Aventis

COMSATS Institute of Information Technology, Wah Campus.

Ratio Analysis

Project ByM.Junaid MehmoodM.Qaiser MehmoodSohail Ahmed Babar

Usman Sheharyar

MBA-3Morning

Project Coordinator

Sir. Shoaib

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Ratio Analysis

A. ACKNOWLEDGEMENT

I am thankful to Almighty Allah who is gracious & merciful and gave us strength for the

completion of this project. Secondly we are really thankful to our respected Teacher Mr.

Hafiz M. Ishaq for giving us such an opportunity to study the Aventis from Financial point

of view. At the end we would also like to acknowledge the moral support of our friends who

supported us and helped us to do this project.

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Ratio Analysis

PURPOSE OF STUDY

The first purpose for making this project is to implement our bookish knowledge in

practical form. To know about application of Ratio Analysis in organizations.

Secondly, we want to complete the semester project regarding Financial Management.

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Ratio Analysis

Introduction

Aventis Limited is committed to improve the quality of life. Through the incredible growth

of knowledge, our scientists are on the threshold of major innovations in the field of

healthcare. Servicing healthcare providers and patients in major markets around the

world, Aventis Limited aims to achieve sustained growth by concentrating on innovative

products that meet significant medical needs. In each area, Aventis Limited is cultivating a

continuous flow of new product launches with high potential.

Vision:

To create and sustain value by being recognized as a pharmaceutical industry leader –

valued by patients and healthcare providers, sought after as an employer, and respected

by the scientific community and by our competitors.

Values:

Respect for people

Integrity

Sense of urgency

Networking

Creativity

Empowerment

Courage

Aventis focuses on innovative pharmaceuticals and human vaccines to fight serious

diseases. Working in a network with partners, Aventis scientists are discovering and

developing therapeutic innovations in areas such as cancer, diabetes, cardiovascular

disease, asthma and allergies. We are also developing new vaccines to prevent and treat a

wide range of serious and often deadly diseases. Our goal is to satisfy unmet medical

needs in large patient populations.

We aim to generate optimum returns on our strategic brands through life-cycle

management and to achieve leadership positions by building on operational excellence in

major pharmaceutical markets such as the United States, France, Germany and Japan.

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Ratio Analysis

Aventis in Pakistan

Aventis Limited stands out among pharmaceutical companies for global reach, with a

strong presence in major markets, and for the diversity of people in the management

teams and business units. We are committed to a strong multicultural team as a source of

innovative thinking and customer-oriented service.

Aventis is a major player in the healthcare industry in Pakistan and has come out with

products that have enjoyed market leader ship and consequently played a very important

role in the development of the health care market in Pakistan. The company currently

markets 48 products in 107 representations

Aventis Limited has two manufacturing units - one at Karachi and the other at Wah. It also

has thirteen regional sales offices in Karachi, Hyderabad, Sukkur, Bahawalpur, Multan,

Faisalabad, Sargodha, Lahore, Gujranwala, Rawalpindi, Peshawar, Bannu and Quetta.

History

Aventis limited was incorporated in 1967 as Hoechst Pakistan

limited.Concequently to a series of mergers and demergers,the name

was changed to the Hoechst Marion Roussel (Pakistan) limited, Aventis

Pharma (Pakistan) limited and finally to Aventis limited when the

company was leagly merged with Rhone-Poulenc Rorer Pakistan

(Private) Limited in 2003.

Aventis is officially created following an extraordinary meeting of Rhône-Poulenc share holders who approved by an overwhelming majority (97.1%) the final steps to complete the business combination. Aventis shares begin trading on the Paris and Frankfurt stock exchanges as well as the NYSE on December 20.

Dec. 1,1998

Rhône-Poulenc and Hoechst announce their intention to combine their pharmaceutical and agricultural businesses to create Aventis.

1997 Hoechst AG becomes a strategic holding company with independently operated businesses. Merial, a leader in animal health, is founded.

1997 Hoechst combines its specialty chemicals business with Clariant AG of Muttenz, Switzerland.

1995 Hoechst acquires Marion Merrell Dow (formerly Marion Laboratories), which is later combined with Roussel-Uclaf and the pharmaceutical activities of Hoechst to create Hoechst Marion Roussel.

1994 Hoechst begins to strategically shift its business focus from industrial

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Ratio Analysis

chemicals to life sciences. Pasteur Mérieux Connaught becomes a wholly owned subsidiary of the Rhône-Poulenc Group. Founding of PM-MSD, which subsequently becomes Aventis Pasteur MSD, a joint venture with the U.S. pharmaceutical company Merck & Co.

1989 Institut Mérieux acquires Connaught Laboratories. Hoechst builds its first production facility for genetically engineered human insulin. Operations begin in 1998. Pasteur Mérieux Sérums & Vaccins is created. As a result of the acquisition of Connaught Laboratories, the company becomes the world leader in vaccines.

