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Aventis Aventis Document Transcript

  • Ratio Analysis Project By M.Junaid Mehmood M.Qaiser Mehmood Sohail Ahmed Babar Usman Sheharyar MBA-3 Morning Project Coordinator Sir. Shoaib 1COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis A. ACKNOWLEDGEMENTI am thankful to Almighty Allah who is gracious & merciful and gave us strength for thecompletion of this project. Secondly we are really thankful to our respected Teacher Mr.Hafiz M. Ishaq for giving us such an opportunity to study the Aventis from Financialpoint of view. At the end we would also like to acknowledge the moral support of ourfriends who supported us and helped us to do this project. 2 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis PURP OSE OF STUDYThe first purpose for making this project is to implement our bookish knowledge inpractical form. To know about application of Ratio Analysis in organizations.Secondly, we want to complete the semester project regarding Financial Management. 3 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisIntroductionAventis Limited is committed to improve the quality of life. Through the incredible growthof knowledge, our scientists are on the threshold of major innovations in the field ofhealthcare. Servicing healthcare providers and patients in major markets around theworld, Aventis Limited aims to achieve sustained growth by concentrating on innovativeproducts that meet significant medical needs. In each area, Aventis Limited is cultivating acontinuous flow of new product launches with high potential.Vision:To create and sustain value by being recognized as a pharmaceutical industry leader –valued by patients and healthcare providers, sought after as an employer, and respectedby the scientific community and by our competitors.Values: • Respect for people • Integrity • Sense of urgency • Networking • Creativity • Empowerment • CourageAventis focuses on innovative pharmaceuticals and human vaccines to fight seriousdiseases. Working in a network with partners, Aventis scientists are discovering anddeveloping therapeutic innovations in areas such as cancer, diabetes, cardiovasculardisease, asthma and allergies. We are also developing new vaccines to prevent and treat awide range of serious and often deadly diseases. Our goal is to satisfy unmet medicalneeds in large patient populations. 4 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisWe aim to generate optimum returns on our strategic brands through life-cyclemanagement and to achieve leadership positions by building on operational excellence inmajor pharmaceutical markets such as the United States, France, Germany and Japan.Aventis in PakistanAventis Limited stands out among pharmaceutical companies for global reach, with astrong presence in major markets, and for the diversity of people in the managementteams and business units. We are committed to a strong multicultural team as a source ofinnovative thinking and customer-oriented service.Aventis is a major player in the healthcare industry in Pakistan and has come out withproducts that have enjoyed market leader ship and consequently played a very importantrole in the development of the health care market in Pakistan. The company currentlymarkets 48 products in 107 representationsAventis Limited has two manufacturing units - one at Karachi and the other at Wah. Italso has thirteen regional sales offices in Karachi, Hyderabad, Sukkur, Bahawalpur,Multan, Faisalabad, Sargodha, Lahore, Gujranwala, Rawalpindi, Peshawar, Bannu andQuetta.HistoryAventis limited was incorporated in 1967 as Hoechst Pakistanlimited.Concequently to a series of mergers and demergers,the namewas changed to the Hoechst Marion Roussel (Pakistan) limited, AventisPharma (Pakistan) limited and finally to Aventis limited when thecompany was leagly merged with Rhone-Poulenc Rorer Pakistan(Private) Limited in 2003. Aventis is officially created following an extraordinary meeting of Rhône-Poulenc share holders who approved by an overwhelming majority (97.1%) the final steps to complete the business combination. Aventis shares begin trading on the Paris and Frankfurt stock exchanges as well as the NYSE on December 20.Dec. 1, Rhône-Poulenc and Hoechst announce their intention to combine their1998 pharmaceutical and agricultural businesses to create Aventis.1997 Hoechst AG becomes a strategic holding company with independently operated businesses. Merial, a leader in animal health, is founded. 5 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis1997 Hoechst combines its specialty chemicals business with Clariant AG of Muttenz, Switzerland.1995 Hoechst acquires Marion Merrell Dow (formerly Marion Laboratories), which is later combined with Roussel-Uclaf and the pharmaceutical activities of Hoechst to create Hoechst Marion Roussel.1994 Hoechst begins to strategically shift its business focus from industrial chemicals to life sciences. Pasteur Mérieux Connaught becomes a wholly owned subsidiary of the Rhône-Poulenc Group. Founding of PM- MSD, which subsequently becomes Aventis Pasteur MSD, a joint venture with the U.S. pharma- ceutical company Merck & Co.1989 Institut Mérieux acquires Connaught Laboratories. Hoechst builds its first production facility for genetically engineered human insulin. Operations begin in 1998. Pasteur Mérieux Sérums & Vaccins is created. As a result of the acquisition of Connaught Laboratories, the company becomes the world leader in vaccines.1987 Hoechst acquires the Celanese Corporation.1986 