A Project Report On Ratio Analysis 5e496v
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PROJECT REPORT Submitted for the Degree of B.Com Honours in ing & Finance under the University of Calcutta
Ratio Analysis
Submitted By, AKASHDEEP CHAKRABORTY C.U. Registration No. : C.U. Roll No. : Name of the College: Prafulla Chandra College
Supervised By, Prof. A. Roy
2015-16
CONTENTS SL NO.
TOPICS
1. 1.1 1.2 1.3 1.4 1.5 1.6
Annexure I Annexure II Introduction Background Review of Literature Objectives of the study Database & Methodology Limitations of the study Chapter planning
2.
Conceptual Framework-Elements of Financial Statements
2.1 2.2 2.3 2.4 3. 3.A 3.A.1 3.A.2 3.B 3.B.1 3.B.2 3.C 4. 4.1 4.2 5.
Ratio Analysis Importance of Financial Statement Analysis Features of Financial Statement Analysis Financial Statement Functions Data Analysis & Interpretations Sun Pharmaceuticals Industries Limited Company Profile Data Analysis Cipla Pharmaceuticals Industries Limited Company Profile Data Analysis Data Comparisons & Interpretations Conclusions & Recommendations Conclusions Recommendations Bibliography
PAGE NO.
2
Annexure - 1: Supervisor’s Certificate This is to certify that Mr. AKASHDEEP CHAKRABORTY a student of B. Com. Honours in ing & Finance of PRAFULLA CHANDRA COLLEGE under the University of Calcutta has prepared a Project Report with the title “Ratio Analysis”. My Contribution however, was mainly in the form of general guidance and discussion.
Place:
Signature:
Date:
Name:
Designation:
Name of the College:
3
Annexure – 2 : Student’s declaration I hereby declare that the Project Work with the title “RATIO ANLYSIS” submitted by me for the partial fulfillment of the degree of B. Com. Honours in ing & Finance under the University of Calcutta is my original work and has not been submitted earlier to any other University or Institution for the fulfillment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part has been incorporated in this report from any earlier work done by others or by me. However, extracts of any literature which has been used for this report has been duly acknowledged providing details of such literature in the references.
Place: Kolkata
Signature:
Name: AKASHDEEP CHAKRABORTY Date: Address:
C. U. Registration No.:
C. U. Roll No.:
4
1. Introduction 1.1 Background of the study: Abstracted report is based on the study of annual reports of Cipla Limited and Sun Pharmaceutical Industries Limited for the five years from 2003-2004 to 20072008. The main objective of this study was to apply the concepts learned as a part of this course and understand the business, financial health and the reporting practices followed by these companies. As a part of this report we have tried to analyze the current and past performance trends for the company and predict the future performance and stock prices of the company. To achieve this we have analyzed Revenue Trends, Profitability, Liquidity, Debts, Stocks, Cash Flows and provided a summary at the end of the report. The scope of the report is limited to our understanding of the Financial Statements based on the current course. The report has to be seen in its completeness along with the excel worksheet containing the past five years financial data of the two firms and various ratios. Introduction Cipla is a leading pharmaceutical company in India and it is one of the largest exporters of drugs from India with exports contributing around 50% of its annual revenues. It offers a comprehensive range of products ranging from antiasthma, cardiac to critical care drugs. Over the past 3 years the domestic revenue has grown at a rate of 12% and the export revenue at 27%. Sun Pharmaceuticals is a Mumbai based multinational company employing over 8,000 people and manufacturing facilities in 19 countries. It specializes in chronic ailment drugs and has been consistently strengthening market share in India. The recent acquisitions of Caraco Pharm has helped Sun to increase its global presence. Cipla and Sun Pharmaceuticals are comparable companies in of revenues and profits which makes it easier to compare the two companies and understand the concepts of Financial Statement Analysis.
5
1.2 Review of Literature: Literature of Global Context Review of Literature refers to the collection of the results of the various researches relating to the present study. It takes into consideration the research of the previous researchers which are related to the present research in any way. Here are the reviews of the previous researches related with the present study:
Bollen (1999) Conducted a study on Ratio Variables on which he found three different uses of ratio variables in aggregate data analysis: (1) as measures of theoretical concepts, (2) as a meansto control an extraneous factor, and (3) as a correction for heteroscedasticity. In the use of ratios as indices of concepts, a problem can arise if it is regressed on other indices or variables that contain a common component. For example, the relationship between two per capita measures may be confounded with the common population component in each variable. Regarding the second use of ratios, only under exceptional conditions will ratio variables be a suitable means of controlling an extraneous factor. Finally, the use of ratios to correct for heteroscedasticity is also often misused. Only under special conditions will the common form forgers soon with ratio variables correct for heteroscedasticity. Alternatives to ratios for each of these cases are discussed and evaluated.
Cooper (2000) Conducted a study on Financial Intermediation on which he observed that the quantitative behavior of business-cycle models in which the intermediation process acts either as a source of fluctuations or as a propagator of real shocks. In neither case do we find convincing evidence that the intermediation process is an important element of aggregate fluctuations. For an economy driven by inter mediation shocks, consumption is not smoother than output, investment is negatively correlated with output, variations in the capital stock are quite large, and interest rates are procyclical. The model economy thus fails to match unconditional moments for the U.S. economy.
