed by less than proportional increase in
sales has primarily caused WCT to nosedive over the study period. If the firm cannot
utilize this added investment in working capital in the near future, the firm may have to
retrench its working capital investment or else it would face further decline in WTC
Ratio.

4.2.2.8 Capital Employed Turnover Ratio (CET)

65
Funds of owners and creditors are invested in various assets to generate sales, so the
invested capital must be compared & analyzed with sales in order to examine the
efficiency of the company's management in generating revenues from available capital.
The Sales to Capital Employed Ratio, also called Capital Employed Turnover, have been
computed to know how efficiently the long term capital is employed in generation of
revenues. Higher Ratio is desirable from the viewpoint of owners as well as creditors.
The Ratio shows the future sales promotion condition by appropriate use of long term
debt and capital. This Ratio is computed by dividing sales by capital employed. This
Ratio for NTC for the period of five year is shown in the following table:
Capital Employed Turnover Ratio (CET) = Sales/Total Capital Employed
Capital Employed Turnover Ratio (CET) = Total of Net Worth + Long Term
Liabilities
Table 10
Calculation of Capital Employed Turnover Ratio and its straight line trend
equation
Year Fiscal Capital CE Straight
Order Year Total Sales Employed Turnover Line Trend
1 2014/15 9194297192 20707903625 0.4440 0.454
2 2015/16 11058914824 23549578731 0.4696 0.475
3 2016/17 14751623805 27854145165 0.5296 0.496
4 2017/18 17889310266 35343894199 0.5061 0.518
5 2018/19 22147582000 41629021574 0.5320 0.539
6 2018/19 24829435135 45907874069 0.56001 0.5603
0.506885
Average of Working Capital (WC) Turnover  
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0 .4325+0.02126 (X)
When X=6, Ŷ = 0.560{i.e. Expected CET for next year (year=6)}
Where, Y= estimate of the Capital Employed Turnover Ratio
X= measure of time when base year 2014/15 = 1
Above table shows that the average of the CET Ratio of NTC for past five years is 0.4963
times which is lower than the general standard average of at least 1.00 times for this line
of business. Barring a sudden upward swing, the ratio seems to be steadily increasing
over the 5-year period. The Ratio ranges from the lowest of 0.444 in F/Y 2014/15 AD to

66
the highest of 0.506 in 2019/20 AD. The average Ratio of 0.5068 indicates that each
rupee of investment in permanent capital is generating sales of just 50.68 paisa. The
overall Ratio Trend shows a positive movement of the Ratio over the five year period.
While comparing with the average, one finds that in F/Ys 2014/15, 2015/16 and 2016/17
AD;; the Ratio is lower than the average and for F/Ys 2017/18,2018/19 AD and 2019/20.
The Ratio is higher than the average.
The Straight Line Trend fitted on the basis of least square method shows a long run
positive growth rate of 0.021 times per year for this Ratio. If this Ratio is to move as per
the fitted Trend Line in future, it can be expected that the volume generated by the
permanent capital of the company should increase in coming years.

4.2.3 Leverage Ratios

The short - term creditors like bankers and suppliers of raw materials are more concerned
with the firm's current debt paying ability. On the other hand, long term creditors, like
debenture holders, financial institutions, etc. are more concerned with the firm's long
term financial strength. In fact, a firm should have a strong short as well as long term
financial position. To judge the long term financial position of the firm, financial
leverage, or Capital Structure Ratios are calculated. These Ratios indicate mix of the
funds provided by owners and lenders. As a general rule, there should be an appropriate
mix of debt and owners equity in financing the firm's assets.

4.2.3.1 Total Debt Ratio (TDR)

The relationship between creditors' funds and total assets is known as proprietary Ratio.
This Ratio measures the proportion of total assets financed by owners' funds. This Ratio
intends to show the long-term financial composition/strength of the company. Higher
Ratio means high financial risk and lower Ratio means not-proper utilization of leverage
benefit. So, an average position between the two extremes is favorable .It is calculated by
dividing total liabilities by total assets. The Total Debt Ratio along with its Straight Line
Trend of NTC for the past five year period is shown in the following table.

67
Total Debt Ratio = Total debt / Total assets
Total Debt = Current liabilities + Long term debt

Table 11
Calculation of Total Debt Ratio and its straight line trend equation
Year Total Debt Straight
Order Fiscal Year Total Debt Total Assets Ratio Line Trend
1 2014/15 14746916713 20850093631 0.7073 0.737
2 2015/16 15665379821 23686026881 0.6614 0.638
3 2016/17 16866833717 29485960845 0.5720 0.540
4 2017/18 15014439425 35343894199 0.4248 0.441
5 2018/19 15406063044 46280626076 0.3329 0.343
6 2019/20 15740132224 49884999989 0.24406 0.2443
Average of Total Debt Ratio 0.490
Source: Annual Reports of NTC
Where, Total Debt= Long Term Liab+ Current Liab and provision
Total Assets= Current Assets+ Fixed Assets+ Investments+ Capital Work in
Progress
Straight Line Trend of the Ratio is: Ŷ =0.8353-0.09854(X)

When X=6, Ŷ = 0.2441{i.e. Expected CET Ratio for next year (year=6)}
Where, Y= estimate of the Total Debt Ratio
X= measure of time when base year 2014/15 = 1
In the above table, Total Debt to Total Asset Ratio of NTC from F/Y 2014/15 to F/Y
2019/20AD is presented. The average ratio for the five t-year period indicates that the
creditors have contributed just around 24% of the fund requirement of the business. It
seems that in recent years the Corporation, recognizing the risk and utilizing the surplus
profit, has increased the debt.
The Straight line trend fitted on the basis of least square method shows a long run
negative growth rate of 0.099 times per year for this Ratio. If this ratio is to move as per
the fitted Trend Line in future, the debt would decrease so fast that most of the benefits of
leverage can be recognized.

