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i SUMMER TRAINING PROJECT ON IDENTIFYING WEALTH OF AN ORGANIGATION BY ANALYSING ACCOUNTING RATIOS SUBMITTED FOR PARTIAL FULFILMENT OF THE DEGREE OF MASTER IN BUSINESS ADMINISTRATION (MBA) SESSION (2014-15) Submitted To: Submitted By: Mr Sudhir Rana Gaurav Saini Asst. Professor MBA 3 rd Sem MMIM 1213710 MAHARISHI MARKANDESHWAR INSTITUTE OF MANAGEMENT MAHARISHI MARKANDESHWAR UNIVERSITY, MULLANA, AMBALA HARYANA, 133203 INDIA
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Summer Training Report

Sep 30, 2015

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Gaurav Saini

Summer training report on Ind swift Industries limited
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  • i

    SUMMER TRAINING PROJECT

    ON

    IDENTIFYING WEALTH OF AN ORGANIGATION BY ANALYSING ACCOUNTING RATIOS

    SUBMITTED FOR PARTIAL FULFILMENT OF THE DEGREE OF MASTER IN BUSINESS ADMINISTRATION (MBA)

    SESSION (2014-15)

    Submitted To: Submitted By:

    Mr Sudhir Rana Gaurav Saini

    Asst. Professor MBA 3rd Sem

    MMIM 1213710

    MAHARISHI MARKANDESHWAR INSTITUTE OF MANAGEMENT MAHARISHI MARKANDESHWAR

    UNIVERSITY, MULLANA, AMBALA HARYANA, 133203 INDIA

  • ii

  • iii

    ABSTRACT

    With the delicensing of pharmaceutical industry and complemented by scientific talent and research

    capabilities and Intellectual Property Protection Regime, Indian pharmaceutical industry is ready to

    take new challenges globally. Indian pharmaceutical industry is playing a key role in promoting and

    sustaining development in the vital field of medicines. Financial analysts often assess firm's

    production and productivity performance, profitability performance, liquidity performance, working

    capital performance, fixed assets performance, fund flow performance and social performance. The

    financial performance analysis identifies the financial strengths and weaknesses of the firm by

    properly establishing relationships between the items of the balance sheet and profit and loss

    account. Thus, the present study is of crucial importance to measure the firms liquidity,

    profitability, and other indicators that the business is conducted in a rational and normal way;

    ensuring enough returns to the shareholders to maintain at least its market value. In this context

    project has undertaken an analysis of financial performance of pharmaceutical company to

    understand how management of finance plays a crucial role in the growth.

  • iv

    DECLARATION

    I hereby declare that the Summer Training Project Report Entitled Application of Accounting

    Ratios to know soundness of the Company is submitted by me in partial fulfilment of the

    requirement for the degree of MBA to at MM Institute of Management affiliated, is my all the

    contents of it are true to my personal knowledge and the same has not been submitted to any other

    University/Institution for the award of any degree.

    DATE . Gaurav Saini

    PLACE .

  • v

    PREFACE

    As a part of MBA (Masters of Business administration) at MM Institute of Management, MM

    University, Mullana, Ambala. This report is our first assignment. This report aims at the

    identification of financial activities effecting the business organization.

    The organization for the purpose of the study, chosen by me, was Ind-Swift Limited

    Chandigarh. It includes the history, effects on Indian economy, and social responsibilities of the

    firm. A special emphasis is given to the Financial & Accounting analysis.

  • vi

    ACKNOWLEDGMENT

    "I Give Thanks & Our Heart Kneels to Pray:

    God Keep Me & Guide Me & Go with Me Today"

    First of all, I thank the "God", for giving me patience and strength to overcome the

    difficulties which crossed our way in accomplishing of this Endeavour.

    I am extremely thankful to my project supervisor Mr Praveen Sharma (HOD of COST &

    MIS) Ind-Swift Limited Chandigarh; who has provided me great opportunity to work under this

    project and given me his full-hearted support and guidance to clear our all doubts with patience.

    I am grateful to humble and esteemed Mr Sudhir Rana (Assistant Professor MM Institute of

    Management) & Mr Praveen Chaudhary (Accounts Manager) Ind-Swift Limited Chandigarh; for

    his unmatched assistance by timely providing me at the time of my research work.

    I wish my greatest gratitude and personally thankful to all my Ind-Swift Limited Staff

    members and my friends & colleagues without whose friendly support and knowledge this project

    would have not been completed.

    Gaurav Saini

  • vii

    Contents

    Abstract

    Declaration

    Preface

    Acknowledgement

    1. Introduction 01

    1.1. Overview of the project 01

    1.2. Introduction of Pharmaceutical industry 02 1.2.1. History 03

    1.2.2. Patient protection 04

    1.2.3. Product development 04

    1.2.4. Small, Medium enterprise 05

    1.2.5. Challenges 05

    1.2.6. Pharmaceuticals and biotechnology 07

    1.2.7. Overall scenario 07

    1.3. Introduction to the company 09

    1.3.1. About the company 09

    1.3.2. Company profile 11

    1.3.3. Chronicles 11

    1.3.4. Business of strategies the company 13

    1.3.5. Awards/Achievements 14

    1.3.6. Ind Swift Ltd. today 14

    2. Literature Review 16

    3. Research Methodology 19

    3.1. Meaning of research 19

    3.2. Process of financial evaluation 19

    3.3. Objectives of the study 20

    3.4. Need for this study 20

    3.5. Problem Statement 20

    3.6. Research design 21

    3.7. Data Collection 21

    3.8. Data analysis 23

    3.9. Ratio Analysis 24

    3.10. Ratio Chart 26

    3.11. Types of Ratios 27

  • viii

    4. Data Collection and Interpretation

    4.1. Current Ratio 29

    4.2. Quick Ratio 31

    4.3. Debt-equity Ratio 33

    4.4. Total-asset to debt ratio 35

    4.5. Proprietary Ratio 37

    4.6. Inventory Turnover Ratio 39

    4.7. Debtors Turnover Ratio 41

    4.8. Working Capital Turnover Ratio 43

    4.9. Fixed Assets Turnover Ratio 45

    4.10. Current Assets Turnover Ratio 47

    4.11. Gross Profit Ratio 49

    4.12. Operating Ratio 52

    4.13. Net Profit Ratio 54

    4.14. Return on Investment 56

    4.15. Earning Per Share 58

    4.16. Dividend Per Share 60

    5. Findings 62

    6. Suggestions 63

    7. Conclusions 64

    8. References 65

    9. Annexure 1 Balance Sheet 66

    10. Annexure 2 Profit & Loss A/C 67

    11. Annexure 3 Cash Flow statement 68

  • 1

    Chapter 1. Introduction

    1.1. Overview of the Project

    The financial health plays a significant role in the successful functioning of a firm. Poor financial

    health threatens the very survival of the firm and leads to business failures. The recent financial

    crisis and the ensuing economic downturn have had a significant impact on the corporate sector.

    Corporate profitability has eroded sharply while debt burden has increased. Corporate failures are a

    common problem of developing and developed economies. Failure is not an impulsive outcome and it

    grows constantly in stages. There are unique characteristics of failure in firm's financial levels prior to

    reaching the levels of total failures. A protective effort could be made effectively if the company is

    foreseen to be proceeding in the direction of potential bankruptcy and this can help the company and

    the stakeholders from facing the painful consequences of a complete failure.

    In what way can financial data add depth to our understanding of why some firms cease growing,

    discontinue, fail, or go into bankruptcy? Signs of potential corporate failure are evident months

    before the actual bankruptcy materializes. But accurate prediction of declining business activity

    that leads to bankruptcy allows time for managers and creditors to take corrective action.

    The turbulent and the competitive scenario in the corporate sector have made it imperative for

    the stakeholders to assess the financial health of the companies.

    With the recent global financial crisis and the failure of many organizations in the U.S and the

    European countries it has become all the more necessary that the stakeholders study the financial health

    of their organization. For companies, being able to meet their financial obligations is an integral part of

    maintaining operations and growing in the future. If the company is not in a good financial health it

    may not be able to survive in the future. That's why it's essential for investors to know how to evaluate

    the short-term as well as long term financial health of the organisation.

    Performance evaluation of a company is usually related to how well a company can use it assets,

    shareholder equity and liability, revenue and expenses. Financial ratio analysis is one of the best

    tools of performance evaluation of any company. In order to determine the financial position of the

    pharmaceutical company and to make a judgment of how well the pharmaceutical company

    efficiency, its operation and management and how well the company has been able to utilize its

    assets and earn profit.

  • 2

    We used ratio analysis for easily measurement of liquidity position, asset management condition,

    profitability and market value and debt coverage situation of the pharmaceutical company for

    performance evaluation. It analysis the company use of its assets and control of its expenses. It

    determines the greater the coverage of liquid assets to short-term liabilities and it also compute

    ability to pay pharmaceutical company monthly mortgage payments from the cash generate. It

    measures the overall efficiency and performance. It determines of share market condition of that

    company. It also used to analysis the pharmaceutical companys past financial performance and to

    establish the future trend of financial position.

