Finance report on alembic pharmaceuticals


Published on


Published in: Economy & Finance, Business
1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Finance report on alembic pharmaceuticals

  1. 1. “FINANCIAL ANALYSIS OF A Project report submitted in the partial fulfillment of the requirement for the degree Submitted by: Nawaz Gazi (A Ashutosh Jha (A IInd year SCHOOL OF PHARMACY AND TECHNOLOGY MANAGEMENT A PROJECT REPORT ON ANALYSIS OF Alembic Pharmaceutical A Project report submitted in the partial fulfillment of the requirement for the degree (MBA Pharma tech) by: Submitted to: Nawaz Gazi (A-004) Dr. ASHOK PANIGRAHI Ashutosh Jha (A-015) Associate Professor SPTM SVKM’s NMIMS SCHOOL OF PHARMACY AND TECHNOLOGY MANAGEMENT (Shirpur Campus) Page | 1 ceutical LTD” A Project report submitted in the partial fulfillment of the requirement for the degree of Submitted to: Dr. ASHOK PANIGRAHI Professor SCHOOL OF PHARMACY AND TECHNOLOGY MANAGEMENT
  2. 2. Page | 2 CERTIFICATE This is certify that Mr. Nawaz Gazi & Mr Ashutosh Kumar worked during the period w.e.f. 10.03.2014 to 21.03.2014 on the development of the project “Financial analysis of Alembic Pharmaceutical Limited”, in the partial fulfillment of the requirement for the degree of MBA Pharma Tech under my guidance & supervision. To the best of my knowledge, the matter represented in this project is a bonafide & genuine piece of work. During his association with the project I found him to be sincere & motivated individual. He has shown keen interest in this project & him conduct was excellent. I wish him all success in his career. Place: Mumbai Date: 21-3-2014 Dr Chirayu R. Amin MANAGING DIRECTOR Alembic Pharmaceutical Ltd. Vadodara
  3. 3. Page | 3 DECLARATION We, Nawaz Gazi & Ashutosh Kumar are bonafied students of M.B.A.Pharma Tech at NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES. Our enrollment number are A004 &A015. I hereby declare that present summer internship report titled Account of assets is my original work. I conducted this study at Alembic Pharmaceutical LTD” during 10 March to 21March, 2014. This report has not been submitted earlier either with NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES and any other educational organization as an essential requirement for the award of any Diploma/ Degree. Date- 21/03/2014 Signature: - Nawaz Gazi Ashutosh Kumar
  4. 4. Page | 4 PREFACE Someone has rightly said that practical knowledge is far better than classroom teaching. During this project I fully realized this and I came to know about how a retailer chooses among a varied range of products available to him. The subject of my study is Financial Analysis of Alembic Pharmaceutical Ltd., which has slowly but steadily evolved from a beginner to a corporate giant earning laurels and kudos throughout. The report contains first of all brief introduction about the company. Finally there comes data presentation and analysis in the end of my project report. I also put forward some of my suggestion hoping that they will help Alembic Pharmaceutical Ltd. Move a step forward to being the very best.
  5. 5. Page | 5 ACKNOWLEDGEMENT We have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them. we are highly indebted to Ashok Panigrahi for their guidance and constant supervision as well as for providing necessary information regarding the project & also for their support in completing the project. we would like to express my gratitude towards my parents & member of SPTM for their kind co- operation and encouragement which help us in completion of this project. Our thanks and appreciations also go to my colleague in developing the project and people who have willingly helped us out with their abilities.
  6. 6. Page | 6 CONTENTS: 1. Introduction • Company profile • History • Future plans • Milestones • Board of directors 2. Awards 3. Achievements and Recognition 4. SWOT Analysis 5. STP and Competitors 6. Product Profile • Formulations • Others- API 7. Research and Development 8. Annual Report (2012-2013) • Balance Sheet • Profit and loss sheet 9. Financial Analysis • Introduction • Nature of financial analysis • Objective of financial analysis • Type of financial analysis 10. Ratio Analysis • Financial ratios • Utility of financial ratios • Advantages
  7. 7. Page | 7 • Role of financial ratios 11. Classification of Ratios • Liquidity ratios • Leverage ratios • Turnover ratios • Profitability ratios • Profitability ratios based on investment 12. Conclusion
  8. 8. Page | 8 INTRODUCTION Company Profile: Established in 1907,Alembic pharmaceutical LTD is leading pharmaceutical company in india. The company is vertically integrated with the ability to develop,manufacture and market pharmaceutical products,pharmaceutical substances and intermediates.Alembic is the market leader in the macrolides segment of anti-infective drugs in india.Alembic pharmaceuticals is asia’s most respected and integrated,commited to improving the quality of life and healthcare in over 75 countries. Alembic's manufacturing facilities are located in Vadodara and Baddi in Himachal Pradesh. The plant at Vadodara has the largest fermentation capacity in India. The Panelav facility houses the API and formulation manufacturing (both US FDA approved) plants. The plant at Baddi, Himachal Pradesh manufactures formulations for the domestic and non-regulated export market. The company has a state of the art Research Centre at Vadodara.
