-
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