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4.2.3.2 Debt Equity Ratio (DE)

Debt to Equity Ratio is another type of measure of financial structure. This Ratio shows
the position of total debt relative to the owner’s capital. This relationship between total
debt and net worth shows the outsiders' liabilities as a percentage of owners’ capital.
There is no exact standard norm of this Ratio, but in common practice this Ratio will be
good for industries of this sort if it is below 1.5:1. This Ratio is calculated by dividing
total debt by net worth. The table given below shows the Debt Equity Ratio of NTC for
five years period with the Trend Line in accompanying graph.
Debt Equity Ratio (DE) = Total Debt / Net Worth
Where, Net worth = Total of equity capital + Reserve and surplus – Deferred expenditure

Table 12
Calculation of Debt Equity Ratio and its straight line trend equation

Year Fiscal Debt Equity Straight

Order Year Total Debt Net worth Ratio Line Trend
1 2014/15 14746916713 20683664971 0.7130 0.746
2 2015/16 15665379821 23549578731 0.6652 0.654
3 2016/17 16866833717 26662465165 0.6326 0.561
4 2017/18 15014439425 35343894199 0.4248 0.469
5 2018/19 15406063044 41629021574 0.3701 0.376
6 2019/20 15740132224 45679233530 0.28328 0.2837
0.51483
Average of Debt Equity Ratio
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.8390-0.0926 (X)
When X=6, Ŷ = 0.2833{i.e. Expected Debt-Equity Ratio for next year (year=6)}
Where, Y= estimate of the Debt-Equity Ratio
X= measure of time when base year 2014/15 = 1
The above table shows that the Total Debt to Net worth Ratio of NTC is increasing year
by year.. This increase indicates that the organization deliberately wants to increase its

69
financial leverage/risk and shows the management's attitude to content with lever up the
capital structure of the organization.. The Ratio ranges from a higher of 0.712 in F/Y
2014/15 AD to a lower of 0.28 in F/Y 2019/20 AD. The average is 0.514 which means
that for each rupee of equity holder's money, the debt holders have contributed 51 paisa
to finance the firm's operation. This Ratio is lower than average in initial three years and
higher than the average in the final two years of the study period. The average of this
Ratio over the study period is clearly much lower than the general industry norm of 1.5:1.
The Straight Line Trend fitted on the basis of least square method shows a long run
sizeable negative growth rate of 0.092 times per year for this Ratio. If this Ratio is to
move as per the fitted Trend Line in future, it can be expected that the debt financing
level of the company would almost two third the equity financing of the Organization in
the coming year

4.2.3.3 Long Term Debt to Capital employed ratio (LTD TO CE)

The relationship between creditors' funds and firm's capital can also be expressed in
terms of another Leverage Ratio, known as LTD to CE Ratio. Here, the just the long term
creditors' funds are measured relative with the total capitalization of the firm and not
merely with the NW. The total capitalization or capital employed includes the total
explicit cost bearing debt (long term) and shareholders' equity. This Ratio is computed by
dividing LTD by CE. The table given below shows the LTD to CE Ratio of NTC for five
years of study period. And the figure shows the Trend Line for this Ratio.
Long Term Debt to capital employed ratio = Long Term Debt / Capital Employed

70
 Table 13
Year Fiscal Long Term Capital CE to NW Straight
Order Year Debt Employed Ratio Line Trend
1 2014/15 24238654 20707903625 0.001170503 0.009
2 2015/16 0 23549578731 0 0.009
3 2016/17 1191680000 27854145165 0.04278286 0.009
4 2017/18 0 35343894199 0 0.009
5 2018/19 0 41629021574 0 0.008
6 2019/20 228640538.4 45907874069 0.008088371 0.0082
Average of Long Term Debt Ratio 0.008673622

Calculation of Long - term debt to capital employed ratio and its straight line trend
equation
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.00949-0.000234 (X)
When X=6, Ŷ = 0.0081{i.e. Expected LTD to CE Ratio for next year (year=6)}
Where, Y= estimate of the LTD to CE Ratio
X= measure of time when base year 2014/15= 1
The ratio shows steeply decreasing pattern over time. The average Ratio of 0.8% implies
that out of total capitalization, only about one-fifth is financed by permanent debt sources
and remaining four-fifth by equity fund. This may imply a good margin of safety to the
company lenders point of view. But, from the view point of the owners, the reduction in
this Ratio position signifies that the company is not properly utilizing the benefits of the
leverage for magnifying the return to the stockholders. The Straight Line Trend fitted on
the basis of least square method shows a long run growth rate 0 times per year for this
Ratio. If this Ratio is to move as per the fitted Trend Line in future, it can be expected
that the long term debt of NTC would take a subsequent part in coming year.

4.2.3.4 Interest Coverage Ratio(IC):

Interest Coverage (IC) ratio is one of the most important Coverage Ratio used to test the
firm's debt- servicing capacity. This ratio is computed by dividing EBIT by interest
expenses. This Ratio, as the name implies shows how many times the interest charges are
covered by EBIT. A higher IC Ratio is desirable, but too high indicates that firm is

71
conservative in using debt and firm is not using enough creditors’ securities to the best
advantage of shareholders. A lower IC Ratio indicates excessive use of debt or
inefficient/weak operational profit. This Ratio for NTC for the period of F/Y2000/01to
2014/15 is calculated as follows.
Interest Coverage Ratio = EBIT / Interest
Table 14
Calculation of Interest Coverage Ratio and its straight line trend equation
Year Fiscal Interest
Order Year EBIT Expenses IC Ratio
1 2014/15 4921528988 696200 7069.13098
2 2015/16 6843726817 1107992 6176.693349
3 2016/17 7983321923 1125799 7091.28
4 2017/18 10871456130 10303949 1055.076663
5 2018/19 13633989872 14562382 936.24
6 2019/20 15286600070 16637760.7 750.5353954
Average of Total Debt Ratio 3846.492731

Source: Annual Reports of NTC

The above table shows the Interest Coverage ratio of NTC over the study periods. It
seems that the Organization has excellent and all time increasing Coverage ratios over the
period i.e. the debt servicing capacity of NTC seems quite favorable. But this is a good
performance in disguise because we can see that the organization is reducing its use of
long term debt over the years so fast that the fixed interest burden of the organization
becomes almost negligible in the most recent year.