  9. 9. Page | 9 History: Alembic Pharmaceuticals Limited ( the Resulting C ompany ) was originally incorporated on 16th June, 2010 in the name and style 'Alembic Pharma Limited', under the Companies Act, 1956 and had received the Certificate of Commencement of business on 1st July, 2010. The company changed its name from Alembic Pharma Limited to Alembic Pharmaceuticals Limited and the Registrar of Companies, Gujarat has approved the change of name and issued a fresh certificate of incorporation consequent upon change of name on 12th March, 2011. 2012 Alembic and Breckenridge Announce Paragraph IV ANDA Litigation with Pfizer on Desvenlafaxine (Pristiq®). Alembic Pharmaceuticals Limited enters into a product development and license agreement with Accu-Break Pharmaceuticals, Inc, USA.
  10. 10. Page | 10 Future plans: To keep growth above the industry average rate is one of their targets. Like the entire industry, Alembic has to deal with threats like recession, slowing demand but this young brigade have the solutions. At Alembic we are focusing our efforts to improve processes and be more optimal in the way we work. Our goal is to increase the efficiency and curtail wasteful expenditure. We are quite confident that we will pass this global economic crisis without much problem and emerge much stronger." Group companies • Alembic Limited • Year Glass • Shreno Ltd. • Paushak Ltd. • Alchemy Real Estate
  11. 11. Page | 11 Milestones: • 1907 - Started manufacturing tinctures and alcohol at Vadodara. • 1940 ? Started manufacturing cough syrup, vitamins, tonics and sulphur drugs. • 1961 ? Lal bahadur Shastri inaugurates the Penicillin plant. • 1967 ? Bulk manufacturing of Vitamin B12. • 1971 ? Erythromycin manufactured for the first time in India. • 1972 ? Althrocin a brand of Erythromycin launched. • 1997 --Althrocin becomes top selling brand in India. • 1999 ? Alembic starts production of synthetic organic API. • 2000- gets ISO 14000 certification for its facilities at Vadodara. • 2001 ? Starts manufacturing of Cephalosporin C. • 2007 ? Acquisition of non ?oncology business of Dabur Pharma Ltd. • 2009 ? Addressed chronic therapies through multiple marketing divisions. • 2010 ? ANDA?s total filed 38. DMF total filed to 53 and get approval for 15. • 2013 ? Receives approval from the USFDA for its NDA, Desvenlafaxine Base Extended Release (ER) Tablets.