6
Maria Zain ( 2008) In this articles he discuss about the return on assets is an important percentage that shows the company’s ability to use its assets to generate income. He said that a high percentage indicates that company’s is doing a good utilizing the company’s 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 it’s 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 11 company’s 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 company’s 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.
7
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.
Literature on Indian Context RammohanRao& et.al (1975) In this study howfar the capital markets in India were competitive. Their study examined the decisions about internal and external finance as interrelated and consequent upon a choice of the structure of current and fixed assets. Secondly, they analyzed the earnings pattern of different types of funds to see if the competitiveness hypothesis can sustain. They concluded that a firm’s ability to borrow was constrained by the rise associated with the proportion of debt in the capital structure. If the ratio was high then internal funds improved the firm’s ability to borrow. Similarly if the financial leverage (Debt or equity ratio) was lower than the institutionally determined leverage. The borrowing was facilitated. But if the leverage was the institutionally determined maximum then borrowing was inhibited.
8
Vasanthamani (1982) In her study “The Financial Performance of Lakshmi Machine Works Limited”. The objective of the study was to analyze the financial performance of Lakshmi machine work with a view to analyze the future of performance potentials. The study covered the period from 1978-1982. The liquidity position of the company showed that the company was able to meet the creditors out of its own current assets. The quick ratio also revealed that the quick liabilities were met at of quick assets without any difficulty.
Rajeswary (1990) In her study entitled “ Financial Performance of Precot Mills Limited” has concluded that the financial position and operating efficiency of the company was satisfactory where as the margin or safely was not stable solvency position was not satisfactory and the earning capacity was minimum.
Parvathi (1990) In her “Financial Performance Analysis Hindustan Photos Films Ooty” for the year 1990-1996, concluded that the gross profit has shown as increasing trends, long term solvency of the company, debt equity ratio was not satisfactory.
Sankar.T.L& et.al (1995) In their study entitled, “Financial Performance of State Level Public Enterprises” suffers from staggering investment, poor profitability, unnecessary investment, poor project planning and inadequate financial control.
9
1.3 Objective of the study: The specific objectives of the study are as follows:
To understand the concept of financial statement analysis. To understand the theoritical aspect of liquidity and profitibility. To analyze the liquidity of the medical companies. To analyze the profitibility of the medical companies. To disclose to the extent possible other information related to the financial statements s
Assessment of Past Performance Past Performance is a good indicator of future performance. Investors or Creditors are interested in the trend of past sales, cost of good sold, operating expenses, net income, cash flows and return on investment. These trends offer a means for judging management's past performance and are possible indicators of future performance Past performance is a good indicator of future performance for Investors or creditors. Assessment of current position Financial statement analysis shows the current position of the firm in of the types of assets owned by a business firm and the different liabilities due against the enterprise. Prediction of profitability and growth prospects Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other s in judging earning potential of business enterprise. Prediction of bankruptcy and failure Financial statement analysis is an important tool in assessing and predicting bankruptcy and probability of business failure.
10
Assessment of the operational efficiency Financial statement analysis helps to assess the operational efficiency of the management of a company. The actual performance of the firm which are revealed in the financial statements can be compared with some standards set earlier and the deviation of any between standards and actual performance can be used as the indicator of efficiency of the management. Therefore, the main purpose of financial statement analysis is to utilize information about the past performance of the company in order to predict how it will fare in the future. Another important purpose of the analysis of financial statements is to identify potential problem areas and troubleshoot those.
1.4 Database and Methodology: Database: The entire study is based on secondary Database which is collected from the Websites of the respective medical company. Period of the study: The study period is started from 1st April 2012 and ended on 31stmarch.It consists of 3 of and financial year. Sample Companies: This study has been conducted based on following two medical companies of Pharmaceutical Industry. These are - 1) Sun Pharmaceutical Co. 2) Cipla Pharmaceutical Co.
11
Methodology The research methodology for the secondary research undertaken has been provided as using qualitative as well as quantitative approaches. The analysis and findings selection highlights the result of the secondary study while a discussion and the conclusion section provides a comprehensive analysis of the literature review for the purpose of the project. Conclusively the recommendation for proper development in the Pharmaceutical Industry had been provided along with the limitation of the current research can be undertaken to the research mode comprehensive. Here we use the annual reports of the Pharmaceutical Industry for the collection, classification and comparison of relevant data. On this study, different chart, ratio analysis are performed .It is to be noted that Microsoft Office 2007 is used to complete the entire database.
1.5 Limitations of the study: The study conducted and done is analytical subject to the following limitations: The study is mainly carried out based on the secondary data providedin the financial statements. This study is based on the historical data and information provided in the annual reports therefore it may not be a future indicator. There may be some fractional difference in the calculated ratio. As the study was for shorts span of 8 weeks and due to lack of time other areas could not be well focused. Although analysis of financial statement is essential to obtain relevant information for making several decisions and formulating corporate plans and policies, it should be carefully performed as it suffers from a number of the following limitations. Mislead the The accuracy of financial information largely depends on how accurately financial statements are prepared. If their preparation is wrong, the information obtained from their analysis will also be wrong which may mislead the in making decisions.
