Professional Documents
Culture Documents
1.1:
A good financial analysis would help to identify the strengths and weaknesses of a
Company and allow making more informed management decisions. The company
will be able to improve their financial image thereby enhancing their chances when
applying for a bank loan for financing various activities. Also it will be able to
identify and correct performance problems before they have a major impact on the
business.
Ratio analysis is one of the techniques available to analyze the financial performance
of a company. It helps indicate the strengths and weakness of the company and
1
facilitate comparison with similar firms in the same industry. There are various ratios
available for measuring a particular aspect each having a significant meaning. Though
ratio analysis enable to analyze the firms financial performance it too has some
limitations. This technique has been applied to the financial data of Geno
Pharmaceuticals. It has indicated that the firm enjoys a good liquidity position,
manages its assets well and is not highly leveraged.
Financial analysis of the company was done by calculating ratios. Data was collected
through annual reports given by the company and information given by the company
employees.
COMPANY PROFILE
2.1: History
Geno has been the pioneer and leader in Anti Migraine, Anti Vertigo and family health
pharmaceutical products in India. Over the years, Geno Pharmaceuticals Ltd. has built
strong brands, which include Cypon, Vertigon, Vertidom, Myolaxin and many more.
The Company has recently set up a separate division, Mother Nature, dealing with
products like Hoodia Fit for natural weight loss, Nutrijoint and Nutrijoint Plus which
effectively help in reducing the pain in joints and slowing the progression of arthritis.
The company's formulations are produced by well trained and expert Pharmacists who
are obsessed with a passion for excellence and adhere scrupulously to current Good
Manufacturing Practices. The Plant is equipped to manufacture a complete variety of
formulations in the dosage forms of Tablets, Liquid Orals, Hard gelatin Capsules,
Topical Ointments, Small Volume Parenterals, Otics, etc.
The Plant was commissioned in the Year 1979 and since then has been producing
entire requirement of the Company as well as manufacturing products for other
Companies on Contract manufacture or Loan License basis.
Geno Pharmaceuticals Ltd. is WHO GMP certified with a modest quality assurance
laboratory which guarantees uniformity and very high standards of quality in the
products manufactured. At the company, they follow the latest quality control and
assurance procedures that ensure consistent high quality finished products.
Quality Policy:
Geno Pharmaceuticals Ltd. quality statement states that they believe in human growth
and organizational effectiveness. They are committed to meet customer requirements
by offering consistent quality of their product. They believe that their people are their
assets and work hard to imbibe quality culture in the organization.
Geno also supports and develops vendors to meet their quality requirements. High
quality standards and good manufacturing practices followed in the production
process merited Geno with WHO-GMP accreditation since April 1999. In its quest for
pursuing GMPs, the entire plant has been renovated to meet the quality standards
prescribed under revised Schedule M of Drugs & Cosmetic Rules 1945. This covers
clean, filtered air and water, hygienically checked/protected man-power and quality
controlled inputs going in the manufacture of these products because of which the
Company has been able to deliver world class quality standard products. It has its own
testing laboratory complying with revised+ Schedule M standards operated by skilled
& FDA approved expert staff.
Geno's strong point has been its product portfolio accustomed to the market needs. Its
innovation of multi ingredient drugs offers definite leverage in tackling the
multiplicity of factors confronting every clinician. This focus on product quality has
earned the company esteem and reliance of the medical fraternity as well as
consumers.
In its list of customers in the medical fraternity there are approximately 70,000
Doctors from all over India and Nepal out of which nearly 50,000 are consultants and
20,000 doctors are general practitioners. The company's focus is mainly directed to
50,000
consultants
who
comprise
of
cardiologists,
consultant
physicians,
In India and Nepal they have presence in all states, all districts, all sub-divisional
towns and majority of the villages as with their product basket they can reach to any
doctor and every doctor. For cardiologists and senior physicians they have two strong
brands (acceptance level is high but not volume level) one is high ceiling loop diuretic
(they are the only Company in India who manufacture 100mg. frusmide tabs.) and the
other is potassium sparing diuretics containing frusemide 40 mg. + amiloride
hydrochloride I.P 5 mg. and these two brands are exclusive in nature.
CMARC has ranked Geno at 66th position in the list of the first 90 pharmaceutical
companies of India. Some of the company's products have already become household
names in different parts of the country or have achieved leadership position in their
class of products.
Geno's formulations are well accepted in several other countries too. After the export
of some modest quantities of its products, the company has embarked upon an
aggressive programmes of exporting its products to several countries from which
there are enqumes and demand for its formulations.
Geno Pharmaceuticals Ltd. has finalized tie ups with highly reputed pharmaceutical
importers and distributors in Africa, Central America, CIS and the South East Asia to
market its products. The company has a well equipped Regulatory Affairs Department
to cater to the registration requirements of the Ministries of Health/FDA/Regulatory
authority and is in the process of registering 120 registration profiles with health
authorities of various countries.
(i)
Sales:
The sales of the Company for the last eight years are depicted in the following figure 2.1
a high increase in sales in 2006-07 due to the introduction of new products, expansion
in market networks and exports.