  12. 12. Page | 12 Board Of Directors: Name Designation Chirayu R Amin CEO Chirayu R Amin Chairman & Managing Director K G Ramanathan Director Milin Mehta Director Paresh Saraiya Director Pranav Amin President & Director Pranav N Parikh Director R K Baheti Dir-President & Com.Secretary R K Baheti Secretary R K Baheti Dir-President & Com.Secretary Shaunak Amin President & Director
  13. 13. Page | 13 AWARDS: FP APPROVAL FACILITY Audited On : Jan, 2008 May , 2010 Therapeutic Product Directorate (TPD) Audited On : Sep,Oct - 2004 Audited On : Sep, Oct - 2004 May , 2010 March - 2010 Audited On : July - 2007 Audited On : May - 2004 API-P1 APPROVAL
  14. 14. Page | 14 Audited On : Nov, Dec - 2004 March - 2008 Audited On : Jan - 2005 Jan - 2008 Audited On : May - 2005 German Regulatory authority Audited On : Dec - 2006 Audited On : May - 2004
  15. 15. Page | 15 SWOT Analysis: SWOT Analysis Strength 1. Strong growth in emerging market business 2. Azithral and Roxid are famous branded formulations of this company 3.Total no. of employes are near about 7000 5. Strong brand presence in India Weakness 1. It is heavily dependent upon generics for its revenue generation 2. Constantly regulated policies by the govt means operational efficiency is affected Opportunity 1. They can leverage their acquisitions to further increase the growth 2. They can increase their presence in contract manufacturing 3. Increasing healthcare awareness in India Threats 1. There is growing competition in generics market 2. Stringent patent regulations 3. High price sensitivity of consumers
  16. 16. Page | 16 STP and Competitors: STP Segment Antibiotics & Antibacterials, Cough & Cold Cardiovascular Antihistamines Gynacological Ortho Gastrointestial Anti Diabetic Ophthalmologicals Urology Others Target Group Healthcare professionals, pharmacists Positioni ng They are international specialty pharma company with strong presence in Indian ,US and cannada Competition Competitors 1. Cipla 2. Lupin pharmaceuticals 3. Aurobindo Pharma 4. Dr. Reddy’s laboratories
  17. 17. Page | 17 PRODUCT PROFILE: Product profile API's continue to make up a significant part of the operations for Alembic Pharmaceuticals Limited. The fermentation based APIs are manufactured at its main manufacturing facility exceeding 3 million This ISO-9002 & ISO14001 accredited facility also houses the central R&D (microbial & Chemical) set-up and Quality Assurance activity. Anti Infectives • Azithromycin Dihydrate • Azithromycin Monohydrate • Clarithromycin • Erythromycin base • Linezolid • Roxithromycin Cardio-Vascular • Bosentan Hcl • Metoprolol Succinate
  18. 18. Page | 18 • Candesartan Cilexetil • Clonidine Hydrochloride • Clopidogrel Bisulphate • Fenofibrate • Fenofibric Acid • Hydrochlorothiazide • Irbesartan • Lercanidipine Hcl • Losartan Potassium • Metoprolol Tartrate • Mexiletine Hydrochloride • Olmesartan Medoxomil • Prasugrel Hcl • Telmisartan • Valsartan (VAE) • Warfarin sodium amorphous • Warfarin Sodium Clathrate Central Nervous System • Aripiprazole • Bupropion Hydrobromide • Bupropion Hydrochloride • Des Venlafaxine Base • Donepezil Hydrochloride • Duloxetine Hydrochloride • Lamotrigine • Levetiracetam • lloperidone • Moclobemide • Modafinil • O-Desmethyl Venlafaxine Succinate • Pramipexole Dihydrochloride monohydrate • Pregabalin • Quetiapine Fumarate • Rivastigmine Tartrate • Ropinirole Hydrochloride • Topiramate
  19. 19. Page | 19 • Memantine Hydrochloride • Meprobamate • Venlafaxine Hydrochloride (Form B) (VSB) • Venlafaxine Hydrochloride (Form C) Musculoskeletal • Alendronate Sodium • Celecoxib • Leflunomide Erectile Dysfunction • Tadalafil Gastro-Intestinal • Rabeprazole Sodium
  20. 20. Page | 20 Formulations: extensive range of finished dosage formulations cover every aspect of human life.asket of formulations contain more than 150 products in several forms belonging to diverse therapeutic segments from anti-infective, cough & cold products to cardiovascular and oral anti-diabetics. The manufacturing expertise is available for almost all dosage forms including sterile as well as non sterile products. Formulations which account for 65% of the total business today has manufacturing facility at three different places; namely Vadodara & Panelav at Gujarat in the west & Baddi at Himachal Pradesh in the north. The facility at Panelav enjoys certifications from international regulatory authorities like MHRA (UK), MCC (South Africa). The formulation business has crossed the boundaries of India and is well spread to many other countries in overseas. Thus, there are three wings of formulation business. International Spread over 75 countries, Alembic Pharmaceuticals is one of the most integrated and robust pharmaceutical companies across the globe. The Company's international network drives its mission of providing access to the best healthcare products at competitive prices to the people of most remote countries. Domestic Alembic Pharmaceuticals presents an extensive range of branded and generic formulations, in compliance with international and national regulations, that cater to diverse therapeutic segments.