4.2.4 Profitability Ratio

A company should earn profits to survive over a long period of time. Therefore, profits
are essential for a company. But, then, it does not mean that every action initiated by
management of a company should be aimed at maximizing profits. The social
consequence of the actions does also matter. So, maximum profit consistent with social
responsibility should be the long run objective. It is unfortunate that the word 'profit' is
looked upon as a term of abuse since some firms always want to maximize profits at the
cost of employees, customers and society. Except such infrequent cases, it is a fact that

72
sufficient profits must be earned to sustain the operation of the business, to be able to
obtain funds from investors for expansion and growth and to contribute towards the
social overheads for the welfare of the society.
Profit is the difference between revenues and expenses over a period of time. Profit is the
ultimate 'output' of a company, and it will have no future if it fails to make sufficient
profits. Therefore, the financial manager should continuously evaluate the efficiency of
the company in terms of profits. The profitability Ratio is calculated to measure the
operating efficiency of the company. Creditors and owners both are interested in the
profitability of the firm. If company is making profits regularly, creditors will also be
assured of getting their dues on time.

4.2.4.1 Net Profit Margin (NPM)

The Net Profit Margin measures the relationship between profit and sales and indicates
management's efficiency in manufacturing, administering and selling the product. This
Ratio is the overall measure of the firm's ability to turn each rupee sales into net profit. A
high Net Profit Margin would ensure adequate return to the owners as well as enable the
firm to withstand adverse economic conditions. A low Net Profit Margin has the opposite
implications. However, a firm with low Net Profit Margin can earn a high rate of return
on investment if it has a higher Inventory Turnover. The Net Profit Margin is measured
by dividing profit after taxes by sales.
Net Profit Margin = Net Profit after Tax / Sales

Table 15

73
 Calculation of net profit margin ratio and its straight line trend equation using net
profit after tax as profit

Straight Line
Year Order Fiscal Year NPAT Total Sales NP Margin Trend
1 2014/15 3542461326 9194297192 0.3853 0.394
2 2015/16 4936647252 11058914824 0.4464 0.409
3 2016/17 5652688491 14751623805 0.3832 0.424
4 2017/18 7942901598 17889310266 0.4440 0.438
5 2018/19 10178024718 22147582000 0.4595 0.453
6 2019/20 11333759016 24829435135 0.46748 0.4677
0.43098
Average of Net Profit Margin Ratio
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is= 0 .3799+0.01464 (X)
When X=6, Ŷ = 0.4675{i.e. Expected NPM for next year (year=6)}
Where, Y= estimate of the Net Profit Margin Ratio
X= measure of time when base year 2014/15 = 1
Above table shows that the average of the NPM Ratio of NTC for past five years is
43.09%. The Ratio seems to be stable barring over the study period. The average Ratio of
0.4309 times indicates that each rupee sales is contributing 42 paisa for rewarding the
owners. The overall Ratio Trend shows a small swing in either direction of the Ratio
within the range of 38.53% to 45.96% over the five year period. The computations show
that the Net Profit Margin upon sales is favorable. With the low Turnover Ratio, further
decline in NPM is sure to have a negative impact on the equity holders' return.
The Straight Line Trend fitted on the basis of least square method shows a long run
positive growth rate of 1.5% per year for this Ratio. If this Ratio is to move as per the
fitted Trend Line in future, it can be expected that the profit margin level of the company
in coming years should remain at stable to the firm currently earning.

4.2.4.2 Modified Net Profit Margin (MNP)

74
Depending on the concept of profit employed by the company, Net Profit Margin Ratio
can be calculated differently. The company's capital structure, non - operating income
and non - operating expenses etc. are some factors that affect the earnings by its
operation. So among different factors, capital structure is an important factor which can
bring important variation in this ratio and can make comparison distorted. Because the
conventional measure of net profit margin computed above is affected by the firms
financing policy. So, for a true comparison free of biases of the leverage ratio variation,
profit should also include the financing charges. Thus, the revised net profit margin can
be computed in the following way:
Net Profit Margin = (NPAT + Interest after tax) /Sales
Table 16
Calculation of net profit margin ratio and its straight line trend equation using
earnings after tax + interests after tax as profit

Year (NPAT + Interest Net Profit

order Year after tax) Sales Margin Straight line trend
1 2014/15 3542962443 9194297192 0.385343476 0.395
2 2015/16 4937446490 11058914824 0.446467539 0.409
3 2016/17 5652688491 14751623805 0.383190933 0.424
4 2017/18 7950429868 17889310266 0.444423499 0.438
5 2018/19 10178024718 22147582000 0.459554669 0.453
6 2019/20 11337242780 24829435135 0.467709527 0.4673
Average of Net Profit Margin Ratio 0.4238
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.3799+.01464 (X)
When X=6, Ŷ = 0.4677{i.e. Expected Modified NPM Ratio for next year (year=6)}
Where, Y= estimate of the Modified NPM Ratio
X= measure of time when base year 2014/15 = 1
If we eliminate the effect of financing charges from the Net Profit Margin, the Trend Line
ranges between a highest of 46.77% in F/Y 2019/20 to 38.53% in F/Y 2014/15 AD.
Besides these, the Modified Net Profit Margin Ratio has similar strengths and
weaknesses as general Net Profit Margin Ratio calculated above.