Rhône-Poulenc acquires the agricultural division of Union Carbide, and the product Temik, a highly effective pesticide that can protect plants against insect pests for several months after a single application.1982 Marion Laboratories introduces Cardizem, a calcium antagonist that is introduced for the treatment of angina. Additional release forms extend the indications to include hypertension.1981 Nationalization of Rhône-Poulenc following the formation of a left-wing government in France.1974 Hoechst is renamed Hoechst Aktiengesellschaft. It is the world’s largest pharmaceutical company.1968 Rhône-Poulenc acquires a 51% stake in Institut Mérieux. Hoechst acquires a stake in the French pharmaceutical company Roussel-Uclaf.1967 Alain Mérieux succeeds his father, becoming chairman of Institut Mérieux.1961 Société des Usines Chimiques Rhône-Poulenc is restructured as Rhône- Poulenc S.A.1956 Rhône-Poulenc and Théraplix merge.1952 Researchers at Rhône-Poulenc laboratories develop the antibiotic Spiramycin, a derivative of Streptomycin. It goes on the market as Rovamycin. A year later, Rhône-Poulenc begins a new era of sedatives and neuroleptics with the introduction of the sedative Largactil.1951 Blaukorn fertilizer is put on the market. It becomes one of Hoechst’s 6 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis most successful agricultural products.1950 Marion Laboratories, Inc. is established by Ewing Marion Kauffman as a one-man company operating out of a basement in Kansas City.1945 Behringwerke AG is the first company in Europe to begin processing human blood plasma into medications.1945 The World War II allies order the breakup of I.G. Farbenindustrie AG. The factory in Höchst is renamed Farbwerke Hoechst U.S. Administration. In 1951, the company is refounded in Frankfurt as Farbwerke Hoechst AG vorm. Meister Lucius & Brüning.1943 Scientists at Rhône-Poulenc succeed in producing the first batches of penicillin based on a culture that the discoverer, Sir Alexander Fleming, had given the Institut Pasteur a number of years before.1937 I.G. Farbenindustrie AG comes under the control of the Nazi regime. Forced labor and involvement in the crimes of Auschwitz are the result.1928 Merger of Etablissements Poulenc Frères and Société Chimique des usines du Rhône forms a new business known as Société des Usines Chimiques Rhône-Poulenc.1926 Institut Mérieux begins a long period of research aimed at finding a vaccine against foot-and-mouth disease. Charles Mérieux subsequently develops a vaccine against the disease. Industrial virology is born, and it will later be used in human medicine.1925 Foundation of I.G. Farbenindustrie AG, including the amalgamation of Farbwerke Höchst.1920 Gaston Roussel founds the Institut de Sérothérapie Hématopoiétique in Romainville, France, to produce Hemostyl, a drug for the treatment of anemia.1919 Companhia quimica Rhodia brasileira is founded in Sao Paulo. Rhodia forms the basis for S.C.U.R.’s expansion in Latin America.1901 Emil von Behring is awarded the first Nobel Prize in medicine for the medical success of his diphtheria vaccine.1895 Gilliard, Monnet et Cartier in Lyon becomes a stock corporation called Société Chimique des usines du Rhône (S.C.U.R.). This is later considered the foundation year of Rhône-Poulenc.1892 Collaboration between the three later Nobel Prize winners Robert Koch, Emil von Behring and Paul Ehrlich, which began in the 1880s, leads to the tuberculosis diagnostic Tuberculoidin, Hoechst’s first immunological product.1880 A stock corporation is formed in Höchst, Germany, near Frankfurt with the soon world-famous name of Farbwerke vormals Meister Lucius & Brüning. In 1883, the company begins producing pharmaceuticals and 7 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis achieves immediate world wide success with Antipyrin, a safe and effective painkiller. Louis Pasteur develops the first successful vaccine against rabies.1859 In Frankfurt, Germany, Eugen Lucius begins laboratory experiments to produce synthetic dyes. Chairman Syed Babar Ali Board of directors 1. Syed Babar Ali 2. Tariq Wajid (MD) 3. Pir Ali Gohar 4. Syed Hyder Ali 5. Michel R.Lienard 6. Jacques Pervez 7. M.Z.Moin Mohajir (company sectary) 8. Mohammad Amjad company registered office Plot 23, sector 22 Korangi Industrial Area, Kaachi-749000 8 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisGlobal ReachAventis have a commercial presence inapproximately 85 countries and ourproducts are available in more than 170.Our top four markets are the United States,Germany, France and Japan. In 2003, wegenerated 62.5% of our core business salesin these countries.Accounting for over 40% of globalprescription drug sales, the United States isthe worlds largest pharmaceutical marketand our single largest national market. In2003, we generated 38% of our corebusiness sales in the U.S. In Europe, ourleading markets are France, Germany,Italy, Spain and the United Kingdom. Japan,the worlds second-largest national market,accounted for 5% of our core business salesin 2003.Market ShareTo day in Pakistan, Aventis limited is one of the top five companies in the PharmaIndustry, the growth rate of over 14% was also amongst the highest in the industry andthe company is market leader in the following ten therapeutic areas: Products Market share Flagyl 42% Claforan 12% Tarivid 8% Haemaccel 98% Phenergan 11% Lasix 40% Claxane 82% Streptase 78% Taxotere 40% 9 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis Nasacort AQ 25% Products OncologyCardiovascula