A project report on financial analysis of novartis india (1)
FINANCIAL ANALYSIS OF
NOVARTIS INDIA LTD
A Project report submitted in the partial fulfillment of the requirement for the
degree of MBA (Pharm tech).
Under Guidance of- Compiled by-
Dr Ashok Panigrahi Yashica Jain (A008)
(Associate Professor- Shagun Agrawal (A001)
This is to certify that Ms.Yashica Jain and Ms.Shagun Agrawal worked during the
period. 15.02.2014 to 20.03.2014 on the development of the project “Financial
analysis of Novartis India Ltd.”, in the partial fulfillment of the requirement for
the degree of MBA (Master of Business Administration) under my guidance &
supervision. To the best of my knowledge, the matter represented in this project
is a bonafide & genuine piece of work.
During their association with the project I found them to be sincere & motivated
individuals. Their conduct was excellent.
I wish them all success in their career.
Dr. Ashok Panigrahi
We are very much thankful to all who have supported us for completion of our
project effectively and on time.
We would like to express our special thanks of gratitude to our beloved professor
“Dr. Ashok Panigrahi” who constantly guided and supported us at every stage.
We would also like to thank our colleagues who helped us a lot in gathering
different information and guiding us in making this project unique.
Thanking you !
MBA Pharm Tech-2nd
With the rapid growth of trade, commerce and industries, the numbers of publicly
traded companies are considerably increasing in India. Pharmaceutical is an
important adjunct of industrialization in the country.
In this paper, an attempt is made to analyze the financial performance,
background, outcomes, management and also to test the strengths & weaknesses
of one of the well known pharmaceutical industry in India named NOVARTIS
INDIA LTD. Since last five years i.e. from 2009 to 2013.
This study is based on both primary and secondary Data. The collected data have
been tabulated, analyzed and interpreted with the help of different analytical
techniques and financial ratio analysis.
History of the Company
Board of Directors
2. Awards and Achievements
3. SWOT Analysis, STP and Competitors
4. Product Profile-
5.Research and Development
6. Annual Report (2011-12 & 2012-13)-
Profit and Loss Sheet
7. Financial Analysis-
Nature of financial analysis
Objective of financial analysis
8. Ratio Analysis-
Utility of financial ratios
Role of financial ratios
9. Classification of Ratios-
Profitability ratios based on investment
Novartis India Limited is a pharmaceutical company. The business
operations of the Company include Pharmaceuticals, Generic, over the
counter (OTC) and Animal Health.
The Pharmaceuticals segment consists of a portfolio of prescription
medicines, which are provided to patients through healthcare
professionals. The Generics segment consists of retail generics products.
The Generics segment’s unit primarily focuses on the therapeutic segments,
such as Anti-TB, Anti-DUB (Gynecology), Anti-histamines, Antibiotics, Anti-
ulcerants, Anti-diabetes and Cardiovascular.
The Animal Health segment has a presence primarily in the cattle and
poultry market segments. The OTC segment is mainly in the vitamins,
minerals and nutritional supplements (VMS) and cough, cold and allergy
During the fiscal year ended March 31, 2012, it introduced Enplus product
in the Poultry segment, and, Antifur, Vayuhara, Vetimam and Feedavit in
the Cattle segment.
Novartis is a world leader in the research and development of products to
protect and improve health and well-being. The company has core
businesses in pharmaceuticals, vaccines, consumer health, generics, eye
care and animal health.
Headquartered in Basel, Switzerland, Novartis employs nearly 115 000
people in over 140 countries worldwide to help save lives and improve the
quality of life. The Group is present in India through Novartis India Limited,
listed on the Mumbai Stock Exchange and its wholly owned subsidiaries
Novartis Healthcare Private Limited, Sandoz Private Limited and Chiron
Behring Vaccines Private Limited.
Company meets the varied and often complex needs of patients and
societies. Novartis is positioned to lead in innovation, partner with others
and offer solutions to patients across a broad healthcare spectrum. In
addition, a diverse portfolio reduces financial risk, bringing greater value to
those who invest in our company.