75
 4.2.4.3 Operating Expenses Ratio (OE)

Operating expenses constitute service/product costs, administrative costs and selling

costs. The Operating Expenses Ratio indicates the average aggregate variation in
expense. In general, higher Operating Expenses Ratio means inefficiency due to higher
operating cost relative to Sales. A lower Operating Expenses Ratio is favorable since it
will leave a higher amount of operating income to meet interest, taxes, bonus, dividend
and plough back of profit in the firm. It is measured by dividing operating expenses by
sales.
Operating Expenses Ratio (OE) = Operating Expenses / Sales
Table 17
Calculation of operating expenses ratio and its straight line trend equation

Year Opt. Opt Exp. Straight Line

Order Fiscal Year Expenses Total Sales Ratio Trend
1 2014/15 3990360743 9194297192 0.43400389 0.408
2 2015/16 3892039342 11058914824 0.351936822 0.392
3 2016/17 5668840348 14751623805 0.384285854 0.376
4 2017/18 6401598507 17889310266 0.357844904 0.359
5 2018/19 7753431879 22147582000 0.350080288 0.343
6 2019/20 8551964595 24829435135 0.327048615 0.3267
0.367533396
Average of Operating Expenses Ratio  
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.4242-.0162 (X)
When X=6, Ŷ = 0.3270 {i.e. Expected OE Ratio for next year (year=6)}
Where, Y= estimate of the Operating Expense Ratio

X= measure of time when base year 2014/15 = 1

Above table shows that the average OE Ratio of NTC for past five years is 36.67%
which is lower than the general standard average of around 50% for this line of
business. . The Ratio seems to be stable but slightly in decreasing trend as it ranges from
a lower of 35% in F/Y 2018/19 to 32.70%in F/Y 2014/15 AD. The average Ratio of
37.56indicates that the firm incurs a cost of 37.56paisa for each rupee of sales it
generates. Barring F/Y 2014/15, the Ratio is decreasing on year to year basis.. Though

76
the operating expense Ratio is relatively stable over time, it shows the good health of
NTC
The Straight Line Trend fitted on the basis of least square method shows a long run
negative growth rate of 1.6 % per year for this Ratio. If this Ratio is to move as per the
fitted Trend

4.2.4.4 Return on Assets Ratio (ROI)

Here the profitability is measured in terms of profit and the assets. The ROA is also
called return on investment (ROI). The conventional approach of calculating ROA/ ROI
is to divide NPAT by investment/assets. Assets represent pool of funds supplied by
shareholders and lenders, while NPAT represents residue income of the owners.
Therefore, it is conceptually unsound to use NPAT in the calculation of ROA. Secondly,
NPAT is affected by the capital structure. It is therefore more appropriate to use the
following formula to compute the ROA/ROI.
Return on Assets = (NPAT + Interests after tax) / Total assets
NPAT = Net profit after tax
Table 18
Calculation of Return on Assets ratio and its straight line trend equation

Year Fiscal (NPAT + Return on Straight line

Order Year Interest after tax Total Assets Assets trend
1 2014/15 3542962443 20850093631 0.169925493 0.180
2 2015/16 4937446490 23686026881 0.208453976 0.191
3 2016/17 5652688491 29485960845 0.191707793 0.203
4 2017/18 7950429868 35343894199 0.224944932 0.215
5 2018/19 10178024718 46280626076 0.219919772 0.226
6 2019/20 11337242780 49884999989 0.237934247 0.2378
0.208814369
Average of Return on Assets
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.1680 +0.01165 (X)
When X=6, Ŷ =0.2379{i.e. Expected ROA Ratio for next year (year=6)}
Where, Y= estimate of the Return on Assets Ratio
X= measure of time when base year 2014/15 = 1

77
The above table shows that the average ROA of NTC for the study period is 20.88%. The
Ratio seems to be an almost stable as it ranges from 17%in F/Y 2014/15 to 23.79% in
F/Y 2019/20 AD. But the real trend of this Ratio is showing upward movement
particularly in the most recent years. The average Ratio of 20.30% indicates that each
100 rupees of investment in assets is generating a profit of Rs. 20.88.
The Straight Line Trend fitted on the basis of least square method shows a long run
positive growth rate 1.1 %per year for this Ratio. If this Ratio is to move as per the fitted
Trend Line in future, it can be expected that the total assets return level of the company
should further incline, albeit slowly, in the coming years. Continuous expansion of its’
assets over the recent years followed by marginal increase/decrease net profit of the
Organization over the most recent years has primarily caused the ROA to take this
upward trend.

4.2.4.5 Return on Capital Employed (ROCE)

The relationship between the after tax return earned by both equity holder and lender and
the capital they provided indicates the efficiency of management for capital utilization.
The Ratio is similar to the ROA expect in one respect. Here the profits are related to
capital employed. The funds employed in net assets or the funds financed by permanent
sources are known as capital employed. This Ratio shows the effectiveness of
management in generating profit by the utilization of available capital. Higher the Ratio,
the more efficient is the use of capital employed. It is calculated as follows:
ROCE = (NPAT + after tax Interests on long-term debt) / Capital Employed

Table 19
Calculation of Return on Capital Employed ratio and its straight line trend
equation

78
 (NPAT + after tax
Year Interests on long- Capital Straight line
Order Year term debt) Employed ROCE trend
1 2014/15 3542962443 20707903625 0.17109228 0.178
2 2015/16 4937446490 23549578731 0.209661776 0.194
3 2016/17 5652688491 27854145165 0.202938861 0.211
4 2017/18 7950429868 35343894199 0.224944932 0.227
5 2018/19 10178024718 41629021574 0.244493489 0.243
6 2019/20 11337242780 45907874069 0.25925194 0.2595
0.218730546
Average of Return on Capital Employed  
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.1620+0.01621 (X)
When X=6, Ŷ = 0.2593{i.e. Expected ROCE Ratio for next year (year=6)}
Where, Y= estimate of the ROCE Ratio
X= measure of time when base year 2014/15 = 1
The above figures show that the average ROCE of NTC for the study period is 21.87%
As is the case with ROA, this is good if we compare this return with the cost of debt. But
the past trend of this Ratio show the upward trend as it is the case with ROA. Therefore,
it can be safely said that the return to the long term stakeholders are better than the return
earned by its assets assuming that cost of the short-term sources are negligible.
The average Ratio of 21.87% indicates that each rupee of long term fund employed by
the Organization is generating after tax profit of 21.87paisa.
The Straight Line Trend fitted on the basis of least square method shows a long run
negligible positive growth rate 1.6 % per year for this Ratio. If this Ratio is to move as
per the fitted Trend Line in future, it can be expected that the return level of the long term
capital employed by the company should increase marginally in coming years.