1987 Hoechst acquires the Celanese Corporation.

1986 Rhône-Poulenc acquires the agricultural division of Union Carbide, and the product Temik, a highly effective pesticide that can protect plants against insect pests for several months after a single application.

1982 Marion Laboratories introduces Cardizem, a calcium antagonist that is introduced for the treatment of angina. Additional release forms extend the indications to include hypertension.

1981 Nationalization of Rhône-Poulenc following the formation of a left-wing government in France.

1974 Hoechst is renamed Hoechst Aktiengesellschaft. It is the world’s largest pharmaceutical company.

1968 Rhône-Poulenc acquires a 51% stake in Institut Mérieux. Hoechst acquires a stake in the French pharmaceutical company Roussel-Uclaf.

1967 Alain Mérieux succeeds his father, becoming chairman of Institut Mérieux.

1961 Société des Usines Chimiques Rhône-Poulenc is restructured as Rhône-Poulenc S.A.

1956 Rhône-Poulenc and Théraplix merge.

1952 Researchers at Rhône-Poulenc laboratories develop the antibiotic Spiramycin, a derivative of Streptomycin. It goes on the market as Rovamycin. A year later,Rhône-Poulenc begins a new era of sedatives and neuroleptics with the introduction of the sedative Largactil.

1951 Blaukorn fertilizer is put on the market. It becomes one of Hoechst’s most successful agricultural products.

1950 Marion Laboratories, Inc. is established by Ewing Marion Kauffman as a one-man company operating out of a basement in Kansas City.

1945 Behringwerke AG is the first company in Europe to begin processing human blood plasma into medications.

1945 The World War II allies order the breakup of I.G. Farbenindustrie AG. The factory in Höchst is renamed Farbwerke Hoechst U.S. Administration. In 1951, the company is refounded in Frankfurt as Farbwerke Hoechst AG

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Ratio Analysis

vorm. Meister Lucius & Brüning.

1943 Scientists at Rhône-Poulenc succeed in producing the first batches of penicillin based on a culture that the discoverer, Sir Alexander Fleming, had given the Institut Pasteur a number of years before.

1937 I.G. Farbenindustrie AG comes under the control of the Nazi regime. Forced labor and involvement in the crimes of Auschwitz are the result.

1928 Merger of Etablissements Poulenc Frères and Société Chimique des usines du Rhône forms a new business known as Société des Usines Chimiques Rhône-Poulenc.

1926 Institut Mérieux begins a long period of research aimed at finding a vaccine against foot-and-mouth disease. Charles Mérieux subsequently develops a vaccine against the disease. Industrial virology is born, and it will later be used in human medicine.

1925 Foundation of I.G. Farbenindustrie AG, including the amalgamation of Farbwerke Höchst.

1920 Gaston Roussel founds the Institut de Sérothérapie Hématopoiétique in Romainville, France, to produce Hemostyl, a drug for the treatment of anemia.

1919 Companhia quimica Rhodia brasileira is founded in Sao Paulo. Rhodia forms the basis for S.C.U.R.’s expansion in Latin America.

1901 Emil von Behring is awarded the first Nobel Prize in medicine for the medical success of his diphtheria vaccine.

1895 Gilliard, Monnet et Cartier in Lyon becomes a stock corporation called Société Chimique des usines du Rhône (S.C.U.R.). This is later considered the foundation year of Rhône-Poulenc.

1892 Collaboration between the three later Nobel Prize winners Robert Koch, Emil von Behring and Paul Ehrlich, which began in the 1880s, leads to the tuberculosis diagnostic Tuberculoidin, Hoechst’s first immunological product.

1880 A stock corporation is formed in Höchst, Germany, near Frankfurt with the soon world-famous name of Farbwerke vormals Meister Lucius & Brüning. In 1883, the company begins producing pharmaceuticals and achieves immediate world wide success with Antipyrin, a safe and effective painkiller. Louis Pasteur develops the first successful vaccine against rabies.

1859 In Frankfurt, Germany, Eugen Lucius begins laboratory experiments to produce synthetic dyes.

Chairman

Syed Babar Ali

Board of directors

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Ratio Analysis

1. Syed Babar Ali

2. Tariq Wajid (MD)

3. Pir Ali Gohar

4. Syed Hyder Ali

5. Michel R.Lienard

6. Jacques Pervez

7. M.Z.Moin Mohajir (company sectary)

8. Mohammad Amjad

company registered office

Global Reach

Aventis have a commercial presence in

approximately 85 countries and our

products are available in more than 170.

Our top four markets are the United States,

Germany, France and Japan. In 2003, we

generated 62.5% of our core business sales

in these countries.