Companies unique portfolio focuses on science-based healthcare sectors
that are growing rapidly, reward innovation, and enhance the lives of
patients. Novartis is the only company with leading positions in each of
these key areas:-
1. Pharmaceuticals: innovative patent-protected medicines
2. Alcon: global leader in eye care with surgical, ophthalmology and
3. Sandoz: affordable, high-quality generic medicines and biosimilars
4. Consumer Health: self-medication products and treatments for
5. Vaccines and Diagnostics: vaccines and diagnostic tools to protect
against life-threatening diseases
History of the Company:-
Novartis was created in 1996 through the merger of Ciba-Geigy and Sandoz,
two companies with a rich and diverse corporate history. Throughout the
years, Novartis and its predecessor companies have discovered and
developed many innovative products for patients and consumers
Novartis has been in India since 1947. The Group operates in India through
four entities namely Novartis India Limited, listed on the Mumbai Stock
Exchange, Novartis Healthcare Private Limited, Sandoz Private Limited and
Chiron-Behring Vaccine Private Limited. In India Novartis have a presence in
pharmaceuticals, generics (pharmaceutical products that are off patent),
Vaccines, OTC (over-the-counter medicines), eye care and Animal Health.
With approximately 4500 associates in India, 115000 associates in 140
countries worldwide, Novartis associates share a vision of a better today
and tomorrow for patients – a vision that drives our growth and success.
The greatest job satisfaction for our associates is the knowledge that they
improve the quality of life for patients with increasing precision and
efficiency through breakthrough science and innovation.
Our performance-oriented culture and responsible approach attract top
experts in all areas – research and development, marketing and sales,
finance and administration. Our talented associates have made us a global
leader in healthcare. Novartis is committed to rewarding the people who
invest ideas and work in our company.
Future Plans of Company:-
Novartis said Thursday that it expects to have at least 14 blockbuster drugs
on the market by 2017, up from seven last year, including serelaxin and
LCZ696 for heart failure and AIN457 for treating psoriasis and multiple
sclerosis. CEO Joseph Jimenez remarked that "as a science-driven
company... our leading pipeline in all phases of development positions us
well for continued future growth."
In an update to investors, the company noted that it has 139 projects in
development, including 73 new compounds across a range of indications.
Novartis indicated that over the next 12 months it expects results from 13
pivotal studies, to submit nine marketing applications and to receive seven
The drug maker highlighted its oncology pipeline as a source of future
growth, despite the patent on chronic myeloid leukemia (CML) drug Glivec
(imatinib) expiring in 2014. Novartis said it plans to start clinical trials next
year designed to show that its newer CML treatment Tasigna (nilotinib) can
achieve sustained treatment-free remission, which it noted, if positive,
could lead to a "major paradigm shift" in the condition. According to the
company, Afinitor (everolimus) has the potential to exceed sales of $2
billion in breast cancer alone by 2017, while new products and possible
future launches, including the ALK inhibitor LDK378 and the pan-PI3K
inhibitor BKM120, could contribute more than $1 billion in revenue.
Novartis noted that it has initiated a clinical development programme for
BKM120 called PRISM across a number of tumour types including breast
cancer. Meanwhile, the company said it plans to start pivotal studies of
LDK378 in December. The drug has shown activity in patients with Alk+
non-small-cell lung cancer, as well as activity on brain metastases.
Regulatory filings for the compound are expected to begin in 2014.
The company also confirmed that it will initiate regulatory filings for
serelaxin in early 2013 in the US and Europe after recently reporting late-
stage results from the RELAX-AHF study in patients with acute heart failure.
Novartis added that in Phase II studies, AIN457 has shown rapid
improvement of signs and symptoms in patients with moderate to severe
psoriasis. Late-stage trials of the therapy are ongoing in this indication, with
regulatory filings planned to start in late 2013, while the drug is also being
investigated in multiple sclerosis.
Novartis indicated that to keep control of R&D costs while managing more
projects, it has adopted new technologies and methods to reduce
recruitment time and trial costs, while improving study quality and patient
comfort and safety. These include mobile field monitoring, continuous
manufacturing and Telehealth.