4.2.4.6 Return on Equity (ROE)

79
The Return on Shareholders’ Equity (ROSE) {or simply Return on Equity (ROE)}
indicates how well the company's management is able to provide return to its owners.
The return on common stock is not fixed. The residue of the earnings, on which the
stockholders have claim, may be distributed to them or retained in the business.
Nevertheless, the net profit after taxes represents their return. The shareholders' equity
includes the total of equity capital, reserve & surplus minus deferred expenditure. ROE is
regarded as an important measure because it reflects the productivity of shareholders'
capitals well as the operational efficiency of management. We use the following formula
to calculate ROE.
Return on Equity (ROE) = Net profit after tax (NPAT) / Net worth
Table 20
Calculation of return on equity ratio and its straight line trend equation
Year Fiscal Straight
Order Year NPAT NET WORTH ROE Line Trend
1 2014/15 3542461326 20683664971 0.171268551 0.180
2 2015/16 4936647252 23549578731 0.209627837 0.196
3 2016/17 5652688491 26662465165 0.212009222 0.212
4 2017/18 7942901598 35343894199 0.224731931 0.229
5 2018/19 10178024718 41629021574 0.244493489 0.245
0.26089239
11333759016 45679233530 0.2613
6 2019/20 7
0.220503905
Average of Return on Equity (ROE) Ratio
Source: Annual Reports of NTC
Straight Line Trend of the Ratio is: Ŷ = 0.164+0.0162 (X)
When X=6, Ŷ = 0.2609{i.e. Expected ROE Ratio for next year (year=6)}
Where, Y= estimate of the Return on Equity Ratio
X= measure of time when base year 2014/15 = 1
The above table shows the ROE of NTC for past 5 years. The average Ratio for the 5-
year period is around 22.05% which indicates that the equity holders of NTC earned
21.24paisa of return on their investment of Re. 1.00 over the last 5 years, on average. It
is obvious from the table that after the initial 2 years of the study period the average ROE
for 5 years has been satisfactory movement toward positive. NTC has to take measures to
make the Ratio more stable in future which should increase the confidence of the owners.

80
The Straight Line Trend fitted on the basis of least square method shows a long run
positive growth rate of .1.6% per year for this Ratio. If this Ratio is to move as per the
fitted Trend Line in future, it can be expected that the equity holders' return would further
go slightly upward from its current level.

4.3 Statistical Analysis

4.3.1 Correlation and Regression Analysis

4.3.1.1 Correlation & Regression Analysis of Investments (Total Assets) and Profit
The relationship between Investment and Profit is measured and tested by Karl Pearson's
Co-efficient of Correlation. A positive Correlation here would imply that the Corporation
maintains a stable growth (or decline) in its Profit in line with its Investment increase (or
decrease). Insignificant or negative value would point out the weakness of management
to keep the Profit in line with the Investments i.e. it points to the fact that the
Corporation's expansion may not be giving desirable results. The Regression Equation
would develop a function using which we can predict what the size of profit would be in
the coming years with a planned additional investment in Assets.
Table 21
Computation of Correlation & Regression co - efficient from the variables
investments and profit (In Billion)
Fiscal Investments Profit (Y) X2 Y2 XY
Year (X)

2014/15 20.85 3.54 434.7225 12.5316 73.809

2015/16 23.69 4.94 561.2161 24.4036 117.0286
2016/17 27.99 5.65 783.4401 31.9225 158.1435
2017/18 35.34 7.94 1248.9156 63.0436 280.5996
2018/19 46.28 10.18 2141.8384 103.6324 471.1304
2264.605 507.606
11.334 113.35922 11.334
2019/20 93 36
 Summatio
n 203.733 43.584 7434.73863 348.89292 1608.31746
Source: Annual Reports of NTC

81
Summary of Computations
r = 0.9975
PE = 0.074
|r| > PE
|r| > 6 x PE & |r| >0.5
The value of r is found to be 0.9974, which implies that there exists a high degree of
positive Correlation between Total Investments and Total Profit. This means the two
variables move in the same direction; i.e. if Total Investment increases then Total Profit
also increase and vice-versa. The value of r is greater than 6 times the probable error and
higher than +0.5; means that there is significant degree of positive Correlation between
the variables i.e. the value of r is significant. Hence, the relationship between Total
Investments and Total Profit is that of a cause and affect one.
The regression co-efficient is 2.0127. The regression equation of Profits (Y) on
Investments (X) is given by
Ŷ = 0.255-1.41* (X)
The value of b is found to be -1.41 which means that, on average, 1 unit change in Total
Investment (Asset) would result in -1.41 unit change in the Net Profit of NTC. Given the
capital budget plan of the NTC for coming years, we can use the above Equation to
estimate what the profit of the NTC would likely to be in the coming years.

4.3.1.2 Correlation & Regression Analysis of sales revenue and Total Cost

The relationship between Sales Revenue and Cost is measured and tested by Karl
Pearson's Co-efficient of Correlation. A positive Correlation here would imply that most
of the Costs of NTC are of variable nature. A low positive Correlation would imply that
the average Cost would go down as the volume expands. A negative Correlation, which is
highly unlikely, would point out that Cost of NTC decreases with the increase in Sales
Volume and vice versa. The Regression Equation would develop a function, with the help
of which, we can predict what the amount of Cost would be in the coming years with
various predicted Sales Levels.