    1.2. Overview of Pharmaceutical industry

    The Pharmaceutical industry in India is the world's third-largest in terms of volume. According to

    Department of Pharmaceuticals of the Indian Ministry of Chemicals and Fertilizers, the total

    turnover of India's pharmaceuticals industry between 2008 and September 2009 was US$21.04

    billion. While the domestic market was worth US$12.26 billion. The industry holds a market share

    of $14 billion in the United States.

    According to India Brand Equity Foundation, the Indian pharmaceutical market is likely to grow at

    a compound annual growth rate (CAGR) of 14-17 per cent in between 2012-16. India is now among

    the top five pharmaceutical emerging markets of the world.

    Exports of pharmaceuticals products from India increased from US$6.23 billion in 200607 to

    US$8.7 billion in 200809 a combined annual growth rate of 21.25%. According to

    PricewaterhouseCoopers (PWC) in 2010, India joined among the league of top 10 global

    pharmaceuticals markets in terms of sales by 2020 with value reaching US$50 billion.

    The government started to encourage the growth of drug manufacturing by Indian companies in the

    early 1960s, and with the Patents Act in 1970. However, economic liberalisation in 90s by the

    former Prime Minister P.V. Narasimha Rao and the then Finance Minister, Dr. Manmohan Singh

    enabled the industry to become what it is today. This patent act removed composition patents from

    food and drugs, and though it kept process patents, these were shortened to a period of five to seven

    years.

    The lack of patent protection made the Indian market undesirable to the multinational companies

    that had dominated the market, and while they streamed out. Indian companies carved a niche in

    both the Indian and world markets with their expertise in reverse-engineering new processes for

    manufacturing drugs at low costs. Although some of the larger companies have taken baby steps

  • 3

    towards drug innovation, the industry as a whole has been following this business model until the

    present.

    India's biopharmaceutical industry clocked a 17 percent growth with revenues of Rs. 137 billion ($3

    billion) in the 200910 financial year over the previous fiscal. Bio-pharma was the biggest

    contributor generating 60 percent of the industry's growth at Rs. 88.29 billion, followed by bio-

    services at Rs. 26.39 billion and bio-agri at Rs. 19.36 billion.

    In 2013, there were 4,655 pharmaceutical manufacturing plants in all of India, employing over 345

    thousand workers.

    1.2.1. History

    The number of purely Indian pharma companies is fairly less. Indian pharma industry is mainly

    operated as well as controlled by dominant foreign companies having subsidiaries in India due to

    availability of cheap labor in India at lowest cost. In 2002, over 20,000 registered drug

    manufacturers in India sold $9 billion worth of formulations and bulk drugs. 85% of these

    formulations were sold in India while over 60% of the bulk drugs were exported, mostly to the

    United States and Russia. Most of the players in the market are small-to-medium enterprises; 250 of

    the largest companies control 70% of the Indian market. Thanks to the 1970 Patent Act,

    multinationals represent only 35% of the market, down from 70% thirty years ago.

    Most pharmaceutical companies operating in India, even the multinationals, employ Indians almost

    exclusively from the lowest ranks to high level management. Home-grown pharmaceuticals, like

    many other businesses in India, are often a mix of public and private enterprise.

    In terms of the global market, India currently holds a modest 12% share, but it has been growing at

    approximately 10% per year. India gained its foothold on the global scene with its innovatively

    engineered generic drugs and active pharmaceutical ingredients (API), and it is now seeking to

    become a major player in outsourced clinical research as well as contract manufacturing and

    research. There are 74 US FDA-approved manufacturing facilities in India, more than in any other

    country outside the U.S, and in 2005, almost 20% of all Abbreviated New Drug Applications

    (ANDA) to the FDA are expected to be filed by Indian companies. Growth in other fields

    notwithstanding, generics is still a large part of the picture. London research company Global

    Insight estimates that Indias share of the global generics market will have risen from 4% to 33% by

  • 4

    2007. The Indian pharmaceutical industry has become the third largest producer in the world and is

    poised to grow into an industry of $20 billion in 2015 from the current turnover of $12 billion.

    1.2.2. Patent protection

    As it expands its core business, the industry is being forced to adapt its business model to recent

    changes in the operating environment. The first and most significant change was the 1 January 2005

    enactment of an amendment to Indias patent law that reinstated product patents for the first time

    since 1972. The legislation took effect on the deadline set by the WTOs Trade-Related Aspects of

    Intellectual Property Rights (TRIPS) agreement, which mandated patent protection on both

    products and processes for a period of 20 years. Under this new law, India will be forced to

    recognise not only new patents but also any patents filed after 1 January 1995. Indian companies

    achieved their status in the domestic market by breaking these product patents, and it is estimated

    that within the next few years, they will lose $650 million of the local generics market to patent-

    holders.

    In the domestic market, this new patent legislation has resulted in fairly clear segmentation. The

    multinationals narrowed their focus onto high-end patients who make up only 12% of the market,

    taking advantage of their newly bestowed patent protection. Meanwhile, Indian firms have chosen

    to take their existing product portfolios and target semi-urban and rural populations.

    1.2.3. Product development

    Indian companies are also starting to adapt their product development processes to the new

    environment. For years, firms have made their ways into the global market by researching generic

    competitors to patented drugs and following up with litigation to challenge the patent. This

    approach remains untouched by the new patent regime and looks to increase in the future. However,

    those that can afford it have set their sights on an even higher goal: new molecule discovery.

    Although the initial investment is huge, companies are lured by the promise of hefty profit margins

    and have a legitimate competitor in the global industry. Local firms have slowly been investing

    more money into their R&D programs or have formed alliances to tap into these opportunities.

  • 5

    1.2.4. Small and medium enterprises

    As promising as the future is for a whole, the outlook for small and medium enterprises (SME) is

    not as bright. The excise structure changed so that companies now have to pay a 16% tax on the

    maximum retail price (MRP) of their products, as opposed to on the ex-factory price. Consequently,

    larger companies are cutting back on outsourcing and what business is left is shifting to companies

    with facilities in the four tax-free states Himachal Pradesh, Jammu & Kashmir, Uttaranchal and

    Jharkhand. Consequently a large number of pharmaceutical manufacturers shifted their plant to

    these states, as it became almost impossible to continue operating in non-tax free zones. But in a

    matter of a couple of years the excise duty was revised on two occasions, first it was reduced to 8%

    and then to 4%. As a result the benefits of shifting to a tax free zone were negated. This resulted in,

    factories in the tax free zones, to start up third party manufacturing. Under this these factories

    produced goods under the brand names of other parties on job work basis.

    As SMEs wrestled with the tax structure, they were also scrambling to meet the 1 July deadline for

    compliance with the revised Schedule M Good Manufacturing Practices (GMP). While this should

    be beneficial to consumers and the industry at large, SMEs have been finding it difficult to find the

    funds to upgrade their manufacturing plants, resulting in the closure of many facilities. Others

    invested the money to bring their facilities to compliance, but these operations were located in non-

    tax-free states, making it difficult to compete in the wake of the new excise tax.

    1.2.5. Challenges

    .Even after the increased investment, market leaders such as Ranbaxy and Dr. Reddys Laboratories

    spent only 510% of their revenues on R&D, lagging behind Western pharmaceuticals like Pfizer,

    whose research budget last year was greater than the combined revenues of the entire Indian

    pharmaceutical industry. This disparity is too great to be explained by cost differentials, and it

    comes when advances in genomics have made research equipment more expensive than ever. The

    drug discovery process is further hindered by a dearth of qualified molecular biologists. Due to the

    disconnection between curriculum and industry, pharma in India also lack the academic

    collaboration that is crucial to drug development in the West and so far.

    The pharmaceutical industry is undergoing a period of intense transformation. Increased scrutiny of

    operational and research practices together with difficult questions over the safety of marketed

    drugs have created uncertainty in what has traditionally been considered a stable and highly

  • 6

    profitable business. Many analysts suggest that the industry is moving from the era of 'blockbuster'

    drugs to a new model of drug development known as 'personalised medicine'.

    Key issues affecting companies in the pharmaceutical sector include:

    1.2.5.1. Successfully developing innovative drugs and enhancing R&D productivity

    Companies need to move new products into existing and new markets quickly to obtain sufficient

    benefit from a limited patent life and to compensate for development costs which can exceed $800

    million per drug. However, the issues involved in effectively carrying out research and development

    are complex and transcend science. The regulatory environment is also a key component that affects

    every stage of the process.

    1.2.5.2. Pricing pressures and shrinking margins

    Contrary to public perception, drugs form only a small proportion of overall healthcare costs.

    However, the high profitability of pharmaceuticals companies makes them a relatively easy target

    for healthcare providers trying to reduce costs. One of the solutions for the companies is to have an

    efficient control over operating costs.