Board of Directors:-
Name Board Relationships
Gary Rosenthal Chief Executive Officer, Chief Financial Officer,
Vice President of Finance, Chief Executive Officer
of Novartis Corp and President of Novartis Corp
André Wyss President and Head of Pharma North America
Cynthia Cetani Chief Compliance Officer and Vice President
Cathryn M. Clary M.D. Chief Scientific Officer for US General Medicines
and Head of US Medical
Rhonda Crichlow Head of US Diversity & Inclusion and Vice
Nikos Georgiades Head of Primary Care & Established Medicines
Name Board Relationships
Business Unit and Vice President
Brian Hanifin Head of US Pharmaceutical Operations and Vice
Jesus Leal Head of the US General Medicines Respiratory
Business Unit and Vice President
Carol Lynch Head of the US General Medicines Specialty
Business Unit and Vice President
Patrice Matchaba Head of Global Development - US
Gregory Oakes Head of US Managed Markets & Market Access
and Vice President
Caryn Parlavecchio Head of US General Medicines - Human
Resources and Vice President
Kevin T. Rigby Head of US General Medicines Public Affairs &
Communications and Vice President
Dagmar Rosa-Bjorkeson Head of the US General Medicines Multiple
Sclerosis and Vice President
Christi Shaw North American Region Head of Novartis
Dorothy Watson Vice President and General Counsel
Diane Young M.D. Vice President and Global Head of Clinical
Meryl Zausner Chief Financial & Administrative Officer of US
General Medicines and Vice President
Board of Directors of Novartis India Limited:-
Name Board Relationship
2. Awards and Achievements
Novartis among top 20 best performing companies worldwide in carbon
emissions from 2005 to 2012Of 100 companies analyzed, Novartis ranked
#18 across all industries, #4 in the healthcare sector and #1 in Switzerland.
Novartis recognized among world’s most sustainable companies in
Corporate Knights Global 100Inclusion in the 2014 index acknowledges
Novartis leadership in key areas of corporate responsibility. Companies
named to the Global 100 are recognized as the top overall sustainability
performers in their respective industries.
Novartis wins Scrip Award for Jian Kang Kuai Che healthcare project in
ChinaNovartis was honored with the first ever "Scrip Award for Best
Advance in an Emerging Market." Novartis won for its Jian Kang Kuai Che
healthcare project in China, which works to improve healthcare conditions
in rural Xinjiang through educational programs in schools and by recruiting
and training healthcare workers.
Novartis listed in STOXX Global ESG Leaders IndexFor the third consecutive
year, Novartis remains in the STOXX Global ESG Leaders indices –
comprising the leading global companies in terms of ESG (environmental,
social and governance) performance.
Novartis recognized among 25 best multinational employers by Great Place
to Work® Institute. The Top 25 World’s Best Multinational Workplaces is
the world’s largest annual study of workplace excellence, identifying the
top 25 best multinationals in terms of workplace culture.
Novartis Pharmaceutical US chosen for 2013 list of best employers for
mothers.Working Mother Magazine selected the Novartis Pharmaceuticals
Division in the US for its 2013 list of the best employers for moms. The
magazine highlighted the Global Executive Female Leadership Program
supporting career development of women and child care support.
Novartis was accredited as the first global CEO Cancer Gold Standard
employer by the CEO Roundtable on Cancer.The standard recognizes
organizations that encourage healthy lifestyles and provide employees with
cancer prevention, detection, and treatment programs.
Award of Excellence for Innovations in Diversity: Research shows diverse
leadership teams deliver better business results. In executive teams, the
magic ratio has been shown to be 30% women. The innovative Novartis
Pharmaceuticals “Executive Female Leadership Program” was recently
recognized by Profiles in Diversity Journal.
Fortune 500 World’s Biggest Corporations: Novartis listed as the third
largest healthcare company worldwide.
2013 European Graduate Barometer: Novartis enters the list of the 50
preferred employers among European Engineering/IT students.
Top 50 Companies for Diversity 2013: Novartis Pharmaceuticals
Corporation recognized among the best employers for diversity in the US in
DiversityInc's Top 50 Companies for Diversity.
Fortune's World's Most Admired Companies 2013: Novartis ranked top
pharmaceutical company infortune’s World's Most Admired Companies
2013 for the third time in a row.
3. SWOT Analysis, STP and Competitors
Parent Company Novartis
Sector Health Care
Tagline/ Slogan Novartis: No pipelines, just pipedreams
Discover, develop and successfully market innovative
products to prevent and cure diseases, to ease suffering
and to enhance the quality of life.