82
 Table 22
Computation of Correlation & Regression co - efficient from the variables sales
revenue and total cost (In million of Rs.)
Fiscal Total Sales Total X2 Y2 XY
Year Revenue Costs (Y)
(X)
2014/15 9190 4272 84456100 18249984 39259680
2015/16 11050 4215 122102500 17766225 46575750
2016/17 14750 6153 217562500 37859409 90756750
2017/18 17890 7018 320052100 49252324 125552020
2018/19 22140 8514 490179600 72488196 188499960
2019/20 24826 9420.5 549689540 81111984.5 211365881
∑ 99846 39592.5 1784042340 276728122.5 702010041
(Source: Audited financial Reports of NTC)
SUMMARY OF COMPUTATIONS
r = 0.9985
PE = 0.00331
|r| > PE
|r| > 6 x PE & |r| >0.5
The value of r is found to be 0.99 which implies that there exists a high degree of positive
Correlation between Sales Revenue and Cost. This means the two variables move in the
same direction; i.e. if Sales Revenue increases then Cost also increases, and vice-versa.
The value of r is greater than 6 times the probable error and higher than +0.5; means that
there is significant degree of positive Correlation between the variables i.e. the value of r
is significant. Hence, the relationship between Total Costs and Total Sales Revenue is
that of a cause and affect one.
The regression co-efficient is 7185.10. Hence the regression equation of Costs (Y) on
Sales (X) is given by,
Ŷ= 799.55+ 0.3489 *(X)
The value of b is found to be 0.3489 which means that, on average, 1 rupee change in
Volume (Sales) would result in 34.89 paisa change in the Total Cost of NTC. Given the
Sales forecasts of the NTC for coming years, we can use the above Equation to estimate
what the Costs of the NTC would likely to be in the coming years.

83
4.3.1.3 Forecasting the trend of the current Assets
Regression equation of Y on X is given by
Y= a + b X.......................(I)
Where,
Y= Dependent variable
X= Independent variable
a = Intercept of the line
b = Slope of the Line (It measures the average change in the value of Y as a result of one
unit change in value of X). It is also called regression coefficient of Y on X. In other
words, it measures the rate of relationship.
The value of the constants a and b can be determined by solving following equation.
ΣY = n a + b ΣX.............................(ii)
ΣXY = a ΣX + b ΣX2......................(iii)
X–
Year(X) Current Assets(Y)
2017(x) x2 X ×Y
6179505636
2014 20598352122
-3 9 6
4505304441
2015 22526522206
-2 4 2
2351975377
2016 23519753772
-1 1 2
2017 24180638361 0 0 0
2883729520
2018 28837295203
1 1 3
5874422605
2019 29372113028
2 4 6
9496143298
2020 31653810995
3 9 5
5217509969
Total 1.80688E+11 0 28 4

The Normal equations are

1.80688E+11 = 7a + 0
52175099694 = 0 + 28 b

84
 1.80688E+11
a= =¿25812640812
7
52175099694
b= =¿1863396418
52175099694
so the trend line can be written as
Y = 25812640812 +1863396418X

Table : 23
Current
Year
Assets
2014 Y = 25812640812 +1863396418X 20598352122
2015 Y = 25812640812 +1863396418X 22526522206
2016 Y = 25812640812 +1863396418X 23519753772
2017 Y = 25812640812 +1863396418X 24180638361
2018 Y = 25812640812 +1863396418X 28837295203
2019 Y = 25812640812 +1863396418X 29372113028
2020 Y = 25812640812 +1863396418X 31653810995
2021 Y = 25812640812 +1863396418X 31185313260
2022 Y = 25812640812 +1863396418X 32998513491
2023 Y = 25812640812 +1863396418X 34811713723

40000000000

35000000000

30000000000

25000000000

20000000000

15000000000

10000000000

5000000000

0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Current Assets Linear (Current Assets)

85
Table 23 shows the trend line of the currents assets from year 2021 to 2023. The trend
line shows that the current assets of the company has an increasing trend where as there is
a small decline in the current assets in the year 2021 an the trend of the current assets will
be in increasing throughout.
4.4 Major Findings
4.4.1 Ratio Analysis

Ratio is said to tell more than what is told alone by absolute values comprising the Ratio.
Indexing of two items tell more than the items tell together. All Ratios computed in
chapter four try to measure the financial position and/or performance of NTC, the core
subject matter of this study. The analysis becomes irrelevant if the corrective actions
based on the suggestion do not make difference.

4.4.1.1 Liquidity Position

This research has used two short-term liquidity indicator Ratios. On the basis of these
Ratios, one should say that the overall short-term solvency position of NTC is
satisfactory. Perhaps, because of the service nature of its operation, NTC has maintained
low level of inventory compared with other current assets components. Hence, the
difference between Current Ratio and Quick Ratio is negligible. Though both these ratios
decreasing beyond 2:1. The nominal negative growth rate shown by the Straight Line
Trend is not fair so the actual trend should not be let to increase this way for long time.
Payment of short term dues and obtaining short term loans under favorable terms and
conditions should not be of problem to the NTC in coming years.

4.4.1.2 Turn over position

This research has used 7 Turnover Ratios to judge the efficiency of the
component/aggregate of the resources used by the firm in generating volume. The
Average Age of Inventory and the Average Collection Period are simply mirror images

86
of Inventory Turnover and Debtor Turnover Ratios. Conclusions are solely based on
historical Straight Line Trend, Actual Trend and historical average.
Of the various resources being enquired, current assets have the poorest performance.
Though inventory seems to have good utilization rate compared to other current assets, it
is because of the inventory's small size NTC carries. So NTC should be concerned about
its current assets investment in future. As the increase in sales is not accompanied
proportionally by the rate of increase in working capital. So There seems to be laxity in
management in efficiently mobilizing the working capital. Fixed Assets
Turnover/utilization seems to be improving over time. But it is still far below 1.00 mark
which should make management not to be complacent. The performance of current assets
in terms of volume generation was so poor over time that the improvement in
performance of fixed assets could not compensate it. That's why the Total Assets
Turnover is poor and fluctuating. So, overall, the asset utilization position of NTC is
termed poor as well as deteriorating over the five years of study period. NTC should pay
constant/close attention on the desirability of the current size of its current assets
investment. If the company can improve asset utilization, it can charge cheaper rates for
its service which would be vital in coming days because of the competition from the
private sector permitted by the government under its liberalization and open market
policy. Its utilization trend needs to be improved if the Organization has to obtain better
return on its resources. We see that, on average, it takes five months to collect a typical
account from a customer.