Accounting for over 40% of global

prescription drug sales, the United States is

the world's largest pharmaceutical market

and our single largest national market. In

2003, we generated 38% of our core

business sales in the U.S. In Europe, our

leading markets are France, Germany, Italy,

Spain and the United Kingdom. Japan, the

world's second-largest national market,

accounted for 5% of our core business sales

in 2003.

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Plot 23, sector 22

Korangi Industrial Area,

Kaachi-749000


Ratio Analysis

Market Share

To day in Pakistan, Aventis limited is one of the top five companies in the Pharma Industry,

the growth rate of over 14% was also amongst the highest in the industry and the

company is market leader in the following ten therapeutic areas:

Products Market shareFlagyl 42%Claforan 12%Tarivid 8%Haemaccel 98%Phenergan 11%Lasix 40%Claxane 82%Streptase 78%Taxotere 40%Nasacort AQ 25%

Products

Oncology

Cardiovascular

Bones

Respiratory

Metabolic

Anti-infective

Distribution

Company owns distribution of thirteen branches, and appointment of regional distributor.

Sales and distribution offices in Pakistan

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Ratio Analysis

Head Office (Karachi) Branch.

Address: Plot No.23,Sector 22,Korangi Industrial Area,Karachi.Phone No: 5060221-35 (ext.2227)Fax No : 5060781 & 5060358

Hyderabad

Area Distribution Manager

Address :A-25, S.I.T.E,Hyderabad.Phone No : 0221-880539Fax No : 0221-880539

Karachi Branch


Address : Plot No.23,Sector 22,Korangi Industrial Area,Karachi.Phone No : 5060221-35 (ext.2316)Fax No : 5060781 & 5060358

Sukkur


Address : F-33/4/8, Barrage Colony, United Nation Avenue, Sukkur.Phone No : 071-613356Fax No : 071-612246

Quetta


Address : Annexe A-322/B , Sahib Bunglows, Shahrah-e-Tufail,Quetta Phone No : 081-835871 Fax No : 081-843397

Bahawalpur


Address : 6-A , Muhammad Hussain Road, Model Town-A, Bahawalpur.Phone No : 0621-874836Fax No : 0621-874836

Multan


Address : 124-a, Bahawalpur Road,Multan.Phone No : 061-570996/584387/ 513691 Fax No : 061 - 572549

Sargodha


Faisalabad


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Ratio Analysis

Address : 102, Shamshir Road, Old Civil Lines , Sargodha.Phone No : 0451-221403Fax No : 0451-221403

Address : 101-A, Civil Lines, Jail Road, Faisalabad.Phone No : 041-640370Fax No : 041-642539

Peshawar


Address : Gali No.8 , Nishtarabad, Peshawar.Phone No : 091-251685

Rawalpindi


Address : 87-A , Satellite Town, P.O.Box -168, Rawalpindi.Phone No : 051-4454728 / 4418524Fax No : 051-4429735

Gujranwala


Address : Ground Floor, Center Point, Near Iqbal High School , G.T Road , Gujranwala.Phone No : 0431-258206Fax No : 0431-258206

Lahore


Address : 14/C , New Muslim Town, Lahore.Phone No : 042-5867431Fax No : 042-5850613

Expansion

Expansion of the production facility and modernization of

plant and machinery and the quality of the products is the

high priority of the company. Company recently purchases

state of the art equipment for the commercial production

which increase the over all production of he plant.

Profit

Company has achieved a profit before taxation of Rs.234

million which is a complete turnaround after the record

loss of Rs.209 million in 2002. This significant

improvement in the profitability has occurred mainly due

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to reduction in discount and expenses, collection of trade

debts, lower interest costs, etc,.

Human Resource

The total numbers of employees were recorded 709 in the

year 2003 and these were recorded 743 in the year 2002.

SAP Adoption

The company has adopted a sap version which has been

extended to the Wah site and all the business working is

now conducted through the SAP.SAP is a video

conferencing facility, which reduces the travel cost and

further upgrading of the computer machines. Aventis

limited is also have a web site that is

www.aventispharma.com .pk

Holding company

The company is a subsidiary of the Aventis Pharma

Holding GmbH and Rhone-Poulenc Rorer UK Holding PLC,

which are incorporated in Germany and UK respectively.

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Ratio Analysis

What is a financial statement?

Financial Statement

Annual reports are divided into three parts the Executive Letter, the business Review,

and the Financial Review. The Executive Letter gives a broad overview of the company's

business and financial performance. The Business Review summarizes recent

developments, trends, and objectives of the company. The Financial Review is where

business performance is quantified in dollars.

The Financial Review has two major parts: Discussion and Analysis, and Audited

Financial Statements. In the Discussion and Analysis, management explains changes in

operating results from year to year. This explanation is presented mainly in a narrative

format, with charts and graphs highlighting the comparisons. The Operating results are

numerically captured and presented in the Financial Statements.

