1111111

PROJECT REPORT
Submitted for the Degree of B.Com Honours
in Accounting & Finance under the
University of Calcutta

Ratio Analysis

Submitted By,
AKASHDEEP CHAKRABORTY
C.U. Registration No. :
C.U. Roll No. :
Name of the College: Prafulla Chandra
College

Supervised By,
Prof. A. Roy

2015-16

CONTENTS
SL
NO.

TOPICS

1.
1.1
1.2
1.3
1.4
1.5
1.6

Annexure I
Annexure II
Introduction
Background
Review of Literature
Objectives of the study
Database & Methodology
Limitations of the study
Chapter planning

2.

Conceptual Framework-Elements of Financial Statements

2.1
2.2
2.3
2.4
3.
3.A
3.A.1
3.A.2
3.B
3.B.1
3.B.2
3.C
4.
4.1
4.2
5.

Ratio Analysis
Importance of Financial Statement Analysis
Features of Financial Statement Analysis
Financial Statement Functions
Data Analysis & Interpretations
Sun Pharmaceuticals Industries Limited
Company Profile
Data Analysis
Cipla Pharmaceuticals Industries Limited
Company Profile
Data Analysis
Data Comparisons & Interpretations
Conclusions & Recommendations
Conclusions
Recommendations
Bibliography

PAGE NO.

Annexure - 1:
Supervisors Certificate
This is to certify that Mr. AKASHDEEP CHAKRABORTY a student of B. Com. Honours in
Accounting & Finance of PRAFULLA CHANDRA COLLEGE under the University of Calcutta
has prepared a Project Report with the title Ratio Analysis.
My Contribution however, was mainly in the form of general guidance and discussion.

Place:

Signature:

Date:

Name:

Designation:

Name of the College:

Annexure 2 :
Students declaration
I hereby declare that the Project Work with the title RATIO ANLYSIS submitted by me for the
partial fulfillment of the degree of B. Com. Honours in Accounting & Finance under the
University of Calcutta is my original work and has not been submitted earlier to any other
University or Institution for the fulfillment of the requirement for any course of study.
I also declare that no chapter of this manuscript in whole or in part has been incorporated in this
report from any earlier work done by others or by me. However, extracts of any literature which
has been used for this report has been duly acknowledged providing details of such literature in
the references.

Place: Kolkata

Signature:

Name: AKASHDEEP CHAKRABORTY

Date:
Address:

C. U. Registration No.:

C. U. Roll No.:

1. Introduction
1.1 Background of the study:
Abstracted report is based on the study of annual reports of Cipla Limited and Sun
Pharmaceutical Industries Limited for the five years from 2003-2004 to 20072008.
The main objective of this study was to apply the concepts learned as a part of this
course and understand the business, financial health and the reporting practices
followed by these companies. As a part of this report we have tried to analyze the
current and past performance trends for the company and predict the future
performance and stock prices of the company. To achieve this we have analyzed
Revenue Trends, Profitability, Liquidity, Debts, Stocks, Cash Flows and provided a
summary
at
the
end
of
the
report.
The scope of the report is limited to our understanding of the Financial Statements
based on the current course. The report has to be seen in its completeness along
with the excel worksheet containing the past five years financial data of the two
firms
and
various
ratios.
Introduction Cipla is a leading pharmaceutical company in India and it is one of
the largest exporters of drugs from India with exports contributing around 50% of
its annual revenues. It offers a comprehensive range of products ranging from antiasthma, cardiac to critical care drugs. Over the past 3 years the domestic revenue
has grown at a rate of 12% and the export revenue at 27%.
Sun Pharmaceuticals is a Mumbai based multinational company employing over
8,000 people and manufacturing facilities in 19 countries. It specializes in chronic
ailment drugs and has been consistently strengthening market share in India. The
recent acquisitions of Caraco Pharm has helped Sun to increase its global
presence.
Cipla and Sun Pharmaceuticals are comparable companies in terms of revenues
and profits which makes it easier to compare the two companies and understand
the concepts of Financial Statement Analysis.