Animal health, Diagnostics, Oncology, cns drugs, vaccines
Target Group Healthcare professionals, Doctors,
We want to discover, develop and successfully market
innovative products to prevent and cure diseases, to ease
suffering and to enhance the quality of life.
1.Has a global reach in over 140 countries
2. Core businesses in pharmaceuticals, vaccines,
consumer health, generics and animal health
3. Novartis Biotechnology leadership camp organized by
it is a unique step
4. Mergers and acquisitions have it a strong brand
5. First company-wide health and well-being initiative at
Employee strength of over 120,000.
1. Controversies regarding their advertising of certain
products affected brand image
2. Case regarding Indian patent laws also created a
problem for the brand
1. Broad-based medical innovation, in technologies and
businesses across the spectrum of health care
2. Venture into health needs in under-developed and
4. Leverage its core business expertise and resources to
create sustainable solutions in countries around the
1. Increasing obsolesce of technology
2. Competition from peers
1. Abbott Laboratories
4. Bristol-Myers Squibb
5. Johnson & Johnson
9. Roche Holdings
10. Sun Pharma
Novartis is recognized worldwide for offering innovative patent-protected
medicines to patients and physicians.
1. Vaccines and Diagnostics:-
Novartis is a leader in providing products to fight vaccine-preventable viral and
bacterial diseases and to help prevent transfusion-related transmission of HIV and
2. Sandoz (generics):-
Sandoz is a global leader in the rapidly growing generics industry, delivering
affordableand high-quality medicines to patients worldwide.
3. Animal Health:-
Animal Health focuses on the well-being of companion animals and on the health
and productivity of farm animals
4. Alcon (eye care):-
As a global leader in eye care, Alcon develops and manufactures innovative
medicines and devices to serve the full life cycle of eye care needs. Alcon offers
the broadest spectrum of surgical, pharmaceutical and vision care products to
treat many eye diseases and conditions.
Over-the-Counter (OTC) is a leader in offering products designed for self-care and
the prevention of common medical conditions and ailments, to help people take
care of themselves and their families to live healthy lives.
Novartis global Pharmaceuticals portfolio includes more than 50 key marketed
products, many of which are innovative leaders in their therapeutic areas. In 2012
we received a total of 13 approvals in the United States, Europe and Japan.
Research and Development
Novartis create innovative medicines and prioritize work based on unmet
medical need and strong scientific understanding of disease - not the size of
the potential commercial market.
Novartis researchers are working to map complex protein signaling
networks known as molecular signaling pathways inside of cells. These
molecular pathways are highly controlled and interconnected signal-relay
systems, similar to communication networks, and are responsible for
normal cell function. When a protein in a pathway does not function
properly, the result can be abnormal signaling and disease. Scientists at the
Novartis Institutes for Biomedical Research (NIBR) develop small molecule
drugs or antibodies to target key nodes within pathways that, when
defective, lead to disease.
To translate scientific discoveries from the lab bench to the clinic, Novartis
uses proof-of-concept clinical trials (small scale studies used to get an early
read on a drug’s safety and effectiveness) to help find and advance the
most promising drug candidates. These proof-of-concept studies often
focus on treating a rare, but genetically well-defined disease.
By focusing on the patient and following the science, Novartis has
discovered innovative treatments for disorders ranging from cancer to
Thanks to this approach, Novartis has one of the strongest and most
productive pipelines in the industry, with 144 projects in clinical
development, many of which are new molecular entities.
One of the innovative techniques that Novartis researchers use to help find
and advance the most promising drug candidates is computer modeling and
simulation. Watch the video below to learn about Computer-Aided Drug
BalanceSheet - Novartis India Ltd.