(ii) Profits:
The profits of the Company have shown an increasing trend as seen in figure 2.2. The
decreases in the profits were mainly due to a fall in the sales turnover of the
Company. In the year 2002-03 the Company earned the least profit in the third and
fourth quarter as traders all over India particularly in the eastern region stopped
buying goods as a protest against uncertainties over V AT implication. In 2003-04 the
Company earned good profits due to better product mix and the cost control measures
adopted by the company.
(iii)
The earnings to the shareholders have shown an increasing trend over the last eight
years which is a good sign. The EPS of the Company for the last eight years is shown
below in figure 2.3. It started with a poor rate of Rs.l.24 in 2000 to a high rate of Rs.
8.99 in 2006-07.
10
The Net worth of the company too has shown an upward trend. It has increased from
Rs. 568.77 lakhs during 1999-00 to Rs. 1083.891akhs in 2006-07.
Figure 2.4: Net Worth of the Company over the last eight years
(iv) Assets:
The figures 2.5 and 2.6 show the percentage of assets owned by the Company during
the year 2006-07.
11
Figure 2.5 depicts that a major chunk of the total assets of the Company comprised of
the current assets i.e. almost 63 % of the total assets while fixed assets accounted for
around 25 % of the total assets during 2006-07. The least asset comprise of
investments which amounts to just 0.13 % in relation to the total assets. Among the
current assets as seen in figure 2.6, 41 % accounted for inventories, 28 % for debtors
while around 14 % cash and bank balances. Its inventories mainly consist of raw
materials, packing materials, work-in-progress, finished goods and goods in transit.
(v)
Liabilities:
The total liabilities of the Company during the year 2006-07 are depicted in the
following figure 2.7. A major chunk of the liabilities belonged to secured and
unsecured loans required for funding business operations.
12
Geno Pharmaceuticals Ltd. began operations in the year 1975. Its mission is to
provide pharmaceutical products of the highest quality that improves lives. It believes
in quality and adopts good manufacturing practices. It has around 22 C&F Agents that
facilitate easy sales and has its own market representatives all over India. It has been
ranked number 66 among the first 90 pharmaceuticals companies all over India.
During the year 1999 it has secured WHO accreditation for all its products being
manufactured in its plant at Karaswada, Tivim Industrial Estate, Goa. This has helped
the Company to be in a better position to bid for the export business. Over the years
the company has been able to build up some good brands that are demanded not only
domestically but also internationally. Geno has also obtained the ISO 9001:2000
certification during the year 2007 -08.
13
OBJECTIVES
i.
ii.
iii.
To find out the liquidity position of the company with the help of current ratios
14
RESEARCH METHODOLOGY
(a)
Period of internship:
The time period of the study for financial analysis was limited to two months at Geno
Pharmaceuticals Ltd, Karaswada, Tivim, Mapusa Goa. The study has been
conducted in the Accounts Department of the company from June 2 2008 to August 1,
2008.
The study has been carried out with the help of published financial statement of Geno
Pharmaceuticals Ltd. for a eight years period from 1999-2000 to 2006-2007
The data collected and used in the project has been acquired from various sources
each being classified into either primary or secondary data.
(i)
Primary Data:
Primary data refers to first hand data collected at its origin. The project being a study
on financial analysis it was essential to have personal interactions with their Company
staff at the Accounts Department.
15
(ii)
Secondary Data:
This refers to data already existing or published. In order to carry out the study data
has been collected from various sources like:
The internet.
There are various techniques available to carry out financial analysis of a Company.
Ratio analysis, an element in financial management, would be used in this financial
analysis exercise. To have a better understanding of data, pictorial depictions of data
with the help of graphs have been used.
16
DATA ANALYSIS
This chapter deals with ratio analysis for the purpose of evaluating the financial
performance of a company. It includes the meaning of ratio analysis, its significance,
the various types of ratio's and also the limitations to ratio analysis. It also includes
the application of these ratios to the financial data of the company.
5.1: Meaning
17
A ratio analysis transforms accounting numbers into meaningful ratios that highlight
strengths and weaknesses of a business. Financial ratios are one of the most common
tools of managerial decision making. It involves the comparison of various figures
from the financial statements in order to gain information about a company's
performance. It is the interpretation, rather than the calculation, that makes financial
ratios a useful tool for business managers. Ratio analysis helps to check whether a
business is doing better this year than the last year; and also tell if the business is
doing better or worse than other businesses in the same industry. The level and
historical trends of these ratios can be used to make inferences about a company's
financial condition, its operations and attractiveness as an investment.
The benefit of ratios is that in comparison they remove the effects of scale, inflation
and foreign currency. Thus they can be easily generated and applied. There are many
financial ratios commonly used to analyze financial statements. Some of these are
"key" ratios that are significant and frequently used. The others are useful in
performing a comprehensive analysis of financial statements.
1.
2.
analysis).
18
3.
standard may be either the ratio which represents the typical performance of the trade
or industry, or the ratio which represents the target set by Management as desirable for
the business.
There are various types of ratios each having its own meaning. They help to evaluate
different aspects of a firm like its liquidity position, its profitability, how it manages
its assets etc. The ratios have been divided in four categories namely; liquidity,
profitability, asset management and leverage. The various types of ratios analyzed
have been explained and computed below. The computation of various ratios has been
shown in the annexure.