r Bones Respiratory MetabolicAnti-infective Distribution Company owns distribution of thirteen branches, and appointment of regional distributor. Sales and distribution offices in Pakistan 10 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisHead Office (Karachi) Branch. Karachi BranchAddress: Plot No.23,Sector 22, Area Distribution ManagerKorangi Industrial Area,Karachi.Phone No: 5060221-35 (ext.2227) Address : Plot No.23,Sector 22,Fax No : 5060781 & 5060358 Korangi Industrial Area,Karachi. Phone No : 5060221-35 (ext.2316)Hyderabad Fax No : 5060781 & 5060358Area Distribution ManagerAddress :A-25, S.I.T.E,Hyderabad.Phone No : 0221-880539Fax No : 0221-880539Sukkur QuettaArea Distribution Manager Area Distribution ManagerAddress : F-33/4/8, Barrage Colony, Address : Annexe A-322/B , SahibUnited Nation Avenue, Sukkur. Bunglows, Shahrah-e-Tufail,QuettaPhone No : 071-613356 Phone No : 081-835871Fax No : 071-612246 Fax No : 081-843397Bahawalpur MultanArea Distribution Manager Area Distribution ManagerAddress : 6-A , Muhammad Hussain Address : 124-a, BahawalpurRoad, Model Town-A, Bahawalpur. Road,Multan.Phone No : 0621-874836 Phone No : 061-570996/584387/Fax No : 0621-874836 513691 Fax No : 061 - 572549Sargodha FaisalabadArea Distribution Manager Area Distribution ManagerAddress : 102, Shamshir Road, Old Civil Address : 101-A, Civil Lines, Jail Road,Lines , Sargodha. Faisalabad.Phone No : 0451-221403 Phone No : 041-640370Fax No : 0451-221403 Fax No : 041-642539 11 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisPeshawar RawalpindiArea Distribution Manager Area Distribution ManagerAddress : Gali No.8 , Nishtarabad, Address : 87-A , Satellite Town, P.O.BoxPeshawar. -168, Rawalpindi.Phone No : 091-251685 Phone No : 051-4454728 / 4418524 Fax No : 051-4429735Gujranwala LahoreArea Distribution Manager Area Distribution ManagerAddress : Ground Floor, Center Point, Address : 14/C , New Muslim Town,Near Iqbal High School , G.T Road , Lahore.Gujranwala. Phone No : 042-5867431Phone No : 0431-258206 Fax No : 042-5850613Fax No : 0431-258206 Expansion Expansion of the production facility and modernization of plant and machinery and the quality of the products is the high priority of the company. Company recently purchases state of the art equipment for the commercial production which increase the over all production of he plant. Profit Company has achieved a profit before taxation of Rs.234 million which is a complete turnaround after the record loss of Rs.209 million in 2002. This significant improvement in the profitability has occurred mainly due to reduction in discount and expenses, collection of trade debts, lower interest costs, etc,. Human Resource The total numbers of employees were recorded 709 in the year 2003 and these were recorded 743 in the year 2002. 12 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis SAP Adoption The company has adopted a sap version which has been extended to the Wah site and all the business working is now conducted through the SAP.SAP is a video conferencing facility, which reduces the travel cost and further upgrading of the computer machines. Aventis limited is also have a web site that is www.aventispharma.com .pk Holding company The company is a subsidiary of the Aventis Pharma Holding GmbH and Rhone-Poulenc Rorer UK Holding PLC, which are incorporated in Germany and UK respectively. 13COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis What is a financial statement?Financial StatementAnnual reports are divided into three parts the Executive Letter, the business Review,and the Financial Review. The Executive Letter gives a broad overview of the companysbusiness and financial performance. The Business Review summarizes recentdevelopments, trends, and objectives of the company. The Financial Review is wherebusiness performance is quantified in dollars.The Financial Review has two major parts: Discussion and Analysis, and AuditedFinancial Statements. In the Discussion and Analysis, management explains changes inoperating results from year to year. This explanation is presented mainly in a narrativeformat, with charts and graphs highlighting the comparisons. The Operating results arenumerically captured and presented in the Financial Statements.The major parts of the Financial Statements are the balance sheet; income statement;statement of changes in shareholders equity; statement of cash flows; andfootnotes. The balance sheet shows the financial strength of the company by showingwhat the company owns and what it owes on a certain date. The balance sheet reports onfinancial position as of the end of the year. The income statement, reports on how thecompany performed during the year and shows whether operations have resulted in aprofit or loss. The statement of changes in shareholders equity reconciles the activity inthe equity section of the balance sheet from year to year. Common changes in equityresult from company profits or losses, dividends, or stock issuances. The statement ofcash flows reports on the movement of cash by the company for the year. The footnotesprovide more detailed information on the balance sheet and income statement. 