4.4.1.3 Long term Solvency Position

This research has, in effect, used 3 Leverage Ratios to judge the extent to which NTC has
been financed with debt and bear fixed obligations. TD to TA and TD to TE Ratios are
essentially the same measure. It seems that NTC has kept the policy of increasing its debt
financing proportion gradually over the study period. The amount of long -term debt used
by NTC has decreasing. Capital employed now solely consists of equity. On overall, the
firm should maintain its long - term debt to the levels so that Debt Ratio is around 50%.

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4.4.1.4 Profitability Position

This research has used 6 Profitability Ratios to judge the overall effectiveness of the firm.
The first three Ratios use sales as a base to measure performance, while the other three
use investment/capital as a base to measure performance. The profitability position
shown by the first type of Ratios seems good. The profit margin are good, operating costs
proportion are minimum. But the trends are not satisfactory enough. The cause may be
the destruction of infrastructure during the civil war and internal problems of the concern.
Operating Expenses Ratio Trend is maintaining its stage up and Modified Net Profit
Margin. It means that operating expenses as well as other expenses are slowly going up
on average over the study period. To reverse this trend, the Organization needs to put
stringent cost control measures in place. The profitability of assets/capital is also poor.
With so huge investment, the average return of 20% on assets can safely be termed as
poor. Because of the cheaper debt source, the return to equity holder could be magnified
to 21.0% on average over the study period. Because the Organization is reducing sharply
its long term debt financing (interest bearing) sources, the shareholders of the
Organization can expect to receive medium level rate of return in future on their
investments. The after tax return on total assets is also going in upward trend according to
least square method. The way it behaved to its customers under monopoly is certainly
not going to work under competitive market. Given the competitors mainly concentrated
around big cities, the Organization subsidizing its rural operation through urban profit is
going to face competition with such a severe constraint.
Solvency position, short-term as well as long -term, is good and the direction of the
Ratios which indicate these positions is positive particularly from the viewpoint of the
lenders. But when it comes to resource employment position, it can be safely said that the
turnovers generated by the assets are not satisfactory. Utilization of working capital in
particular is very poor. Profitability on the operational front seems fairly good but with
such low turnover, this cannot be termed excellent. Moreover, the negative trend of profit
on operation makes the situation even more disappointing. The low rate of profit on
assets/capital accompanied by negative growth rate on these Ratios shows that asset
returns are poor on aggregate. Investments decisions are weak, operational efficiency are

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weak, only financial position / management is good. But even the financial management
from the viewpoint of the equity holder can be termed unsatisfactory because of the
reducing leverage benefits to the Share holders. So, on all fronts, NTC need to have a
fresh re - look so that it can run smoothly in coming days of the 21st century.

4.4.2 Regression and correlation analysis

Regression and Correlation Analysis are used to see the relationship between the
variables that does not point to the past position and performance but to the future
prospect based on which planning for better performance can be done. We computed
Correlations and Regression Equations between three pairs of variables. Correlations
between all the pairs of variables are highly positive as per our anticipation. Because the
Correlations are highly positive and significant, one can safely use the Regression
Equations to forecast the value of dependent variables based on the anticipated value of
independent variable.
The relation between the Investment and profit indicates the profitability on investment.
High and significant Correlation between investment and profit points to the fact that
additional investment, on aggregate; by rupee 1 will lead to increase in profit by just 20
paisa. So, a typical investment project, NTC is expected to initiate, can expect to earn
around 20% Return on Investment, approximately equal to the 5 years average ROI.
The relationship between sales and investment indicates turnover. The sales and
investment are highly positively correlated means that an increase in investment would
definitely increase sales. But as indicated by the Regression Coefficient 'b' on average, 1
rupee change in Volume (Sales) would result in 9.44 paisa change in the Total Cost of
NTC. Next time when NTC considers further investment, the company should see that
whether the turnover or volume generated by the investment is sufficient or not.
On sum, the Correlation and Regression Analysis backs the same conclusion we drew
under Ratio Analysis. Profitability on investment is around 21%, which we already
termed medium position in Ratio Analysis. As of the relation between sales and
investment, the company should see that whether the turnover or volume generated by the
investment is sufficient or not.

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 CHAPTER V
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
Telecommunication is an inevitable infrastructure of development to all countries. It is
considered as prerequisite for the other dimension of development. In Nepal the need of
telecommunication services are primarily fulfilled by Nepal Telecom.
Introduction of liberalized economic policy in Nepal gradually facilitated the private
sector investment as a result multinational companies also showed their presence. Further
more public enterprises started to be privatized. Such trend couldn’t also remain intact
without influencing Nepal Telecommunications Corporation. Hence Nepal
Telecommunications Corporation has been changed to Nepal Doorsanchar Company
limited in 2061 BS under the company act. It’s popularly known commercial name is
“Nepal Telecom”. Although Nepal Telecom has been established under the company act
and its 92.2% ownership has been held by Nepal Government, 5% has its employee &
3.8% has the general public.
As financial health is the key indicator of the success and failure of the organization.
Different financial indicator show to what extent would the organization is capable to
meet the expectations of various stakeholders of the company. In the light of this main
issue of the study has focused to evaluate the financial performance of Nepal Telecom on
the basis of latest available information. Financial Analysis and planning function is not a
decision- making in itself rather it is an ancillary service, which helps in planning for
those two decisions and evaluating the outcome of those two decisions and
recommending necessary rectifying measures.
To make the study significant, ratio analysis and trend analysis, income and expense
analysis, correlation and regression analysis have been carried out regarding the major
variables of NTC. Before the analysis of such financial and statistical tools the details of

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the same has been explained in the chapter namely literature review and for the
mathematical calculations research methodology has been carried out. On basis of the
analysis we will conclude our findings and try to provide some relevant recommendations
to the management of NTC so that they can apply those recommendations if they deem
appropriate.
Nepal Telecom as a state owned enterprise has involved in providing the cost effective
and people friendly telecom services in the nation since long time. Even thought, with the
upcoming of private sectors telecom, Nepal Telecom has been able to maintain its profit
growth. Nepal Telecom is financially performing well. It has able to use its assets in an
effective manner providing a huge return to the government.