  21. 21. Page | 21 Herbal Nutraceuticals Alembic Pharmaceuticals Limited has been in the Nutraceuticals business for 50 years. In order to cater to the changing needs of world Nutraceuticals, the Company has constantly been adding products with their improvised therapeutic profile. Research and Development: Research and Development is a part of their strategy to become an integrated pharmaceutical industry. they believe R&D is of critical importance in our need to grow in the area of biotechnology and original drug research. Have very specific programs in • Process Development (Synthetic Drug Development) • Fermentation Research • Formulations Development • New Drug Delivery Systems
  22. 22. Page | 22 Process Development (Synthetic Drug Development) The key objectives has been to develop indigenous processes for new drugs introduced in the developed countries, produce and introduce them in India and promptly supply them to non- regulatory markets. Secondly, their emphasis will be on the development and commercialization of generic Active Pharmaceutical Ingredients in line with domestic and international regulatory and quality requirements. their research efforts are geared to develop innovative (patentable/non-infringing) and cost-effective process know-how for the production of leading APIs and intermediates that are going off patent shortly. For which, they have identified semi-synthetic Macrolides, semi- synthetic Cephalosporins and certain other products in non-antibiotic therapeutic areas. Formulations Development The aim here is to devise formulations and dosage forms for new drugs to be introduced and to make variants of particular dosage forms. Another objective is to introduce drug combinations by understanding the mechanism of the interaction and the combined effects in increasing intensity of response, in decreasing untoward actions and in altering absorption. The therapeutic range covers Antibiotics, Analgesics, Antihistamines, Antihypertensives, Antidiabetics, Vitamins, Antioxidants, NSAIDs, Psychotropic and Nutritional products.
  23. 23. Page | 23 New Drug Delivery Systems The development of new delivery systems like liposomes, nanoparticles and controlled drug delivery systems to ensure better compliance, less total drug, efficiency in treatment and economy. As the global economy is on a path of recovery, our thrust continues to be a research driven company. Low product costs and intellectual property are going to be the most definitive drivers in the international generics market for Alembic Pharmaceuticals. We have proven excellence in this regard. Based at Vadodara, India (250 miles north of Mumbai) Alembic Research Centre (ARC) is the research and development division of Alembic Pharmaceuticals Limited, one of India's reputed, well-established and integrated pharmaceuticals company.
  24. 24. Page | 24 Alembic ANNUAL REPORT (2012-2013) Balance Sheet of Alembic Pharmaceuticals ------------------- in Rs. Cr. ------------------- Mar '13 Mar '12 Mar '11 12 mths 12 mths 12 mths Sources Of Funds Total Share Capital 37.70 37.70 11.00 Equity Share Capital 37.70 37.70 11.00 Share Application Money 0.00 0.00 26.70 Preference Share Capital 0.00 0.00 0.00 Reserves 422.06 323.16 238.51 Revaluation Reserves 0.00 0.00 0.00 Networth 459.76 360.86 276.21 Secured Loans 70.11 99.89 181.85 Unsecured Loans 70.53 134.43 146.05 Total Debt 140.64 234.32 327.90 Total Liabilities 600.40 595.18 604.11
  25. 25. Page | 25 Mar '13 Mar '12 Mar '11 12 mths 12 mths 12 mths Application Of Funds Gross Block 572.46 462.89 433.52 Less: Accum. Depreciation 228.24 195.08 161.54 Net Block 344.22 267.81 271.98 Capital Work in Progress 32.26 62.19 26.50 Investments 3.35 3.35 3.35 Inventories 266.83 258.74 219.23 Sundry Debtors 232.38 186.83 201.97 Cash and Bank Balance 4.25 2.68 1.25 Total Current Assets 503.46 448.25 422.45 Loans and Advances 115.38 205.37 133.07 Fixed Deposits 0.00 23.05 0.04 Total CA, Loans & Advances 618.84 676.67 555.56 Deffered Credit 0.00 0.00 0.00 Current Liabilities 330.16 373.81 205.11 Provisions 68.12 41.05 48.18 Total CL & Provisions 398.28 414.86 253.29
  26. 26. Page | 26 Net Current Assets 220.56 261.81 302.27 Miscellaneous Expenses 0.00 0.00 0.00 Total Assets 600.39 595.16 604.10 Contingent Liabilities 32.25 36.38 35.66 Book Value (Rs) 24.39 19.14 45.36
  27. 27. Page | 27 Profit & Loss account of Alembic Pharmaceuticals ------------------- in Rs. Cr. ------------------- Mar '13 Mar '12 Mar '11 12 mths 12 mths 12 mths Income Sales Turnover 1,501.39 1,380.82 1,169.52 Excise Duty 8.75 10.63 14.30 Net Sales 1,492.64 1,370.19 1,155.22 Other Income 3.93 8.78 6.20 Stock Adjustments -21.34 64.44 4.72 Total Income 1,475.23 1,443.41 1,166.14 Expenditure Raw Materials 653.27 715.92 572.20 Power & Fuel Cost 26.66 29.57 24.58 Employee Cost 193.79 168.46 149.21 Other Manufacturing Expenses 5.10 24.96 22.05 Selling and Admin Expenses 0.00 266.53 223.53 Miscellaneous Expenses 348.72 16.62 13.41 Preoperative Exp Capitalised 0.00 0.00 0.00 Total Expenses 1,227.54 1,222.06 1,004.98 Mar '13 Mar '12 Mar '11