1.2 Review of Literature:

Literature of Global Context
Review of Literature refers to the collection of the results of the various researches
relating to the present study. It takes into consideration the research of the previous
researchers which are related to the present research in any way. Here are the
reviews of the previous researches related with the present study:

Bollen (1999)
Conducted a study on Ratio Variables on which he found three different
uses of ratio variables in aggregate data analysis: (1) as measures of theoretical
concepts, (2) as a meansto control an extraneous factor, and (3) as a correction for
heteroscedasticity. In the use of ratios as indices of concepts, a problem can
arise if it is regressed on other indices or variables that contain a common
component. For example, the relationship between two per capita
measures may be confounded with the common population component in
each variable. Regarding the second use of ratios, only under exceptional
conditions will ratio variables be a suitable means of controlling an extraneous
factor. Finally, the use of ratios to correct for heteroscedasticity is also often
misused. Only under special conditions will the common form forgers
soon with ratio variables correct for heteroscedasticity. Alternatives
to ratios for each of these cases are discussed and evaluated.

Cooper (2000)
Conducted a study on Financial Intermediation on which he observed that
the quantitative behavior of business-cycle models in which the intermediation
process acts either as a source of fluctuations or as a propagator of real shocks. In
neither case do we find convincing evidence that the intermediation process is
an important element of aggregate fluctuations. For an economy driven
by inter mediation shocks, consumption is not smoother than output,
investment is negatively correlated with output, variations in the capital stock are
quite large, and interest rates are procyclical. The model economy thus fails to
match unconditional moments for the U.S. economy.

Maria Zain ( 2008)

In this articles he discuss about the return on assets is an important percentage that
shows the companys ability to use its assets to generate income. He said that a
high percentage indicates that companys is doing a good utilizing the companys
assets to generate income. He notices that the following formula is one method of
calculating the return on assets percentage. Return on Assets = Net Profit/Total
Assets. The net profit figure that should be used is the amount of income after all
expenses, including taxes. He enounce that the low percentage could mean that the
company may have difficulties meeting its debt obligations. He also short explains
about the profit margin ratio Operating Performance .He pronounces that the
profit margin ratio is expressed as a percentage that shows the relationship between
sales and profits. It is sometimes called the operating performance ratio because
its a good indication of operating efficiencies. The following is the formula for
calculating the profit margin. Profit Margin = Net Profit/Net Sales.

James Clausen (2009)

In this article he barfly express about the liquidity ratio. He Pronounce that it is
analysis of the financial statements is used to measure company performance. It
also analyses of the income statement and balance sheet. Investors and lending
institutions will often use ratio analyses of the financial statements to determine a
11 companys profitability and liquidity. If the ratios indicate poor performance,
investors may be reluctant to invest. Therefore, the current ratio or working capital
ratio, measures current assets against current liabilities. The current ratio measures
the companys ability to pay back its short-term debt obligations with its current
assets. He thinks a higher ratio indicates the company is better equipped to pay off
short-term debt with current assets. Wherefore, the acid test ratio or quick ratio,
measures quick assets against current liabilities. Quick assets are considered assets
that can be quickly converted into cash. Generally they are current assets less
inventory.

Gopinathan Thachappilly (2009),

In this articles he discuss about the Financial Ratio Analysis for Performance
evaluation. It analysis is typically done to make sense of the massive amount of
numbers presented in company financial statements. It helps evaluate the
performance of a company, so that investors can decide whether to invest in that
company. Here we are looking at the different ratio categories in separate articles
on different aspects of performance such as profitability ratios, liquidity ratios,
debt ratios, performance ratios, investment evaluation ratios.

Literature on Indian Context

RammohanRao& et.al (1975)
In this study howfar the capital markets in India were competitive. Their study
examined the decisions about internal and external finance as interrelated and
consequent upon a choice of the structure of current and fixed assets. Secondly,
they analyzed the earnings pattern of different types of funds to see if the
competitiveness hypothesis can sustain. They concluded that a firms ability to
borrow was constrained by the rise associated with the proportion of debt in the
capital structure. If the ratio was high then internal funds improved the firms
ability to borrow. Similarly if the financial leverage (Debt or equity ratio) was
lower than the institutionally determined leverage. The borrowing was facilitated.
But if the leverage was the institutionally determined maximum then borrowing
was inhibited.