    1.2.5.3. Reputation management

    A number of recent product recalls, despite quality assurance processes and regulatory

    requirements, have led many consumers to believe that pharmaceutical manufacturers have lost

    sight of their original vision of improving human health and are more interested in increasing

    profits. In the absence of trust, the public may demand an alternative business model which may

    impose unacceptable controls and operating restrictions.

    1.2.5.4. Managing regulatory compliance

    The pharmaceutical industry is experiencing a period of heightened regulatory scrutiny in a number

    of areas. Therefore, the industry will be challenged to move beyond the current crisis management

  • 7

    approach to regulatory compliance and implement a comprehensive strategic approach that builds

    compliance into the way companies do business.

    1.2.6. Pharmaceuticals and biotechnology

    Unlike in other countries, the difference between biotechnology and pharmaceuticals remains fairly

    defined in India. Bio-tech there still plays the role of pharmas little sister, but many outsiders have

    high expectations for the future. India accounted for 2% of the $41 billion global biotech market

    and in 2003 was ranked 3rd in the Asia-Pacific region and 11th in the world in number of biotech.

    In 2004-5, the Indian biotech industry saw its revenues grow 37% to $1.1 billion. The Indian

    biotech market is dominated by bio pharmaceuticals; 75% of 20045 revenues came from bio-

    pharmaceuticals, which saw 30% growth last year. Of the revenues from bio-pharmaceuticals,

    vaccines led the way, comprising 47% of sales. Biologics and large-molecule drugs tend to be more

    expensive than small-molecule drugs, and India hopes to sweep the market in bio-generics and

    contract manufacturing as drugs go off patent and Indian companies upgrade their manufacturing

    capabilities.

    Most companies in the biotech sector are extremely small, with only two firms breaking 100 million

    dollars in revenues. At last count there were 265 firms registered in India, over 75% of which were

    incorporated in the last five years. The newness of the companies explains the industrys high

    consolidation in both physical and financial terms. Almost 50% of all biotech are in or around

    Bangalore, and the top ten companies capture 47% of the market. The top five companies were

    home-grown; Indian firms account for 62% of the bio-pharma sector and 52% of the industry as a

    whole. The Association of Biotechnology-Led Enterprises (ABLE) is aiming to grow the industry

    to $5 billion in revenues generated by 1 million employees by 2009, and data from the

    Confederation of Indian Industry (CII) seem to suggest that it is possible.

    1.2.7. Overall scenario

    The Indian pharma industry has been growing at a compounded annual growth rate (CAGR) of

    more than 15 per cent over the last five years and has significant growth opportunities. India is now

    among the top five pharmaceutical emerging markets in the world. According to a report of

    McKinsey & Companys , the Indian pharmaceuticals market will grow to US$55 billion in 2020;

  • 8

    and if aggressive growth strategies are implemented, it has further potential to reach US$70 billion

    by 2020. The industry, particularly, has been the front runner in a wide range of specialties

    involving complex drugs' manufacture, development, and technology. With the advantage of being

    a highly organized sector, the number of pharmaceutical companies is increasing their operations in

    India. The pharmaceutical industry in India is an extremely fragmented market with severe price

    competition and government price control. The industry meets around 70 per cent of the country's

    demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,

    capsules, orals, and injectable's. The domestic pharmaceutical market is expected to register a

    strong double-digit growth of 13-14 per cent in 2013 on back of increasing sales of generic

    medicines, continued growth in chronic therapies and a greater penetration in rural markets.

    Generics will continue to dominate the market while patent-protected products are likely to

    constitute 10 per cent of the pie till 2015, according to McKinsey report.

  • 9

    1.3. Introduction to the Company

    1.3.1. About the Company

    Ind-Swift Limited was incorporated as a public limited company on June 6, 1986 under the

    Companies Act 1956. It is the flagship company of India based Ind Swift Group. Ind-Swift Limited

    is a north India based pharmaceutical company.

    Ind Swift Group is a legendary forename in the world Class Pharmaceutical Industry who has

    broaden its horizons by plucking profound & sparkling footprints on multifarious diversified fronts,

    whilst going steadily and surely, scripting a success story filled with enviable milestones and

    pioneering breakthroughs and has subsequently emergent as a group with an annual turnover of

    1000 Crore.

    Manufacturing of Pharmaceutical finished dosage are carried out at 7 state-of-the art manufacturing

    facilities which are second to the none are duly certified and approved by WHO GMP, spread over

    an area of 12, 00, 000 sq. ft. with manufacturing capacities confirming to stringent TGA/MHRA

    approvals; possessing an installed capacities of 3 billion units comprising tablets, capsules,

    ointments, injectable, liquids & dry syrup (all latest formulations with a marketing network.

    Ind-Swift Ltd is an India-based pharmaceutical company. The company is engaged in the

    manufacturing and marketing of pharmaceutical finished dosage. The products manufactured by the

    company include cephalosporin, quinolones, aminoglycosides, macrolides, chloramphenicol,

    tetracycline, and sulphonamides, antianaerobics and anti-fungal's. The company manufactures

    various dosage forms, including oral solutions and suspensions; dry syrups and hard gelatine

    capsules; tablets; dermatological comprising creams, ointments, and gels; eye and ear drops; and

    injectable. The company, through their different divisions, markets formulations focusing on the

    needs of various therapeutic segments, such as diabetology, cardiovascular, anaesthesiology,

    oncology, ophthalmology, neuropsychiatry, gynaecology, paediatric, ENT, surgery, internal

    medicine, dermatology, urology, cardiology, and dental specialty. Ind-Swift Ltd was incorporated

    in the year 1986. In the year 1991, the company set up a manufacturing facility for injectable and

    eye/ear drops. In the year 1995, they incorporated Ind-Swift Laboratories Ltd for initiating a

    backward integration into the manufacturing of apes and advanced intermediates. In the year 1997,

    the company commissioned a multipurpose plant with five independent blocks erected as per US

    FDA standards, designed by Quara, Switzerland. In addition, they launched a Marketing Division

    with the name Ind-Swift Health Care. In the year 2000, the company launched Super Specialty

    Division, which is focusing on Cardiology and Diabetology segments. In the year 2001, they

  • 10

    launched Pioglitazone and Candesartan, in which the company is the second to launch this product

    in India. In addition, they launched Institution/Hospital Division. In the year 2003, the company

    launched another division by the name Ind-Swift Biosciences. They entered into formulations

    export to six countries and filed patent in US for Clarithromycin. In the year 2004, the company

    launched Mukur Division with focus on ophthalmology, neuropsychiatry and ENT. They launched

    Nitazoxanide, an antidiarrheal drug, first time in India after successful clinical trials. In addition,

    they launched another division by the name Resurgence catering to the Anesthesiology and

    Oncology segments. The company opened first overseas office in New Jersey, USA During the year

    2004-05, the company launched combination of Nitazoxanide and Ofloxacin, with the brand name

    Netazox-OF, first time in Asia. They commenced commercial production in their new formulation

    facility at Jammu, J&K. During the year 2005-06, the company introduced various new product

    ranges in the domestic market through their nine marketing divisions. The new product launches

    included the launch of a unique combination of the Quinolone derivative, anti-diarrheal and anti-

    bacterial drug that was launched for the first time in India after completion of the successful clinical

    trials. They also launched the new marketing division namely Institutions & Hospitals division to

    look after the institutional sales. During the year, the company commissioned three new state of the

    art finished dosages facility at; Samba in Jammu & Kashmir; 100% EOU at Jawaharpur and an

    internationally benchmarked plant at Baddi in Himachal Pradesh. During the year 2006-07, the

    company developed and launched 65 new products and line extension. They launched their product

    in Kenya and Senegal. They also launched three new marketing divisions to focus on marketing of

    products for personal healthcare, veterinary and manufacturing and marketing of products for

    international companies. During the year, the company entered into licensing agreements with

    number of international Pharma companies for out licensing the technology of their patented

    products, Clarithromycin. They received approval of the Drug Authorities of Uganda and Tanzania,

    which will pave the way for the supply of their drugs in these countries. During the year 2007-08,

    the company's manufacturing unit at Parwanoo was upgraded as per WHO standards. The

    company's Global Business unit at Derabassi got MHRA & TGA approval. The manufacturing unit

    at Baddi received WHO GMP certification for tablet/SVP/Liquid manufacturing. In August 2007,

    the company commissioned a manufacturing facility at the same tax exempted zone and green

    plains of Baddi. This facility is for soft Gelatin Encapsulation with an annual capacity of 36 crore.

    In December 2007, they launched their new division 'Diagnosis' dealing in medical equipments &

    devices. The company also launched animal health care, which is absolutely a new concept with

    outsourced marketing.

  • 11

    1.3.2. Company Profile

    Ind-swift group is Chandigarh based prospering group of over 500 crores, an ISO9001-2000

    certified company poised to take up a major share of the pharmaceutical industry. The group has

    established a strong reputation as innovators in the Indian pharmaceutical industry. IMS &

    EXPRESS PHARMA PULSE ranked it as over of the most promising pharmaceutical group in

    India.

    This group has two companies under its banner:

    ISL listed on BSE & NSE, is the flagship company of the Ind-swift group.