14 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisTypes of financial statement analysis ratios • Balance sheet ratios 1. Liquidity ratios a. Current ratio b. Acid test ratio 2. Financial leverage ratio a. Debt to equity ratio c. Debt to total assets • Income statement ratios 1. Coverage ratio a. Interest coverage ratio 2. Activity ratio a. Receivable activity b. Payable activity c. Inventory activity d. Total asset turn over 3. Profitability ratio a. Sales growth ratio b. Cost of goods sold to sales ratio c. Gross profit margin ratio d. Net profit margin ratio 4. Profitability in return to investment a. Return on investment b. Return on equity 5. Market value ratio a. Profit earning ratio b. Market to book value ratioTrend analysis 15 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisRatio analysisThe Balance Sheet and the Statement of Income are essential, but they are only thestarting point for successful financial management. Apply Ratio Analysis to FinancialStatements to analyze the success, failure, and progress of company business.Ratio Analysis enables the business owner/manager to spot trends in a business and tocompare its performance and condition with the average performance of similarbusinesses in the same industry. To do this compare company ratios with the average ofbusinesses similar to company. Ratio analysis may provide the all-important early warningindications that allow to the company to solve business problems before business isdestroyed by them.a. Balance Sheet RatiosImportant Balance Sheet Ratios measure liquidity and solvency (a businesss ability to payits bills as they come due) and leverage (the extent to which the business is dependent oncreditors funding). They include the following ratiosLiquidity ratios:Quick ratio is a prevalent indicator of liquidity with a long history of usage. As is wellknown, it is defined as the ratio of the current assets less inventories to current liabilities.Financial ratios often include the current ratio (current assets to current liabilities) in thedata basis along with the quick ratio. 16 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysisa. Current ratioDefinition: The ratio between all current assets and all current liabilities; another way ofexpressing liquidity.What it is:The current ratio is the standard measure of any business financial health. It will tell youwhether your business is able to meet its current obligations by measuring if it hasenough assets to cover its liabilities. The standard current ratio for a healthy business istwo, meaning it has twice as many assets as liabilities.When to use it:The current ratio should be part of any business’ basic financial planning, meaning itshould be tracked monthly or quarterly. By keeping a close eye on this figure, you willrecognize if it begins to get out of line. This will allow taking early action to preventbusiness from ending up in a difficult position.Computation: Total current assets divided by total current liabilities. Total Current Assets Total Current LiabilitiesFinancial years 2000 1999Calculations 685153/515127 737505/514054Resulting ratios 1.330 1.434Analysis:Even there is a slight decrease in the both years of the company’s current ratio, still in theweek position to pay its short term debts. This ratio is a rough indication of a firms abilityto service its current obligations. Generally, the higher the current ratio, the greater the"cushion" between current obligations and a firms ability to pay them. The stronger ratioreflects a numerical superiority of current assets over current liabilities. However, thecomposition and quality of current assets is a critical factor in the analysis of an individualfirms liquidity. 1:1 current ratio means; the company has $1.00 in current assets to covereach $1.00 in current liabilities. Look for a current ratio above 1:1 and as close to 2:1 aspossible. The ratio values are arrayed from the highest positive to the lowest positive. 17 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysisb. Acid test ratioDefinition:After deduction of the inventories from the current assets, the ratio between theremaining value and all current liabilities is called acid test ratio.What it is:This ratio serves as a supplement to the current ratio in analyzing liquidity. .This ratio issame as the current ratio except that it excludes inventories-presumably the least liquidportion of current asset-from the numerator.When to use: A measurement of the liquidity position of the business. The quick ratio compares thecash plus cash equivalents and accounts receivable to the current liabilities. The primarydifference between the current ratio and the quick ratio is the quick ratio does not includeinventory and prepaid expenses in the calculation. Consequently, a businesss quick ratiowill be lower than its current ratio. It is a stringent test of liquidity.Computation: current assets-inventories Current liabilities Or Cash + Marketable Securities + Accounts Receivable Current Liabilities Or Quick assets Current liabilitiesFinancial year 2000 1999Calculations (685153-365061)/515127 (737505-413464)/514054Resulting ratios 0.62 0.63Analysis:Increase in the quick ratio shows the company’s strong position to pay its debts. Indicatesthe extent to which you could pay current liabilities without relying on the sale ofinventory -- how quickly you can pay your bills. Generally, a ratio of 0.7:1 is good andindicates you dont have to rely on the sale of inventory to pay the bills.Although a little better than the Current ratio, the Quick ratio still ignores timing ofreceipts and payments. 