12
Not useful for planning Since financial statements are prepared by using historical financial data, therefore, the information derived from such statements may not be effective in corporate planning, if the previous situation does not prevail. Qualitative aspects Then financial statement analysis provides only quantitative information about the company's financial affairs. However, it fails to provide qualitative information such as management labor relation, customer's satisfaction, and management’s skills and so on which are also equally important for decision making. Comparison not possible The financial statements are based on historical data. Therefore comparative analysis of financial statements of different years cannot be done as inflation distorts the view presented by the statements of different years. Wrong judgment The skills used in the analysis without adequate knowledge of the subject matter may lead to negative direction. Similarly, biased attitude of the analyst may also lead to wrong judgment and conclusion.
1.6 Chapter Planning:
1. 2. 3. 4. 5.
Introduction Conceptual Framework Data Analysis and Findings Conclusion and Recommendation Bibliography
13
2. Conceptual Framework-Elements of Financial Statements 2.1 Ratio Analysis A ratio analysis is a quantitative analysis of information contained in a company’s 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 then calculated. Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency. 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.
Importance of Ratio Analysis It helps the management to gauze the efficiency of performance and assess the financial health of the business. It is an essential tool for checking the efficiency with which the working capital is being used and managed. Where ratio are based on analysis and scrutiny of past results, the assist the management to formulate policy, to arrive at correct decisions, to prepare budgets and to plan for future . Similarly, comparative ratio analysis injects trend analysis, the improvement or deterioration of a business is clearly disclosed by ratio analysis. It helps to make inter firm comparisons, that is to know the relative positions of a firm vis-à-vis its competitors . 14
The ability of a firm to pay its short debts denotes its liquidity positions. Ratio analysis helps to draw correct conclusions regarding liquidity position of a firm. Ratios are meaningfully used to indicate the relative performance of different industries. These help the government to take suitable plans and policies accordingly. Ratios help to make useful communication with outsiders by providing pertinent piece of information.
15
2.2 Importance of financial statement analysis: Financial statement analysis provides important information about a company's financial health. To meet their financial reporting obligations and to assist in strategic decisionmaking, firms prepare financial statements. However, “the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone.” Firms employ financial analysts to read, compare and interpret the data as necessary for quantitative analysis and decisionmaking.
Liquidity The balance sheet provides liquidity rations that show how much monetary worth the company has on a given day, which helps determine if the firms financial reliability. The current ratio shows “the 'working capital' relationship of current assets available to meet the company's current obligations,” reports Credit Guru. The quick ratio is similar, calculating those assets easily convertible into cash, determining the immediate working capital relationship. The debt to equity ratio establishes who owns more of the company, creditors or shareholders.
Efficiency Efficiency ratios measure how efficiently the company turns inventory into revenue. The day sales outstanding ratio focuses on the time required to turn inventory into cash and the age of your s receivable. The inventory turnover ratio “indicated the rapidity with which the company is able to move its merchandise,” reports Credit Guru. s payable to sales shows the percentage of sales funded with supplier's money.
Profitability Profitability ratios reveal a firm's success at generating profits. “The profit margin of a company determines its ability to withstand competition and adverse conditions,” reports Credit Guru. Return on assets, reveals the profits earned for each dollar of assets and measures the company's efficiency at creating profit returns on assets. Net worth focuses on financial returns generated by the owner's invested capital.
16
Limits It is important to know that financial statement analysis has limits; simply manipulating numbers hides the actual state of the company. Different ing methods will look different on paper, and the method a particular firm uses can change the visible health and profit levels for either better or worse. Quantitative financial analysis is an art, and different analysts may get slightly different results from the same information, or may return different data about the same business.
2.3 Features of Financial Statement Analysis: Financial statements are those which reveal the financial position of the company at a particular point of time. Financial statements include balance sheet, profit and loss and cash flow statements. Given below are some of the features or characteristics of financial statements –
Financial statements are those statements which present historical data, which implies that financial statements reveal what has already happened and they do not tell anything about the future.
Financial statements are expressed in monetary , so profit and loss statements show the profitability of the business, balance sheet reveal the financial position of the company and cash flow statement reveal the cash position or liquidity which is there with the company.
Financial statements do not reveal the employee satisfaction levels, or effort put by the owner of the company and all other such qualitative factors are excluded from financial statements.
Financial statements should reveal all things and should not leave out anything which materially affects the decision of the person who is reading that financial statements and then taking decision regarding the company. For example prospective shareholders will look financial statements before investing into the company.
17
2.4 Financial Statement Functions: A financial statement summarizes key information about the financial health, success, and profitability about a particular company. The financial figures in a financial statement also provide a measure of the success or failure of its current management and business strategies. Financial statements are generally divided into four distinct parts: a balance sheet, income statement, statement of stockholder equity, and statement of cash flows.