    ISLL (Ind-swift lab ltd.) is listed at BSE & NSE

    It had two unlisted companies Mukur Pharma Pvt. Ltd. & Swift Formulation Pvt. Ltd. Under it, but

    they got merged with ISL on June 10th 2004. This will lead to better transparency and good

    corporate governance which the market is bound to take notice.

    1.3.3. Chronicles

    1983 The birth of todays Ind-swift was by the name of Mukur. It dealt with liquid & capsules in

    small volume.

    1984 Swift Formulation was formed with two more sections viz. tablets and ointments.

    1986 Birth of Ind swift Limited/

    1986 Introduce for the first time in India Sustained Released tablet Isoxsuprine HCl.

    1991 A sterile plant for injectibles, eye/ear drops, was set up cater to the growing market needs.

    1994 Ind-swift went public with issues oversubscribed 52 times

    1996 Ind-swift Laboratories Limited (ISSL) as born for the manufacture of APIs (Active Pharmaceutical Ingredient)

    1997 A 30 multipurpose plant commissioned with five independent blocs erected as per USFDA standard, designed by Quara, Switzerland. Another marketing Division launched with the name Ind-

    Swift Health Care.

  • 12

    2000 Super specialty division (SSD) was launched Cardio & Endo Segment. Launch of Atorva / Fexafenadine.

    2001 Launch of Institution / Hospital Division. 2ND Company to launch Pioglitazone / Candesartan in India.

    2002 Bagged ISO 9001-2000 Certification. Attained recognition in the world over as Indias

    largest manufacturer of Clarithromycin Granules. Export to almost 40 countries in the world & set

    up eleven representative offices worldwide.

    2003 The Ind-swift group achieved a turnover of INR 300 crore and launched another division by the name of Ind Swift BioscienInd Swift enters into formulation export to 6 countries. Filed Patent

    in USFDA for Clarithromycin.

    2004 Another division launched by the name Resurgence Group achieves a sale of 375 crores. Got DGQA registration. Opened first overseas office at New Jersey, USA.

    2006-07- .Filled Dossiers for registration in about 20 countries .ISL launched new division AGILE

    in joint venture with a Dubai based pharma company focusing on paid management & anti-

    infectives.

    2007-08- Achieved 35th rank among top 300 pharma industries. ISL generics emerged as a 2nd rank pharma generic company.

    2009-10-ISL Received U.S. and E.U. patent for extended release dosage form of Clarithromycin.

    Received European patents for the taste masked formulations of Fexofenadine for pediatrics. Developed the Nitazoxanide an Anti-Diarrheal drug for the first time in India after successful

    clinical trial and bioequivalence studies.

    2010-11- Restructure of 3 divisions GENERIC, MEGASWIFT, GYNOSWIFT and launched three

    new divisions ONCRIT, Q-DEN and CARDIA SWIFT. Ranked 97th largest Pharma company in

    the global market by Plimsoll Global Analysis.

    2011-12- Ind-Swift in collaboration with Wockhardt UK launches Atorvastatin tablets in UK

    ROCHE DIAGNOSTICS partners with ISL to expand TROP T Rapid assay in India Troponin-T is

    used to measure damage to the heart muscle and to differentiate between non- cardiac chest pains

    and heart attacks.

  • 13

    1.3.4. Businesses Strategies of the company

    Ind-Swift manufactures and markets finished dosage forms, through its different divisions, focusing

    on the needs of various therapeutic segments. The divisions include the following: Super Specialty,

    Animal Division, Diagnosis, Institutions, Agile, Bio Sciences, Ethical, Health Care, Max Care,

    Mega care, Neuro and Resurgence

    The company is also in health Publications- With the maiden issue in September, 2002; Ind-Swifts

    Health Publication TRENDZ brings the latest in medical field to the medical fraternity. Routinely

    published four times a year, each issue of TRENDZ is devoted to important contemporary

    healthcare issues and medical issues of a particular specialty.

    Ind Swift is known for its reverse engineering ability with highly focused R & D capabilities (duly

    approved by Department of Science & Technology, Govt. of India) and is equipped with state-of-

    the-art equipment, facilities and talented pool of scientists and researchers.

    A well accepted expertise in NDDS, in India and the world over.

    A US patent for Claire OD, with a market size of $300 million.

    Another patent for Fexofenadine ODT with a market size of $2.5 billion.

    Development of 10 new molecules with a market size of $6 billion.

    Ind Swifts efforts and achievements in taste masking of macrolides was India's first and remains

    the only feat of its kind in the country. The R &D department is also involved in creating

    international opportunities and alliances for CRAMS business, contributing significantly to the

    company's profitability. It also offers complete support to international partners for preparing and

    filing dossiers for finished dosages. By taking giant strides on roads less traveled, Ind-Swift has

    become one of India's fastest growing pharmaceutical companies.

    Ind Swift has radiance up in infrastructures business in the name and style of Ind Swift

    Infrastructures and developers Ltd, and has come up with a multi crore project named Regalia

    Towers, of course a society with 2 bedroom /3 bedroom flats and penthouses owing a mystique

    which is exemplary in itself which not only reflects a diversified transformative spell to

    infrastructures front but a unique state of art with the best of specifications also. In infrastructures,

    Ind Swift plans to be emergent with motels & Resorts project in the upcoming phases.

  • 14

    1.3.5. Awards/ Achievements

    Ranked as one of the most promising pharmaceutical group in India by Express Pharma Pulse.

    All India achievers award as legend in Business house category.

    An ISO 9001, 2000 company.

    Achieved Pharma Pulse award for three consecutive years for fastest growing & most promising

    pharmaceutical company.

    1.3.6. Ind Swift Ltd Today

    Swift is the fastest flying bird on earth. It is the philosophy behind the genesis of the name Ind

    Swift ltd incepted in 1986 when three visionaries the Mehta's, the Munjal's and the Jains, all 1st

    generation entrepreneurs visualized the business. Even with limited resources, the vision was to

    develop a Pharma enterprise with its body spread internationally and soul rooted in ethics. It is

    indeed a proud moment for us today, starting as a small domestic company in 1986 we have

    transformed into a truly global organization with its operations and product range in more than 50

    countries .Ind Swift today is 2000 crore group, moving forward and still growing to new

    dimensions and spheres every day.

    Ind Swift Ltd. is the flagship company of the Ind Swift group at Chandigarh. Ind Swift Ltd is listed at three stock exchanges-Mumbai stock Exchange, Ludhiana stock exchange

    & National stock exchange. It has a string prescribing Doctor base of, over 2.5 lacs doctors from

    Gynaecology, Paediatrics, Cardiology/ Diabetes, Dermatology, ENT, Dentistry, Neuropsychiatry,

    Gastrology, Urology speciality.

    Over 225 offices in India Portfolio of over 750 products with presence in high growth therapeutic segments of Cardiology,

    Diabetology, anti-depressant, anti-allergic, anti-infective, Neurology and Oncology.

    A nation-wide distribution network of over 1000 marketing professionals. R&D facility by DSIR, Govt. of India. At present a team of 50 scientists to be augmented to 100

    scientists.

    The company is poised to grab a large share of the burgeoning pharmaceutical market with: Strong and Supportive Top Management headed by Sh. S. R. Mehta, Chairman Stage of R&D Promising Quality products

  • 15

    Innovative Marketing Strategies 7 District Marketing Divisions Dedicated & Hardworking Field Force

    The current turnover of all divisions combined of ISL is 39946 crore.

  • 16

    Chapter 2. Literature Review

    A lot of research has gone into studying and analysing the financial health of company by

    accountants and researches all over the world. Accounting ratios have been widely used in

    development of models for the prediction of financial health and financial distress of company.

    Researchers have been trying to find a ratio that would serve as the sole predictor of corporate

    health and bankruptcy for a long time. They have also tried to build up models that would help in

    predicting the financial health of company.

    This chapter will present some definitions of accounting ratios. By understanding financial ratios or

    accounting ratios can help the investors know what kind and how much of accounting ratios level

    they need to make efficient decisions in investment.

    Gopinathan Thachappilly (2009), in this articles he discuss about the Financial Ratio Analysis for

    Performance evaluation. It analysis is typically done to make sense of the massive amount of

    numbers presented in company financial statements. It helps evaluate the performance of a

    company, so that investors can decide whether to invest in that company. Here we are looking at the

    different ratio categories in separate articles on different aspects of performance such as

    profitability ratios, liquidity ratios, debt ratios, performance ratios, investment evaluation ratios.

    James Clausen (2009), He state that the Profitability Ratio Analysis of Income Statement and

    Balance Sheet Ratio analysis of the income statement and balance sheet are used to measure

    company profit performance. He said the learn ratio analyses of the income statement and balance

    sheet. The income statement and balance sheet are two important reports that show the profit and

    net worth of the company. It analyses shows how the well the company is doing in terms of profits

    compared to sales. He also shows how well the assets are performing in terms of generating

    revenue. He defines the income statement shows the net profit of the company by subtracting

    expenses from gross profit (sales cost of goods sold). Furthermore, the balance sheet lists the

    value of the assets, as well as liabilities. In simple terms, the main function of the balance sheet is to

    show the companys net worth by subtracting liabilities from assets. He said that the balance sheet

    does not report profits, theres an important relationship between assets and profit. The business

    owner normally has a lot of investment in the companys assets.