The major parts of the Financial Statements are the balance sheet; income statement;

statement of changes in shareholders' equity; statement of cash flows; and

footnotes. The balance sheet shows the financial strength of the company by showing

what the company owns and what it owes on a certain date. The balance sheet reports on

financial position as of the end of the year. The income statement, reports on how the

company performed during the year and shows whether operations have resulted in a

profit or loss. The statement of changes in shareholders' equity reconciles the activity in

the equity section of the balance sheet from year to year. Common changes in equity

result from company profits or losses, dividends, or stock issuances. The statement of

cash flows reports on the movement of cash by the company for the year. The footnotes

provide more detailed information on the balance sheet and income statement.

Types of financial statement analysis ratios

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Balance sheet ratios

1. Liquidity ratios

a. Current ratio

b. Acid test ratio

2. Financial leverage ratio

a. Debt to equity ratio

c. Debt to total assets

Income statement ratios

1. Coverage ratio

a. Interest coverage ratio

2. Activity ratio

a. Receivable activity

b. Payable activity

c. Inventory activity

d. Total asset turn over

3. Profitability ratio

a. Sales growth ratio

b. Cost of goods sold to sales ratio

c. Gross profit margin ratio

d. Net profit margin ratio

4. Profitability in return to investment

a. Return on investment

b. Return on equity

5. Market value ratio

a. Profit earning ratio

b. Market to book value ratio

Trend analysis

Ratio analysis

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Ratio Analysis

The Balance Sheet and the Statement of Income are essential, but they are only the

starting point for successful financial management. Apply Ratio Analysis to Financial

Statements to analyze the success, failure, and progress of company business.

Ratio Analysis enables the business owner/manager to spot trends in a business and to

compare its performance and condition with the average performance of similar

businesses in the same industry. To do this compare company ratios with the average of

businesses similar to company. Ratio analysis may provide the all-important early warning

indications that allow to the company to solve business problems before business is

destroyed by them.

a. Balance Sheet Ratios

Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay

its bills as they come due) and leverage (the extent to which the business is dependent on

creditors' funding). They include the following ratios

Liquidity ratios:

Quick ratio is a prevalent indicator of liquidity with a long history of usage. As is well

known, it is defined as the ratio of the current assets less inventories to current liabilities.

Financial ratios often include the current ratio (current assets to current liabilities) in the

data basis along with the quick ratio.

a. Current ratio

Definition: The ratio between all current assets and all current liabilities; another way of

expressing liquidity.

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What it is:

The current ratio is the standard measure of any business' financial health. It will tell you

whether your business is able to meet its current obligations by measuring if it has enough

assets to cover its liabilities. The standard current ratio for a healthy business is two,

meaning it has twice as many assets as liabilities.

When to use it:

The current ratio should be part of any business’ basic financial planning, meaning it

should be tracked monthly or quarterly. By keeping a close eye on this figure, you will

recognize if it begins to get out of line. This will allow taking early action to prevent

business from ending up in a difficult position.

Computation: Total current assets divided by total current liabilities.

Total Current AssetsTotal Current Liabilities

Financial years 2000 1999

Calculations 685153/515127 737505/514054

Resulting ratios 1.330 1.434

Analysis:

Even there is a slight decrease in the both years of the company’s current ratio, still in the

week position to pay its short term debts. This ratio is a rough indication of a firm's ability

to service its current obligations. Generally, the higher the current ratio, the greater the

"cushion" between current obligations and a firm's ability to pay them. The stronger ratio

reflects a numerical superiority of current assets over current liabilities. However, the

composition and quality of current assets is a critical factor in the analysis of an individual

firm's liquidity. 1:1 current ratio means; the company has $1.00 in current assets to cover

each $1.00 in current liabilities. Look for a current ratio above 1:1 and as close to 2:1 as

possible. The ratio values are arrayed from the highest positive to the lowest positive.

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Ratio Analysis

b. Acid test ratio

Definition:

After deduction of the inventories from the current assets, the ratio between the remaining

value and all current liabilities is called acid test ratio.

What it is:

This ratio serves as a supplement to the current ratio in analyzing liquidity. .This ratio is

same as the current ratio except that it excludes inventories-presumably the least liquid

portion of current asset-from the numerator.

When to use:

A measurement of the liquidity position of the business. The quick ratio compares the

cash plus cash equivalents and accounts receivable to the current liabilities. The primary

difference between the current ratio and the quick ratio is the quick ratio does not include

inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio

will be lower than its current ratio. It is a stringent test of liquidity.

Computation: current assets-inventories Current liabilities Or

Cash + Marketable Securities + Accounts ReceivableCurrent Liabilities

OrQuick assets

Current liabilities

Financial year 2000 1999Calculations (685153-365061)/515127 (737505-413464)/514054Resulting ratios 0.62 0.63

Analysis:

Increase in the quick ratio shows the company’s strong position to pay its debts. Indicates

the extent to which you could pay current liabilities without relying on the sale of inventory

-- how quickly you can pay your bills. Generally, a ratio of 0.7:1 is good and indicates you

don't have to rely on the sale of inventory to pay the bills.