18 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis1. Financial leverage ratioHighly leveraged firms (those with heavy debt in relation to net worth) are morevulnerable to business downturns than those with lower debt to worth positions. Whileleverage ratios help to measure this vulnerability, it must be remembered that they varygreatly depending on the requirements of particular industry groups.a. Debt to equity ratioDefinition:Shows the ratio between capital invested by the owners and the funds provided bylenders.What it is:This ratio indicates how much the company is leveraged (in debt) by comparing what isowed to what is owned. A high debt to equity ratio could indicate that the company maybe over-leveraged, and should look for ways to reduce its debt.When to use:Equity and debt are two key figures on a financial statement, and lenders or investorsoften use the relationship of these two figures to evaluate risk. The ratio of business’equity to its long-term debt provides a window into how strong its finances are. Equity willinclude goods and property business owns, plus any claims it has against other entities.Debts will include both current and long-term liabilities.Computation: Total liabilities divided by total equity. Total Debt Total EquityFinancial year 2000 1999Calculation 104000/860767 108000/937090Resulting ratios 0.12 0.11Analysis: There is decrease in this ratio, but it is higher than the bench mark which 0.8is. Comparison of how much of the business was financed through debt and how muchwas financed through equity. For this calculation it is common practice to include loansfrom owners in equity rather than in debt. The higher the ratio, the greater the risk to apresent or future creditor.Too much debt can put the business at risk. But too little debt may mean company is notrealizing the full potential of business and may actually hurt overall profitability. This isparticularly true for larger companies where shareholders want a higher reward (dividendrate) than lenders (interest rate). 19 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysisb. Debt to total assetsDefinition:The ratio between the debt and the total assets is called debt to total assets ratio.What it is:It shows the relative importance of debt financing to the firm by showing the percentageof the firm’s asset that is supported by the debt financing.When it used:When the company wants the relation ship between its total debts and the total assets ituse this ratio because this ratio expresses the relationship between capital contributed bycreditors and that contributed by owners. It expresses the degree of protection providedby the owners for the creditors. The higher the ratio, the greater the risk being assumedby creditors. A lower ratio generally indicates greater long-term financial safety. A firmwith a low debt/worth ratio usually has greater flexibility to borrow in the future. A morehighly leveraged company has a more limited debt capacity.Computation: Total Liabilities Net Worth Or Total debt Total assets Financial year 2000 1999 Calculations 515127/860767 514054/937090 Resulting ratios 0.59 0.54Analysis:Decrease in this ratio is a good sign and this ratio shows that out of $1 only $.2727 is holdby the others because the bench mark for this ratio is 0.8; if it is more than 0.8 it is morerisky. Generally, the higher this ratio, the more risky a creditor will perceive its exposurein your business, making it correspondingly harder to obtain credit. 20 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis • Income statement ratios It is the combination of three types of ratios coverage ratio, activity ratio and profitability ratio. These ratios are derived from income statement and balance sheet data. 1. Coverage ratioCoverage ratios measure a firms ability to service debt. 1. Activity ratioThe ratio that measure how effectively the firm is using its assets. It is also known asefficiency or turn over ratio. In computing the activity ratio amuse year end asset levelsfrom the balance ratio.a. Receivable activityDefinition:Ratio between the annual net credit sales and the account receivable is called receivableactivity.What it is:This ratio indicates how much the company’s active in accounts receivable turn over in tocash during the year.When it is use:This ratio is a measure of turn over of a firms accounts receivable in to cash during aspecific time. The higher the turnover the shorter the time between typical sale and thecash collection.Computation: Annual net sales Account receivable Financial year 2000 1999 Calculation 1800607/13521 1624284/8093 Resulting ratios 133.17 200.70 21 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisAnalysis:The higher the turnover, the shorter the time between sales and collecting cash.B. Payable activityDefinition:Ratio between the annual net purchases and the account payable is called receivableactivity.What it is:This ratio indicates how much the company’s active in accounts payable turn over in tocash during the year.When to use:This ratio is a measure of turn over of a firms accounts payable in to cash during aspecific time. The higher the turnover the shorter the time between typical purchases andthe cash payment.Computation: Net purchases Account pay able Financial year 2000 1999 Calculation 825670/286370 929060/334122 Resulting ratios 2.88 times 2.78 TimesAnalysis:The pay able activity means that purchases can be paid in that period or times so it alsomeans that we can pay cash in365/2.36=154days. 22 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis C. Inventory activityDefinition:The number of times the average inventory has been replenished during a fiscal period,known as the inventory turn over.What it is:It is ratio between the cost of goods sole and the inventories.When it to use:The inventory position and the approximate disposal time may be evaluated by calculatingthe inventory turn. The inventory turn over is calculated by dividing the cost of goods soldby the average inventory for the period.Computation: Cost of goods sold Inventories Financial year 2000 1999 Calculation 1218270/365061 1149727/413464 Resulting ratios 3.33 2.78Analysis:Lower the ratio, the better it is, the bench mark of this ratio is 4 to 6 time. If the companyhas the ratio more than the bench marks it means that there is excessive or overproduction. 