    Gopinathan Thachappilly (2009), He discuss about the Profitability Ratios Measure Margins and

    Returns such as gross, Operating, Pretax and Net Profits, ROA ratio, ROE ratio, ROCE ratio.

    However, he determines the Gross profit is the surplus generated by sales over cost of goods sold.

    He discussion about the Gross Profit Margin = Gross Profit/Net Sales or Revenue. Moreover,

    Operating profits are arrived at by deducting marketing, administration and depreciation and R&D

  • 17

    costs from the gross margin. Nonetheless, He explains about the operating profit margin. Operating

    Profit Margin = Operating Profit/Net Sales or Revenue. Nevertheless, pretax profits are computed

    by deducting non-operational expenses from operating profits and by adding non-operational

    revenues to it. Pretax Profit Margin = Pretax Profit/Net Sales or Revenue .Nonetheless, he also

    analysis about the net profit margin.Net Profit Margin = Net Profit/Net Sales or Revenue. He also

    explains that the returns on resources use dividend into three categories such as ROA, ROE,

    and ROCE: At first the Return on Assets = Net Profit/ (Total Assets at beginning of the period +

    Total Assets at the close of the period)/2) - The denominator is the average total assets employed

    during the year. Return on Equity = Net Profit/ (Shareholders' Equity at the beginning of the year +

    Shareholders' Equity at the close of the year)/2).ROCE ratio: Return on Capital Employed = Net

    Profit/ (Average Shareholders' Equity + Average Debt Liabilities) - Debt Liabilities.

    Maria Zain (2008), in this articles he discuss about the return on assets is an important percentage

    that shows the companys ability to use its assets to generate income. He said that a high percentage

    indicates that companys is doing a good utilizing the companys assets to generate income. He

    notices that the following formula is one method of calculating the return on assets percentage.

    Return on Assets = Net Profit/Total Assets. The net profit figure that should be used is the amount

    of income after all expenses, including taxes. He enounce that the low percentage could mean that

    the company may have difficulties meeting its debt obligations. He also short explains about the

    profit margin ratio Operating Performance .He pronounces that the profit margin ratio is

    expressed as a percentage that shows the relationship between sales and profits. It is sometimes

    called the operating performance ratio because its a good indication of operating efficiencies. The

    following is the formula for calculating the profit margin. Profit Margin = Net Profit/Net Sales.

    James Clausen (2009), in this article he barfly express about the liquidity ratio. He Pronounce that it

    is analysis of the financial statements is used to measure company performance. It also analyses of

    the income statement and balance sheet. Investors and lending institutions will often use ratio

    analyses of the financial statements to determine a companys profitability and liquidity. If the

    ratios indicate poor performance, investors may be reluctant to invest. Therefore, the current ratio or

    working capital ratio, measures current assets against current liabilities. The current ratio measures

    the companys ability to pay back its short-term debt obligations with its current assets. He thinks a

    higher ratio indicates the company is better equipped to pay off short-term debt with current assets.

    Wherefore, the acid test ratio or quick ratio, measures quick assets against current liabilities. Quick

    assets are considered assets that can be quickly converted into cash. Generally they are current

    assets less inventory.

  • 18

    Gopinathan Thachappilly(2009),he also state that the Liquidity Ratios help Good Financial

    .He know that a business has high profitability, it can face short-term financial problems and its

    funds are locked up in inventories and receivables not realizable for months. Any failure to meet

    these can damage its reputation and creditworthiness and in extreme cases even lead to bankruptcy.

    In addition to, liquidity ratios are work with cash and near-cash assets of a business on one side, and

    the immediate payment obligations (current liabilities) on the other side. The near-cash assets

    mainly include receivables from customers and inventories of finished goods and raw materials.

    Coupled with, current ratio works with all the items that go into a business' working capital, and

    give a quick look at its short-term financial position. Current assets include Cash, Cash equivalents,

    Marketable securities, Receivables and Inventories. Current liabilities include Payables, Notes

    payable, accrued expenses and taxes, and Accrued installments of term debt). Current Ratio =

    Current Assets / Current Liabilities. Similarly, Quick ratio excludes the illiquid items from current

    assets and gives a better view of the business' ability to meet its maturing liabilities. Quick Ratio =

    Current Assets minus (Inventories + Prepaid expenses + Deferred income taxes + other illiquid

    items) / Current Liabilities. In the final ratio under this article is cash ratio .Cash ratio excludes even

    receivables that can take a long time to be converted into cash. Cash Ratio = (Cash + Cash

    equivalents + Marketable Securities) / Current Liabilities.

    James Clausen (2009), He denotes that about the total asset ratio. The calculation uses two factors,

    total revenue and average assets to determine the turnover ratio. When calculating for a particular

    year, the total revenue for that year is used. Instead of using the year ending asset total from the

    balance sheet, a more accurate picture would be to use the total average assets for the year. Once the

    average assets are determined for the same time period that revenue is compared, the formula for

    calculating the asset turnover ratio is. Total Revenue / Average Assets = Asset Turnover Ratio.

    Gopinathan Thachappilly (2009), he shows that the EPS is computed by dividing the company's

    earnings for the period by the average number of shares outstanding during the period. He discuss

    that Stock analysts regularly estimate future EPS for listed companies and this estimate is one major

    factor that determines the share's price. Price/Earnings (PE) Ratio = Stock Price per Share /

    Earnings per Share (EPS).Hence, many investors prefer the Price/Sales ratio because the sales value

    is less prone to manipulation. Price/Sales (PS) Ratio = Stock Price per Share / Net Sales per Share.

    The Dividend Yield, The dividend yield ratio annualizes the latest quarterly dividend declared by

    the company Dividend Yield = Annualized Dividend per Share / Stock Price per Share.

  • 19

    Chapter 3. Research Methodology

    3.1. Meaning of research

    Research is defined as a scientific & systematic search for pertinent information on a

    specific topic. Research is an art of scientific investigation. Research is a systemized effort

    to gain new knowledge. The search for knowledge through objective and systematic

    method of finding solution to a problem is a research.

    3.2. Process of financial evaluation

    Research is a systematic and continuous method of defining a problem, collecting the facts and

    analysing them, reaching conclusion forming generalizations.

    Research methodology is a way to systematically solve the problem. It may be understood as a

    science of studying how research is done scientifically. In it we study the various steps that are

    Model Of Performance Evaluation

    Selection of Financial Report

    Identification of balance sheet, income

    statement and cash flow statement

    Ratio analysis

    Liquidity Ratio

    Solvency Ratio

    Activity Ratio

    Profitability Ratio

    Mathematical calculation

    Graphical representation

  • 20

    generally adopted by a researcher in studying his research problem along with the logic behind

    them.

    3.3. Objectives of the study:-

    1. Assessment of current financial position of the company

    2. Comparison of the firms past, present financial position.

    3. It is done to find firms financial strengths and weaknesses.

    4. To compare present performance with past performance.

    5. To study the level of risk of operations.

    6. To connect the academic study with industry exposure.

    3.4. Need for this Study:

    The major reason behind doing this project was to see the Financial status of the company .How

    much company has eased their funds by issuing their securities and with some other factors. To get

    aware about the all financial Performa and the structure by which the company update their sources.

    Besides this, the study was aimed at finding out the effort of the Finance System on-

    1. The employees

    2. On the owners (shareholders)

    3. Debtors and creditors.

    4. Stakeholders (Banks and the Financial Institute)

    3.5. Problem Statement

    The research problems, in general refers to some difficulty with a researcher experience in the

    contest of either a particular a theoretical situation and want to obtain a salutation for same. The

    present project has been undertaken to do the Analysis of Financial Statements at IND SWIFT

    PHARMACEUTICAL LTD.

  • 21

    3.6. Research Design:

    A research design is a systematic plan to study a scientific problem. The design of a study defines

    the study type, data collection methods and a statistical analysis plan.

    Exploratory research is research conducted for a problem that has not been clearly defined. It often

    occurs before we know enough to make conceptual distinctions or posit an explanatory relationship.

    Exploratory research helps determine the best research design, data collection method and selection

    of subjects. It should draw definitive conclusions only with extreme caution. Given its fundamental

    nature, exploratory research often concludes that a perceived problem does not actually exist.

    Exploratory research often relies on secondary research such as reviewing available literature and/or

    data.

    3.7. Data collection

    Main data for our research are the annual financial reports on Ind-Swift Limited from 2011 to 2013.

    When we measurement the ratio analysis for any company, we must be used in annual financial

    report otherwise we dont measurement. We have also used four main financial statements for ratio

    analysis of pharmaceutical company such as; balance sheets, an income statement, cash flow

    statement; statement of shareholders equity. After the research problem has been identified and

    selected the next step is to gather the requisite data. While deciding about the method of data

    collection to be used for the researcher should keep in mind two types of data viz. primary and

    secondary.