Although a little better than the Current ratio, the Quick ratio still ignores timing of

receipts and payments.

1. Financial leverage ratio

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Ratio Analysis

Highly leveraged firms (those with heavy debt in relation to net worth) are more

vulnerable to business downturns than those with lower debt to worth positions. While

leverage ratios help to measure this vulnerability, it must be remembered that they vary

greatly depending on the requirements of particular industry groups.

a. Debt to equity ratio

Definition:

Shows the ratio between capital invested by the owners and the funds provided by

lenders.

What it is:

This ratio indicates how much the company is leveraged (in debt) by comparing what is

owed to what is owned. A high debt to equity ratio could indicate that the company may

be over-leveraged, and should look for ways to reduce its debt.

When to use:

Equity and debt are two key figures on a financial statement, and lenders or investors

often use the relationship of these two figures to evaluate risk. The ratio of business’

equity to its long-term debt provides a window into how strong its finances are. Equity will

include goods and property business owns, plus any claims it has against other entities.

Debts will include both current and long-term liabilities.

Computation: Total liabilities divided by total equity.

Total DebtTotal Equity

Financial year 2000 1999Calculation 104000/860767 108000/937090Resulting ratios 0.12 0.11

Analysis: There is decrease in this ratio, but it is higher than the bench mark which 0.8 is.

Comparison of how much of the business was financed through debt and how much was

financed through equity. For this calculation it is common practice to include loans from

owners in equity rather than in debt. The higher the ratio, the greater the risk to a present

or future creditor.

Too much debt can put the business at risk. But too little debt may mean company is not

realizing the full potential of business and may actually hurt overall profitability. This is

particularly true for larger companies where shareholders want a higher reward (dividend

rate) than lenders (interest rate).

b. Debt to total assets

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Ratio Analysis

Definition:

The ratio between the debt and the total assets is called debt to total assets ratio.

What it is:

It shows the relative importance of debt financing to the firm by showing the percentage

of the firm’s asset that is supported by the debt financing.

When it used:

When the company wants the relation ship between its total debts and the total assets it

use this ratio because this ratio expresses the relationship between capital contributed by

creditors and that contributed by owners. It expresses the degree of protection provided

by the owners for the creditors. The higher the ratio, the greater the risk being assumed

by creditors. A lower ratio generally indicates greater long-term financial safety. A firm

with a low debt/worth ratio usually has greater flexibility to borrow in the future. A more

highly leveraged company has a more limited debt capacity.

Computation:

Total LiabilitiesNet Worth

OrTotal debtTotal assets

Financial year 2000 1999Calculations 515127/860767 514054/937090


Analysis:

Decrease in this ratio is a good sign and this ratio shows that out of $1 only $.2727 is hold

by the others because the bench mark for this ratio is 0.8; if it is more than 0.8 it is more

risky. Generally, the higher this ratio, the more risky a creditor will perceive its exposure in

your business, making it correspondingly harder to obtain credit.

Income statement ratios

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Ratio Analysis

It is the combination of three types of ratios coverage ratio, activity ratio and

profitability ratio. These ratios are derived from income statement and balance sheet

data.

1. Coverage ratio

Coverage ratios measure a firm's ability to service debt.

1. Activity ratio

The ratio that measure how effectively the firm is using its assets. It is also known as

efficiency or turn over ratio. In computing the activity ratio amuse year end asset levels

from the balance ratio.

a. Receivable activity

Definition:

Ratio between the annual net credit sales and the account receivable is called receivable

activity.

What it is:

This ratio indicates how much the company’s active in accounts receivable turn over in to

cash during the year.

When it is use:

This ratio is a measure of turn over of a firm's accounts receivable in to cash during a

specific time. The higher the turnover the shorter the time between typical sale and the

cash collection.

Computation:Annual net sales

Account receivable

Financial year 2000 1999Calculation 1800607/13521 1624284/8093


Analysis:

The higher the turnover, the shorter the time between sales and collecting cash.

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Ratio Analysis

B. Payable activity

Definition:

Ratio between the annual net purchases and the account payable is called receivable

activity.

What it is:

This ratio indicates how much the company’s active in accounts payable turn over in to

cash during the year.

When to use:

This ratio is a measure of turn over of a firm's accounts payable in to cash during a specific

time. The higher the turnover the shorter the time between typical purchases and the cash

payment.

Computation: Net purchases

Account pay able


Resulting ratios 2.88 times 2.78 Times

Analysis:

The pay able activity means that purchases can be paid in that period or times so it also

means that we can pay cash in365/2.36=154days.