The Balance Sheet The balance sheet is a snapshot of the financial health of a company at a given point in time. Depending on how a company tracks financial records, a balance sheet is commonly created every three months, or at the end every quarter. A typical balance sheet generally summarizes three financial components: assets, liabilities, and owner's (or stockholder's) equity. From the balance sheet you can determine if a company is making money by subtracting liabilities from assets. This difference is the net worth of the company.
The Income Statement The income statement, also called an earnings statement, measures whether company operations were profitable. The measurement of profitability is determined by revenue, expenses, net profit or loss, and the net profit or loss per share of ownership. By measuring how revenue is used in company operations, you can determine if the company is making money. In addition, the income statement represents an entire ing period of time whereas the balance sheet is only a specific point in time.
Statement of Stockholder Equity A statement of stockholder equity reconciles beginning and ending balances of both stockholder equity and the retained earnings s. A typical statement of stockholder equity commonly includes several years of data to reflect balance changes from year to year. Stockholder equity and retained earnings are also components of the balance sheet, which eases reconciliation in the statement of stockholder equity.
18
3. Data Analysis and Interpretations A. Sun Pharmaceutical Industries Limited 3.A.1 Company Profile: Sun Pharmaceutical Industries Limited is an India-based generic and pharmaceutical company. The Company's business segments include US Business, which includes Western Europe, Canada, Australia, New Zealand and Other Markets; Indian Branded Generics Business, including Global Consumer Healthcare Business, and Emerging Markets, which include Active Pharmaceutical Ingredients (APIs). The Company's manufacturing operations are focused on producing generics, branded generics, specialty products, over-the-counter products, anti-retroviral and active pharmaceutical ingredients (APIs). The Company caters various therapy areas, such as dermatology, psychiatry, neurology, cardiology, nephrology, gastroenterology, orthopedics and ophthalmology. It also produces a range of dosage forms, including tablets, capsules, injectable, ointments, creams and liquids. The Company also manufactures various specialty APIs, including controlled substances, steroids, peptides and anti-cancer products. Sun Pharmaceutical Industries began with just 5 products to treat psychiatry ailments in 1983. Sales were initially limited to 2 states – West Bengal and Bihar. Sales were rolled out nationally in 1985. Products that are used in cardiology were introduced in 1987, and Monotrate, one of the first products launched at that time has since become one of our largest selling products. Important products in Cardiology were then added; several of these were introduced for the first time in India. Sun Pharma was listed on the main stock exchanges in India in 1994. It is an international specialitypharma company, with a presence in 30 markets. It also make active pharmaceutical ingredients. In branded markets, its products are prescribed in chronic therapy areas like cardiology, psychiatry, neurology, gastroenterology, diabetology and respiratory. Realizing the fact that research is a critical growth driver, they established their research center SPARC in 1993 and this created a base of strong product and process development skills. In India, it has reached leadership in each of the therapy areas that we operate in, and are rated among the leading companies by key customers. Strengthening market share and keeping this customer focus remains a high priority area for the company. 19
Another API plant, its Ahmednagar plant, was acquired from the multinational Knoll Pharmaceuticals in 1996, and upgraded for approvals from regulated markets, with substantial capacity addition over the years.
3.A.2 Data Analysis:
Operating Profit Ratio: The profit earned from a firm’s normal core business operations. This value does not include any profit earned from the firm’s investments (such as earnings from firms in which the company has partrial interest) and the effects of interest and taxes.
Operating Profit Ratio= (Operating Net Profit/Net Sales) x 100 (Amount in Rs. Millions)
Particulars
31st March 2013
31st March 2014
31st March 2015
Operating Profit
5,894.60
(27,579)
(9,753.80)
Net Sales
29,683.10
30,065.50
82,287.70
Operating Profit Ratio
19.86
-91.72
-11.85
Gross Profit Ratio: Gross profit is a company’s residual profit after selling a Product or service and deducting the cost associated with its production and Sale. Gross Profit Ratio= (Gross Profit/Net Sales) x100 (Amount in Rs. Millions)
Particulars
31st March 2013
31st March 2014
31st March 2015
Gross Profit
6,630.30
745.1
(15,589.7) 20
Net Sales
Gross Profit Ratio
29,683.10
30,065.50
82,287.70
22.33
2.48
(18.94)
Net Profit: Net Profit ratio is a popular profitability ratio that shows relationship between net profit after tax and net sales. It is computed by dividing the net profit (after tax) by net sales. Net Profit Ratio = (Net Profit/Sales) x 100 Particulars
31st March 2013
31st March 2014
31st March 2015
Net Profit
5,165.5
(28,285.2)
(14,741.3)
Net Sales
29,683.10
30,065.50
82,287.70
(94.07)
(17.91)
Net Profit Ratio
17.40
21
Debt Equity Ratio: It is the ratio between long term debt and shareholders fund. Long term debt include debentures, loan from financial institutions etc. shareholders fund include equity and preference share capital + reserve and surplus-fictitious asset (debit balance of profit and loss or discount on issue of shares) Debt Equity Ratio= Debt/Shareholder Fund Particulars
31st March 2013
31st March 2014
31st March 2015
Debt
46.4
46.4
11,703.2
Shareholder Fund
1,035.6
2,071.2
2,071.2
4.48
2.24
565.04
Debt-Equity Ratio
22
PROJECT REPORT Submitted for the Degree of B.Com Honours in ing & Finance under the University of Calcutta
Ratio Analysis
Submitted By, AKASHDEEP CHAKRABORTY C.U. Registration No. : C.U. Roll No. : Name of the College: Prafulla Chandra College
Supervised By, Prof. A. Roy
2015-16
CONTENTS SL NO.