Vasanthamani (1982)
In her study The Financial Performance of Lakshmi Machine Works Limited.
The objective of the study was to analyze the financial performance of Lakshmi
machine work with a view to analyze the future of performance potentials. The
study covered the period from 1978-1982. The liquidity position of the company
showed that the company was able to meet the creditors out of its own current
assets. The quick ratio also revealed that the quick liabilities were met at of quick
assets without any difficulty.

Rajeswary (1990)
In her study entitled Financial Performance of Precot Mills Limited has
concluded that the financial position and operating efficiency of the company was
satisfactory where as the margin or safely was not stable solvency position was not
satisfactory and the earning capacity was minimum.

Parvathi (1990)
In her Financial Performance Analysis Hindustan Photos Films Ooty for the year
1990-1996, concluded that the gross profit has shown as increasing trends, long
term solvency of the company, debt equity ratio was not satisfactory.

Sankar.T.L& et.al (1995)

In their study entitled, Financial Performance of State Level Public Enterprises
suffers from staggering investment, poor profitability, unnecessary investment,
poor project planning and inadequate financial control.

1.3 Objective of the study:

The specific objectives of the study are as follows:

To understand the concept of financial statement analysis.

To understand the theoritical aspect of liquidity and profitibility.
To analyze the liquidity of the medical companies.
To analyze the profitibility of the medical companies.
To disclose to the extent possible other information related to the financial
statements users

Assessment of Past Performance

Past Performance is a good indicator of future performance. Investors or
Creditors are interested in the trend of past sales, cost of good sold, operating
expenses, net income, cash flows and return on investment. These trends offer a
means for judging management's past performance and are possible indicators
of future performance Past performance is a good indicator of future
performance for Investors or creditors.
Assessment of current position
Financial statement analysis shows the current position of the firm in terms of
the types of assets owned by a business firm and the different liabilities due
against the enterprise.
Prediction of profitability and growth prospects
Financial statement analysis helps in assessing and predicting the earning
prospects and growth rates in earning which are used by investors while
comparing investment alternatives and other users in judging earning potential
of business enterprise.
Prediction of bankruptcy and failure
Financial statement analysis is an important tool in assessing and predicting
bankruptcy and probability of business failure.

10

Assessment of the operational efficiency

Financial statement analysis helps to assess the operational efficiency of the
management of a company. The actual performance of the firm which are
revealed in the financial statements can be compared with some standards set
earlier and the deviation of any between standards and actual performance can
be used as the indicator of efficiency of the management.
Therefore, the main purpose of financial statement analysis is to utilize
information about the past performance of the company in order to predict how
it will fare in the future. Another important purpose of the analysis of financial
statements is to identify potential problem areas and troubleshoot those.

1.4 Database and Methodology:

Database:
The entire study is based on secondary Database which is collected from the
Websites of the respective medical company.
Period of the study:
The study period is started from 1st April 2012 and ended on 31stmarch.It consists
of 3 of and financial year.
Sample Companies:
This study has been conducted based on following two medical companies of
Pharmaceutical Industry. These are - 1) Sun Pharmaceutical Co.
2) Cipla Pharmaceutical Co.

11

Methodology
The research methodology for the secondary research undertaken has been
provided as using qualitative as well as quantitative approaches.
The analysis and findings selection highlights the result of the secondary study
while a discussion and the conclusion section provides a comprehensive analysis of
the literature review for the purpose of the project. Conclusively the
recommendation for proper development in the Pharmaceutical Industry had been
provided along with the limitation of the current research can be undertaken to the
research mode comprehensive.
Here we use the annual reports of the Pharmaceutical Industry for the collection,
classification and comparison of relevant data. On this study, different chart, ratio
analysis are performed .It is to be noted that Microsoft Office 2007 is used to
complete the entire database.