C. Inventory activity

Definition:

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Ratio Analysis

The number of times the average inventory has been replenished during a fiscal period,

known as the inventory turn over.

What it is:

It is ratio between the cost of goods sole and the inventories.

When it to use:

The inventory position and the approximate disposal time may be evaluated by calculating

the inventory turn. The inventory turn over is calculated by dividing the cost of goods sold

by the average inventory for the period.

Computation:

Cost of goods soldInventories



Analysis:

Lower the ratio, the better it is, the bench mark of this ratio is 4 to 6 time. If the company

has the ratio more than the bench marks it means that there is excessive or over

production.

e. Total asset turn over

Definition:

The production or sales on the total assets referred to as the assets turn over ratio.

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Ratio Analysis

What it is:

It is found or calculated by dividing the net sales for the year by the total assets employed

in the production of such sales.

When it to use:

When the company wants to check the contribution that is made by total assets to sales. A

ratio increase suggests the better utilization of the assets. An increase in the total assets

when accompanied by a ratio decrease my show an over investment in assets or their in

effective use.

Computation: Net sales

Total assets



Analysis:

A slight increase shows how effectively the company is using the assets to turn them into

huge sales so that they remain the market leaders. The bench mark for this ratio is 1.6.

2. Profitability ratio

Profitability ratios undoubtedly are the most important financial ratios in financial

statement analysis.

Profitability is best regarded as earnings generated in relation to the resources invested in

a firm's activities. There are two major ways of looking at profitability. The shareholders

are per definition interested mainly in the return on their investment. On the other hand,

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Ratio Analysis

taking a more managerial oriented view, the focus of interest becomes the productivity of

the firm's capital resources. These views are well reflected in including as profitability

ratios the return after interest and taxes on equity, and the return on total assets.

A. Sales growth ratio

Definition:

The growth in the sales from the last year is called sales growth ratio.

What it is:

It is calculated by subtracting the last yea sales from the current year sales and by

dividing the last year sales.

When it to use:

When the company want to compare the last year sales from the current year sales. The

greater the figure shows the growth of the company and it also shows that by using the

extra resources what percentage of the sales of the company increase.

Computation:Current year sales-last year sales

Last year sales

Financial year 2000 1999Calculation 1800607-

1624284/1624284Resulting ratios 10.85%

Analysis:

Higher the ratio, the better it is. If the company has the ratio more than the last year it

means that there is progress but if inflation rate in the county is 5% it means that growth

of the company is 9.27%.

B. Cost of goods sold to sales ratio

Definition:

The ratio between the cost of goods sold and sales is called cost of goods sold to sales

ratio.

What it is:

It is the Indicator of how much cost on your products you are selling.

When it to use:

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Ratio Analysis

When the company wants to check the percentage of the cost of goods sold on the sales.

It Compare to other businesses in the same industry to see that what is the percentage

difference they have adopted the cost of goods sold and sales.

Computation:Cost of goods sold

Sales


Resulting ratios 0.6765*100=67.65% 0.7078*100=70.78%

Analysis:

There is a decrease in this ratio that shows that company is decreasing the percentage of

cost of goods sold. It means that if we have $1 then there is $0.70 is our cost of goods

sold.

C. Gross profit margin ratio

Definition:

Indicator of how much profit is earned on your products without consideration of selling

and administration costs.

What it is:

This ratio is the percentage of sales dollars left after subtracting the cost of goods sold

from net sales. It measures the percentage of sales dollars remaining (after obtaining or

manufacturing the goods sold) available to pay the overhead expenses of the company.

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Ratio Analysis

Comparison of your business ratios to those of similar businesses will reveal the relative

strengths or weaknesses in your business.

When it to use:

When the company wants to check that is there enough gross profit in the business to

cover the operating cost and is there is a positive gross margin. It Compare to other

businesses in the same industry to see that business is operating as profitably as it should

be.

Computation:Gross ProfitTotal Sales

OrNet sales-CGS

Net sales

where Gross Profit = Sales less Cost of Goods Sold



Analysis:

The gross profit margin ratio indicates how efficiently a business is using its materials and

labor in the production process. It shows the percentage of net sales remaining after

subtracting cost of goods sold. A high gross profit margin indicates that a business can

make a reasonable profit on sales, as long as it keeps overhead costs in control. The bench

mark for this ratio is 23.8.

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Ratio Analysis

d. Net profit margin ratio

Definition:

It shows how much profit comes from every rupee or dollar of sales.

What it is:

This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold

and all expenses, except income taxes. It provides a good opportunity to compare

company’s "return on sales" with the performance of other companies in industry. It is

calculated before income tax because tax rates and tax liabilities vary from company to

company for a wide variety of reasons, making comparisons after taxes much more

difficult.

When it to use:

Company uses this ratio when the company wants to measure the rate of net profit earned

on sales.