    Types of Data

    Secondary Primary

  • 22

    The secondary data as it has always been important for the completion of any report provides a

    reliable, suitable, adequate and specific knowledge. The standard cost reports, working sheets

    provide the knowledge and information regarding the relevant subject. Secondary data is the data

    compiled by someone other than the user. It includes published in the form of documents, research

    papers, web pages and other organizational records.

    It is recommended to use secondary data in order to avoid duplicating of efforts, running up,

    unnecessary costs, and tiring of informants.

    3.7.1. Secondary Data Sources:

    1. Internet Sites.

    2. Reference Books

    3. Company Records (Annual Reports of the company)

    4. Outline Application forms.

    3.7.2. Objective to bank upon secondary Data:

    There are some advantages of using secondary data:

    1. The secondary data is more economical.

    2. The use of secondary data saves much more time. Secondary data is useful to indicate

    deficiencies & gaps.

    3. Hence, analysis of secondary data may improve the understanding of the problem & throw more

    light on newer ideas.

    4. In this context it can be stated that secondary data was used because it was readily available for

    use & was very relevant to the pertinent issues. It has been collected sometime in the past, but is

    not so remote to render the data unless. Moreover, the proper accuracy of the data has also been

    appropriately ensured by considerable extent of care in its collection.

    5. The relevant secondary data has been obtained from the internal source within the company.

    The information has been sourced from the accounting record &MIS report of the Regional

    Office of the company. Some of the information has been extracted from the intranet or web

    portal of the company.

  • 23

    3.8. Data Analysis

    3.8.1. Studying the annual report:

    For this purpose, secondary data is collected. Analysing the financial statement of the company

    for the present year as well as the past year and identifying the main source as well as

    application of funds. Ratio analysis would be used to provide us a deep view into the companys

    financial statement. The analysis of financial statement is a process of using ratio analysis to

    evaluate the relationship between components part of financial statement to obtain a better

    understanding of the firms position & performance. This would be followed by an insight into

    the working capital cycle of the company. This involves calculation of the raw material

    inventory period, conversion period, average credit period etc.

    3.8.2. Limitations of the Study:-

    The personal biases of the respondents might have entered into their response.

    1. The first limitation of this project is limitation in categories of accounting ratios. This

    project only focuses on four types of accounting ratios about: liquidity, solvency, activity,

    and profitability ratios. Therefore, this project cannot express all aspects, functions also

    disadvantages of other accounting ratios that are not mentioned

    2. Besides, this work process is designed under a tight college timetable and working pressure.

    Hence, it is not a perfect and standardized research to investors and users.

    3. Qualitative Information: All the analysis is based on quantitative information. There is not

    much importance given to qualitative information.

    4. Historical Data: All the study is based on historical data so that it has no more importance. 5. Lack of Comparative Data: There was no other organization by which we can compare the

    data of INDSWIFT PHARMACEUTICAL LTD. for effective analyses.

    6. Secrecy: Some of the information was kept confidential and was not disclosed to any person whosoever.

  • 24

    3.8.3. Interpretation

    We used the model for performance evaluation of pharmaceutical company. It is briefly discussed

    on next page. It indicates the different steps such Selection of financial report, Identification of

    balance sheet, income statement and cash flow statement, ratio analysis, mathematical

    calculation and statistical analysis of the company.

    First step of model is the selection of financial report that means a chore of annual financial report.

    The annual financial report present financial data of a company's position, operating performance,

    and funds flow for an accounting period .We are using the annual reports from 2011 to 2013 of the

    company.

    Second step of model, we identify the balance sheet, income statement, cash flow statement from

    the annual financial report. We use some data from balance sheets for different kind of ratio such as

    liquidity ratios, solvency ratios. In contrast, we was used some sources from income statement.

    When we analysis the profitability ratios we must be use income statement of the company.

    The third step of model, we identify the suitable ratio for performance evaluation and we analysis

    the ratio such as liquidity ratio, solvency ratio, profitability ratio, activity ratio, etc. All types of

    ratio are important for knowing how well a company is in generating its assets, liquidity, revenue,

    expense, shareholder equity profit or loss etc.

    The Forth step of model, we use Mathematical calculation. Here we identify some figure from the

    income statement and balance sheet from 2011 to 2013.

    The five step of model; we used the graphical analysis for evaluation of the company. The graphical

    analysis is an inexpensive, easy-to-learn program for producing, analysing, and printing graphs.

    Here we used Microsoft excel for graphic representation.

    The finally step of model, we analyse the various ratios. We also analyse why the company is not in

    a good position and where its lacking.

    3.9. Ratio Analysis

    Quantitative analysis of information contained in a companys financial statements. Ratio analysis

    is based on line items in financial statements like the balance sheet, income statement and cash flow

    statement; the ratios of one item or a combination of items - to another item or combination are

  • 25

    then calculated. Ratio analysis is used to evaluate various aspects of a companys operating and

    financial performance such as its liquidity, solvency, activity and profitability. The trend of these

    ratios over time is studied to check whether they are improving or deteriorating. Ratios are also

    compared across different companies in the same sector to see how they stack up, and to get an idea

    of comparative valuations. Ratio analysis is a cornerstone of fundamental analysis.

    Financial ratio analysis is a useful tool for users of financial statement. It has following advantages:

    Advantages

    1. It simplifies the financial statements.

    2. It helps in comparing companies of different size with each other.

    3. It helps in trend analysis which involves comparing a single company over a period.

    4. It highlights important information in simple form quickly. A user can judge a company by just

    looking at few numbers instead of reading the whole financial statements.

    Limitations

    1. Despite usefulness, financial ratio analysis has some disadvantages. Some key demerits of

    financial ratio analysis are:

    2. Different companies operate in different industries each having different environmental

    conditions such as regulation, market structure, etc. Such factors are so significant that a

    comparison of two companies from different industries might be misleading.

    3. Financial accounting information is affected by estimates and assumptions. Accounting

    standards allow different accounting policies, which impairs comparability and hence ratio

    analysis is less useful in such situations.

    4. Ratio analysis explains relationships between past information while users are more concerned

    about current and future information.

  • 26

    3.10. Ratio Chart

    Ratios

    Liquidity Ratio

    Current Ratio

    Quick Ratio

    Solvency Ratio

    Debt-Equity Ratio

    Total Asset to Debts Ratio

    Proprietory Ratio

    Activity Ratio

    Inventory Turnover Ratio

    Debtors Turnover Ratio

    Working Capital Turnover Ratio

    Fixed Asset Turnover Ratio

    Current Asset Turnover Ratio

    Profitability Ratio

    Gross Profit Ratio

    Operating Ratio

    Net Profit Ratio

    Return on Investment

    Earning Per Share

    Dividend Per Share

  • 27

    3.11. Types of ratios

    1. Liquidity Ratios

    Liquidity ratios analyse the ability of a company to pay off both its current liabilities as they

    become due as well as their long-term liabilities as they become current. In other words, these

    ratios show the cash levels of a company and the ability to turn other assets into cash to pay off

    liabilities and other current obligations.

    Liquidity is not only a measure of how much cash a business has. It is also a measure of how

    easy it will be for the company to raise enough cash or convert assets into cash. Assets like

    accounts receivable, trading securities, and inventory are relatively easy for many companies to

    convert into cash in the short term. Thus, all of these assets go into the liquidity calculation of a

    company.

    Here are the most common liquidity ratios.

    1.1. Current ratio

    1.2. Quick Ratio

    2. Solvency Ratios

    Solvency ratios, also called leverage ratios, measure a company's ability to sustain operations

    indefinitely by comparing debt levels with equity, assets, and earnings. In other words, solvency

    ratios identify going concern issues and a firm's ability to pay its bills in the long term. Many

    people confuse solvency ratios with liquidity ratios. Although they both measure the ability of a

    company to pay off its obligations, solvency ratios focus more on the long-term sustainability of

    a company instead of the current liability payments.

    Solvency ratios show a company's ability to make payments and pay off its long-term

    obligations to creditors, bondholders, and banks. Better solvency ratios indicate a more

    creditworthy and financially sound company in the long-term.

    The most common solvency ratios include:

    2.1. Debt-equity ratio

    2.2. Total asset to debt ratio

    2.3. Proprietary ratio

    3. Activity Ratios

    Accounting ratios that measure a firm's ability to convert different accounts within its balance

    sheets into cash or sales. Activity ratios are used to measure the relative efficiency of a firm

    based on its use of its assets, leverage or other such balance sheet items. These ratios are

    important in determining whether a company's management is doing a good enough job of

    generating revenues, cash, etc. from its resources.