Liquidity ratios measure the ability of a company to repay its short-term debts and
meet unexpected cash needs. The current liabilities represent obligations of the firm
that are typically due in one year or less. Liquidity refers to the ability of a firm to
meet its short-term financial obligations as when they fall due. The main concern of
liquidity ratio is to measure the ability of the firms to meet their short-term maturing
obligations. Failure to do so will result in the total failure of the business, as it would
be forced into liquidation. A company may be profitable but if it fails to generate
19
enough cash to settle its liability it is said to be insolvent. The liquidity ratios are used
to indicate the soundness of the current financial state of a business.
The current ratio and the quick ratio are used to gauge a firms liquidity position.
(i)
Current Ratio:
The Current Ratio expresses the relationship between the firm's current assets and its
current liabilities. This compares assets which will become liquid within
approximately twelve months with liabilities which will be due for payment in the
same period and is intended to indicate whether there are sufficient short term assets
to meet the short- term liabilities. Current assets normally include cash, marketable
securities, accounts receivable and inventories. Current liabilities consist of accounts
payable, short term notes payable, short-term loans, working capital loans, accrued
income taxes and other accrued expenses (wages).
Recommended current ratio is 2: 1. Any ratio below indicates that the entity may face
liquidity problem but also a ratio over 2: 1 and above indicates over trading, that is the
entity is under utilizing its current assets. Such a ratio however may vary according to
the industry. One drawback of the current ratio is that inventory may include many
items that are difficult to liquidate quickly and that have uncertain liquidation values.
As liquidity is the ability to turn an asset into cash at or near fair market value,
inventory that is not easily sold will not be helpful in meeting short term obligations.
The quick ratio is an alternative measure of liquidity that does not include inventory
in the current assets.
Current Ratio = Current Assets / Current Liabilities
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(ii)
Quick Ratio:
The quick ratio is also called as the acid test ratio. Quick assets are defined as cash,
marketable (or short-term) securities, and accounts receivable and notes receivable,
net of the allowances for doubtful accounts. These assets are considered to be very
liquid (easy to obtain cash from the assets) and therefore, available for immediate use
to pay obligations. The acid-test ratio is calculated by dividing quick assets by current
liabilities.
The traditional rule of thumb for this ratio has been 1: 1. Anything below this level
requires further analysis of receivables to understand how often the company turns
them into cash. It may also indicate that the company needs to establish a line of
credit with a financial institution to ensure the company has access to cash when it
needs to pay its obligations.
The above mentioned ratios have been used to analyze the liquidity position of Geno
Pharmaceuticals Ltd. The table 3.1 shows the liquidity position of the company for
the period of eight years (1999-2000 to 2006-07).
21
The figure 3.1 clearly indicates a satisfactorily liquidity position of the company. The
ideal Current ratio is 2: 1. However for the pharmaceuticals industry an ideal current
ratio is anything above 1.15: 1. The current ratio has remained fairly stable from
199900 to 2002-03. However since 2003-04 it has shown a decreasing trend. It started
with 1.42 in the year 1999-00 and dropped down to just 1.19 in the year 2006-07.
However it has been above 1.15 indicating a satisfactory position. Almost the same
trend is observed in the case of quick ratio also. For the last eight years it has been
below the standard level of 1: 1 which is not a good indicator. This indicates that the
company relies heavily on its inventory to payoff its current liabilities. Thus the firms
current and quick ratios suggest that the company has to improve its liquidity position
so as to avoid liquidity problems. The firm has a low ratio as the current liabilities
amount are huge which include amount availed from bank for working capital loans
and which is shown under secured loans in schedule C to the balance sheet (annexure
22
to balance sheet). It also includes amounts repayable within a year in respect of term
loans availed by the company.
These ratios are used to measure the financial performance of the business. The types
of ratios most often used and considered by those outside a firm are the profitability
ratios. Profitability is the ability of a business to earn profit over a period of time.
Without profit, there is no cash and therefore profitability must be seen as a critical
success factor. A company should earn profits to survive and grow over a long period
of time. Profitability is a result of a larger number of policies and decisions. The
profitability ratios show the combined effects of liquidity, asset management (activity)
and debt management (gearing) on operating results. The following are the various
profitability ratios available:
(i)
This ratio indicates the business's ability consistently to control its production costs or
to manage its margin it makes on products its sells. Normally the gross profit has to
rise proportionately with sales. The Gross profit is the difference between the sales
and the cost of goods sold of the company. This ratio is calculated with the help of the
following formula:
Gross Profit Margin = Gross Profit / Sales Genos gross profit margin has been
shown in the following figure 3.2
23
The figure showed a decreasing trend in gross profit margin during the years 1999-00
to 2002-03. The possible reason for such a fall could have been that the stock needed
to be examined or that the selling prices didn't increase with the rise in the cost of
sales. The gross margin trend shows that the margin remained fairly stable over time
with slight improvement to 10 % in the year 2003-04. This indicates that the rate in
increase in cost of goods sold are less than rate of increase in sales, hence the
increased efficiency. This was because the company had registered a growth of 22 %
in its sales during the year 2003-04. After 2003-04, however the gross profit margin
shows a relatively stable trend where the margin settled at around 7 %.
24
(ii)
The net profit margin indicates how much of each rupee sales is left for the owner
after all the costs have been met. This is a widely used measure of performance and is
comparable across companies in similar industries. To arrive at the net profit margin
the following equation is used:
The net profit margin of the company has been computed and shown in the following
figure 3.3 and in table 3.3 in annexure.