23 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis e. Total asset turn overDefinition:The production or sales on the total assets referred to as the assets turn over ratio.What it is:It is found or calculated by dividing the net sales for the year by the total assets employedin the production of such sales.When it to use:When the company wants to check the contribution that is made by total assets to sales.A ratio increase suggests the better utilization of the assets. An increase in the totalassets when accompanied by a ratio decrease my show an over investment in assets ortheir in effective use.Computation: Net sales Total assets Financial year 2000 1999 Calculation 1800607/860767 1624284/937090 Resulting ratios 2.09 1.73Analysis:A slight increase shows how effectively the company is using the assets to turn them intohuge sales so that they remain the market leaders. The bench mark for this ratio is 1.6. 24 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis 2. Profitability ratioProfitability ratios undoubtedly are the most important financial ratios in financialstatement analysis.Profitability is best regarded as earnings generated in relation to the resources invested ina firms activities. There are two major ways of looking at profitability. The shareholdersare per definition interested mainly in the return on their investment. On the other hand,taking a more managerial oriented view, the focus of interest becomes the productivity ofthe firms capital resources. These views are well reflected in including as profitabilityratios the return after interest and taxes on equity, and the return on total assets. 1. Sales growth ratioDefinition:The growth in the sales from the last year is called sales growth ratio.What it is:It is calculated by subtracting the last yea sales from the current year sales and bydividing the last year sales.When it to use:When the company want to compare the last year sales from the current year sales. Thegreater the figure shows the growth of the company and it also shows that by using theextra resources what percentage of the sales of the company increase.Computation: Current year sales-last year sales Last year sales Financial year 2000 1999 Calculation 1800607-1624284/162428 4 Resulting ratios 10.85%Analysis: 25 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisHigher the ratio, the better it is. If the company has the ratio more than the last year itmeans that there is progress but if inflation rate in the county is 5% it means that growthof the company is 9.27%. B. Cost of goods sold to sales ratioDefinition:The ratio between the cost of goods sold and sales is called cost of goods sold to salesratio.What it is:It is the Indicator of how much cost on your products you are selling.When it to use:When the company wants to check the percentage of the cost of goods sold on the sales.It Compare to other businesses in the same industry to see that what is the percentagedifference they have adopted the cost of goods sold and sales.Computation: Cost of goods sold Sales Financial year 2000 1999 Calculation 2042436/2896603 1149727/1624284 Resulting ratios 0.6765*100=67.65% 0.7078*100=70.78%Analysis:There is a decrease in this ratio that shows that company is decreasing the percentage ofcost of goods sold. It means that if we have $1 then there is $0.70 is our cost of goodssold. 26 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis C. Gross profit margin ratioDefinition:Indicator of how much profit is earned on your products without consideration of sellingand administration costs.What it is:This ratio is the percentage of sales dollars left after subtracting the cost of goods soldfrom net sales. It measures the percentage of sales dollars remaining (after obtaining ormanufacturing the goods sold) available to pay the overhead expenses of the company.Comparison of your business ratios to those of similar businesses will reveal the relativestrengths or weaknesses in your business.When it to use:When the company wants to check that is there enough gross profit in the business tocover the operating cost and is there is a positive gross margin. It Compare to otherbusinesses in the same industry to see that business is operating as profitably as it shouldbe.Computation: Gross Profit Total Sales Or Net sales-CGS Net sales where Gross Profit = Sales less Cost of Goods Sold Financial year 2000 1999 Calculation 854167/2896603 474557/1624284 Resulting ratios 0.323*100=32.34% 0.292*100=29.2%Analysis:The gross profit margin ratio indicates how efficiently a business is using its materials andlabor in the production process. It shows the percentage of net sales remaining aftersubtracting cost of goods sold. A high gross profit margin indicates that a business can 27 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysismake a reasonable profit on sales, as long as it keeps overhead costs in control. Thebench mark for this ratio is 23.8. 