1.5 Limitations of the study:

The study conducted and done is analytical subject to the following limitations:
The study is mainly carried out based on the secondary data providedin
the financial statements.
This study is based on the historical data and information provided in the
annual reports therefore it may not be a future indicator.
There may be some fractional difference in the calculated ratio.
As the study was for shorts span of 8 weeks and due to lack of time other
areas could not be well focused.
Although analysis of financial statement is essential to obtain relevant information
for making several decisions and formulating corporate plans and policies, it
should be carefully performed as it suffers from a number of the following
limitations.
Mislead the user
The accuracy of financial information largely depends on how accurately
financial statements are prepared. If their preparation is wrong, the information
obtained from their analysis will also be wrong which may mislead the user in
making
decisions.

12

Not useful for planning

Since financial statements are prepared by using historical financial data,
therefore, the information derived from such statements may not be effective in
corporate planning, if the previous situation does not prevail.
Qualitative aspects
Then financial statement analysis provides only quantitative information about
the company's financial affairs. However, it fails to provide qualitative information
such as management labor relation, customer's satisfaction, and managements
skills and so on which are also equally important for decision making.
Comparison not possible
The financial statements are based on historical data. Therefore comparative
analysis of financial statements of different years cannot be done as inflation
distorts the view presented by the statements of different years.
Wrong judgment
The skills used in the analysis without adequate knowledge of the subject
matter may lead to negative direction. Similarly, biased attitude of the analyst may
also lead to wrong judgment and conclusion.

1.6 Chapter Planning:

1.
2.
3.
4.
5.

Introduction
Conceptual Framework
Data Analysis and Findings
Conclusion and Recommendation
Bibliography

13

2. Conceptual Framework-Elements of Financial Statements

2.1 Ratio Analysis
A ratio analysis is a quantitative analysis of information
contained in a companys financial statements. Ratio analysis is
based on line items in financial statements like the balance
sheet, income statement and cash flow statement; the ratios of
one item or a combination of items - to another item or
combination are then calculated. Ratio analysis is used to
evaluate various aspects of a companys operating and financial
performance such
as
its
efficiency, liquidity,
profitability
and solvency. The trend of these ratios over time is studied to
check whether they are improving or deteriorating. Ratios are also
compared across different companies in the same sector to see
how they stack up, and to get an idea of comparative valuations.
Ratio analysis is a cornerstone of fundamental analysis.

Importance of Ratio Analysis

It helps the management to gauze the efficiency of
performance and assess the financial health of the business.
It is an essential tool for checking the efficiency with which
the working capital is being used and managed.
Where ratio are based on analysis and scrutiny of past
results, the assist the management to formulate policy, to
arrive at correct decisions, to prepare budgets and to plan
for future .
Similarly, comparative ratio analysis injects trend analysis,
the improvement or deterioration of a business is clearly
disclosed by ratio analysis.
It helps to make inter firm comparisons, that is to know the
relative positions of a firm vis--vis its competitors .
14

 The ability of a firm to pay its short debts denotes its

liquidity positions. Ratio analysis helps to draw correct
conclusions regarding liquidity position of a firm.
Ratios are meaningfully used to indicate the relative
performance of different industries. These help the
government to take suitable plans and policies accordingly.
Ratios help to make useful communication with outsiders by
providing pertinent piece of information.

15

2.2 Importance of financial statement analysis:

Financial statement analysis provides important information about a company's
financial health.
To meet their financial reporting obligations and to assist in strategic decisionmaking, firms prepare financial statements. However, the information provided in
the financial statements is not an end in itself as no meaningful conclusions can be
drawn from these statements alone. Firms employ financial analysts to read,
compare and interpret the data as necessary for quantitative analysis and decisionmaking.