  • 28

    The most common solvency ratios include:

    3.1. Inventory turnover ratio

    3.2. Debtors turnover ratio

    3.3. Creditors turnover ratio

    3.4. Working capital turnover ratio

    3.5. Fixed assets turnover ratio

    3.6. Current assets turnover ratio

    4. Profitability Ratios

    Profitability ratios compare income statement accounts and categories to show a company's

    ability to generate profits from its operations. Profitability ratios focus on a company's return on

    investment in inventory and other assets. These ratios basically show how well companies can

    achieve profits from their operations.

    Investors and creditors can use profitability ratios to judge a company's return on investment

    based on its relative level of resources and assets. In other words, profitability ratios can be used

    to judge whether companies are making enough operational profit from their assets. In this

    sense, profitability ratios relate to efficiency ratios because they show how well companies are

    using their assets to generate profits. Profitability is also important to the concept of solvency

    and going concern.

    Here are some of the key ratios that investors and creditors consider when judging how

    profitable a company should be:

    4.1. Gross profit ratio

    4.2. Operating ratio

    4.3. Net profit ratio

    4.4. Return on Investment

    4.5. Earning per Share

    4.6. Dividend per Share

  • 29

    Chapter 4. Data Collection and Interpretation

    4.1. CURRENT RATIO

    Current Ratio is a relationship of current assets to current liabilities and is computed to access the

    short-term financial position of the enterprise. It means current ratio is an indicator of the enterprise

    ability to meet its short term obligations. Current assets are the assets that are either in the form of

    cash or cash equivalents or can be converted into cash or cash equivalents in a short time (say,

    within a years time) and current liabilities are liabilities repayable in the short period of time.

    Computation:

    The ratio is calculated as follows:

    Current Ratio:

    It is generally accepted that current assets should be two times the current liabilities, and then only

    will realization from current assets be sufficient to pay the current liabilities in time and enable the

    enterprise to meet other day-to-day expenses

    Objective:

    The objective of calculating current ratio is to assess the ability of the enterprise to meet its short-

    term liabilities promptly. It is used to assess the short-term solvency of the business enterprise since

    0.00

    0.50

    1.00

    1.50

    2.00

    2011 2012 2013

    Current Ratio

    2011 2012 2013 C. Assets 80573.94 98618.25 84283.16

    C. Liabilities 70861.63 94579.81 58056.38

    Ratio 1.14 1.04 1.45

  • 30

    this ratio assumes that current assets can be converted into cash to meet current liabilities. It shows

    the number of times the current assets are in excess over current liabilities.

    Significance

    A low ratio indicates that the enterprise may not be able to meet its current liabilities on time and

    inadequate working capital. On the other hand a high ratio indicates funds are not used efficiently

    and are lying idle. It indicates poor investment policies of the management. The current ratio thus,

    throws a good light on the short-term financial position and policy of a firm. An enterprise should

    have a reasonable current ratio. Although there is no hard and fast rule yet a current ratio of 2:1 is

    considered satisfactory.

    Findings

    The current ratio means the ability of the firm to meet its current liabilities. Current assets get

    converted into cash in the operating cycle of the firm and provide the funds needed to pay current

    liabilities. As per the above flow of ratio during the last three years it has increased but as per

    standards it should be around 2:1 whereas it is 1.45:1 which is still less than required. And even if

    we see previous years it was 1.04:1 for 2012 and 1.14:1 for 2011 respectively.

    Suggestions

    The company is over utilising its funds as in this case we can clearly see that the company is being

    on the riskier side. It is suggested to decrease the liabilities of the company.

  • 31

    4.2. Quick Ratio

    It is also known as Liquid ratio and Acid test ratio. Quick ratio is a relationship of Quick assets with

    current liabilities and is computed assess the short-term liquidity of the enterprise in its correct

    form. Quick/liquid assets put against the current liabilities given the quick/liquid ratio.

    Computation:

    Liquid assets are the assets which are either in the form of cash or cash equivalents or can be

    converted into cash within one year short period. Liquid assets are computed by deducting stock

    and prepaid expenses from total current assets. Liquid assets include cash, bills receivable,

    marketable securities, and debtors (excluding bad and doubtful debt), etc. Stock is excluded from

    liquid assets because it may take some time before it is converted into cash. Similarly, prepaid

    expenses do not provide cash at all and are thus, excluded from liquid assets.

    A quick ratio of 1:1 is usually considered favourable, since for every rupee of current liabilities,

    there is a rupee of quick assets.

    Quick Ratio:

    Quick Asset: C. Asset Prepaid Exp. - Stock

    00.20.40.60.8

    1

    2011 2012 2013

    Quick Ratio

    2011 2012 2013

    C. Assets 80573.94 98618.25 84283.16

    Prepaid Exp. 177.92 178.49 63.88

    Stock 47174.50 36553.35 32945.90

    Quick Assets 33221.52 61886.41 51273.38 C. Liabilities 70861.63 94579.81 58053.38

    Ratio 0.47 0.65 0.88

  • 32

    Objective

    The objective of computing liquid ratio is to assess the short-term solvency of the enterprise. A part

    of the current assets are not readily realisable or convertible into cash. Therefore, the current ratio

    does not indicate adequately the ability of the enterprise to discharge the current liabilities as and

    when they fall due whereas while computing the liquid assets, a part of current assets that are not

    liquid are eliminated. This ratio is an indicator of short-term debt payment capacity of enterprise

    and thus, is a better indicator of liquidity. This ratio is very important for banks and financial

    institutions but not for manufacturing concerns. The comparison of Current ratio with liquid ratio

    would indicate the degree of inventory held.

    Significance:

    A high quick ratio compared to current ratio may indicate under stocking while a low quick ratio

    indicates over stocking.

    Findings

    In the last year 2013 the quick ratio of the company was 0.88:1. In year 2011 quick ratio was 0.47:1

    and in 2012 it was 0.65:1. It is generally accepted as 1:1, which represents that company is doing

    well.

    Suggestions

    The company should carry on doing which will help improving this ratio i.e. buying more quick

    assets of keeping more stock of quick assets.

  • 33

    4.3. DEBT-EQUITY RATIO

    The debt-equity is computed to ascertain soundness of the long term financial position of the firm.

    This ratio expresses a relationship b/w debt (external equities) and the equity (internal equities).

    That means long term loans i.e. debenture, loans (from financial institutions). Equity means

    shareholders funds i.e. preference share capital, equity share capital, reserves less losses and

    fictitious assets (preliminary expenses).

    Computation:

    The debt-equity ratio indicates the proportion between shareholders funds and the long-term

    borrowed funds. A higher ratio indicates a risky financial position while a lower ratio indicates

    safer financial position. A low debt-equity ratio implies the use of more equity that debt which

    means a larger safety by creditors and vice-versa.

    Debt-equity ratio is acceptable if it is 2:1, which means debts can be twice the equity.

    Debt equity ratio: ( )( )

    Objective

    The objective of the debt equity ratio is to arrive at an idea of the amount of capital supplied to the

    enterprise by the proprietors and of asset cushion or cover available to its creditors on liquidation.

    0.00

    1.00

    2.00

    3.00

    2011 2012 2013

    Debt Equity Ratio

    2011 2012 2013

    Debt 16728.03 27259.40 59062.44 Equity 32280.86 31807.91 21000.97 Ratio 0.52 0.86 2.81

  • 34

    Significance:

    This ratio is sufficient to assess the soundness of long term financial position. It also indicates the

    extent to which the firm depends upon outsiders for its existence. In other words, it portrays the

    proportion of total funds acquired by a firm by way of loans.

    A ratio of 1 or 1:1 means that creditors and stockholders equally contribute to the assets of the

    business.

    A less than 1 ratio indicates that the portion of assets provided by stockholders is greater than the

    portion of assets provided by creditors and a greater than 1 ratio indicates that the portion of assets

    provided by creditors is greater than the portion of assets provided by stockholders.

    Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of

    greater protection to their money. But stockholders like to get benefit from the funds provided by

    the creditors therefore they would like a high debt to equity ratio.

    Findings

    In year 2011 ratio was 0.52:1, in 2012 ratio was 0.86:1 and in 2013 it was 2.81:1 which shows there

    was a greater security for the creditors in 2011 & 2012. But in 2013 we have noticed a dramatic rise

    in the debts. This shows that company has relied more on debts rather than equity in 2013.

    Suggestions

    It is suggested that company should not increase its debts any further, as ratio has raised from

    0.86:1 in 2012 to 2.81:1 in 2013. It is almost ideal condition for company by such a dramatic

    increase in figure might effect the companys.

  • 35

    4.4. TOTAL ASSET TO DEBT RATIO

    It establishes a relationship between total assets and total long term debts. The two components of

    this ratio i.e. total assets and debt are computed as follows:

    Total Assets: Total Assets include fixed as well as current assets. However, it does not include

    fictitious assets like preliminary expenses, underwriting commission, share issue expenses, discount

    on issue of share/debentures, etc., and debit balance of Profit & loss Account.

    Long Term Debts: Long-term debts refer to debts that will mature after one year. It includes

    debentures, bonds, and loans from financial institutions

    Computation:

    This ratio is computed by dividing the total assets by long-term debts. This ratio is usually

    expressed as a pure ratio, e.g., 2:1.