Computation: Net Profit

Total Sales



Analysis:

Huge increase in this ratio shows that company has adequate control over the expenses

and reduces the cost of production. The bench mark for this ratio is 4.7.

4. Profitability in return to investment

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Ratio Analysis

A. Return on investment

Definition:

It considered a measure of how effectively assets are used to generate a return.

What it is:

The ROI is perhaps the most important ratio of all. It is the percentage of return on funds

invested in the business by its owners. ROI shows the amount of income for every dollar

tied up in assets.

When it to use:

This ratio tells the owner whether or not all the effort put into the business has been

worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment

such as a bank savings account, the owner may be wiser to sell the company, put the

money in such a savings instrument, and avoid the daily struggles of small business

management

Computation: Net Profit Total Assets



Analysis:

The great improvement in this ratio shows that company is utilizing its resources at the

maximum point. The industrial bench mark for this ratio is 7.8.

B. Return on equity

Definition:

Making enough profit to compensate for the risk of being in business.

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Ratio Analysis

What it is:

Determines the rate of return on your investment in the business. As an owner or

shareholder this is one of the most important ratios as it shows the hard fact about the

business.

When it to use:

When the company want to Compare the return on equity to other investment

alternatives, such as a savings account, stock or bond and want to Compare the ratio to

other businesses in the same or similar industry.

Computation:

Net ProfitEquity



Analysis:

By comparing the bench mark of 14.04%with the company’s 34.9% which has increase

nearly 73 points from the last year ratio; shows strong investment by the investors and the

return on that investment.

5. Market value ratio

A. Profit earning ratio

Definition:

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Ratio Analysis

The ratio that shows what the company is earning per share is called price earning ratio.

Value ratio

What it is:

This ratio indicates how much times the difference between the market price per share

and the earning per share.

When it to use:

When the company wants to check that what the company is earning per share

Computation:Market price per share

Earning per share

Where the earning per share is calculated by total equity by the number of shares issued.Financial year 2000 1999

Calculation 120/16.04 62/(22.15)Resulting ratios 7.48 -2.799

Analysis:

There is great increase in the figure. It also shows that profit will cover with in 7.48 years.

b. Market to book value ratio

Definition:

The ratio between the market and the book value per share is called market to book value

ratio.

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30


Ratio Analysis

What it is:

This ratio indicates how much times the difference between the market and in the books of

accounts per share.

When it to use:

When the company want to compare the value of the share in time from the books of

accounts and market price.

Computation:Price per share

Book value per share

Financial year 2000 1999Calculation 120/45.9031 62/


Analysis:

The current figure shows that there is a good increase in the value of the share the bench

mark for this ratio is 02 this figure also shows the company’s good will.

Inventory Turn Over Ratio:

Computation: C.G.SAvg.Inventroy


Resulting ratios 307.17% 336.61%

Raw Material turnover:

Computation: R.M ConsumedAvg.R.m

Financial year 2000 1999

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Ratio Analysis

Calculation 824674/1699682 875008/1699682Resulting ratios 0.485*100=48.51% 0.514*100=51.48%

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Ratio Analysis

Trend analysis

Serial #

Ratio’s 2002 2003 Difference Analysis

1 Current ratio 0.99 0.97 (0.2) Decrease in the current ratio

2 Acid test ratio 0.46 0.52 0.06 Increase

3 Debt to equity ratio

3.47 1.4 (2.07) Decrease

4 Debt to total assets

0.82 0.73 (0.09) Decrease

5 Interest coverage ratio

(0.8) 4.7 5.5 Increase

6 Receivable activity

29.48

7 Payable activity 3.9 2.36 (15.4) Decrease

8 Inventory activity

2.984

9 Total asset turn over

1.32 1.83 0.48 Increase

10 Sales growth ratio

14.27

11 Cost of goods sold to sales ratio

76.3% 70.5% (5.8)% Decrease

12 Gross profit margin ratio

23.66% 29.4% 5.74 Increase

13 Net profit margin ratio

(8.4)% 5.3% 13.7 Increase

14 Return on investment

(11.16)% 9.783% 20.943% Increase

15 Return on equity (61.7)% 34.9% 96.6% Increase

16 Profit earning ratio

(2.799) 7.48 10.279 Increase

17 Market to book value ratio

1.7 2.614 0.914 Increase

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Ratio Analysis

In the both years of the company’s current ratio, still in the week position to pay its short

term debts. This ratio indicates the firm's ability to service its current obligations.

Generally, the higher the current ratio, the greater the "cushion" between current

obligations and a firm's ability to pay them. The stronger ratio reflects a numerical

superiority of current assets over current liabilities.

But increase in the quick ratio shows the company’s strong position to pay its debts.

Indicates the extent to which you could pay current liabilities without relying on the sale of

inventory -- how quickly you can pay your bills.