31 march 2013 31 march 2012
Equity and Liabilities:-
Share capital 159.8 159.8
Reserves and surplus 8842.3 8018.9
Long-term Borrowings 1.4
Other Long-term Liabilities 37.8 38.7
Long-term Provisions 249.7 187.6
Trade Payables 1,195.9 979.1
Other Current Liabilities 406.9 411.2
Short-term Provisions 519.4 540.2
Total 11,411.8 10,336.9
Tangible Assets 99.4 100.5
Intangible Assets 0.2 0.6
Capital Work-in-Progress 2.7 1.0
Non-Current Investments 0.3 0.3
Deferred Tax Assets 162.1 172.6
Long-term Loans and Advances 810.9 711.4
Other Non-Current Assets 0.9 23.9
Inventories 1,101.5 790.1
Trade Receivables 824.4 699.5
Cash and Bank Balances 393.0 828.9
Short-term Loans and Advances 7,971.1 6,997.6
Other Current Assets 45.3 10.5
Total 11,411.8 10,336.9
Profit and Loss Account of Novartis india:-
31 march 2013 31 march 2012
Revenue from Operations (Gross) 9,065.0 8,468.0
Less: Excise Duty 31.4 25.1
Revenue from Operations (Net) 9,033.6 8,442.9
Other Income 831.9 840.1
Total Revenue 9,865.5 9,283.0
Cost of Materials Consumed 403.6 313.9
Purchases of Stock-in-Trade 3,579.3 3,023.8
Changes in Inventories of Finished
Goods and Stock-in-Trade (266.4) (222.9)
Employee Benefits Expense 1,623.0 1,376.8
Finance Costs 2.2 5.4
Depreciation Expense 35.9 26.7
Other Expenses 2,793.7 2,512.4
Total Expenses 8,171.3 7,036.1
Profit before Tax 1,694.2 2,246.9
For the year
Current Tax 570.0 745.0
Deferred Tax 10.5 (15.0)
For earlier years
Current Tax (Net) (73.7) (3.3)
Fringe Benefits Tax (9.9) —
Profit for the year 1,197.3 1,520.2
Financial Analysis is the process of determining the operating & financial
characteristics of a firm from accounting data & financial statement. The
goal of such analysis is to determine efficiency & performance of the firm
management, as reflected in the financial records and reports. Its main aim
is to measure the firm’s liquidity, profitability and other indications that
business is conducted in a rational and orderly way.
The basic financial statement -
Of the various reports that the companies issue to their shareholder, the
annual report is by far the most important. Two types of information are
given in this report, first there is a text that describes the firms operating
results during the past year and discusses new development that will affect
future operations. Second there are few basic financial statements –the
income statement, the balance sheet, the statement of retained earnings
and the sources and uses of funds statements.
The financial statement taken together gives an accounting picture of the
firm’s operation and financial positions.
“Financial statement analysis is largely a study of relationship among the
various financial factors in a business as disclosed by a single set of
statements, and a study of trends of these factors as shown in a series of
--- John N. Myer
“The analysis and interpretation of financial statement are an attempt to
determine the significance and meaning of the financial statement data so
that the forecast may be made of the prospects for future earnings, ability
to pay interest and debt maturities (both current & long term) and
profitability of a sound dividend policy”
--- R.D. and S. % Mc Muller
Thus, analysis of financial statement means such a treatment of the
information contained in the financial statement as to afford a full
diagnosis of the profitability and financial position of the firm concerned.
Nature of financial statement:-
According to the American institute of certified public accountants
“……………… financial statement reflected a combination of recorded facts,
accounting conventions and personal judgments.
Objective of financial analysis: -
The number and types of people interested in financial statements have
changed radically over a period of time. They need varied information and
fortunately such information may be classified as relating to profitability,
liquidity and solvency.
The Project “ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS” is undertaken to fulfill the following objectives.
To estimate the earning capacity
To gouge the financial position and financial performance of the firm
To determine the long terms liquidity of the funds as well as solvency
To determine the debt capacity of the firm
To decide about the future prospective of the firm
A ratio may be defined as a fixed relationship in degree or number between
two numbers. In finance, ratios are used to point out relationship that is
(1) To Compare Different Companies in Some Industry: ratio can high light
the factors association with successful and unsuccessful firms. They can reveal
strong firms and weak firms, overvalued undervalued firms.
(2) To Compare Different Industries: Every industry has its own unique set
of operating and financial characteristics. These can be identified with the help of
(3) To Compare Performance in the Different Time Periods: Over a period
of years, a firm or a industry develop certain forms that may indicate future
success or failure. If relationship changes in firms data over different time periods,
the ratio may provide clues and trends of future problems.
Utility of Financial Analysis:-
Following are the advantages of Financial Analysis:-
With the help of ratios we can determine the ability of the firms to meet its
Overall operating efficiency and performance of the firm.
Efficiency with which firms is utilizing its various assets in generating sales
Ratios help in inter-firm and intra-firm comparison.