5.2 Conclusion

Nepal Telecom has better performance than other state owned enterprise of Nepal, in the
sense that it is such a state owned enterprise, which is operating under the net profit
margin since the establishment of NTC. Financial statement of the company shows that
the Gross Revenue as well as Net Profit has increased to a tune of higher rate. The overall
short-term solvency position of NTC is satisfactory. Perhaps, because of the service
nature of its operation, NTC has maintained low level of inventory compared with other
current assets components.
There seems to be laxity in management in efficiently mobilizing the working capital.
Fixed Assets Turnover/utilization seems to be improving over time. But it is still far
below 1.00 which should make management not to be complacent. The performance of
current assets in terms of volume generation was so poor over time that the improvement
in performance of fixed assets could not compensate it. That's why the Total Assets
Turnover is poor and fluctuating.
So, overall, the asset utilization position of NTC is termed poor as well as deteriorating
over the five years of study period. NTC should pay constant/close attention on the
desirability of the current size of its current assets investment. If the company can
improve asset utilization, it can charge cheaper rates for its service which would be vital

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in coming days because of the competition from the private sector permitted by the
government under its liberalization and open market policy.
Solvency position, short-term as well as long -term, is good and the direction of the
Ratios which indicate these positions is positive particularly from the viewpoint of the
lenders. But when it comes to resource employment position, it can be safely said that the
turnovers generated by the assets are not satisfactory.
Utilization of working capital in particular is very poor. Profitability on the operational
front seems fairly good but with such low turnover, this cannot be termed excellent.
The relation between the Investment and profit indicates the profitability on investment.
High and significant Correlation between investment and profit points to the fact that
additional investment, on aggregate; by rupee 1 will lead to increase in profit by 20 paisa.
So, a typical investment project, NTC is expected to initiate, can expect to earn around
20% Return on Investment, approximately equal to the 5 years average ROI.
Overall the company is able to perform well. The general faith of people on the
government telecom will drive the profit of the business in upward trend. Because of its
low price of calls, and effective reach it will prove to be one of the best earning company
for the government. If the management is managed properly, this company should and
will provide a huge return to the government and its shareholders.

5.3 Recommendations

The following recommendations are in order NTC’s management on improving its

financial position and performance addressed by this study.
 NT being a service oriented firm does not need s higher liquidity position. Thus
company should stabiles its current ratio near 1:1. Large amount of fund tied up in
current assets may bypass the opportunity cost so it is better to invest such excess
amount in fixed assets to increase its capacity.
 Average collection period of NTC is very poor... On average, it takes more than 4
months to collect a typical account, so the collection effort needed to be
intensified by providing attractive packages to the customers, providing more

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 authority and accountability to the concerned officers so that ACP can be reduced
to more manageable level.
 Though the average cost of producing and selling services to the customers of this
Organization is satisfactory, the increasing trend of cost should be a cause of
concern. With such a low Turnover Ratio of the Organization's assets, the
management should be careful not to let the Profit Margin go down. This can be
achieved either by increasing price charged to the customer or by reducing cost.
Given the competition that is forthcoming in the recent years, the Organization
should concentrate itself seriously on second alternative (i.e. reducing cost).
 It seems that the Organization is losing the benefit of the leverage over time,
particularly in the most recent years. A profitable company like NTC should not
hesitate to use the cheaper debt source to magnify the Return of Equity. So, the
management should consider using long-term debt when financing new expansion
projects in the future.
 It seems that the working capital is not managed properly in generating sales
volume. The excess investment in working capital is not properly utilized. So
NTC can think of reducing its current assets components by using cash to
expand its equipment capacity or reducing operating expenses.
 Though Fixed Assets Turnover is increasing over time, it is still far below 1.00
times barrier. So, NTC management should be careful in future not to undertake
capital intensive investment projects if they fail to generate sufficient volume.
And the Fixed assets Turnover could be increased to some extent if the company
runs in installed capacity of the equipment as far as possible.
 Given the high risk perception on most part of the countryside where the key
communication towers and related structures are situated, NTC should buy
enough insurance for all of these structures. So that it does not suffer from huge
losses even if the facilities/structures are destroyed. The past experience of the
management of not buying enough insurance for those valuable structures
should have taught a good lesson to them.

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 The investment appraisal criteria should be overhauled to make it more
scientific so that it weighs all relevant factors before making further investment
decision so that the project do not provided lesser return than cost of capital.
 Set up pro-forma balance sheet and income statements to use these as a general
guideline to determine the size/proportion of investment and financing items of
balance sheet and operational items of the income statement, so that a
standardization and rationalization in operation, financing and investment can be
made.
 The Organization should impart professional management on its top hierarchy.
Given the tough competition emanating from the private sector, the
Organization should resist unnecessary political interferences in managing its
day to day operations. It should seek freedom to decide on its own under the
broad guidelines given by the government.
 The delay of Share distribution to the public may cause that the organization
would not face stiff competition in future due to government intervention in
decision making. So the organization should issue share timely. As the
organization have largest issued capital in the amount yet not distributed by any
single company in Nepal. The proper regulation and procedure should be
followed so as to avoid speculation and wrong interest of any party
 The company should diversify its investment in different infrastructure and
services sectors that gives the good and positive return to the company.
 The company should invest some percent of profit to the social responsibility as
the education, health, sports and basic infrastructure such that service holders
feel the pride of its service.
 The top management should be hired as the professional and high skilled that
gives fast tracking the technology acquisition and market captured policy to the
organization.
 The company should be made proper business plan and attractive marketing
policy.

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