As seen in the figure 3.3 the net profit margin of the company has increased from
around 2% in 1999-00 to 5% in 2006-07. The profit margin was the least in the year
2002-03 since the company's sales fell in the third and fourth quarter due to a protest
against uncertainty over VAT implementation by all the traders all over India
particularly in the eastern sector who stopped buying goods. As a result of a drop in
25
sales the net profit too of the company decreased. However due to a focused sales
promotional strategy and the introduction of new products the company was able to
increase its sales and thus its net profit. Since 2003-04 the profit margin shows an
increasing trend. This increasing trend is a good sign from the investors' point of view
indicating that the company has a good profitability position.
(iii)
This ratio indicates how profitable a company is relative to its total assets. Return on
assets (ROA) measures how effectively the firm's assets are used to generate profits
net of expenses. It is calculated by dividing the net profit by the total assets. The rate
of return on total assets indicates the degree of efficiency with which management has
used the assets of the enterprise during an accounting period. The ROA is calculated
as below:
The ROA of the Company for the last eight years is shown in the table 3.4. The same
has been portrayed in following graph 3.4
26
From the above graph it can be seen that the percentage of return on total assets of the
company shows an increasing trend from 2.89% in 1999-00 to 10.24% in 2006-07.
The return on assets in the year 2002-03 plunged the lowest to 1.48% due to a fall in
the net profits. The return on the assets has not been satisfactory in the first four years
however later after 2003-04 it has improved considerably. This indicates that the
management of the company has been efficiently utilizing its assets base.
The return on equity is a profitability ratio that measures how much the shareholders
have earned on their investment in the company. This ratio is calculated as follows:
27
The return on equity ratio has been computed for the eight year period and shown in
table
3.5
and
the
same
has
also
been
depicted
in
figure
3.5.
From the above figure 3.5 it can be observed that the trend of return on equity of the
company for the last eight years is an increasing one. The return on equity increased
from 14 % in 1999-00 to 38 % in the year 2006-07. There has been a significant
increase in the ratio since 2003-04. The possible reason for such a low ratio could be a
28
decrease in sales leading to a decrease in the net profits. Such a rising trend indicates
that the management has become more efficient in utilizing its equity base and a
better return to the investors. Therefore the profitability to the shareholders is quite
strong.
These ratios serve as a guide to critical factors concerning the use of the firms' assets,
inventory and accounts receivables collections in day-to-day operations. Asset
Management ratios are especially important for internal monitoring concerning
performance over multiple periods serving as warning signals or benchmark from
which meaningful conclusions may be reached on operational issues.
If a business does not use its assets effectively, investors in the business would rather
take their money and place it somewhere else. In order for the assets to be used
effectively, the business needs a high turnover. Unless the business continues to
generate high turnover, assets will be idle as it is impossible to buy and sell fixed
assets continuously as turnover changes. Activity ratios are therefore used to assess
how active various assets are in the business. There are various ratios that fall under
this category which are as follows:
29
(i)
1.
2.
The inventory turnover ratio measures the number of times the company sells its
inventory during the period. It is calculated by dividing the cost of goods sold by
inventory. The inventory turnover ratio of the company has been computed in table
3.6 and shown in figure 3.6.
30
The figure 3.6 depicts a gradual increase in the inventory turnover ratio over the last
eight years. Since it has shown an increasing trend it is viewed as a positive sign. This
indicates that the firm is having strong sales and also may indicate that there are little
chances of the company holding damaged or obsolete stock. The ratio has moved
from 4.58 times in the year 1999-00 to 6.36 times in the year 2006-07. This points out
that there is a better inventory management practice followed by the company and as
such better liquidity.
(ii)
Days Inventory:
This ratio identifies the average length of time in days it takes the inventory to turn
over. As with inventory turnover (above), fewer days mean that inventory is being
sold more quickly. Inventory days are different for different industries. For
perishables, inventory days could be a few days, whereas for a manufacturer it could
range from 60 to 90 days or more depending on the complexity and time it takes to
31
manufacture the goods. It calculates the number of day's sales being carried in
inventory. It is calculated as follows:
This ratio measures how efficiently the inventories are managed. The inventory days
of Geno has reduced from 80 days in 1999-00 to around 57 days in the year 2006-07.
This is a good sign for the company. The possible reasons for such a decline could be
due to good demand for the company's products with the help of proper sales
promotion.
(iii)
32
Debtors turnover measures the efficiency with which debtors are converted to cash.
This ratio indicates both the quality of debtors and the collection efforts of the
business enterprise.
Debtors Turnover Ratio = Sales / Debtors
The average collection period measures the quality of debtors since it indicates the
speed of their collection. This is calculated by dividing 365 by the debtors' turnover
ratio. Managers strive to minimize the firms average collection period, since rupees
received from customers becomes immediately available for reinvestment. This
specially a critical measure for firms in industries where extensive trade credit is
33
offered, but any company that extends credit on sales should be aware of their average
collection period on a regular basis.
34
Table 3.8 and figure 3.8 show that there was a steady increase in the turnover of
debtors. Table 3.9 and figure 3.9 on the other hand show the debtors collection period
over the last 8 years. The debtors turnover has started with a poor ratio of 3.80 in
1999-00, which improved steadily and reached to 11.07 in 2005-06. However in
2006-07 there has been a fall to 1 0.81.