They help in determining the financial strength by highlighting the liquidity.
They are useful in comparison of performance.
They are also useful in forecasting purpose.
Advantages of Ratios:-
The ratio analysis is one of the most powerful tools of financial analysis. It is
use as a device to analysis and interprets the financial health of enterprise.
Just like a doctor examines his conclusion regarding the illness and before
giving his treatment, a financial analyst analyses the financial statement
with various tools of analysis before commenting upon the financial bearlth
or weakness of an enterprise. „A ratio is known as a symptom like blood
pressure, the pulse rate or the temperature of the individual‟. It is with
help of ratios that the financial statements can be analysed and decision
made from such analysis.
HELPS IN DIVISION MAKING: Financial statements are prepared primarily
for decision making, but the information provided in financial statements is
not an end in itself and no meaningful conclusions can be drawn from these
statements alone. Ratio analysis helps in making decisions from the
information provided in these financial statements.
HELPS IN FINANCIAL FORCASTING AND PLANNING: Ratios analysis is of
much help in financial forecasting and planning. Planning is looking ahead
and the ratios calculated for a number of year’s work as a guide for the
future. Meaningful conclusions can be drawn for future from these ratios.
Thus, ratio analysis helps in forecasting and planning.
HELPS IN COMMUNICATING: The financial strength and weakness of a firm
are communicated in aneasier and understandable manner by the use of
ratios the information contained in financial statements conveyed in a
meaningful manner to the one for whom it is meant. Thus, ratios help in
communicating and enhance the value of financial statements.
HELPS IN COORDINATION: Ratios even helps in coordinating, which is
utmost important in effective business management. Better
communication of efficiency and weakness of an enterprise results in better
coordination in the enterprise.
HELPS IN CONTROL: Ratio analysis even helps in making effective control of
the business. Standard ratios can be based upon Performa Financial
Statements and variance or deviations, if any, can be founded by comparing
the actual with the standards so as to take corrective action at the right
time. The weakness or otherwise, if any, come to the knowledge of the
management which helps in effective control of the business.
Role of Financial Ratio: -
Aid in financial forecasting: Ratio analysis is very helpful in financial
forecasting. Ratio relating to the past sales, profits & financial position from
the basis for setting future trends.
Aid in comparison: With the help of ratio analysis ideal ratio can be
composed & they can be used for comparing a firm progress &
performance. Inter firm comparison with the industry averages is made
possible by ratio analysis.
Financial solvency of the firm: Ratio analysis indicates the trend in financial
solvency of the firm. Solvency has to dimensions:
Long term solvency refers to the financial viability of the firm while Short-
term solvency is the liquidity position of the firm.
Communication values: Different financial ratios communicate the strength
& financial standing of the firm to the internal & the external parties. They
indicate overall profitability of the firm
Other uses: Financial ratios are very helpful in the diagnosis & financial
health of a firm. They highlight the liquidity, solvency, profitability & capital
gearing etc. of the firm. They are useful tools of analysis of financial
CLASSIFICATION OF RATIOS
Current ratio Liquid ratio
Debt equity Total Assets Proprietary Capital Interest
Ratio to Debt Ratio Gearing Coverage
Stock Debtors Creditors Fixed assets working capital
Turnover turnover turnover turnover turnover
Gross Operating Net profit
Profits Ratio Ratio
Profitability Ratio based on investment
Return on Return on Return on equity Earning Per
Capital Shareholder fund shareholder fund Share
1. LIQUIDITY RATIOS:-
Liquidity refers to the ability of the firm to meet its obligations inventory
the short-run, usually one year. Liquidity ratios are generally based on the
relationship between current assets and current liabilities (the sources for
meeting short-term obligations). Example: Current ratio, Acid test ratio.
I. Current ratio: also known as working capital ratio, this is used to
evaluate short term financial position of the business concern. It
indicates the ability of the firm to meet its short term obligations.
It compares the current assets and current liabilities of the firm.
Current assets are those which are either in the form of cash or
cash equivalent. Current Liabilities are those which are to be
discharged during the accounting period
Current ratio = current assets
Significance: Ideal current ratio is 2:1. A very high ratio indicates availability of
idle cash and is not a good sign.
II. Quick ratio: it is very useful in measuring liquidity position of a
firm. It measures the firm’s capacity to pay off current obligations.