28 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis d. Net profit margin ratioDefinition:It shows how much profit comes from every rupee or dollar of sales.What it is:This ratio is the percentage of sales dollars left after subtracting the Cost of Goods soldand all expenses, except income taxes. It provides a good opportunity to comparecompany’s "return on sales" with the performance of other companies in industry. It iscalculated before income tax because tax rates and tax liabilities vary from company tocompany for a wide variety of reasons, making comparisons after taxes much moredifficult.When it to use:Company uses this ratio when the company wants to measure the rate of net profitearned on sales.Computation: Net Profit Total Sales Financial year 2000 1999 Calculation 172448/1800607 83325/1624284 Resulting ratios 0.095*100=9.57% 0.051*100=5.12%Analysis:Huge increase in this ratio shows that company has adequate control over the expensesand reduces the cost of production. The bench mark for this ratio is 4.7. 29 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis 4. Profitability in return to investment A. Return on investmentDefinition:It considered a measure of how effectively assets are used to generate a return.What it is:The ROI is perhaps the most important ratio of all. It is the percentage of return on fundsinvested in the business by its owners. ROI shows the amount of income for every dollartied up in assets.When it to use:This ratio tells the owner whether or not all the effort put into the business has beenworthwhile. If the ROI is less than the rate of return on an alternative, risk-freeinvestment such as a bank savings account, the owner may be wiser to sell the company,put the money in such a savings instrument, and avoid the daily struggles of smallbusiness managementComputation: Net Profit Total Assets Financial year 2000 1999 Calculation 172448/860767 83325/937090 Resulting ratios 0.200*100=20.13% 0.088*100=8.89%Analysis:The great improvement in this ratio shows that company is utilizing its resources at themaximum point. The industrial bench mark for this ratio is 7.8. 30 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis B. Return on equityDefinition:Making enough profit to compensate for the risk of being in business.What it is:Determines the rate of return on your investment in the business. As an owner orshareholder this is one of the most important ratios as it shows the hard fact about thebusiness.When it to use:When the company want to Compare the return on equity to other investmentalternatives, such as a savings account, stock or bond and want to Compare the ratio toother businesses in the same or similar industry.Computation: Net Profit Equity Financial year 2000 1999 Calculation 172448/69448 83325/69448 Resulting ratios 2.48*100=248.31% 1.19*100=119.98%Analysis:By comparing the bench mark of 14.04%with the company’s 34.9% which has increasenearly 73 points from the last year ratio; shows strong investment by the investors andthe return on that investment. 31 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis 5. Market value ratio A. Profit earning ratioDefinition:The ratio that shows what the company is earning per share is called price earning ratio.Value ratioWhat it is:This ratio indicates how much times the difference between the market price per shareand the earning per share.When it to use:When the company wants to check that what the company is earning per shareComputation: Market price per share Earning per shareWhere the earning per share is calculated by total equity by the number of shares issued. Financial year 2000 1999 Calculation 120/16.04 62/(22.15) Resulting ratios 7.48 -2.799Analysis:There is great increase in the figure. It also shows that profit will cover with in 7.48 years. 32 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis b. Market to book value ratioDefinition:The ratio between the market and the book value per share is called market to book valueratio.What it is:This ratio indicates how much times the difference between the market and in the booksof accounts per share.When it to use:When the company want to compare the value of the share in time from the books ofaccounts and market price.Computation: Price per share Book value per share Financial year 2000 1999 Calculation 120/45.9031 62/ Resulting ratios 2.614 1.7Analysis:The current figure shows that there is a good increase in the value of the share the benchmark for this ratio is 02 this figure also shows the company’s good will. Inventory Turn Over Ratio:Computation: C.G.S Avg.Inventroy Financial year 2000 1999 Calculation 1218270/396602 1149727/341554 Resulting ratios 307.17% 336.61% 33 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis Raw Material turnover:Computation: R.M Consumed Avg.R.m Financial year 2000 1999 Calculation 824674/1699682 875008/1699682 Resulting ratios 0.485*100=48.51% 0.514*100=51.48% 34 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis Trend analysisSerial Ratio’s 2002 2003 Difference Analysis#1 Current ratio 0.99 0.97 (0.2) Decrease in the current ratio2 Acid test ratio 0.46 0.52 0.06 Increase3 Debt to equity 3.47 1.4 (2.07) Decrease ratio4 Debt to total 0.82 0.73 (0.09) Decrease assets5 Interest (0.8) 4.7 5.5 Increase coverage ratio6 Receivable 29.48 activity7 Payable activity 3.9 2.36 (15.4) Decrease8 Inventory 2.984 activity9 Total asset turn 1.32 1.83 0.48 Increase over10 Sales growth 14.27 ratio11 Cost of goods 76.3% 70.5% (5.8)% Decrease sold to sales ratio12 Gross profit 23.66% 29.4% 5.74 Increase margin ratio13 Net profit (8.4)% 5.3% 13.7 Increase