Liquidity
The balance sheet provides liquidity rations that show how much monetary worth
the company has on a given day, which helps determine if the firms financial
reliability. The current ratio shows the 'working capital' relationship of current
assets available to meet the company's current obligations, reports Credit Guru.
The quick ratio is similar, calculating those assets easily convertible into cash,
determining the immediate working capital relationship. The debt to equity ratio
establishes who owns more of the company, creditors or shareholders.

Efficiency
Efficiency ratios measure how efficiently the company turns inventory into
revenue. The day sales outstanding ratio focuses on the time required to turn
inventory into cash and the age of your accounts receivable. The inventory
turnover ratio indicated the rapidity with which the company is able to move its
merchandise, reports Credit Guru. Accounts payable to sales shows the
percentage of sales funded with supplier's money.

Profitability
Profitability ratios reveal a firm's success at generating profits. The profit margin
of a company determines its ability to withstand competition and adverse
conditions, reports Credit Guru. Return on assets, reveals the profits earned for
each dollar of assets and measures the company's efficiency at creating profit
returns on assets. Net worth focuses on financial returns generated by the owner's
invested capital.

16

Limits
It is important to know that financial statement analysis has limits; simply
manipulating numbers hides the actual state of the company. Different accounting
methods will look different on paper, and the method a particular firm uses can
change the visible health and profit levels for either better or worse. Quantitative
financial analysis is an art, and different analysts may get slightly different results
from the same information, or may return different data about the same business.

2.3 Features of Financial Statement Analysis:

Financial statements are those which reveal the financial position of the company
at a particular point of time. Financial statements include balance sheet, profit and
loss account and cash flow statements. Given below are some of the features or
characteristics of financial statements

Financial statements are those statements which present historical data,

which implies that financial statements reveal what has already happened
and they do not tell anything about the future.

Financial statements are expressed in monetary terms, so profit and loss

statements show the profitability of the business, balance sheet reveal the
financial position of the company and cash flow statement reveal the cash
position or liquidity which is there with the company.

Financial statements do not reveal the employee satisfaction levels, or effort

put by the owner of the company and all other such qualitative factors are
excluded from financial statements.

Financial statements should reveal all things and should not leave out
anything which materially affects the decision of the person who is reading
that financial statements and then taking decision regarding the company.
For example prospective shareholders will look financial statements before
investing into the company.

17

2.4 Financial Statement Functions:

A financial statement summarizes key information about the financial health,
success, and profitability about a particular company. The financial figures in a
financial statement also provide a measure of the success or failure of its current
management and business strategies. Financial statements are generally divided
into four distinct parts: a balance sheet, income statement, statement of stockholder
equity, and statement of cash flows.

The Balance Sheet

The balance sheet is a snapshot of the financial health of a company at a given
point in time. Depending on how a company tracks financial records, a balance
sheet is commonly created every three months, or at the end every quarter. A
typical balance sheet generally summarizes three financial components: assets,
liabilities, and owner's (or stockholder's) equity. From the balance sheet you can
determine if a company is making money by subtracting liabilities from assets.
This difference is the net worth of the company.

The Income Statement

The income statement, also called an earnings statement, measures whether
company operations were profitable. The measurement of profitability is
determined by revenue, expenses, net profit or loss, and the net profit or loss per
share of ownership. By measuring how revenue is used in company operations,
you can determine if the company is making money. In addition, the income
statement represents an entire accounting period of time whereas the balance sheet
is only a specific point in time.

Statement of Stockholder Equity

A statement of stockholder equity reconciles beginning and ending balances of
both stockholder equity and the retained earnings accounts. A typical statement of
stockholder equity commonly includes several years of data to reflect balance
changes from year to year. Stockholder equity and retained earnings are also
components of the balance sheet, which eases reconciliation in the statement of
stockholder equity.