The sales growth ratio of the company is less than the previous year which is 14.3% in this

year but in the last year it was 22.3% the decrease in this ratio is because that company

has shut down its some distribution centers.

0.00%5.00%10.00%15.00%20.00%25.00%

Ratios

1 2 3 4 5

Years

Sales Growth Ratio

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Ratio Analysis

The gross profit margin ratio indicates how efficiently a business is using its materials and

labor in the production process. It shows the percentage of net sales remaining after

subtracting cost of goods sold. A high gross profit margin indicates that a business can

make a reasonable profit on sales, as long as it keeps overhead costs in control. But the

gros profit in this year is 29.4% and in the last year it was 23.7%.

Huge increase in the net profit ratio shows that company has adequate control over the

expenses and reduces the cost of production. Net profit ratio of the aventis in this year is

5.3% but in the last year it was -8.4% this shows that company is utilizing its resources in

a very good manner.

Suggestion

As the year 2002 shows that company was receiving heavy loss this was because that

some of the company units and distribution centers were not working well and another

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35

-10.00%

-5.00%

0.00%

5.00%

10.00%

Ratios

1 2 3 4 5

Years

Net Profit Margin


Ratio Analysis

cause was the competition from the some other companies ,because of these reasons

company was not receiving profit but in that year 2003 the net profit of the company is

Rs.154673 thousands so for the year 2004 it is important for the company to decrease its

miss utilization of resources, to shut down less productive units , adopt new technology

for its long term market survival , because through this way the company can increase is

profit ratio in the up coming years.

VERTICAL ANALYSIS

P/L Account

For the year ended Dec 31, 2000

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36


Ratio Analysis

2000 1999

Net Sales 309.20% 342.27%

Cost of Good Sold (C.G.S) 209.20% 242.27%

Trading/Gross Profit 100% 100%

Admin/Gen Expense 70.38% 82.44%

Operating Profit 29.58% 17.56%

Other Income 3.5% 6.81%

33.08% 24.71%

Financial Charges 6.48% 6.99%

Other Charges 3.21% 2.55%

9.69% 9.54%

Profit Before Tax 23.39% 14.82%

Taxation 13.53% 10.17%

Profit After Tax 9.36% 4.65%

HORIZONTIAL ANALTYSIS

P/L Account

For the year Ended Dec 31,2000

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37


Ratio Analysis

HORIZONTIAL ANALYSISBalance Sheet

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Increase/Decrease 2000

Net Sales 10.8%

Cost of Good Sold (C.G.S) 6%

Trading/Gross Profit 22.71%

Gen Admin & selling Expense 4.7%

Operating Profit 107%

Other Income (36)%

67%

Financial Charges 14%

Other Charges 54.19%

24.06%

Net Profit Before Taxation 94.26%

Taxation 63.23%

Net Profit 162.24%

38


Ratio Analysis

As on December 31,2000

Increase/Decrease Increase/Decrease %AgeShare capital & reserves ------ 0%

Authorized Capital ----- 0%Issued, subscribed 33500 13.81%Revenue reserve 17 9.71%

Unappropriated Profit 33517 10.73%

Redeemable capital (104000) 100%Deferred Taxation (6913) 100%

CURRENT LIABILITIES

TANGIBLE ASSETS

CURRENT ASSETS

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Current Liabilities 100000 2500%Under mark-up (58120) 36.65%

Creditors, accrued (47752) 14.29%Proposed Dividends 7008 40.36%

1073 0.20%Contingences &

Commitment(76323) 8.14%

Operating Assets (43991) 23.13%Capital work in progress 16949 246.56%

Long-Term Deposits 1553 282.36%Long-Term & Advances 1518 75.67%

39


Ratio Analysis

Stores & Spares (568) 2.33%Stock in Trade (48403) 11.70%Trade Debts 145871 192.36%

Loans & Advances (358) 7.8%Deposits & short-term

Prepayments(109591) 78.45%

Taxation (47784) 68.28%Other Receivables 5428 67%

Bank and cash 3053 200%(52652) 7.13%

VERTICAL ANALYSIS

Balance Sheet

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Ratio Analysis

As on Dec 31, 2005

CURRENT ASSETS

2000 1999Stores & spares 3.4% 3.3%Stock in trade 53.2% 56%Trade debts 32.3% 10.2%

Loans & advances 0.6% 0.6%Deposits & short-term Pay 4.3% 18.9%

Taxation 3.2% 9.4%Other Receivables 1.9% 1%

Bank and cash balances 0.6% 0.2%

CURRENT LIABILITIES

2000 1999Current Liabilities 20.1% 0.7%

Under mark-up arrangement

19.5% 30.8%

Creditors, accrued and 55.5% 64.9%Proposed Dividend 4.7% 3.3%

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Aventis

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