margin ratio14 Return on (11.16)% 9.783% 20.943% Increase investment15 Return on equity (61.7)% 34.9% 96.6% Increase16 Profit earning (2.799) 7.48 10.279 Increase ratio17 Market to book 1.7 2.614 0.914 Increase value ratio 35 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio AnalysisIn the both years of the company’s current ratio, still in the week position to pay its shortterm debts. This ratio indicates the firms ability to service its current obligations.Generally, the higher the current ratio, the greater the "cushion" between currentobligations and a firms ability to pay them. The stronger ratio reflects a numericalsuperiority of current assets over current liabilities. Current Ratio 1.6 1.4 1.2 1 Ratios 0.8 0.6 0.4 0.2 0 1 2 3 4 5 YearsBut increase in the quick ratio shows the company’s strong position to pay its debts.Indicates the extent to which you could pay current liabilities without relying on the sale ofinventory -- how quickly you can pay your bills.The sales growth ratio of the company is less than the previous year which is 14.3% inthis year but in the last year it was 22.3% the decrease in this ratio is because thatcompany has shut down its some distribution centers. 36 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis Sales Growth Ratio 25.00% 20.00% 15.00% Ratios 10.00% 5.00% 0.00% 1 2 3 4 5 Ye arsThe gross profit margin ratio indicates how efficiently a business is using its materials andlabor in the production process. It shows the percentage of net sales remaining aftersubtracting cost of goods sold. A high gross profit margin indicates that a business canmake a reasonable profit on sales, as long as it keeps overhead costs in control. But thegros profit in this year is 29.4% and in the last year it was 23.7%. Gross Profit Margin 40.00% 30.00% Ratios 20.00% 10.00% 0.00% 1 2 3 4 5 Years Net Profit MarginHuge increase in the net profit ratio shows that company has adequate control over theexpenses and reduces the cost of production. Net profit ratio of the aventis in this year is5.3% but in the last 10.00% -8.4% this shows that company is utilizing its resources in year it wasa very good manner. 5.00% Ratios 0.00% -5.00% -10.00% 1 2 3 4 5 37 COMSATS Institute of Information Technology, WahYears Campus. of 44
  • Ratio AnalysisSuggestionAs the year 2002 shows that company was receiving heavy loss this was because thatsome of the company units and distribution centers were not working well and anothercause was the competition from the some other companies ,because of these reasonscompany was not receiving profit but in that year 2003 the net profit of the company isRs.154673 thousands so for the year 2004 it is important for the company to decrease itsmiss utilization of resources, to shut down less productive units , adopt new technologyfor its long term market survival , because through this way the company can increase isprofit ratio in the up coming years. 38 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis VERTICAL ANALYSIS P/L Account For the year ended Dec 31, 2000 2000 1999 Net Sales 309.20% 342.27% Cost of Good Sold (C.G.S) 209.20% 242.27% Trading/Gross Profit 100% 100% Admin/Gen Expense 70.38% 82.44% Operating Profit 29.58% 17.56% Other Income 3.5% 6.81% 33.08% 24.71% Financial Charges 6.48% 6.99% Other Charges 3.21% 2.55% 9.69% 9.54% Profit Before Tax 23.39% 14.82% 39COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis Taxation 13.53% 10.17% Profit After Tax 9.36% 4.65% HORIZONTIAL ANALTYSIS P/L Account For the year Ended Dec 31,2000 Increase/Decrease 2000 Net Sales 10.8% Cost of Good Sold (C.G.S) 6% Trading/Gross Profit 22.71% Gen Admin & selling Expense 4.7% Operating Profit 107% Other Income (36)% 67% Financial Charges 14% Other Charges 54.19% 24.06% Net Profit Before Taxation 94.26% Taxation 63.23% Net Profit 162.24% 40COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis HORIZONTIAL ANALYSIS Balance Sheet As on December 31,2000 Increase/Decrease Increase/Decrease %Age Share capital & reserves ------ 0% Authorized Capital ----- 0% Issued, subscribed 33500 13.81% Revenue reserve 17 9.71% Unappropriated Profit 33517 10.73% Redeemable capital (104000) 100% Deferred Taxation (6913) 100% CURRENT LIABILITIES Current Liabilities 100000 2500% Under mark-up (58120) 36.65% Creditors, accrued (47752) 14.29% Proposed Dividends 7008 40.36% 1073 0.20% Contingences & (76323) 8.14% Commitment 41COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis TANGIBLE ASSETS Operating Assets (43991) 23.13% Capital work in progress 16949 246.56% Long-Term Deposits 1553 282.36% Long-Term & Advances 1518 75.67% CURRENT ASSETS Stores & Spares (568) 2.33% Stock in Trade (48403) 11.70% Trade Debts 145871 192.36% Loans & Advances (358) 7.8% Deposits & short-term (109591) 78.45% Prepayments Taxation (47784) 68.28% Other Receivables 5428 67% Bank and cash 3053 200% (52652) 7.13% 42COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis VERTICAL ANALYSIS Balance Sheet As on Dec 31, 2005 CURRENT ASSETS 2000 1999 Stores & spares 3.4% 3.3% Stock in trade 53.2% 56% Trade debts 32.3% 10.2% Loans & advances 0.6% 0.6%Deposits & short-term Pay 4.3% 18.9% Taxation 3.2% 9.4% Other Receivables 1.9% 1% Bank and cash balances 0.6% 0.2% CURRENT LIABILITIES 2000 1999 Current Liabilities 20.1% 0.7% Under mark-up 19.5% 30.8% arrangement Creditors, accrued and 55.5% 64.9% Proposed Dividend 4.7% 3.3% 43 COMSATS Institute of Information Technology, Wah Campus. of 44
  • Ratio Analysis 44COMSATS Institute of Information Technology, Wah Campus. of 44