RANBAXY RATIO ANALYSIS

OPERATING PROFIT RATIO :

Operating net profit ratio is calculated by dividing the operating net profit by sales. This ratio helps in determining the ability of the management in running the business.

FORMULA :

Operating profit / (Net sales 100) Operating profit = Gross profit - Operating Exp. OR Operating profit = Net sales - Operating cost OR = Net sales - (Cost of goods sold + Administrative and office expenses + Selling and distribution exp.) OR (Net profit + Non-operating expenses) - (Non-operating incomes)

HIGHER THE RATIO BETTER IT IS

EXAMPLE : consider the table below . Particulars Sales less returns Gross profit Administration expenses Solution: Operating profit = Gross profit - Administration and selling expenses = 1,40,000 - (35,000 + 25,000) = 1,40,000 - 60,000 = $80,000 Operating profit ratio = 80, 000 / (4,00,000 100) = 20 % In analysing the OPERATING PROFIT RATIO of the Ranbaxy co.ltd , we have deduced that the operating profit per share increased from Rs.256.17 to Rs.1271.03 from Dec08 to Dec10 and the net operating profit per share also increased from Rs. 0.0551 to Rs.0.2551 Particulars $ Selling 4,00,000 25,000 expenses Income from 1,40,000 1,000 investment Loss on account 35,000 2,000 of fire $

RETURN ON INVESTMENT (ROI) :

Return on investment is one way of considering profits in relation to capital invested. RETURN ON ASSET (ROA), RETURN ON NET ASSET (RONA), RETURN ON CAPITAL (ROC) and RETURN ON INVESTED CAPITAL (ROIC) are similar measures with variations on how INVESTMENT is defined.

FORMULA :

In the above formula "GAINS FROM INVESTMENT", refers to the proceeds obtained from selling the investment of interest.

Return on investment is a very popular metric because of its versatility and simplicity.i.e. if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

In case of Ranbaxy co.ltd the RETURN ON INVESTMENT has increased from -0.365 to 0.328 from Dec08 to Dec10 .

EARNING PER SHARE (EPS) :

It is the Net Income (profit) of a company divided by the number of outstanding shares. Earnings Per Share is the single most popular variable in dictating a share's price. EPS indicates the profitability of a company. EXAMPLE : if a company earned Rs. 2 million in one year and had 4 million shares of stock outstanding, its EPS would be Rs. 0.50 per share. FORMULA : EPS can be calculated as:

EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS").

NOTE : Last year's EPS would be actual, while current year and forward year EPS would be estimates.

The EARNING PER RATIO (EPS) of Ranbaxy co.ltd has increased from -24.85 to 27.28 from Dec08 to Dec10 .

DIVIDEND PER SHARE (DPS) :

The sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued.

FORMULA : DPS can be calculated by using the following formula:

D - Sum of dividends over a period (usually 1 year). SD - Special, one time dividends. S - Shares outstanding for the period.

EXAMPLE :

ABC company paid a total of $237,000 in dividends over the last year of which there was a special one time dividend totalling $59,250. ABC has 2 million shares outstanding so its DPS would be ($237,000-$59,250)/2,000,000 = $0.0889 per share.

NOTE : Dividends are a form of profit distribution to the shareholder.Having a growing dividend per share can be a sign that the company's management believes that the growth can be sustained. The DIVIDEND PER SHARE (DPS) for Ranbaxy co.ltd hasincreased from 0 to 0.0002 from Dec08 to Dec10 .

CURRENT RATIO :
The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to current liabilities . FORMULA : It is expressed as follows:

EXAMPLE : if WXY Company's current assets are $50,000,000 and its current liabilities are $40,000,000, then, CURRENT RATIO = 50,000,000/40,000,000 CURRENT RATIO = 1.25 It means that for every dollar the company owes in the short term it has $1.25 available in assets that can be converted to cash in the short term. A current ratio of assets to liabilities of 2:1 is usually considered to be acceptable (i.e., your current assets are twice your current liabilities).

 The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. If a company's current ratio is in the ratio 2:1, then it is generally considered to have good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets or its shortterm financing facilities. This may also indicate problems in working capital management. Low values for the current or quick ratios (values less than 1) indicate that a firm may have difficulty meeting current obligations. The CURRENT RATIO for Ranbaxy co.ltd has increased from 0.5919 to 1.126 from Dec08 to Dec10.

QUICK RATIO :
The QUICK RATIO measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. FORMULA :

Note that inventory is excluded from the sum of assets financially. Ratio are financially viable option for business entities but the liquidity of the liabilities show financial stability. Generally, the acid test ratio should be 1:1 or higher, however this varies widely by industry . In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets . Notice that very often Acid test refers instead of Quick ratio to Cash ratio:

There is also another Quick Ratio which is widely used and computed as below

*Total Liabilities excludes Share Capital and Retained Earnings

NOTE : A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities. The QUICK RATIO for Ranbaxy co.ltd has increased from 0.2798 to 0.5279 from Dec08 to Dec10.

DEBT-EQUITY RATIO :
A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. FORMULA :

Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. The DEBT-EQUITY RATIO for Ranbaxy co.ltd has increased from 17.724 to 20.239 from Dec08 to Dec10 .

TOTAL ASSET-DEBT RATIO :

Debt assets ratio or total assets for financial ratio evaluates the firm's solvency. This ratio is calculated and known by taking into consideration the company's total liabilities with division of the total assets of the company. FORMULA : Debt assets ratio calculator calculates ratio like, debt asset ratio = total debt divided by total assets. OR = Total Liabilities Total Assets

This ratio indicates the extent to which the total assets are burdened with debts. If the ratio exceeds over 65%, it indicated that the debs are excessive debts and cannot be considered for approval. It also indicates what proportion of the company's assets are being financed through debt. The TOTAL ASSET-DEBT RATIO for Ranbaxy co.ltd has increased from 1.9977 to 2.2046 from Dec08 to Dec10.

PROPRIETARY RATIO :
The PROPRIETARY RATIO (also known as the equity ratio) is the proportion of shareholders' equity to total assets, and as such provides a rough estimate of the amount of capitalization currently used to support a business.

If the ratio is high, this indicates that a company has a sufficient amount of equity to support the functions of the business, and probably has room in its financial structure to take on additional debt, if necessary. A low ratio indicates that the business may be making use of too much debt or trade payables, rather than equity, to support operations (which may place the company at risk of bankruptcy).

Formula :

To calculate the proprietary ratio,divide total shareholders' equity by total assets. Note : The results will be more representative of the company's true situation if you exclude goodwill and intangible assets. from the denominator. The more restrictive version of the formula is: Shareholders' equity Total tangible assets

EXAMPLE : ABC Company has shareholders' equity of $2,000,000 and total assets of $5,000,000. There is no goodwill on its balance sheet, nor any intangible assets. Its proprietary ratio is: $2,000,000 Shareholders' equity $5,000,000 Total tangible assets = 40% Proprietary ratio Thus, shareholders have contributed 40% of all funds used in the business, with creditorscontributing the remaining 60% of funds. NOTE : The proprietary ratio is not a clear indicator of whether or not a business is properly capitalized. Also, the ratio is not necessarily a good indicator of longterm solvency, since it does not make use of any information on the income statement, which would indicate profitability or cash flows . The PROPRIETARY RATIO for Ranbaxy co.ltd has decreased from 0.0282 to 0.0224 from Dec08 to Dec10.