It is used as complimentary ratio to the current ratio.
Quick ratio = liquid assets
Significance: Liquid ratio of 1:1 is considered satisfactory. If quick assets are equal
to current liabilities, then the concerm may be able to meet its short term
2. LEVERAGE RATIOS:-
Leverage ratios analyze the long term solvency that help us judge the
ability of a firm to pay the interest regularly as well as repay the principal
when due to debenture holders, long term lenders.
I. Debt equity ratio: shows a relationship between long term debt and
shareholder’s fund. This ratio indicates the relation between outsider’s
fund and shareholder’s fund. Also called external internal equity ratio
Debt equity ratio= debt or long term debt
Equity shareholder’s fund
Significance: A ratio of 1:1 is usually considered to be satisfactory. This ratio is
calculated to know about the organization’s repayment capacity of long term
II. Total asset to debt ratio: shows a relationship between total assets and
the long-term debts.
Total asset to debt ratio= total assets
Long term debts
III. Proprietary ratio: this establishes the relationship between
shareholder’s funds to assets of the firm. It is important for determining
long term solvency of the term. Also known as euity ratio or net worth
to total assets ratio.
Proprietary ratio= Equity
Significance: Higher the ratio, dependency on external sources and loans for
working capital will be less and financial condition of the organization will be
IV. Capital gearing ratio: it shows relationship between equity capital (
including reserves and undistributed profits) and fixed cost bearing
capital ( preference sharing capital, fixed interest bearing loans)
Capital gearing ratio= equity share capital+ reserves+ P&L balance
Fixed cost bearing capital
Significance: A high gearing will be beneficial to equity shareholders when rate of
interest/dividend payable on fixed cost bearing capital is lower than the rate of
return on investment in business.
V. Interest coverage ratio: also known as debt service ratio. This is
calculated by dividing net profit before charging interest and income tax
by ‘fixed interest charges’.
Interest coverage ratio= net profit before charging interest and income tax
‘Fixed interest charges’
Significance: This shows how many times the interest charges are covered by
profits available to pay interest charges. It is helpful in finding out whether the
business will earn sufficient
3. Turnover ratios/Activity Ratios: These ratios measures how well the
resources at the disposal of concern are being utilized. They are known as
turnover ratios as they indicate the rapidity with which the resources
available to the concern are being used to produce sales. In other words,
they measure the efficiency and rapidity of resources of the company like
stock, debtors, fixed assets, working capital, etc. They are generally
calculated on the basis of sales or cost of sales.
I. Stock turnover Ratio: a.k.a inventory ratio. This ratio indicates
relationship between cost of goods sold during the year and average
stock kept during that year.
Stock turnover ratio= cost of goods sold
Significance: This ratio indicates whether stock has been efficiently used or not. It
shows the speed with which the stock is rotated into sales or the number of times
the stock is turned into sales during the year. The higher the ratio, the better it is,
since it indicates that stock is selling quickly. In business, where the STR is high,
goods can be sold at a low margin of profit and even then, the profitability may be
II. Debtor’s turnover ratio: a.k.a receivable turnover ratio. This ratio
indicates relationship between credit sales and average debtors
during the year.
Debtors Turnover Ratio= Net credit sales
Average debtors + Average B/R
Significance: This ratio indicates the speed with which the amount is collected
from debtors. The higher the ratio, the better it is, since it indicates that the
amount from debtors is being collected quickly. A lower DTR will indicate the
inefficient credit sales policyof the management.
III. Creditors turnover ratio: This ratio indicates relationship between
credit purchases and average creditors during the year.
Creditors turnover ratio= Net credit purchases
Average creditors + Average B/P
Significance: This ratio indicates the speed with which the amount is being paid to
the creditors. The higher the ratio, the better it is, since it will indicate that the
creditors are being paid more quickly which increases the credit worthiness of the
IV. Fixed assets turnover ratio: This ratio indicates relationship between
costs of goods sold and fixed assets during a year.
Fixed assets turnover ratio= cost of goods sold
Net fixed assets
Significance: This ratio reveals how efficiently the fixed assets are being utilized. If
there is increase in ratio, it indicates that there is better utilization of fixed assets
and vice versa.
V. Working capital turnover ratio: This ratio indicates relationship
between sales and working capital.