On the other hand table 3.9 and figure 3.9 shows a decreasing trend in the debtors
collection period. In 1999-00 it was around 96 days which fell down to just 33 days in
the year 2006-07. Such a decrease in debtors' collection period is favorable to the
company. The decline in the collection period indicates better quality of debtors
implying prompt payment by debtors. The possible reasons for such a decline could
have been an aggressive debt collection adopted by the company or stricter rules must
have been introduced by the company with regard to its credit transactions. Geno has
taken good efforts in maintaining the efficiency of the two important current assets;
i.e. inventory and its debtors.
(v)
This ratio offers managers a measure of how well the firm is utilizing its assets in
order to generate sales revenue. An increasing total asset turnover ratio would be an
indication that the firm is using its assets more productively. Asset turnover is the
relationship between sales and assets. The firm should manage its assets efficiently to
maximize sales.
It appears that the activity of the business is relatively constant, with a slight upward
trend.
The ratio of net sales to fixed assets measures the efficiency with which the company
is utilizing its investments in fixed assets. In addition this ratio serves as a secondary
test of the adequacy of the sales volume. Since fixed assets are acquired to further the
sales progress of a company, that is, increasing production and services or reducing
cost or both, the utilization of these assets must be measured by reference to sales
activity. Fixed assets (such as plant & equipment) are often more closely associated
with direct production than are current assets; so many analysts prefer this measure of
effectiveness.
The purpose of assets is to work for the company. A decline in the ratio may indicate
that the company is over provided with assets and could free up capital with some
disposals. Rapid growth in the ratio may indicate that capacity constraints have been
reached and more time for maintenance and repairs should be considered. The Fixed
Asset turnover of the company has been computed in Table 3.11 and shown in figure
3.11.
The company's investments in fixed assets have been justified as portrayed by the
consistent trend for the period considered. The figures of the company fall to around
6.74 in 2005-06 due to a decrease in sales. It has increased to 7.84 in 2006-07 As there
has been a marginal increase in sales there has been a slight increase in fixed assets
too so as to meet up with the increasing sales levels.
(vii)
This ratio is commonly known as the trading ratio. It is a measure of the extent to
which a company's sales volume is supported by invested capita1. Every business
objective is to make profits. Only by achieving a level of sales adequate to offset fixed
costs as well as their variable counterparts, can any company hope to break even. As
sales exceeds the break even level, the company's profit percentage rises sharply. So
management may logically initiates tough efforts to achieve ever higher sales in the
hope of obtaining even greater profit.
The trend seen in the above figure 3.12 indicates a relatively consistent and stable
performance of the company. It ranges from 7.16 to 7.39. However the company
needs to concentrate and channelise all efforts towards increasing their sales volume
at reduced expense.
Financial leverage ratios measure the use of debt financing. This group of ratios
calculates the proportionate contributions of owners and creditors to a business.
Creditors like owners too participate to secure their margin of safety, while
management enjoys the greater opportunities for risk shifting and multiplying return
on equity that debt offers.
The ratios indicate the degree to which the activities of a firm are supported by
creditors' funds as opposed to owners. The relationship of owner's equity to borrowed
funds is an important indicator of financial strength. The debt requires fixed interest
payments and repayment of the loan and legal action can be taken if any amounts due
are not paid at the appointed time.
The various types of ratios falling under this category are below:
The debt to total assets ratio calculates the percent of assets provided by creditors. It is
calculated by dividing total debt by total assets. This is the measure of financial
strength that reflects the proportion of capital which has been funded by debt,
including preference shares. With higher debt ratio (low equity ratio), a very small
cushion has developed thus not giving creditors the security they require. The
company would therefore find it relatively difficult to raise additional financial
support from external sources if it wished to take that route. The higher the debt ratio
the more difficult it becomes for the firm to raise debt. This ratio is worked out as
follows:
This ratio indicates the extent to which debt is covered by shareholders funds. It
reflects the relative position of the equity holders and the lenders and indicates the
company's policy on the mix of capital funds. It measures the direct proportion of debt
to equity capital. This ratio is closely watched by the creditors and investors because it
reveals the extent to which the management of the company is willing to fund its
operations with debt rather than equity. This ratio is computed as follows:
The debt equity ratio has been computed in table 3.14 and is shown in the below
graph.
The debt to equity ratio has shown a decreasing trend over the eight years. It was 2.22
in the year 1999-00. This means that for every rupee of shareholders fund Rs. 2.22
was of debt. During the years of 1999-00 to 2002-03 it showed financial weakness in
the business. However since 2003-04 the ratio indicates that the company is
financially stable and is probably in a better position to borrow funds when required.
It has a sound capital structure. It has dropped down from 1.97 in 2003-04 to 1.36 in
2006-07.
(iii)
This ratio is used to determine how easily a company can pay interest to its lenders. It
shows whether a company is earning enough profits before interest and tax, to pay its
interest cost comfortably. This ratio measure the extent to which earnings can decline
without causing financial losses to the firm and creating an inability to meet the
interest cost. The times interest earned shows how many times the business can pay its
interest bills from profit earned. This ratio tests the ability of the company to pay the
interest charges on its debt. This ratio is calculated as follows:
In the above figure 3.15 the interest coverage ratio of Geno shows an increasing trend.