  28. 28. Page | 28 12 mths 12 mths 12 mths Operating Profit 243.76 212.57 154.96 PBDIT 247.69 221.35 161.16 Interest 14.57 37.55 29.25 PBDT 233.12 183.80 131.91 Depreciation 34.96 33.65 29.59 Other Written Off 0.00 0.00 0.00 Profit Before Tax 198.16 150.15 102.32 Extra-ordinary items 0.00 0.00 0.00 PBT (Post Extra-ord Items) 198.16 150.15 102.32 Tax 40.71 29.62 20.83 Reported Net Profit 157.44 120.54 81.51 Total Value Addition 574.26 506.14 432.78 Preference Dividend 0.00 0.00 0.00 Equity Dividend 47.13 26.39 18.85 Corporate Dividend Tax 8.01 4.28 3.06 Per share data (annualised) Shares in issue (lakhs) 1,885.16 1,885.16 550.00 Earning Per Share (Rs) 8.35 6.39 14.82 Equity Dividend (%) 125.00 70.00 50.00 Book Value (Rs) 24.39 19.14 45.36
  29. 29. Page | 29 FINANCIAL ANALYSIS Introduction: • 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 give 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 statements” --- John N. Myer
  30. 30. Page | 30 • “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
  31. 31. Page | 31 To determine the debt capacity of the firm To decide about the future prospective of the firm Types of Financial Analysis • Financial analysis may be classified into different categories dependency upon The material used The method of operation followed in the analysis Graphical representation Financial Analysis The material used the method of operation followed in the Analysis Internal External Horizontal Vertical Analysis Analysis Analysis Analysis
  32. 32. Page | 32 Ratio Analysis Financial ratio: 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 not obvious from the row data. Some uses financial ratios are following: (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 ratios. (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 current- obligation. • Overall operating efficiency and performance of the firm. • Efficiency with which firms is utilizing its various assets in generating sales Revenue. • 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.
  33. 33. Page | 33 • 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 analyzed 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 a more easy and understandable manner by the use of ratios the information contained in a financial statements conveyed in a meaningful manner to the
  34. 34. Page | 34 one for the 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
  35. 35. Page | 35 Short-term Solvency 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 performances.
  36. 36. Page | 36 Classification of ratios: Ratio analysis Liquidity ratio Current ratio Liquid ratio Leverage ratio Debt equity total assets Proprietary Capital Interest Ratio to debt ratio Gearing coverage Turnover ratio Stock Debtors Creditors Fixed assets working capital Turnover turnover turnover turnover turnover Profitability ratio 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 employed
  37. 37. Page | 37 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 current liabilities Significance: Ideal current ratio is 2:1. A very high ratio indicates availinility 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 current liabilities.
  38. 38. Page | 38 Significance: Liquid ratio of 1;1 is considered satisfactory. If quick assets are equal to current liabilities, then the concerm maybe able to meet its short term obligations. 1. 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 organzation’s repayment capacity of long term debts. II. Total asset to debt ratio: shows a relationship between total assets and the longterm debts. Total asset to debt ratio= total assets long term debts
  39. 39. Page | 39 III. Proprietory 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. Proprietory ratio= equity total assets Significance: Higher the ratio, dependency on external sources and loans for working capital will be less and financial condition of the organization will be sound. 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’.
  40. 40. Page | 40 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 2. 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 Average stock 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 quite high.
  41. 41. Page | 41 II. Debtors 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 are 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 firm. IV. Fixed assets turnover ratio: This ratio indicates relationship between cost 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.