    Total asset to debt ratio:

    Objective:

    The objective of computing the ratio is to establish the relationship b/w total assets and long term

    debts of the business. It measures the safety margin available to the providers of long-term debts.it

    measures the extent to which debt is covered by the assets.

    0.00

    2.00

    4.00

    6.00

    8.00

    2011 2012 2013

    Total Assets to Debt Ratio

    2011 2012 2013

    Total Assets 123718.99 156816.15 140735.27 Long Term Debts 16728.03 27259.40 59062.44 Ratio 7.40 5.75 2.38

  • 36

    Significance:

    A higher ratio represents higher security to lender for extending long term loans to the business. On

    the other hand, a low ratio represents a risky financial position as it means that the business depends

    heavily on outside loans for its existence. In other words, investment by the proprietors is low

    Findings:

    It was clear that companys total assets far exceeded its long-term debts in 2011 as ratio was 7.40:1,

    but it gradually decreased and in 2012 ratio was 5.75, and ultimately in 2013 ratio was 2.38. This is

    an almost ideal ratio for the business.

    Suggestions:

    High ratio surely provides a safety margin, but it also indicates that is resources are not being fully

    utilized and its assets are sitting idle. Hence, a requirement arises to increase its long-term debts

    which can be used in the organization.

  • 37

    4.5. PROPRIETARY RATIO

    It establishes a relationship b/w proprietors fund and total assets. Proprietors funds means share

    capital plus reserves and surplus, both of capital and revenue nature. Loss and fictitious assets, if

    any are deducted. This ratio shows the extent to which the shareholders own the business. The

    difference between this ratio and 100 represents the ratio of total liabilities to total assets.

    Computation:

    It is calculated by dividing equity (shareholders funds) by total assets. Higher the ratio, the better it

    is for all concerns.

    Proprietary ratio: 100

    Objective:

    The proprietary ratio highlights the general financial position of the enterprise. This ratio is of

    particular importance to the creditors who can ascertain the proportion of shareholders fund in total

    assets employed in the firm. The higher the ratio, the better it is for all concerned.

    0.00

    10.00

    20.00

    30.00

    2011 2012 2013

    Proprietary Ratio

    2011 2012 2013

    Equity 32280.86 31807.91 21000.97

    Total Assets 123718.99 154431.09 128641.05

    Ratio 26.09 20.60 16.33

  • 38

    Significance:

    A ratio indicates adequate safety for creditors. But a very high ratio indicates improper mix of

    proprietors funds and loan funds, which results in lower return on investment. It is so because on

    loan funds, interest is deductible as an expense and thus, the enterprise does not pay income tax

    thereon. As a result, higher return on investment. A low ratio on the other hand, indicates

    inadequate or low safety concern for the creditors. It may lead to unwillingness of creditors to

    extend credit to the enterprise. It is so because in case of liquidation creditors being unsecured are

    likely to lose their money.

    Findings:

    The proprietary ratio of the company in 2011 was 26.09%, in 2012 was 20.60% and in 2013 it was

    16.33% and has decreased gradually over the years, which is not considered good for creditors. As

    per standards proprietary ratio should be 60% to 75%, where as in this case it is only 16.33%.

    Suggestions:

    It is suggested to decrease the equity as total assets are already sitting idle. It can be done by

    decreasing its Equity Capital, Preference Capital, Reserves and Surplus, Accumulated funds.

  • 39

    4.6. INVENTORY TURNOVER RATIO

    It establishes a relationship b/w the cost of goods sold during a given period and average amount of

    inventory carried during the period. It indicates whether the investment in stock has been efficiently

    used or not, the purpose being to check whether only the required minimum amount is invested in

    stocks.

    Computation:

    Higher ratio indicates that more sales are being produced by a unit of investment in stocks.

    Industries in which the stock turnover ratio is high usually work on a comparatively low margin of

    profit. The ratio shows better performance if it increases, since it means that the investment in

    stocks is leading to higher sales. The reverse is also true.

    Inventory Turnover ratio: ()

    COGS = Sales Gross profit/loss

    Average Stock = + 2

    0.00

    5.00

    10.00

    15.00

    20.00

    2011 2012 2013

    Inventory Turnover Ratio

    2011 (P) 2012 (L) 2013 (L) Sales 86414.42 158341.05 38920.86

    G. Profit/G. Loss 4480.87 -2385.06 -12094.22

    COGS 81933.55 160726.11 51015.08 Avg. Stock 8774.55 9837.28 9888.68

    Ratio 9.34 16.34 5.16

  • 40

    Objective

    The objective of computing inventory turnover ratio is to ascertain whether investment in stock has

    been judicious or not i.e. that only the required amount is invested in stock. A higher ratio indicates

    that more sales are being produced by a rupee of investment in stocks.

    Significance:

    A high ratio indicates that more sales are being produced by a rupee of investment in stocks. A very

    high inventory turnover ratio indicates overtrading and it may lead to working capital shortage. A

    low inventory turnover ratio may reflect inefficient use of investment, over-investment in stocks,

    accumulation of stocks at the end of the period in anticipation of higher prices or unsalable goods,

    etc. Thus, only an optimum inventory turnover ratio ensures adequate working capital and also

    enables the business to earn a reasonable margin of profit.

    Findings

    In the year 2011 inventory turnover ratio was 9.34, in 2012 it was 16.34 and in 2013 it was 5.16

    times. Although in 2012 it was noticed that inventory turnover ratio was 16.34 times which

    represents overtrading.

    Suggestions

    No suggestions as company is doing well have improved form 16.34 times to 5.16 which is much

    better.

  • 41

    4.7. Debtors Turnover Ratio

    It establishes a relationship b/w net credit sales and average debtors or receivables of the year.

    Average debtors are calculated by dividing the sum of debtors in the beginning and at the end by 2.

    Computation

    While calculating debtors turnover, it is important to remember that doubtful debts are not

    deducted from total debtors, since here the purpose is to calculate the number of days for which

    sales are tied up in debtors and not the realizable value of debtors. In case details regarding opening

    and closing receivables and credit sales are not given, the ratio may be worked out as followings:

    Debtors Turnover Ratio:

    Objective:

    This ratio indicated the no. of times the receivables are turned over in a year in relation to sales. It

    shows how quickly debtors are converted into cash and thus, indicates the efficiency of the staff

    entrusted with collection of amount due from debtors.

    Significance:

    A high ratio is better since it would indicate that debts are being collected more promptly. Prompt

    collection of book debts means more available funds which can be put to some other use. A

    0.00

    1.00

    2.00

    3.00

    4.00

    2011 2012 2013

    Debtors Turnover Ratio

    2011 2012 2013 Net Cr. Sales 86414.42 158341.05 38920.86

    A/c's Receivables 23665.67 45991.68 36408.28

    Ratio 3.65 3.44 1.07

  • 42

    standard ratio should be setup for measuring the efficiency. A ratio lower than the standard would

    indicate inefficiency in collection and more investment in debtors than required.

    Findings

    It is noted that in year 2011 & 2012 the Debtors turnover ratio was 3.65 & 3.44 respectively, and in

    the previous year i.e. 2013 it fell to 1.07 which means inefficiency in collection and more

    investment in debtors.

    Suggestions

    It is advised that collection should be made frequently and investment in the debtors should be

    reduced so as to even the scales.

  • 43

    4.8. WORKING CAPITAL TURNOVER RATIO

    It establishes a relationship b/w working capital and sales. It indicates the number of times a unit

    invested in working capital produces sales. This ratio indicates whether the working capital has

    been effectively utilised or not. In fact, in the short run, it is the current assets and current liabilities

    which play a major role.

    Computation

    This ratio is better than stock turnover ratio, since it shows the efficiency or inefficiency in the use

    of the entire working capital and not merely a part of it, viz., the capital invested in stock-it is the

    whole of the working capital that leads to sales. The ratio is computed as follows:

    Working capital turnover ratio:

    Working Capital = Current Assets Current Liabilities

    Objective

    The objective of computing the ratio is to ascertain whether or not working capital has been

    effectively utilised in making sales. It measures the effective utilization of working capital. It also

    shows the no. of times a unit invested in working capital produces sales.

    0.0010.0020.0030.0040.0050.00

    2011 2012 2013

    Working Capital Turnover Ratio

    2011 2012 2013 Sales 86414.42 158341.05 38920.86

    Working Capital 9712.31 4038.44 26229.78

    Ratio 8.90 39.21 1.48

  • 44

    Significance:

    The higher the ratio, the better it is. But a very high ratio may indicate overtrading, the working

    capital being inadequate for the sale of promotions,

    Findings:

    In the year 2011 working capital turnover ratio was 8.90 was high but good as higher the ratio, the

    better it is, but in 2012 it rose to 39.21 which represents overtrading and working capital became

    inadequate. In 2013 it dramatically fell to 1.48 which is low.

    Suggestions:

    The company tried to decrease its working capital turnover ratio but over did it.

  • 45

    4.9. FIXED ASSET TURNOVER