It has increased from 1.35 in 1999-00 to 4.57 in the year 2006-07. During the years
1999-00 to 2003-04 the ratio indicates that the company is burdened by debt
expenses. However since 2005 it has increased due to judicious use of funds and
better control on outstanding. It indicates that the company is in a better position to
repay its interest amounts.
This ratio indicates how much of profits have grown or decline over the past years. An
increasing trend would be favorable indicating that the profits are good. This ratio is
calculated using the following formula:
The growth percentage has been computed in table 3.17. It can- be pointed out that
year 2000-01 and 2002-03 witnessed a decline in its net profit. In the 2003-04 the net
profit raised significantly to 394.05 %. Such a hike was due to a rise in sales that year.
Years 2004-05, 2005-06 and 2006-07 show a relatively stable growth in net profit of
around 33 %.
(ii)
Sales Growth :
This indicates the increase or decline in the level of sales over the years. A sales
growth is good however it should be proportionate to profit growth. If sales have
grown but profits have declined, additional sales could be harmful. A growth in sales
may be calculated as follows:
The company does not enjoy a stable growth in sales. The trend of this ratio shows a
fluctuating level of sales over the eight years.
(iii)
Assets Growth:
Asset growth would indicate if there is any increase or decrease in the assets of the
firm. The asset growth should be proportionate to sales and profit growth. To find out
a growth in assets the following formula is applied:
Asset Growth = (Asset yr2-Asset yr1 ) / Asset yr1
It is noticed that the growth of assets too hasn't been pleasant and does not show a
steady trend. The years in which the sales of the Company decreased, those years the
assets too were found to be decreasing.
Having carried out a comprehensive and critical examination of records and books of
accounts it was found that the companies were not taking advantage of the favorable
business environment in terms of increasing profits, increasing dividends for
shareholders and the growth of the companies. This article then presents historical
data analysis of three years (1979-1981) of operations of three companies. It mainly
concentrates on the evaluation of performance in the face of rising demand and cost,
increasing competition and falling profits. The facts and figures presented however
showed that the performance of the beer producing firms were not too encouraging.
Jackson's study used basically four ratios to evaluate the performance of the three beer
producing companies. His analysis pointed that three areas required urgent attention.
They were sales, profit and fixed assets. He pointed out that their sales volume were
not adequate in face of business opportunities. This required serious efforts from the
management. The investments in fixed assets of the companies were pretty high and
as such a substantial proportion of the companies capital was tied up in illiquid
assets. He suggested that the companies should consider making innovative efforts in
their processes, products and in all areas of distribution and customer expectations.
Debasish Sur
insurance companies using four major profitability indicators they are; return on
operating assets, return on capital employed, net & gross profit margin and return on
net worth. The objective of the study was to measure the profitability of General
Insurance Companies (GIC) in India with the help of ratio analysis.
The study also makes use of various statistical techniques such as simple regression
analysis, multiple correlation analysis etc. The companies selected for the purpose of
the study were four wholly owned subsidiaries of GIC. The return on operating assets
employed (ROAE) ratio expressed the relationship of the amount of operating profit
to the amount of operating assets employed in the business. It helps to assess the
earning power of the operating assets. The study revealed that the higher the ROAE
the larger is the earning capacity of the operating assets and accordingly the wider is
the future prospects of the enterprise.
Prof. M.R. Kumara Swamy's 3, article is a study based on primary data obtained
and analyzed for a sick agricultural Company (ADARICE Production Ltd.). The
Company is engaged in the production of paddy milled rice. He analyzed the
investment cycle of the agricultural loan administration. He also studied the operating
performance of ADARICE Production Ltd., with the help of financial ratios. The
article also speaks about the significance of cash flow analysis.
Cash flows aim at maintaining working capital and providing for asset replacement.
The study revealed that after analyzing the current ratio and net worth to debt ratio of
the Company it was found that the Company had very high borrowing. Sales to fixed
asset ratio gave an indication that the Company made heavy investments in fixed
assets and therefore led to over capitalization. The turnover ratios and profitability
ratios indicated that the investment cycle had become sluggish and as such incurred
huge losses. He also provides certain suggestion that the Company could consider to
improve its performance.
Lee Kendrick 4 (Jan 14, 2008) in his article speaks about how to prevent corporate
bankruptcy. According to him access to capital, owner's education levels, an
established business plan and the usage of professional accountants appear to be the
most likely reasons for business failures today. It also speaks about the number one
reason for business failures as cited by small business owners, which is money.
Access to financing, the lack of available financial assistance, not understanding how
to properly utilize credit, are just a few of the examples that force businesses to fail
and which is bad for the economy. Worse still, is that a majority of all small business
owners are unaware of financing options other than their local banks, grants for the
few that could qualify and use of personal debt.
He tells to simply be proactive. The Company should seek out business credit offers at
every step wherever possible. However, if one doesn't understand how to setup,
structure and maintain their corporate credit file they could be facing a rising battle.
He says that one needs to find a corporate credit expert that can provide them with a
corporate identity.