TOPICS
1. 1.1 1.2 1.3 1.4 1.5 1.6
Annexure I Annexure II Introduction Background Review of Literature Objectives of the study Database & Methodology Limitations of the study Chapter planning
2.
Conceptual Framework-Elements of Financial Statements
2.1 2.2 2.3 2.4 3. 3.A 3.A.1 3.A.2 3.B 3.B.1 3.B.2 3.C 4. 4.1 4.2 5.
Ratio Analysis Importance of Financial Statement Analysis Features of Financial Statement Analysis Financial Statement Functions Data Analysis & Interpretations Sun Pharmaceuticals Industries Limited Company Profile Data Analysis Cipla Pharmaceuticals Industries Limited Company Profile Data Analysis Data Comparisons & Interpretations Conclusions & Recommendations Conclusions Recommendations Bibliography
PAGE NO.
2
Annexure - 1: Supervisor’s Certificate This is to certify that Mr. AKASHDEEP CHAKRABORTY a student of B. Com. Honours in ing & Finance of PRAFULLA CHANDRA COLLEGE under the University of Calcutta has prepared a Project Report with the title “Ratio Analysis”. My Contribution however, was mainly in the form of general guidance and discussion.
Place:
Signature:
Date:
Name:
Designation:
Name of the College:
3
Annexure – 2 : Student’s declaration I hereby declare that the Project Work with the title “RATIO ANLYSIS” submitted by me for the partial fulfillment of the degree of B. Com. Honours in ing & Finance under the University of Calcutta is my original work and has not been submitted earlier to any other University or Institution for the fulfillment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part has been incorporated in this report from any earlier work done by others or by me. However, extracts of any literature which has been used for this report has been duly acknowledged providing details of such literature in the references.
Place: Kolkata
Signature:
Name: AKASHDEEP CHAKRABORTY Date: Address:
C. U. Registration No.:
C. U. Roll No.:
4
1. Introduction 1.1 Background of the study: Abstracted report is based on the study of annual reports of Cipla Limited and Sun Pharmaceutical Industries Limited for the five years from 2003-2004 to 20072008. The main objective of this study was to apply the concepts learned as a part of this course and understand the business, financial health and the reporting practices followed by these companies. As a part of this report we have tried to analyze the current and past performance trends for the company and predict the future performance and stock prices of the company. To achieve this we have analyzed Revenue Trends, Profitability, Liquidity, Debts, Stocks, Cash Flows and provided a summary at the end of the report. The scope of the report is limited to our understanding of the Financial Statements based on the current course. The report has to be seen in its completeness along with the excel worksheet containing the past five years financial data of the two firms and various ratios. Introduction Cipla is a leading pharmaceutical company in India and it is one of the largest exporters of drugs from India with exports contributing around 50% of its annual revenues. It offers a comprehensive range of products ranging from antiasthma, cardiac to critical care drugs. Over the past 3 years the domestic revenue has grown at a rate of 12% and the export revenue at 27%. Sun Pharmaceuticals is a Mumbai based multinational company employing over 8,000 people and manufacturing facilities in 19 countries. It specializes in chronic ailment drugs and has been consistently strengthening market share in India. The recent acquisitions of Caraco Pharm has helped Sun to increase its global presence. Cipla and Sun Pharmaceuticals are comparable companies in of revenues and profits which makes it easier to compare the two companies and understand the concepts of Financial Statement Analysis.
5
1.2 Review of Literature: Literature of Global Context Review of Literature refers to the collection of the results of the various researches relating to the present study. It takes into consideration the research of the previous researchers which are related to the present research in any way. Here are the reviews of the previous researches related with the present study:
Bollen (1999) Conducted a study on Ratio Variables on which he found three different uses of ratio variables in aggregate data analysis: (1) as measures of theoretical concepts, (2) as a meansto control an extraneous factor, and (3) as a correction for heteroscedasticity. In the use of ratios as indices of concepts, a problem can arise if it is regressed on other indices or variables that contain a common component. For example, the relationship between two per capita measures may be confounded with the common population component in each variable. Regarding the second use of ratios, only under exceptional conditions will ratio variables be a suitable means of controlling an extraneous factor. Finally, the use of ratios to correct for heteroscedasticity is also often misused. Only under special conditions will the common form forgers soon with ratio variables correct for heteroscedasticity. Alternatives to ratios for each of these cases are discussed and evaluated.
Cooper (2000) Conducted a study on Financial Intermediation on which he observed that the quantitative behavior of business-cycle models in which the intermediation process acts either as a source of fluctuations or as a propagator of real shocks. In neither case do we find convincing evidence that the intermediation process is an important element of aggregate fluctuations. For an economy driven by inter mediation shocks, consumption is not smoother than output, investment is negatively correlated with output, variations in the capital stock are quite large, and interest rates are procyclical. The model economy thus fails to match unconditional moments for the U.S. economy.