  42. 42. Page | 42 V. Working capital turnover ratio: This ratio indicates relationship between sales and working capital. Working capital turnover ratio= cost of goods sold or sales Working capital 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 efiicient use of working capital and quick turnover of current assets like stock and debtor. 3. 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 sales. Gross profit ratio= gross profit X 100 Net sales 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.
  43. 43. Page | 43 Operating ratio= cost of goods sold + operating exp. X 100 Net sales 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 profit. III. Net profit ratio: This ratio indicates relationship between net profit and net sales Net profit ratio= Net profit X 100 Net sales 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. 4. 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.
  44. 44. Page | 44 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 the firm 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.
  45. 45. Page | 45 Financial Ratios Liquidity Ratios Year 2012 2013 Current ratio = 676.67/414.8 6 = 1.69 618.84/398.2 8 = 1.59 Quick Ratio = 676 – 258.74/414.8 6 =1.01 618.84 – 266.83/398.2 8 = 0.88 Interpretation: Current Ratio: An ideal current ratio should be 2:1, which denotes that the current assets of a business should at least be twice of its current liabilities. Current ratio of Alembic is not satisfactory but still for year 2012 is better than 2013. Quick Ratio: An ideal liquid ratio should be 1:1, which is usually considered satisfactory. Quick ratio of Alembic Ltd. is satisfactory for year 2012.
  46. 46. Page | 46 Activity ratios (Efficiency Ratios) Year 2012 2013 Proprietary Ratio = 360.86/595.16 = 0.61 459.76/600.39 = 0.76 Capital Gearing Ratio = 676.67/414.86 = 1.69 618.84/398.28 = 1.59 Net Profit Ratio = 120.54/1370.19 = 0.08 157.44/1492.64 = 0.105 Interest on Coverage Ratio = 150.15+37.55/37.55 = 4.99 198.16+14.57/14.57 = 14.60 Return on Capital Employed = 150/294.32+360.86 = 0.25 198.16/140.64+459.76 = 0.33 Fixed Asset Turnover Ratio = 1370.19/462.89 = 2.96 1492.64/572.46 = 2.60 Interpretations: Proprietary Ratio: An ideal value of this ratio should be 1:1, here for Alembic Ltd. proprietary ratio is not satisfactory but still for year 2013 is better than 2012. Capital Gearing Ratio: An ideal value of capital gearing ratio should be 1:1, which means it establishes ideal relation between equity capital and fixed cost bearing capital. Here for Alembic Ltd. this ratio is satisfactory and 2012 is better than 2013. Net Profit Ratio: The increase in net profit ratio shows better performance of the company and here for year 2013 is 10.50% where for year 2012 is 8% so 2013 is better.
  47. 47. Page | 47 Interest on Coverage Ratio: An interest coverage ratio of 6 to 7 times is considered appropriate. Here for Alembic in year 2013 is approx 15 times so it is more than satisfactory. Return On Capital Employed: Efficiently the capital employed in the business is being used and the higher value shows better performance of company and here for Alembic Ltd. in year 2013 is 33% which is higher than 2012 (25%), and shows satisfactory performance than 2012. Fixed Asset Turnover Ratio: For Alembic Ltd. this ratio is approx. 3 times for both the year and it shows satisfactory condition. It’s value shows increase or decrease shows how efficiently fixed assets used. Debt Ratios (Leveraging Ratios) Year 2012 2013 Debt Equity = 234.32/360.86 = 0.64 140.64/459.76 = 0.30 Total Assset to Debt = 595.16/234.32 = 2.54 600.39/140.64 = 4.26 Interpretations: Debt Equity Ratio: An ideal debt equity ratio should be 1:1, which is considered as satisfactory. Here of Alembic Ltd. company ratio is not satisfactory but still for year 2012 is far better than 2013. Total Assets to Debt: An ideal total asset to debt ratio should be 1:1, The higher the level of long term debt, the more important it is for a company to have positive revenue and steady cash flow. Here for Alembic Ltd. this ratio is more than satisfactory in year 2013 than 2012.
  48. 48. Page | 48 Conclusion From the various study of balance sheet, profit loss account and different ratios we can conclude that company’s both short term and long term financial health is in good condition. Thus from the above study we can say that company’s financial condition is optimum and it is expected to rise in the future as company is expanding day by day with new tie-ups. Hence company’s future holds good and is expected to reach new heights in the future.