DEA and Financial Ratio Analysis: Efficiency of Power Plants in India – Shareholder’s View
Purpose: India is among the world’s top three producers of electricity and is also its second largest consumer. With the growing demand, the electricity sector continues to grow and currently has an installed capacity of 388.134 GW. Given the growing nature of the sector, the interest in calculating the efficiency of some of the top power plants also grows. This paper explores the business performance of the electricity sector in India and combines the economic and social dimensions. Design/Methodology/Approach: It uses data from financial statements to measure technical efficiency of the chosen DMUs through the DEA approach and the financial ratios measure. Through the study, it was concluded that DEA analysis (Scale Efficiency) is a good measures of efficiency of decision-making units (DMUs), given the management’s motives, while the financial ratios provide insight into how to improve efficiency of the inefficient DMUs along with clearer ranking of the efficient ones. Findings: The DMU 9 has been given ranks 1 under DEA, due to its ability to efficiently transform the capital employed into revenues as compared to the other (as shown in Table 6). The same unit was ranked 2nd when it came to ROTA criterion (EBIT/capital) that is 2nd rank in being able to maximize shareholder’s profit. Practical implications: Looking at the results, we can say that DEA measures performance more comprehensively as opposed to the financial ratio (ROTA) individually. This is because DEA has more aspects of measurement which helps in a balanced evaluation of the DMUs. Originality value: In fact Scale Efficiency enhances the result as it also takes into consideration the optimum scale of a DMU. Even though the DEA is capable of ranking DMUs according to their efficiency, it faces a drawback when there are two efficient DMUs. In our case though, we can limit this drawback substantially since we can prioritize even among the efficient DMUs depending upon the management’s priorities.