6
Maria Zain ( 2008) In this articles he discuss about the return on assets is an important percentage that shows the company’s ability to use its assets to generate income. He said that a high percentage indicates that company’s is doing a good utilizing the company’s 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 it’s 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 11 company’s 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 company’s 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.
7
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.
Literature on Indian Context RammohanRao& et.al (1975) In this study howfar the capital markets in India were competitive. Their study examined the decisions about internal and external finance as interrelated and consequent upon a choice of the structure of current and fixed assets. Secondly, they analyzed the earnings pattern of different types of funds to see if the competitiveness hypothesis can sustain. They concluded that a firm’s ability to borrow was constrained by the rise associated with the proportion of debt in the capital structure. If the ratio was high then internal funds improved the firm’s ability to borrow. Similarly if the financial leverage (Debt or equity ratio) was lower than the institutionally determined leverage. The borrowing was facilitated. But if the leverage was the institutionally determined maximum then borrowing was inhibited.
8
Vasanthamani (1982) In her study “The Financial Performance of Lakshmi Machine Works Limited”. The objective of the study was to analyze the financial performance of Lakshmi machine work with a view to analyze the future of performance potentials. The study covered the period from 1978-1982. The liquidity position of the company showed that the company was able to meet the creditors out of its own current assets. The quick ratio also revealed that the quick liabilities were met at of quick assets without any difficulty.
Rajeswary (1990) In her study entitled “ Financial Performance of Precot Mills Limited” has concluded that the financial position and operating efficiency of the company was satisfactory where as the margin or safely was not stable solvency position was not satisfactory and the earning capacity was minimum.
Parvathi (1990) In her “Financial Performance Analysis Hindustan Photos Films Ooty” for the year 1990-1996, concluded that the gross profit has shown as increasing trends, long term solvency of the company, debt equity ratio was not satisfactory.
Sankar.T.L& et.al (1995) In their study entitled, “Financial Performance of State Level Public Enterprises” suffers from staggering investment, poor profitability, unnecessary investment, poor project planning and inadequate financial control.
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1.3 Objective of the study: The specific objectives of the study are as follows:
To understand the concept of financial statement analysis. To understand the theoritical aspect of liquidity and profitibility. To analyze the liquidity of the medical companies. To analyze the profitibility of the medical companies. To disclose to the extent possible other information related to the financial statements s
Assessment of Past Performance Past Performance is a good indicator of future performance. Investors or Creditors are interested in the trend of past sales, cost of good sold, operating expenses, net income, cash flows and return on investment. These trends offer a means for judging management's past performance and are possible indicators of future performance Past performance is a good indicator of future performance for Investors or creditors. Assessment of current position Financial statement analysis shows the current position of the firm in of the types of assets owned by a business firm and the different liabilities due against the enterprise. Prediction of profitability and growth prospects Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other s in judging earning potential of business enterprise. Prediction of bankruptcy and failure Financial statement analysis is an important tool in assessing and predicting bankruptcy and probability of business failure.
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Assessment of the operational efficiency Financial statement analysis helps to assess the operational efficiency of the management of a company. The actual performance of the firm which are revealed in the financial statements can be compared with some standards set earlier and the deviation of any between standards and actual performance can be used as the indicator of efficiency of the management. Therefore, the main purpose of financial statement analysis is to utilize information about the past performance of the company in order to predict how it will fare in the future. Another important purpose of the analysis of financial statements is to identify potential problem areas and troubleshoot those.
1.4 Database and Methodology: Database: The entire study is based on secondary Database which is collected from the Websites of the respective medical company. Period of the study: The study period is started from 1st April 2012 and ended on 31stmarch.It consists of 3 of and financial year. Sample Companies: This study has been conducted based on following two medical companies of Pharmaceutical Industry. These are - 1) Sun Pharmaceutical Co. 2) Cipla Pharmaceutical Co.
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Methodology The research methodology for the secondary research undertaken has been provided as using qualitative as well as quantitative approaches. The analysis and findings selection highlights the result of the secondary study while a discussion and the conclusion section provides a comprehensive analysis of the literature review for the purpose of the project. Conclusively the recommendation for proper development in the Pharmaceutical Industry had been provided along with the limitation of the current research can be undertaken to the research mode comprehensive. Here we use the annual reports of the Pharmaceutical Industry for the collection, classification and comparison of relevant data. On this study, different chart, ratio analysis are performed .It is to be noted that Microsoft Office 2007 is used to complete the entire database.
1.5 Limitations of the study: The study conducted and done is analytical subject to the following limitations: The study is mainly carried out based on the secondary data providedin the financial statements. This study is based on the historical data and information provided in the annual reports therefore it may not be a future indicator. There may be some fractional difference in the calculated ratio. As the study was for shorts span of 8 weeks and due to lack of time other areas could not be well focused. Although analysis of financial statement is essential to obtain relevant information for making several decisions and formulating corporate plans and policies, it should be carefully performed as it suffers from a number of the following limitations. Mislead the The accuracy of financial information largely depends on how accurately financial statements are prepared. If their preparation is wrong, the information obtained from their analysis will also be wrong which may mislead the in making decisions.