C T Sam Luther5 (2006), has studied the impact of financial distress and the
subsequent turnarounds of ESL with the help of three key financial indicators;
liquidity, leverage and solvency. C T Luther's article 'Financial Distress and
Turnaround Management' is a case study on Essar Steel Ltd. The Company had
suffered huge losses during the period of 1998-99 to 2001-02 as a result of the global
downturn in the late 1990's. The company's net worth too showed a falling trend.
However the Company is now sailing smoothly as a result of the effective turnaround
strategies adopted by the Management.
The study was based on the secondary data collected and compiled from the annual
reports of the company for a period of eight years. As a result of the various
turnaround initiatives, the company's financial performance improved slowly as well
as its net worth. It also makes use of the Z-Score model for measuring the firms'
financial health.
His study revealed that the Company had a poor liquidity position during the years of
financial distress. The Z-Score analysis revealed that the score of the firm was much
below the danger level indicating bankruptcy which further worsened during the year
2002. However after the period of turnaround, it crossed the danger level in 2005. He
further advised the Company to still improve the Z-Score during the ensuing years to
avoid any further damage.
M. Selvam, S. Vanitha and M.Bab6 (2004), has done a case study to predict the
financial health of India Cement Ltd. with the help of Z-Score. The study speaks
about the role of the Indian Cement industry. The cement industry represents an
important segment of the Indian economy. This industry was caught in a vicious down
cycle that rendered operations unviable. This caused a reduction in profits in some
cases and even losses in some of the cement producing firms. The study is based on
one such Company (the India Cement Ltd) which also incurred losses.
The objective of the study was to examine the overall financial performance and to
predict the financial health of the Company. The data collected was analysed with the
help of five financial ratios adopted in Z-score. The authors reveal that their study
would be useful to all companies, policy makers and research for appraising the
financial health of corporate sector in general and cement companies in particular.
FINDINGS
From an analysis of the financial statements of the company the following were the
findings.
6.1.:
Liquidity Position:
Having analyzed the liquidity position of Geno with the help of liquidity ratios the
following was found:
The current ratio of the company has been near to the ideal ratio of 1.15: 1.
This indicates that the company has a good liquidity position and would not
have to much problems in meeting its current liabilities.
The quick ratio indicates that the company relies heavily on its inventory to
settle its current obligations as it is below the ideal level of 1: 1. Inventories
accounts for a huge portion of the current assets of the company.
6.2.:
Profitability Position:
The profitability position of the company was analyzed with the help of few
profitability ratios and the following was found:
In the first three years the gross profit margin showed a decreasing trend
however 2003-04 showed an improvement. Since then it is found to be fairly
stable at around 7 %.
The Net profit margin has increased over the years from 1.96 % in 1999-00
to 5.14 % in 2006-07. The least margin was witnessed in the year 2002-03
due to a decrease in sales.
The return on assets ratio indicated that the management of the company has
been utilizing its assets efficiently. Also the Return on equity ratio indicates
that the management has too been utilizing its shareholders fund efficiently.
6.3:
These ratios measure how efficiently the management is utilizing its assets for
business purpose. The application of various asset management ratios indicated the
following:
The inventory turnover rate of the company was increasing. This indicates
good inventory management practices are adopted by the company.
The days inventory have reduced from 80 days in 1999-00 to 57 days in the
year 2006-07 which is a good sign for the company.
The debtors Turnover ratio showed a steady increase while the average
collection period reduced from 96 days to just 34 days indicating proper
control over its debtors.
The total assets turnover showed a slight increase from 1.48 in 1999-00 to
1.99 in 2006-07.
The fixed asset turnover rate changed from 8.31 in the year 1999-00 to 7.84
in 2006-07 and showed a relatively constant trend.
6.4:
Leverage Position:
The leverage position of the company was studied with the help of leverage ratios and
it was found that:
The debt ratio of the company suggests that the company is not highly
leveraged and its ratios ranged from 37 % to 46 % over the last eight years .
The debt to equity ratio showed a slight decreasing trend however in the later
years from 2003-04 it indicates a fairly stable capital structure.
The interest coverage ratio showed an increasing trend from 1.35 in 1999-00
to 4.57 in 2006-07.
6.5: Growth :
The growth in profits, sales and assets of the company was analyzed. The following
was found:
The profit growth was the highest in 2003-04 due to a rise in sales. Years 200405,
2005-06 and 2006-07 showed a stable growth in profits.
The percentage of growth in sales has not been a stable one for the company.
SUGGESTIONS
The firm has an increasing inventory turnover ratio. However if the firm wants to
increase it even more it needs take a proper look at its inventory management
techniques. The supply chains need to be optimized; the production process needs to
be efficient as well, so that suppliers are in a position to better deliver the goods on
time. Even developing good customer relationships will help in increasing demand for
products and as such inventory will move much quicker.
Assets are required for the purpose of production as such the growth in assets
showed be in proportion with the growth in sales. This will help avoid
blockage of huge funds in fixed assets.
CONCLUSION
Ratio analysis has been used in evaluating the financial performance of Geno
Pharmaceuticals Ltd. Geno Pharmaceuticals has been in the pharmaceutical industry
since 1975. It has built up a wide range of product mix and has a number of brands
that are not only in demand domestically but also internationally. The company has
only one business segment i.e. manufacture and sale of Pharmaceutical formulations.