Working capital turnover ratio=cost of goods sold or sales
Significance: This ratio reveals how efficiently working capital has been utilized in
making sales. In other words, it shows the number of times working capital has
been rotated in producing sales. A high working turnover ratio shows efficient use
of working capital and quick turnover of current assets like stock and debtor.
4. Profitability ratios: These ratios measure the profit earning capacity of the
company. Generally, profitability ratio is calculated in percentage (%).
I. Gross profit ratio: It shows relationship between gross profit and sales.
It shows margin of profit on sale.
Gross profit ratio= gross profit X 100
Significance: It reveals profit earning capacity of business w.r.t. its sales. Increase
in gross profit ratio indicates reduction in cost while decrease in gross profit ratio
will indicate increase in cost or sales at a lesser price.
II. Operating ratio: This ratio indicates the proportion that the cost of
goods sold bears to sales.
Operating ratio= cost of goods sold + operating exp. X 100
Significance: It is the measure of efficiency and profitability of the business. The
lesser is the ratio, the better it is because less operating ratio means higher net
III. Net profit Ratio: This ratio indicates relationship between net profit
and net sales
Net profit Ratio= Net profit X 100
Significance: It shows the operational efficiency of the business. Decrease in the
ratio indicates managerial inefficiency and excessive selling and distribution
expenses. Increase in it shows better performance.
5. Profitability ratios based on Investment: These ratios reflect the true
earning capacity of the resources employed in the enterprise.
I. Return on capital employed: It reflects the overall profitability of
the business. It is calculated by comparing the profit earned and the
capital employed to earn it.
Rate on capital = Profit before interest, tax and dividends X 100
Employed Capital employed
Significance: This ratio is a barometer of the overall performance which measures
how efficiently the capital employed in the business is being used.
II. Return on total shareholder’s fund: To calculate this, net profit after
interest and tax is divided by shareholder’s fund
Return on total = net profit after interest and tax
Shareholder’s fund Total shareholder’s funds
Significance: It reveals how profitably the proprietor’s funds have been utilized by
III. Return on Equity Shareholder’s funds: This ratio measures the
profitability of the funds belonging to the equity shareholders.
Return on Equity Shareholders funds-
= Net profit (after interest, tax & preference dividend X 100
Equity Shareholders funds
Significance: It measures how efficiently the equity shareholders’ funds are being
used in the business. The higher the ratio, the better it is, because in such case,
equity shareholders may be given a higher dividend.
IV. Earning per share: This ratio measures the profit available to the
equity shareholders on per share basis. All profits left after payment
of tax and preference dividend are available to equity shareholders.
Earning per share= Net profit – Dividend on preference share
Number of equity shares
Significance: It is helpful in the determination of the market price of the equity
share of the company. It is also helpful in estimating the capacity of the company
to declare dividends in equity shares.
1. Current ratio:
Interpretation: Ideal current ratio should be 2:1. So, we can say that the
company’s financial position is satisfactory and compared to 2012, the current
ratio of 2013 is less.
2. Quick ratio:
Interpretation:ideally, it should be 1:1. So, it can be concluded that company’s
financial position in 2013 is more sound compared to 2012.
3. Debt equity ratio:
Interpretation: ideally, it should be 1:1. So, it can be said that the organization’s
repayment capacity of long-term debts is same for both the years which is not
4. Total assets to debt ratio:
Interpretation:Total assets in both the years are more than sufficient to repay in
cash the total debts.
5. Proprietor’s ratio:
Interpretation: Since it is same for both the years, it can be concluded that the
financial condition of the company is sound.
6. Capital gearing ratio:
6. Interest coverage ratio:
Interpretation:from the findings, it can be said that the business will earn
7. Fixed assets turnover ratio:
Interpretation: it can be concluded that the fixed assets are not being utilized
properly since there is a decline in the ratio of 2013 compared to 2012.
9. Working capital turnover ratio:
Interpretation: since there is decrease in the ratio in 2013, it can be said that the
working capital has not been utilized efficiently in making sales.
10.Net profit ratio:
Interpretation: the decrease in ratio in 2013 implies managerial inefficiency and
excessive selling and distribution expenses.
11.Return on capital employed:
Interpretation: the capital employed in the business is not utilized properly as
there is a decline in the ratio in 2013.