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Not useful for planning Since financial statements are prepared by using historical financial data, therefore, the information derived from such statements may not be effective in corporate planning, if the previous situation does not prevail. Qualitative aspects Then financial statement analysis provides only quantitative information about the company's financial affairs. However, it fails to provide qualitative information such as management labor relation, customer's satisfaction, and management’s skills and so on which are also equally important for decision making. Comparison not possible The financial statements are based on historical data. Therefore comparative analysis of financial statements of different years cannot be done as inflation distorts the view presented by the statements of different years. Wrong judgment The skills used in the analysis without adequate knowledge of the subject matter may lead to negative direction. Similarly, biased attitude of the analyst may also lead to wrong judgment and conclusion.
1.6 Chapter Planning:
1. 2. 3. 4. 5.
Introduction Conceptual Framework Data Analysis and Findings Conclusion and Recommendation Bibliography
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2. Conceptual Framework-Elements of Financial Statements 2.1 Ratio Analysis A ratio analysis is a quantitative analysis of information contained in a company’s 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 then calculated. Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency. 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.
Importance of Ratio Analysis It helps the management to gauze the efficiency of performance and assess the financial health of the business. It is an essential tool for checking the efficiency with which the working capital is being used and managed. Where ratio are based on analysis and scrutiny of past results, the assist the management to formulate policy, to arrive at correct decisions, to prepare budgets and to plan for future . Similarly, comparative ratio analysis injects trend analysis, the improvement or deterioration of a business is clearly disclosed by ratio analysis. It helps to make inter firm comparisons, that is to know the relative positions of a firm vis-à-vis its competitors . 14
The ability of a firm to pay its short debts denotes its liquidity positions. Ratio analysis helps to draw correct conclusions regarding liquidity position of a firm. Ratios are meaningfully used to indicate the relative performance of different industries. These help the government to take suitable plans and policies accordingly. Ratios help to make useful communication with outsiders by providing pertinent piece of information.
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2.2 Importance of financial statement analysis: Financial statement analysis provides important information about a company's financial health. To meet their financial reporting obligations and to assist in strategic decisionmaking, firms prepare financial statements. However, “the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone.” Firms employ financial analysts to read, compare and interpret the data as necessary for quantitative analysis and decisionmaking.
Liquidity The balance sheet provides liquidity rations that show how much monetary worth the company has on a given day, which helps determine if the firms financial reliability. The current ratio shows “the 'working capital' relationship of current assets available to meet the company's current obligations,” reports Credit Guru. The quick ratio is similar, calculating those assets easily convertible into cash, determining the immediate working capital relationship. The debt to equity ratio establishes who owns more of the company, creditors or shareholders.
Efficiency Efficiency ratios measure how efficiently the company turns inventory into revenue. The day sales outstanding ratio focuses on the time required to turn inventory into cash and the age of your s receivable. The inventory turnover ratio “indicated the rapidity with which the company is able to move its merchandise,” reports Credit Guru. s payable to sales shows the percentage of sales funded with supplier's money.
Profitability Profitability ratios reveal a firm's success at generating profits. “The profit margin of a company determines its ability to withstand competition and adverse conditions,” reports Credit Guru. Return on assets, reveals the profits earned for each dollar of assets and measures the company's efficiency at creating profit returns on assets. Net worth focuses on financial returns generated by the owner's invested capital.
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Limits It is important to know that financial statement analysis has limits; simply manipulating numbers hides the actual state of the company. Different ing methods will look different on paper, and the method a particular firm uses can change the visible health and profit levels for either better or worse. Quantitative financial analysis is an art, and different analysts may get slightly different results from the same information, or may return different data about the same business.
2.3 Features of Financial Statement Analysis: Financial statements are those which reveal the financial position of the company at a particular point of time. Financial statements include balance sheet, profit and loss and cash flow statements. Given below are some of the features or characteristics of financial statements –
Financial statements are those statements which present historical data, which implies that financial statements reveal what has already happened and they do not tell anything about the future.
Financial statements are expressed in monetary , so profit and loss statements show the profitability of the business, balance sheet reveal the financial position of the company and cash flow statement reveal the cash position or liquidity which is there with the company.
Financial statements do not reveal the employee satisfaction levels, or effort put by the owner of the company and all other such qualitative factors are excluded from financial statements.
Financial statements should reveal all things and should not leave out anything which materially affects the decision of the person who is reading that financial statements and then taking decision regarding the company. For example prospective shareholders will look financial statements before investing into the company.
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2.4 Financial Statement Functions: A financial statement summarizes key information about the financial health, success, and profitability about a particular company. The financial figures in a financial statement also provide a measure of the success or failure of its current management and business strategies. Financial statements are generally divided into four distinct parts: a balance sheet, income statement, statement of stockholder equity, and statement of cash flows.