18

3. Data Analysis and Interpretations

A. Sun Pharmaceutical Industries Limited
3.A.1 Company Profile:
Sun Pharmaceutical Industries Limited is an India-based generic and
pharmaceutical company. The Company's business segments include US Business,
which includes Western Europe, Canada, Australia, New Zealand and Other
Markets; Indian Branded Generics Business, including Global Consumer
Healthcare Business, and Emerging Markets, which include Active Pharmaceutical
Ingredients (APIs). The Company's manufacturing operations are focused on
producing generics, branded generics, specialty products, over-the-counter
products, anti-retroviral and active pharmaceutical ingredients (APIs). The
Company caters various therapy areas, such as dermatology, psychiatry, neurology,
cardiology, nephrology, gastroenterology, orthopedics and ophthalmology. It also
produces a range of dosage forms, including tablets, capsules, injectable,
ointments, creams and liquids. The Company also manufactures various specialty
APIs, including controlled substances, steroids, peptides and anti-cancer products.
Sun Pharmaceutical Industries began with just 5 products to treat psychiatry
ailments in 1983. Sales were initially limited to 2 states West Bengal and Bihar.
Sales were rolled out nationally in 1985. Products that are used in cardiology were
introduced in 1987, and Monotrate, one of the first products launched at that time
has since become one of our largest selling products. Important products in
Cardiology were then added; several of these were introduced for the first time in
India. Sun Pharma was listed on the main stock exchanges in India in 1994.
It is an international specialitypharma company, with a presence in 30 markets. It
also make active pharmaceutical ingredients. In branded markets, its products are
prescribed in chronic therapy areas like cardiology, psychiatry, neurology,
gastroenterology, diabetology and respiratory. Realizing the fact that research is a
critical growth driver, they established their research center SPARC in 1993 and
this created a base of strong product and process development skills. In India, it
has reached leadership in each of the therapy areas that we operate in, and are rated
among the leading companies by key customers. Strengthening market share and
keeping this customer focus remains a high priority area for the company.
19

Another API plant, its Ahmednagar plant, was acquired from the multinational
Knoll Pharmaceuticals in 1996, and upgraded for approvals from regulated
markets, with substantial capacity addition over the years.

3.A.2 Data Analysis:

Operating Profit Ratio: The profit earned from a firms normal core business
operations. This value does not include any profit earned from the firms
investments (such as earnings from firms in which the company has partrial
interest) and the effects of interest and taxes.

Operating Profit Ratio= (Operating Net Profit/Net Sales) x 100

(Amount in Rs. Millions)

Particulars

31st March 2013

31st March 2014

31st March 2015

Operating Profit

5,894.60

(27,579)

(9,753.80)

Net Sales

29,683.10

30,065.50

82,287.70

Operating Profit
Ratio

19.86

-91.72

-11.85

Gross Profit Ratio: Gross profit is a companys residual profit after selling a
Product or service and deducting the cost associated with its production and Sale.
Gross Profit Ratio= (Gross Profit/Net Sales) x100
(Amount in Rs. Millions)

Particulars

31st March 2013

31st March 2014

31st March 2015

Gross Profit

6,630.30

745.1

(15,589.7)
20

Net Sales

Gross Profit
Ratio

29,683.10

30,065.50

82,287.70

22.33

2.48

(18.94)

Net Profit: Net Profit ratio is a popular profitability ratio that shows relationship
between net profit after tax and net sales. It is computed by dividing the net profit
(after tax) by net sales.
Net Profit Ratio = (Net Profit/Sales) x 100
Particulars

31st March 2013

31st March 2014

31st March 2015

Net Profit

5,165.5

(28,285.2)

(14,741.3)

Net Sales

29,683.10

30,065.50

82,287.70

(94.07)

(17.91)

Net Profit
Ratio

17.40

21

Debt Equity Ratio: It is the ratio between long term debt and shareholders fund.
Long term debt include debentures, loan from financial institutions etc.
shareholders fund include equity and preference share capital + reserve and
surplus-fictitious asset (debit balance of profit and loss account or discount on
issue of shares)
Debt Equity Ratio= Debt/Shareholder Fund
Particulars

31st March 2013

31st March 2014

31st March 2015

Debt

46.4

46.4

11,703.2

Shareholder Fund

1,035.6

2,071.2

2,071.2

4.48

2.24

565.04

Debt-Equity
Ratio

22