On the whole the company over the last eight years has been performing well. The
various ratios of the company indicate that the company enjoys a sound financial
position. It has a satisfactory liquidity position, manages its assets and inventory well
and also has a control over its debtors. The firm is not very high on leverage.
Thus ratio analysis aids in evaluating companies past performance, compare with
competitors in the same industry or compare with the industry averages to know the
position of the company in that industry.
Many things can impact the calculation of ratios and make comparisons difficult. The
limitations include:
1)
The choices of accounting policies may distort inter company comparisons. Example
IAS 16 allows valuation of assets to be based on either revalued amount or at
depreciated historical cost. The business may opt not to revalue its asset because by
doing so the depreciation charge is going to be high and will result in lower profit.
This makes the comparison of ratios difficult.
2) Information problems:
Ratios are not definitive measures. Ratios need to be interpreted carefully. They can
provide clues to the company's performance or financial situation. But on their own,
they cannot show whether performance is good or bad. Ratios require some
quantitative information for an informed analysis to be made.
3)
The figures in a set of accounts are likely to be at least several months out of date, and
so might not give a proper indication of the companys current financial position.
Ratios are based on financial statements that reflect the past and not the future. Unless
the ratios are stable, one cannot make reasonable projections about the future trend.
4)
Changes in accounting policy may affect the comparison of results between different
accounting years as misleading. The problem with this situation is that the directors
may be able to manipulate the results through the changes in accounting policy. This
would be done to avoid the effects of an old accounting policy or gain the effects of a
new one. It is likely to be done in a sensitive period, perhaps when the business's
profits are low.
5)
Inter-firm comparison:
No two companies are the same, even when they are competitors in the same industry
Or market. Using ratios to compare one company with another could provide
misleading information. Businesses may be within the same industry but having
different financial and business risk. One company may be able to obtain bank loans
at reduced rates and may show high gearing levels while as another may not be
successful in obtaining cheap rates and it may show that it is operating at low gearing
level.
BIBLIOGRAPHY:
1]
2]
Bowlin Oswald, "Guide to Financial Analysis ", New York: Mcgraw Hill
Publishing Company, 1990
Journals:
1]
2]
3]
Websites:
1]
www.netmba.com
2]
www.va-interactive.com 3] www.asbdc.uaIr.edu
4]
www.middlecity.com
5]
www.college.hmco.com
6]
www.missouribusiness.net
7]
www.I2manage.com
8]
www.benbest.com
9]
www.valuebasedmanagement.net
10]
www.creditworthy.com
11]
www.textbiz.org
12]
www.genopharma.com
4]
Lee
Kendrick
(2008),
"How
to
Prevent
Corporate
Bankruptcy",
www.bestmanagementartic1es.com
6] Dr. M. Selvam, S. Vanitha and M. Babu (2004), "A study on financial health of
cement industry - Z Score analysis", The Management Accountant, July Vol 39, No.
Secured Loans
Unsecured Loans
40214\701
5
8
4
9
7
1
7
Fixed Assets
49008130
47068400
47548074
49926276
59145611
65675278
94642409
9793052
Capital work in pro!!ress
113643
1738639 1583401 2036640 3784600
Fixed Assets (A)
Investments (B)
524000
524000
520000
522000
522000
522000
522000
2006-07
801172045
6787449
9119835
817079329
241991988
67083045
1056]5772
132639723
11527495
209818270
7215806
775892099
7987448
5585499
9649148
3533733
4] ]87230
2900000
-
2650000
-
]650000
-
-7000000
-
-5916300
-
-8554693
-392101
Depreciation
Less: Prior of
Less: Provision
Less: Provision
Net Profit after 5087448
Add/(less):
written back
Add/(less):Leave
Add/(Less):
- ]49055
4938393
Balance brought 2080619
2935499
3400000
-.
6249148
239584
1644]49
2274315
]2732844
-270537
917 634
3853133
3] 23012-
259308
205042
6713498
3523145
784760
2428909
5283643
34951
-5099243
-16264
471076
1516]9
-200]969
7652288 18152798 21364955 26993570
4225052 4314840 13202638 23611343
6976145 10236643
7712552
Less:
Provision
( Net Profit)
Less:
-6552650
-
-57456
-547216
-4000000 -2200000
-300403 . 283013
-497681
17681722 2]213336 28995539
Profit available
7019012
for appropriation
Profitability:
Year
2000
2001
2002
2003
2004
2005
2006
2007
Year
2000
2001
2002
2003
2004
2005
2006
2007
Year
2000
2001
2002
2003
2004
2005
2006
2007
31540429
41187230
655090297
801172045
4.81%
5.14%
Year
2000
2001
2002
2003
2004
2005
2006
2007
Year
1999-00
2000-01
2001-02
2002-03
2003-04
200405
2005-06
2006-07
Year
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Year
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
(iv) Leverage:
Year
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Debt Ratio
45.68%
49.54%
42.42%
53.92%
43.58%
44.25%
39.37%
36.62%
(v) Growth:
Year
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Year
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Percentage
Change
-30.07%
72.75%
-63.38%
394.05%
38.44%
30.50%
30.59%
Percentage
Change
-6.0 1%
28.05%
-14.47%
22.39%
-0.85%
28.74%
22.30%
Percentage
Change
-12.05%
12.97%
-12.84%
24.56%
-5.44%
28.91 %
2006-07
402141701
39038024
10.75%