The Balance Sheet The balance sheet is a snapshot of the financial health of a company at a given point in time. Depending on how a company tracks financial records, a balance sheet is commonly created every three months, or at the end every quarter. A typical balance sheet generally summarizes three financial components: assets, liabilities, and owner's (or stockholder's) equity. From the balance sheet you can determine if a company is making money by subtracting liabilities from assets. This difference is the net worth of the company.
The Income Statement The income statement, also called an earnings statement, measures whether company operations were profitable. The measurement of profitability is determined by revenue, expenses, net profit or loss, and the net profit or loss per share of ownership. By measuring how revenue is used in company operations, you can determine if the company is making money. In addition, the income statement represents an entire ing period of time whereas the balance sheet is only a specific point in time.
Statement of Stockholder Equity A statement of stockholder equity reconciles beginning and ending balances of both stockholder equity and the retained earnings s. A typical statement of stockholder equity commonly includes several years of data to reflect balance changes from year to year. Stockholder equity and retained earnings are also components of the balance sheet, which eases reconciliation in the statement of stockholder equity.
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3. Data Analysis and Interpretations A. Sun Pharmaceutical Industries Limited 3.A.1 Company Profile: Sun Pharmaceutical Industries Limited is an India-based generic and pharmaceutical company. The Company's business segments include US Business, which includes Western Europe, Canada, Australia, New Zealand and Other Markets; Indian Branded Generics Business, including Global Consumer Healthcare Business, and Emerging Markets, which include Active Pharmaceutical Ingredients (APIs). The Company's manufacturing operations are focused on producing generics, branded generics, specialty products, over-the-counter products, anti-retroviral and active pharmaceutical ingredients (APIs). The Company caters various therapy areas, such as dermatology, psychiatry, neurology, cardiology, nephrology, gastroenterology, orthopedics and ophthalmology. It also produces a range of dosage forms, including tablets, capsules, injectable, ointments, creams and liquids. The Company also manufactures various specialty APIs, including controlled substances, steroids, peptides and anti-cancer products. Sun Pharmaceutical Industries began with just 5 products to treat psychiatry ailments in 1983. Sales were initially limited to 2 states – West Bengal and Bihar. Sales were rolled out nationally in 1985. Products that are used in cardiology were introduced in 1987, and Monotrate, one of the first products launched at that time has since become one of our largest selling products. Important products in Cardiology were then added; several of these were introduced for the first time in India. Sun Pharma was listed on the main stock exchanges in India in 1994. It is an international specialitypharma company, with a presence in 30 markets. It also make active pharmaceutical ingredients. In branded markets, its products are prescribed in chronic therapy areas like cardiology, psychiatry, neurology, gastroenterology, diabetology and respiratory. Realizing the fact that research is a critical growth driver, they established their research center SPARC in 1993 and this created a base of strong product and process development skills. In India, it has reached leadership in each of the therapy areas that we operate in, and are rated among the leading companies by key customers. Strengthening market share and keeping this customer focus remains a high priority area for the company. 19
Another API plant, its Ahmednagar plant, was acquired from the multinational Knoll Pharmaceuticals in 1996, and upgraded for approvals from regulated markets, with substantial capacity addition over the years.
3.A.2 Data Analysis:
Operating Profit Ratio: The profit earned from a firm’s normal core business operations. This value does not include any profit earned from the firm’s investments (such as earnings from firms in which the company has partrial interest) and the effects of interest and taxes.
Operating Profit Ratio= (Operating Net Profit/Net Sales) x 100 (Amount in Rs. Millions)
Particulars
31st March 2013
31st March 2014
31st March 2015
Operating Profit
5,894.60
(27,579)
(9,753.80)
Net Sales
29,683.10
30,065.50
82,287.70
Operating Profit Ratio
19.86
-91.72
-11.85
Gross Profit Ratio: Gross profit is a company’s residual profit after selling a Product or service and deducting the cost associated with its production and Sale. Gross Profit Ratio= (Gross Profit/Net Sales) x100 (Amount in Rs. Millions)
Particulars
31st March 2013
31st March 2014
31st March 2015
Gross Profit
6,630.30
745.1
(15,589.7) 20
Net Sales
Gross Profit Ratio
29,683.10
30,065.50
82,287.70
22.33
2.48
(18.94)
Net Profit: Net Profit ratio is a popular profitability ratio that shows relationship between net profit after tax and net sales. It is computed by dividing the net profit (after tax) by net sales. Net Profit Ratio = (Net Profit/Sales) x 100 Particulars
31st March 2013
31st March 2014
31st March 2015
Net Profit
5,165.5
(28,285.2)
(14,741.3)
Net Sales
29,683.10
30,065.50
82,287.70
(94.07)
(17.91)
Net Profit Ratio
17.40
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Debt Equity Ratio: It is the ratio between long term debt and shareholders fund. Long term debt include debentures, loan from financial institutions etc. shareholders fund include equity and preference share capital + reserve and surplus-fictitious asset (debit balance of profit and loss or discount on issue of shares) Debt Equity Ratio= Debt/Shareholder Fund Particulars
31st March 2013
31st March 2014
31st March 2015
Debt
46.4
46.4
11,703.2
Shareholder Fund
1,035.6
2,071.2
2,071.2
4.48
2.24
565.04
Debt-Equity Ratio
22
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